THE REPUBLIC of KENYA Joint Lead Managers BARCLAYS J.P

THE REPUBLIC OF KENYA

US$250,000,000 5.875 per cent. Notes due 2019 to be consolidated and form a single series with the existing US$500,000,000 5.875 per cent. Notes due 2019 issued by the Republic of Kenya, acting through the National Treasury on 24 June 2014 Issue Price for the Notes due 2019: 103.524 per cent. (plus accrued interest in respect of the period from and including 24 June 2014 to but excluding the Closing Date (as defined below) (the “2019 Accrued Interest”) US$500,000,000 6.875 per cent. Notes due 2024 to be consolidated and form a single series with the existing US$1,500,000,000 6.875 per cent. Notes due 2024 issued by the Republic of Kenya, acting through the National Treasury on 24 June 2014 Issue Price for the Notes due 2024: 107.041 per cent. (plus accrued interest in respect of the period from and including 24 June 2014 to but excluding the Closing Date (as defined below) (the “2024 Accrued Interest”)

The US$250,000,000 5.875 per cent. Notes due 2019 (the “2019 Further Notes”) to be consolidated and form a single series with the existing US$500,000,000 5.875 per cent. Notes due 2019 (the “2019 Original Notes” and together with the 2019 Further Notes, the “2019 Notes”) and the US$500,000,000 6.875 per cent. Notes due 2024 (the “2024 Further Notes”) to be consolidated and form a single series with the existing US$1,500,000,000 6.875 per cent. Notes due 2024 (the “2024 Original Notes” and together with the 2024 Further Notes, the “2024 Notes”, the 2019 Original Notes and the 2024 Original Notes being, together, the “Original Notes”, the 2019 Further Notes and the 2024 Further Notes being, together, the “Further Notes”, and the Original Notes and the Further Notes being, together, the “Notes”) to be issued by the Republic of Kenya, acting through the National Treasury (the “Issuer” or “Kenya”) are direct, unconditional and unsecured obligations of Kenya.

The Further Notes, as with the Original Notes, will bear interest from (and including) 24 June 2014 at the rate of 5.875 per cent. per annum for the 2019 Further Notes and at the rate of 6.875 per cent. per annum for the 2024 Further Notes, in each case payable semi-annually in arrear on 24 June and 24 December of each year, commencing on 24 December 2014. The 2019 Further Notes, as with the 2019 Original Notes, will mature on 24 June 2019 (the “2019 Maturity Date”) and the 2024 Further Notes, as with the 2024 Original Notes, will mature on 24 June 2024 (the “2024 Maturity Date”).

Payments on the Further Notes will be made in US dollars without deduction for or on account of taxes imposed or levied by Kenya to the extent described under “Terms and Conditions of the Further Notes—Taxation”.

The Further Notes have not been and will not be registered under the US Securities Act of 1933, as amended (the “Securities Act”), or with any securities regulatory authority of any State or other jurisdiction of the United States, and may not be offered or sold within the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. For a summary of certain restrictions on resale, see “Transfer Restrictions” and “Plan of Distribution”. The Further Notes will be offered and sold outside the United States in reliance on Regulation S under the Securities Act (“Regulation S”) and within the United States to qualified institutional buyers (“QIBs”) within the meaning of Rule 144A under the Securities Act (“Rule 144A”). Prospective purchasers are hereby notified that sellers of the Further Notes may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A. An investment in the Further Notes involves a high degree of risk. Prospective investors should have regard to the factors described under the heading “Risk Factors” on page 9. This Prospectus has been approved by the Central Bank of Ireland (the “Central Bank”), as competent authority under Directive 2003/71/ EC, as amended (including the amendments made by Directive 2010/73/EU) (the “Prospectus Directive”). This Prospectus constitutes a prospectus for the purposes of the Prospectus Directive. The Central Bank only approves this Prospectus as meeting the requirements imposed under Irish and EU law pursuant to the Prospectus Directive. Such approval relates only to Further Notes that are to be admitted to trading on the regulated market of the Irish Stock Exchange plc (the “Main Securities Market”) or on another regulated market for the purposes of Directive 2004/39/EC (the “Markets in Financial Instruments Directive”) or that are to be offered to the public in any member state of the European Economic Area (“EU Member States”). Application has been made to the Irish Stock Exchange for the Further Notes to be admitted to its official list (the “Official List”) and trading on the Main Securities Market. In addition, the Issuer intends to make an application, after the Further Notes are delivered against payment, for the Further Notes to be listed on the Fixed Income Securities Market Segment of the Nairobi Securities Exchange. However, the Further Notes will not be traded on the Fixed Income Securities Market Segment of the Nairobi Securities Exchange, unless appropriate protocols are put in place after the Further Notes are delivered against payment. On the issue of the Further Notes, the Notes’ ratings are expected to be reaffirmed as B+ by Fitch Ratings Ltd (“Fitch”) and as B+ by Standard & Poor’s Credit Market Services Europe Limited (“S&P”). All references to Fitch and S&P in this Prospectus are to the entities as defined in this paragraph. Fitch is established in the European Union and registered under Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies (the “CRA Regulation”). A rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating organisation. The Further Notes will be offered and sold in registered form in denominations of US$200,000 or any amount in excess thereof which is an integral multiple of US$1,000. The 2019 Further Notes and the 2024 Further Notes that are offered and sold in reliance on Regulation S (respectively, the “2019 Unrestricted Further Notes” and the “2024 Unrestricted Further Notes” and, together, the “Unrestricted Further Notes”) will be represented by beneficial interests in two global notes (respectively, the “2019 Unrestricted Further Global Note” and the “2024 Unrestricted Further Global Note”, the 2019 Unrestricted Further Global Note and the 2024 Unrestricted Further Global Note being, together, the “Unrestricted Further Global Notes”, and the Unrestricted Further Global Notes and all global notes representing any Original Notes offered and sold in reliance on Regulation S being, together, the “Unrestricted Global Notes”) in each case in registered form without interest coupons attached, which will be registered in the name of Citivic Nominees Limited, as nominee for, and will be deposited on or about 3 December 2014 (the “Closing Date”) with, Citibank, N.A., London, as common depositary for Euroclear Bank S.A./N.V. (“Euroclear”) and Clearstream Banking, société anonyme (“Clearstream, Luxembourg”). The 2019 Further Notes and the 2024 Further Notes that are offered and sold in reliance on Rule 144A (respectively, the “2019 Restricted Further Notes” and the “2024 Restricted Further Notes” and, together, the “Restricted Further Notes”) will be represented by beneficial interests in one or more global notes (respectively, the “2019 Restricted Further Global Note” and the “2024 Restricted Further Global Note”, the 2019 Restricted Further Global Note and the 2024 Restricted Further Global Note being, together, the “Restricted Further Global Notes”, and the Restricted Further Global Notes and all global notes representing any Original Notes offered and sold in reliance on Rule 144A being, together, the “Restricted Global Notes”) in each case in registered form without interest coupons attached, which will be deposited on or about the Closing Date with Citibank, N.A., London, as custodian (the “Custodian”) for, and registered in the name of Cede & Co. as nominee for, The Depository Trust Company (“DTC”). Interests in the Restricted Further Global Notes will be subject to certain restrictions on transfer. Beneficial interests in the Unrestricted Further Global Notes and Restricted Further Global Notes (together, the “Further Global Notes” and together with all the global notes which exist in respect of the Original Notes, the “Global Notes”) will be shown on, and transfers thereof will be effected only through, records maintained by DTC, Euroclear, Clearstream, Luxembourg and their respective participants. Except in the limited circumstances as described herein, certificates will not be issued in exchange for beneficial interests in the Further Global Notes.

Joint Lead Managers

BARCLAYS J.P. MORGAN STANDARD BANK

Prospectus dated 28 November 2014

RESPONSIBILITY STATEMENT

Kenya accepts responsibility for the information contained in this Prospectus and declares that, having taken all reasonable care to ensure that such is the case, the information contained in this Prospectus is, to the best of its knowledge, in accordance with the facts and contains no omission likely to affect its import.

To the best of the knowledge and belief of Kenya, the information contained in this Prospectus is true and accurate in every material respect and is not misleading in any material respect, and this Prospectus, does not omit to state any material fact necessary to make such information not misleading. The opinions, assumptions, intentions, projections and forecasts expressed in this Prospectus with regard to Kenya are honestly held by Kenya, have been reached after considering all relevant circumstances and are based on reasonable assumptions.

IMPORTANT NOTICE

No person has been authorised to give any information or to make any representation other than those contained in this Prospectus in connection with the offering of the Further Notes and, if given or made, such information or representation must not be relied upon as having been authorised by Kenya or the managers listed in the section entitled “Plan of Distribution” (the “Managers”). Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, constitute a representation or create any implication that there has been no change in the affairs of Kenya since the date hereof. This Prospectus may only be used for the purpose for which it has been published.

This Prospectus does not constitute an offer of, or an invitation by, or on behalf of, Kenya or the Managers to subscribe for, or purchase, any of the Further Notes in any jurisdiction in which such offer or invitation is unlawful. This Prospectus does not constitute an offer, and may not be used for the purpose of an offer to, or a solicitation by, anyone in any jurisdiction or in any circumstances in which such an offer or solicitation is not authorised or is unlawful. The distribution of this Prospectus and the offering, sale and delivery of the Further Notes in certain jurisdictions may be restricted by law. Persons into whose possession this Prospectus comes are required by Kenya and the Managers to inform themselves about and to observe any such restrictions.

This Prospectus is not intended to provide the basis of any credit or other evaluation and should not be considered as a recommendation by Kenya or the Managers that any recipient of this Prospectus should purchase any of the Further Notes. Each investor contemplating purchasing Further Notes should make its own independent investigation of the financial condition and affairs, and its own appraisal of the creditworthiness, of Kenya.

The Managers have not separately verified the information contained in this Prospectus. Accordingly no representation, warranty or undertaking, express or implied, is made and no responsibility or liability is accepted by the Managers or any of them as to the accuracy or completeness of the information contained in this Prospectus or any other information provided by Kenya in connection with the Further Notes or their distribution.

For a description of certain restrictions on offers, sales and deliveries of the Further Notes, see “Plan of Distribution”.

The Republic of Kenya is a sovereign state. Consequently, it may be difficult for investors to obtain or enforce judgments or arbitral awards. See “Risk Factors—Kenya is a sovereign state, and accordingly it may be difficult to obtain or enforce judgments or arbitral awards against it”.

The Further Notes have not been approved or disapproved by the US Securities and Exchange Commission, any State securities commission in the United States or any other US regulatory authority, nor have any of the foregoing authorities passed upon or endorsed the merits of the offering of the Further Notes or the accuracy or adequacy of this Prospectus. Any representation to the contrary is a criminal offence in the United States.

IN CONNECTION WITH THE ISSUE OF THE FURTHER NOTES, J.P. MORGAN SECURITIES PLC AS STABILISING MANAGER (THE “STABILISING MANAGER”) (OR PERSONS ACTING ON BEHALF OF THE STABILISING MANAGER) MAY OVERALLOT FURTHER NOTES OR EFFECT TRANSACTIONS WITH A VIEW TO SUPPORTING THE MARKET PRICE OF THE FURTHER NOTES AT A LEVEL HIGHER THAN THAT WHICH MIGHT OTHERWISE PREVAIL. HOWEVER, THERE IS NO ASSURANCE THAT THE STABILISING MANAGER (OR PERSONS ACTING ON BEHALF OF THE STABILISING MANAGER) WILL UNDERTAKE STABILISATION ACTION. ANY STABILISATION ACTION MAY BEGIN ON OR AFTER THE DATE ON WHICH ADEQUATE PUBLIC DISCLOSURE OF THE TERMS OF THE OFFER OF THE 2019 NOTES OR THE 2024 FURTHER NOTES, AS THE CASE MAY BE, IS MADE AND, IF BEGUN, MAY BE ENDED AT ANY TIME, BUT IT MUST END NO LATER THAN THE EARLIER OF 30 DAYS AFTER THE ISSUE DATE OF THE RELEVANT FURTHER NOTES AND 60 DAYS AFTER THE DATE OF THE ALLOTMENT

OF SUCH FURTHER NOTES. ANY STABILISATION ACTION OR OVER ALLOTMENT SHALL BE CONDUCTED BY THE STABILISING MANAGER (OR PERSONS ACTING ON BEHALF OF THE STABILISING MANAGER) IN ACCORDANCE WITH ALL APPLICABLE LAWS AND RULES.

This Prospectus may not be copied or reproduced in whole or in part nor may it be distributed or any of its contents disclosed to anyone other than the prospective investors to whom it is originally submitted.

Each purchaser or holder of interests in the Further Notes will be deemed, by its acceptance or purchase of any such Further Notes, to have made certain representations and agreements as set out in “Transfer Restrictions”.

Notwithstanding anything herein to the contrary, from the commencement of discussions with respect to the transaction contemplated by this Prospectus, all persons may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of the transaction described herein and all materials of any kind (including opinions and other tax analyses) that are provided to such persons relating to such tax treatment and tax structure, except to the extent that any such disclosure could reasonably be expected to cause this transaction not to be in compliance with securities laws. For the purposes of this paragraph, the tax treatment of this transaction is the purported or claimed US federal income tax treatment of this transaction and the tax structure of this transaction is any fact that may be relevant to understanding the purported or claimed US federal income tax treatment of this transaction.

NOTICE TO NEW HAMPSHIRE RESIDENTS

NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENCE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF NEW HAMPSHIRE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE OF NEW HAMPSHIRE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT, ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.

PRESENTATION OF ECONOMIC AND OTHER INFORMATION

Annual information presented in this Prospectus is based upon a fiscal year commencing on 1 July in one year and ending on 30 June in the subsequent year, unless otherwise indicated. While the fiscal year ends on 30 June of each year, certain information in this prospectus provided by the Kenya National Bureau of Statistics, including GDP and GDP sector information, are provided as of 31 December of each year. Certain figures included in this Prospectus have been subject to rounding adjustments; accordingly, figures shown for the same category presented in different tables may vary slightly and figures shown as totals in certain tables may not be the sum of the figures which precede them. Statistical information reported herein has been derived from official publications of, and information supplied by, a number of agencies and ministries of Kenya, including the National Treasury, the Central Bank of Kenya and the Kenya National Bureau of Statistics. Some statistical information has also been derived from information publicly made available by third parties such as the International Monetary Fund (the “IMF”) and the World Bank (the “World Bank”). Where such third party information has been so sourced, the source is stated where it appears in this Prospectus. Kenya confirms that it has accurately reproduced such information and that, so far as it is aware and is able to ascertain from information published by third parties, it has omitted no facts which would render the reproduced information inaccurate or misleading. As used in this Prospectus, references to the “government” are to the government of Kenya, and the term “central government” is interchangeable with and means the same as “national government”.

Similar statistics may be obtainable from other sources, but the date of publication, underlying assumptions, methodology and, consequently, the resulting data may vary from source to source. In addition, statistics and data published by one ministry or agency may differ from similar statistics and data produced by other agencies or ministries due to differing underlying assumptions, methodology or timing of when such data is reproduced. Certain historical statistical information contained herein is provisional or otherwise based on estimates that Kenya and/or its agencies believe to be based on reasonable assumptions. Kenya’s official financial and economic statistics are subject to internal review as part of a regular confirmation process. Accordingly, the financial and economic information set out in this Prospectus may be subsequently adjusted or revised and may differ from previously published financial and economic information. While Kenya does not expect such revisions to be material, no assurance can be given that material changes will not be made.

References to any individual period such as 2013/14 are references to a fiscal year commencing on 1 July in one year and ending on 30 June in the subsequent year. References to any individual calendar year are references to a calendar year commencing on 1 January and ending on 31 December in the same year. All references in this document to “Kenyan shilling”, “shilling” and “KES” are to the currency of the Republic of Kenya; to “US dollars”, “US$” and “$” are to the currency of the United States of America; and to “euro” are to the currency introduced at the start of the third stage of European economic and monetary union pursuant to the Treaty establishing the European Community, as amended by the Treaty of European Union. For ease of information, certain financial information relating to the Republic of Kenya included herein is presented as translated into US dollars at the US dollar/KES rates of exchange deemed appropriate by Kenya. Unless otherwise specified, such rates were applicable as of the end of such specified period(s). Such translations should not be construed as a representation that the amounts in question have been, could have been or could be converted into US dollars at that or any other rate. References to “SDR” are to the Special Drawing Right, a unit of account having the meaning ascribed to it from time to time by the Rules and Regulations of the IMF. References in this document to “billions” are to thousands of millions.

Rebasing of National Accounts

In September 2014, Kenya National Bureau of Statistics rebased its national accounts, changing the base year from 2001 to 2009, and revised the annual and quarterly national accounts statistics for the period 2006 to 2013. Kenya National Bureau of Statistics applied the System of National Accounts 2008 and the International Standard Industrial Classification revision 4 system (“ISIC”) to compile the rebased GDP estimates. The System of National Accounts is the internationally agreed standard set of recommendations on how to compile measures of economic activity, and ISIC is the international standard for the classification of productive economic activities. The UN Statistical Commission recommends that countries rebase every five years. This revision is the sixth time that Kenya has revised the national account statistics. The first revision was carried out in 1957 and subsequent revisions were carried out in 1967, 1976, 1985 and 2005. The government expects that using the 2009 base year for economic estimates will better reflect the current structure of the economy, including changes in production structure, relative product prices and products. The new 2009 base year adopts weights that are more consistent with current conditions of the economy and better reflect the performance of the most important parts of the economy.

These measures have led to changes in the size of GDP, growth rates, contributions by sector and related indicators that use GDP. The GDP estimate for 2013 under the new 2009 base year is 25.3 per cent. higher than the GDP estimate for 2013 under the 2001 base year. An increase in the size of the real estate, agricultural and manufacturing sectors measured under the 2009 base year compared to the size of these sectors measured under the 2001 base year accounted for most of the change in the size of GDP in 2013 under the 2009 base year compared to the size of GDP in 2013 under the 2001 base year. Inclusion of economic activities such as mobile money transfer activities which were not previously included in the calculation of GDP estimates also contributed to the increase in the size of GDP under the 2009 base year compared to the size of the GDP under 2001 base year. In addition,

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revised calculations took into account increased efficiencies in production processes. In 2013, the agricultural sector accounted for 28.9 per cent. of GDP under the 2001 base year, while it accounted for 29.5 per cent. of GDP under the 2009 base year. In 2013, the services sector accounted for 53.9 per cent. of GDP under the 2001 base year, while it accounted for 50.7 per cent. of GDP under the 2009 base year. In 2013, the manufacturing sector accounted for 10.0 per cent. of GDP under the 2001 base year, while it accounted for 11.7 per cent. of GDP under the 2009 base year. The use of new data such as 2009 Kenya Population and Housing Census (the “2009 Census”), 2005/06 Kenya Integrated Household Budget Survey (the “2005/06 Budget Survey”) and the 2010 Census of Industrial Production, and the inclusion of more data from the informal economy in the rebased GDP also contributed to the upward revision of the level of GDP.

FORWARD-LOOKING STATEMENTS

This Prospectus includes forward-looking statements, which involve risks and uncertainties. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes”, “estimates”, “anticipates”, “expects”, “intends”, “may”, “will” or “should” or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this Prospectus and include statements regarding the government’s intentions, beliefs or current expectations concerning, among other things, the general political and economic conditions in Kenya. All forward-looking statements are based upon information available to Kenya on the date of this Prospectus, and Kenya undertakes no obligation to update any of these in light of new information or future events. Kenya derives many of its forward-looking statements from its budgets and forecasts, which are based upon many detailed assumptions. While Kenya believes that its assumptions are reasonable, it cautions that it is difficult to predict the impact of known factors, and it is impossible to anticipate all factors that could affect Kenya’s actual results. These factors include, but are not limited to:

External factors, such as:

• the impact of changes in international oil prices; • the impact of changes in other international commodity prices including tea, coffee and horticultural products; • interest rates in financial markets outside Kenya; • the impact of changes in the credit rating of Kenya; • economic conditions in Kenya’s major export markets; • the impact of possible future regional instability; • changes in the amount of remittances from non-residents; and • the decisions of international financial institutions and creditor countries regarding the amount and terms of their financial assistance to Kenya; as well as internal factors, such as:

• general economic, political and business conditions in Kenya; • the impact of possible future social and political unrest; • present and future exchange rates of the Kenyan currency; • the level of foreign currency reserves; • the impact of natural disasters, health epidemics and droughts and other agricultural blights; • the level of domestic and external public debt; • domestic inflation; • the ability of Kenya to implement important economic reforms; • the ability of Kenya to upgrade its infrastructure; • the levels of foreign direct and portfolio investment; and • the levels of domestic interest rates in Kenya.

ENFORCEMENT OF CIVIL LIABILITIES

Kenya is a sovereign state, and substantially all of the assets of Kenya are located in Kenya. Consequently, it may be difficult for investors to obtain or enforce judgments of courts and/or arbitral tribunals in England, the United States or anywhere else against Kenya. Kenya has not submitted to the jurisdiction of any courts, but instead has agreed to resolve disputes by arbitration in accordance with rules and procedures of the London Court of International Arbitration (“LCIA”). Kenya has waived certain immunities for the purpose of arbitration of disputes arising out of or in connection with the Notes. Kenya has not, however, waived immunity from execution or attachment in respect of certain of its assets. See “Terms and Conditions of the Further Notes—Governing Law, Arbitration and Enforcement—Consent to Enforcement and Waiver of Immunity”. Kenya is a party to the United Nations (New York) Convention on Recognition and Enforcement of Foreign Arbitral Awards.

Kenya’s waiver of immunity is, however, limited. Such a waiver constitutes only a limited and specific waiver for the purposes of the Notes, and under no circumstances shall it be interpreted as a general waiver by Kenya or a waiver with respect to proceedings unrelated to the Notes.

Arbitral awards obtained outside Kenya may be enforced in Kenya under the Arbitration Act 1995. Leave to enforce the award as a decree of the High Court must be obtained. Where an order is made against the government for the payment of money or costs, a further application must follow for a certificate of order against the government and must be served on the Attorney General. The amount can then be paid out of appropriations provided in the national budget. Aside from this procedure, no execution, attachment or process may be issued by any Kenyan court for enforcing payment by the government of any money or costs, and no person shall be individually liable under any order for payment by the government, any government department or any officer of the government in relation to such money or costs. Injunctive relief and orders for specific performance may not be made by Kenyan courts against the government. Because it may be difficult to obtain or enforce judgments in Kenya, third parties may seek to attach assets of the Issuer abroad, including funds intended for use in payments for other third parties.

EXCHANGE RATES

The currency of Kenya is the Kenyan shilling. The following table sets forth, for the periods indicated, the high, low, average and year end official rates set by the Central Bank of Kenya, expressed in US dollars. These translations should not be construed as representations that KES amounts actually represent such US dollar amounts or could be converted into US dollars at the rate indicated as of any of the dates mentioned in this Prospectus at all.

Average High Low Period End (KES:US$1.00) 2011 ...... 88.87 105.96 80.74 85.07 2012 ...... 84.52 88.44 82.27 86.03 2013 ...... 86.12 87.70 83.72 86.31 2014 January ...... 86.36 86.96 85.46 85.88 February ...... 86.28 86.58 86.06 86.23 March ...... 86.49 86.58 86.18 86.44 April ...... 86.71 87.09 84.40 86.87 May ...... 87.41 87.86 86.87 87.78 June ...... 87.63 87.92 87.38 87.61 July ...... 87.77 87.89 87.63 87.80 August ...... 88.10 88.58 87.80 88.39 September ...... 88.83 89.28 88.43 89.23 October ...... 89.23 89.41 88.90 89.35 November (through 24 November 2014) ...... 89.90 90.22 89.42 90.18 ______Source: Central Bank of Kenya

The US dollar versus KES exchange rate as set by the Central Bank of Kenya on 24 November 2014 was US$0.0110890 per 1 KES.

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TABLE OF CONTENTS

Page

PRESENTATION OF ECONOMIC AND OTHER INFORMATION ...... iii FORWARD-LOOKING STATEMENTS ...... v ENFORCEMENT OF CIVIL LIABILITIES ...... vi EXCHANGE RATES ...... vii OVERVIEW ...... 1 RISK FACTORS ...... 9 USE OF PROCEEDS ...... 22 REPUBLIC OF KENYA ...... 23 THE ECONOMY ...... 37 BALANCE OF PAYMENTS AND FOREIGN TRADE ...... 63 MONETARY AND FINANCIAL SYSTEM ...... 78 PUBLIC FINANCE ...... 90 PUBLIC DEBT ...... 101 TERMS AND CONDITIONS OF THE FURTHER NOTES ...... 106 THE GLOBAL NOTES ...... 124 CLEARING AND SETTLEMENT ARRANGEMENTS ...... 126 TRANSFER RESTRICTIONS ...... 130 TAXATION ...... 133 PLAN OF DISTRIBUTION ...... 138 GENERAL INFORMATION ...... 142

OVERVIEW

You should read this overview as an introduction to this Prospectus. Any decision to invest in the Further Notes should be based on a consideration of this Prospectus as a whole. This overview does not purport to be complete and is qualified in its entirety by the more detailed information elsewhere in the Prospectus. Prospective investors should also carefully consider the information set forth in the “Risk Factors” below prior to making any investment decision. Capitalised terms not otherwise defined in this overview have the same meaning as elsewhere in this Prospectus. See “Republic of Kenya” and “The Economy”, amongst other sections, for a more detailed description of the Issuer. References in this overview to a “Condition” are to the numbered condition corresponding thereto set out in the “Terms and Conditions of the Further Notes”.

Republic of Kenya

General

Kenya occupies a land area of 581,309 square kilometres. Kenya lies on the equator and is bordered by the Indian Ocean in the south east, Tanzania to the south, Uganda to the west, South Sudan to the north west, Ethiopia to the north and Somalia to the north east. Kenya has an estimated population of approximately 43 million. Nairobi is the largest city and the capital of the country. In August 2010, Kenyans overwhelmingly adopted a new constitution (the “Constitution”) in a national referendum. The Constitution introduced additional checks and balances to executive power, including a bill of rights for Kenyan citizens, and significant devolution of power and resources to 47 semi-autonomous newly created counties, each headed by an elected Governor. It also eliminated the position of Prime Minister following the first presidential election under the Constitution, which occurred on 4 March 2013. Uhuru Kenyatta, the son of founding president Jomo Kenyatta, won the March elections in the first round by a close margin and was sworn into office on 9 April 2013.

The Economy

From 2011 to 2013, Kenya’s economy exhibited a positive growth trend. Kenya’s real GDP increased by 6.1 per cent. in 2011, 4.5 per cent. in 2012 and 5.7 per cent. in 2013.

Kenya’s capital and financial account registered surpluses of US$4,150.4 million in 2011/12, US$4,838.2 million in 2012/13 and US$5,166.6 million in 2013/14, while its current account registered deficits of US$3,343.2 million in 2011/12, US$4,240.3 million in 2012/13 and US$4,504.3 million in 2013/14. Gross official international reserves were US$5,241.4 million in 2011/12, US$6,222.0 million in 2012/13 and US$7,475.0 million in 2013/14. Gross international reserves represented the equivalent of approximately 3.4 months of imports in 2011/12, 4.0 months of imports in 2012/13 and 4.3 months of imports in 2013/14.

Exports of goods increased from US$5,960.9 million in 2011/12 to US$6,018.2 million in 2012/13. However, exports of goods decreased to US$5,823.3 million in 2013/14. Imports of goods increased from US$14,903.0 million in 2011/12 to US$15,568.0 million in 2012/13 and further increased to US$16,308.2 million in 2013/14.

The average inflation rate in Kenya decreased from 14.0 per cent. in 2011 to 9.4 per cent. in 2012 and further decreased to 5.7 per cent. in 2013. The average inflation rate increased to 7.2 per cent for the nine month period ended 30 September 2014.

The central government recorded fiscal deficits of 5.5 per cent. of GDP in 2011/12, 5.2 per cent. of GDP in 2012/13 and 6.2 per cent. in 2013/14.

The central government’s total public debt reached US$18,018.2 million at 30 June 2012 (45.9 per cent. of GDP), US$22,022.4 million (42.0 per cent. of GDP) at 30 June 2013 and US$27,132.9 million (43.5 per cent. of GDP) at 30 June 2014.

Vision 2030

In 2007, the government announced “Vision 2030” as its long-term plan for attaining middle income status as a nation by 2030. In line with Vision 2030, the government prepares successive Medium Term Plans (“MTP”) that outline the policies, programmes and projects that the government intends to implement over a five year period. The first MTP covered the period from 2008 to 2012.

In the initial year of the first MTP, a number of projects aimed at national healing and reconciliation following the 2007 post- election violence were implemented. Repair of damaged infrastructure, assistance to affected small scale businesses and resettlement of internally displaced persons were all undertaken in order to raise GDP growth (which fell to 1.5 per cent. in 2008 from 7.0 per cent. in 2007) and to promote national reconciliation.

The government announced the second MTP of Vision 2030 in October 2013. The second MTP gives priority to devolution as specified in the Constitution and to more rapid socio-economic development with equity as a tool for building national unity. The second MTP also aims to build on the successes of the first MTP, particularly in increasing the scale and pace of economic transformation through infrastructure development, and strategic emphasis on priority sectors under the economic and social pillars of Vision 2030. Under the second MTP, transformation of the economy is focused on rapid economic growth in a stable macro-economic environment, modernisation of infrastructure, diversification and commercialisation of agriculture, food security, a higher contribution of manufacturing to GDP, wider access to African and global markets, wider access for Kenyans to better quality education and health care, job creation targeting unemployed youth, provision of better housing and improved water sources and sanitation to Kenyan households that presently lack these.

On 14 February 2014, the National Treasury presented to Parliament the Budget Policy Statement (the “Budget Policy Statement”), a document that states the government’s plans for raising and spending money in the coming fiscal year 2014/15 and the main priorities on which it will spend its resources. Consistent with the second MTP, the government announced in the Budget Policy Statement that it plans to (i) create a business environment conducive to encourage innovation, investment, growth and expansion of economic and employment opportunities; (ii) invest in agricultural transformation and food security to expand food supply, reduce food prices, support expansion of agro-processing industries and spur export growth; (iii) invest in a first class transport and logistics hub and scale investments in other key infrastructure products, including roads, energy and water to reduce cost of doing business and improve competitiveness; (iv) invest in quality and accessible healthcare services and education as well as social safety net to reduce the burden on households and to enhance the nation’s prospects for long-term growth and development; and (v) further entrench devolution for the delivery of better government services and enhanced rural economic development.

On 28 April 2014, the Cabinet approved the budget estimates for the 2014/15 budget. The budget estimates include allocations, among others, of KES116.7 billion for on-going and new road projects, KES19.4 billion for the Standard Gauge Rail project, KES3.5 billion for an urban commuter rail system, KES1.3 billion for enhancing security to the Jomo Kenyatta International Airport and KES43.6 billion for energy related initiatives. The 2014/15 budget assumes:

• economic growth of 5.8 per cent. for 2014 and 6.4 per cent. for 2015;

• inflation will remain in the upper limit target of 7.5 per cent. in 2014;

• the net-public debt to GDP ratio will decline from 52.1 per cent. for the year ended 30 June 2014 to 49.8 per cent. for the year ended 30 June 2017; and

• for ordinary revenue to be up to 25.5 per cent. of GDP in 2014/15.

For the purposes of the 2014/15 budget, the government made the above assumptions on the basis of GDP estimates made prior to the rebasing of GDP in September 2014.

Selected Economic Information Year ended 31 December 2011 2012 2013* Domestic economy Nominal GDP (US$ millions) ...... 43,801 49,458 55,121 Real GDP (growth rate)(per cent.) ...... 6.1 4.5 5.7 Average inflation rate (per cent.) ...... 14.0 9.4 5.7

Year ended 30 June 2012 2013 2014* Balance of payments Exports of goods, f.o.b. (US$ millions) ...... 5,960.9 6,018.2 5,823.3 Imports of goods, f.o.b. (US$ millions) ...... (14,903.0) (15,568.0) (16,308.2) Balance of goods ...... (8,942.2) (9,549.8) (10,484.9) Current account balance (US$ millions) ...... (3,343.2) (4,240.3) (4,504.3) Capital and financial account balance (US$ millions) ...... 4,150.4 4,838.2 5,166.6 Gross official reserves (end of period) (US$ millions) ...... 5,241.4 6,222.0 7,475.0

Public finance Central government revenues (KES millions)...... 763,453 868,651 1,001,374 Central government expenditures (KES millions) ...... 947,777 1,117,018 1,300,589 Deficit including grants (cash basis) (KES millions) ...... (171,742) (231,974) (299,215) per cent. of GDP(1) ...... 5.5 5.2 6.2

At 30 June 2012 2013 2014* Public debt(2) Central government external debt (US$ millions) ...... 8,893.9 9,808.0 12,476.6 Central government internal debt (US$ millions) ...... 9,124.3 12,214.4 14,656.3 Total central government debt (US$ millions) ...... 18,018.2 22,022.4 27,132.9 per cent. of GDP(1) ...... 45.9 42.0 43.5 ______Notes: * Estimated (1) Figures calculated at 30 June are calculated with the nominal GDP as at 30 June of the year provided. (2) Central Government Debt excludes certain publicly guaranteed debt such as debt of state-owned enterprises and debt of local government. Source: Kenya National Bureau of Statistics; National Treasury; Central Bank of Kenya; and Kenyan authorities and IMF staff estimates and projections for balance of payments figures.

The Offering The following is an overview of the terms of (and other matters relating to) the Further Notes and, where applicable, the Notes. Issuer ...... The Republic of Kenya, acting through the National Treasury.

Notes Being Issued ...... US$250,000,000 5.875 per cent. Notes due 2019 to be consolidated and form a single series with the existing US$500,000,000 5.875 per cent. Notes due 2019 issued by the Issuer on 24 June 2014.

US$500,000,000 6.875 per cent. Notes due 2024 to be consolidated and form a single series with the existing US$1,500,000,000 6.875 per cent. Notes due 2024 issued by the Issuer on 24 June 2014.

Issue Price of Further Notes ...... 2019 Further Notes: 103.524 per cent. plus the 2019 Accrued Interest. 2024 Further Notes: 107.041 per cent. plus the 2024 Accrued Interest.

Issue Date...... 3 December 2014. Maturity and Redemption ...... The 2019 Notes will mature on 24 June 2019 and will be redeemed at par on that date. The 2024 Notes will mature on 24 June 2024 and will be redeemed at par on that date. The Notes are not redeemable prior to maturity. Interest ...... The 2019 Notes bear interest from and including 24 June 2014 to but excluding 24 June 2019 at the rate of 5.875 per cent., per annum and the 2024 Notes bear interest from and including 24 June 2014 to but excluding 24 June 2024 at the rate of 6.875 per cent., per annum, in each case payable semi-annually in arrear on 24 June and 24 December in each year commencing on 24 December 2014. Status ...... The 2019 Notes and the 2024 Notes (as the case may be) constitute direct, unconditional, unsubordinated and (subject to a negative pledge, described below) unsecured obligations of the Issuer and rank pari passu without any preference among themselves and at least pari passu with all other present and future unsubordinated and (subject as provided in the negative pledge described below) unsecured obligations of the Issuer, save only for such obligations as may be preferred by mandatory provisions of applicable law. The Notes are backed by the full faith and credit of the Issuer. Negative Pledge ...... So long as any 2019 Note or 2024 Note (as the case may be) remains outstanding, the Issuer has undertaken that it will not (save for the specific exceptions provided in the Conditions) create, incur, assume or permit to subsist any Security (as defined in the Conditions) upon the whole or any part of its present or future assets or revenues to secure (i) any of its Public External Indebtedness, (ii) any guarantees in respect of Public External Indebtedness or (iii) Public External Indebtedness of any other person, without, at the same time or prior thereto, securing the 2019 Notes or the 2024 Notes (as the case may be) equally and rateably therewith or providing such other arrangement as shall be approved by relevant Noteholders. Events of Default ...... Condition 10 (Events of Default) provides that holders of the 2019 Notes or the 2024 Notes, as the case may be, who hold at least 25 per cent. in aggregate principal amount of the relevant Notes then outstanding may declare such Notes to be immediately due and payable at their principal amount together with accrued interest if, inter alia, (i) the Issuer fails to pay principal or interest on such Notes when due and continues to do so for 15 business days or 30 days, respectively; (ii) the Issuer does not comply with one or more of the terms of such Notes, the applicable Agency Agreement or the applicable Deed of Covenant and (if capable of remedy) such default continues for 45 days following service of notice by any relevant Noteholder requiring such breach be remedied, (iii) the Issuer is in default or there is an acceleration in maturity in relation to any External Indebtedness or default in any guarantee thereof in excess of US$25,000,000; (iv) the Issuer declares a moratorium in respect of its External Indebtedness; (v) the Issuer ceases to be a member of the IMF or ceases to be eligible to use the general resources of the IMF, (vi) the Issuer denies the validity of the 2019 Notes or the 2024 Notes (as

the case may be) or any of its obligations under such Notes, or it shall become unlawful for the Issuer to perform or comply with all or any of its obligations set out in such Notes as a result of any change in law or regulation in Kenya or final and unappealable ruling of a court in Kenya; or such obligations cease to be in full force and effect; or (vii) if any authorisation, consent of, or filing or registration with any governmental authority necessary for the payment of such Notes when due ceases to be in effect; all as more particularly described in Condition 10 (Events of Default). A declaration of acceleration may be rescinded in certain circumstances by the resolution in writing of the holders of at least 50 per cent. in aggregate principal amount of the outstanding 2019 Notes or 2024 Notes (as the case may be) in accordance with the procedures in Condition 10 (Events of Default). Noteholder Meetings ...... A summary of the provisions for convening meetings of holders of the 2019 Notes or the 2024 Notes (as the case may be) to consider matters relating to their interests is set out in Condition 13 (Meetings of Noteholders and Modification). Withholding Tax ...... All payments by the Issuer under the Notes are to be made without withholding or deduction for or on account of Taxes (as defined in Condition 8 (Taxation)) unless the withholding or deduction for taxes is required by law. In such circumstances, the Issuer may be required to pay additional amounts so that Noteholders will receive the full amount which otherwise would have been due and payable under the Notes; all as more particularly described in Condition 8 (Taxation). Listing ...... Application has been made to the Irish Stock Exchange for the Further Notes to be admitted to the Official List and trading on the Main Securities Market. In addition, the Issuer intends to make an application, after the Further Notes are delivered against payment, for the Further Notes to be listed on the Fixed Income Securities Market Segment of the Nairobi Securities Exchange. However, the Further Notes will not be traded on the Fixed Income Securities Market Segment of the Nairobi Securities Exchange, unless appropriate protocols are put in place after the Further Notes are delivered against payment. Form and Denomination ...... The Further Notes will be in registered form and will be offered and sold in a minimum denomination of US$200,000 and integral multiples of US$1,000 thereof. Settlement ...... The Further Notes will initially be represented by the Further Global Notes. One or more Restricted Further Global Notes will be issued in respect of Further Notes offered and sold in reliance on Rule 144A. The Unrestricted Further Global Notes will be issued in respect of the Further Notes offered and sold in reliance on Regulation S. Transfer Restrictions ...... The Further Notes have not been registered under the Securities Act, and are subject to certain restrictions on transfers. See “Transfer Restrictions” and “Plan of Distribution”. Use of Proceeds ...... Kenya expects the net cash proceeds, before expenses, of the issue of the Further Notes to amount to US$793,940,000 (plus accrued interest in respect of both series for the period from and including 24 June 2014 to but excluding 3 December 2014) which Kenya expects to use for general budgetary purposes, including for the funding of infrastructure projects. Fiscal Agent ...... Citibank, N.A., London Branch. Registrar ...... Citigroup Global Markets Deutschland AG. Rule 144A CUSIP/ISIN/Common Code .. 2019 Notes: 491798 AF1 / US491798AF18 / 098266372 2024 Notes: 491798 AE4 / US491798AE43 / 098266429 Regulation S ISIN/Common Code ...... 2019 Notes: XS1028951850 / 102895185 2024 Notes:

XS1028952403 / 102895240 Further Issues ...... The Issuer may from time to time, without notice to or the consent of the registered holders of the 2019 Notes or the 2024 Notes (as the case may be), issue additional securities that will form a single series with such Notes, subject to certain conditions set out in Condition 15 (Further Issues). Governing Law ...... The Agency Agreements, the Deeds of Covenant and the Notes (including any non-contractual obligations arising from or in connection with any of them) are governed by, and will be construed in accordance with, English law. Arbitration ...... Any dispute arising out of or in connection with the Notes shall be resolved by arbitration under the Arbitration Rules of the London Court of International Arbitration, as more particularly described in Condition 16 (Governing Law, Arbitration and Enforcement). The parties have expressly excluded the jurisdiction of the courts. Risk Factors ...... Any one or more of the risk factors below could affect Kenya’s economy, its ability to fulfil its obligations under the Further Notes and your investment in the Further Notes. Risks Relating to the Republic of Kenya ..  Investing in securities in emerging markets such as Kenya generally poses a greater degree of risk than investment in more mature market economies because the economies in emerging markets are more susceptible to destabilisation resulting from domestic and international developments.  A significant portion of the Kenyan economy is not recorded.  Statistical information published by Kenya may differ from that produced by other sources and may be unreliable. Statistical information may also be more limited in scope and published less frequently than in the case of other countries such that adequate monitoring of key fiscal and economic indicators may be difficult.  Kenya continues to be challenged by internal security issues as well as unfavourable media coverage which has had and may continue to have a negative impact on the tourism industry.  An unsuccessful administration of the devolution of power under the Constitution could result in weak fiscal management, control, accountability and transparency, and delay or increase the cost of implementing the national MTP. Implementing the transition to devolved government, in tandem with many other reforms to the institutions of national government, poses enormous challenges.  Because legal reforms in a number of areas were adopted fairly recently and are largely untested, any perceived inadequacy in the Kenyan legal system may generally deter foreign and domestic investment in Kenya and adversely affect Kenya’s economy.  Political instability may ensue if the International Criminal Court (the “ICC”) at The Hague ultimately convicts President Uhuru Kenyatta or Deputy President William Ruto.  Kenya has in the past experienced volatility and violence related with acquisition or maintenance of political power. If significant political violence or instability returns, Kenya’s capital markets, level of tourism and foreign investment, among other things, may suffer and potentially affect Kenya’s economy.  An escalation in tensions with Kenya’s neighbours could materially disrupt the Kenyan economy and have negative consequences for Kenya in its international diplomatic and trade relations.  Stability and growth in Kenya may be threatened if the government fails to address high levels of poverty, unemployment and inequality in income.  Failure to address actual and perceived risks of corruption and money

laundering may adversely affect Kenya’s economy and ability to attract foreign direct investment.  Kenya may be unable to meet its economic growth and reform objectives and policies which may adversely affect the performance of the Kenyan economy.  High inflation could have a material adverse effect on Kenya’s economy and its ability to service its debt, including the Notes.  Further increases in the public sector wage bill could crowd out spending in much-needed infrastructure investment and social protection. Reforms which negatively impact the remuneration of civil servants could, however, lead to protests, demonstrations and strikes by civil servants. Instability in the civil service sector could, in turn, affect the stability of the Kenyan economy.  A sudden reversal of accommodative monetary policies in developed markets may cause capital outflows from emerging and frontier markets and generate a negative impact on emerging and frontier economies, such as Kenya.  Failure to significantly improve Kenya’s infrastructure could adversely affect Kenya’s economy, competitive ranking and growth prospects, including its ability to meet GDP growth targets.  Natural disasters such as floods and droughts have negatively affected Kenya in the past and may negatively affect it in the future.  Any shortage of water in Kenya could have an adverse effect on Kenya’s economy and its level of economic growth.  Chronic power shortages, over-dependence on hydropower and high energy costs may negatively impact economic growth.  Kenya’s energy sector relies exclusively on imported oil to meet its petroleum requirements and is therefore vulnerable to oil price increases and prolonged weakness in the Kenya shilling against the US dollar exchange rate.  Health risks could adversely affect Kenya’s economy.  Any significant depreciation of the Kenyan shilling against the US dollar or other major currencies might have a negative effect on Kenya’s ability to repay its debt denominated in currencies other than the Kenyan shilling, including the amounts due under the Notes. Risks Relating to the Further Notes ......  An investment in the Further Notes may not be suitable for all investors.  Events in other emerging markets, including those in other African countries, may negatively affect the Notes.  The credit ratings of the Notes are subject to revision or withdrawal, either of which could adversely affect the trading price of the Notes.  Legal investment considerations may restrict certain investments.  The liquidity of the Further Notes may be limited, and trading prices may fluctuate.  Fluctuations in exchange rates and interest rates may adversely affect the value of the Notes.  Definitive Notes not denominated in an integral multiple of US$200,000 or its equivalent may be illiquid and difficult to trade.  The terms of the 2019 Notes and the 2024 Notes may be modified, waived or substituted without the consent of all the holders of the 2019 Notes or the

2024 Notes (as the case may be).  Kenya is a sovereign state, and accordingly it may be difficult to obtain or enforce judgments or arbitral awards against it.  Payments made in certain EU Member States may be subject to withholding tax under the EU Savings Directive.

RISK FACTORS

An investment in the Notes involves a high degree of risk. You should carefully consider the risks described below as well as the other information contained in this Prospectus before buying any of the Notes. Any of the following risks could materially adversely affect Kenya’s economy and your investment in the Notes. The risks described below are not the only risks Kenya faces. Additional risks and uncertainties not currently known to Kenya or that Kenya currently deems to be immaterial may also materially affect Kenya’s economy and its ability to fulfil its obligations under the Notes. In any such case, you may lose all or part of your investment in the Notes.

Risks Relating to the Republic of Kenya

Investing in securities in emerging markets such as Kenya generally poses a greater degree of risk than investment in more mature market economies because the economies in emerging markets are more susceptible to destabilisation resulting from domestic and international developments. These risks include, but are not limited to, higher volatility and more limited liquidity in respect of the Notes, greater political risk, a fragile export base, budget deficits, lack of adequate infrastructure necessary to accelerate economic growth and changes in the political and economic environment. Although significant progress has been made in reforming Kenya’s economy and its political and judicial systems, Kenya is still in the process of developing the necessary infrastructure, regulatory and judicial framework that is essential to support market institutions and broad-based social and economic reforms. Emerging markets can also experience more instances of corruption by government officials and misuse of public funds than more mature markets, which could affect the ability of governments to meet their obligations under issued securities. Investors should also note that emerging markets such as Kenya are subject to rapid change and that the information set out in this Prospectus may become outdated relatively quickly. Any such political risks, budget deficits, lack of sufficient infrastructure or unimplemented government reforms may adversely impact Kenya’s economy.

In addition, Kenya’s economy and macroeconomic goals are susceptible to adverse external shocks, including the recent global economic crisis, the ongoing instability in the international financial markets, the recent turmoil in the European banking system and the sovereign debt market of certain members of the European Monetary System. If economic recovery from the global recession is slow or stalls, and some of Kenya’s primary trading partners continue to experience economic difficulties, or euro area members experience difficulties issuing securities in the sovereign debt market or servicing existing debt, it could result in fewer exports by Kenya, which relies on the export market. The European Union is Kenya’s second largest export market and accounted for 20.8 per cent. of total exports in 2013. The Common Market for Eastern and Southern Africa (“COMESA”) remained the dominant destination of exports accounting for 70.7 per cent. of the value of total exports to Africa in 2013. The value of exports to COMESA decreased slightly from US$2.1 billion in 2011 to US$2.0 billion in 2012. The value of exports to COMESA further decreased to US$1.9 billion in 2013. Russia, India and China, three of the five countries that are considered fast developing economies (“BRICS”, Brazil, Russia, India, China and South Africa), recorded approximately 4.7 per cent. of the total exports in 2013 (excluding Brazil). A significant number of foreign tourists visiting Kenya are from Russia, India, China and South Africa. However, a large portion of foreign tourists visiting Kenya are from Italy, Germany, the United States and the United Kingdom, which accounted for a combined 49.2 per cent. of departing tourists in 2013. A decline in demand for exports from Kenya’s major trading partners, such as the European Union or COMESA countries, or a decline in tourism receipts, could have a material adverse impact on Kenya’s balance of payments and have a material adverse affect on Kenya’s economy.

A significant portion of the Kenyan economy is not recorded.

A significant portion of the Kenyan economy is comprised of the informal, or shadow, economy. Based on information from the Kenya National Bureau of Statistics, approximately 82.6 per cent. of employment in 2013 was in the informal sector. The informal economy is not recorded and is only partially taxed, resulting in a lack of revenue for the government, ineffective regulation, unreliability of statistical information (including the understatement of GDP and the contribution to GDP of various sectors) and inability to monitor or otherwise regulate a large portion of the economy. Lack of effective regulation and enforcement in this sector also gives rise to other issues, including health and safety issues. Although the government is attempting to address the informal economy by streamlining certain regulations, particularly tax laws, there can be no assurance that such reforms will adequately address the issues and bring the informal economy into the formal sector thus having a material adverse effect on Kenya’s economy.

Statistical information published by Kenya may differ from that produced by other sources and may be unreliable. Statistical information may also be more limited in scope and published less frequently than in the case of other countries such that adequate monitoring of key fiscal and economic indicators may be difficult.

The National Treasury, Kenya National Bureau of Statistics and the Central Bank of Kenya all produce, and prior to August 2010 the Ministry of Finance produced, statistics relating to Kenya and its economy. Although collaborative efforts are being taken by the relevant agencies in order to produce accurate and consistent social and economic data, there may be inconsistencies in the compilation of data and methodologies used by some of these agencies, and in common with many developing economies, given the relative size of the informal economy in Kenya there may be material omissions or misstatements in the statistical data prepared by such agencies. As a result, there can be no assurance that these statistics are as accurate or as reliable as those published by more developed countries. In addition, Kenya’s statistical information may also be more limited in scope and published less frequently than in the case of other countries such that adequate monitoring of key fiscal and economic indicators may be difficult.

Some of the statistics contained in this Prospectus for 2011, 2012, 2013 and 2014 may be estimated or provisional figures that are subject to later revision. In addition, the government recently rebased its national accounts, resulting in changes in the size of GDP and growth rates and in other measures derived from these statistics. See “The Economy—2014 Rebase of GDP”. There have also been significant efforts to improve the compilation of Kenya’s balance of payments data in recent years, including through technical assistance provided by the IMF, however, errors and omissions in the balance of payments data persist and may complicate the assessment of such data. The inability to improve compilation of key fiscal and economic indicators may affect how effectively government policy is made in response to such statistical information and thus have a material adverse effect on Kenya’s economic growth. Prospective investors should be aware that figures relating to Kenya’s GDP, its balance of payments and other figures cited in this Prospectus may be subject to some degree of uncertainty and that the information set forth in this Prospectus may become outdated relatively quickly, which may result in such figures being revised in future periods.

Kenya continues to be challenged by internal security issues as well as unfavourable media coverage which has had and may continue to have a negative impact on the tourism industry.

Kenya has from time to time experienced internal security concerns. For example, in September 2013, a terrorist attack occurred at the Westgate Mall in Nairobi. The al-Shabaab group, an extremist militant group, claimed responsibility for the attack and resumed its threats of continued attacks, not only against Kenya but also against Western countries for their intervention in Somalia. Al-Shabaab claimed that the presence of Kenyan troops in southern Somalia as part of the peacekeeping forces of the African Union Mission in Somalia (“AMISOM”) prompted the attack and announced that it would continue its attacks until Kenya withdrew its troops from Somalia. Al-Shabaab also claimed responsibility for carrying out an attack on 22 November 2014 on a bus in northern Kenya in which 28 people were killed.

Since 2012, there have been numerous attacks involving grenades or explosive devices in Kenya. Between January 2012 and January 2014, a total of 27 improvised explosive device attacks occurred, causing the deaths of 128 people and injuring another 427. The attacks mostly occurred in the North Eastern, Nairobi and the Coast regions, targeting police stations and police vehicles, nightclubs and bars, churches, a mosque, a religious gathering, a downtown building consisting of small shops and a bus station. In addition to these attacks, Kenyan law enforcement authorities have also disrupted several suspected terrorist plots, including attempted car bombings in Nairobi and Mombasa. On 15 June 2014, armed militants attacked the coastal town of Mpeketoni and killed 49 people. On 16 June 2014 an attack on a nearby village resulted in approximately 15 more deaths. As a result of such incidents, the United Kingdom, the United States, France and Australia have issued new travel advisories advising their citizens to avoid or reconsider travel to certain areas within Kenya. The United Kingdom and the United States were, respectively, the largest and third largest sources of foreign tourists to Kenya in 2013. Accordingly, these travel warnings, as well as unfavourable media coverage, including coverage of the recent outbreak of Ebola virus disease (“Ebola”) in West Africa, may create a negative perception of Kenya as a holiday destination and thus have a detrimental impact on the level of tourism. Any such decrease in tourism is likely to have a wider economic impact, as tourism is one of Kenya’s largest sources of foreign exchange, and the industry is one of Kenya’s largest employers. Receipts in the tourism sector decreased by 9.4 per cent. from KES96.2 billion in 2012/13 to KES87.2 billion in 2013/14. See “The Economy—Principal Sectors of the Economy—Tourism” for more information.

As at 31 October 2014, approximately 340,000 Somalis live in the Dadaab refugee complex in north east Kenya. Originally established in 1991 to house refugees from the Somali civil war, the Dadaab complex has elicited tension among the surrounding communities. Some have alleged that the existence of the settlement can compromise border security and has caused significant law and order problems within Kenya’s territory. In November 2013, the Somali and Kenyan governments signed an agreement with the United Nations High Commission for Refugees to begin repatriating Somali refugees. All repatriations are done voluntarily, but any forced repatriation of Somali refugees, or even the perception of such repatriation, could potentially build resentment among affected individuals and enhance al-Shabaab’s appeal and recruitment efforts in Kenya. There can also be no assurance that repatriated persons will not seek to return to Kenya.

In addition, the Mombasa Republican Council, a separatist organisation based at the coastal town of Mombasa, has demanded that Mombasa secede from the rest of the country. The Council was formed in 1999 to address perceived historical injustice against the indigenous people of the coast who do not own land. The government believes that members of Mombasa Republican Council could potentially be a recruiting ground for al-Shabaab.

Kenya also suffers from high crime rates. The total number of crimes reported to the police increased by 2.8 per cent. from 75,733 in 2011 to 77,852 in 2012. The total number of crimes reported to the police declined by 7.7 per cent. from 77,852 in 2012 to 71,832 in 2013. The number of reported offenders increased from 82,052 in 2011 to 83,853 in 2012 and declined to 81,900 in 2013. Although, the number of persons who committed offences against morality (i.e., rape, incest, sodomy, bestiality, indecent assault and bigamy) and other offences against persons declined by 8.7 per cent. from 28,270 in 2011, 25,809 in 2012 to 28,899 in 2013, the total number of persons reported to have committed homicides increased by 25.3 per cent. from 2,494 in 2011 to 3,124 in 2012 and declined by 10.9 per cent to 2,784 in 2013. The number of persons reported to have committed robbery and other thefts increased by 7.9 per cent from 32,595 in 2011 to 35,168 in 2012 and declined by 3.3 per cent to 32,240 in 2013.

If the level of instability, crime and violence, and unfavourable coverage of Kenya or Africa in the media, continues or increases in the future, Kenya’s level of tourism and foreign investment, among other things, may suffer and potentially materially adversely affect Kenya’s economy and its ability to service its debt, including the Further Notes.

An unsuccessful administration of the devolution of power under the Constitution could result in weak fiscal management, control, accountability and transparency, and delay or increase the cost of implementing the national MTP. Implementing the transition to devolved government, in tandem with many other reforms to the institutions of national government, poses enormous challenges.

Prior to the promulgation of the Constitution, Kenya had a system of provincial administration through which Provincial Commissioners held significant power, including responsibility for law and order, but were civil servants appointed by, and directly accountable to, the national government. After the Constitution was promulgated in 2010, the governance framework in Kenya was fundamentally altered by abolishing the provincial administration, promoting devolution and creating a two-tier government—one at the national level and the other in each of the 47 counties, led by locally elected Governors and County Assemblies. Under the new system of devolution, government functions have been distributed between the two levels of government. In addition, the Constitution provides that (i) counties must be allocated not less than 15 per cent. of all revenue collected by the national government; (ii) marginalised areas will receive an additional 0.5 per cent. of all the revenue collected by the national government to bring the quality of basic services including water, roads, health facilities and electricity in those areas to the same level as that generally enjoyed by the rest of the country; (iii) a Commission on Revenue Allocation will make recommendations for equitable sharing of national government revenue between the national and county governments, and among the county governments, thus likely reducing total fiscal receipts for the national government; (iv) a county government may also impose property rates, entertainment taxes, service charges and other taxes that it is authorised to impose by law in order to raise revenue; and (v) counties will be responsible for establishing and abolishing offices in the public service, appointing persons to hold such offices and removing them from holding or acting in those offices. Given that the devolution of governmental power in Kenya is a relatively recent event and is still in process, an unsuccessful administration of the devolution of power could result in weak fiscal management, control, accountability and transparency of national accounts.

In addition, counties have development responsibilities that are central to the implementation of the central government’s MTP, among them agriculture, county hospitals and public health, early childhood education, cooperatives, trade, county roads, fisheries and livestock. Harmonising the medium term plan with county integrated development plans and urban plans will require coordinated action between national and local government authorities. A failure in coordination or cooperation between national and local governments may result in delays or increased costs to the completion of the projects and programmes contained in the national MTP.

Furthermore, implementing the transition to devolved government, in tandem with many other reforms to the institutions of national government, poses enormous challenges such as: the movement of staff from line ministries and local authorities to county governments without disruption in service delivery or labour unrest; establishing systems in the 47 counties to enable them to operate quickly after the county governments were elected in 2013; coordination among counties with respect to the construction of inter-county roads; potential duplication of expenditures at national and county levels; and capacity building at the county level to ensure that they can make their own laws, manage new powers and resources, and properly plan, execute and report county budgets. Capacity building will include training to use government wide electronic systems such as the Integrated Financial Management Systems (“IFMIS”), the automated system for public finance management, and Kenya Electronic Single Window System (“KESWS”), the automated system for clearance of import and export documents, and move away from the old manual systems.

Some of these challenges were manifest during 2013 when doctors that were impacted by the implementation of devolution went on strike demanding that their salaries and allowances not be paid at the county level. In addition, during the counties’ first fiscal year 2013/14, county governments experienced challenges in planning, executing and reporting on budgets because of timing challenges, with elections having just been concluded in March 2013, as well as human resource capacity constraints.

Challenges have also emerged following the establishment of the National Land Commission (the “NLC”), which was established following promulgation of the Constitution. The NLC and the Ministry of Land, Housing and Urban Development have differed over which body is responsible for the registration and issuance of title deeds and land leases. The Ministry of Land, Housing and Urban Development and the NLC have reached a memorandum of co-operation to agree on their respective roles. Nevertheless, any continued disagreements in this regard may cause confusion among investors, financial institutions and businesses on the legal status of title deeds and land leases and may impede economic activity and negatively impact investor confidence.

In February 2012, the National Assembly enacted three laws to implement devolution. Together with the provisions of the Constitution, these laws provide a set of institutional arrangements for managing transition through a Transition Authority, an independent body with broad membership and powers to coordinate implementation by the various organs of the government. Although there is a legal framework for managing transition a great deal of work remains to be done. No assurance can be given that there will be a smooth transition or that there will not be service delivery disruptions which could adversely affect residents or businesses, and in turn materially adversely affect the country’s growth prospects.

Because legal reforms in a number of areas were adopted fairly recently and are largely untested, any perceived inadequacy in the Kenyan legal system may generally deter foreign and domestic investment in Kenya and adversely affect Kenya’s economy.

The justice system in Kenya is going through major changes. The reform of the legal and institutional framework includes reforms to the judiciary and the police services.

With respect to the judiciary, a new and independent Judicial Service Commission responsible for nominating judges was created and competitively appointed with the approval of Parliament. On 22 March 2011, a Judicial Service Act was enacted that establishes the mandate and membership of the Judicial Service Commission, creates a Judiciary Fund, and regulates appointment and removal of judges, among other things. Judges and magistrates have undergone public vetting and many new judges and magistrates have been appointed to increase capacity. Infrastructure development, including the construction of new courts and the purchase of equipment, has been completed. The Chief Justice and the Deputy Chief Justice of the Supreme Court were competitively appointed with the approval of Parliament. In addition, the judiciary now has its own Judiciary Fund and the government has increased funding from KES2 billion in 2011/12 to KES16.5 billion for 2013/14. Moreover, new court procedural rules have also been promulgated, which are aimed at improving efficiency. Because the legal reforms in a number of areas were adopted fairly recently and are largely untested, any perceived inadequacy in the Kenyan legal system may generally deter foreign and domestic investment in Kenya and adversely affect Kenya’s economy.

With respect to the police services, the Constitution has provided for major changes to security and police governance, including provisions to diminish political manipulation and increase accountability of the police. The Constitution also merged the prior two police forces (the Kenya Police Service and the Administration Police Service) into one National Police Service. In August 2011, three key police reform laws were passed: the National Police Service Act, 2011, which provides for the establishment, structure, powers and operations of the police service; the National Police Service Commission Act No. 30, which makes further provisions for the functions and powers of the National Police Service Commission and the qualifications and procedures for appointment of such; and the Independent Policing Oversight Authority Act, 2011, which provides for civilian oversight of the work of the police and establishes the Independent Policing Oversight Authority, as well as its functions and powers. Reforms to the police force are still in early stages and are continuing. No assurance can be given that these reforms might not lead to increased costs for the government and materially adversely affect Kenya’s economy.

Political instability may ensue if the ICC (the “ICC”) at The Hague ultimately convicts President Uhuru Kenyatta or Deputy President William Ruto.

On 8 March 2011, President Uhuru Kenyatta, Deputy President William Ruto and radio executive Joshua Arap Sang were summoned to appear before the ICC at The Hague following accusations of crimes against humanity related to the violence that occurred in the aftermath of the 2007 presidential elections. President Kenyatta and Deputy President Ruto have been cooperating and appearing at the proceedings, consistent with the ICC Rules of Procedure and Evidence. These rules have recently been amended to provide that defendants may be excused from appearing in person, under certain circumstances. President Kenyatta has been charged but the prosecutor has requested an adjournment of the hearing in his case. On 31 March 2014, the ICC rejected the request by President Kenyatta for the termination of the case and set a commencement date of 7

October 2014 for the trial. The ICC also rejected a prosecution request to suspend the proceeding indefinitely pending compliance by Kenya with its cooperation obligations.

On 19 September 2014, Trial Chamber V(b) postponed the trial commencement date in the case and convened two public status conferences for 7 and 8 October 2014 to discuss the status of cooperation between the Prosecution and the Kenyan government and issues raised in the Prosecution’s Notice of 5 September 2014, respectively. On 8 October 2014 President Uhuru Kenyatta attended the status conference in person. The prosecution asked the judges either to accept the request for indefinite adjournment of the Kenyatta trial, pending delivery of records requested from the Kenyan government or terminate the case. The defence called for termination of the case on grounds of lack of evidence. The government expects that the chamber judges will decide on next steps by the beginning of 2015.

As at the date of this Prospectus, the proceedings have not interfered with, and the ICC has shown sensitivity not to interfere with, the ability of the President and the Deputy President to fulfil their constitutional duties, although there can be no guarantee that this will always be the case. Further, the political impact of a conviction, if confirmed after appeal, of either the President or the Deputy President cannot be predicted. In accordance with Article 146(b) of the Constitution, if the office of the President and Deputy President is vacant, or the Deputy President is unable to assume the office of President, the Speaker of the National Assembly shall act as President and an election to the office of President shall be held within sixty days after the vacancy arose. However, should political instability occur due to the ICC ultimately convicting the President or the Deputy President, such political instability could adversely affect Kenya’s economic growth and may impact your investment in the Notes. See “Republic of Kenya—Legal Proceedings” for more information.

Kenya has in the past experienced volatility and violence related with acquisition or maintenance of political power. If significant political violence or instability returns, Kenya’s capital markets, level of tourism and foreign investment, among other things, may suffer and potentially affect Kenya’s economy.

Kenya has in the past experienced volatility and violence related with the acquisition or maintenance of political power. During the 1992, 1997 and 2007 elections, threats, harassment and violent clashes between supporters for different parties occurred. Although the 2002 election campaign experienced a significant decrease in political violence compared to its two proceeding elections, political rallies did on some occasions lead to violence. Violence erupted after the disputed elections in 2007, which left an estimated 1,133 people dead and more than 500,000 people displaced while fleeing the violence. A power sharing agreement was signed on 28 February 2008 and a unity government with the Party of National Unity and Orange Democratic Movement began on 17 April 2008. The agreement also provided for the prosecution in the ICC or in Kenya of those connected with inciting the violence. Although Kenya held peaceful elections in 2013, no assurance can be made that incidents of political violence or political instability will not occur in the future. If significant political violence or political instability occurs, Kenya’s capital markets, level of tourism and foreign investment, among other things, may suffer and potentially materially adversely affect Kenya’s economic growth.

An escalation in tensions with Kenya’s neighbours could disrupt the Kenyan economy and have negative consequences for Kenya in its international diplomatic and trade relations.

Kenya has in the past been involved in territorial disputes with its neighbours, and such disputes may continue. In 2008, both Kenya and Uganda claimed Migingo Island as their territory. A joint re-demarcation line of the border was launched on 2 June 2009 to recover and to place survey markers on land, making delineation of the boundary on the lake more precise. The two countries have established a joint technical experts committee to demarcate the borderline along the island.

Also, Kenya has submitted to the UN Commission on the Limits of the Continental Shelf (the “UN Commission”) its filing on claims to mineral exploitation rights in ocean waters beyond the 200 nautical mile baseline. Somalia and Kenya are in discussion over the non-objection of their respective submissions. In addition, in 2014 Somalia instituted proceedings against Kenya before the International Court of Justice (the “ICJ”) with regard to the dispute concerning the location of the maritime boundary between the two countries in the Indian Ocean. See “Republic of Kenya— Border Disputes” for more information. An escalation in tensions with Kenya’s neighbours could materially adversely affect the Kenyan economy and have negative consequences for Kenya in its international diplomatic and trade relations.

Stability and growth in Kenya may be threatened if the government fails to address high levels of poverty, unemployment and inequality in income.

Despite recording annual real GDP growth rates of 6.1 per cent., 4.5 per cent. and 5.7 per cent. in 2011, 2012 and 2013, respectively, poverty remains high in Kenya, with approximately 45 per cent. of the population living below the poverty line in 2013. Kenya’s most recent employment data is derived from the 2009 Census, at which time the government estimated unemployment at 9.7 per cent. The country’s Vision 2030 acknowledges that there are also large disparities in incomes and access to education, healthcare and land, as well as to basic needs, including, clean water, adequate housing and sanitation. High

and persistent levels of poverty and unemployment and increasing inequality may individually or in the aggregate have negative effects on the Kenyan economy. However, if these reforms do not address the high levels of poverty, unemployment and inequality, such continued conditions may materially adversely affect Kenya’s economic growth.

Failure to address actual and perceived risks of corruption and money laundering may adversely affect Kenya’s economy and ability to attract foreign direct investment.

Although Kenya has implemented and is pursuing major initiatives to prevent and fight corruption and money laundering, both remain important issues in Kenya. Kenya is ranked 136 out of 175 in Transparency International’s 2013 Corruption Perceptions Index and placed at the 12.92 percentile rank (with 100 the highest rank) on the World Bank’s Worldwide Governance Indicators for 2013 (control of corruption dimension). Although the total number of cases handled by the Kenya Ethics and Anti- Corruption Commission (the “EACC”) declined by 59.4 per cent. from 7,326 in 2011 to 2,978 in 2012 following the enactment of the Ethics and Anti-corruption Commission Act, 2011 and the Anti-Corruption and Economic Crimes (Amnesty and Restitution) Regulations, 2011, corruption continues to be a concern. The number of cases handled by the EACC declined further by 8.7 per cent. from 2,978 in 2012 to 2,719 in 2013. In October 2013, the Financial Action Task Force (the “FATF”) established by the G-7 countries identified Kenya as one of 11 jurisdictions with strategic anti-money laundering deficiencies. In June 2014, the FATF announced that Kenya was no longer subject to the FATF’s monitoring process under its on-going global Anti-Money Laundering/Combating the Financing of Terrorism compliance process. The FATF announced that Kenya had established the legal and regulatory framework to meet its commitments in its action plan regarding the strategic deficiencies that the FATF had identified in February 2010.

Since 2002, Kenya has implemented various initiatives aimed at combating corruption, money laundering and financing of terrorism. Parliament has enacted several pieces of legislation dealing with corruption and money laundering, including the following: the Anti-Corruption and Economic Crimes Act 2003 which provides for the prevention, investigation and punishment of corruption, economic crime and related offences; the Proceeds of Crime and Anti-Money Laundering Act 2009 which establishes the offence of money laundering and introduces measures for combating the offence; the Ethics and Anti-corruption Commission Act 2011 creating an agency responsible for investigating and litigating corruption cases, tracing assets and recovery of illegally acquired public assets; and the Prevention of Terrorism Act 2012, as amended, which gives law enforcers more powers in fighting terrorism. On 28 March 2013, the Proceeds of Crime and Anti-Money Laundering Regulations, 2013 were issued by the Minister for Finance which provide for the due diligence and reporting requirements of certain reporting institutions licensed and regulated by Kenyan regulatory authorities.

The government has developed a strategy as part of its MTP to address corruption in government, specifically in the public procurement sector. Under the plan, the government aims to (i) implement an e-procurement and interactive system to enable any supplier to bid for tenders in a transparent manner, (ii) execute laws such as the Ethics and Anti-corruption Commission Act, 2011 and the Anti-Corruption and Economic Crimes (Amnesty and Restitution) Regulations, 2011 (which provides for interest on property or money irregularly obtained, the procedures for amnesty applications and restitution of property to rightful owners), and (iii) enhance the investigative capacity of and grant prosecutorial powers to the EACC.

There is no certainty, however, as to the success of these measures. Failure to implement these strategies, continued corruption in the public sector and deficiencies in the systems for addressing money laundering activities could have a material adverse effect on the Kenyan economy and may have a negative effect on Kenya’s ability to attract foreign investment. See also “Republic of Kenya—Legal Proceedings” for recent allegations against the Governor of the Central Bank of Kenya and “The Economy— Major Infrastructure Projects—Expansion of Railway Transport” for a discussion of the procurement process in the Mombasa to Nairobi Standard Gauge Railway project.

Kenya may be unable to meet its economic growth and reform objectives and policies which may adversely affect the performance of the Kenyan economy.

Although the government has announced its intention to pursue a series of economic and fiscal reform initiatives, including those set forth in Vision 2030 and the second MTP, no assurance can be given that such initiatives will be adequately funded, will achieve or maintain the necessary long-term political support, will be fully implemented or prove successful in achieving their objectives. Continued pursuit of long-term objectives such as those set forth in Vision 2030 and the second MTP will depend on a number of factors including continued political support at many levels of the Kenyan society, adequate funding, effective transition to devolved government, improved security, power sector reform, availability of human capital and significant coordination. The significant funding requirements for these plans may prove difficult or impossible to meet. Kenya may be unable to complete planned flagship projects or may experience difficulties implementing reforms. If the government is not able to fund or implement the medium-term objectives contained in the second MTP, or if there is a delay in such funding or implementation, then the government may not be able to meet the long-term strategic objectives set forth in Vision 2030, which could result in a material adverse effect on the economy.

High inflation could have a material adverse effect on Kenya’s economy and its ability to service its debt, including the Notes.

Historically, inflation in Kenya has fluctuated significantly from year to year. International food and petroleum prices in the past resulted in inflation levels as high as 14.0 per cent. in 2011. The average inflation rate decreased to 9.4 per cent. in 2012 and further to 5.7 per cent. in 2013. However, the average inflation rate increased to 7.2 per cent for the nine month period ended 30 September 2014. Although tighter monetary policies have historically helped to curb inflation, the impact on inflation of higher fuel and other import prices is beyond the government’s control. There can be no assurance that the inflation rate will not rise in the future. Significant inflation could have a material adverse effect on Kenya’s economy and the ability to service the Notes. See “Monetary and Financial System—Inflation and interest rates”.

Further increases in the public sector wage bill could crowd out spending in much-needed infrastructure investment and social protection. Reforms which negatively impact remuneration of civil servants could, however, lead to protests, demonstrations and strikes by civil servants. Instability in the civil service sector could, in turn, affect the stability of the Kenyan economy.

In 2012, the government raised wages for doctors, nurses, teachers and lecturers. Combined with the addition of new public employees, the adjustment in civil service remuneration raised the government’s wage bill from approximately 30 per cent. of government revenue in 2009/10 (7.0 per cent. of GDP) to approximately 33.9 per cent. of government revenue (7.5 per cent. of GDP) in 2012/13. In 2013/14, the government wage bill was approximately 28.9 per cent. of government revenue and 5.6 per cent. of GDP. Any further increases in the wage bill could crowd out spending in needed infrastructure investment and social protection.

The government has sought to contain pressures on the wage bill by rationalising the salary scheme for all levels of government in line with the Public Finance Management Act, 2012 (the “PFMA”) and limit the scope for ad hoc wage increases. The Salaries and Remuneration Commission is currently conducting a nationwide job evaluation to gradually move to a harmonised salary scales framework for both central and county government levels. The government is committed to be guided by the Salaries and Remuneration Commission’s advice and has set a target ceiling of 7 per cent. of GDP for all general government wages in the medium term. Reforms to address the wage bill could include reductions in public sector employment in addition to decreases in remuneration. Resistance to these reforms by those who will be immediately affected may be followed by protests, demonstrations and strikes. Instability in the civil service sector could affect the stability of the Kenyan economy. On the other hand, if the government fails to implement reforms to the wage bill, the government’s fiscal position could deteriorate and the Kenyan economy may be materially adversely affected.

A sudden reversal of accommodative monetary policies in developed markets may cause capital outflows from emerging and frontier markets and generate a negative impact on emerging and frontier economies, such as Kenya. Of significance, short-term private capital flows, a large source of financing for Kenya’s capital and financial account, may decline if developed markets scale back accommodative monetary policy measures and adversely affect funding of Kenya’s current account deficit. As of 30 June 2014, short-term private capital flows of US$1.2 billion financed 22.3 per cent. of Kenya’s capital and financial account. A portfolio shift to larger economies with increasing yields could lead to a depreciation of the Kenyan shilling and increase exchange rate volatility. Higher volatility in the exchange rate could bring uncertainty in the currency market. Faced with uncertainty, investors tend to postpone making investment decisions, which could lead to less investment in the economy and have a material adverse effect on Kenya’s economy.

Failure to significantly improve Kenya’s infrastructure could adversely affect Kenya’s economy, competitive ranking and growth prospects, including its ability to meet GDP growth targets.

Failure to improve infrastructure may impede growth of key sectors of the economy and may constrain Kenya’s economic growth. The lack of infrastructure (including inadequate power supply and transportation systems) may be a significant constraint in further development in the key sectors of the economy, and Kenya’s current rate of growth may decline in future periods as a result of poor infrastructure development. Over the last five years, however, Kenya has made progress in the development and expansion and improvement of airports, ports, rail, pipelines, hydropower, geothermal plants, ferries, housing and public works facilities. It has, among other things, expanded and modernised the Kisumu International Airport and selected airstrips countrywide and began such process on the Jomo Kenyatta International Airport, improved shipping and maritime facilities with the dredging and widening of Mombasa Port and the development of Berth No.19, upgraded the commuter rail core system with the completion of JKIA Commuter Rail Phase I and the construction of a railway station at Syokimau, and constructed 2,200 km of roads and rehabilitated/reconstructed 1,863 km of roads. Nevertheless, government concerns still exist over the length of future planning and consultative processes, inadequate funding, prioritisation among projects in light of

uncertainties related to devolution, contracting disputes and low/poor maintenance of key projects. For example, the government has identified that:

• in the aviation sector, there is a lack of adequate and skilled flight safety inspectors, and reconstruction of the Jomo Kenyatta International Airport is necessary as a result of a significant fire in August 2013;

• in the shipping and maritime sector, there is inadequate equipment and machinery that limits handling capacity at the ports and a lack of a training vessel to offer practical sea time to commercial shipping trainees;

• in the railway sector, a large capital outlay is required to construct standard gauge railway lines and commuter rail services, and there are inadequate trained engineers, encroachments of unauthorised buildings upon railway lines and aging wagons;

• in the road transport sector, there is rapid urbanisation and increased traffic volume, lack of specific standards and capacity for devolved county roads, a large maintenance backlog of the road network, weak enforcement of axle load rules and regulations, high cost/delays in relocation of utilities and services along and across road reserves, and high cost of road construction; and

• in the public works sector, there are delayed projects under the Economic Stimulus Programme and high rental accommodation charges in foreign missions abroad.

A failure to improve significantly Kenya’s infrastructure in order to support growth in the key sectors of its economy may constrain Kenya’s overall economic growth and make it difficult to meet the objectives of Vision 2030, which may in turn result in a material adverse effect on Kenya’s ability to meet its debt obligations, including those under the Notes. For more information on risks to growth of key sectors of the economy, see “—Kenya may be unable to meet its economic growth and reform objectives and policies which may adversely affect the performance of the Kenyan economy”.

Natural disasters such as floods and droughts have negatively affected Kenya in the past and may negatively affect it in the future.

Like other countries in Africa, Kenya has historically been affected by a variety of natural disasters, including floods and droughts. Natural disasters such as floods may lead to casualties, the destruction of crops and livestock, the outbreak of waterborne disease and the destruction of infrastructure, such as roads and bridges. Droughts may negatively affect the supply of agricultural commodities, the food supply in general and the generation of hydroelectric power. During 2012, Kenya experienced serious floods in certain areas which resulted in the destruction of infrastructure, crops and loss of human life and livestock. In addition, during the first quarter of 2012, some parts of Kenya also experienced drought conditions that resulted in reduced production of milk and tea. Expenditures associated with natural disaster relief efforts may adversely affect Kenya’s budgetary position and, as a result, may impair Kenya’s ability to service the Notes. In addition, because agriculture and forestry has historically accounted for a significant portion of Kenya’s GDP (26.3 per cent. of GDP in 2013 and 26.2 per cent in 2012), Kenya’s economy is particularly vulnerable to natural disasters such as floods and drought. Thus, any such natural disasters could have a material adverse effect on its economy.

Any shortage of water in Kenya could have an adverse effect on Kenya’s economy and its level of economic growth.

The United Nations (“UN”) has classified Kenya as a water scarce country. According to the current estimates of the Water Resources Management Authority, 53.5 per cent. of the population obtains piped water from water service providers, while approximately 25.0 per cent. obtains water from either improved or unimproved springs, wells or boreholes, and approximately 20 per cent. obtains water from other unsafe sources like streams, lakes and ponds. Kenya is also periodically affected by droughts. In recognition of the importance of sustainable management of water resources, the government initiated reforms in the sector including, among others, the rehabilitation and protection of Kenya’s five water towers; review of six catchment area management strategies; construction of 50 sand dams and/sub-surface dams along seasonal rivers especially in arid and semi-arid land; mapping of shared water resources of the country; and development of a national water allocation plan. Kenya could face water shortages, however, if planned reforms are not implemented. Such water shortages could have an impact on the agriculture and forestry products sector of the economy including the important exports of tea and horticulture, potentially leading to trade and current account imbalances. Any shortage of water in Kenya could have a material adverse effect on Kenya’s economy and its level of economic growth.

Chronic power shortages, over-dependence on hydropower and high energy costs may negatively impact economic growth.

In spite of investments in the power sector in recent years, lack of reliable electricity supply remains a serious impediment to Kenya’s economic growth and development. Recorded peak electricity demand, which is considered suppressed, stands at 1,664 MW recorded in October 2013, while the unsuppressed demand is estimated at 1,700 MW, thus depicting a shortfall of 546 MW

after providing for a 30 per cent. margin. Insufficient power generation, aging or insufficient infrastructure, inadequate funding and weak distribution networks result in frequent power outages, high transmission and distribution losses and power rationing, particularly during the dry season. Droughts also have impacted electricity generation as Kenya depends on hydropower generation for much of its power generation capacity (52.5 per cent. of total power generation in 2013). During severe droughts, electricity generation is switched from hydropower to more expensive thermal generation. Kenya also suffers from high energy costs of up to US$0.21 per Kwh compared to approximately US$0.06 per Kwh in India and China.

The government has identified the improvement of electricity generation, transmission and distribution infrastructure as a critical element in meeting economic growth and development objectives. To address these issues, the government has launched a series of policy initiatives under Vision 2030 and the second MTP. The government has identified the exploitation of “green growth” opportunities such as the use of carbon credits (especially in reforested catchment towers), clean energy use in geothermal, hydro, wind and solar power, the promotion of natural products initiatives, promotion of resource efficiency and clean production systems as elements of a strategy to improve the energy infrastructure and promote development of a reliable, adequate and cost effective energy supply. In addition, the government has identified major projects in the power sector expected to be completed by 2018 such as the development of an additional 3,085 MW of geothermal energy at Olkaria, Menengai and Silali-Bogoria and the development of multi-purpose dams such as the High Grand Falls dam (700 MW), the Magwagwa dam (120 MW), the Arror dam (60 MW) and the Nandi Forest dam (50 MW). The government also intends to develop the transmission network to minimise transmission distances and losses. No assurances can be given that Kenya will be able to reform the power sector effectively, or that the reforms will not cost significantly more than what is estimated. Failure to address adequately the significant deficiencies in Kenya’s power generation, transmission and distribution infrastructure could lead to lower GDP growth and reduce the country’s ability to attract investment, thereby causing a material adverse effect on Kenya’s economy.

Kenya’s energy sector relies exclusively on imported oil to meet its petroleum requirements and is therefore vulnerable to oil price increases and prolonged weakness in the Kenya shilling to US dollar exchange rate.

Kenya’s energy sector relies exclusively on imported oil to meet its petroleum requirements. Accordingly, a rise in the international price of oil significantly affects Kenya’s economy because, among other things, a higher oil price increases Kenya’s imports cost and thereby increases its trade and current account deficits and exerts upward pressure on prices and inflation.

Kenya procures oil through an open tender system, under which the government tenders online for petroleum products to be purchased every month. The oil marketing company that offers the lowest price on freight and premium wins the tender and is contracted to deliver the petroleum products on behalf of the other licenced oil marketing companies. The participants in the tender are all licenced import and wholesale oil marketing companies. Because the price is fixed for the amount of oil needed for a month, Kenya is not able to take advantage of any decreases in the market price of oil during the month of purchase.

Oil prices and markets historically have been volatile, and they are likely to continue to be volatile in the future. Prices of oil are subject to wide fluctuations in response to relatively minor changes in the supply of, and demand for, oil, market uncertainty and a variety of additional factors that are beyond Kenya’s control. These factors include, but are not limited to, political conditions in the Middle East and other regions, internal and political decisions of OPEC and other oil producing nations to decrease or increase production of crude oil, domestic and foreign supplies of oil, consumer demand, weather conditions, domestic and foreign government regulations, transport costs, the price and availability of alternative fuels and overall economic conditions.

Further, international oil prices are typically denominated in US dollars, and so prolonged weakness in the exchange rate of the Kenyan shilling against the US dollar will increase the local cost of petroleum and other oil-based products, even if there is no change in the international price of oil. Should oil prices increases and prolonged weaknesses in the Kenya shilling to US dollar exchange rate occur, such events could have a material adverse effect on Kenya’s economy.

Health risks could adversely affect Kenya’s economy.

HIV/AIDS, tuberculosis (which is exacerbated in the presence of HIV/AIDS) and malaria are major healthcare challenges in Kenya and other East African countries. In the period 2010/11 to 2012/13, national HIV prevalence declined from 7.2 per cent. to 5.6 per cent. of adults aged 15-64 years, while prevalence dropped from 3.8 per cent. to 2.1 per cent. of adults aged 15-24 years and 10.5 per cent. to 6.4 per cent. of adults aged 25-34 and the total number of persons living with HIV is estimated to be in the region of 1.6 million.

About 25 million Kenyans live in malaria endemic regions of the former provinces of Western, Nyanza and the Coast, with a majority of them under the age of 15. While combination therapies and use of indoor residual spraying have resulted in reduction of prevalence from 38 per cent. in 2010 to 21 per cent. in 2012; some regions of Western and Nyanza, however, still have contributed to little or no changes in the period 2010/11 to 2012/13 (between 37 per cent. and 47 per cent.).

Ebola has recently spread rapidly in West Africa, particularly in Guinea, Liberia and Sierra Leone, although no Ebola outbreaks have been reported in Kenya or in East Africa, and the government has taken steps to prepare for any possible outbreak. If Ebola continues to spread in West Africa or spreads to East Africa or Kenya, costs in treating victims of the disease as well as associated travel and trade restrictions and disruptions to commercial activity may adversely impact Kenya’s economy. There can be no assurance that the high prevalence rate of HIV/AIDS, tuberculosis and malaria or other diseases or the possible spread of Ebola in Kenya will not have a material adverse effect on the economy of Kenya and its ability to service its debt, including the Notes.

Any significant depreciation of the Kenyan shilling against the US dollar or other major currencies might have a negative effect on Kenya’s ability to repay its debt denominated in currencies other than the Kenyan shilling, including the amounts due under the Notes.

The Kenyan shilling experienced considerable volatility during 2012. The shilling depreciated against most of the selected major trading currencies as reflected in the overall trade weighted exchange rate index, which increased by 0.7 per cent. from 109.6 in 2011 to 110.4 in 2012. However, the overall trade weighted exchange rate index decreased by 3.6 per cent. from 110.4 in 2012 to 106.4 in 2013. The shilling weakened against the pound sterling, euro and US dollar by 6.0, 3.2 and 1.1 per cent., respectively, in the year ended at 31 December 2012. For the year ended 31 December 2013, the Kenya shilling depreciated against pound sterling, euro and US dollar by 2.4, 5.0 and 0.3 per cent. respectively. For the year ended 31 December 2013, the shilling appreciated against the Japanese yen by 17.5 per cent. At 30 June 2014, 42.7 per cent. of the public external debt was denominated in US dollars, 28.5 per cent. was denominated in euros, 11.5 per cent. was denominated in Japanese yen and 4.7 per cent. was denominated in pound sterling. The shilling stood at 89.23 to the US dollar at end of September 2014. Any significant depreciation of the Kenyan shilling against the US dollar or other major currencies might have a material adverse effect on Kenya’s ability to repay its debt denominated in currencies other than the Kenyan shilling, including the amounts due under the Notes.

Risks Relating to the Further Notes

An investment in the Further Notes may not be suitable for all investors.

Generally, investment in emerging markets such as Kenya is only suitable for sophisticated investors who fully appreciate the significance of the risks involved in, and are familiar with, investing in emerging markets. Investors are urged to consult their own legal, tax and financial advisers before making an investment. Such risks include, but are not limited to, higher volatility and more limited liquidity in respect of the Further Notes, a fragile export base, budget deficits, lack of adequate infrastructure necessary to accelerate economic growth and changes in the political and economic environment. Emerging markets can also experience more instances of corruption by government officials and misuse of public funds than do more mature markets, which could affect the ability of governments to meet their obligations under issued securities.

Investors should also note that emerging markets such as Kenya are subject to rapid change and that the information set out in this Prospectus may become outdated relatively quickly.

Each potential investor in the Further Notes must determine the suitability of that investment in light of its own circumstances.

In particular, each potential investor should:

• have sufficient knowledge and experience to make a meaningful evaluation of the Further Notes, the merits and risks of investing in the Further Notes and the information contained in this Prospectus or any applicable supplement;

• have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in the Further Notes and the impact the Further Notes will have on its overall investment portfolio;

• have sufficient financial resources and liquidity to bear all of the risks of an investment in the Further Notes, including where the currency for principal or interest payments is different from the potential investor’s currency;

• understand thoroughly the terms of the Further Notes and be familiar with the behaviour of any relevant financial markets; and

• be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic, interest rate and other factors that may affect its investment and its ability to bear the applicable risks.

Events in other emerging markets, including those in other African countries, may negatively affect the Notes.

Economic distress in any emerging market country may adversely affect prices of securities and the level of investment in other emerging market issuers as investors move their money to more stable, developed markets. Financial problems or an increase in the perceived risks associated with investing in emerging market economies could dampen foreign investment in Kenya, adversely affect the Kenyan economy or adversely affect the trading price of the Notes. Even if the Kenyan economy remains relatively stable, economic distress in other emerging market countries could adversely affect the trading price of the Notes and the availability of foreign funding sources for the government. Adverse developments in other countries in sub-Saharan Africa, in particular, may have a negative impact on Kenya if investors perceive risk that such developments will adversely affect Kenya or that similar adverse developments may occur in Kenya. Risks associated with sub-Saharan Africa include political uncertainty, civil unrest and conflict, corruption, the outbreak of diseases, such as Ebola in West Africa, and poor infrastructure. Investors’ perceptions of certain risks may be compounded by incomplete, unreliable or unavailable economic and statistical data on Kenya, including elements of the information provided in this Prospectus. See “—The statistical information published by Kenya may differ from that produced by other sources and may be unreliable”.

The credit ratings of the Notes are subject to revision or withdrawal, either of which could adversely affect the trading price of the Notes.

In connection with the issue of the Further Notes, S&P and Fitch are expected to reaffirm their credit rating assigned to the Notes. The ratings may not reflect the potential impact of all risks related to structure, market, additional factors discussed above, and other factors that may affect the value of the Notes. A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating organisation. Other than pursuant to Article 16 of the Prospectus Directive, Kenya has no obligation to inform Noteholders of any revision, downgrade or withdrawal of its current or future sovereign credit ratings. A suspension, downgrade or withdrawal at any time of a credit rating assigned to Kenya may adversely affect the market price of the Notes.

Fitch and S&P are established in the European Union and registered under the CRA Regulation. In general, European regulated investors are restricted under the CRA Regulation from using credit ratings for regulatory purposes, unless such ratings are issued under the CRA Regulation (and such registration has not been withdrawn or suspended). Such general restriction will also apply in the case of credit ratings issued by non-EU credit-rating agencies, unless the relevant credit ratings are endorsed by an EU- registered credit rating agency or the relevant non-EU rating agency is certified in accordance with the CRA Regulation (and such endorsement or certification, as the case may be, has not been withdrawn or suspended).

Legal investment considerations may restrict certain investments.

The investment activities of certain investors are subject to legal investment laws and regulations, or review or regulation by certain authorities. Each potential investor should consult its legal advisers to determine whether and to what extent the Further Notes are legal investments for it, the Further Notes can be used as collateral for various types of borrowing and other restrictions apply to its purchase or pledge of the Further Notes. Financial institutions should consult their legal advisors or the appropriate regulators to determine the appropriate treatment of the Further Notes under any applicable risk-based capital or similar rules.

The liquidity of the Further Notes may be limited, and trading prices may fluctuate.

The Further Notes have no established trading market. While application has been made to list the Further Notes on the Irish Stock Exchange, (the Original Notes are already listed) and any one or more of the Managers may make a market in the Notes, they are not obligated to do so and may discontinue any market making, if commenced, at any time without notice. There can be no assurance that a secondary market will develop for the Further Notes, or, if a secondary market therein does develop, that it will continue. If the Further Notes are traded after their initial issuance, they may trade at a discount to their initial offering prices, depending upon prevailing interest rates, the market for similar securities, general economic conditions and the financial condition of Kenya.

Fluctuations in exchange rates and interest rates may adversely affect the value of the Notes.

The Issuer will pay principal and interest on the Further Notes in US dollars. This presents certain risks relating to currency conversions if an investor’s financial activities are denominated principally in a currency or currency unit (the “Investor’s Currency”) other than US dollars. These include the risk that exchange rates may significantly change (including changes due to devaluation of the US dollar or revaluation of the Investor’s Currency) and the risk that authorities with jurisdiction over the Investor’s Currency may impose or modify exchange controls. An appreciation in the value of the Investor’s Currency relative to the US dollar would decrease the Investor’s Currency-equivalent yield on the Notes, the Investor’s Currency equivalent value of the principal payable on the Notes and the Investor’s Currency equivalent market value of the Notes.

Government and monetary authorities (including where the investor is domiciled) may impose (as some have done in the past) exchange controls that could adversely affect an applicable exchange rate. As a result, investors may receive less interest or principal than expected, or no interest or principal. In addition, investment in the Further Notes involves the risk that subsequent changes in market interest rates may adversely affect the value of the Notes.

Definitive Notes not denominated in an integral multiple of US$200,000 or its equivalent may be illiquid and difficult to trade.

The Notes have denominations consisting of a minimum of US$200,000 plus integral multiples of US$1,000 in excess thereof. It is possible that the Notes may be traded in amounts that are not integral multiples of US$200,000. In each, such holder who, as a result of trading such amounts, holds an amount which is less than US$200,000 in his account with the relevant clearing system at the relevant time may not receive a Certificate in respect of such holding (should Certificates be printed) and would need to purchase a principal amount of Notes such that its holding amounts to US$200,000.

If Certificates are issued, holders should be aware that Certificates which have a denomination that is not an integral multiple of US$200,000 may be illiquid and more difficult to trade than Notes denominated in an integral multiple of US$200,000.

The terms of the 2019 Notes and the 2024 Notes may be modified, waived or substituted without the consent of all the holders of the 2019 Notes or the 2024 Notes (as the case may be).

The Terms and Conditions of the 2019 Notes and the 2024 Notes contain provisions for convening meetings of holders of the 2019 Notes or the 2024 Notes (as the case may be) to consider matters affecting their interests. The provisions permit defined majorities to bind all holders of the 2019 Notes or the 2024 Notes (as the case may be) including any such Noteholders who did not attend and vote at the relevant meeting and any such Noteholders who voted in a manner contrary to the majority.

Kenya is a sovereign state, and accordingly it may be difficult to obtain or enforce judgments or arbitral awards against it.

Kenya is a sovereign state and has waived only certain immunities and has not submitted to the jurisdiction of any court outside Kenya, but instead it has agreed to resolve disputes by arbitration in accordance with rules and procedures of the LCIA. As a result, a LCIA arbitration proceeding is the exclusive forum in which a holder may assert a claim against Kenya. In addition, it may not be possible for investors to effect service of process upon Kenya within their own jurisdiction, obtain jurisdiction over Kenya in their own jurisdiction or enforce against Kenya judgments or arbitral awards obtained in their own jurisdiction. See “Enforcement of Civil Liabilities” and Condition 16(b) (Arbitration).

Payments made in certain EU Member States may be subject to withholding tax under the EU Savings Directive.

Under EC Council Directive 2003/48/EC on the taxation of savings income (the “Savings Directive”), EU Member States are required, from 1 July 2005, to provide to the tax authorities of another EU Member State details of certain payments of interest (or similar income) paid by or secured for a person established within its jurisdiction to (or for the benefit of) an individual resident, or certain types of entity established, in that other EU Member State. However, for a transitional period, Luxembourg and Austria will (unless during that period they elect otherwise) instead operate a withholding system in relation to such payments. The current rate of withholding under the Directive is 35 per cent. The transitional period is to terminate at the end of the first full fiscal year following agreement by certain non-EU countries to exchange information procedures relating to interest and other similar income. The Luxembourg government has announced its intention to elect out of the withholding system in favour of automatic exchange of information with effect from 1 January 2015.

The Council of the European Union has adopted a Directive (the “Amending Directive”) which will, when implemented, amend and broaden the scope of the requirements of the Savings Directive described above. The Amending Directive will expand the range of payments covered by the Savings Directive, in particular to include additional types of income payable on securities, and the circumstances in which payments must be reported or paid subject to withholding. For example, payments made to (or for the benefit of) (i) an entity or legal arrangement effectively managed in an EU Member State that is not subject to effective taxation, or (ii) a person, entity or legal arrangement established or effectively managed outside of the EU (and outside any third country or territory that has adopted similar measures to the Savings Directive) which indirectly benefit an individual resident in an EU Member State, may fall within the scope of the Savings Directive, as amended. The Amending Directive requires EU Member States to adopt national legislation necessary to comply with it by 1 January 2016, which legislation must apply from 1 January 2017.

A number of non-EU countries and certain dependent or associated territories of certain EU Member States have adopted similar measures to the Savings Directive.

If a payment were to be made or collected through an EU Member State which has opted for a withholding system and an amount of, or in respect of, tax were to be withheld from that payment pursuant to the Savings Directive or any other Directive implementing the conclusions of the ECOFIN Council meeting of 26-27 November 2000 on the taxation of savings income or any law implementing or complying with, or introduced in order to conform to such Directive, neither the Issuer nor any paying agent nor any other person would be obliged to pay additional amounts with respect to any Note as a result of the imposition of such withholding tax. Furthermore, once the Amending Directive is implemented and takes effect in EU Member States, such withholding may occur in a wider range of circumstances than at present, as explained above. The Issuer is, however, required to maintain a paying agent in an EU Member State, if any, that will not be obligated to withhold or deduct tax pursuant to the Savings Directive. Noteholders should consult their own tax advisers regarding the implications of the Savings Directive in their particular circumstances.

USE OF PROCEEDS

Kenya expects the net cash proceeds of the issue of the Further Notes, before expenses, to amount to US$793,940,000 (plus accrued interest in respect of both series for the period from and including 24 June 2014 to but excluding 3 December 2014) which Kenya expects to use for general budgetary purposes, including for the funding of infrastructure projects.

REPUBLIC OF KENYA

Location and Geography

Kenya has a warm and humid climate along its Indian Ocean coastline, with wildlife-rich savannah grasslands inland towards the capital. Nairobi has a cool climate that gets colder approaching Mount Kenya. Further inland there is a warm and humid climate around Lake Victoria and temperate forested and hilly areas in the western region. The north-eastern regions along the border with Somalia and Ethiopia are arid and semi-arid areas with near-desert landscapes. Lake Victoria, the world’s second largest fresh-water lake and the world’s largest tropical lake, is situated to the southwest, and Kenya, Uganda and Tanzania share its border.

The “long rains” season occurs from March to June. The “short rains” season occurs from October to December. The rainfall is sometimes heavy and often falls in the afternoons and evenings. The temperature remains high throughout these months of tropical rain. The hottest period is February and March, leading into the season of the long rains, and the coldest is in July and August.

Kiswahili and English are both official languages in Kenya, and Kiswahili is the national language.

Border Disputes

The Maritime Border with Somalia

On 6 May 2009, Kenya submitted to the UN Commission information on the limits of the continental shelf beyond 200 nautical miles from the baselines from which the breadth of the territorial sea is measured. The submission is intended to give Kenya the right to explore and exploit mineral resources on this additional territory under the Convention on the Law of the Sea. Kenya and Somalia are in discussion with regards to their respective submissions to the UN Commission. In addition, on 28 August 2014, Somalia instituted proceedings against Kenya before the ICJ with regard to the dispute concerning the location of the maritime boundary in the Indian Ocean between the two countries. Somalia requested the ICJ to determine the complete course of the single maritime boundary dividing all the maritime areas appertaining to Somalia and Kenya in the Indian Ocean and asked the ICJ to determine the precise geographical co-ordinates of the single maritime boundary in the Indian Ocean. On 16 October 2014, the President of the ICJ fixed the time limits for the filing of the initial pleadings. Somalia must file its memorial by 13 July 2015, and Kenya must file its counter-memorial by 27 May 2016.

Migingo Island

Migingo is a 2,000-square-metre (half-acre) island in Lake Victoria. In 2008, both Kenya and Uganda claimed the island. The basis for the dispute revolves primarily around the lucrative fishing rights associated with the island, mostly for valuable Nile perch. In July 2009, the Ugandan government shifted its official position, stating that while Migingo Island was in fact Kenyan, much of the waters near it were Ugandan.

In April 2009, the Ugandan flag was lowered and Ugandan security personnel withdrew from the island. A joint re-demarcation line of the border was launched on 2 June 2009 to recover and to place survey markers on land, making delineation of the boundary on the lake more precise. The two countries have established a joint technical experts committee to demarcate the borderline along the island. The committee has held several meetings aimed at concluding the exercise.

Ilemi Triangle

The Ilemi Triangle is an area of disputed land in East Africa, measuring between 10,320 and 14,000 square kilometres (3,985 and 5,405 square miles). The territory borders Ethiopia, and both South Sudan and Kenya have claimed the territory. Since independence, Kenya, however, has had de facto control of the area.

History

Kenya was not a unified political entity prior to the last decade of the nineteenth century. In 1890, Britain established the East Africa Protectorate, which in 1920 became a crown colony by the name of Colony of Kenya. Organised resistance to colonial rule began in the 1920s, intensified in the 1940s, and became violent in 1952 following the formation of the Mau Mau Resistance movement. After nearly eight decades of British colonial rule, Kenya gained independence in 1963 and became a republic a year later. Jomo Kenyatta, an icon of the struggle for liberation, led Kenya as Prime Minister, and later President, from independence in 1963 until his death in 1978, when President Daniel arap Moi took power in a constitutional succession. The country was a de facto one party state from 1969 until 1982 when the ruling Kenya African National Union (“KANU”) made itself the sole legal party in Kenya. President arap Moi acceded to internal and external pressure for political liberalisation in late 1991. The ethnically fractured opposition failed to dislodge KANU from power in elections in 1992 and 1997, which were marred by violence and fraud, but were viewed as having generally reflected the will of the Kenyan people. President arap Moi stepped down in December 2002 following fair and peaceful elections. Mwai Kibaki, running as the candidate of the multi-ethnic, united opposition group, the National Rainbow Coalition (“NARC”), defeated KANU candidate Uhuru Kenyatta (the son of founding President Jomo Kenyatta) and assumed the presidency following a campaign centred on an anti-corruption platform. Kibaki’s NARC coalition splintered in 2005 over a constitutional review process. Government defectors joined with KANU to form a new opposition coalition, the Orange Democratic Movement (“ODM”), which defeated the government’s draft constitution in a popular referendum in November 2005. President Kibaki’s re-election in December 2007 brought charges of vote rigging from ODM candidate Raila Odinga and unleashed two months of violence in which an estimated 1,133 people died. African Union- sponsored mediation led by former UN Secretary General Kofi Annan in late February 2008 resulted in a power-sharing accord bringing Mr. Odinga into the government in the restored position of Prime Minister. The power-sharing accord included a broad reform agenda, the centre piece of which was constitutional reform. In August 2010, Kenyans overwhelmingly adopted the Constitution in a national referendum. The Constitution introduced additional checks and balances to executive power, including a bill of rights for Kenyan citizens, and significant devolution of power and resources to 47 newly created counties. It also eliminated the position of Prime Minister following the first presidential election under the Constitution, which occurred on 4 March 2013. While allegations of irregularities in the voting process were made, the elections were not marred by violence, and the newly constituted Supreme Court, which dismissed the opposition’s appeal, confirmed the result. Uhuru Kenyatta, running against a field including Prime Minister Odinga, won the March elections in the first round by a close margin and was sworn into office on 9 April 2013.

Population

Kenya has an estimated population of approximately 43 million. According to the 2009 population census, ethnic groups in the nation are represented as follows: Kikuyu (17 per cent.), Luhya (14 per cent.), Luo (11 per cent.), Kalenjin (13 per cent.), Kamba (10 per cent.), Kisii (6 per cent.), Meru (4 per cent.), other African (24 per cent.) and non-African (Asian, European, and Arab) (less than 1 per cent.). According to the 2009 Census, the vast majority of Kenyans are Christian (83 per cent.), with 47.7 per cent. regarding themselves as Protestant and 23.5 per cent. as Roman Catholic of the Latin rite, while other Kenyans are Muslim (11.2 per cent.), irreligious (2.4 per cent.) or have indigenous beliefs (1.7 per cent.).

As of 30 June 2013, population density is estimated at approximately 75 persons per square kilometre, with approximately 24 per cent. of the population living in urban areas. Nairobi, the capital of the country and its largest city, has an estimated population of 3.4 million. Other main cities of Kenya are Mombasa, Kisumu and Nakuru with estimated population of 966,000, 388,000 and 307,000, respectively.

Kenya has a diverse population that includes most major ethnoracial and linguistic groups found in Africa. As of 30 June 2013, there are an estimated 42 different communities, with Bantus (67 per cent.) and Nilotes (30 per cent.) constituting the majority of local residents. Cushitic groups also form a small ethnic minority, as do Arabs, Indians and Europeans. The country has a young population with 73 per cent. of residents aged below 30 years.

The following table sets out selected comparative macroeconomic statistics regarding certain socioeconomic indicators for 2012 (unless otherwise indicated) for Kenya and for certain other countries.

Selected Comparative Socioeconomic Statistics

Adult Doing Per capita GDP Life expectancy literacy Business Debt/GDP (in constant 2005 US$) (in years)(1) rate(2) Ranking(3) 2013(4) Zambia ...... 798 55.8 61.4 83 31.8 Ghana ...... 724 60.8 71.5 67 53.1 Kenya ...... 1,028(5) 60.4 72.2 129 43.5 Tanzania ...... 483 60.1 67.8 145 42.7 Uganda ...... 405 58.0 73.2 132 30.7 Rwanda ...... 390 62.9 65.9 32 23.5 Burundi ...... 153 53.1 86.9 140 47.6 ______Notes: (1) 2011 data. (2) 2010 data, except for Kenya and Zambia, which are 2007 data, and Burundi, which is 2008 data. (3) Doing Business Index 2014. (4) Estimated, except for Kenya. (5) Per Capita GDP in Constant Prices for Kenya is for December 2012 based on the rebased GDP numbers. Source: World Bank Statistical Compendium; The World Factbook

Public Health

Kenya’s public health policy is guided by the policy of having the highest attainable standard of health in a manner responsive to the needs of the population. At the national level, the Ministry of Health has been working to move towards the devolution model provided by the Constitution. A two-tier system is being implemented which provides a role for institutions at the national and county level, instead of the previous sector wide approach. Under the current health sector approach, the sector is comprised of the Ministry of Health and eight semi autonomous government agencies namely, Kenyatta National Hospital, Moi Teaching & Referral Hospital, Kenya Medical Research Institute, Kenya Medical Supplies Agency, Kenya Medical Training College, National Health Insurance Fund, National Aids Control Council and HIV & AIDS Tribunal, which provide the Ministry of Health with support of the following core functions through specialised health service delivery; medical research and training; procurement and distribution of drugs; and financing through health insurance.

Under the proposed framework to comply with devolution, the Ministry of Health is primarily responsible for developing national policy, providing technical support, monitoring quality standards of performance of the county governments and community organisations, providing guidelines on tariffs and conducting studies required for administrative and management purposes. During this transitional period of 2012-2017, the national government will also support the establishment of capabilities of the institutions at the county level.

Pursuant to the Constitution, most of the delivery of health services will be provided by the counties, with further responsibilities at the county level being provided at a sub-county and community level. The one exception is the Ministry of Health will retain national referral services, which are comprised of all secondary and tertiary referral facilities that provide specialised services. The county health services will be responsible for all level 4 (primary) hospitals and services in the county, including those managed for non-state entities. The county health services thus will be primarily responsible for comprehensive in-patient diagnostics, medical surgical and rehabilitative care, including reproductive health services, specialised outpatient services and facilitating and managing referrals from the sub-county and community health level. The sub-county health management will comprise all level 2 (dispensary) and level 3 (health centres) facilities, including those managed by non-state entities. The primary responsibilities at the sub-county level are disease prevention and health promotion, basic outpatient diagnostic, medial surgical and rehabilitative services, inpatient services for emergency patients waiting referral, patient observation and normal delivery services. The sub-county level institutions are also responsible for facilitating referrals from the community health level. Finally, the community health level institutions in the country, comprised of the community units, are primarily responsible for promotion of better health behaviours, recognition of signs and symptoms of conditions requiring referral and facilitation of community diagnostics, management and referrals to the higher levels.

As of 30 June 2013, the Ministry of Health owned and operated 3,965 facilities or 42.9 per cent. of all health facilities in the country, with private institutions and private practices, faith based organisations, other public institutions, and non-governmental organisations owning and operating, 3,500 (37.8 per cent.), 1,053 (11.4 per cent.), 438 (4.7 per cent.), and 293 (3.2 per cent.), respectively.

The table below provides summary statistics about the public health system for the periods presented.

Public Health System Year ended 31 December 2010 2011 2012 Number of primary care facilities ...... 7,111 8,006 8,375 Number of registered medical personnel ...... 100,411 95,960 105,369 Medical personnel in training ...... 8,985 8,261 11,338 ______Source: Ministry of Health

Expenditures by Programme 2009/2010 2010/2011 2011/2012 (KES millions) Curative Health ...... 26,818.70 25,109.20 29,314.70 Preventative and Promotive Health ...... 9,670.60 17,090.44 29,588.99 Research and Development ...... 7,398.00 6,454.00 8,283.00 ______Notes: (1) Provisional. Source: Ministry of Health

HIV/AIDS, Malaria and Tuberculosis

HIV/AIDS, tuberculosis and malaria are major healthcare challenges in Kenya and other East African countries. In the period 2010/11 to 2012/13, national HIV prevalence declined from 7.2 per cent. to 5.6 per cent. of adults aged 15-64 years, while prevalence dropped from 3.8 per cent. to 2.1 per cent. of adults aged 15-24 years and 10.5 per cent. to 6.4 per cent. of adults aged 25-34 and the total number of persons living with HIV is estimated to be in the region of 1.6 million. Tuberculosis infections are mostly opportunistic infections relating to immune system suppression due to HIV. In 2013, there were 11,186 deaths due to tuberculosis compared to 10,611 deaths due to tuberculosis in 2012, an increase of 5.4 per cent.

About 25 million Kenyans live in malaria endemic regions of the former provinces of Western, Nyanza and the Coast, with a majority of them under the age of 15. While combination therapies and use of indoor residual spraying have resulted in reduction of prevalence from 38 per cent. in 2010 to 21 per cent. in 2012; some regions of Western and Nyanza, however, still have experienced little or no changes in the period 2010/11 to 2012/13 (between 37 per cent. and 47 per cent.).

Ebola

Ebola virus disease, or Ebola, is a severe, often fatal illness that has recently reappeared in outbreaks in certain West and Central African countries, including Guinea, Liberia, Nigeria, Senegal and Sierra Leone. Since March 2014, the US Centers for Disease Control and Prevention have documented over 14,404 cases of Ebola in Guinea, Liberia, Nigeria, Senegal and Sierra Leone, with over 5,173 deaths recorded. Ebola is a dangerous and contagious virus that often results in death. Ebola is introduced into the human population through close contact with the blood, secretions, organs or other bodily fluids of infected animals. In Africa, infection is documented through the handling of infected chimpanzees, gorillas, fruit bats, monkeys, forest antelope and porcupines found ill or dead or in the rainforest. Ebola then spreads in the community through human-to-human transmission, with infection resulting from direct contact (through broken skin or mucous membranes) with the blood, secretions, organs or other bodily fluids of infected people, and indirect contact with environments contaminated with such fluids. No licensed vaccine for Ebola is currently available. While reported cases of Ebola have increased substantially in West Africa in 2014, there are no confirmed cases of Ebola in Kenya or any other nearby countries in East Africa. Kenya, however, has invested in significant training and equipment to combat any possible outbreak.

Education

The education sector has as its overall goals to increase access to education and training, improve quality and relevance of education, reduce inequality as well as develop knowledge and skills in science, technology and innovation for global competitiveness. The education sector is comprised of the Ministry of Education, Science and Technology, the Teachers Service Commission and their affiliated institutions. In order to align the sector with the Constitution, international commitments and other policies such as Kenya Vision 2030 there are several reforms being considered to reshape the sector. The national government’s role is in setting policy, allocating the national education budget and supervising and regulating the education system. At the school level, the sector is already decentralised. However, decisions regarding what specific functions currently

performed by the Ministry of Education, Science and Technology will be devolved to the counties and if there will be a management level equivalent to an education department at the county level is still to be determined. Expenditures by the Ministry of Education, Science and Technology, including expenditures by the Teachers Service Commission, were KES183,965 million, KES227,894 million and KES264,403 million for 2011/2012, 2012/2013 and 2013/14, respectively.

Other recent initiatives in the sector include:

• creation of programmes targeting marginalised children, such as the School Feeding and Gender in Education programmes;

• the construction/rehabilitation or expansion of 560 secondary schools. Under the economic stimulus initiative, commenced in 2009 a total of KES6.3 billion was disbursed to 355 secondary schools. Construction/rehabilitation works aimed at transforming the 200 schools into centres of excellence is still ongoing and under the infrastructure programme, funds were disbursed to 371 schools for rehabilitation/expansion and work is ongoing. Cumulatively 60 schools have been upgraded from the former provincial schools to national schools and an additional 27 provincial schools have been earmarked for upgrading to national schools in 2013/14; and

• establishment of a voucher system programme in the five poorest districts. The programme seeks to enhance financial assistance targeting vulnerable groups to supplement the already existing initiatives including the school feeding and nutrition programme, bursary, free primary education and free secondary education.

Primary, Secondary and Higher Education

At present basic education covers eight years of primary education, four years of secondary education and four years of basic university degree. The table below provides student enrolment in primary and secondary schools for periods provided below.

Primary and Secondary School Enrolment

2011 2012 2013(1) (thousands of students) Primary school ...... 9,857 9,995 10,183 Secondary school ...... 1,768 1,915 2,104 ______Notes: (1) Provisional. Source: Ministry of Education, Science and Technology.

As at 30 June 2014, there were 22 public universities and nine constituent university colleges and 35 private universities in Kenya.

The table below provides student enrolment in public and private universities for the periods provided.

Enrolment in Public and Private Universities

2011/2012 2012/2013 2013/2014(1) (thousands of students) Public Universities(2) ...... 157,916 195,528 276,349 Private Universities ...... 40,344 45,023 48,211

Total enrolment ...... 198,260 240,551 324,560 ______Notes: (1) Provisional. (2) Includes information as to enrolment only as to the following universities: University of Nairobi, Kenyatta University, Moi University, Egerton University, Jomo Kenyatta University of Agriculture and Technology, Maseno University, Masinde Muliro University of Science and Technology, Kenya Polytechnic University and Mombasa Polytechnic University College. Source: Ministry of Education, Science and Technology.

Political System

General

Kenya is a multi-party democratic state comprising the executive, the legislature, the judiciary and the devolved government.

The President, the Deputy President, and the Cabinet constitute the executive branch of the Kenyan government. The President is Head of State and government, the Commander in Chief of the Kenya Defence Forces and the chairperson of the National Security Council. The President is elected by registered voters in a national election for a five-year term and can only be re- elected for one additional term. The Deputy President is the principal assistant of the President and deputises the President in the execution of the President’s functions. The Cabinet is comprised of the President, the Deputy President, the Attorney General, and the Cabinet Secretaries, of which there may be no less than 14 and no more than 22. The President nominates and, with the approval of the National Assembly, appoints Cabinet Secretaries. Kenya currently has 18 Cabinet Secretaries.

The legislature is composed of the Senate and the National Assembly.

There are 67 Senators. Forty-seven are elected by the registered voters in the 47 counties of Kenya, 16 women members are nominated by political parties according to their proportion of members in the Senate, four members (two men and two women) represent the youth and persons with disabilities and are elected on the basis of proportional representations by use of party lists. The Speaker is an ex officio member of the Senate. The Speaker is elected from candidates who are not Senators by the votes of two-thirds of all the Senators. If no candidate reaches the required number of votes, then a runoff election is held between the two candidates who receive the highest and next highest number of votes; however, if more than one candidate receives the highest number of votes, then only the candidates who receive the highest number of votes will participate in the runoff election. The candidate who receives the highest number of votes in the runoff election is declared the Speaker.

There are 349 members of the National Assembly. Each of the 290 constituencies elect a member to the National Assembly. Under the Constitution, there must be a women’s representative member of parliament elected from each county, guaranteeing a minimum of 47 women members in the National Assembly. Twelve additional members are nominated by parliamentary political parties according to their proportion of members in the National Assembly. Similar to the Senate, the Speaker is an ex officio member of the National Assembly and is elected from candidates who are not members of the National Assembly. The procedure for election of the Speaker of the National Assembly is similar to the election of the Speaker of the Senate.

The coalition of political parties supporting President Kenyatta holds 186 out of the 349 seats in the National Assembly and 33 out the 67 of the seats in the Senate.

The most recent presidential and legislative elections in Kenya took place in March 2013, and the next presidential and legislative elections are scheduled for August 2017.

Since the occurrence of the 2007-2008 post-election violence, Kenya has made concerted efforts to put in place an institutional framework intended to facilitate peaceful transfer of power. The most notable measures that have been implemented are the following:

• the Constitution contains detailed provisions in respect of general election cycles and the requirement that election petitions be determined within six months after the declaration of results, establishes the Supreme Court of Kenya, whose mandate includes hearing and determining petitions arising out of a presidential election, and provides for the process of swearing in a newly elected President;

• the enactment of legislation containing provisions aimed at addressing concerns that might have contributed to the 2007 post election violence as further detailed below;

• the establishment of various independent commissions whose mandates are to implement the provisions of the Constitution as further detailed below;

• undertaking extensive on-going judicial reforms to instil public confidence in the Kenyan judicial system, in particular the public vetting of judicial officers including Magistrates and Judges of Kenya’s subordinate and superior courts, respectively; and

• the establishment of the Constitutional Implementation Oversight Committee, a select committee of Parliament established under the Constitution to oversee implementation of the Constitution.

As mentioned above, several independent commissions have been established under the Constitution respectively to entrench constitutionalism and respect for the rule of law and implement the devolved system of government. The independent commissions include:

• the National Cohesion and Integration Commission (the “NCIC”), which is established under the National Cohesion and Integration Act, 2008 (the “NCIC Act”). The NCIC facilitates and promotes equality of opportunity, good relations, harmony and peaceful co-existence between persons of different ethnic and racial communities of Kenya and advises the government on the aforementioned matters. In addition, the NCIC has the lead role in promoting elimination of all forms of discrimination on the basis of ethnicity or race, promoting tolerance, understanding and acceptance of diversity in all aspects of national life, encouraging full participation by all ethnic communities in the social, economic, cultural and political life of other communities, promoting arbitration, conciliation, mediation and similar forms of dispute resolution mechanisms in order to secure and enhance ethnic and racial harmony and peace, investigating complaints of ethnic or racial discrimination and making recommendations to the Attorney-General, the Kenya National Human Rights Commission or any other relevant authority on the remedial measures where such complaints are valid, and identifying and analysing factors that inhibit the attainment of harmonious relations between ethnic communities, particularly barriers to the participation of any ethnic community in social, economic, commercial, financial, cultural and political endeavours, amongst other roles set out in the NCIC Act;

• the Kenya National Commission on Human Rights (the “KNCHR”), which is established under the Kenya National Commission on Human Rights Act, 2011. The functions of the KNCHR include, among others, promoting respect for human rights and developing a culture of human rights in Kenya, monitoring, investigating and reporting on the observance of human rights in all spheres of life in Kenya, receiving and investigating complaints about the alleged abuses of human rights and taking steps to secure appropriate redress where human rights have been violated, and on its own initiative or the basis of complaints, investigating or researching matters in respect of human rights, and making recommendations to improve the functioning of state organs;

• the Independent Electoral and Boundaries Commission, which is established under the Independent Electoral and Boundaries Commission Act, 2011, supervises elections and referenda at the county and national government levels;

• the National Police Service Commission established under Article 246 of the Constitution whose role includes staffing of the National Police Service, and exercising disciplinary control over the members of the National Police Service;

• the National Land Commission established under Article 67(1) of the Constitution and whose functions include, managing public land on behalf of the national and county governments, initiating investigations, on its own initiative or on a complaint, into present or historical land injustices and recommending appropriate redress; and

• the Commission for the Implementation of the Constitution established under the Constitution whose mandate is to monitor, facilitate and oversee the development of legislation and administrative procedures to implement the Constitution, co-ordinate with the Attorney-General and the Kenya Law Reform Commission in the tabling in Parliament of legislation to implement the Constitution, prepare and submit a report every three months to the Constitutional Implementation Oversight Committee of Parliament on progress made on the implementation of the Constitution and any impediments to its implementation, and work with each Constitutional commission to ensure that the letter and spirit of the Constitution is respected.

In addition to the Constitution and statutes mentioned above, the following statutes have been enacted with the aim of fostering the peaceful transition and transfer of power:

• the Assumption of the Office of President Act, 2012 (the “AOP Act”), which came into force upon the announcement of the date of first elections in March 2013 under the Constitution. The provisions of the AOP Act apply to the President’s and the Deputy President’s assumption into office and set out the procedure for the swearing in ceremony of the President and the Deputy President;

• the National Police Service Act, 2011, which among other provisions, provides for the recruitment, enlisting and training of police officers and the implementation of the ongoing police reforms, which involve, among other measures, the public vetting of senior officials serving in the National Police Service; and

• the Land Act, 2012 and the Land Registration Act, 2012, which were enacted under Article 68 of the Constitution and were intended to address unequal distribution of land, one of the perceived causes of the 2007 post election violence. The two statutes revise, consolidate and rationalise existing land ownership in accordance with the Constitutional principles aimed at ensuring equitable access to land, security of land rights, transparent and cost effective land administration, among others.

The judiciary comprises of three superior courts: the Supreme Court; the Court of Appeal; and the High Court.

The Supreme Court is the highest judiciary organ consisting of the Chief Justice, the Deputy Chief Justice and five other judges. The Supreme Court has original jurisdiction to hear and determine disputes relating to the office of the President and appellate jurisdiction to hear and determine appeals from the Court of Appeal and any other court or tribunal as prescribed by national legislation.

The Court of Appeal consists of the number of judges, being not fewer than 12, as may be prescribed by an Act of Parliament. This court has jurisdiction to hear appeals from the High Court and any other court or tribunal as prescribed by an Act of Parliament.

The High Court consists of such number of judges prescribed by an Act of Parliament and has: (i) unlimited jurisdiction in civil and criminal matters; (ii) jurisdiction to determine any infringements of the rights and freedoms under the bill of rights, to hear appeals from a decision of a tribunal appointed under the Constitution to consider the removal of a person from office and to hear any questions with respect to interpretation of the Constitution; (iii) and supervisory jurisdiction over all other subordinate courts and any other persons, body or authority exercising judicial or quasi-judicial functions.

The Constitution establishes 47 counties, each with its own county government. County governments consist of a county assembly and a county executive.

The county assembly is made up of members elected from different wards in the county, the number of special seat members necessary to ensure that no more than two thirds of the membership of the assembly are the same gender and the number of members of marginalised groups, including persons with disabilities and youth prescribed under an Act of Parliament. The speaker of the county assembly is an ex officio member and is elected by the county assembly from among persons who are not members of the county assembly.

The executive authority of the county is vested in and exercised by a county executive committee. The executive committee consists of the county governor, the deputy governor and members appointed by the county governor with the approval of the county assembly (from among persons who are not members of the assembly).

Voters in each county elect their governor. Each county governor nominates a person as a candidate for deputy governor. The governor and the deputy governor shall not hold office for more than two terms.

Some of the provisions of the Constitution with regard to devolved governments are still in the process of being implemented. Parliament is required to enact legislation within three years of the adoption of the Constitution to support the full implementation of devolved government.

The 2010 Constitution and Devolution

After the 1997 general elections, Parliament enacted the Constitution of Kenya Review Act (2002) which formed the legal groundwork for constitutional reforms. A constitutional review body was created to provide civic education, seek public input and draft a new constitution to be studied by a National Constitutional Conference. Voters rejected the draft constitution, however, in the 2005 referendum. The draft constitution was eventually revived after the 2007 post-election violence in Kenya. A Committee of Experts published a proposed constitution on 23 February 2010 and presented it to Parliament. Parliament approved the proposed constitution on 1 April 2010. The proposed constitution was subjected to a referendum on 4 August 2010, approved by 67 per cent. of Kenyan voters and became the Constitution. The Constitution introduced additional checks and balances to executive power, including a bill of rights for Kenyan citizens and significant devolution of power and resources to 47 newly created counties.

Although devolution is one of the key concepts in the Constitution, it is not new to Kenya’s political history. Prior to Kenya’s independence in 1963, there was already a movement to transfer significant powers to regional authorities. While regional governments during the period after independence had some autonomy, successive central government administrations moved rapidly to centralise and consolidate state power. The clamour for devolution grew during the 1990s. Although there were some piecemeal decentralisation efforts from 1998 to 2006 with the introduction of devolved (geographically earmarked) funds (such as the Local Authority Transfer Fund created through the LATF Act 1998, the Road Maintenance Levy Fund created through the Kenya Roads Act, 2007, the Rural Electrification Fund created through the Energy Act of 2006 and the Constituency Development Fund created through the CDF Act of 2003), it was not until the adoption of the Constitution in 2010 that devolution was placed at the core of the law of the land and the political system. The implementation of devolution under the Constitution, however, requires Parliament to approve important acts. The acts passed in accordance with the Constitution include the Urban Areas and Cities Act, The County Governments Public Finance Management Transition Act, 2013, Division of Revenue Act, The National Government Co-ordination Act, The Transition County Allocation of Revenue Act, 2013, The Transition County Appropriation Act, 2013, The County Governments Act and the PFMA.

Audit Report

Article 229 of the Constitution requires the Auditor General to submit an audit report to Parliament within six months after the end of each fiscal year. The Auditor General prepares the initial draft of the audit report with the information that the ministries have made available to him at the time of submission, which is often incomplete at such time, and, as a result, the Auditor General is unable to account for all public funds in the government accounts of the prior year. Consequently, the draft report submitted to Parliament typically has significant audit queries. The ministries continue to provide the required information, and, at the time Parliament adopts the report, virtually all outstanding queries in the submitted report typically will have been addressed. If Parliament finds a weakness in internal controls, it makes a recommendation for improvement, and National Treasury is required to respond within six months through a memorandum which, if adopted by Parliament, concludes the audit. For the fiscal years 2010/11, 2011/12 and 2012/13, the audit reports are currently under review by the Public Accounts Committee of Parliament. For the fiscal year 2013/14, the Auditor General has not yet submitted a report to Parliament.

Legal Proceedings

ICC Proceedings

In March 2011, President Uhuru Kenyatta, Deputy President William Ruto, former Industrialisation Minister Henry Kosgey, former head of Public Service and Secretary to the Cabinet Francis Muthaura, radio executive Joshua Arap Sang and former police commissioner Mohammed Hussein Ali were summoned to appear before the ICC at The Hague following accusations of crimes against humanity related to the violence that occurred in the aftermath of 2007 presidential elections. The government of Kenya and the National Assembly both attempted to put in place mechanisms to have the cases tried in Kenya. The government appealed to both the UN Security Council and the ICC itself regarding the admissibility of the case. The National Assembly voted in favour of removing Kenya as a state party to the Rome Statute, the international treaty which established the ICC. Despite this opposition, the suspects cooperated with the proceedings and attended preliminary hearings in The Hague in April 2011 and confirmation of charges hearings in September of that year. The Pre-Trial Chamber II of the ICC confirmed the charges against Kenyatta, Ruto, and Sang and declined to confirm the charges against Ali, Kosgey, and Muthaura. The trial of Ruto and Sang began in September 2013, while that of Kenyatta was set to begin in March 2014, but the prosecutor has requested an indefinite adjournment of the hearing citing insufficient evidence. President Kenyatta and Deputy President Ruto have been cooperating and appearing at the proceedings, consistent with the ICC Rules of Procedure and Evidence. These rules have recently been amended to provide that defendants may be excused from appearing in person, under certain circumstances. The prosecutor in President Kenyatta’s case has requested an adjournment of the hearing in his case. On 31 March 2014, the ICC rejected the request by President Kenyatta for the termination of the case and set a commencement date of 7 October 2014 for the trial. The ICC also rejected a prosecution request to suspend the proceeding indefinitely pending compliance by Kenya with its cooperation obligations.

Governor of the Central Bank of Kenya

On 11 February 2014 the Director of Public Prosecutions ordered the arrest and prosecution of the Governor of the Central Bank of Kenya, Njuguna Ndung’u, alleging abuse of office for failure to comply with public procurement regulations related to the award of a contract for installation of security software at the Central Bank of Kenya. Governor Ndung’u has denied the allegations and sought an order that he could not be arrested or charged. On 14 February 2014, the High Court of Kenya ruled that the EACC, the Director of Public Prosecutions and the police could not arrest or charge Governor Ndung’u until the High Court heard and determined his petition. A hearing to determine this petition had been set for 14 May 2014. In May 2014, three successive judges recused themselves from hearing the case and the hearing on 14 May 2014 was vacated. The case was referred to Chief Justice for the appointment of a new judge. The Chief Justice has referred the case to a judge of the Judicial Review Division of the High Court. In September 2014, a High Court judge ruled the award of the tender was not irregular, and directed

the Central Bank of Kenya to conclude the contract. The EACC appealed the ruling, and, on 17 November 2014, the High Court denied Governor Ndung’u’s petition, thus clearing the way for the EACC to proceed with his prosecution. The court did, however, restrain the EACC from arresting Governor Ndung’u for 14 days, pending an appeal of the November ruling. If Governor Ndung’u is ultimately charged, he would be suspended from office, and the Deputy Governor of the Central Bank of Kenya, Haron Sirima, would temporarily take over the duties of the Governor.

Anglo Leasing

In December 2003, the Department of Immigration contracted for a loan for the issuance of secure passports and the equipment to be used at Kenya’s borders. Kenya’s procurement laws were not followed, and a company named “Anglo Leasing and Finance Company Ltd.” was awarded the contract. Subsequent review revealed that there were 18 contracts similar to the one arranged by Anglo Leasing and Finance Company Ltd., and these contracts have been collectively referred to as the “Anglo Leasing contracts.” On 12 August 2004, the then Ministry of Finance suspended all payments pursuant to the 18 contracts pending further investigation. Investigations followed by the Ministry of Finance, the Public Accounts Committee of Parliament, the Controller and Auditor General. Additionally, PricewaterhouseCoopers, an independent auditor, was contracted to conduct a forensic audit and valuation of the Anglo Leasing contracts. The various reports concluded, among other things, that Kenyan’s procurement laws were not followed, there was gross overpricing for goods and services, pre-financing payments were made, Kenya was paying interest on its own funds, in some cases, and there was evidence of corruption and abuse of office.

Of the 18 Anglo Leasing contracts, (i) four contracts with a value of KES18.9 billion were cancelled, and KES1 billion were recovered; (ii) three contracts with a value of KES6.8 billion have been completed and paid out; and (iii) eleven contracts with a value of KES30.6 billion were at various stages of completion. Of the eleven partially completed contracts, six have not been active, two have been settled directly with the parties, and two had final judgments totalling approximately US$14.8 million plus interest and costs entered against Kenya in courts in Switzerland and England. On 19 May 2014, Kenya paid a negotiated amount of US$16.4 million concerning these two judgments. The negotiated amount was due on 28 April 2014. The Attorney General of Kenya does not believe that the claimant creditors will seek further payments from Kenya, but, if they do, Kenya is prepared to resolve the matter. As for the eleventh contract, which involved a contract for the design, supply and installation of various electronic security equipment for the National Intelligence Service, the contractor terminated the contract in October 2013 and sent Kenya a claim for approximately KES3.05 billion. The claimant has yet to file any litigation to enforce its claim. In May 2014, the President ordered an investigation by the EACC into the corruption allegations in connection with the Anglo Leasing contracts. Given the public scrutiny associated with the contracts, the government will oppose vigorously any claim connected to the Anglo Leasing contracts.

Vanoil Energy Limited

On 24 September 2014, the Attorney General of Kenya received a notice of arbitration from Vanoil Energy Ltd. (“Vanoil”) in connection with a dispute over production sharing contracts between the government and Vanoil’s predecessor, Vangold Resources Ltd., related to Blocks 3A and 3B in Anza Basin in Garissa. Vanoil has asserted a force majeure due to civil disruptions, which it claims extended its rights under the production sharing contracts. Vanoil has also claimed that the alleged failure by the government to resolve civil disruptions was a breach of the government’s obligations under the production sharing contracts, including an obligation to provide Vanoil with access to the territory to enable Vanoil to fulfil its obligations under the production sharing contracts. In addition, Vanoil has alleged that the government’s actions constituted deprivation of its property rights in the production sharing contracts. Vanoil has claimed damages equal to the alleged US$150 million market value of its rights in Blocks 3A and 3B in Anza Basin in Garissa. An arbitration tribunal has not yet been appointed, and the claim is pending.

Konza Technology City

On 26 June 2014, Konza Ranching & Farming Cooperative Society Ltd brought a claim against the Attorney General of Kenya, Director of Physical Planning and others challenging the validity of the local physical development plan as it applies to a 10 km buffer zone. The buffer zone delineates land within 10 km outside the Konza Technology City. The Konza Technopolis Development Authority (the “KoTDA”) has joined the legal action as an interested party. The Attorney General of Kenya and KoTDA have each filed a preliminary objection. The KoTDA believes that the courts will decide the matter in the defendants’ favour. If Konza Ranching & Farming Cooperative Society Ltd does succeed, the local landowners in the 10 km buffer zone will not be required to comply with the local physical development plan. Such decision, however, will not affect the legality or suitability of Konza Technology City for its intended purposes. In addition, on 5 September 2014, the government charged the former Permanent Secretary of the Ministry of Information, Communications and Technology and others for theft and abuse of office for their actions in connection with the acquisition of land for Konza Technology City. These criminal actions do not affect the government’s legal ownership of land for Konza Technology City. See “The Economy—Principal Sectors of the Economy— Information, Communication and Technology”.

International Relations

WTO Membership

Kenya has been a member of the World Trade Organisation (the “WTO”) since 1 January 1995. In connection with Kenya’s WTO membership, the government is committed to supporting the progressive elimination of export subsidies as well as the substantial reduction of trade-distorting domestic support, whilst ensuring that it retains the right to support its own producers. As part of Kenya’s goal of ensuring its citizens have access to foreign goods and services that are not readily available in the country, the government is committed to engage in successive WTO Services negotiations to improve market access in partner WTO countries.

United Nations

Kenya has been a member of the UN since 1963. Kenya recognises the vital role of the UN in establishing and maintaining international peace and security, as well as in sustainable development and democratisation. Kenya continues to contribute military, police and corrections personnel to UN peace keeping operations with most of them being in Africa. Kenya has peacekeepers in Somalia, Sudan, South Sudan, Sierra Leone and Liberia.

World Bank and IMF

Kenya has been a member of the World Bank and the IMF since 1964. See “Public Debt—Relations with the IMF” for more information on Kenya’s relationship with the IMF.

EU Relations

Kenya participates in political, trade and co-operation relations with the EU through the “Cotonou Agreement”, the revised draft of which the EU and 79 countries in Africa, the Caribbean and the Pacific (the “ACP”) signed in March 2010. The agreement has the objective of reducing and eventually eradicating poverty consistent with the objectives of sustainable development and the gradual integration of the ACP countries into the world economy. The agreement is designed to establish a comprehensive partnership, based on three complementary pillars: development cooperation, economic and trade cooperation, and the political dimension.

Regional Relations

African Union. Kenya is an active member of the African Union (the “AU”), the successor of the Organisation of African Unity, which formally launched in July 2002 at a meeting in South Africa of African heads of state. The AU is modelled on the EU and has plans for a parliament, a central bank, a single currency, a court of justice and an investment bank. These plans include the Pan-African Parliament, which was inaugurated in March 2004 and has since held a number of sessions, although it does not yet play a legislative role.

AMISOM. AMISOM is an active regional peace support mission set up by the Peace and Security Council of the African Union with the full support of the UN. The principal aim of the mission is to provide support for the Federal Government of Somalia in its efforts to stabilise the country and foster political dialogue and reconciliation. AMISOM is also mandated to facilitate the delivery of humanitarian aid and create necessary conditions for the reconstruction and sustainable development of Somalia. AMISOM staff come from a wide range of nations across Africa, although a large number of its troops come from five countries: Uganda, Burundi, Djibouti, Kenya and Sierra Leone. AMISOM was created with an initial six-month mandate though subsequent renewals of its mandate by the AU Peace and Security Council and the UN Security Council have been authorised. UN Security Council resolution 2182 renewed the mandate of the troops to 30 November 2015. The strength of AMISOM uniformed personnel stands now at 22,126 , including 3,664 from Kenya.

East African Community. Kenya is also an active member of the East African Community (“EAC”). The EAC is a regional intergovernmental organisation of the Republics of Burundi, Kenya, Rwanda and Uganda and the United Republic of Tanzania. The Treaty for Establishment of the East African Community was signed on 30 November 1999 and entered into force on 7 July 2000 following its ratification by the original three partner states—Kenya, Tanzania and Uganda. Rwanda and Burundi acceded to the treaty on 18 June 2007 and became full members on 1 July 2007. The EAC aims at widening and deepening co-operation among its members in, among others, political, economic and social fields for their mutual benefit. The EAC countries established a customs union in 2005 and a common market in 2010. The common market comprises over 133 million people

across five member states with a total GDP of approximately US$79 billion. The EAC expects to enter into the next phase of integration which contemplates monetary union and the entry into a political federation of the East African states.

The EAC customs union has assisted to level the playing field for the region’s producers by imposing uniform competition policy and laws, customs procedures and external tariffs on goods imported from third countries, which has supported the region to advance its economic development and poverty reduction agenda. The customs union has also promoted cross-border investment and served to attract investment into the region. As an enlarged market with minimal customs clearance formalities, it is more attractive to investors than the smaller markets of individual nations. In addition, the customs union offers a more predictable economic environment for both investors and traders across the region, as the regionally administered Common External Tariff (the “CET”) and trade policy tend to be more stable.

Private sector operators based in the region with cross-border business operations are able to exploit the comparative and competitive advantages that the regional business locations offer, without having to factor in the differences in tariff protection rates, and added business transaction costs arising from customs clearance formalities.

Most important, however, is the signal that arises from the member states agreeing to implement a common trade policy in their relationship with the rest of the world. This is important in view of the developments at the global level, where countries are entering into economic partnership as regional groupings.

The EAC common market provides for freedom of movement for all factors of production between the member states. Thus, factors of production may become more efficiently allocated further increasing productivity.

For both business within the market and consumers, a single market is a competitive environment, making the existence of monopolies more difficult. Inefficient companies are likely to suffer a loss of market share and may have to close. However, efficient firms can benefit from economies of scale, increased competitiveness and lower costs, as well as expect increased profitability.

Consumers have benefited from the single market because the competitive environment brings them cheaper products, more efficient providers of products and also increased choice of products.

Other benefits include common and coordinated policies that increase efficiency especially in those countries that are behind in instituting good policies. In addition, the common regulatory regime and frameworks of a single market ensure that best practice within the regional framework are not only instituted but are also observed.

On 30 November 2013, the protocol on monetary union was signed by the member states, establishing a target to have a unified currency by 2023. The protocol will be implemented over a ten-year period, subsequently leading to creation of a regional central bank whose mandate is to stabilise financial prices. The protocol aims to provide a wide scope of cooperation in monetary and financial sectors among the EAC member states. Member states are expected to surrender monetary and exchange rates policies to one authority leading to a single currency regime within the region. The benefits expected from the single currency include price harmonisation, elimination of exchange rate risk, economies of international reserves and overall reduction in transaction costs among the member countries.

Kenya has benefited from EAC integration with trade in goods and services increasing since the launch of the customs union. In 2012, EAC member states accounted for 26.1 per cent. of Kenya’s total exports, with Uganda as the leading destination within the EAC, accounting for approximately 49.6 per cent. of exports to the EAC. In 2013, EAC member states accounted 25.0 per cent. of Kenya's total exports, with Uganda as the leading destination within the EAC, accounting for approximately 52.2 per cent. of exports to the EAC.

In order to enhance trade within the EAC, member states have been addressing issues relating to movement of goods and services. Recently, the heads of state of Kenya, Uganda and Rwanda launched a project to revamp the existing railway from the port of Mombasa to Nairobi extending to Kampala, Uganda, which also is expected to have links to Kigali, Rwanda. The government expects to build a new railway, road and pipeline as part of the Lamu Port-Southern Sudan-Ethiopia Transport (“LAPSSET”) corridor project from Lamu, Kenya to South Sudan, which also is expected to have a connection to Ethiopia. The EAC member states expect these infrastructure projects to boost trade and economic integration among the members. The three member states also launched the single customs territory that saw the reduction of transit time for goods from Mombasa port to Kigali from 22 days to eight, and to Kampala from 18 days to five days.

South Sudan, Somalia and Ethiopia have expressed interest in joining the EAC.

COMESA. Kenya attaches great significance to COMESA, as it provides a market for its manufactured products. The COMESA region is a vibrant economic area and membership in the free trade area was launched in October 2000, and has since been a catalyst to increased trade and investment. The COMESA member states are Burundi, Comoros, Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe.

Currently, COMESA is the leading destination of Kenya’s exports, constituting over 32.0 per cent. of total exports. Kenya’s exports to COMESA increased by 58.1 per cent. from KES111.1 billion in 2008 to KES175.7 billion in 2012. In 2013, Kenya’s exports to COMESA decreased by 6.9 per cent. from KES175.7 billion in 2012 to KES163.7 billion in 2013. Kenya’s primary exports to COMESA include tea, cement, natural sodium carbonate, iron and steel bars and cigarettes. Kenya now hosts a number of COMESA institutions which include, the Monetary Institute, ZEP-RE (re-insurance company) and COMESA reference laboratory for plant health at the Kenya Plant Health Institute.

Within the framework of EAC and COMESA, Kenya has been negotiating the Tripartite, an umbrella of organisations consisting of three of Africa’s regional economic communities, which are EAC, COMESA and South African Development Community (“SADC”). The first Tripartite summit was held on 22 October 2008 in Kampala, Uganda, and the heads of state conveyed in their communiqués a sense of urgency for the establishment of single free trade area covering the 26 countries of COMESA, EAC and SADC.

The objective of the Tripartite is to contribute to the broader objectives of the AU, namely accelerating economic integration of the continent and achieving sustainable economic development, thereby alleviating poverty and improving quality of life for the people of Eastern and Southern Africa region. The Tripartite works towards harmonisation of the various regional integration programmes of its member regional economic communities. These regional integration programmes focus on expanding and integrating trade and include the establishment of a free trade area, a customs union, a monetary union, and a common market; as well as infrastructure development projects in transport, information, communication, technology and energy sectors. The Tripartite negotiations for the first phase are likely to conclude by the end of 2014. Kenya is expected to benefit from the Tripartite framework due to an increase market for goods and services as well as increased investments with member states.

Nile Water Agreement of 1929. The Nile Water Agreement of 1929 grants Egypt the majority share of the Nile River’s waters. Under the treaty, Egypt is guaranteed access to 55.5 billion cubic metres of water out of a total of 84 billion cubic metres. To forestall any potential disputes, the Nile Basin Initiative was formally launched in February 1999 by the water ministers of nine countries that share the river—Egypt, Sudan, Ethiopia, Uganda, Kenya, Tanzania, Burundi, Rwanda and the Democratic Republic of Congo, with Eritrea as an observer. The Nile Basin Initiative is a partnership among the Nile riparian states that “seeks to develop the river in a cooperative manner, share substantial socioeconomic benefits, and promote regional peace and security”. The Nile Basin Initiative has ten member states—Burundi, the Democratic Republic of Congo, Egypt, Ethiopia, Kenya, Rwanda, South Sudan, Sudan, Tanzania and Uganda. Eritrea is an observer.

Relations with Neighbouring Countries

South Sudan. South Sudan remains a country with special links to Kenya premised on cultural, social, political, economic and other strategic factors. Culturally, the border communities share languages and traditions. Kenya hosted many of South Sudan’s refugees during its struggle for independence. However, when South Sudan achieved independence in 2005, some of the refugees returned to South Sudan. The foregoing factors have contributed to the close relations both between the governments and the people of the two countries.

Kenya also helped the negotiation processes between South Sudan and Sudan leading to the creation of South Sudan. This process included the signing of the Comprehensive Peace Agreement in Nairobi in January 2005. Following the independence of South Sudan, the two countries agreed on several initiatives aimed at strengthening and formalising relations. As a priority area, Kenya supported South Sudan in establishing its new government system. Kenya also strongly supports the African Union process led by the High Level Implementation Panel aimed at securing permanent and conclusive solutions to the pending issues between Sudan and South Sudan including, resolution over the disputed area of Abyei and the border dispute between South Sudan and Sudan.

When internal conflict broke out in South Sudan in December 2013, some South Sudanese refugees returned to Kenya. In January 2014, under an African Union initiative, Kenya was designated to receive political prisoners as a precondition to the cessation of hostilities between Sudan and South Sudan.

Kenya continues to support South Sudan in developing a stable, prosperous and peaceful state. Some Kenyan citizens currently reside in South Sudan. They run businesses, offer technical expertise and work in South Sudan. In addition, some Kenyan firms have invested in South Sudan. A new 1,800 kilometre railway and a road and pipeline under the LAPSSET project are expected to be built from Lamu, Kenya to South Sudan, which also will have a connection to Ethiopia, and mobilisation of funds are

underway. See “The Economy—Major Infrastructure Projects—Development of the Lamu Port-Southern Sudan-Ethiopia Transport (“LAPSSET”) Corridor”.

Additionally, given South Sudan’s position as an immediate neighbour with Kenya and its ensuing participation in East African development projects, the government expects relations between the two countries to be strengthened in various strategic fields of national development.

Sudan. Kenya maintains diplomatic relations with Sudan, and, as a COMESA member state, Kenya maintains an ordinary course trading relationship with Sudan and expects to continue to do so.

Somalia. Kenya has good relations with the Somalia Federal Government. The launch of the Joint Commission of Cooperation in June 2013 aims to boost bilateral ties as well as provide a platform for the economic and technical cooperation between Kenya and Somalia. Following the conflict in Somalia in October 2011, Kenya intervened to help stabilise, promote peace and reconciliation in the war torn country, which has contributed to good bilateral relations between the two countries. In addition, Kenya is involved in regional peace initiatives in Somalia and has contributed troops to the AMISOM peacekeeping forces in Somalia.

Uganda. Kenya has good relations with Uganda, Kenya’s largest export destination. Exports to Uganda totalled US$893 million in 2011, US$784 million in 2012 and $757 million in 2013. There is a large population of Kenyan students in Uganda.

Ethiopia. Kenya has good relations with Ethiopia. Kenya plans to import electricity from Ethiopia under the Eastern Electricity Highway Project, a project that aims to connect Ethiopia’s electrical grid with Kenya’s and allow Ethiopia to sell its surplus power to Kenya. Funding is expected to be provided by the World Bank, African Development Bank and the Agence Française de Développement. In addition, the new railway, road and pipeline under the LAPSSET project expected to be built from Lamu, Kenya to South Sudan are also expected to have a connection to Ethiopia. See “The Economy—Major Infrastructure Projects— Development of the Lamu Port-Southern Sudan-Ethiopia Transport (“LAPSSET”) Corridor”.

Tanzania. Kenya has good relations with Tanzania. Exports to Tanzania totalled US$491 million in 2011, US$535 million in 2012 and US$469 million in 2013. Imports from Tanzania totalled US$184 million in 2011, US$167 million in 2012 and US$135 million in 2013. Kenya, Tanzania and Zambia are planning to construct a power grid interconnection among the three countries. Funding for construction of the project, expected to be between US$650 million and US$800 million, is still to be sourced.

THE ECONOMY

Background and Economic History

Kenya is the largest economy in East Africa and is a regional financial and transportation hub. After independence, Kenya promoted rapid economic growth through public investment, encouraged smallholder agricultural production and provided incentives for private (often foreign) industrial investment.

Kenya has experienced continued growth in GDP over the last few years, driven primarily by growth in (i) financial intermediation, (ii) wholesale and retail trade and repairs and (iii) construction sectors of the economy. Real GDP grew 6.1 per cent. in 2011, 4.5 per cent. in 2012 and 5.7 per cent. in 2013. The government attributes this growth largely to continued growth in the wholesale and retail trade and repairs sector, which in real terms grew 8.3 per cent. in 2011, 7.0 per cent. in 2012 and 9.2 per cent. in 2013. The World Bank has forecasted Kenya’s GDP growth to be 5.0 per cent. in 2014 (prior to the rebasing of GDP in September 2014).

Vision 2030

In 2007, the government announced “Vision 2030” as its long-term plan for attaining middle income status as a nation by 2030. In line with Vision 2030, the government prepares successive MTPs that outline the policies, programmes and projects that the government intends to implement over a five year period. The first MTP covered the period from 2008 to 2012.

In the initial year of the first MTP, a number of projects aimed at national healing and reconciliation following the post election violence were implemented. Repair of damaged infrastructure, assistance to affected small scale businesses and resettlement of internally displaced persons were all undertaken in order to raise GDP growth (which fell to 1.5 per cent. in 2008) and to promote national reconciliation.

Up to the year 2012, progress recorded included the following:

• enrolment in early childhood education increased by 40 per cent. from 1.72 million in 2008 to 2.4 million;

• transition rate from primary to secondary education increased from 64 per cent. in 2008 to 77 per cent.;

• the number of students enrolled in university education increased by 103 per cent. from 118,239 in 2008 to 240,551;

• a total of 2,200 km of roads were constructed exceeding the MTP target of 1,500 km;

• three undersea submarine fibre optic networks linking Kenya to the global internet networks were completed including 5,500 km of terrestrial fibre optic network;

• total installed capacity for generation of electricity increased by 22 per cent.; and

• enactment of the Constitution.

The government announced the second MTP of Vision 2030 in October 2013. The second MTP gives priority to devolution as specified in the Constitution and to more rapid socio-economic development with equity as a tool for building national unity. The second MTP also aims to build on the successes of the first MTP, particularly in increasing the scale and pace of economic transformation through infrastructure development, and places strategic emphasis on priority sectors under the economic and social pillars of Vision 2030. Under the second MTP, transformation of the economy is focused on rapid economic growth on a stable macro-economic environment, modernisation of infrastructure, diversification and commercialisation of agriculture, food security, a higher contribution of manufacturing to GDP, wider access to African and global markets, wider access for Kenyans to better quality education and health care, job creation targeting unemployed youth, provision of better housing and provision of improved water sources and sanitation to Kenyan households.

Macroeconomic stability continues to be a key objective in the second MTP. The second MTP aims at sustained growth in agriculture, manufacturing and service sectors in order to achieve an overall GDP growth rate of 10 per cent. by 2017. To sustain and increase the growth momentum inherited from the first MTP, the second MTP aims to increase local savings, remittances from the Kenya diaspora and foreign direct investment in all the sectors. The second MTP also features an enhanced regional and international trade strategy to grow and diversify exports, improve Kenya’s balance of payments and ensure exchange rate stability.

The second MTP aims to sustain and expand physical infrastructure to ensure that it can support a rapidly-growing economy and the demands that higher rural and urban incomes and new economic activities impose. A national spatial plan and county specific spatial plans will be developed in order to rationalise utilisation of space for economic and social development. In addition, air transport facilities will be expanded within the country in order to strengthen Kenya’s position as the air transport hub in the region. The second MTP will prioritise improving the efficiency of ports and the implementation of the single window clearance system. With the construction of the standard gauge railway line from Mombasa to Malaba, rail transport will be expected to handle 50 per cent. of the freight cargo throughput, thus easing the pressure on roads, lowering the cost of doing business and enhancing trade and regional integration in East Africa. The new Lamu port and the LAPSSET corridor will be implemented as part of upgrading the national transport framework in collaboration with other countries in East Africa. To relieve congestion in Kenya’s main urban areas, planned mass rapid transit systems will be constructed. Expansion of roads will be continued.

With regard to energy, a strategy is in place for modernising Kenya’s energy infrastructure network, increasing the share of energy generated from renewable energy sources and providing energy that is affordable and reliable to businesses and homes.

Development in the information and communications technology sector (“ICT”) will build on achievements realised under the first MTP. This will include a modern ICT policy aimed at more growth and regulation necessary to increase local and foreign investment in ICT. The policy will provide for more utilisation of digital technology in goods and service sectors. The government intends to promote the use of ICT in learning institutions starting with schools and improve cyber security in order to facilitate more use of ICT in business and commercial transactions. New policies will also aim to facilitate usage of ICT in research and development and to drive learning and innovation in the Kenyan economy.

In addition, the second MTP aims to ensure that on-going efforts in land reform, security of land tenure, more efficient registration of land titles and records, and resolution of historic grievances are completed. Security and rule of law at the county and national levels of government will remain a priority. The government will seek to address security in the country in order to provide safety to Kenyans, address investors’ concerns about security-related increase in cost of doing business in Kenya and minimise crime, which affects the poor and the residents of arid and semi-arid lands disproportionately. This initiative will require a better trained and equipped police service backed by research and technology. In line with the Constitution, security force regulations and behaviour will be made to conform to local and international human rights standards.

The economic pillar in the second MTP consists of six priority sectors: tourism; agriculture, livestock and fisheries; trade; manufacturing; financial; business process outsourcing and information technology enabled services; and a recently added seventh priority sector, oil and other minerals. The overall strategy for the tourism sector is to turn the country into a top 10 long haul tourist destination in the world. The government expects to achieve this goal through growth and diversification of tourist sources from the traditional areas (i.e., Western Europe and North America), and from non-traditional sources in the Middle East and East Asia. The sector will also market new high- end tourist segments like business, cultural and ecological tourism. Construction of two coastal resort cities and three upcountry tourist resort cities in Isiolo, Lamu and Lake Turkana will be initiated and measures taken to increase bed capacity, to open more five-star hotels and improve the standards of tourist accommodation and facilities.

Under agriculture, livestock and fisheries, the second MTP gives top priority to increased acreage under irrigation in order to reduce the country’s dependence on rain fed agriculture. Measures will be taken to mechanise agricultural production, revive cooperatives and farmers unions and subsidise farm inputs to raise productivity.

Trade within and outside the country remains a priority sector of the economic pillar. Over the plan period, the government expects to strengthen economic partnerships with neighbours in East Africa and the rest of Africa. Foreign policy will aim at increasing international trade, and international economic partnerships.

The second MTP gives additional attention to growth and diversification in the manufacturing sector with the aim of increasing the sector’s contribution to Kenya’s GDP and foreign exchange earnings. To achieve this goal, the government plans to establish three special economic zones targeting manufacturing in Mombasa, Kisumu and Lamu. Other initiatives in the sector include building clusters for meat and leather products, a stronger dairy sector and the development of industrial and SME parks that will provide linkages to other sectors like agricultural and services.

The government will aim for universal access to ICT, development of digital content, promoting e-government services and encourage the establishment of more ICT based industries.

Oils and other mineral resources is a new priority sector under the economic pillar of the plan. In the plan period, the government aims to develop the policy, legal and institutional framework for the exploitation and management of Kenya’s natural resources (oil, gas and other minerals). It also intends to enact legislation for transparency and fair sharing of the revenue

generated and erect safeguards to protect the environment and to avoid risks usually associated with huge inflows of resource- based external earnings.

Under education, the government aims to continue strengthening access to universal primary education and to provide wider access to secondary education for all primary school leavers. It also expects to introduce universal access to computers, promote wider use of ICT as an instrument of instruction and training in schools, lower the student/ teacher ratio by increasing recruitment of teachers, and provide more textbooks and teaching equipment to schools.

In the health sector, the government in partnership with county governments, aims to continue to emphasise primary health care, access to clean water to households and better management of communicable diseases. The government intends to continue to support efforts to make Kenya a regional health services hub and to encourage new local and foreign investment in medical research, pharmaceutical production and modern hospital care.

The government aims to increase the supply of modern housing units, especially for the low-income segment of the market where supply lags behind demand.

The government aims to ensure a rapid and efficient transition to a two-tier government under which county governments assume full responsibility of the functions assigned to them under the Constitution. Priority at the national level will be given to provision of adequate finance to match functions assigned to counties, and capacity building for policy-making and project implementation in all county governments in order to bring the full benefits of devolution to the people. The government intends to implement the PFMA with the objective of exercising controls in public spending and improving the quality of public expenditure through full implementation of the IFMIS at national and county levels.

2014 Rebase of GDP

In September 2014, Kenya National Bureau of Statistics rebased its national accounts, changing the base year from 2001 to 2009, and revised the annual and quarterly national accounts statistics for the period 2006 to 2013. Kenya National Bureau of Statistics applied the System of National Accounts 2008 and the ISIC to compile the rebased GDP estimates. The System of National Accounts is the internationally agreed standard set of recommendations on how to compile measures of economic activity, and ISIC is the international standard for the classification of productive economic activities. The UN Statistical Commission recommends that countries rebase every five years. This revision is the sixth time that Kenya has revised the national account statistics. The first revision was carried out in 1957 and subsequent revisions were carried out in 1967, 1976, 1985 and 2005. The government expects that using the 2009 base year for economic estimates will better reflect the current structure of the economy, including changes in production structure, relative product prices and products. The new 2009 base year adopts weights that are more consistent with current conditions of the economy and better reflect the performance of the most important parts of the economy.

These measures have led to changes in size of the GDP, growth rates, contributions by sector and related indicators that use GDP. The GDP estimate for 2013 under the new 2009 base year is 25.3 per cent. higher than the GDP estimate for 2013 under the 2001 base year. An increase in the size of the real estate, agricultural and manufacturing sectors measured under the 2009 base year compared to the size of these sectors measured under the 2001 base year accounted for most of the change in the size of GDP in 2013 under the 2009 base year compared to the size of GDP in 2013 under the 2001 base year. Inclusion of economic activities such as mobile money transfer activities which were not previously included in the calculation of GDP estimates also contributed to the increase in the size of GDP under the 2009 base year compared to the size of GDP under the 2001 base year. In addition, revised calculations took into account increased efficiencies in production processes. In 2013, the agricultural sector accounted for 28.9 per cent. of GDP under the 2001 base year, while it accounted for 29.5 per cent. of GDP under the 2009 base year. In 2013, the services sector accounted for 53.9 per cent. of GDP under the 2001 base year, while it accounted for 50.7 per cent. of GDP under the 2009 base year. In 2013, the manufacturing sector accounted for 10.0 per cent. of GDP under the 2001 base year, while it accounted for 11.7 per cent. of GDP under the 2009 base year. The use of new data such as the 2009 Census, the 2005/06 Budget Survey and the 2010 Census of Industrial Production, and the inclusion of more data from the informal economy in the rebased GDP also contributed to the upward revision of the level of GDP.

The following table sets out nominal GDP under the old 2001 base year and the new 2009 base year for the periods presented:

Year ended 31 December 2011 2012 2013(1)

GDP (2001 base year) (KES billions) ...... 3,047.4 3,403.5 3,798.0 GDP (2009 base year) (KES billions) ...... 3,726.1 4,254.8 4,757.5 % increase in GDP (2009 base year) compared to GDP (2001 base year) ...... 22.3 25.0 25.3 Exchange rate (average) ...... 88.8 84.5 86.1 GDP (2001 base year) (US$ billions) ...... 34.3 40.3 44.1 GDP (2009 base year) (US$ billions) ...... 42.0 50.3 55.2 ______Notes: (1) Provisional. Source: Kenya National Bureau of Statistics

GDP

The following table sets out Kenya’s nominal GDP by economic sector for the periods presented.

Nominal GDP by Economic Sector Year ended 31 December Industry 2011 2012 2013(1) (US$ millions) Agriculture, forestry and fishing ...... 11,521 12,944 14,479 o/w Fishing & aquaculture ...... 270 336 394 Mining and quarrying ...... 382 541 448 Manufacturing ...... 5,146 5,394 5,750 Electricity supply ...... 424 558 586 Water supply, sewerage and waste management ...... 393 439 478 Construction ...... 1,935 2,218 2,457 Wholesale and retail trade and repairs ...... 3,534 3,852 4,330 Transport and storage...... 3,129 3,828 4,069 Accommodation and food service activities...... 591 669 676 Information and communication ...... 717 786 793 Financial and insurance activities ...... 2,500 2,926 3,627 Real estate ...... 3,531 3,986 4,349 Professional, scientific and technical activities ...... 440 497 548 Administrative and support service activities ...... 589 635 660 Public administration and defence ...... 1,870 2,206 2,648 Education ...... 2,341 2,659 2,994 Human health and social work activities ...... 797 813 872 Arts, entertainment and recreation ...... 67 72 80 Other service activities...... 268 302 339 Activities of households as employers ...... 247 281 295 Financial Intermediation Services Indirectly Measured ...... (1,066) (1,298) (1,418) All economic activities ...... 39,358 44,308 49,059 Taxes on products ...... 4,442 5,150 6,062 GDP at market prices ...... 43,801 49,458 55,121 ______Notes: (1) Provisional. Source: Kenya National Bureau of Statistics

The following table sets out each economic sector’s contribution to Kenya’s nominal GDP for the periods presented.

Nominal GDP by Economic Sector

Year ended 31 December Industry 2011 2012 2013(1) (per cent. contribution) Agriculture, forestry and fishing ...... 26.3 26.2 26.3 o/w Fishing & aquaculture ...... 0.6 0.7 0.7 Mining and quarrying ...... 0.9 1.1 0.8 Manufacturing ...... 11.7 10.9 10.4 Electricity supply ...... 1.0 1.1 1.1 Water supply, sewerage and waste management ...... 0.9 0.9 0.9 Construction ...... 4.4 4.5 4.5 Wholesale and retail trade and repairs ...... 8.1 7.8 7.9 Transport and storage...... 7.1 7.7 7.4 Accommodation and food service activities...... 1.3 1.4 1.2 Information and communication ...... 1.6 1.6 1.4 Financial and insurance activities ...... 5.7 5.9 6.6 Real estate ...... 8.1 8.1 7.9 Professional, scientific and technical activities ...... 1.0 1.0 1.0 Administrative and support service activities ...... 1.3 1.3 1.2 Public administration and defence ...... 4.3 4.5 4.8 Education ...... 5.3 5.4 5.4 Human health and social work activities ...... 1.8 1.6 1.6 Arts, entertainment and recreation ...... 0.2 0.1 0.1 Other service activities...... 0.6 0.6 0.6 Activities of households as employers; ...... 0.6 0.6 0.5 Financial Intermediation Services Indirectly Measured ...... -2.4 -2.6 -2.6 All economic activities ...... 89.9 89.6 89.0 Taxes on products ...... 10.1 10.4 11.0 GDP at market prices ...... 100.0 100.0 100.0 ______Notes: (1) Provisional. Source: Kenya National Bureau of Statistics

The following table sets out Kenya’s real GDP by economic sector for the periods presented.

Real GDP by Economic Sector(1) Year ended 31 December Industry 2011 2012 2013(2) (US$ millions) Agriculture, forestry and fishing ...... 8,859 9,018 9,444 o/w Fishing & aquaculture ...... 228 237 247 Mining and quarrying ...... 334 393 357 Manufacturing ...... 4,513 4,440 4,687 Electricity supply ...... 540 607 649 Water supply, sewerage and waste management ...... 335 342 351 Construction ...... 1,634 1,797 1,889 Wholesale and retail trade and repairs ...... 2,792 2,955 3,217 Transport and storage...... 2,719 2,763 2,790 Accommodation and food service activities...... 627 639 608 Information and communication ...... 1,240 1,253 1,417 Financial and insurance activities ...... 2,177 2,281 2,485 Real estate ...... 3,198 3,290 3,415 Professional, scientific and technical activities ...... 407 424 447 Administrative and support service activities ...... 547 554 560 Public administration and defence ...... 1,563 1,637 1,636 Education ...... 2,480 2,737 2,916 Human health and social work activities ...... 714 683 727 Arts, entertainment and recreation ...... 59 57 59 Other service activities...... 257 264 281 Activities of households as employers ...... 211 211 214 Financial Intermediation Services Indirectly Measured ...... -883 -961 -1,012 All economic activities ...... 34,324 35,385 37,135

Real GDP by Economic Sector(1) Year ended 31 December Industry 2011 2012 2013(2) (US$ millions) Taxes on products ...... 4,403 4,615 5,024 GDP at market prices ...... 38,727 40,000 42,159 ______Notes: (1) Constant 2009 prices. (2) Provisional. Source: Kenya National Bureau of Statistics

The following table sets out Kenya’s real GDP growth by economic sector for the periods presented.

Real GDP Growth by Economic Sector(1) Year ended 31 December Industry 2011 2012 2013(2) (as a percentage of GDP) Agriculture, forestry and fishing ...... 2.4 2.9 5.1 o/w Fishing & aquaculture ...... 10.4 5.1 4.8 Mining and quarrying ...... 19.0 19.0 -9.0 Manufacturing ...... 7.2 -0.5 5.9 Electricity supply ...... 13.3 13.6 7.4 Water supply, sewerage and waste management ...... 3.6 3.2 3.0 Construction ...... 4.0 11.2 5.5 Wholesale and retail trade and repairs ...... 8.3 7.0 9.2 Transport and storage...... 7.1 2.8 1.3 Accommodation and food service activities...... 4.1 3.1 -4.6 Information and communication ...... 22.0 2.2 13.5 Financial and insurance activities ...... 4.7 6.0 9.3 Real estate ...... 5.1 4.0 4.1 Professional, scientific and technical activities ...... 1.6 5.2 5.8 Administrative and support service activities ...... 2.5 2.3 1.4 Public administration and defence ...... 2.5 5.9 0.2 Education ...... 7.5 11.6 6.9 Human health and social work activities ...... -2.6 -3.2 6.8 Arts, entertainment and recreation ...... 3.6 -2.7 3.8 Other service activities...... 1.1 4.0 6.9 Activities of households as employers ...... 1.5 1.5 1.5 FISIM ...... 9.1 10.1 5.7 All economic activities ...... 5.4 4.3 5.3 Taxes on products ...... 12.6 6.0 9.2 GDP at market prices ...... 6.1 4.5 5.7 ______Notes: (1) Constant 2009 prices. (2) Provisional. Source: Kenya National Bureau of Statistics

Principal Sectors of the Economy

Agricultural and Forestry

The agricultural and forestry sector was the largest contributor to the economy in 2013. The four subsectors of the agriculture and forestry sector are crops and horticulture, livestock, agricultural and husbandry services, and forestry and logging. In 2011, it accounted for US$8.8 billion of real GDP and 26.3 per cent. of nominal GDP. In 2012, the sector accounted for US$9.0 billion of real GDP and 26.2 per cent. of nominal GDP. In 2013, the sector accounted for US$9.4 billion of real GDP and 26.3 per cent. of nominal GDP. The agricultural and forestry sector grew 2.4 per cent. in 2011, 2.9 per cent. in 2012 and 5.1 per cent. in 2013.

The following table sets out the agricultural and forestry sector’s output and input values at current and constant prices for the periods presented.

Agricultural Output and Input Year ended 31 December 2011 2012 2013(1) (KES millions) PRODUCTION AT CURRENT PRICES Output at basic prices ...... 881,572 1,001,277 1,042,305 Intermediate consumption ...... 178,871 189,003 106,092 Value added at basic prices, gross ...... 702,701 812,274 936,213 PRODUCTION CONSTANT PRICES Output ...... 409,121 424,625 435,539 Intermediate consumption ...... 97,130 99,433 100,893 VALUE ADDED, GROSS ...... 311,991 325,193 334,646 ______Notes: (1) Provisional. Source: Kenya National Bureau of Statistics

The following table sets out the value of marketed production in the agricultural sector for the periods indicated.

Recorded Marketed Production at Current Prices Year ended 31 December 2011 2012 2013(1) (KES millions) CEREALS Maize ...... 10,145.5 13,153.0 10,121.1 Wheat ...... 3,045.0 5,612.8 6,926.1 Others ...... 7,090.9 5,721.2 7,555.3 Total 20,281.4 24,487.0 24,602.5 HORTICULTURE(2) Cut flowers ...... 58,835.0 64,962.6 55,975.7 Vegetables ...... 26,251.2 20,225.4 22,923.3 Fruits ...... 3,535.4 4,680.0 4,482.5 Total 88,621.7 89,868.0 83,381.5 TEMPORARY INDUSTRIAL CROPS Sugar-cane ...... 18,615.6 21,676.2 24,583.4 Pyrethrum ...... 133.4 17.0 52.6 Others ...... 2,775.8 1,706.1 849.0 Total ...... 21,524.8 23,399.3 25,485.0 PERMANENT CROPS Coffee ...... 17,826.3 15,375.2 10,910.2 Tea ...... 100,145.5 100,262.3 94,722.0 Sisal ...... 2,513.3 2,915.3 2,810.8 Total ...... 120,485.2 118,552.7 108,443.0 Total crops ...... 250,913.1 256,307.0 241,912.0 LIVESTOCK AND PRODUCTS Cattle and Calves ...... 48,943.4 54,140.6 58,237.0 Dairy Produce ...... 14,548.4 15,413.9 16,776.7 Chicken and eggs ...... 5,553.0 6,482.2 7,086.4 Others ...... 11,854.9 12,266.7 10,727.3 Total ...... 80,899.7 88,305.3 92,827.4 Grand total ...... 331,812.8 344,612.3 334,739.4 ______Notes: (1) Provisional (2) Data refers to fresh horticultural exports only. Source: Kenya National Bureau of Statistics

The overall marketed production of the agricultural sector increased by 3.9 per cent. from KES331,812.8 million in 2011 to KES344,612.4 million in 2012 and decreased by 2.9 per cent. to KES334,739.4 million in 2013. Increased production during 2013 occurred in key crops like wheat, vegetables, potatoes and sugar cane, while maize, beans, tea, coffee, cut flowers and fruits recorded declines in production. Marketed production of coffee decreased by 29.0 per cent. in 2013 due mostly to the decline in international coffee prices.

The marketed value for tea decreased by 5.5 per cent. in 2013 due to lower international prices which more than offset increased production. The value of marketed maize production decreased by 23.0 per cent. as a result of lower marketed volumes and lower prices paid to farmers for the crop. The marketed production of livestock and its products increased by 5.1 per cent. in 2013 with most of the subsectors recording growth.

Under the agriculture and forestry sector, the second MTP will give top priority to increased acreage under irrigation in order to reduce the country’s dependence on rain-fed agriculture. The plan puts a total of 404,800 hectares under irrigation during the 2013-2017 period. The construction of the High Grand Falls Dam and implementation of other irrigation projects across the country will be part of this effort.

Other measures included in the second MTP include:

• improved agricultural production through mechanisation;

• revival of cooperatives and farmers unions;

• subsidies of farm inputs in order to raise productivity;

• implementation of a fertiliser cost reduction strategy;

• support to extension services;

• establishment of greenhouses and agro processing plants at the county level;

• promotion of value addition in farm products;

• policies to increase exports of agricultural and livestock products;

• adoption of climate-smart agriculture, such as the use of farm waste as an organic fertiliser and the use of bio- fertilisers, which do not contribute to harmful emissions;

• adoption of better weather forecasting/early warning systems;

• promotion of resilient food crops; and

• better management of post harvest losses, including crop insurance.

The government also will take steps to increase the involvement of youth in income generating ventures in the Agriculture, Livestock and Fisheries sector. The flagship projects implemented include the enactment of the Consolidated Agricultural Reform Bill. Out of the five Bills currently under consideration by Parliament, three acts have been enacted and assented namely: the Agriculture, Fisheries and Food (AFFA) Act 2012, Crops Act 2012 and National Agricultural Research Act 2012. These acts had intended consequences in multiple areas, among them:

• Fertiliser Cost Reduction Project: A total of 274,000 MT of fertiliser was procured as a price stabilisation mechanism while the feasibility study for viability of a manufacturing plant was completed.

• Establishment of Disease Free Zones (“DFZ”): A road map for implementation of Kenya DFZ was developed focusing on one out of the four DFZ due to financial and other logistical challenges.

• Expansion of Irrigation Coverage: The area under irrigation expanded from 119,000 to 159,000 hectares in small holders as well as large schemes namely; Bura, Hola, Kano, Bunyala, Perkerea and Mwea.

Other Programmes and Projects: The sector implemented a number of other priority programmes and projects. These other interventions were in research and development; improving delivery of extension services; strengthening producer institutions; intensification and expansion of irrigation; seed improvements; livestock development and fisheries development.

Wholesale and Retail Trade and Repairs

The wholesale and retail trade and repairs sector was the fourth largest contributor to the economy in 2013. This sector includes wholesale and retail sales (i.e., sale without transformation of any type of goods and the rendering of services incidental to the sale of these goods, including maintenance and repairs of motor vehicles and motorcycles). Wholesaling and retailing are the final steps in the distribution of goods. In 2011, the sector accounted for US$2.8 billion of real GDP and 8.1 per cent. of nominal GDP. In 2012, the sector accounted for US$3.0 billion of real GDP and 7.8 per cent. of nominal GDP. In 2013, the sector accounted for US$3.2 billion of real GDP and 7.9 per cent. of nominal GDP. The wholesale and retail trade and repairs sector grew 8.3 per cent. in 2011 and 7.0 per cent. in 2012 and 9.2 per cent. in 2013.

Information and Communication

The information and communications sector comprises telecommunications, publishing, broadcasting and other IT and information activities. The information and communications sector was the eleventh largest contributor to the economy in 2013. In 2011, it accounted for US$1.2 billion of real GDP and 1.6 per cent. of nominal GDP. In 2012, the sector accounted for US$1.3 billion of real GDP and 1.6 per cent. of nominal GDP. In 2013, the sector accounted for US$1.4 billion of real GDP and 1.4 per cent. of nominal GDP. The information and communications sector grew 22.0 per cent. in 2011, 2.2 per cent. in 2012 and 13.5 per cent. in 2013.

The following table sets out information regarding land line and portable phone connections, international call traffic and mobile connections.

Telecommunications Indicators At 31 December 2011 2012 2013(1) (in thousands) Land Line and Portable Phone Telephony Land Line Capacity ...... 401 380 408 Land Line and Portable Phone Connections Land Line Connections(2) ...... 188 75 57 Portable Phone Connections(3) ...... 192 188 160 Total Land Line and Portable Phone Connections ...... 380 263 217 International Outgoing Traffic (Minutes)(4) ...... 17,651 16,383 15,736 International Incoming Traffic (Minutes)(4) ...... 22,195 16,522 12,232 Mobile Telephony Mobile Telephone Capacity ...... 47,677 49,977 55,077 Mobile Telephone Connections ...... 26,981 30,433 31,309 Mobile Money Transfer Service Subscribers(1) ...... 17,396 19,319 26,016 ______Notes: (1) Provisional. (2) As at 30 June of the provided year. (3) Includes local loop operators. (4) Land lines. Source: Communications Commission of Kenya and Kenya National Bureau of Statistics

The total number of land line and portable phone connections declined in 2012 and 2013. The total number of land line and portable phone connections was approximately 217,000 in 2013. The land line connections declined from approximately 75,000 in 2012 to approximately 57,000 in 2013. In 2013, the land line capacity increased by 7.4 per cent. reversing the downward trend that has occurred since 2010. The increase is due to Telkom Kenya Limited’s transformation of the fixed network infrastructure and Mobile Telephone Network’s entry to the market.

Outgoing calls for fixed international voice traffic declined to 15.7 million minutes in 2013 compared to 16.4 million minutes in 2012, a decline of 4.2 per cent. This decrease was due to competition from voice over internet protocol service, which is more affordable than land line service. Land line voice incoming international traffic declined by 26.0 per cent. in 2013, partly due to competition from mobile telephony and the reduction in land line connections.

Following the liberalisation of the telecommunications sector in the late 1990s, there are now many players in the sector providing satellite based broadband access. In particular, the mobile telephony providers have introduced internet access products, including mobile phone banking. Mobile phone based financial transactions commenced in 2007, with the introduction by Safaricom of MPESA, a mobile-phone based money transfer and micro financing service. As at 30 June 2013, the average

size of mobile phone based banking transactions increased from US$45.5 in March 2007 to US$78.6, while total mobile phone transactions per day reached an average of US$58.4 million (KES5.1 billion). The mobile telephony market, recorded an increased market penetration rate from 68.2 per cent. in 2011 to 74.9 per cent. in 2012 and remained the same in 2013. As at 30 August 2014, 26.3 million mobile phone customers had carried out 583.7 million transactions valued at KES1,526.4 billion.

The Central Bank of Kenya regulates all mobile phone based banking products offered by banks under the Banking Act, chapter 488 of the Laws of Kenya (the “Chapter 488 Banking Act”) similar to other banking products. Following the enactment of the National Payment System Act in 2011, the Central Bank of Kenya is empowered to oversee all payment system platforms including mobile phone based payments. The regulations to implement the National Payment System Act took effect in August 2014.

Information, Communication and Technology

The government recognises ICT as a foundation for economic development. Since 2008, the government, under the first MTP, has executed several significant ICT infrastructure projects. In 2009, the government, in cooperation with the government of the United Arab Emirates, completed the installation of the East African Marine Systems, a submarine cable that extends from Mombasa to Fujairah, United Arab Emirates and provides Kenya with high-capacity bandwidth. In 2010, the government established the National Fibre Optic Network through which all major towns in the country are now connected. In 2009, the government also established the Government Common Core Network, a network that functions as a shared and secure interoperable government-wide ICT system, integrates work processes and information flows and improves inter- ministerial sharing of databases and exchange of information.

As a result of these flagship projects, demand for internet and data services has been rising with internet subscription increasing from 6.2 million subscribers in 2011 to 8.5 million in 2012 and to 13.2 million in 2013. This increase in internet access enhanced business activities and created job opportunities. In 2012, the government increased bandwidth of broadband internet capacity to government offices from 80 to 100 Megabits per second. This increase has improved the quality and reliability of the government’s communication system. Several ministries have developed online systems geared towards improving service delivery. These systems include: the re-engineered Integrated Financial Management Information System (an automated system used for public financial management that enhances budget planning, procurement process, financial data recording, tracking and information management), the County Revenue Collection System, application of public service jobs online, status tracking of identification and passports, public examination results and candidate selection into secondary schools, digitised education content in 12 subjects in secondary school level; online submission of tax returns, online custom declaration, electronic reporting of corruption, and a business licensing e-registry. These achievements have resulted in Kenya ranking second in Africa and 22nd out of 77 countries worldwide in the open data initiative of the Open Data Institute and World Wide Web Foundation in 2012.

The government also developed and implemented the Kenya Communications (Amendment) Act, 2009 and Kenya Information and Communications Regulations, 2010, which led to improved competition and broad choices of ICT services.

Multinational technology companies have expressed interest in investing in Kenya. In March 2013, Microsoft launched its 4Afrika initiative that includes working with the Kenyan government and a Kenyan Internet service provider to deliver low-cost, high-speed wireless access in the country. In November 2013, IBM inaugurated its first research facility in Africa in Nairobi. Researchers at the facility aim to focus on finding technological solutions to some of Africa’s most-pressing problems.

Under the second MTP, the government aims to continue the development of the ICT infrastructure by:

• extending the National Fibre Optic Network to every county headquarters, providing connectivity to all public buildings such as hospitals, schools, police stations and other public service institutions;

• establishing wide area networks and network operations centres to ensure that each county headquarters use a broadband network, VOIP telephony and unified communication systems;

• rolling out 4G networks to provide faster internet and increase bandwidth capacity; migrating 80 per cent. of television viewers to a digital platform;

• establishing national data centres and disaster recovery centres to ensure that strategic public data is stored in secure locations with minimal risk and delivered cost-effectively; and

• integrating ICT in education to familiarise young Kenyans with ICT as a learning tool.

One of the major projects under the second MTP is the development of the Konza Technology City that aims to position Kenya as the ICT hub of Africa. The government expects to develop the project in phases and the first phase includes construction of a

BPO park, a science park, residential buildings, a data centre and part of the central business district. It will also involve the construction of basic infrastructure including access roads, telecommunications, water and sewerage and electricity. The first phase commenced in 2014. Construction of access roads commenced in November 2014. The first phase is expected to be developed by 2017 and is projected to generate approximately 17,000 jobs and provide homes for approximately 30,000 residents.

The project has already completed the following steps: acquired 5,000 acres of land at Malili Ranch; completed a feasibility and demand assessment study; developed the approved local physical development plan; completed the preparation of a strategic environmental and social impact assessment; established the KoTDA to lead the implementation of the project; established access roads and drilling of six boreholes; and conducted a ground breaking ceremony.

The National Treasury is in the process of engaging a contractor to implement the project. The government expects that the implementation of the first phase will begin in November 2014. The government estimates the development of on-site infrastructure and sales pavilion, including roads, power, sewerage and railway to cost approximately US$760,000,000 over five years, of which it expects 10 per cent. to be funded by the national budget, through public private partnerships.

Transport and Storage

The transport and storage sector comprises land transport, air transport including support services and all other transport including postal and courier activities. The transport and storage sector was the sixth largest contributor to the economy in 2013. In 2011, it accounted for US$2.7 billion of real GDP and 7.1 per cent. of nominal GDP. In 2012, the sector accounted for US$2.8 billion of real GDP and 7.7 per cent. of nominal GDP. In 2013, the sector accounted for US$2.8 billion of real GDP and 7.4 per cent. of nominal GDP. The transport and storage sector grew 7.1 per cent. in 2011, 2.8 per cent. in 2012 and 1.3 per cent. in 2013.

The following table sets out the value of output for various transport and communication subsectors for the periods presented.

Transport and Communication—Value of Output Year ended 31 December 2011 2012 2013(1) (KES millions) Road Transport ...... 386,636 402,452 415,031 Railway Transport ...... 6,017 5,613 5,172 Water Transport ...... 28,188 29,869 29,801 Air Transport ...... 100,203 108,780 116,576 Services Incidental to Transport ...... 60,097 60,484 60,466 Pipeline Transport ...... 15,474 17,755 18,735 Communications ...... 110,022 115,819 127,282 Total ...... 706,637 740,772 773,063 ______Notes: (1) Provisional. Source: Kenya National Bureau of Statistics

The sector’s total output value increased from KES706.7 billion in 2011 to KES740.8 billion in 2012 and increased to KES773.1 billion in 2013, representing a growth of 4.8 per cent. and 4.4 per cent. in 2012 and 2013, respectively. The road transport subsector accounted for 53.7 per cent. of the total value of output in 2013. The output value for road transport recorded growth of 3.1 per cent. in 2013 while the value of output for water transport marginally decreased by 0.2 per cent. In 2013, the value of output for air transport registered growth of 7.2 per cent. to KES116.6 billion compared to a growth of 8.6 per cent. in 2012. The value of output of pipeline transport grew by 5.5 per cent to stand at KES18.7 billion in 2013 up from KES17.8 billion recorded in 2012. Similarly, the output value of the communications sub-sector expanded by 9.9 per cent. in 2013. The output value of the railway transport subsector decreased by 7.9 per cent. during 2012, and the value of services incidental to transport dropped marginally in the same period.

Manufacturing

The manufacturing sector was the second largest contributor to the economy in 2013. In terms of employment generation, the government estimates that the sector employed approximately 280,300 in 2013, an increase of 3.4 per cent. from 2012. In 2011, it accounted for US$4.5 billion of real GDP and 11.7 per cent. of nominal GDP. In 2012, the sector accounted for US$4.4 billion of real GDP and 10.9 per cent. of nominal GDP. In the 2013, the sector accounted for US$4.7 billion of real GDP and for 10.4

per cent. of nominal GDP. The manufacturing sector grew 7.2 per cent. in 2011, and declined by 0.5 per cent. in 2012 and grew 5.9 per cent. in 2013.

The following table sets out the quantum index of manufacturing production using 2009 as the base year (Base 2009 = 100).

Quantum Index of Manufacturing Production At 31 December 2011 2012 2013(1) Meat and meat products ...... 103.2 107.0 106.6 Processed and preserved fish ...... 115.2 91.9 75.4 Prepared and preserved fruits and vegetables ...... 115.0 114.7 128.7 Vegetables and animal oils and fats ...... 99.4 106.3 110.7 Dairy products ...... 151.1 186.6 194.0 Grain Mill Products ...... 112.1 120.1 129.2 Bakery products ...... 107.0 98.2 101.9 Sugar ...... 89.5 90.1 109.5 Cocoa, Chocolate and Sugar Confectionery ...... 99.8 113.1 108.7 Food products MPC ...... 114.7 115.1 130.5 Animal feeds ...... 111.2 115.4 125.3 Total food products ...... 106.5 110.5 120.7 Beverages ...... 104.9 104.7 102.1 Tobacco products ...... 110.8 116.5 100.6 Beverages and Tobacco ...... 105.9 106.6 101.9 Textiles ...... 110.7 105.4 112.3 Wearing apparel ...... 92.4 81.8 85.4 Leather and related products ...... 142.3 138.8 139.2 Wood and products wood and cork except furniture ...... 103.2 98.2 99.4 Paper and paper products ...... 108.5 108.3 114.6 Printing and reproduction of recorded media ...... 101.5 98.8 101.4 Refined petroleum products ...... 114.0 91.4 47.0 Chemical and Chemical Products ...... 116.8 116.8 118.5 Pharmaceuticals Products ...... 129.0 160.8 180.4 Rubber Products ...... 72.0 82.1 100.2 Plastic Products ...... 117.3 126.9 120.2 Rubber and plastics products ...... 112.3 121.9 118.0 Other non-metallic mineral products ...... 119.5 125.5 133.5 Basic Metals ...... 124.8 128.1 149.5 Fabricated metal products except machinery and equipment ...... 125.8 139.1 162.6 Electrical Equipment ...... 126.9 125.7 116.9 Machinery and Equipment n.e.c ...... 83.8 74.1 75.1 Motor vehicles, trailers and semi-trailers ...... 108.7 126.7 130.8 Manufacture of Furniture ...... 104.6 102.6 116.1 Other Manufacturing M.P.C...... 111.7 110.4 111.7 Repair and installation of machinery and equipment ...... 106.8 106.8 110.2 Total Manufacturing ...... 112.3 112.9 115.8 ______Notes: (1) Provisional Source: Kenya National Bureau of Statistics

During 2013, the political stability that prevailed after the March 2013 general elections positively affected manufacturing activities which in turn increased investor confidence, eased inflationary pressure, stabilised exchange rates and lowered interest rates, which also contributed to capital accumulation, thus boosting production. There were increases in production of food products, textiles, basic metals, fabricated metals, motor vehicles, trailers and semi-trailers, furniture and non-metallic mineral products.

The overall manufacturing quantum index increased by 2.7 per cent. in 2013, compared to 0.5 per cent. growth in 2012. In 2013, sectors that improved including prepared and preserved fruits and vegetables, sugar, rubber products, basic metals and fabricated metal products (except machinery and equipment) which grew by 12.2, 21.5, 22.0, 16.7 and 16.9 per cent., respectively. However, there was a significant drop in the quantity of petroleum products (a 48.6 per cent. decline), a decline of 18.0 per cent. in the processed and preserved fish and a decline in the quantity of tobacco products (a 13.6 per cent. decline). The decline in

refined crude oil was due to a reduction in output of refined petroleum products processed at Kenya Petroleum Refineries, Ltd. due to higher costs of operations and lower international oil prices.

Export Processing Zones (each, an “EPZ”) are specific areas that the government establishes to promote, attract and facilitate investment in industrial and commercial exports. The zones enjoy incentives such as exemptions from certain taxes and business regulations. During 2013, the EPZ programme reported improved performance. However, businesses within the zones were adversely affected by the high cost of doing business in the country. Furthermore, under EAC union requirements, EPZ firms are now allowed to sell only 20 per cent. of their annual output to the EAC market. This has affected companies that were set up targeting this market. The number of enterprises operating under the EPZ declined from 82 in 2012 to 81 in 2013. During 2013, the number of gazetted zones increased to 50 from 47 in 2012, with only two zones being public while the others are owned and operated privately. As at 31 December 2013, there are 22 zones located in Mombasa, nine in Nairobi, three in Athi River, four in Kilifi, and one each in Voi, Kerio Valley, Thika, Isinya, Ruiru, Malindi, Eldoret, Muranga, Meru, Bomet and Nandi.

The value of sales from the EPZ enterprises increased to KES49.5 billion in 2013 from KES44.3 billion in 2012. The value of exports from the EPZ increased from KES40.0 billion in 2012 to KES43.6 billion in 2013. Domestic sales accounted for 11.9 per cent. of the total sales in 2013 at KES5.9 billion. During 2013, local purchases of goods and services decreased to KES7.2 billion from KES8.0 billion recorded in 2012.

Financial and Insurance Activities

The financial and insurance activities sector recorded the tenth highest rate of growth in the economy during 2013. The financial intermediation sector comprises institutions that carry out banking and similar activities, insurance and pension funds and auxiliary financial activities. The financial and insurance activities sector grew 9.3 per cent. in 2013, compared to 6.0 per cent. in 2012. At the start of the year, credit demand was generally low due to uncertainty associated with the general election. However, with the peaceful conclusion of the election, the demand for credit greatly improved. Broad money supply (M3) grew by 15.6 per cent. in 2013 compared to 14.1 per cent. in 2012, which was attributed to positive increase in net foreign assets and domestic credit. The government estimates that the sector employs an average of 2.5 per cent. of the formal sector labour force.

In 2011, the sector accounted for US$2.2 billion of real GDP and accounted for 5.7 per cent. of nominal GDP. In 2012, the sector accounted for US$2.3 billion of real GDP and accounted for 5.9 per cent. of nominal GDP. In 2013, the sector accounted for US$2.5 billion of real GDP and accounted for 6.6 per cent. of nominal GDP.

Construction

The construction sector is the eighth largest contributor to the economy and comprises the roads and public/private housing subsectors. The government estimates that the sector employs an average of 5.8 per cent. of the formal sector labour force. In 2011, it accounted for US$1,634 million of real GDP and 4.4 per cent. of nominal GDP. In 2012, the sector accounted for US$1,797 million of real GDP and 4.5 per cent. of nominal GDP. In 2013, the sector accounted for US$1,889 million of real GDP and 4.5 per cent. of nominal GDP. The construction sector grew 4.0 per cent. in 2011, 11.2 per cent. in 2012 and 5.5 per cent. in 2013.

The following table sets out the classification of road networks by type and length as at the dates indicated.

Kilometres of Road by Type and Classification At 1 July 2009 2013(1) (in thousands of Km) Type of Road Bitumen Earth/ Gravel Bitumen Earth/ Gravel A—International Trunk ...... 2.83 0.82 2.89 0.70 B—National Trunk ...... 1.54 1.16 1.58 1.11 C—Primary ...... 2.81 5.16 3.46 4.57 D—Secondary ...... 1.28 9.48 2.09 8.62 E—Minor ...... 0.66 26.07 1.05 26.46 F—Special Purpose(2) ...... 0.16 10.38 0.16 10.95 Total ...... 9.28 53.07 11.23 52.41 ______Notes: (1) Provisional (2) Special purpose roads include Government access, settlement, rural access, sugar, tea and wheat roads. Source: Ministry of Transport and Infrastructure

Electricity Supply

The electricity supply sector recorded the fourth highest rate of growth in the economy during 2013. The electricity supply sector grew 7.4 per cent. in 2013, compared to an increase of 13.6 per cent. in 2012. The growth during these periods was mainly a result of government investment and private investment by independent power producers.

In 2011, the sector accounted for US$540 million of real GDP and accounted for 1.0 per cent. of nominal GDP. In 2012, it accounted for US$607 million of real GDP and accounted for 1.1 per cent. of nominal GDP. In 2013, it accounted for US$649 million of real GDP and accounted for 1.1 per cent. of nominal GDP.

The following table sets out installed capacity and generation of electricity by producers for the periods indicated.

Installed Capacity and Generation of Electricity(1)

INSTALLED CAPACITY MW(2) GENERATION GWh(3) Thermal Oil Thermal Co- Co- Hydro Oil Geothermal generation Total Hydro(4) KenGen IPP EPP Total Geothermal generation Wind Total 2011 735.0 582.7 190.6 26.0 1,534.3 3,217.2 903.0 1,538.8 358.7 2,800.5 1,443.7 80.9 17.6 7,559.9 2012 769.9 610.6 199.6 26.0 1,606.1 4,015.9 682.5 1,208.9 309.0 2,200.4 1,515.9 104.7 14.4 7,851.3 2013(5) 766.6 693.2 236.5 21.5 1,717.8 4,435.0 598.3 1,386.2 177.2 2,161.7 1,780.9 55.6 14.7 8,447.9 ______Notes: IPP: Independent Power Producers EPP: Emergency Power Producers (1) Includes generation for industrial establishment with generation capacity of over 100KVA plus emergency supply of 99 MW by contract. (2) 1 megawatt = million watts = 1,000 kilowatts. (3) 1 gigawatt hour = 1,000,000 kilowatt hours. (4) Includes imports from Uganda and Tanzania. (5) Provisional. Source: Kenya Power & Lighting Company Ltd./Kenya Electricity Generation Company Ltd.

During 2013, total installed capacity of electricity expanded by 7.0 per cent. to 1,717.8 MW in 2013 from 1,606.1 MW in 2012. Similarly, total electricity generation expanded from 7,851.3 GWh in 2012 to 8,447.9 GWh in 2013, reflecting a growth of 7.6 per cent. Total domestic demand for electricity grew 2.2 per cent. from 6,273.6 million KWh in 2011 to 6,414.4 million KWh in 2012. In 2013, total domestic demand for electricity grew 8.0 per cent., from 6,414.4 million KWh in 2012 to 6,928.1 million KWh in 2013. The number of customers connected under the Rural Electrification Programme, a government program intended to increase connectivity of rural areas to the national grid, grew by 18.5 per cent. to 453,544 customers as at 30 June 2013.

The following table sets out demand and supply of electricity for the periods indicated.

Electricity Supply and Demand Balance Year ended 31 December 2011 2012 2013(1) (million KWh) DEMAND Domestic and Small Commercial ...... 2,471.4 2,568.5 2,866.1 Large & Medium (Commercial and Industrial) ...... 3,440.3 3,409.2 3,585.3 Off-peak ...... 37.9 36.0 32.7 Street Lighting ...... 17.9 20.6 17.2 Rural Electrification ...... 306.1 380.1 426.8 TOTAL DOMESTIC DEMAND...... 6,273.6 6,414.4 6,928.1 Exports to Uganda & Tanzania ...... 37.3 32.7 43.7 Transmission losses(2) and unallocated demand ...... 1,248.9 1,404.2 1,476.1 TOTAL DEMAND = TOTAL SUPPLY ...... 7,559.8 7,851.2 8,447.9 of which imports from Uganda and Tanzania ...... 33.9 39.1 49.0 Net generation ...... 7,525.9 7,812.1 8,398.9 ______Notes: (1) Provisional. (2) Voltage losses in power transmission lines.

Source: Kenya Power & Lighting Company Ltd.

The following table sets out supply and demand of commercial energy by primary source for the periods indicated.

Production, Trade and Consumption of Energy distributed in Terms of Primary Sources(1) Year ended 31 December 2011 2012 2013(2) (‘000’ tonnes of oil equivalent) COAL AND COKE CONSUMPTION ...... 236.3 211.3 208.9 Imports of crude oil ...... 1,772.1 997.1 567.4 Net exports of petroleum ...... 1,883.5 2,532.3 2,917.0 Stock changes and balancing item ...... (34.0) (102.7) 192.1 TOTAL CONSUMPTION OF LIQUID FUELS ...... 3,857.9 3,638.0 3,676.5 HYDRO AND GEOTHERMAL ENERGY Local production of hydro power ...... 276.6 345.3 381.3 Local production of geothermal power ...... 124.1 130.3 153.1 Imports of hydro power ...... 2.9 3.4 4.2 TOTAL CONSUMPTION OF HYDRO AND GEOTHERMAL ENERGY ...... 403.7 479.0 538.6 TOTAL LOCAL ENERGY PRODUCTION ...... 400.7 464.3 534.4 TOTAL NET IMPORTS ...... 127.8 (1,320.5) (2,136.5) TOTAL ENERGY CONSUMPTION ...... 4,497.9 4,328.3 4,424.0 LOCAL PRODUCTION AS PERCENTAGE OF TOTAL .. 8.9 10.7 12.1 PER CAPITA CONSUMPTION IN TERMS OF ...... KILOGRAMS OF OIL EQUIVALENT ...... 113.7 106.5 105.9 ______Notes: (1) Formal sector only; fuel wood and charcoal are excluded. (2) Provisional. Source: Kenya National Bureau of Statistics

Oil and Gas

On 15 January 2014, Tullow Oil plc announced oil discoveries at the Amosing-1 and Ewoi-1 exploration wells in Block 10BB onshore northern Kenya. As a result of these discoveries and prior discoveries at Ekales-1 and Agete-1, Tullow Oil plc updated its estimate of discovered resources in this basin to over 600 million barrels of oil. Tullow Oil plc also announced that the overall potential for the basin, which is expected to be fully assessed over the next two years through a significant programme of exploration and appraisal wells, could be in excess of one billion barrels of oil.

Seeking prospects, exploring for and developing oil reserves involves a high degree of operational and financial risk. The actual costs of seeking prospects, drilling, completing and operating wells may exceed Tullow Oil plc’s budgeted costs and can increase significantly when drilling costs rise due to a tightening in the supply of various types of oil field equipment and related services. Prospects may be unsuccessful for many reasons, including geological conditions, weather, cost overruns, equipment shortages and mechanical difficulties. Exploratory wells bear a much greater risk of loss than development wells. Moreover, the successful drilling of an oil well does not necessarily result in a profit on investment. A variety of factors, both geological and market-related, can cause a well to become uneconomic or only marginally economic. Initial costs associated with identifying prospects and drilling wells require significant additional exploration and development, regulatory approval and commitments of resources prior to commercial development.

Kenya stopped its licensing of new open blocks of petroleum exploration licenses to allow time for the on-going review of the legal and regulatory framework of oil and gas operations in the country. The government plans to propose a new licensing process under an energy legislation that would be more competitive and use bidding rounds instead of a first-come, first serve approach under the current framework .

In June 2014, BG Group plc announced oil and gas discoveries at the Sunbird 1 exploration well in Block L10A in Lamu Basin. BG Group plc operates the block. BG Group plc, Pancontinental Oil & Gas NL and PTT Exploration and Production plc hold an equity interest in the block.

In June 2014, Africa Oil Corp. announced gas discoveries at the Sala 1 exploration well in Block 9 in Anza Basin. In October 2014, Africa Oil Corp. announced that an appraisal failed to find significant hydrocarbons up-dip from the Sala 1 discovery site, and Africa Oil Corp. was in the process of reviewing potential appraisal targets and prospects in the block. Africa Oil Corp.

operates and has a 50 per cent. interest in the block, while Marathon Oil Kenya Limited B.V. has the remaining 50 per cent. interest.

In September 2012, Apache Corporation announced gas discoveries at the Mbawa 1 exploration well in Block L8 in Lamu Basin. In October 2013, Apache Corporation abandoned its operations and relinquished its 50 per cent. interest in the block. Origin Energy Ltd., Pancontinental Oil & Gas NL and Tullow Kenya B.V. had the remaining 50 per cent. interest in the block.

The Ministry of Energy and Petroleum estimates the gas reserves at the Sunbird 1, Sala 1 and Mbawa 1 exploration wells to be 1.75 trillion cubic standard feet.

Water Supply, Sewerage and Waste Management

The water supply, sewerage and waste management sector recorded the fifteenth highest rate of growth in the economy during 2013. The sector grew 3.0 per cent. in 2013, compared to an increase of 3.2 per cent. in 2012.

In 2011, the sector accounted for US$335 million of real GDP and accounted for 0.9 per cent. of nominal GDP. In 2012, it accounted for US$342 million of real GDP and accounted for 0.9 per cent. of nominal GDP. In 2013, it accounted for US$351 million of real GDP and accounted for 0.9 per cent. of nominal GDP.

Tourism

Tourism is an important contributor to the economy. In terms of employment generation, the sector is estimated to employ an average of 3.2 per cent. of the labour force in the formal sector.

The following table sets out annual departing tourists by country of residence for the periods indicated.

Year ended 31 December Departing Tourists by Country of Residence 2012 2013(1) 2013(1) Country of Residence (number in thousands) (per cent. of total) Germany ...... 133.2 135.1 12.7 United Kingdom ...... 198.0 196.2 18.5 Switzerland ...... 37.1 34.9 3.3 Italy ...... 87.3 90.6 8.5 France ...... 39.7 36.5 3.4 Scandinavia ...... 33.9 38.8 3.7 Other Europe ...... 105.8 106.5 10.0 Total Europe ...... 634.8 638.6 60.3 United States ...... 109.1 101.1 9.5 Canada ...... 23.4 23.2 2.2 Total North America ...... 132.5 124.3 11.7 Uganda ...... 33.2 36.1 3.4 Tanzania ...... 34.3 30.5 2.9 Other Africa ...... 113.7 116.3 11.0 Total Africa ...... 181.3 182.9 17.3 India ...... 29.8 20.9 2.0 Japan ...... 13.7 11.8 1.1 Israel ...... 7.5 7.1 0.7 Other Asia ...... 48.2 45.6 4.3 Total Asia ...... 99.2 85.4 8.1 Australia and New Zealand ...... 18.0 12.8 1.2 All other Countries ...... 18.8 15.9 1.5 Total ...... 1,084.6 1,059.9 100.0 ______Notes: (1) Provisional. Source: Kenya National Bureau of Statistics

In 2011, the accommodation and food service activities sector accounted for US$627 million of real GDP and 1.3 per cent. of nominal GDP. In 2012, the sector accounted for US$639 million of real GDP and 1.4 per cent. of nominal GDP. In 2013, the sector accounted for US$608 million of real GDP and 1.2 per cent. of nominal GDP. The accommodation and food service

activities sector grew 4.1 per cent. in 2011, 3.1 per cent. in 2012 and experienced a decline of 4.6 per cent. in 2013. The decline was primarily due to the low bookings from international visitors mainly linked to uncertainties over the country’s general elections held in March 2013.

Receipts in the tourism sector decreased by 1.9 per cent. to KES96.0 billion in 2012 and further decreased by 2.1 per cent. in 2013 to KES94.0 billion. Receipts decreased by 9.4 per cent. from KES96.2 billion in 2012/13 to KES87.2 billion in 2013/14. International visitor arrivals, including tourist arrivals decreased from 1,822,900, in 2011 to 1,710,800 in 2012 and further decreased to 1,519,600 in 2013 due to a slow-down in the global economy, especially in the euro zone, coupled with negative travel advisories following security concerns. International arrivals decreased by 12.3 per cent. from 1,167,741 in 2012/13 to 1,023,702 in 2013/14. Arrivals at the Jomo Kenyatta International Airport declined by 13.5 per cent. from 983,715 in 2012/13 to 850,992 in 2013/14. Arrivals at the Moi International Airport decreased by 5.6 per cent. from 182,651 in 2012/13 to 172,348 in 2013/14. However, the government believes that tourism will benefit from Kenya Airways’ fleet expansion plans.

The number of hotel bed-nights occupied decreased by 3.8 per cent. from approximately 6,860,800 in 2012 to approximately 6,596,700 in 2013. The number of visitors to national parks and game reserves decreased from approximately 2,492,200 in 2012 to approximately 2,337,700 in 2013. Similarly, the number of visitors to museums, and other historical sites registered a 6.5 per cent. decline to stand at approximately 770,800 in 2013. From 2012 to 2013, the number of local and international conferences held in Kenya declined by 14.6 and 8.8 per cent., respectively. There were 11 global brand hotels under construction in Kenya in 2013 amounting to an addition of 1,469 rooms. Seven of the brands were new entrants to Kenya.

The United Kingdom, the United States, France and Australia have all issued new travel advisories advising their citizens to avoid or reconsider travel to certain areas within Kenya following a series of fatal attacks and attempted attacks in Nairobi and Mombasa. In addition, negative perceptions arising from the spread of Ebola in West Africa also appear to be having a detrimental impact on tourism. See “Risk Factors— Kenya continues to be challenged by internal security issues as well as unfavourable media coverage which has had and may continue to have a negative impact on the tourism industry.” The government has taken remedial measures in order to mitigate the effects of these developments, including promotion of local tourism, exemption of value added taxes to all travel agents, reducing landing charges in Mombasa and Malindi as the main tourist destinations and providing budgetary reallocations to promote domestic tourism. The tourism sector contributes to the accommodation and food service activities, wholesale and retail trade and repairs and transport and storage sectors. In 2013, the wholesale and retail trade and repairs sector accounted for 7.9 per cent. of nominal GDP, the transport and storage sector accounted for 7.4 per cent. of nominal GDP and the accommodation and food service activities sector accounted for 1.2 per cent. of nominal GDP.

Role of the State in the Economy; Privatisation

General

The central government is active in various sectors of the economy. State corporations as defined under the State Corporations Act, chapter 466 of the Laws of Kenya comprise both commercial and non-commercial entities including regulatory agencies and statutory boards, research institutions, institutions of higher learning and referral hospitals. Among commercial state corporations are corporations that have a “public goods” mandate for which the government is required to meet full cost using budgetary resources approved by the National Assembly, such as the Kenya Broadcasting Corporation, Kenya Ferry Services Limited and National Cereals Produce Board. Non-commercial state corporations act as implementing agencies of the government in areas ranging from social services such as education and health, to physical infrastructure (roads, transport, energy and water) and regulatory services. They are specialised agencies that deliver public projects and programmes, including Vision 2030 flagship projects. Examples of infrastructure non-commercial state corporations through which the government implements projects are the Kenya National Highways Authority, Kenya Rural Roads Authority, Kenya Urban Roads Authority, Geothermal Development Corporation, Rural Electrification Authority and National Irrigation Board.

Commercial state corporations do not, in general, depend on central government funds to meet their operations, except in cases where: (i) the corporation is required to carry out social (non-commercial) programmes/activities on behalf of the government (e.g., the National Cereals and Produce Board, Kenya Broadcasting Corporation and Kenya Ferry Services) or (ii) the corporation is unable to sustain itself on account of persistent poor performance (e.g., Pyrethrum Board of Kenya, Kenya Meat Commission and Numerical Machining Complex).

Some commercial state corporations are key implementing agencies for purposes of major infrastructure projects of the government. They therefore receive central government budgetary resources for these projects (e.g., Kenya Airports Authority and Kenya Ports Authority). The government from time to time also provides guarantees on their behalf for purposes of raising funds to finance projects of national importance.

To meet their recurrent and development budgetary requirements, non-commercial state corporations rely on internally-generated revenue and/or central government funding. In any given year, however, these corporations post surpluses or deficits. The corporations either retain these surpluses or remit whole, or part of it, to the central government. According to the State Corporations Act and the PFMA, state corporations may contract commercial debts on the strength of their balance sheets with the approval of the Cabinet Secretaries of the line ministry and with the approval of the National Treasury. The line ministries refer to the ministries charged with the following functions: (i) Interior and Co-ordination of National Government; (ii) Devolution and Planning; (iii) Foreign Affairs; (iv) Defence; (v) Education, Science and Technology; (vi) The National Treasury; (vii) Health; (viii) Transport and Infrastructure; (ix) Environment, Water and Natural Resources; (x) Land, Housing and Urban Development; (xi) Information, Communications and Technology; (xii) Sports, Culture and the Arts; (xiii) Labour, Social Security and Services; (xiv) Energy and Petroleum; (xv) Agriculture, Livestock and Fisheries; (xvi) Industrialisation and Enterprise Development; (xvii) East African Affairs, Commerce and Tourism; and (xviii) Mining. In accordance with the PFMA, the government may provide guarantees to borrow provided that: (i) the proceeds of the loan will be utilised for capital expenditure; (ii) the guarantee will be approved by the National Assembly; and (iii) the loan will be accommodated within the approved national debt ceiling.

The following table sets out information regarding the significant state corporations’ mandate, government ownership and summary financial information.

Year ended 30 June 2013(1)(2) Government Profits/ Name Mandate Shareholdings Assets Liabilities (Losses) (per cent.) (in KES millions) Kenya Electricity Generating Company Power generation and sale of electricity 70% 188,673 114,545 5,250 Kenya Pipeline Company To provide efficient, reliable, safe and cost effective means of transporting petroleum products from Mombasa to the hinterland and to market, process, treat, deal in petroleum products and other products and goods. 100% 60,161 3,430 8,086 Kenya Power and Lighting Transmission, distribution and retail of Company electricity 51% 177,158 129,758 4,479 Geothermal Development To fast track development of geothermal Company resource which is indigenous, abundant, affordable, reliable and environmentally- friendly source of electricity. 100% 42,602 3,846 -298 Consolidated Bank of Kenya To provide flexible financial solutions that support customers to achieve success 51% 18,000 16,427 139 Kenya Reinsurance Mandated to provide reinsurance services for Corporation Limited most classes of business. 60% 25,770 10,034 2,802 National Housing To play a principal role in the implementation Corporation of the Government’s Housing Policies and Programmes and provision of affordable housing. 100% 12,299 2,832 569 East African Portland To manufacture cement for infrastructure Cement development in the East African region. 25.3% 16,134 9,043 1,775 Kenya Tourist Development Facilitating and providing affordable Corporation development funding and advisory services for long-term investments in Kenya’s tourism sector. 100% 3,266 179 473 Industrial and Commercial To promote economic growth and industrial Development development through provision of affordable Corporation credit. 100% 17,134 1,112 341 Kenya Airports Authority To construct, operate and maintain aerodromes and other related facilities. 100% 37,928 8,897 5,304

Kenya Ports Authority To maintain, operate, improve and regulate all 100% 79,950 20,427 6,594 scheduled sea ports situated along Kenya’s

Year ended 30 June 2013(1)(2) Government Profits/ Name Mandate Shareholdings Assets Liabilities (Losses) (per cent.) (in KES millions) coastline. Kenya Railways Corporation Provide effective railway services and promote, facilitate and participate in railway networks developments 100% 53,946 2,038 680 ______Notes: (1) For the Consolidated Bank of Kenya and Kenya Reinsurance Corporation Limited figures are as at and for the year ended 31 December 2013. (2) Provisional. Source: Department of Government Investments & Public Enterprises

State-Owned Financial Institutions

The government owns a substantial majority of the capital stock of several financial institutions such as the Development Bank of Kenya, the National Bank of Kenya and the Consolidated Bank of Kenya, although it intends to decrease its participation in the financial system over the medium term, providing assistance only to specific sectors of the Kenyan economy.

Under the parastatal reform programme, ten parastatals were transferred to the Agriculture, Fisheries and Food Authority (“AFFA”), following the enactment of the AFFA Act 2013. The AFFA now performs the functions of the ten parastatals, and during the transition in order to enable the transfer of the functions, assets, and liabilities of those institutions their accounts have been frozen. The parastatals which were transferred to the AFFA are: (i) the Coconut Development Authority; (ii) The Kenya Sugar Board; (iii) The Tea Board of Kenya; (iv) Coffee Board of Kenya; (v) Horticultural Crops Development Authority; (vi) Pyrethrum Board of Kenya; (vii) Cotton Development Authority; (viii) Sisal Board of Kenya; (ix) Pests Control Products Board; and (x) Kenya Plant Health Inspectorate Service.

The government is currently reviewing the parastatal sector for reforms, which could include privatisation of state owned corporations. The government is considering classifying state corporations as commercial and non-commercial, separate institutions overseeing each class of corporations. A proposal provides that the government establish Government Investment Corporation to serve as a holding company for commercial state corporations.

Major Infrastructure Projects

Expansion of Railway Transport

Kenya has an existing metre gauge railway that is over 100 years old. The railway design and its current state of repair limits its capacity and delivery speed and cannot therefore meet future demand for rail transport in the country and the region. The government believes that Uganda and the Democratic Republic of the Congo need a fast and dependable means of transportation that can facilitate trade and industrial development. In view of expected local and international demand for reliable transport, the government plans to develop a standard gauge railway line between Mombasa through Nairobi to Malaba with connectivity to Kisumu, Uganda and Rwanda. With the construction of the standard gauge railway line from Mombasa to Malaba, the government expects rail transport to handle 50 per cent. of the freight cargo throughput, thus easing the pressure on roads, lowering the cost of doing business and enhancing trade and regional integration in East Africa.

The government plans for construction of the new railway to take place in three phases. Phase I, which President Kenyatta launched on 28 November 2013, involves the construction of a 495 kilometre line from Mombasa to Nairobi. A contractor has been selected for this phase of the project and financing agreements with the Export-Import Bank of China in the form of a US$2.0 billion commercial loan and with the government of China in the form of a US$1.6 billion semi- concessional loan was signed on 11 May 2014. Phase II involves the construction of the Nairobi—Malaba— Kisumu line for which feasibility and preliminary designs are being undertaken. Phase III of the project involves the construction of the Malaba—Kampala, Uganda— Kigali, Rwanda line for which feasibility and preliminary designs are also being undertaken. The government expects the entire project to be completed by 2018, at a cost of approximately US$13 billion. On February 2014, the Committee on Transport, Public Works and Housing completed a report on the Mombasa-Nairobi Standard Gauge Railway project and found that there were no improprieties under the Public Procurement and Disposal Act in the procurement process. The committee accepted an interpretation that the procurement was a government-to-government procurement and therefore did not require a competitive bid process under the Public Procurement and Disposal Act. Prior to the report, the Attorney General had issued an opinion on April 2014 that did not agree with the interpretation of the procurement as a “government-to-government” procurement. The Public

Investments Committee from Parliament also completed their report on 29 April 2014 and concluded that the project had complied with the procurement laws.

Development of the Lamu Port-Southern Sudan-Ethiopia Transport (“LAPSSET”) Corridor.

The LAPSSET corridor project is another major transport and infrastructure project of the government. The objective of the project is to open up access to northern Kenya, provide a reliable transport corridor for Ethiopia and Southern Sudan, promote trade between regions and enhance socio-economic activity along the corridor and open up new tourist destinations by initiating development of resort cities. The project includes the following components:

• a standard gauge railway line;

• a new road network;

• an oil pipeline, crude oil pipeline and refined oil pipeline from Lamu to Juba and Ethiopia;

• an oil refinery at Lamu with capacity of 120,000 barrels per day;

• a modern oil terminal at Lamu port to facilitate tanker loading and offloading;

• a refined petroleum products pipeline from Lamu connecting to the existing Mombasa-Kampala pipeline;

• international airports at Lamu, Isiolo and Lokichoggio;

• a free port at Lamu (Manda Bay) including three berths to handle container, conventional and bulk cargo vessels,

• Lamu Port Management Building, Lamu Port Police Station and staff housing, as well as a dispensary and club house;

• three resort cities in Lamu (at Manda Bay), Isiolo and on the shores of Lake Turkana; and

• 1,420km 220 KV double circuit electricity transmission line along the LAPSSET corridor.

Currently, the development of the first three berths at Lamu is undergoing design review and the government expects construction to begin in December 2014. The government has awarded consultancy services contracts for construction of roads along Lamu—Garissa and Garissa—Isiolo. Construction of a road along the Isiolo—Nginyany is awaiting award for design studies. Fundraising efforts are underway for the construction of the 1,800 kilometre Lamu-South Sudan and Ethiopia Railway and the Lamu, Isiolo and Lake Turkana Airports. The government expects the cost of the project to reach KES1.6 trillion (US$18.1 billion) and expects construction to be completed by 2018. The government anticipates that funding for the various components will be made through a public–private partnership of government and one or more private sector companies.

Improvement of Shipping and Maritime Facilities.

The government hopes to implement a programme to build port capacity of 50 million tonnes and transform Kenya into a maritime hub by facilitating trans-shipment of cargo at the port of Mombasa. In order to achieve this goal, the government plans to improve port efficiency, construct a second container terminal at the Mombasa port, provide new handling facilities at the Mombasa port, develop Dongo Kundu Free Trade Port and modernise ferry services to increase passenger capacity per year.

The second terminal is expected to have a capacity of 1.2 million twenty foot equivalent units. The government expects the construction of the second terminal to be completed by 2018. The KES23.0 billion (US$267 million) project is being funded by a JPY 26.7 billion loan from the Japan International Cooperation Agency.

Increasing Electricity Availability through Power Generation.

The government plans to improve the energy infrastructure network and promote development and use of renewable energy sources to create a reliable, adequate and cost effective energy supply regime to support industrial take off for economic growth. One of the key projects prioritised for implementation is the development of an additional 3,085 MW of geothermal energy at Olkaria, Menengai and Silali-Bogoria. The government expects the cost of the project to reach KES753.9 billion (US$8.7 billion) and expects construction to be completed by 2018. The government anticipates that funding will be made through a public–private partnership of government, development partners and one or more private sector companies.

Other key projects are the development of multi-purpose dams such as the High Grand Falls dam (700 MW), the Magwagwa dam (120 MW), the Arror dam (60 MW) and the Nandi Forest dam (50 MW). The government expects the cost of the project to reach

KES1.4 trillion (US$16.8 billion) and expects construction to be completed by 2018. The government anticipates that funding will be made through a public–private partnership of government, development partners and one or more private sector companies.

The government also plans to upgrade and expand the national power transmission and distribution network to improve supply and reliability, reduce losses and connect two million new customers by 2017. The government aims to connect 6,304 public facilities, including electrifying 2,600 main public facilities (trading centres, secondary schools, health centres and dispensaries) and other facilities such as primary schools, tea buying centres, water supply systems and places of worship, among others.

Replacement of the Mombasa-Nairobi Pipeline

In March 2014 the Kenyan Pipeline Company Ltd. (“KPC”) began the procurement process for the replacement of the Mombasa-Nairobi multi-product pipeline (“Line 1”). Line 1 was originally commissioned in 1978 and is approximately 449.1 km long. An in-line inspection of the pipeline was performed in fiscal year 2009/2010, and the resulting report recommended replacement of the pipeline because of extensive corrosion damage and metal loss throughout the entire pipeline, making it no longer economical to repair. The new proposed pipeline will replace the old pipeline entirely, thus ensuring continued uninterrupted supply of petroleum products while construction occurs. The government expects the project to be financed through KPC internally generated funds and external borrowing. The loan limit for the project is set in a range of US$400 million to US$500 million. In July 2014, KPC signed a contract for the replacement of the pipeline with Zakhem International Construction Co. Ltd.

Employment and Wages

The total number of people employed outside small scale agriculture and pastoralist activities increased from 12.8 million in 2012 to 13.5 million in 2013, an increase of 5.8 per cent. There were approximately 116,800 new jobs created in the formal sector in 2013. The increase was mostly due to recruitment in the devolved structures and employment of more teachers. The growth in the formal-private and informal sectors may be attributed to expansion in sectors that are labour intensive including wholesale and retail trade, information, communication and technology and construction. Wage employment in the formal sector registered growth of 5.1 per cent. in 2013 compared to 3.4 per cent. in 2012. The number of self-employed and unpaid family workers engaged in the formal sector increased by 9.0 per cent. in 2013 compared to an increase of 4.2 per cent. in 2012. The government estimates that the informal sector created 625,900 new jobs in 2013 compared to the 591,400 jobs in 2012. This sector constituted 84.3 per cent. of all the new jobs created in 2013. The government only estimates the national unemployment rate at the time of the national census. The last census was in 2009, at which time the government estimated total unemployment at 9.7 per cent.

Average nominal earnings per employee increased by 13.0 per cent. in 2013, compared to an increase of 6.6 per cent. in 2012. Real average earnings increased by 7.7 per cent. in 2013, compared to a decrease of 3.1 per cent. the previous year.

The following table sets out certain employment data as at the dates indicated.

Total Recorded Employment(1) At 31 December 2011 2012 2013(2) (in thousands) Modern Establishments—Urban and Rural Areas ...... Wage employees ...... 2,084.1 2,155.8 2,265.7 Self-employed and unpaid family workers ...... 73.8 76.9 83.8 Informal sector ...... 9,958.3 10,549.4 11,175.3 Total ...... 12,116.2 12,782.0 13,524.8 ______Notes: (1) Employment numbers excludes small scale farming and pastoral activities. (2) Provisional Source: Kenya National Bureau of Statistics

The following table sets out wage employment in the formal sector by industry and sector for the periods presented.

Wage Employment by Industry and Sector Year ended 31 December 2011 2012 2013(1) (in thousands) PRIVATE SECTOR: Agriculture, forestry and fishing ...... 289.0 295.5 303.8 Mining and quarrying ...... 8.0 8.3 8.7 Manufacturing ...... 245.2 245.4 254.1 Electricity, gas, steam and air conditioning supply ...... 1.1 1.1 1.1 Water supply, sewerage and waste management and remediation activities ...... 1.3 1.3 1.4 Construction ...... 88.8 98.7 112.0 Wholesale and retail trade and repair of motor vehicles and motorcycles 189.6 197.1 211.4 Transport and storage ...... 56.1 58.1 59.0 Accommodation and food service activities ...... 64.2 67.6 72.3 Information and communication ...... 78.8 83.9 90.9 Financial and insurance activities ...... 48.5 51.3 56.4 Real estate activities ...... 3.6 3.7 3.8 Professional, scientific and technical activities ...... 55.6 56.9 59.5 Administrative and support service activities ...... 4.2 4.5 4.8 Education ...... 100.9 106.9 112.8 Human health and social work activities ...... 68.9 73.8 80.4 Arts, entertainment and recreation ...... 3.9 4.0 4.3 Other service activities ...... 27.3 28.2 29.8 Activities of households as employers; undifferentiated goods ...... 104.8 106.3 109.7 Activities of extraterritorial organisations and bodies ...... 1.0 1.0 1.1 Total private sector ...... 1,440.8 1,493.6 1,577.3

PUBLIC SECTOR Agriculture, forestry and fishing ...... 41.4 42.2 42.9 Mining and quarrying ...... 0.7 0.7 0.7 Manufacturing ...... 25.0 25.6 26.2 Electricity, gas, steam and air conditioning supply ...... 10.3 13.2 13.6 Water supply, sewerage and waste management and remediation activities ...... 6.3 7.2 8.1 Construction ...... 17.3 17.4 18.3 Wholesale and retail trade and repair of motor vehicles and motorcycles 0.8 0.9 1.0 Transport and storage ...... 16.8 17.1 17.4 Accommodation and food service activities ...... 1.4 1.3 1.4 Information and communication ...... 1.7 1.8 1.8 Financial and insurance activities ...... 9.6 10.3 10.6 Professional, scientific and technical activities ...... 5.7 5.8 5.9 Public administration and defence; compulsory social security ...... 206.0 207.4 217.8 Education ...... 269.1 277.9 288.0 Human health and social work activities ...... 29.0 30.9 32.4 Arts, entertainment and recreation ...... 2.4 2.4 2.4 Total public sector ...... 643.5 662.1 688.5 Total wage employment ...... 2,084.3 2,155.7 2,265.8 ______Notes: (1) Provisional Source: Kenya National Bureau of Statistics

During 2013, the share of private sector employment in the formal sector increased from 69.2 per cent. in 2012 to 69.6 per cent. in 2013. Growth in employment in this sector improved from 3.7 per cent. in 2012 to 5.6 per cent. in 2013. This increase represented approximately 83,700 workers.

In 2013, the leading activities providing wage employment in the private sector were agriculture, forestry and fishing, manufacturing and wholesale and retail trade and repair of motor vehicles, accounting for 19.2, 16.1 and 13.4 per cent. of total private sector employment, respectively. The share of education, human health, and building and construction industries in the private sector employment increased slightly. The building and construction industry registered the highest growth in employment posting an increase of 13.5 per cent., followed by financial and insurance at 9.9 per cent. The government attributes

this growth to the expansion of financial and insurance services to rural areas by increasing branch networks and embracing agency banking. Human health, communications and arts, entertainment and recreation registered growth of 8.9 per cent., 8.3 per cent. and 7.5 per cent., respectively. Employment creation in the transport and storage industry registered growth of 1.5 per cent. in 2013 compared to an increase of 3.6 per cent. in 2012.

Employment in the public sector registered growth of 4.0 per cent. in 2013 compared to a 2.9 per cent. growth in 2012. Most economic activities in the public sector registered positive growth in employment while the rest remained at the same level as in the previous year. Though employment in water supply, sewerage and waste management and remediation activities recorded growth of 12.5 per cent., the human health and social work sector grew by 4.9 per cent., while financial and insurance activities rose by 2.9 per cent. Education services grew 3.6 per cent. in 2013, compared to the 3.3 per cent. growth in 2012.

The government defines the informal sector to include all small-scale activities that are semi-organised, unregulated and use low and simple technologies while employing few persons. The informal sector plays a central role in the economy as a source of employment opportunities for the youthful population and persons exiting from the formal sector of the economy. The sector also plays a vital role in the economic development of the country by increasing competition, fostering innovation, besides generating employment. The inter-linkages between the informal sector and the formal sector including government are also crucial in fostering growth in the sector. The majority of the small businesses such as retailers, street vendors and other service providers fall in the informal sector. The sector has also expanded to cover areas such as manufacturing and information and communications. The government expects to build on the current tax and revenue reform movement to seal tax loopholes, broaden the tax base to ensure equity in the tax system, review and modernise existing tax legislation, enhance capacity of tax administration including widening the tax brackets to include the informal sector.

An estimated 10.6 million persons were engaged in informal sector economic activities in 2012, an increase of approximately 6.0 per cent. from 2011. An estimated 11.2 million persons were engaged in informal sector economic activities in 2013, an increase of approximately 6.0 per cent. from 2012. The government attributes growth in the formal-private and informal sectors to notable economic growth especially in labour intensive sectors including wholesale and retail trade and construction.

The following table sets out the distribution of the informal sector by industry for the periods presented.

Informal Sector Employment by Activity(1) Year ended 31 December 2011 2012 2013(2) (in thousands) Manufacturing ...... 1,969.7 2,044.4 2,238.9 Construction ...... 261.3 282.5 292.9 Wholesale and Retail Trade, Hotels and Restaurants ...... 6,007.0 6,406.5 6,708.3 Transport and Communications (3) ...... 308.9 328.7 346.1 Community, Social and Personal Services ...... 967.4 1,029.9 1,086.7 Others ...... 449.0 457.9 502.4 Total ...... 9,958.3 10,549.9 11,175.3 ______Notes: (1) Estimated. (2) Provisional. (3) Includes mainly support services to transport activity. Source: Kenya National Bureau of Statistics

The manufacturing and wholesale and retail trade, hotels and restaurants activities registered the highest growths of 9.5 per cent. and 4.7 per cent., respectively, in terms of employment in the informal sector in 2013. Informal sector workers in wholesale and retail trade, hotels and restaurants accounted for 60.0 per cent. of all workers in the sector. The second largest employer was manufacturing which accounted for 20.0 per cent. of the informal sector labour force.

Minimum Wage

The Salaries and Remuneration Commission (“SRC”) is established by the Constitution and the Salaries & Remuneration Commission Act, 2011. The mandate of the SRC is to set and regularly review the remuneration and benefits of state officers, realign and restore harmony and equity in the public service remuneration structure and banding system. In performing its functions, the commission is expected to ensure that the total public compensation bill is fiscally sustainable; ensure that the public services are able to attract and retain the skills required to execute their functions; recognise productivity and performance; and transparency and fairness.

The SRC has established remuneration breakdown for state officers, including the President, Deputy President, Governors, Members of Parliament and Cabinet Secretaries, among others.

The government has had an active minimum wage setting policy since Kenya’s independence in 1963. Minimum wages apply to all salaried employees who are at least 18 and work in the formal sector. However, the minimum wages do not apply to the skilled and professional personnel. During 2012, a high number of professionals such as teachers and doctors went on strike demanding improved work environment, higher salaries and allowances. Subsequently, the government and such professionals reached negotiated settlements upon which such professionals returned to work.

On 1 May 2013, the government announced new statutory minimum wage rates that reflected a 14.0 per cent. increase in the wages specified in both the Regulation of Wages Agriculture Order, 2012 and the Regulation of Wages (General) Order, 2012. In contrast, in 2013, the annual average inflation rate was 5.7 per cent., implying in real terms the minimum wage increase was positive.

On average, the monthly basic minimum wages for the agricultural industry increased from KES5,044 in 2011 to KES5,704 in 2012 and KES6,503 in 2013, reflecting an increase of 13.1 per cent. in 2012 and 14.0 per cent. in 2013. The lowest paid category of workers, unskilled employees, saw their monthly wages raise from KES3,765 in 2011 to KES4,258 in 2012 and to KES4,854 in 2013. Wages for the highest paid categories of workers, namely farm foreman and farm clerks, increased from KES6,792 in 2011 to KES7,681 in 2012 and to KES8,757 in 2013.

The average monthly basic minimum wages in Nairobi, Mombasa and Kisumu cities increased from KES11,911 in 2011 to KES13,471 in 2012 and further increased to KES15,357 in 2013. For other municipalities, average basic minimum monthly wages increased from KES11,066 in 2011 to KES12,515 in 2012 and further increased to KES14,267 in 2013. Similarly, the wages in all other towns rose from KES9,413 in 2011 to KES10,646 in 2012 and further increased to KES12,136 in 2013.

The following table sets out the average monthly basic minimum wage for the agricultural sector.

Monthly Basic Minimum Wages for Agricultural Industry Year ended 31 December Type of Employee 2011 2012 2013(1) (KES) Unskilled employees ...... 3,765 4,258 4,854 Stockman, herdsman and watchman ...... 4,348 4,917 5,606 SKILLED AND SEMI-SKILLED EMPLOYEES: House servant or cook ...... 4,298 4,861 5,542 Farm foreman ...... 6,792 7,681 8,757 Farm clerk ...... 6,792 7,681 8,757 Section foreman ...... 4,397 4,973 5,669 Farm artisan ...... 4,500 5,089 5,802 Tractor driver ...... 4,772 5,397 6,153 Combine harvester driver ...... 5,257 5,945 6,778 Lorry driver or car driver ...... 5,517 6,239 7,113 AVERAGE ...... 5,044 5,704 6,503 ______Notes: (1) Provisional. Source: Ministry of Labour & Human Resource Development

The following table sets out the average monthly basic minimum wages in urban areas for the periods presented.

Monthly Basic Minimum Wages in Urban Areas(1) All Municipalities and Nairobi, Mombasa & Mavoko, Ruiru & Kisumu Cities Limuru Town Councils All other towns Year ended 30 June Occupation 2011 2012 2013(2) 2011 2012 2013(2) 2011 2012 2013(2) (KES) General labourer ...... 7,586 8,579 9,781 6,999 7,915 9,024 4,047 4,577 5,218 Miner, stone cutter, turnboy, waiter, cook ... 8,193 9,266 10,564 7,269 8,221 9,372 4,676 5,288 6,029 Night watchman ...... 8,463 9,571 10,912 7,846 8,873 10,116 4,827 5,459 6,224 Machine attendant ...... 8,598 9,724 11,086 8,001 9,049 10,316 6,485 7,334 8,361 Machinist...... 9,815 11,100 12,655 9,182 10,384 11,839 7,507 8,490 9,679 Plywood machine operator ...... 10,239 11,580 13,202 9,450 10,687 12,184 7,811 8,834 10,071 Pattern designer ...... 11,684 13,214 15,065 10,682 12,081 13,773 9,108 10,301 11,743 Tailor, driver (medium vehicle) ...... 12,877 14,564 16,603 11,835 13,385 15,259 10,553 11,935 13,606 Dyer, crawler, tractor driver, salesman...... 14,216 16,078 18,329 13,264 15,001 17,102 11,971 13,539 15,435 Saw doctor, caretaker (building) ...... 15,732 17,793 20,284 14,690 16,614 18,940 13,685 15,477 17,645 Cashier, driver (heavy commercial) ...... 17,118 19,360 22,071 16,109 18,219 20,770 15,104 17,083 19,474 Artisan (ungraded) ...... 10,239 11,580 13,202 9,450 10,686 12,184 7,811 8,834 10,071 Artisan Grade III ...... 12,877 14,564 16,603 11,835 13,385 15,259 10,533 11,913 13,581 Artisan Grade II ...... 13,908 15,730 17,932 13,264 15,002 17,102 11,971 13539 15,435 Artisan Grade I ...... 17,118 19,361 22,071 16,109 18,219 20,770 15,104 17,083 19,474 AVERAGE ...... 11,911 13,471 15,357 11,066 12,515 14,267 9,413 10,646 12,136 ______Notes: (1) Excludes housing allowance. (2) Provisional. Source: Ministry of Labour & Human Resource Development

Social Security

The National Social Security Fund (“NSSF”) provides social security protection to workers in the formal and informal sectors and in the private and government sectors. The number of registered employers and employees increased marginally in 2013. There were more male registered employees than female in 2012. The number of male and female employees registered increased marginally during 2013. Annual contributions increased marginally and benefits increased by 2.9 per cent., during 2013.

In December 2013, the National Social Security Fund Act 2013 (the “Act”) transformed the NSSF from a provident fund which pays a limited number of lump sum benefits into a social security scheme paying retirement pension as well as additional benefits such as invalidity and funeral grants. The Act increased contribution rates by members and employers significantly from the prior cap of KES400.0 to a total of 12.0 per cent. of a member’s pensionable earnings. In June 2014, certain trade unions brought legal action against NSSF alleging that certain provisions of the Act, including those related to mandatory contributions to NSSF are inconsistent with the Constitution. The judiciary has not appointed judges to hear and decide on the matter and the government has put on hold implementation of provisions in dispute. NSSF is implementing the provisions of the Act other than those in dispute.

The Act divides a member’s contributions into Tier I and Tier II. Tier I is based on emoluments up to the average minimum wage, while Tier II is based on emoluments above this level. Tier I contributions must be retained in NSSF, whereas an employer can “opt out” of the NSSF and make Tier II contributions to another retirement benefits scheme, subject to fulfilling certain requirements. In determining pensionable earnings, the Act sets an upper limit at the average national wage in the first year but rising to four times the average national wage in the fifth year.

The following table sets out details of registered employers, registered employees, annual contributions and benefits to members of the NSSF.

Year ended 31 December 2011 2012 2013(1) Registered Employees (in thousands) ...... 84.2 92.1 92.1 Male ...... 2,720.0 2,954.7 2,955.0 Female ...... 945.2 1,001.2 1,001.3 Total ...... 3,665.2 3,955.9 3,956.3 Annual contribution (KES millions) ...... 5,990.6 6,571.1 6,571.6 Annual benefits paid (KES millions)...... 2,387.1 2,765.3 2,844.6 ______Notes: (1) Provisional Source: National Social Security Fund

The government is in the process of establishing the Social Protection Fund to facilitate access to credit and cash transfer on flexible terms in a bid to attain a meaningful and better quality of life for poor and vulnerable individuals by transferring a monthly stipend. The government increased the funding allocated to the Social Protection Fund for Older Persons from KES1.5 billion in 2012/13 to KES3.2 billion in 2013/14. The direct cash disbursement increased from KES1.5 billion in 2012/13 to KES2.9 billion in 2013/14. The increase in allocation and direct cash disbursement resulted in an increase in the number of targeted households from 49,000 to 164,000 in the same period. The monthly cash transfer per household was KES2,000 per household in 2012/13 and 2013/14.

The Social Protection Fund for Orphans and Vulnerable Children (“OVC”) started in 2004 in response to the strong need to protect and assist the highly vulnerable children and also to strengthen the capacity of the households to protect and care for OVC within their families and communities. The fund is currently directed to the poor households taking care of OVC through the department of children’s services. The funding allocated for OVC increased from KES1,081.4 million in 2012/13 to KES4,763.1 million in 2013/14. The direct cash disbursement increased from KES1,030.3 million in 2012/13 to KES4,524.9 million in 2013/14. The increased allocation and direct cash disbursements were attributed to increased capital transfers and an increase in the number of targeted households from 44,000 in 2012/13 to 135,000 in 2013/14.

The following table sets out the funds allocated to OVC through the department of children’s services.

Social Protection Fund for Older Persons Social Protection Fund for OVC Direct Cash Direct Cash Allocation Disbursement Allocation Disbursement (KES millions) 2010/11 ...... 530.0 394.0 827.7 766.9 2011/12 ...... 1,000.0 949.5 1,026.9 896.9 2012/13 ...... 1,519.2 1,478.0 1,081.4 1,030.3 2013/14(1) ...... 3,168.0 2,919.0 4,763.1 4,524.9 ______Notes: (1) Provisional Source: Department of Gender and Social Development

BALANCE OF PAYMENTS AND FOREIGN TRADE

Balance of Payments

The balance of payments records the value of the transactions carried out between a country’s residents and the rest of the world. The balance of payments is composed of:

• The current account, which includes:

• net exports of goods and services (the difference in value of exports minus imports);

• net financial and investment income; and

• net transfers; and

• The capital and financial accounts, which comprise the difference between financial capital inflows and financial capital outflows.

The current account of the Kenya’s balance of payments for the past three years has been characterised by deficits, which were partially offset by capital and financial account surpluses. During this period, the current account deficit averaged 7.8 per cent. of Kenya’s nominal GDP.

The following table sets forth Kenya’s balance of payments for the periods indicated.

Balance of Payments Year ended 30 June 2012 2013 2014(1) (US$ millions) Current Account (3,343.2) (4,240.3) (4,504.3) Excluding Official Transfers ...... (3,343.2) – – Exports, f.o.b...... 5,960.9 6,018.2 5,823.3 Coffee ...... 263.0 230.1 216.4 Tea ...... 1,138.2 1,207.1 1,124.7 Horticulture ...... 647.9 717.8 770.3 Imports, f.o.b...... (14,903.0) (15,568.0) (16,308.2) Oil ...... (4,192.3) (3,776.5) (3,899.4) Other Private ...... (10,398.5) (11,610.6) (12,293.3) Of which: Capital Imports(2) ...... (3,116.8) (3,530.3) (3,803.2) Balance of Goods ...... (8,942.2) (9,549.8) (10,484.9) Balance on Services(3) ...... 2,651.4 2,563.1 2,823.4 Of which: foreign travel credit(4) ...... 970.7 907.7 933.1 Balance on goods and services ...... (6,290.8) (6,986.7) (7,661.5) Income (net) ...... (144.9) (226.7) (364.9) Current transfers (net) ...... 3,092.5 2,973.1 3,522.1 Private (net) ...... 3,115.1 2,765.5 3,391.7 Of which: remittances ...... 1,658.1 2,088.7 2,409.8 Capital and Financial Account ...... 4,150.4 4,838.2 5,166.6 Capital account (incl. capital transfers) ...... 173.4 166.5 175.6 Financial account(5) ...... 3,977.0 4,671.7 4,991.0 Net Foreign Direct Investment ...... 830.0 375.7 802.5 In Kenya ...... 855.7 386.5 861.1 abroad ...... (25.7) (10.8) (58.6) Net other investment...... 2,186.4 3,453.7 2,610.8 Official, medium and long-term ...... 1,128.8 725.4 (48.7) Inflows ...... 1,416.9 1,005.5 905.1 Project loans ...... 807.0 – – Commercial loans(6) ...... 609.8 – – Outflows ...... (288.1) (280.1) (953.8) Private, medium and long-term ...... 690.7 957.9 1,506.1 Energy financing ...... 60.0 86.9 108.9 Kenya Airways ...... 17.8 99.0 195.0 Other ...... 612.9 771.9 1,202.2 Short term-capital ...... 366.9 1,770.4 1,153.4 Of which: public net (includes trade credit) ...... 0.0 – – Private net ...... 366.9 – –

Year ended 30 June 2012 2013 2014(1) (US$ millions) Of which: commercial banks ...... 94.1 372.3 354.3 Errors and omissions ...... 974.2 732.3 471.7 Overall balance ...... 807.2 872.6 937.0 Financing items ...... (807.2) (872.6) (937.0) Reserve assets (gross) ...... (1,120.9) (1,081.4) (1,000.7) Use of Fund credit and loans to the Fund (net) ...... 307.8 203.1 49.1 Disbursements ...... 319.7 225.3 111.4 Repayments ...... (11.9) (22.1) (62.3) Rescheduling/debt swap ...... 5.9 – – Memorandum items: Gross official reserves (end of period) ...... 5,241.4 6,222.0 7,475.0 ______Notes: (1) Provisional. (2) Excludes power generation related machinery and airplanes but includes oil-exploration related machinery and equipment. (3) Service receipts were revised retroactively upwards in September 2013 to account for 90 per cent. of classified receipts as reported by commercial banks. (4) The foreign travel credit comprises two components, recorded tourism inflows and an estimate of additional underreported tourism receipts. (5) Historical figures include errors and omissions. (6) 2012 includes the US$600 million syndicated loan. Source: Kenyan authorities and IMF staff estimates and projections.

Current Account

The current account deficit was US$3.3 billion in 2011/12, or 6.8 per cent. of nominal 2012 GDP. The current account deficit increased by 26.8 per cent., or US$89.7 million, to US$4.2 billion in 2012/13 or 7.7 per cent. of nominal 2013 GDP. The increase in the current account deficit was mainly due to a relatively greater increase in imports from US$14.9 billion in 2011/12 to US$15.6 billion in 2012/13, while the value of exports remained the same at US$6.0 billion in 2011/12 and 2012/13. The Euro zone sovereign debt crisis that continued in 2012 affected the shilling, making it depreciate against major currencies, which in turn contributed to the high import bill. The current account deficit increased by 6.2 per cent., or US$264 million, to US$4.5 billion in 2013/14. The increase in the 2014 current account deficit was mainly due to an increase in balance of goods deficit. The current account deficit increased by 14.0 per cent. from US$4,643 million, or 9.2 per cent. of GDP, at 30 September 2013 to US$5,293 million, or 9.6 per cent. of GDP, at 30 September 2014. The government attributes this increase mainly to an increase in balance of goods deficit. An increase in imports of goods, while exports of goods remained the same, resulted in an increase in balance of goods deficit.

Based on discussions with the IMF, the government believes that the current account deficit may be overstated. This is based on several grounds. First, the deficit appears at odds with the observed 5-10 per cent. real effective exchange rate appreciation in the Kenyan shilling. The rise of capital goods imports associated with higher investment may be part of the explanation. If capital goods imports were excluded, the current account would have been in surplus. Second, the government believes that part of “unclassified” services reported by commercial banks are excluded from current account receipts because of possible inappropriate classification by commercial banks. These “unclassified” services have quadrupled in the last four years. Third, foreign direct investment may have been substantially underreported. A survey conducted by the Kenya National Bureau of Statistics in 2010 found that foreign direct investment underreporting was higher than 50 per cent. Considering the foregoing, the government believes that external current account net of long-term financing may be close to balance. See “Risk Factors—The statistical information published by Kenya may differ from that produced by other sources and may be unreliable”.

The following table sets out information on the balance of trade for the periods presented.

Balance of Trade Year ended 31 December 2011 2012 2013(1) (KES millions) EXPORTS (f.o.b.) Exports ...... 484,507 479,706 455,689 Re-exports ...... 28,097 38,141 46,598 Total ...... 512,604 517,847 502,287 IMPORTS (c.i.f.):

Balance of Trade Year ended 31 December 2011 2012 2013(1) (KES millions) Commercial...... 1,283,111 1,360,408 1,403,225 Government ...... 17,639 14,179 10,091 Total ...... 1,300,749 1,374,587 1,413,316 BALANCE OF TRADE ...... (788,145) (856,740) (911,029) TOTAL TRADE ...... 1,813,354 1,892,434 1,915,602 COVER RATIO(2) (in percentage) ...... 39.4 37.7 35.5 ______Notes: (1) Provisional (2) Cover ratio is the ratio of exports to imports. Source: Kenya National Bureau of Statistics/Kenya Revenue Authority

In 2013, the value of exports decreased by 3.0 per cent. while the value of imports rose by 2.8 per cent. The value of re-exports increased by 22.2 per cent. The value of petroleum product re-exports increased from KES9,560.1 million in 2012 to KES10,503.5 million in 2013. The value of medicament re-exports increased from KES3,194 million to KES3,265 million in 2013. However, the value of animal and vegetable oil re-exports declined from KES693 million in 2012 to KES502 million in 2013. The trade deficit widened by 6.3 per cent. from KES856.7 billion in 2012 to KES911.0 billion in 2013. The export/import cover ratio decreased from 37.7 per cent. in 2012 to 35.5 per cent. in 2013.

International trade in services increased by 19.6 per cent., from a surplus of KES173.9 billion in 2010/11 to a surplus of KES208.0 billion in 2011/12. During 2011/12, earnings from transportation improved while tourism earnings declined. Current transfer flows increased by 0.2 per cent., supported by remittances from Kenyans living outside the country.

International trade in services increased by 10.0 per cent., from a surplus of KES208.0 billion in 2011/12 to a surplus of KES228.8 billion in 2012/13. Earnings from tourism decreased by 2.1 per cent., from KES96.0 billion in 2011/12 to KES94.0 billion in 2012/13. The surplus in current transfers account decreased by 3.9 per cent.

Remittances from the Kenyan diaspora are a major contributor to Kenya’s economic growth and development. In 2011/12, remittances increased by 41.7 per cent. from US$1.2 billion in 2010/11 to US$1.7 billion in 2011/12. In 2012/13, remittances increased by 26.0 per cent. to US$2.1 billion. In 2013/14, remittances increased by 15.4 per cent. to US$2.4 billion. North America has remained the main source of remittances, accounting for approximately 50 per cent. of total inflows as at 31 August 2014. However, as a share of total inflows, remittances from this region has declined slightly from an average of about 54 per cent. in 2011 to about 50 per cent. in 2013. Diaspora remittances, along with tourism, tea and horticulture are among Kenya’s leading foreign exchange earners.

Directions of Foreign Trade

Most of Kenya’s exports are destined for other African countries. In 2012, the value of exports to other African countries was 48.4 per cent. of total exports and increased by 0.1 per cent. Of such exports, exports to countries that are members of the COMESA remained the dominant destination, accounting for 70.1 per cent. of the value of total exports to Africa. In 2013, the value of exports to other African countries was 46.0 per cent. of total exports and declined by 7.9 per cent. The total value of exports to COMESA countries, however, decreased from US$2.1 billion in 2011 to US$2.0 billion in 2012 and further decreased to US$1.9 billion in 2013.

For the year ended 31 December 2013, exports to Uganda, Tanzania, Egypt and Rwanda represented 27.2 per cent. of total exports. For the year ended 31 December 2013, exports to COMESA represented 32.6 per cent. of total exports.

The value of exports to the EAC region, which includes some members who are also members of COMESA, declined from US$1.6 billion in 2012 to US$1.5 billion in 2013 and in 2013 accounted for 54.0 per cent. of the total value of exports to Africa. There was a decline in the value of total exports to Rwanda and Tanzania in 2013. In 2013, total exports to Rwanda and Tanzania decreased by 17.0 per cent. and 12.3 per cent., respectively. Exports to Uganda was the largest share of total exports to Africa in 2013, accounting for 28.2 per cent., even though exports to that country declined by 3.4 per cent. during 2013 from US$784 million in 2012 to US$757 million.

The region that recorded the second largest share of exports during 2013 was the EU, accounting for 20.8 per cent. of total exports. The countries in the EU that received the most exports from Kenya by value were the United Kingdom and the Netherlands, with each receiving 35.6 per cent. and 31.1 per cent. of total exports to the EU, respectively. During 2013, exports

to the United Kingdom decreased by 7.6 per cent., while the Netherlands increased, by 4.4 per cent. Exports to Germany and Sweden declined by 15.8 per cent. and 34.1 per cent. in 2013, respectively.

Exports to the Far East accounted for the third largest share of the value of exports during 2013 at 13.6 per cent. Pakistan received the most exports in the region at US$280 million, or 35.5 per cent. Total exports to the Far East increased by 7.1 per cent. during 2013. Exports to Singapore and India increased by 375.0 per cent. and 25.0 per cent., respectively. An increase in re-exports to Singapore of manufactured metal products and equipment from 2012 to 2013 contributed to the increase in total exports to Singapore during this period. Exports to Indonesia and China declined by 16.7 per cent. and 22.2 per cent., respectively. For 2013, exports to Pakistan represented 4.8 per cent. of total exports.

Exports to the Middle East accounted for the fourth largest share of the value of exports during 2013 at 7.9 per cent. In 2013, exports to the Middle East decreased by US$31 million or 6.3 per cent. Total exports to the United Arab Emirates declined by 12.6 per cent. from US$333 million in 2012 to US$291 million in 2013. The government attributes the decline primarily to a decline in exports of gold bars to the United Arab Emirates. In 2013, exports to the United Arab Emirates represented 5.0 per cent. of total exports. Total value of exports to Israel and Saudi Arabia decreased by 45.8 per cent. and 5.1 per cent., respectively, during the same period. Exports to Iran, however, increased by 113.0 per cent. during 2013. Exports to Iran totalled US$15.0 million in 2012 and US$32.0 million in 2013. The major export commodities to Iran include tea, mate, crude vegetable minerals, while imports include residual petroleum and related material.

The following table sets out the value of total exports by destination for the periods presented.

Value of Total Exports by Destination Year ended 31 December 2011 2012 2013(1) (US$ millions) Europe Western Europe European Union Belgium ...... 54 61 72 Finland ...... 15 17 13 France ...... 66 57 62 Germany ...... 91 114 96 Italy ...... 78 63 53 Netherlands ...... 386 361 377 Spain...... 26 22 23 Sweden ...... 35 44 29 United Kingdom ...... 554 472 436 Other...... 57 52 52 Total European Union ...... 1,362 1,264 1,212 Other Western Europe ...... 124 66 81 Total Western Europe ...... 1,486 1,330 1,293 Eastern Europe Russia Federation ...... 68 77 79 Other ...... 48 49 56 Total Eastern Europe ...... 116 125 136 Total Europe ...... 1,602 1,455 1,429 America United States...... 303 307 347 Canada ...... 14 18 15 Other ...... 7 10 29 Total America ...... 324 334 391 Africa South Africa ...... 33 31 38 Rwanda ...... 159 188 156 Egypt ...... 275 250 197 Tanzania ...... 491 535 469 Uganda ...... 893 784 757 Burundi ...... 69 62 65 Other ...... 990 1,064 999 Total Africa ...... 2,911 2,913 2,682 Asia

Year ended 31 December 2011 2012 2013(1) (US$ millions) Middle East: Iran ...... 23 15 32 Israel ...... 17 24 13 Jordan ...... 3 3 3 Saudi Arabia ...... 28 39 37 United Arab Emirates ...... 234 333 291 Other...... 83 76 81 Total Middle East ...... 387 489 458 Far East China ...... 45 63 49 India ...... 110 88 110 Indonesia ...... 25 18 15 Japan...... 27 29 31 South Korea ...... 6 12 12 Pakistan ...... 247 278 280 Singapore...... 13 4 19 Other...... 263 246 273 Total Far East ...... 737 737 789 Total Asia ...... 1,124 1,226 1,246 Australia & Oceanic Australia ...... 11 19 31 Other ...... 2 3 2 Total Australia & Oceanic ...... 13 22 33 All Other Countries ...... 12 14 17 Aircraft and Ships Stores ...... 41 56 22 Total Exports ...... 6,027 6,019 5,820 ______Notes: (1) Provisional Source: Kenya National Bureau of Statistics and Kenya Revenue Authority

Most of Kenya’s imports originate from Asia. During 2013, imports from the Far East and the Middle East accounted for 47.9 per cent. and 15.6 per cent. of total imports, respectively. The countries with the greatest share of Kenya’s total imports during 2013 were India and China, accounting for 18.3 per cent. and 12.9 per cent. of the total, respectively. Imports from India increased 31.9 per cent. from US$2.3 billion in 2012 to US$3.0 billion in 2013, while imports from China increased 8.7 per cent. from US$1.9 billion in 2012 to US$2.1 billion in 2013. During 2013, imports from Japan increased 32.2 per cent. and accounted for 5.9 per cent. of total imports. Imports from the United Arab Emirates declined 21.9 per cent. during 2013, but still accounted for 8.3 per cent. of total imports. In 2013, imports from India, China and Japan represented 37.1 per cent. of total imports and increased by 22.8 per cent. from US$4.9 billion in 2012 to US$6.1 billion in 2013. In 2013, imports from United Arab Emirates and Saudi Arabia represented 11.2 per cent. of total imports and declined by 26.9 per cent. from US$2.5 billion in 2012 to US$1.8 billion in 2013.

The region with the third largest share of total imports during 2013 was the EU, accounting for 14.7 per cent. of total imports. The value of imports from Europe increased by 8.0 per cent. in 2013. In 2013, imports from the United Kingdom and the Netherlands increased by 11.3 per cent. and 40.0 per cent., respectively. An increase of imports of petroleum products contributed to the increase in the value of imports from the Netherlands. In 2013, imports from France, Germany and Italy declined by 24.1 per cent., 9.9 per cent. and 2.5 per cent., respectively. A decline in imports of drilling, engine and other equipment from France from 2012 to 2013 contributed to the decline of imports from France during this period.

The region with the fourth largest share of total imports during 2013 was Africa, accounting for 10.5 per cent. of total imports. The value of imports from Africa increased from US$1.6 billion in 2012 to US$1.7 billion in 2013. The government attributes this increase to an increase in imports of flat rolled products of iron or non-alloy steel. In 2013, the value of imports from South Africa increased by 13.8 per cent., with its share of total imports increasing to 5.0 per cent. of total imports from 4.5 per cent. for the same period in 2012.

Additionally, Zimbabwe and Kenya have a joint permanent commission which has been instrumental in the proportion of trade between the two countries. Exports to Zimbabwe totalled US$21.0 million in 2013 and US$20.0 million in 2012. Imports from Zimbabwe totalled US$9.5 million in 2013 and US$12.3 million in 2012.

Total imports from COMESA declined by 5.7 per cent. from US$715 million in 2012 to US$675 million in 2013. The value of imports from Uganda increased by 4.5 per cent. to US$186 million in 2013 from US$178 million in 2012.

Imports from the United States increased by 46.4 per cent. from US$524 million in 2011 to US$767 million in 2012. This was occasioned by increases in the value of imports of aircraft and associated equipment, fertilisers, internal combustion engines and steam turbines. Imports from Canada increased by 78.2 per cent., partly due to increased imports of automatic data processing machines in preparation of 2013 general elections, from US$87 million in 2011 to US$155 million in 2012. For the year ended 31 December 2013, imports from the United States declined by 13.2 per cent., compared with corresponding period of 2012, to US$665 million, mainly due to a decline in imports of aircraft and associated equipment. Imports from Canada declined by 51 per cent. to US$76 million in 2013. A one time importation of data processing machines in preparation of 2013 general elections from Canada in 2012 is the primary reason for the difference between the value of imports from Canada in 2012 and the value of imports from Canada in 2013.

The following table sets out the value of total imports by country of origin for the periods presented.

Value of Imports by Country of Origin Year ended 31 December 2011 2012 2013(1) (US$ millions) Europe Western Europe European Union Belgium ...... 126 127 151 Finland ...... 56 26 42 France ...... 233 315 239 Germany ...... 375 482 434 Italy ...... 170 241 235 Netherlands ...... 264 205 287 Spain...... 75 93 97 Sweden ...... 99 94 82 United Kingdom ...... 507 510 568 Other...... 369 280 268 Total European Union ...... 2,275 2,373 2,406 Other Western Europe ...... 401 249 278 Total Western Europe ...... 2,675 2,622 2,683 Eastern Europe ...... Russia Federation ...... 270 177 269 Other ...... 51 105 184 Total Eastern Europe ...... 322 282 452 Total Europe ...... 2,997 2,903 3,136 America United States...... 524 767 665 Canada ...... 87 155 76 Other ...... 320 464 238 Total America ...... 931 1,387 979 Africa South Africa...... 831 720 819 Tanzania ...... 184 167 135 Uganda...... 122 178 186 Other ...... 641 570 572 Total Africa ...... 1,778 1,636 1,713 Asia Middle East: Iran ...... 43 43 28 Israel ...... 75 84 109 Jordan ...... 10 14 9 Saudi Arabia ...... 629 777 480 United Arab Emirates ...... 2,340 1,742 1,360 Other...... 425 643 561 Total Middle East ...... 3,522 3,303 2,548 Far East

Year ended 31 December 2011 2012 2013(1) (US$ millions) China ...... 1,691 1,944 2,113 India ...... 1,746 2,269 2,992 Indonesia ...... 511 642 522 Japan...... 665 734 970 South Korea ...... 310 262 284 Pakistan ...... 203 150 181 Singapore...... 362 151 225 Other...... 501 502 555 Total Far East ...... 5,990 6,654 7,842 Total Asia ...... 9,511 9,956 10,389 Australia & Oceanic Australia ...... 27 53 144 Other ...... 8 41 7 Total Australia & Oceanic ...... 35 94 151 All Other Countries ...... 38 2 7 Total Imports ...... 15,291 15,978 16,375 ______Notes: (1) Provisional Source: Kenya National Bureau of Statistics and Kenya Revenue Authority

Content of Foreign Trade

Tea was the leading commodity foreign exchange earner in 2012, accounting for 21.1 per cent. of total export earnings. Export earnings from tea, however, decreased from KES102.2 billion in 2011 to KES101.4 billion in 2012. Horticulture exports, which is the second largest export, reached KES81.1 billion in 2012, a decline of 2.6 per cent. from 2011 levels. The reduced production of tea was due to adverse conditions including frost in some of the tea growing regions and drought in the first quarter of 2012. Foreign exchange earnings from medicinal and pharmaceutical products, sugar confectionary and coffee increased by 16.8, 11.7 and 6.7 per cent., respectively, in 2012. The value of exports of petroleum products, however, decreased by 47.0 per cent. from US$6.2 billion in 2011 to KES3.3 billion in 2012.

For the year ended 31 December 2013, Kenya exported approximately 446,000 metric tons of tea worth KES104.6 billion. Tea accounted for 23.0 per cent. of total domestic export earnings for the year ended 31 December 2013. Export earnings from tea increased to KES104.6 billion for the year ended 31 December 2013 from KES101.4 billion in the corresponding period of 2012. Horticulture exports reached KES89.3 billion for the year ended 31 December 2013.

With respect to principal imports, petroleum products and industrial machinery had the largest share of total imports, and collectively accounted for 34.2 per cent. of the total in 2013. The value of imported petroleum products increased by 6.3 per cent. to KES252.7 billion in 2013 while the value of imported industrial machinery increased by 18.8 per cent. to KES231.4 billion in 2013.

Fuel, lubricants and machinery and other capital equipment accounted for 40.8 per cent. of total imports for year ended 31 December 2013.

The following table sets out the values of principal exports and imports for the periods presented.

Values of Principal Exports and Imports Year ended 31 December 2011 2012 2013(1) (KES millions) Exports Fish and fish preparations ...... 4,955 5,392 3,362 Maize (raw) ...... 169 57 192 Meals and flours of wheat ...... 159 290 145 Horticulture ...... 83,331 81,129 89,339 Sugar confectionery ...... 5,211 5,818 5,401 Coffee, unroasted ...... 20,863 22,271 16,328 Tea ...... 102,236 101,441 104,648 Margarine and shortening ...... 2,950 2,684 2,245 Beer made from malt ...... 2,961 3,209 3,636 Tobacco and tobacco manufactures ...... 18,633 16,615 13,709 Hides and skins (undressed) ...... 108 504 134 Sisal ...... 1,212 1,184 1,020 Stone, sand and gravel ...... 494 385 389 Fluorspar ...... 3,928 3,272 1,714 Soda ash ...... 12,371 9,724 8,997 Metal scrap ...... 1,050 2,826 2,498 Petroleum products ...... 6,217 3,294 2,652 Animal and vegetable oils ...... 14,166 12,727 8,156 Medicinal and pharmaceutical products ...... 7,446 8,699 7,068 Essential oils ...... 13,822 13,623 11,172 Insecticides and fungicides ...... 1,828 801 771 Leather ...... 7,208 7,036 8,491 Wood manufactures n.e.s...... 193 140 159 Paper and paperboard ...... 651 474 639 Textile yarn ...... 851 792 885 Cement ...... 8,898 8,118 8,292 Iron and steel ...... 18,165 15,098 15,560 Metal containers ...... 734 715 500 Wire products, nails screws, nuts, etc...... 1,142 1,649 1,036 Footwear ...... 3,562 4,148 3,992 Articles of plastic ...... 9,350 10,278 10,263 Articles of apparel and clothing accessories ...... 22,260 20,676 24,379 All other commodities ...... 107,385 114,637 97,916 Total ...... 484,507 479,706 455,688

Imports Wheat, unmilled ...... 31,371 29,743 30,189 Rice ...... 12,548 14,520 14,111 Maize ...... 11,479 6,451 2,291 Wheat flour ...... 2,517 2,120 1,964 Sugars, molasses and honey ...... 11,088 17,030 16,770 Textile fibres and their waste ...... 5,093 5,025 5,099 Second-hand clothing ...... 6,831 8,400 8,345 Crude petroleum ...... 124,042 68,086 41,037 Petroleum products ...... 199,120 237,557 252,673 Animal/vegetable fats and oils ...... 56,733 54,876 48,371 Organic & inorganic chemicals ...... 19,593 22,080 22,303 Medicinal & pharmaceutical products ...... 39,681 41,307 40,114 Essential oils & perfumes ...... 13,454 15,351 16,935 Chemical Fertilisers ...... 23,045 20,184 27,957 Plastics in primary & non-primary forms ...... 49,296 47,650 55,182 Paper and paperboard ...... 22,947 20,049 21,356 Iron and steel ...... 62,087 56,667 80,749 Non-ferrous metals ...... 13,863 12,119 14,626 Hand &machine tools ...... 2,335 2,794 3,265 Industrial machinery ...... 177,174 194,666 231,440

Year ended 31 December 2011 2012 2013(1) (KES millions) Agricultural machinery and tractors ...... 5,532 6,347 7,802 Bicycles, assembled or partly assembled ...... 395 354 429 Road motor vehicles ...... 62,870 73,768 83,330 All other Commodities ...... 347,657 417,443 386,978 Total ...... 1,300,749 1,374,587 1,413,316 ______Notes: (1) Provisional Source: Kenya National Bureau of Statistics and Kenya Revenue Authority

The following table sets out the quantities of principal exports and imports for the periods presented.

Year ended 31 December Unit of Quantity 2011 2012 2013(1) Exports Fish and fish preparations ...... Tonne 15,519 17,455 11,712 Maize (raw) ...... Tonne 1,173 548 1,236 Meals and flours of wheat ...... Tonne 4,624 7,488 3,076 Horticulture ...... Tonne 363,799 367,985 394,387 Sugar confectionery ...... Tonne 33,092 33,188 30,159 Coffee, unroasted ...... Tonne 37,570 51,713 48,890 Tea ...... Tonne 385,425 376,996 446,033 Margarine and shortening ...... Tonne 20,288 18,532 15,924 Beer made from malt ...... 000 Lt. 59,054 62,638 48,166 Tobacco and tobacco manufactures ...... Tonne 40,290 35,259 53,093 Hides and skins (undressed) ...... Tonne 2,250 10,200 2,832 Sisal ...... Tonne 12,040 11,066 10,010 Stone, sand and gravel ...... Tonne 45,962 39,138 29,632 Fluorspar ...... Tonne 116,600 105,753 78,002 Soda ash ...... Tonne 592,207 458,811 478,822 Metal scrap ...... Tonne 4,342 5,465 4,478 Petroleum products ...... Mn. Lt. 89 27 18 Animal and vegetable oils ...... Tonne 106,420 99,252 70,339 Medicinal and pharmaceutical products ...... Tonne 11,446 13,063 12,419 Essential oils ...... Tonne 121,919 120,059 94,157 Insecticides and fungicides ...... Tonne 3,301 1,709 1,416 Leather ...... Tonne 26,485 22,698 26,542 Wood manufactures n.e.s...... Tonne 712 608 468 Paper and paperboard ...... Tonne 9,572 5,063 7,313 Textile yarn ...... Tonne 2,263 1,859 2,046 Cement ...... Tonne 708,384 737,496 826,941 Iron and steel ...... Tonne 170,143 150,182 155,442 Metal containers ...... Tonne 3,262 3,432 2,831 Wire products, nails screws, nuts, etc...... Tonne 8,356 10,931 9,232 Footwear ...... ‘000’ Pairs 47,288 51,712 52,021 Articles of Plastic ...... — — 55,882 48,370 Imports Wheat, unmilled ...... Tonne 1,002,710 1,044,848 1,033,054 Rice ...... Tonne 337,446 399,699 409,576 Maize ...... Tonne 359,232 324,622 93,473 Wheat flour ...... Tonne 61,850 54,397 30,853 Sugars, molasses and honey ...... Tonne 176,174 267,679 276,542 Textile fibres and their waste ...... Tonne 18,182 19,451 18,183 Second-hand clothing ...... Tonne 76,533 82,216 101,066 Crude petroleum ...... Tonne 1,772,133 997,028 567,432 Petroleum products ...... Mn. Lt. 2,874 3,484 3,760 Animal/vegetable fats and oils ...... Tonne 553,087 591,488 636,120 Organic & inorganic chemicals ...... Tonne 240,714 241,719 256,736 Medicinal & pharmaceutical products ...... Tonne 16,637 16,110 17,187 Essential oils & perfumes ...... Tonne 33,273 50,269 46,097 Chemical Fertilisers ...... Tonne 522,200 425,840 688,436 Plastics in primary & non-primary forms .... Tonne 317,119 342,163 377,340 Paper and paperboard ...... Tonne 278,797 263,089 279,700 Iron and steel ...... Tonne 792,093 778,859 1,217,865 Non-ferrous metals ...... Tonne 45,425 42,405 52,588 Hand &machine tools ...... ‘000’ No 9,534 11,027 10,682 Bicycles, assembled or partly assembled ..... ‘000’ No 143 134 166 Road motor vehicles ...... Nos. 65,987 74,111 92,270 ______Notes: (1) Provisional. Source: Kenya National Bureau of Statistics and Kenya Revenue Authority

The volume of coffee exports increased by 37.6 per cent. in 2012. Export quantities of wire and products, metal scrap, medicinal and pharmaceutical products, fish and fish preparations and footwear increased by 30.8, 25.9, 14.1, 12.5 and 9.4 per cent, respectively, in 2012. On the other hand, the export quantities of soda ash, iron and steel declined by 22.5 per cent. and 11.7 per cent., respectively, in 2012. Export quantities of tea declined by 2.2 per cent. in 2012 while export quantities of maize decreased by 53.3 per cent.

For the year ended 31 December 2013, the volume of coffee exports was 48,890 tonnes, compared to 51,713 tonnes during 2012, a decline of 5.8 per cent. For the year ended 31 December 2013, the volume of horticulture exports was 394,387 tonnes, compared to 367,985 tonnes during 2012, an increase of 7.2 per cent.

During 2012, imports of sugars, molasses and honey increased by 51.9 per cent. Essential oil and perfume imports increased by 51.1 per cent., while imports of un-milled wheat increased from 1,002,710 thousand tonnes in 2011 to 1,044,848 tonnes in 2012. There were notable increases in imports of rice, petroleum products, hand and machine tools and road motor vehicles which increased by 18.5, 21.2,15.7 and 12.3 per cent. respectively in 2012. Imports of crude petroleum products decreased by 43.7 per cent. from 1,772,133 tonnes in 2011 to 997,028 tonnes in 2012. Similarly, imports of chemical fertiliser products decreased by 18.5 per cent. to 425,840 tonnes in 2012. During the review period, imports of un-milled maize declined by 9.6 per cent. Imports of processed wheat, non- ferrous metals and, paper and paperboard decreased by 12.1, 6.7 and 5.6 per cent., respectively.

During 2013, imports of sugars, molasses and honey increased by 3.3 per cent. Essential oil and perfume imports declined by 8.3 per cent., while imports of un-milled wheat declined from 1,044,848 tonnes in 2012 to 1,033,054 tonnes in 2013. Imports of non- ferrous metals increased by 24.0 per cent., mainly due to an increase in imports of copper, zinc and aluminium products. Imports of petroleum products increased by 7.9 per cent., mainly due to an increase in imports of refined petroleum products, which the government primarily attributes to a reduction in output of refined petroleum products processed at Kenya Petroleum Refineries, Ltd. Imports of animal/vegetable fats and oils increased by 7.5 per cent. Imports of iron and steel increased by 56.4 per cent.

Capital and Financial Account

The capital and financial account registered a surplus of US$4.2 billion in 2011/12 compared to a surplus of US$3.0 billion in 2010/11, primarily due to increased long-term and medium-term loan disbursements. Net foreign direct investment inflows increased from US$694.0 million in 2010/11 to US$830.0 million in 2011/12. The capital and financial account increased by 16.6 per cent., or US$688.0 million, to a surplus of US$4.8 billion in 2012/13 primarily due to increases recorded in both long and short-term net capital flows.

The capital and financial account registered a surplus of US$5.2 billion in 2013/14 compared to a surplus of US$4.8 billion in 2012/13 primarily due to an increase in net foreign direct investment and net portfolio investment inflows. Net foreign direct investment inflows increased from US$375.7 million in 2012/13 to US$802.5 million in 2013/14.

The following table sets out information on foreign investor net cash inflow activity in the equity market according to the Nairobi Securities Exchange for the periods indicated.

Year ended 31 December 2011 2012 2013 2014 (KES millions) January ...... 1,987 (812) 2,133 (876) February ...... 622 795 (3,927) (1,505) March ...... 1,552 2,651 1,810 (399) April ...... (3,024) 1,771 3,026.00 1,409 May...... (3,334) 1,099 3,475.00 (2,578) June...... (1,597) 1,639 2,602.00 142 July ...... 1,173 828 1,625.00 3,253 August ...... 621 1,048 9,839.00 (850) September ...... 535 3,286 2,063.00 – October ...... 719 2,965 2,723.00 – November ...... 31 4,335 884 N/A December...... 935 2,129 (690) N/A Net Cash Inflow ...... 220 21,734 25,369 1,182 ______Source: Nairobi Securities Exchange

The government plans to implement the following objectives in order to increase foreign investment in Kenya:

 expand energy sources to provide reliable energy to industries at competitive rates;

 improve Kenya’s investment climate by simplifying processes;

 finalise commercial laws aimed at increasing efficiency in business and investment in the country;

 improve investor facilitation by creating “one-stop shops” for information;

 prioritise and effectively carry out the necessary institutional reforms to improve governance;

 maintain and expand existing infrastructure; and

 enhance internal security.

Foreign Reserves

Gross international reserves increased by 11.4 per cent. from KES480.7 billion (US$5.59 billion) at 31 December 2012 to KES535.3 billion (US$6.20 billion) at 31 December 2013. As at 30 June 2014, gross reserves increased further by 81.56 per cent. to KES971.93 billion (US$11.09 billion). The increase is primarily attributable to the purchases of foreign exchange from the domestic interbank market by the Central Bank of Kenya. Net foreign assets of the Central Bank of Kenya increased from KES283.0 billion (US$3.3 billion) at 31 December 2011 to KES390.4 billion (US$4.54 billion) at 31 December 2012, and further to KES430.6 billion (US$4.99 billion) at 31 December 2013. Net foreign assets of the Central Bank of Kenya increased further to KES970.0 (US$11.07 billion) at 30 June 2014. The reserve position in the IMF increased from KES1.69 billion (US$0.02 billion) at 31 December 2011 to KES1.71 billion (US$0.02 billion) at 31 December 2012, and further to KES1.77 billion (US$0.02 billion) at 31 December 2013, while the Special Drawing Rights (“SDRs”) declined from KES1.4 billion (US$0.02 billion) at 31 December 2011 to KES596 million (US$0.01 billion) at 31 December 2012. The decline in the SDRs is primarily due to conversion of the SDRs to the major foreign currencies by the IMF. SDRs declined from KES1.4 billion at 31 December 2013 to KES692 million at 30 June 2014. The foreign liabilities of the Central Bank of Kenya consisting of external banks’ deposits and use of fund credit increased by 29.5 per cent. to KES88.5 billion (US$1.03 billion) at 31 December 2012, compared to a total of KES68.3 billion (US$0.80 billion) at 31 December 2011. The foreign liabilities of the Central Bank of Kenya increased from KES102.7 (US$1.19 billion) billion at 31 December 2013 to KES105.49 million (US$1.20 billion) at 30 June 2014.

The following table sets out international reserves held by the Central Bank of Kenya and the National Treasury as at the dates indicated.

Official Foreign Assets and Liabilities Central Bank of Kenya Central Government Total Net Gross Foreign Foreign Foreign Assets of Total Reserves of Exchange External Use of Central Reserve Reserves of Central (cash + Banks’ Fund Bank of Position in Other Central Monetary As at end of SDRs gold) Deposits Credit Kenya IMF Holdings Government Authorities (KES millions) 2011 January ...... 24,295 289,547 2,819 33,678 277,345 1,643 43 1,686 315,528 February ...... 24,723 303,335 2,896 42,805 282,357 1,677 40 1,717 329,775 March ...... 1,961 329,657 4,095 43,484 284,039 1,704 35 1,739 333,357 April ...... 2,047 340,090 5,051 44,689 292,397 1,751 31 1,782 343,919 May ...... 2,047 337,599 5,106 45,333 289,206 1,798 27 1,803 341,448 June ...... 2,731 363,361 5,440 47,495 313,157 1,861 23 1,884 367,976 July ...... 2,048 368,422 5,961 53,338 311,171 1,895 63 1,948 372,418 August ...... 2,121 383,682 7,600 55,188 323,015 1,950 62 2,013 387,815 September ...... 2,144 389,852 8,263 57,074 326,650 2,017 50 2,067 394:053 October ...... 2,181 382,367 7,694 57,845 319,010 2,044 47 2,092 386,640 November ...... 1,881 348,274 10,911 50,958 288,285 1,801 76 1,877 352,032 December ...... 1,431 349,877 8,829 59,507 282,972 1,690 68 1,757 353,065 2012 January ...... 786 341,956 7,737 59,146 275,859 1,703 64 1,766 344,508 February ...... 762 354,781 8,071 58,210 289,261 1,676 59 1,735 357,277 March ...... 758 376,283 7,073 58,021 311,947 1,670 55 1,725 378,766 April ...... 2,564 416,877 5,808 67,448 346,185 1,675 51 1,726 421,167 May ...... 2,597 396,526 8,899 68,541 321,683 1,702 46 1,748 400,871 June ...... 7,200 424,690 7,581 71,487 352,822 1,659 41 1,700 428,591 July ...... 1,562 418,957 8,379 65,449 346,691 1,649 76 1,725 422,245 August ...... 1,577 440,596 8,691 66,122 367,360 1,666 72 1,738 443,911 September ...... 1,606 453,854 10,779 67,754 376,927 1,707 71 1,778 457,238 October ...... 1,110 454,531 9,572 67,112 378,957 1,703 63 1,766 457,407 November ...... 1,113 478,096 12,964 76,966 389,279 1,713 113 1,826 481,035 December ...... 596 478,288 11,653 76,814 390,417 1,713 113 1,826 480,710 2013 January ...... 128 460,742 11,940 77,742 371,188 1,756 104 1,861 462,731 February ...... 1,292 440,108 12,671 75,204 353,525 1,700 94 1,794 443,194 March ...... 1,268 451,058 10,623 73,808 367,895 1,671 89 1,761 454,087 April ...... 1,915 492,146 9,917 81,451 402,693 1,647 85 1,732 495,793 May ...... 2,972 513,952 11,234 82,064 423,626 1,662 81 1,743 518,667 June ...... 2,694 514,081 11,651 83,605 421,519 1,662 81 1,743 518,518 July ...... 2,694 514,244 12,046 83,582 421,311 1,721 95 1,816 518,760 August ...... 2,094 524,599 9,827 84,000 432,865 1,731 93 1,824 528,574 September ...... 2,087 519,566 9,301 84,110 428,243 1,749 93 1,842 523,547 October ...... 2,097 529,465 9,608 82,375 439,580 1,738 126 1,864 533,469 November ...... 1,583 515,999 7,541 83,113 426,929 1,765 127 1,892 519,510 December ...... 1,369 531,981 10,377 92,333 430,640 1,765 123 1,888 535,302 2014 January ...... 1,954 557,314 12,799 93,347 665,414 1,756 119 1,875 667,289 February ...... 1,953 559,221 10,626 93,764 665,564 1,775 120 1,895 667,459 March ...... 1,959 558,830 9,503 94,053 664,345 1,776 120 1,896 666,241 April ...... 1,741 569,941 12,577 94,416 678,675 1,789 122 1,911 680,586 May ...... 692 557,716 11,703 94,317 664,428 1,798 123 1,921 666,349 June ...... 692 863,820 11,152 94,337 970,001 1,803 126 1,929 971,930 July ...... 17 589,178 13,792 91,069 693,992 1,785 124 1,909 695,901 August ...... 3,368 584,164 12,444 90,908 690,819 1,782 122 1,905 692,724 September ...... 3,334 666,581 12,412 89,649 771,914 1,758 121 1,879 773,793 ______Source: Central Bank of Kenya

Foreign Exchange

Kenya follows a floating exchange regime. The Central Bank of Kenya allows the exchange rate to move in line with the fundamentals in the economy and has a policy to only intervene in the foreign exchange market if there is excess volatility in the trading level of the local currency that hampers proper functioning of the market.

The Kenyan shilling has depreciated against most of the selected major trading currencies. The overall trade weighted exchange rate index increased by 0.7 per cent. from 109.6 in 2011 to 110.4 in 2012 and decreased by 3.6 per cent. to 106.4 in 2013. The government attributes the depreciation of the Kenyan shilling against the leading world currencies to the large current account deficit occasioned by the high import bill vis-à-vis export earnings and to global economic volatility resulting from the Euro zone sovereign debt crisis and currency speculation activities within the foreign exchange market. The Kenyan shilling weakened against the pound sterling, euro and US dollar by 2.4, 5.0 and 0.3 per cent., respectively, at 31 December 2013. However, the Kenyan shilling strengthened against the Japanese yen by 17.5 per cent. at 31 December 2013. As at 31 December 2013, the Kenyan shilling remained relatively stable against the pound sterling, Euro and US dollar, but continued to strengthen against the Japanese yen. From 31 December 2013 to 30 June 2014, the Kenyan shilling strengthened against the Euro by 0.05 per cent. and weakened against the pound sterling, the US dollar and the Japanese yen by 4.03, 1.5 and 4.20 per cent., respectively.

The table below sets out the foreign exchange rates for the Kenyan shilling computed as a simple average of the mean buying and selling exchange rate prevailing as at the last trading day of the year, which is presented as the simple average of the mean buying and selling exchange rate prevailing as at the last trading day of the month.

Foreign Exchange Rates of Shilling for Selected Currencies

As at 31 December As at 30 June 2011 2012 2013 2014 1 Euro(1) ...... 110.06 113.56 119.22 119.16 1 US dollar ...... 85.07 86.03 86.31 87.61 1 Pound Sterling ...... 131.12.... 139.02 142.40 148.15 100 Japanese Yen ...... 111.25.. 99.90 82.42 85.88 ______Notes: (1) Countries in the Euro area included in the computation of Trade Weighted Fisher’s Ideal index are: Germany, France, Switzerland, Netherlands, Belgium and Italy. Source: Central Bank of Kenya

Trade Policy

Exports from Kenya enjoy preferential access to world markets under a number of special access and duty reduction programmes. Kenya is signatory to a number of multilateral and bilateral trade agreements as part of its trade policy. Kenya is a member of the WTO which provides Kenya’s export products access to more than 90 per cent. of world markets at “most favoured nation” treatment. In addition, Kenya is member to several trade arrangements and beneficiary to trade-enhancing schemes that include the Africa Growth and Opportunity Act (“AGOA”), the ACP-EU Trade Agreement and the COMESA.

Regional Agreements

Kenya, as a member of the EAC, enjoys preferential tariff rates for exports and imports within the region. Member states of the EAC have signed a protocol to establish a customs union.

Kenya is also a member of COMESA. The COMESA agenda is to deepen and broaden the integration process among member states through the adoption of more comprehensive trade liberation measures such as the complete elimination of tariff and non- tariff barriers to trade and elimination of customs duties.

Under the ACP/Cotonou Partnership Agreement, exports from Kenya entering the EU are entitled to duty reductions and freedom from all quota restrictions. Trade preferences include duty-free entry of all industrial products as well as a wide range of agricultural products including beef, fish, dairy products, cereals, fresh and processed fruits and vegetables.

Under the AGOA, Kenya qualifies for duty free access to the US market. Kenya’s major products that qualify for export under AGOA include textiles, apparels, handicrafts, etc. Kenya’s exports to the United States under the AGOA increased from KES4.3 billion in 2005 to KES29.9 billion in 2013.

Under the Generalised System of Preferences, a wide range of Kenya’s manufactured products are entitled to preferential duty treatment in the United States, Japan, Canada, New Zealand, Australia, Switzerland, Norway, Sweden, Finland, Austria and other European countries. In addition, no quantitative restrictions are applicable to Kenyan exports on any of the 3,000-plus items currently eligible for GSP treatment.

Bilateral Trade Agreements

Kenya has signed bilateral trade agreements with several countries around the world. Some of the countries are already members of existing schemes offering market access/duty reduction preferences as explained above.

Kenya has concluded Avoidance of Double Taxation Agreements with the United Arab Emirates, the United Kingdom, Germany, India, Canada, Norway, Sweden, Denmark, Zambia, France and South Africa, and is currently negotiating a number of others with various countries.

Kenya has concluded Investment Promotion and Protection Agreements with France, Finland, Germany, Italy, Netherlands, Switzerland, China, Libya, Iran, Burundi and the United Kingdom, among others.

Export Promotion Council

The Export Promotion Council (“EPC”) through the Centre for Business Information in Kenya supports Kenyan exporters by consolidating, diversifying and expanding Kenya’s export products and markets. The EPC supports producers and exporters of goods and services through enhancing market access, value addition and dissemination of trade information. The EPC exposes the beneficiary firms to the opportunities availed through enhanced international visibility for their products and ease of transacting business.

Under the trade policy facilitation, the EPC advocates a trade policy environment that aids growth and development of Kenya’s export sector. This was achieved through participation and contribution in several bilateral and multilateral trade negotiations policy forums to ensure expansion of export markets for the country’s products. These fora included EAC-EU Economic Partnership Agreements, EAC/COMESA/SADC tripartite negotiations, the AGOA, the COMESA, and the EAC common market negotiations among others.

The EPC, within its strategy of export consolidation and diversification, undertook market research covering broad economic and social categories in the Republic of South Sudan and the Democratic Republic of Congo to aid the economic operators in Kenya to conduct business with their counterparts in these countries. The findings of the studies identified business opportunities for expanding Kenya’s export of goods and services, and also pointed out the market entry requirements for Kenyan investors and businessmen into South Sudan and the Democratic Republic of Congo. The EPC completed 27 trade statistical analyses on Kenya’s foreign trade to establish the direction of bilateral trade with Kenya’s trading partners by identifying potential products for development and promotion and markets for expansion and diversification. The reports facilitated policy interventions to promote export growth.

The EPC also organised and facilitated the participation of Kenya’s exhibitors in major international trade fairs and exhibitions in Tanzania, China, Zambia, Uganda, DRC, Zimbabwe, the United States—Specialty Coffee Association of America and Mozambique. These events were aimed at consolidation and expansion of market shares as well as enabling the Kenyan exhibitors to gauge competitiveness of their products, appoint distributors, study consumer trends and identify joint venture opportunities in these markets.

In the Micro, Small and Medium Enterprises Development Project, the EPC provided assistance to strengthen the export supply base and mainstreaming micro, small and medium enterprises in the export process. This was achieved through the establishment of Export Production Villages (“EPVs”) and capacity building programmes for SME exporters. The EPC facilitated the establishment of 19 EPVs and is assisting them to form co-operatives to maximise the production capacity of individual units through collective selling. In 2012, a total of 736 exporters were trained under various modules to enhance exporters’ skills and knowledge to enable them to respond effectively to opportunities in the export market. The Training Modules included basic, intermediate and advanced courses in export marketing, e-trade, international commercial terms, export-logistics, documentation and payment.

MONETARY AND FINANCIAL SYSTEM

Central Bank of Kenya

The Central Bank of Kenya Act of 1966 established the Central Bank of Kenya. The establishment of the Central Bank of Kenya was a direct result of three East African states’ desire to have independent monetary and financial policies. This led to the collapse of the East Africa Currency Board in the mid-1960s. Following the promulgation of the Constitution on 27 August 2010, the Central Bank of Kenya was established as an autonomous institution under Article 231 of the Constitution. Under this Article, the Central Bank of Kenya has the responsibility to formulate monetary policy, promote price stability, issue currency and perform any other functions conferred on it by an act of Parliament. The Central Bank of Kenya Act of 1966 limits the Central Bank of Kenya’s lending to the government to 5 per cent. of the government’s audited revenue.

The functions and powers of the Central Bank of Kenya are the following:

 to formulate and implement monetary policy directed to achieving and maintaining stability in the general level of prices;

 to foster the liquidity, solvency and proper functioning of a stable market-based financial system;

 subject to the above, the Central Bank of Kenya shall support the economic policy of the government, including its objectives for growth and employment;

 to formulate and implement foreign exchange policy;

 to hold and manage its foreign exchange reserves;

 to license and supervise authorised dealers;

 to formulate and implement such policies as best promote the establishment, regulation and supervision of efficient and effective payment, clearing and settlement systems;

 to act as banker and adviser to, and as fiscal agent of the government; and

 to issue currency notes and coins.

Under the Central Bank of Kenya Act of 1966 (Cap. 491), the responsibility for determining the policy of the Central Bank of Kenya, other than the formulation of monetary policy, is given to the Board of Directors. The board is comprised of 11 members consisting of the Chairperson, the Governor, the Principal Secretary to the National Treasury or his representative who must be a non-voting member, and eight other non-executive directors. The chairperson and directors are appointed by the President with the approval of Parliament and hold office for a period of four years but are eligible for re-appointment for one further term of four years. Persons eligible to be appointed to the board must be citizens of Kenya who are knowledgeable or experienced in monetary, financial, banking and economic matters or other disciplines relevant to the functions of the Central Bank of Kenya.

The Central Bank of Kenya operates from its head office in Nairobi and has branch offices in Mombasa, Kisumu and Eldoret. The Central Bank of Kenya also runs currency centres in Nyeri, Nakuru and Meru. The Central Bank of Kenya also has a major stake in the Kenya School of Monetary Studies which is headed by an executive director answerable to the Governor of the Central Bank of Kenya.

The following table sets out the financial position of the Central Bank of Kenya as at the dates indicated.

Central Bank of Kenya Statement of Financial Position

At 30 June 2011 2012 2013 (KES millions) Assets Balances due from banking institutions and gold holdings ...... 368,835 395,283 450,693 Funds held with IMF ...... 2,731 2,200 2,694 Items in the course of collection ...... 409 — — Advances to banks ...... 49 9,973 351 Loans and advances ...... 30,642 3,560 2,645 Financial assets at fair value through profit or loss ...... — 42,678 77,929 Investments in securities ...... — — 6 Other assets ...... 5,385 2,557 4,119 Retirement benefit asset ...... 1,897 2,193 2,967 Property and equipment ...... 3,117 11,651 12,052 Intangible assets ...... 1,171 1,272 973 Due from government of Kenya ...... 32,380 38,131 35,960 Total assets ...... 446,616 509,498 590,389 Liabilities Currency in circulation ...... 147,718 159,216 183,047 Investments by banks ...... — 35,673 41,589 Deposits ...... 135,792 160,642 191,671 IMF ...... 81,829 101,868 118,568 Other liabilities ...... 9,447 1,332 2,595 Dividends payable ...... 2,641 — — Accruals ...... 98 — — Total liabilities ...... 377,525 458,731 537,470 Equity and reserves...... 69,091 50,767 52,919 Share Capital ...... 5,000 5,000 5,000 General reserve fund ...... 62,722 35,368 39,020 Asset revaluation reserve ...... 1,369 8,899 8,899 Proposed Dividends ...... — 1,500 — Total liabilities and equity ...... 446,616 509,498 590,389 ______Source: Central Bank of Kenya

Structure and Development of the Kenya Banking System

Commercial Banks and Mortgage Finance Institutions

Commercial banks and mortgage finance institutions are licensed and regulated pursuant to the provisions of the Chapter 488 Banking Act and the Regulations and Prudential Guidelines issued thereunder. They are the dominant players in the Kenyan banking system.

Currently there are 43 licensed commercial banks and one mortgage finance company. Out of the 44 institutions, 30 are locally owned and 14 are foreign owned. The locally owned financial institutions are comprised of three banks with significant shareholding by the government and state corporations, Consolidated Bank of Kenya (77.8 per cent. government owned), Development Bank of Kenya (entirely government owned) and National Bank of Kenya (70.6 per cent. government owned), 26 commercial banks and one mortgage finance institution. There has been no consolidation in the banking sector in the past five years.

The current minimum capital requirement is KES1 billion, with the minimum core capital and total capital ratios to risk weighted assets at 8 per cent. and 12 per cent., respectively. Banks have until 31 December 2014 to comply with new effective minimum core capital and total capital ratios of 10.5 per cent. and 14.5 per cent., respectively. To ensure full adherence with the Basel I

Accord (International Convergence of Capital Measurement and Capital Standards; Basel Committee on Banking Supervision (July 1988)), capital charges for operational and market risk became effective from 1 January 2014. Banks are now required to set aside specific capital charges for credit, market and operational risks.

The Central Bank of Kenya reviews the legal and regulatory environment, on an on-going basis, to align it to the Basel Core Principles for Effective Banking Supervision. With regard to the Basel II Accord (International Convergence of Capital Measurement and Capital Standards: A Revised Framework; Basel Committee on Banking Supervision (June 2004)) and Basel III Accord (International Framework for Liquidity Risk Measurement, Standards and Monitoring; Basel Committee on Banking Supervision (December 2010)), the central banks of the EAC have agreed to adopt those aspects of the Accords that are relevant and applicable to the East African region given the current state of financial infrastructure. In this regard, the Central Bank of Kenya issued revised prudential and risk management guidelines in January 2013 that incorporated pertinent aspects of the Basel II Accord on supervisory review (Pillar II) and market disclosures (Pillar III) and the Basel III Accord on capital buffer and enhanced liquidity requirements. In view of the cross border nature of the Kenyan banking sector, the Central Bank of Kenya has implemented consolidated supervision and has set up supervisory colleges for three of the largest Kenyan regional banking groups. To manage the growing country risks as Kenyan banks expand their footprint in other African countries, guidelines on country risk management were issued by the Central Bank of Kenya in 2013. Other reforms to enhance financial inclusion include introduction of agency banking and expanding credit information sharing mechanism to incorporate both positive and negative information and to extend it beyond banks to incorporate deposit taking microfinance institutions.

The government believes that the four major risks affecting the Kenyan banking sector, in order of severity, are credit risk, operational risk, country risk and transfer risk. Credit risk is the current or prospective risk to earnings and capital arising from an obligor’s failure to meet the terms of any contract with the bank or if an obligor otherwise fails to perform as agreed. Credit risk in the Kenyan banking sector was enhanced in 2013 as a result of high interest rates that prevailed in 2011 and 2012 and the slowing down of economic activity in 2013 due to the general elections. Operational risk is the risk of losses resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk in the Kenyan banking sector has been elevated by the adoption of information communication technology by banks. To enhance banks’ ICT risk management, the Central Bank of Kenya issued ICT Risk Management Guidelines, which took effect on 1 January 2013. Country risk is the risk that economic, social, political conditions and events in a foreign country will adversely affect an institution’s financial condition. Transfer risk is the risk that a borrower may not be able to secure foreign exchange to service its external obligation. Country and transfer risk is increasing in the Kenyan banking system as Kenyan banks expand into the EAC region and beyond. To mitigate this risk, the Central Bank of Kenya has issued country and transfer risk guidelines, which took effect on 1 January 2013.

Microfinance Institutions

The Microfinance Act, 2006 and the Microfinance Regulations issued thereunder set out the legal, regulatory and supervisory framework for the microfinance industry in Kenya. The Microfinance Act took effect in 2008. As at 30 June 2014, there were nine deposit taking microfinance institutions in Kenya.

Forex Bureaus

Forex bureaus were established and first licensed in January 1995 to foster competition in the foreign exchange market and to narrow the exchange rate spread in the market. As authorised dealers, forex bureaus conduct business and are regulated under the provisions of the sections 33A to 33O of the Central Bank of Kenya Act, chapter 491 of the Laws of Kenya and guidelines issued thereunder. As at 30 June 2014, there were 97 licensed forex bureaus located in various towns.

Credit Reference Bureaus

Credit reference bureaus (“CRBs”) complement the central role played by banks and other financial institutions in extending financial services within an economy. CRBs help lenders make faster and more accurate credit decisions. They collect, manage and disseminate customer information to lenders within a regulatory framework—the Banking (Credit Reference Bureau) Regulations, 2008, which took effect in 2009. The Banking (Credit Reference Bureau) Regulations 2008, will govern licensing, operation and supervision of CRBs by the Central Bank of Kenya. As at 30 June 2014, there were two licensed credit reference bureaus.

Capital Adequacy Ratios

The table below sets out the two main capital adequacy ratios (“CARs”) for the Kenyan banking sector.

Capital Adequacy Ratios

At 31 December At 30 June 2011 2012 2013 2014 CAR Ratio(1)(2) Core Capital (tier 1) to Risk Weighted Assets ...... 17.3% 18.9% 19.5% 15.0% Total (Regulatory) Capital to Risk Weighted Assets ...... 19.4% 21.7% 22.9% 17.5% ______Notes: (1) Ratios are based on Basel I Capital Accord standards. (2) The current minimum capital requirement is KES1 billion with the minimum core capital and total capital ratios to risk weighted assets at 8 per cent. and 12 per cent., respectively. Banks have until 31 December 2014 to comply with new effective minimum core capital and total capital ratios of 10.5 per cent. and 14.5 per cent., respectively. Source: Central Bank of Kenya

Non-Performing Loans

The Central Bank of Kenya classifies credit exposures of commercial banks in five categories according to their performance at a given point in time. These five categories are:

 Normal: loans performing in accordance with the contractual terms and which are up to date on repayments, and expected to continue in this condition.

 Watch: Loans which are generally past due by between 30 and 90 days.

 Substandard: Loans which are generally past due for more than 90 but less than 180 days.

 Doubtful: Loans which are generally past due for more than 180 but less than 360 days.

 Loss: Loans which are generally past due for 360 days or more.

Loans classified as sub-standard, doubtful and loss are considered as non-performing loans (“NPL”).

The following table sets out the amount of non-performing loans in the banking sector at the dates indicated.

Non-performing Loans in the Banking Sector(1)

At 31 December At 30 June 2011 2012 2013 2014 (US$ millions) Category Substandard(2) ...... 124 190 305 328 Doubtful(3) ...... 372 345 401 595 Loss(4) ...... 114 173 211 232 Total ...... 610 708 917 1,155 ______Notes: (1) Figures converted at the prevailing exchange rate as at 30 November 2013 of US$1 to KES87 for 2011, 2012 and 2013, and the prevailing exchange rate at 30 June 2014 of US$1 to KES88 for 2014. (2) Substandard loans are loans past due for more than 90 days but less than 180 days. (3) Doubtful loans are loans past due for more than 180 days but less than 360 days. (4) Loss loans are loans past due for 360 days or more. Source: Central Bank of Kenya

The following table sets out the amount of loan loss reserves in the banking sector at the dates indicated.

Loan Loss Reserves

At 31 December At 30 June 2011 2012 2013 2014 (US$ millions)

Interest in suspense ...... 147 129 188 220 Specific provisions ...... 323 269 331 360 General provisions ...... 103 100 140 147 Gross provisions ...... 573 498 659 727 ______Source: Central Bank of Kenya

The table below sets out the amount of non-performing loans by the type of bank ownership.

Non-performing Loans per Year(1)

At 31 December At 30 June 2011 2012 2013 2014 (US$ millions) Bank Ownership Category(2) ...... Local Private Banks (27) ...... 525 630 673 721 Foreign Banks (13) ...... 68 59 170 333 Local Public Banks (3) ...... 17 19 74 101 Total ...... 610 708 917 1,155 ______Notes: (1) Figures converted at the prevailing exchange rate as at 30 November 2013 of US$1 to KES87 for 2011, 2012 and 2013, and the prevailing exchange rate at 30 June 2014 of US$1 to KES88 for 2014. (2) Banks are categorised based on the control of their shareholding. A bank with local shareholding of more than 50 per cent. is categorised as local, whereas one with foreign shareholding of more than 50 per cent. is categorised as foreign and those with more than 50 per cent. shareholding of the government of Kenya or its entities shareholding are categorised as public banks. Source: Central Bank of Kenya

Gross loans of the banking sector reached KES1,330,365 million with gross NPLs of KES61,917 million in 2012. In 2013, gross loans reached KES1,578,768 million with gross NPLs of KES81,857 million. At 30 June 2014, gross loans reached KES1,784,272 million with gross NPLs of KES101,655 million. Returns on assets in 2012 were 4.6 per cent., while return on equities were 29.8 per cent. In 2013, returns on assets were 4.7 per cent., while return on equities was 29.1 per cent. At 30 June 2014, returns on assets were 3.7 per cent., while return on equities was 30.9 per cent.

Monetary Policy Framework

The Central Bank of Kenya’s principal objective is the formulation and implementation of monetary policy directed at achieving and maintaining stable prices (i.e., low inflation) and sustaining the value of the Kenyan shilling. Following amendments to the law, the Minister for Finance may by notice in writing to the Central Bank of Kenya set the price stability targets of the government.

Monetary policy is the main tool used in the preservation of the value of the currency in an economy. It involves the control of liquidity circulating an economy to levels consistent with growth and price objectives set by the government. The volume of liquidity in circulation influences the levels of interest rates, and thus the relative value of the local currency against other currencies. It is the responsibility of the Monetary Policy Committee (the “MPC”) to formulate the monetary policy of the Central Bank of Kenya. Movements in the general price level are influenced by the amount of money in circulation, and

productivity of the various economic sectors, the Central Bank of Kenya regulates the growth of the total money stock to a level that is consistent with a predetermined economic growth target as specified by the government and outlined in its Monetary Policy Statement.

The Monetary Policy Committee is the organ of the Central Bank of Kenya responsible for formulating monetary policy. The membership of the MPC is as follows:

 the Governor, who is the chairman;

 the Deputy Governor, who is the deputy chairman;

 two members appointed by the Governor from the Central Bank of Kenya. One being a person with executive responsibility within the Central Bank of Kenya for monetary policy analysis (Director of Research Department) and the other is a person with responsibility within the Central Bank of Kenya for monetary policy operations (External Payments and Reserves Management);

 four external members who have knowledge, experience and expertise in matters relating to finance, banking, fiscal and monetary policy, who are appointed by the Minister for Finance; and

 the Principal Secretary, National Treasury, or his designated alternate as representing the National Treasury. The National Treasury representative is a non-voting member of the committee.

Each external member of the Committee serves for a term of three years, which is renewable once.

There are three major tools the Central Bank of Kenya uses to implement monetary policy:

 Open market operations: Through open market operations, the Central Bank of Kenya buys or sells securities in the secondary market in order to achieve a desired level of reserves. Alternatively, the Central Bank of Kenya injects money into the economy through buying securities in exchange for money stock. As the law of supply and demand takes effect to determine the cost of credit (interest rates) in the money market, money stock adjusts itself to the desired level. This process influences availability of money in the economy.

 Discount window operations: The Central Bank of Kenya, as lender of last resort, may provide secured short-term loans to commercial banks on overnight basis at punitive rates, thus restricting banks to seek funding in the market resorting to Central Bank of Kenya funds only as a last solution. The discount rate is set by the Central Bank of Kenya to reflect the monetary policy objectives.

 Reserve requirements: The Central Bank of Kenya is empowered by the law to retain a certain proportion of commercial banks’ deposits to be held as non-interest bearing reserves at the Central Bank of Kenya. An increase in reserve requirements restricts commercial banks ability to expand bank credit and the reverse is regarded as credit easing.

The Central Bank Rate (“CBR”) was the main instrument used to signal the direction of monetary policy stance and was reviewed and announced at least every month in 2012. The monetary policy operations framework focused on reduced volatility in the interbank rate in alignment with the CBR. Pricing for open market operations and discount window was referenced to the CBR for enhancement of clarity and certainty in the money market. See “Inflation and interest rates”.

Under the Protocol on the Establishment of the East African Monetary Union, the exchange rate of a member state will be fixed against the single currency for the EAC. In addition, the members of the EAC will transfer the power to set monetary policy to the EAC Central Bank. The powers of the EAC Central Bank include the power to manage the monetary policy of the EAC member states as well as manage liquidity and stability of the financial system through open market operations, marginal lending facilities, reserve requirements and other policy instruments which may be available to the EAC Central Bank. The EAC Central Bank will be an independent body. The EAC Central Bank will set monetary policy with a view to the EAC community as a whole. Therefore, where economic events are limited to Kenya or do not affect the EAC community as a whole, any action taken by the EAC Central Bank might not be as immediate or as swift as such action would have been had the Central Bank of Kenya possessed the sole power to set monetary policy to alleviate the effects of a financial crisis in Kenya.

Inflation and Interest Rates

During the first half of 2012, the Central Bank of Kenya maintained the CBR at the December 2011 level of 18.0 per cent. The monetary policy yielded reduced inflation rates and stable exchange rates. While the inflation target for the second half of fiscal year 2011/12 was 9.0 per cent., the overall inflation rate declined from 18.9 per cent. in December 2011 to 7.7 per cent. in July 2012 and further to 3.2 per cent. in December 2012. Following the decline in inflation rate, the Central Bank of Kenya eased the monetary policy by lowering the CBR to 16.5 per cent., 13.0 per cent. and 11.0 per cent. in the months of July, September and November 2012, respectively. This downward adjustment of the CBR was aimed at providing a signal to commercial banks to lower the interest rates and therefore promote uptake of private sector credit to support economic activities. Reflecting these measures, interest rates declined with the average inter-bank rate declining from 21.75 per cent. in December 2011 to 17.18 per cent. in June 2012 and 5.84 per cent. in December 2012. The average 91-day treasury bills rate declined from 18.30 per cent. in December 2011 to 10.09 per cent. in June 2012 before settling at 8.30 per cent. in December 2012. The weighted average commercial bank lending and overdraft rates were at approximately 20.3 per cent. in January through to August 2012 but eased thereafter to stand at 17.79 per cent. in December 2012. The average deposit rate decreased from 6.99 per cent. in December 2011 to 6.80 per cent. in December 2012. Consequently, the interest rate spread narrowed to 11.35 per cent. in December 2012 compared to 13.05 per cent. in December 2011.

As at 30 June 2013, the CBR was 8.50 per cent., while the average 91-day treasury bills rate reached 6.21 per cent. The average deposit rate was at 6.65 per cent. As at 30 June 2014, the CBR was 8.50 per cent., while the average 91-day treasury bill rate reached 11.44 per cent. The average deposit rate was 6.56 per cent.

The following table sets out the nominal principal interest rates as at the end of the months indicated.

Principal Interest Rates

2011 2012 2013 2014 December June December June December June Central Bank of Kenya 91 day Treasury Bills Rate ...... 18.30 10.09 8.30 6.21 9.52 11.44 Central Bank Rate ...... 18.00 18.00 11.00 8.50 8.50 8.50 Repo rate ...... 17.59 17.75 6.85 7.93 7.95 3.99 Inter-bank rate ...... 21.75 17.18 5.84 7.14 8.98 10.04 Commercial Banks(1)...... Average deposits ...... 6.99 7.88 6.80 6.65 6.65 6.56 Savings deposits ...... 1.59 1.46 1.60 1.73 1.58 1.50 Loan and Advances ...... 20.04 20.30 18.15 16.97 16.99 16.36 Overdraft ...... 20.20 20.36 17.79 16.92 16.51 15.88 ______Notes: (1) Weighted average commercial bank interest rates. Source: Central Bank of Kenya

The following table sets selected real interest rates for the periods indicated.

Trends in Selected Real Interest Rates

Nominal Real Year(1) Interest Inflation Rate Interest(2) (per cent.) Average Interest Rate for 91-day Treasury Bills 2011 18.3 18.9 (0.6) 2012 8.3 3.2 5.1 2013 9.5 7.2 2.4 2014 11.4 7.4 4.0 Commercial bank savings deposits (average) 2011 1.6 18.9 (17.3) 2012 1.6 3.2 (1.6) 2013 1.6 7.2 (5.6) 2014 1.5 7.4 (5.9) Commercial bank loans and advances (maximum) 2011 20.0 18.9 1.1 2012 18.2 3.2 15.0 2013 17.0 7.2 9.8 2014 16.4 7.4 9.0

Inter-Bank Rate 2011 22.1 18.9 3.2 2012 5.8 3.2 2.6 2013 9.0 7.2 1.8 2014 10.0 7.4 2.6 ______Notes: (1) At 31 December for 2011, 2012 and 2013 data. 2014 data is at 30 June. (2) Real interest rate equals nominal rate minus inflation rate. Source: Central Bank of Kenya

At the beginning of fiscal year 2010/11, the government’s overall inflation target was 5 per cent. ± 2 per cent. During the period from July to December 2010, overall inflation remained within the government’s target. Following the escalation of food and fuel prices between March and June 2011, overall inflation, however, rose above the target band. Depressed rains in the first quarter of 2011 and political crises in the Middle East and North Africa during the period resulted in significant rises in food and crude oil prices, respectively.

Overall inflation rose from 14.5 per cent. in June 2011 to 19.7 per cent. in November 2011, but decreased to 18.9 per cent. in December 2011. The high inflation was attributed to persistently high food and fuel prices and exchange rate volatility during most of the period from June to November 2011. Demand driven inflationary pressures were also evident during such period as non-food and non-fuel inflation increased above target in the period. The government revised the overall inflation target for the period from January 2012 to June 2012 to 9 per cent. During the period from January to June 2012, overall inflation declined gradually towards the government’s revised target, to stand at 10.1 per cent. in June 2012.

Overall inflation declined to 3.2 per cent. in December 2012, reflecting an easing in food prices, stabilisation of world oil prices as well as easing demand pressure in the economy. Similarly, non-food-non-fuel inflation declined from 9.3 per cent. to 4.8 per cent. during the period. In December 2012, the government set the overall inflation target at 5 per cent. ± 2.5 per cent. Overall inflation increased to 4.9 per cent. in June 2013 as a consequence of an increase in food prices coupled with the impact of the base effect attributed to the decline in the Consumer Price Index in mid-2012. Non-food-non-fuel inflation declined from 4.8 per cent. to 3.9 per cent. during the same period.

Average annual inflation decreased from 9.4 per cent. in 2012 to 5.7 per cent. in 2013. The deceleration in average inflation reflected slowing food and fuel inflation. The average inflation rate increased to 7.2 per cent. for the nine month period ended 30 September 2014.

The following table sets the consumer price index for the periods indicated.

Consumer Price Indices(1)

2011 2012 2013 2014 January ...... 110.57 130.82 135.62 145.40 February ...... 112.06 130.76 136.59 145.95 March ...... 114.62 132.51 137.96 146.61 April ...... 118.29 133.74 139.28 148.20 May ...... 119.48 134.09 139.52 149.70 June ...... 120.91 133.06 139.59 149.91 July ...... 122.44 131.92 139.87 150.60 August ...... 123.97 131.51 140.29 152.02 September ...... 125.23 131.89 142.82 152.24 October ...... 127.20 132.46 142.75 151.92 November ...... 129.13 133.33 143.14 — December ...... 130.09 134.25 143.85 — Annual Average CPI ...... 121.17 132.53 140.10 — Average Inflation (per cent.) ...... 14.0 9.4 5.7 — ______Notes: (1) Base: February 2009 = 100. Source: Kenya National Bureau of Statistics

Liquidity and Credit Aggregates

The following table sets out the deposit liabilities and liquid assets of commercial banks as at the end of each month indicated.

Commercial Banks-Deposit Liabilities and Liquid Assets(1)

Deposit Overall Liquidity Liabilities Liquid Assets(2) Ratio(3) (KES millions) (per cent.) 2011 December ...... 1,541,791 545,534 37.0 2012 January ...... 1,544,522 560,995 37.7 February ...... 1,542,355 561,302 37.7 March ...... 1,560,815 560,229 37.3 April ...... 1,577,072 574,037 37.4 May ...... 1,606,391 590,557 38.1 June ...... 1,656,406 600,719 38.2 July ...... 1,648,086 605,888 38.1 August ...... 1,675,211 627,867 39.1 September ...... 1,716,359 683,167 41.2 October...... 1,728,712 697,402 41.1 November ...... 1,783,849 719,844 42.0 December ...... 1,761,106 717,614 41.9 2013 January ...... 1,751,755 722,631 41.9 February ...... 1,760,233 719,414 41.8 March ...... 1,776,064 751,174 42.8 April ...... 1,812,199 751,685 42.6 May ...... 1,843,839 771,198 42.7 June ...... 1,857,342 770,895 42.7 July ...... 1,856,855 759,702 41.5 August ...... 1,874,023 748,808 40.9 September ...... 1,909,482 750,282 40.4 October...... 1,906,274 732,785 39.8 November ...... 1,916,084 727,300 39.0 December ...... 1,980,156 766,188 39.8 2014 January ...... 2,002,521 769,840 39.7 February ...... 2,000,961 775,220 39.4 March ...... 2,037,128 782,600 39.2 April ...... 2,089,324 799,216 39.3

May ...... 2,120,031 818,336 39.5 June ...... 2,147,933 820,720 38.7 July ...... 2,183,523 764,102 39.7 August ...... 2,215,852 815,522 37.6 September ...... 2,247,669 816,294 37.4 October...... 2,255,144 822,321 37.4 ______Notes: (1) Deposits are comprised of local and foreign currency denominated deposits. (2) Includes notes and coins, balances at Central Bank of Kenya, net inter-bank balances in Kenya and overseas (included only if positive) and treasury bills. (3) The ratios given in this column are not consistent with figures in the other two columns because of the inclusion of certain other min or items in the denominator. Source: Central Bank of Kenya

Net foreign assets of the banking system increased by 19.8 per cent., or KES73.7 billion, in the 12-month period ended 30 September 2014, compared with an increase of 5.9 per cent., or KES20.8 billion, in the 12-month period ended 30 September 2013. This increase reflects an increase in the holdings of the Central Bank of Kenya. Over the same 12-month period, net foreign assets of the Central Bank of Kenya increased by 32.3 per cent. from KES417.3 billion at 30 September 2013 to KES552.2 billion at 30 September 2014, reflecting an increase in foreign exchange reserves. Over the same 12-month period, the net foreign assets of banking institutions, however, declined by KES61.3 billion from a deficit of KES44.5 billion to a deficit of KES105.7 billion. The government attributes this decline primarily to an increase in loans to banking institutions in Kenya from creditors outside Kenya. An increase in demand for loans from the private sector has contributed to the increase in loans from creditors outside Kenya.

The primary contributors to foreign exchange are as follows: (a) exports (tea, coffee, horticulture produce, manufactured goods, etc.), (b) tourism, (c) international organisation/aid agencies; (d) foreign investments (foreign direct investment, portfolio investments, etc.); (e) loans and grants and (f) remittances. Remittances from workers abroad has demonstrated a growing trend in the past few years, with remittances transferred through formal channels of US$1.3 billion, US$1.2 billion and US$0.89 billion in the 12-month year ended in 2013, 2012 and 2011, respectively.

Over the 12-month period ended 30 September 2014, net domestic assets of the banking system increased by 19.3 per cent., compared to an increase of 14.7 per cent. in the 12-month period ended 30 September 2013. The increase was primarily due to an increase in credit to the private sector, including credit to other public sector (comprised of, among others, semiautonomous and autonomous government agencies (parastatals), municipalities, and local governments). Over the 12-month period ended 30 September 2014, credit to the private sector increased by 24.6 per cent., compared to an increase of 15.9 per cent. in the 12- month period ended 30 September 2013. At 30 September 2014, lending to the private sector accounted for 79.3 per cent. of total lending, while lending to the central government accounted for 18.5 per cent. of total lending.

The increase in net foreign assets and other domestic assets of the banking system led to an acceleration in monetary expansion with broad money supply increasing by 18.2 per cent. in the 12-month period ended 30 June 2014, compared to an increase of 14.2 per cent. in the 12-month period ended 30 June 2014. The broad money supply expansion in the 12-month period ended 30 June 2014 was above the targeted growth of 15.0 per cent.

The following table sets out monetary indicators as at the dates indicated.

Monetary Indicators

Commercial DOMESTIC Bank Advances/ Net Foreign CREDIT Money Supply Liquidity Deposits As at 31 December Assets Private(1) Government Total (M3) (2) Ratio Ratio (KES millions) (per cent.) 2011 ...... 295,203 1,162,739 311,581 1,505,129 1,514,152 37.8 79 2012 ...... 325,992 1,283,873 368,823 1,702,510 1,727,324 42.2 79 2013 ...... 389,179 1,541,737 397,164 1,978,521 1,996,241 40.3 82 2014(3) ...... 448,401 1,808,323 421,932 2,281,282 2,251,762 38.7 82 ______Notes: (1) Excludes certain public entities, including parastatals and government agencies. (2) Following conversions and mergers there are no operational non-bank financial institutions. (3) As at 30 September except for commercial bank liquidity ratio and advances/deposits ratio, which are as at 30 June. Source: Central Bank of Kenya

The following table sets out monetary aggregates as at the dates indicated.

Monetary Aggregates

Quasi-Money Broad Money Supply Overall Liquidity As at 31 December Money(1) (M1) Banks Others(2) M2 M3 L (KES millions) 2011 ...... 622,731 613,279 18,089 1,253,958 1,514,152 1,876,142 2012 ...... 710,744 737,083 22,272 1,469,037 1,727,324 2,129,475 2013 ...... 788,319 818,891 25,815 1,632,845 1,957,492 2,484,480 2014(3) ...... 903,124 958,063 32,360 1,893,333 2,251,762 2,849,227 ______Notes: (1) Currency outside banks plus all demand deposits except those of central government, local government, commercial banks, non-residents and foreign currency denominated deposits. (2) Following the conversions and mergers there are no operational non-bank financial institutions. (3) As at 30 September. Source: Central Bank of Kenya

Narrow money supply (M1) grew by 20.6 per cent. from KES752.8 billion at 30 June 2013 to KES908.2 billion at 30 June 2014, while broad money supply (M2) increased by 18.5 per cent. from KES1.6 trillion at 30 June 2013 to KES1.8 trillion at 30 June 2014. The overall liquidity expanded by 18.2 per cent. in the 12-month period ended 30 June 2014 compared to 14.2 per cent. expansion recorded in the 12-month period ended 30 June 2014.

Securities Markets

Kenya has one stock exchange, the Nairobi Securities Exchange, which was established in 1954 and currently has 64 listed companies. The Capital Markets Authority of Kenya is the government regulator charged with licensing and regulating the capital markets in Kenya. It also approves public offers and listings of securities traded at the Nairobi Securities Exchange. The Capital Markets Authority was set up in 1989 through an act of Parliament (Cap 485A, Laws of Kenya). In June 2014, the Capital Markets Authority of Kenya approved the demutualisation of the Nairobi Securities Exchange and the initial public offering of its shares and subsequent listing of its shares on the Nairobi Securities Exchange. The government of Kenya and the CMA Investor Compensation Fund each hold a 5.1 per cent. interest in the Nairobi Securities Exchange. In September 2014, the Nairobi Securities Exchange announced the conclusion of the initial public offering.

The total number of shares traded in 2012 decreased by 4.5 per cent. from 5.7 billion in December 2011 (US$929 million) to 5.5 billion in December 2012 (US$1,000 million). Market capitalisation increased by 46.5 per cent. to US$14.8 billion in December 2012, up from US$10.2 billion in December 2011. The total number of transactions on the stock exchange in 2012 decreased by 3.8 per cent. to 342,235 from a high of 355,738 in 2011. Total bond turnover increased by 26.7 per cent. to US$6.6 billion in 2012, up from US$5.2 billion in 2011. Total net foreign portfolio inflow improved in 2012, with total inflow rising to US$109 million in the fourth quarter, up from US$61 million in the preceding quarter, an 82 per cent. improvement. The number of investment banks decreased from 11 in 2011 to ten in 2012, while the number of stockbrokers, fund managers and custodians increased by seven, two and one, respectively, to 12, 21 and 15, respectively.

The total number of shares traded in 2013 increased by 38.7 per cent. from 5.5 billion in December 2012 (US$1,000 million) to 7.6 billion in December 2013 (US$1,800 million). Market capitalisation increased by 50.5 per cent. to US$22.3 billion in December 2013, up from US$14.8 billion in December 2012. The total number of transactions on the stock exchange in 2013 increased by 24.6 per cent. to 426,327 from 342,235 in 2012. Total bond turnover decreased by 16.7 per cent. to US$5.5 billion in 2013, down from US$6.6 billion in 2012. Total net foreign portfolio inflow declined in 2013, with total inflow declining to US$34 million in the fourth quarter, down from US$157 million in the preceding quarter, a 78.4 per cent. decline. The number of investment banks was ten in 2012 and 2013, while the number of stockbrokers and fund managers decreased by one to 11 and 20, respectively. The number of custodians was 15 in 2012 and 2013.

The following table sets out information on various capital markets indicators for the periods indicated.

Year ended 31 December 2011 2012 2013 Equities: Total No. of Shares Traded (millions) ...... 5,721 5,464 7,576 Total No. of Transactions ...... 355,738 342,235 426,327 Total Value of Shares Traded (US$ billions) ...... 0.93 1.0 1.8 NSE 20 Share Index (Base Jan1966=100) ...... 3,205 4,133 4,927 Market Capitalisation (US$ billions) ...... 10.20 14.79 22.26 Fixed Income: Total Bond Turnover (US$ billions) ...... 5.2 6.6 5.5 ______Source: Kenya National Bureau of Statistics

PUBLIC FINANCE

Budget Process

The Constitution provides that the national government must share equitably among the national and county governments all revenue that it raises. For every financial year, the equitable share of the revenue raised nationally that is allocated to the county governments shall not be less than fifteen per cent. of all the revenue the national government collects. This amount is calculated on the basis of the most recent audited accounts of revenue received, as approved by the National Assembly. County governments may however be given additional allocations from the national government’s share of the revenue either conditionally or unconditionally.

At least two months before the end of each financial year, a Division of Revenue Bill is introduced in Parliament to divide revenue raised nationally between the national government and the county governments. Similarly, a County Allocation of Revenue Bill is introduced in Parliament that divides among the counties the revenue allocated to the county governments. Both these bills must be passed by the National Assembly and the Senate. However, the National Assembly has power under the Constitution to amend or veto the County Allocation of Revenue Bill that has been passed by the Senate by a resolution supported by two-thirds of the members of the National Assembly.

The Division of Revenue Bill and the County Allocation of Revenue Bill are submitted to Parliament by 15 February each financial year.

The revenue allocated to the national government must be dealt with through a process involving the introduction of budget estimates (proposals as to how the money should be spent) and then the annual Appropriation Bill (which authorises the executive to spend).

Three separate sets of “budget estimates” are submitted to the National Assembly. They are:

 the expenditure of the national government prepared by the National Treasury and submitted by the Cabinet Secretary for the National Treasury;

 the expenditure by the parliamentary service submitted by the Parliamentary Service Commission; and

 the expenditure by the judiciary submitted by the Chief Registrar of the judiciary.

The budget estimates prepared by the National Treasury incorporates estimates of the projects and programs provided for in the MTP.

The Constitution does not require estimates for the parliamentary service or the judiciary to be considered by the National Treasury before they are submitted to Parliament.

Before the National Assembly considers the estimates of revenue and expenditure, a committee of the National Assembly discusses and reviews the estimates and makes recommendations to the National Assembly.

In discussing and reviewing the estimates, the committee must seek representations from the public and the recommendations shall be taken into account when the committee makes its recommendations to the National Assembly.

When the estimates of the national government expenditure and the estimates of expenditure for the Judiciary and the Parliament have been approved by the National Assembly, they are included in an Appropriation Bill which is introduced into the National Assembly to authorise withdrawal from the Consolidated Fund of the money needed for the expenditure and appropriation of that money for purposes mentioned in the Appropriation Bill.

The budget estimates and Appropriation Bill are submitted to the National Assembly by 30 April in each financial year.

On the basis of the Division of Revenue Bill passed by Parliament, each county government prepares and adopts its own budget and appropriation bill based on the revenue they raise themselves as well as their share of the revenue raised nationally that is divided among the counties in a County Allocation of Revenue Act.

In line with the Constitution, Section 15 of the PFMA sets out fiscal responsibility principles to ensure prudency and transparency in the management of public resources. The law provides that:

 over the medium term, a minimum of thirty per cent. of the national budget shall be allocated to development expenditure;

 the national government’s expenditure on wages and benefits for its public officers must not exceed a percentage (as prescribed by regulation) of total national government revenue;

 over the medium term, the national government’s borrowings should be used only for the purpose of financing development expenditure and not for recurrent expenditure;

 the public debt should be maintained at a sustainable level;

 fiscal risks should be managed prudently; and

 a reasonable degree of predictability with respect to the level of tax rates and tax bases should be maintained, taking into account any tax reforms that may be made in the future.

In order to control the flow of cash between treasury and spending units and reduce the procedural bottlenecks encountered in the actual execution of budgets, the PFMA provides for the establishment of single treasury accounts for each of the national government and county governments through which payments of money should be made.

While county governments have a greater involvement in the budget process now than they had prior to the adoption of the Constitution as a result of devolution, the Constitution also provides the basis for a coherent public financial management legal framework. Under the Constitution, the Controller of Budget shall oversee the implementation of the budgets of the national and county governments by authorising withdrawals from public funds. In addition, the PFMA also provides that the County Fiscal Strategy Paper must align with the national objectives in the Budget Policy Statement. The County Fiscal Strategy Paper contains the broad strategic priorities and policy goals that will guide the county government in preparing its budget for the coming financial year and over the medium term.

In addition, intergovernmental fora, which facilitate closer cooperation between the national and county governments such as the Intergovernmental Budget and Economic Council, the Intergovernmental Relations Summit and the Council of County Governors have been established. The Intergovernmental Budget and Economic Council is a forum for consultation on economic and financial matters. Moreover, the national government, in accordance with the requirements of the Constitution, has been supporting county governments by building their capacity in the management of public finances. The government is also working closely with the Salaries and Remuneration Commission, which is mandated to set and advise on salaries in the public sector, to devise a policy that will govern wage issues.

Revenues and Expenditures

In 2012/13, the government’s fiscal deficit was 5.2 per cent. of GDP, a decrease from 5.5 per cent. of GDP in 2011/12. In absolute terms, however, the government’s fiscal deficit increased primarily due to lower growth in government revenues compared to expenditures. The actual deficit in 2012/2013 was KES67.4 billion, or 29.0 per cent. of the target deficit, less than the target deficit included in the budget for the fiscal year. This was mainly the result of a reduction of KES186.2 billion, or 16.7 per cent., in actual government expenditures, partially offset by reduced actual revenues and grants of KES121.3 billion, or 14.0 per cent., compared to the target government expenditures and revenues, respectively, included in the budget for the year.

In 2013/14, the government’s fiscal deficit was 6.2 per cent. of GDP, an increase from 5.2 per cent. of GDP in 2012/13. The government’s fiscal deficit increased primarily due to lower growth in government revenues compared to expenditures. The actual deficit in 2013/2014 was KES118.4 billion, or 26.7 per cent. of the target deficit, less than the target deficit included in the budget for the fiscal year. This was mainly the result of a reduction of KES150.4 billion, or 11.5 per cent., in actual government expenditures, partially offset by reduced actual revenues and grants of KES58.6 billion, or 5.9 per cent., compared to the actual government expenditures and revenues, respectively, included in the budget for the year.

The following tables sets forth the fiscal accounts of the government for the periods indicated.

2011/2012 2012/2013 2013/2014(1) Actual Target Actual Target Actual Target (KES millions) TOTAL REVENUE AND GRANTS ...... 763,453 846,744 868,651 989,949 1,001,374 1,060,113 Ordinary revenue ...... 748,167 804,500 847,217 915,282 974,417 1,006,402 Import duty ...... 51,712 56,595 57,650 61,484 67,555 67,349 Excise duty ...... 78,884 81,763 85,502 91,810 102,029 101,153 Income tax ...... 312,463 311,465 373,422 370,600 449,590 450,899 VAT ...... 183,386 193,825 184,581 216,000 232,630 230,962 Investment Revenue ...... 14,132 13,582 15,264 19,120 10,181 13,741 Others ...... 50,156 67,664 63,017 64,640 57,004 53,864 Appropriation-in-Aid ...... 57,434 79,606 67,781 91,628 35,707 88,434 Railway Development Levy ...... N/A N/A N/A N/A 19,721 20,200 Grants ...... 15,286 42,244 21,434 74,667 26,957 53,711 AMISON Receipts ...... N/A N/A N/A N/A 4,695 4,761 Revenue ...... N/A N/A N/A N/A 6,431 9,845 Programme Grants ...... N/A 1,132 5,826 18,913 N/A N/A Cash...... 7,765 12,733 5,188 13,886 N/A N/A Appropriation-in-Aid ...... 7,521 28,379 9,936 41,384 15,317 38,591 Rescheduling/Debt Swap ...... N/A N/A 484 484 514 514 TOTAL EXPENDITURE AND NET LENDING ...... 947,777 1,082,930 1,117,018 1,303,233 1,300,589 1,451,067 Recurrent Expenditure ...... 647,120 697,527 818,103 882,373 752,501 800,430 Domestic Interest ...... 82,339 77,692 110,184 108,132 119,193 110,065 Foreign Interest due ...... 8,880 8,880 11,051 11,620 15,627 14,934 Pensions, salaries, allowances, and miscellaneous services...... 26,052 32,562 26,996 31,625 30,155 31,992 Wages & Salaries ...... 224,568 229,374 274,407 292,239 281,197 288,471 Operations & Maintenance/Others ...... 305,281 349,021 385,682 428,974 306,329 354,968 Transitional Transfer to County Governments ...... 0 0 9,783 9,783 193,390 193,419 Parliamentary Service ...... N/A N/A N/A N/A 22,473 25,084 Judicial Service ...... N/A N/A N/A N/A 12,951 13,912 Development and Net Lending ...... 300,657 385,403 298,915 420,360 319,274 413,222 CCF ...... 0 0 0 500 0 5,000 DEFICIT INCL. GRANT (Commitment basis) ...... (199,610) (278,430) (269,801) (387,951) (326,172) (444,665) DEFICIT EXCLUDING GRANTS (Commitment basis) .... (184,324) (236,186) (248,367) (313,284) (299,215) (390,954) ADJUSTMENT TO CASH BASIS ...... 12,582 1,954 16,814 13,861 0 0 DEFICIT INCLUDING GRANTS (cash basis) ...... (171,742) (234,232) (231,974) (299,423) (299,215) (390,954) FINANCING ...... 171,742 234,232 231,974 299,423 299,215 390,954 Net Foreign Financing ...... 96,618 171,795 62,197 134,907 106,412 291,850 Disbursements ...... 70,735 144,970 79,559 161,354 96,852 145,806 World bank Counterpart Refinancing ...... 0 3,000 N/A N/A N/A N/A Project Cash Loans ...... 19,342 39,485 23,569 43,405 28,432 55,369 Loans AIA ...... 51,393 102,485 55,990 111,318 68,420 90,437 Repayments due (current) ...... (25,375) (25,375) (23,994) (26,931) (25,792) (29,956) Domestic Loans ...... - - - - 1,267 1,400 Commercial Financing ...... 51,258 52,200 6,632 6,632 35,352 176,000 Domestic financing ...... 75,124 62,437 169,777 164,516 226,998 97,704 NOMINAL GDP ESTIMATE ...... 3,306,310 3,306,310 4,506,200 4,506,200 4,985,130 4,985,130 ______Notes: (1) Provisional. Source: National Treasury

Ordinary revenue increased from KES667.5 billion in 2010/11 to KES748.2 billion in 2011/12. The increase was primarily due to increased revenues from income tax and value added tax (“VAT”). Ordinary revenue increased to KES847.2 billion in 2012/13 primarily due to increased income tax revenues.

Ordinary revenue increased from KES847.2 billion in 2012/13 to KES974.4 billion in 2013/14. The increase in ordinary revenues was primarily due to increased revenues from income tax and VAT.

Tax revenues were 22.6 per cent. of GDP in 2011/12. In absolute terms, tax revenues in 2011/12 recorded an increase of 12.4 per cent. During 2011/12, the increase in tax revenues in absolute terms was primarily due to increasing income tax by KES60.9 billion, income taxes increased by 20.8 per cent. in 2011/12. Revenues from VAT increased by 6.7 per cent. in 2011/12. The growth in VAT was due to growth in GDP. Non-tax revenues increased 10.3 per cent. in 2011/12 as compared with 2012/11, primarily due to higher increase in investment revenues.

Tax revenues in 2012/13 increased by 11.9 per cent., compared with an increase of 12.4 per cent., in 2011/12. During 2012/13, most categories of tax receipts increased. Income taxes increased 19.5 per cent. in 2012/13. There was marginal growth in VAT in 2012/13 due to increase in VAT as the VAT Act was being reviewed. Overall non-tax revenues grew by 20.2 per cent. in 2012/13 as compared to 10.3 per cent. increase in 2011/12.

Actual revenue in 2012/2013 was KES121.3 billion, or 14.0 per cent., less than the target revenue included in the budget for the fiscal year. This was mainly the result of a reduction of KES68.1 billion, or 8.0 per cent., in actual ordinary revenue, which was due mainly to less than budgeted VAT and Appropriation-in-Aid (“A-i-A”) revenues, and a reduction of KES53.2 billion, or 248.4 per cent., in actual revenue from grants, when compared to their respective targets included in the budget for this year.

Tax revenues increased from 17.3 per cent. of GDP in 2012/13 to 18.4 per cent. of GDP in 2013/14, primarily due to higher growth in tax revenues as compared to growth in GDP. In absolute terms, tax revenues in 2013/14 increased by 15.3 per cent. compared to an increase of 11.9 per cent. in 2012/13. During 2013/14, the increase in tax revenues was primarily due to increasing income tax by KES76.2 billion, income taxes increased by 20.4 per cent. in 2013/14. Revenues from VAT increased by 26.2 per cent. in 2013/14 compared to 2012/13. Non-tax revenues decreased 10.0 per cent. in 2013/14 as compared with 2012/13, primarily due to decrease in investment revenues.

Actual revenue in 2013/2014 was KES58.7 billion, or 5.9 per cent., less than the target revenue included in the budget for the fiscal year. This was mainly the result of a reduction of KES32.0 billion, or 3.3 per cent., in actual ordinary revenue, which was due mainly to less than budgeted VAT and A-i-A revenues.

The following table sets forth information regarding the composition of fiscal revenues as a percentage of total revenues and grants, for the periods indicated.

2011/2012 2012/2013 2013/2014(1) Actual Target Actual Target Actual Target

Ordinary revenue ...... 98.0% 95.0% 97.5% 92.5% 97.3% 94.9% Import duty ...... 6.8% 6.7% 6.6% 6.2% 6.7% 6.4% Excise duty ...... 10.3% 9.7% 9.8% 9.3% 10.2% 9.5% Income tax ...... 40.9% 36.8% 43.0% 37.4% 44.9% 42.5% VAT ...... 24.0% 22.9% 21.2% 21.8% 23.2% 21.8% Investment Revenue ...... 1.9% 1.6% 1.8% 1.9% 1.0% 1.3% Others ...... 6.6% 8.0% 7.3% 6.5% 5.7% 5.1% Appropriation-in-Aid ...... 7.5% 9.4% 7.8% 9.3% 3.6% 8.3% Railway Development Levy ...... — — — — 2.0% 1.9% Grants ...... 2.0% 5.0% 2.5% 7.5% 2.7% 5.1% AMISON Receipts ...... 0.5% 0.4% Revenue ...... 0.0% 0.0% 0.0% 0.0% 0.6% 0.9% Programme Grants ...... 0.0% 0.1% 0.7% 1.9% 0.0% 0.0% Cash ...... 1.0% 1.5% 0.6% 1.4% 0.0% 0.0% Appropriation-in-Aid ...... 1.0% 3.4% 1.1% 4.2% 1.5% 3.6% Rescheduling/Debt Swap ...... — — 0.1% 0.0% 0.1% 0.0% ______Notes: (1) Provisional. Source: National Treasury

The overall aim of Kenya’s tax policy is to move more to expenditure-based taxes that cover all sectors including the informal sector. However, the impact of the informal sector on tax revenues is minimal. The potential for informal sector tax revenue is low given the turnover of an average informal sector business unit and that no income tax is payable below the minimum taxation threshold of approximately KES10,000 per month. In addition, the government believes that the high administration and enforcement costs do not justify enhanced focus on informal sector taxation.

The Kenya Revenue Authority has been intensifying efforts to educate taxpayers in the informal sector and accustom them to paying income taxes, especially small and medium enterprises. Kenya Revenue Authority has now prioritised the real estate sector as a potential source of revenues. Kenya is also working with development partners to develop a fiscal framework for management of natural resources as another potential source of revenue. These efforts, together with increased use of technology, are expected to help improve administration and compliance and tax revenue performance.

The Finance Act 2014 reintroduces the capital gains tax, effective 1 January 2015, at the rate of 5 per cent.

The recent review of the VAT Act has simplified administration and compliance, and the government expects that it will result in increased revenue. The focus of the government now is on other taxes including excise and income taxes. The Kenya Revenue Authority is also implementing a new customs management system, which, when integrated with the KESWS, is expected to bring more transparency, accountability and higher revenue.

Out of the total expenditure for 2011/12, recurrent expenditure was KES647.1 billion, or 68.3 per cent. of total expenditure. Development and net lending expenditure was KES300.7 billion, or 31.7 per cent. of total expenditure in 2011/12.

The three largest components of expenditures in 2011/12 were expenditures for the Teachers Service Commission at 11.6 per cent. of total expenditures, expenditures for the Ministry of Transport and Infrastructure at 8.9 per cent. of total expenditures and expenditures for the Ministry of Defence at 6.7 per cent. of total expenditures. Expenditures for the Teachers Service Commission are composed primarily of payments for salaries. Expenditures for the Ministry of Transport and Infrastructure entail payments for construction of roads and personal emoluments. Expenditures for the Ministry of Defence entail payments for salaries, operations and maintenance.

Total expenditure for 2012/2013 amounted to KES1,117.0 billion, compared to a target of KES1,303.2 billion. The shortfall of KES186.2 billion was the result of lower absorption in both recurrent and development expenditures by the line ministries. Recurrent expenditure for 2012/2013 amounted to KES818.1 billion, or 73.2 per cent. of total expenditure, compared to a target of KES882.4 billion, with underperformance in pensions, wages and salaries, and operations and maintenance, which accounted for 3.6 per cent., 33.5 per cent. and 47.1 per cent., respectively, of total recurrent expenditure. Development expenditure also lagged, at only KES298.9 billion or 71.1 per cent. of the budgeted amount of KES420.3 billion. The government attributes this shortfall mainly to delays in the procurement process.

Actual foreign interest payments for 2012/2013 amounted to KES11.1 billion, compared to KES8.9 billion for 2011/12. The domestic interest payment totalled KES110.2 billion for 2012/2013, which was higher than the KES82.3 billion paid for 2011/2012, mainly due to higher domestic borrowing.

Total cumulative ministerial and other public agencies expenditure was KES917.1 billion for 2012/2013 against a target of KES1,139.6 billion. Recurrent expenditure was KES660.1 billion for 2012/2013 against a target of KES721.7 billion, while development expenditure was KES257.0 billion for 2012/2013 against a target of KES417.9 billion. The percentage of total expenditures to target was 80.5 per cent. as at the end of 2012/2013.

Out of the total expenditure for 2013/14, recurrent expenditure was KES752.5 billion, or 57.9 per cent. of total expenditure, compared to KES818.1 billion, or 73.2 per cent. of total expenditure in 2012/13. Development expenditure increased to KES319.3 billion in 2013/14, compared to KES298.9 billion. Development expenditure as a percentage of total expenditure, however, decreased to 24.6 per cent., compared to 26.8 per cent. in 2012/13.

The three largest components of ministerial expenditures in 2013/14 were expenditures for the Teachers Service Commission, 15.1 per cent. of total target ministerial expenditures, expenditures for the Ministry of Transport and Infrastructure, 9.8 per cent. of total target ministerial expenditures, and expenditures for the Ministry of Education, Science and Technology, 9.0 per cent. of total target ministerial expenditures. Expenditures for the Teachers Service Commission consist primarily of payments for salaries. Expenditures for the Ministry of Transport and Infrastructure consist primarily of payments for construction of roads and personal emoluments. Expenditures for the Ministry of Education, Science and Technology consist primarily of payments for salaries.

Total expenditure for 2013/2014 amounted to KES1,300.6 billion, compared to a target of KES1,451.1 billion. The shortfall of KES150.5 billion was the result of lower absorption in operations which the government largely attributed to lower absorption in operations and maintenance in the national government, as well as slow utilisation of foreign financed development expenditures and shortfalls in A-i-A related expenditures. Recurrent expenditure for 2013/2014 amounted to KES752.5 billion, or 57.9 per cent. of total expenditure, compared to a target of KES800.4 billion, with underperformance in pensions, wages and salaries, and operations and maintenance, which accounted for 0.1 per cent., 0.6 per cent. and 3.7 per cent. of total recurrent expenditure. Development expenditure also lagged, at only KES319.3 billion or 77.3 per cent. of the budgeted amount of KES413.2 billion. The government attributes this shortfall mainly to delays in the procurement process.

Actual foreign interest payments for 2013/2014 amounted to KES15.6 billion, compared to KES11.1 billion for 2012/13. The domestic interest payment totalled KES119.2 billion for 2013/2014, which was higher than the KES110.2 billion in 2012/2013. The increase was mainly due to higher domestic borrowing.

Total cumulative ministerial and other public agencies expenditure was KES942.9 billion for 2013/2014 compared to a target of KES1,098.3 billion.

For the year ended 30 June 2013, expenditures by the Ministry of Education, the Ministry of Higher Education, Science and Technology, the Ministry of Medical Services and the Ministry of Public Health and Sanitation accounted for 14.7 per cent. of total target ministerial expenditures. Expenditures by the Ministry of Agriculture, the Ministry of Transport and Infrastructure and the Ministry of Water and Irrigation comprised 11.4 per cent. of total target ministerial expenditures. This allocation is in line with the government’s priority of spending in infrastructure projects and social programmes.

For the year ended 30 June 2014, expenditures by the Ministry of Interior and Coordination of National Government, the Ministry of Education, Science and Technology and the Ministry of Transport and Infrastructure accounted for 27.4 per cent. of total target ministerial expenditures. Expenditures by the Ministry of Devolution and Planning and the Ministry of Energy & Petroleum comprised 11.1 per cent. of total target ministerial expenditures. This allocation is consistent with the government’s priority of spending in infrastructure projects and social programmes.

The three largest components of ministerial expenditures in 2012/13 were expenditures for the Teachers Service Commission, 12.2 per cent. of total target ministerial expenditures, expenditures for the Ministry of Transport and Infrastructure, 7.5 per cent. of total target ministerial expenditures, expenditures for the Ministry of State for Defence, 6.8 per cent. of total target ministerial expenditures, expenditures for Ministry of State for Provincial Administration & Internal Security, 6.0 per cent. of total target ministerial expenditures. In total, these ministries accounted for 32.5 per cent. of total target ministerial expenditures.

The following table sets forth information regarding the composition of fiscal expenditures as a percentage of total expenditures and net lending for the periods indicated.

2011/2012 2012/2013 2013/2014(1) Actual Target Actual Target Actual Target PER CENT. TOTAL EXPENDITURE AND NET LENDING Recurrent Expenditure ...... 68.3% 64.4% 73.2% 67.7% 57.9% 55.2% Domestic Interest ...... 8.7% 7.2% 9.9% 8.3% 9.2% 7.6% Foreign Interest due ...... 0.9% 0.8% 1.0% 0.9% 1.2% 1.0% Pensions, salaries, allowances, and miscellaneous services ...... 2.7% 3.0% 2.4% 2.4% 2.3% 2.2% Wages & Salaries ...... 23.7% 21.2% 24.6% 22.4% 21.6% 19.9% Operations & Maintenance/Others (2) ...... 32.2% 32.2% 34.5% 32.9% 23.6% 24.5% Transitional Transfer to County 0.0% 0.0% 0.9% 0.8% 14.9% 13.3% Governments ...... Parliamentary Service ...... 0.0% 0.0% 0.0% 0.0% 1.7% 1.7% Judicial Service ...... 0.0% 0.0% 0.0% 0.0% 1.0% 1.0% Development and Net Lending ...... 31.7% 35.6% 26.8% 32.3% 24.5% 28.5% CCF ...... 0.0% 0.0% 0.0% 0.0% 0.0% 0.3% ______Notes: (1) Provisional. (2) Other expenditures consist of personal emoluments, utilities for use of goods and services, current and capital transfers which includes subscriptions. Source: National Treasury

The following table sets forth information regarding the composition of ministerial expenditures as a percentage of total expenditures, for the periods indicated.

(*) (*) (*) 2010/2011 2011/2012 2012/2013 Recur. Devel. Total % of Recur. Devel. Total % of Recur. Devel. Total % of (1) (1) (1) MINISTRY/DEPARTMENT/COMMISSION Actual Actual Actual Total Actual Actual Actual Total Actual Actual Actual Total (KES millions) (KES millions) (KES millions)

Ministry of State for Provincial Administration & Internal Security ...... 44,905 1,887 46,792 5.76% 52,661 2,467 55,128 5.7% 64,322 3,839 68,161 6.0% Ministry of Foreign Affairs...... 7,758 131 7,889 0.97% 8,353 308 8,661 0.9% 9,648 232 9,880 0.9% Office of the Vice-President and Ministry of Home Affairs ...... 12,137 1,553 13,690 1.69% 11,581 782 12,363 1.3% 11,960 1,070 13,030 1.1% Ministry of State for Planning, National Development & V2030 ...... 2,141 15,692 17,833 2.20% 2,600 24,576 27,176 2.8% 2,520 18,923 21,443 1.9% Office of the Deputy Prime Minister and Ministry of Finance ...... 22,776 9,661 32,437 4.00% 17,379 20,886 38,265 4.0% 21,507 13,908 35,415 3.1% Ministry of State for Defence ...... 50,283 — 50,283 6.19% 64,537 — 64,537 6.7% 77,485 — 77,485 6.8% Ministry of Agriculture ...... 7,750 7,279 15,029 1.85% 7,988 8,445 16,433 1.7% 8,232 10,602 18,834 1.7% Ministry of Medical Services ...... 22,298 1,534 24,518 3.02% 27,938 1,788 29,726 3.1% 43,366 4,587 47,953 4.2% Office of the Deputy Prime Minister and Ministry of Local Government ...... 13,423 4,161 17,584 2.17% 18,209 3,184 21,393 2.2% 19,455 5,000 24,455 2.1% Ministry of Transport and Infrastructure ...... 24,365 47,650 72,015 8.87% 26,015 59,677 85,692 8.9% 30,292 55,576 85,868 7.5% Ministry of Water and Irrigation ...... 3,552 19,238 22,790 2.81% 3,806 23,528 27,334 2.8% 3,963 20,725 24,688 2.2% Judicial Department ...... 2,924 554 3,478 0.43% 6,137 1,174 7,311 0.8% 10,025 2,004 12,029 1.1% Ministry of Energy ...... 2,020 26,229 28,249 3.48% 2,244 40,034 42,278 4.4% 2,046 35,604 37,650 3.3% Ministry of Education ...... 133,792 5,965 139,757 17.21% 31,630 4,187 35,817 3.7% 39,918 6,338 46,256 4.1% Ministry of Higher Education, Science and Technology ...... 25,628 6,334 31,962 3.94% 25,620 10,652 36,272 3.8% 34,278 7,790 42,068 3.7% National Security Intelligence Service ...... 10,616 — 10,616 1.31% 14,798 — 14,798 1.5% 13,749 — 13,749 1.2% The Teachers Service Commission ...... — — — 0.00% 111,876 111,876 11.6% 139,570 139,570 12.2% Ministry of Public Health and Sanitation ...... 9,560 6,018 15,578 1.92% 12,272 12,776 25,048 2.6% 16,337 14,855 31,192 2.7% Independent Electoral and Boundaries Commission ...... — — — 0.00% — — — 0.0% 25,158 — 25,158 2.2% Parliamentary Service Commission ...... — — — 0.00% — — — 0.0% 11,642 1,710 13,352 1.2% Other(2) ...... 71,894 44,641 116,535 14.4% 81,175 51,929 133,104 13.9% 74,613 54,240 128,853 11.3% Total ...... 468,535 198,527 667,062 82.16% 526,819 266,393 793,212 82.5% 660,086 257,003 917,089 80.5%

______Notes: (*) Expenses are set forth according to the composition of the ministries, departments and commissions prior to the reorganisation of the government in 2013. (1) Total actual expenditures for ministry, department or commission as per cent. of total target expenditures for all ministries, departments and commissions. (2) Other includes ministries and government agencies, none of which represents more than 1.0 per cent. total government expenditures for 2012/13. These agencies include, among others, the Ministry of State for Special Programmes, Ministry of Gender and Children, Ministry of Transport, Ministry of Environment and Mineral Resources, Ministry of State for Immigration and Registration of Persons, Ministry of Regional Development Authorities, Ministry of Public Works, Ministry of Lands, Ministry of Industrialisation, Ministry of Housing, Cabinet Office, Ministry of Fisheries Development, Ministry of Justice, Office of the Prime Minister, etc. Source: National Treasury

The following table sets forth information regarding the composition of ministerial expenditures as a percentage of total expenditures, for the period indicated.

2013/14(1)(2) MINISTRY/DEPARTMENT/COMMISSION Recur. Devel. Total % of Actual Actual Actual Total(3) (KES millions) The Presidency ...... 5,250 1,542 6,792 0.6% Ministry of Interior and Coordination of National Government ...... 90,162 4,799 94,960 8.6% Ministry of Devolution and Planning ...... 16,371 50,609 66,980 6.1% Ministry of Defence...... 78,088 - 78,088 7.1% Ministry of Foreign Affairs and International Affairs ...... 10,582 120 10,703 1.0% Ministry of Education, Science and Technology ...... 82,332 16,451 98,784 9.0% The National Treasury ...... 21,630 12,462 34,092 3.1% Ministry of Health ...... 17,176 13,135 30,311 2.8% Ministry of Transport and Infrastructure ...... 26,111 81,100 107,211 9.8% Ministry of Environment, Water and Natural Resources ...... 8,670 28,157 36,827 3.4% Ministry of Land Housing and Urban Development ...... 4,158 10,706 14,864 1.4% Ministry of Information, Communications and Technology .. 2,295 5,983 8,278 0.8% Ministry of Sports Culture and Arts ...... 3,475 850 4,325 0.4% Ministry of Labour Social Security and Services ...... 6,704 5,826 12,530 1.1% Ministry of Energy & Petroleum ...... 1,891 52,673 54,564 5.0% Ministry of Agriculture, Livestock and Fisheries ...... 10,437 26,047 36,485 3.3% Ministry of Industrialisation and 2,607 3,081 5,688 0.5% Enterprise Development ...... Ministry of East African Affairs, Commerce and Tourism .. 4,625 1,288 5,913 0.5% Ministry of Mining ...... 589 611 1,200 0.1% Office of The Attorney General and Department 2,488 416 2,904 0.3% of Justice...... The Judiciary ...... 10,680 1,514 12,193 1.1% Ethics and Anti-Corruption Commission ...... 1,177 - 1,177 0.1% National Intelligence Service ...... 15,687 - 15,687 1.4% Directorate of Public Prosecutions ...... 946 11 957 0.1% Commission for the Implementation of the Constitution ...... 422 - 422 0.0% Registrar of Political Parties ...... 311 - 311 0.0% Witness Protection Agency ...... 198 - 198 0.0% Kenya National Commission on Human Rights ...... 264 - 264 0.0% National Land Commission ...... 583 - 583 0.1% Independent Electoral and Boundaries Commission ...... 4,960 166 5,127 0.5% Parliamentary Service Commission ...... 20,762 1,708 22,470 2.0% Judicial Service Commission ...... 239 0 239 0.0% The Commission on Revenue Allocation ...... 266 - 266 0.0% Public Service Commission ...... 665 206 871 0.1% Salaries and Remuneration Commission ...... 464 - 464 0.0% Teachers Service Commission...... 165,619 - 165,619 15.1% National Police Service Commission ...... 330 - 330 0.0% Auditor-General ...... 2,699 525 3,224 0.3% Controller of Budget ...... 307 - 307 0.0% The Commission on Administrative Justice ...... 284 - 284 0.0% National Gender and Equality Commission ...... 224 - 224 0.0% Independent Police Oversight Authority ...... 221 - 221 0.0% Totals ...... 622,950 319,986 942,936 85.9% ______Notes: (1) Expenses are set forth according to the composition of the ministries, departments and commissions after reorganisation of the government in 2013. (2) Provisional. (3) Total actual expenditures for ministry, department or commission as per cent. of total target expenditures for all ministries, departments and commissions. Source: National Treasury

2014/15 Budget

On 14 February 2014, the National Treasury presented to Parliament the Budget Policy Statement, a document that states the government’s plans for raising and spending money in the coming fiscal year 2014/15 and the main priorities on which it will spend its resources. Consistent with the second MTP, the government announced in the Budget Policy Statement that it plans to

(i) create a business environment conducive to encourage innovation, investment, growth and expansion of economic and employment opportunities; (ii) invest in agricultural transformation and food security to expand food supply, reduce food prices, support expansion of agro-processing industries and spur export growth; (iii) invest in first class transport and logistics hub and scale investments in other key infrastructure products, including roads, energy and water to reduce cost of doing business and improve competitiveness; (iv) invest in quality and accessible healthcare services and education as well as social safety net to reduce the burden on households and to enhance the nation’s prospects for long-term growth and development; and (v) further entrench devolution for the delivery of better government services and enhanced rural economic development.

On 28 April 2014, the Cabinet approved the budget estimates for the 2014/15 budget. The budget estimates includes allocations, among others, of KES116.7 billion for on-going and new road projects, KES19.4 billion for the Standard Gauge Rail project, KES3.5 billion for the urban commuter rail system, KES1.3 billion for enhancing security to the Jomo Kenyatta International Airport and KES43.6 billion for energy related initiatives. The 2014/2015 budget assumes:

 economic growth of 5.8 per cent. for 2014 and 6.4 per cent. for 2015;

 inflation will remain in the upper limit target of 7.5 per cent. in 2014;

 the net-public debt to GDP ratio will decline from 52.1 per cent. for the year ended 30 June 2014 to 49.8 per cent. for the year ended 30 June 2017; and

 ordinary revenue to be up to 25.5 per cent. of GDP in 2014/15.

For the purposes of the 2014/15 budget, the government made the above assumptions on the basis of GDP estimates made prior to the rebasing of GDP in September 2014.

On 12 June 2014, the Cabinet Secretary for the National Treasury delivered the Budget Statement for the fiscal year 2014/15 to the National Assembly.

Estimated total revenue for fiscal year 2014/15 is KES1.2 trillion, comprising of KES1.1 trillion of ordinary revenue and KES71.2 billion of A-i-A. The total revenue estimate represents an increase of 21.2 per cent. over the budget estimates for 2013/14. Budgeted revenues are estimated at 21.2 per cent. of GDP in 2013/14. The revenues target is premised on projected economic growth, but takes into account the challenges experienced in the past two years with collection of VAT. Scaling up the on-going reforms in tax policy and administrative measures, to eliminate loopholes and ensure sustainability in domestic resource mobilisation, are key assumptions supporting the revenue projection. In addition, the government expects new tax measures, including the introduction of the railway development levy on all imports, to contribute to the growth in revenues. The 2014/15 budget includes external grants from development partners’ amounting to KES58.7 billion.

The government estimates total expenditure in the 2014/15 budget to amount to KES1.2 trillion, which the government expects to result in an overall fiscal deficit of KES599.1 billion (10.8 per cent. of GDP). The government expects the deficit to be financed by net foreign financing of KES295.4 billion, which includes redemptions amounting to KES81.5 billion, and KES101.7 billion net borrowing from domestic market.

The recurrent expenditures comprise KES122.9 billion for domestic interest payments, KES24.5 billion for foreign interest payments and KES36.6 billion for civil servants’ pensions. The government estimates gross development expenditures for 2014/15 at KES674.5 billion.

The following table sets out the budget allocation by sector for the 2014/15 budget as provided in the Budget Review and Outlook Paper published in September 2014.

2014/15 2014/2015 Recurrent Development Expenditure Expenditure Sectors Allocations Allocations Total Allocation (KES millions) Education ...... 273.4 34.9 308.3 Energy, infrastructure and IT ...... 35.6 221.3 256.9 Agriculture, rural and urban development ...... 15.9 44.3 60.2 Public administration and international relations ...... 94.2 102.7 196.9 Governance, justice law and order ...... 119.2 11.7 130.9 National security ...... 90.7 — 90.7 Social protection, culture and recreation ...... 11.1 12.9 24.0 Environment protection, water and natural resources . 14.7 36.1 50.8 Health services ...... 26.0 21.3 47.3 General economic and commercial affairs ...... 6.6 9.6 16.2 Totals ...... 687.5 494.8 1,182.2 ______Source: National Treasury

Preliminary Results for Fiscal Year 2013/14

Ordinary revenues (inclusive of the railway development levy) grew by 15.0 per cent. during 2013/14 compared to the same period in 2012/13. Excluding the levy, ordinary revenues grew by 12.7 per cent.

As at 30 June 2014, total revenue amounted to KES1,001.4 billion, against a target of KES1,060.1 billion, resulting in an underperformance of KES58.7 billion. The underperformance was in respect of KES32.0 billion in ordinary revenue (inclusive of railway development levy) and KES52.7 billion in A-I-A. The underperformance in ordinary revenue was mainly reflected in excise and income taxes while the shortfall in A-i-A partly reflects underreporting by line ministries.

Expenditure execution lagged behind during 2013/14 because of lower absorption of funds from external sources. Total expenditure (based on disbursement) amounted to KES1,300.6 billion against a target of KES1,451.0 billion. This reflected an overall under-spending of KES150.4 billion.

The following table sets forth the fiscal accounts of the government for the periods indicated.

2012/2013 2013/2014(1) Actual Target Actual Target (KES millions) TOTAL REVENUE AND GRANTS ...... 868,651 989,949 1,001,374 1,060,113 Ordinary revenue ...... 847,217 915,282 974,417 1,006,402 Import duty ...... 57,650 61,484 67,555 67,349 Excise duty ...... 85,502 91,810 102,029 101,153 Income tax ...... 373,422 370,600 449,590 450,899 VAT ...... 184,581 216,000 232,630 230,962 Investment Revenue ...... 15,264 19,120 10,181 13,741 Others ...... 63,017 64,640 57,004 53,864 Appropriation-in-Aid ...... 67,781 91,628 35,707 88,434 Railway Development Levy ...... N/A N/A 19,721 20,200 Grants ...... 21,434 74,667 26,957 53,711 TOTAL EXPENDITURE AND NET LENDING .. 1,117,018 1,303,233 1,300,589 1,451,067 Recurrent Expenditure ...... 818,103 882,373 752,501 800,430 Domestic Interest ...... 110,184 108,132 119,193 110,065 Foreign Interest due ...... 11,051 11,620 15,627 14,934 Pensions, salaries, allowances, and miscellaneous services ...... 26,996 31,625 30,155 31,992 Wages & Salaries ...... 274,407 292,239 281,197 288,471 Operations & Maintenance/Others ...... 385,682 428,974 306,329 354,968 Transfer to County Governments ...... 9,783 9,783 193,390 193,419 Parliamentary Service ...... N/A N/A 22,473 25,084 Judicial Service ...... N/A N/A 12,951 13,912 Development and Net Lending ...... 298,915 420,360 319,312 413,222 Contingency Fund ...... 0 500 0 5,000 Deficit Excluding Grants ...... (248,367) (313,284) (326,172) (390,954) Adjustment to cash basis ...... 16,814 13,861 0 0 DEFICIT INCLUDING GRANTS (CASH BASIS) ... (231,974) (299,423) (299,215) (390,954) FINANCING ...... 231,974 299,423 299,215 390,954 NET FOREIGN FINANCING ...... 62,197 134,907 106,412 291,850 DOMESTIC FINANCING ...... 169,777 164,516 191,536 97,704 ______Notes: (1) Provisional Source: National Treasury

100

PUBLIC DEBT

Overview

Government debt comprises external and domestic debt. Domestic debt is reported on a gross basis and excludes government deposits in commercial banks, Central Bank of Kenya and National Treasury advances to parastatals. It consists of government securities and loans and advances from the banking system. All domestic debt is in local currency; there is no foreign currency domestic debt. External debt consists of public and publicly guaranteed debt from outside the country contracted in foreign currency.

Total central government debt stood at US$18.0 billion at 30 June 2012, representing a 22.4 per cent. increase from US$14.7 billion at 30 June 2011. The proportion of central government’s external debt to total debt decreased from 52.8 per cent. at 30 June 2011 to 49.4 per cent. at 30 June 2012, mainly due to continued efforts by the central government to limit foreign borrowing in favour of domestic borrowing that comes with lower costs and risks. Total central government debt stood at US$27.1 billion at 30 June 2014, representing a 23.2 per cent. increase from US$22.0 billion at 30 June 2013. The proportion of central government’s external debt to total debt increased from 44.5 per cent. at 30 June 2013 to 46.0 per cent. at 30 June 2014, mainly due to the issuance of the Original Notes. The government is permitted under the terms of the PFMA to incur debt within the limits set by Parliament. In November 2014, the government, acting through the National Treasury, applied to Parliament to increase the external debt limit to KES2,500 billion from KES1,200 billion in order to provide the government with further flexibility to undertake development projects.

The following table sets out a summary of central government debt disaggregated into foreign and domestic debt as at the dates indicated.

Central Government Public Debt Stocks Other Debt Total External Internal Total External Internal Total External Internal Total At 30 June (US$ millions) 2011 ...... — — — 7,765.6 6,952.2 14,717.8 7,765.6 6,952.2 14,717.8 2012 ...... — — — 8,893.9 9,124.3 18,018.2 8,893.9 9,124.3 18,018.2 2013 ...... — — — 9,808.0 12,214.4 22,022.4 9,808.0 12,214.4 22,022.4 2014(1) ...... — — — 12,476.6 14,656.3 27,132.9 12,476.6 14,656.25 27,132.9 ______Notes: (1) Provisional Source: National Treasury/Central Bank of Kenya

The following table sets out a summary of central government debt disaggregated into fixed rate debt and floating rate debt as at the dates indicated.

At 30 June 2012 2013 2014(1) Amount Amount Amount (KES (KES (KES millions) Percentage millions) Percentage millions) Percentage Floating rate debt ...... 16,228.0 1% 56,823.5 3% 59,545.2 3% Fixed rate debt ...... 1,606,573.0 99% 1,837,293.5 97% 2,318,065.6 97% Total ...... 1,622,801.0 100% 1,894,117.0 100% 2,377,610.8 100% ______Notes: (1) Provisional Source: National Treasury/Central Bank of Kenya

Total multilateral debt rose by 12.0 per cent. to stand at US$5.5 billion at 30 June 2012 while total bilateral debt increased from US$2.9 billion at 30 June 2011 to US$2.9 billion at 30 June 2012. Although the government exerted efforts to restrict borrowing to sources that attract low interest rates as well as long-term repayment period, the depreciation of the Kenyan shilling contributed to the overall increase in external debt. External debt from most bilateral lenders decreased in 2011/12, except that from the People’s Republic of China which recorded the highest increase during 2011/12.

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Total multilateral debt rose by 9.5 per cent. to US$6.5 billion at 31 December 2013 compared to US$6.0 billion at 30 June 2013 while total bilateral debt increased by 10.1 per cent. from US$3.0 billion at 30 June 2013 to US$3.3 billion at 31 December 2013. As at 31 December 2013, approximately 6.0 per cent. of external debt is floating-rate debt.

Total multilateral debt rose by 3.1 per cent. to stand at US$6.7 billion at 30 June 2014 compared with US$6.5 billion at 31 December 2013, while total bilateral debt increased by 10.1 per cent. from US$3.0 billion at 30 June 2013 to US$3.3 billion at 31 December 2013.

On 19 November 2014, the board of directors of the African Development Bank approved a US$133 million loan to Kenya.

The following table sets out the total public and publicly guaranteed debt by source as at the dates indicated.

Total Public and Publicly Guaranteed Debt by Source

At 30 June 2012 2013(1) 2014(1) (US$ millions) EXTERNAL DEBT: Lending Countries: Germany ...... 295.4 291.2 303.2 Japan ...... 1,275.10 1,009.10 964.5 France ...... 435.8 551.1 702.7 United States ...... 61 56 51.8 Netherlands ...... 34.7 30.2 30.8 Denmark ...... 24.7 23.1 22.7 Finland ...... 1.2 1.1 1.1 China ...... 466.8 734 922.7 Belgium ...... 87.4 88.4 92.4 Austria ...... 15.6 11.9 8.1 Canada ...... 17.6 16.2 15.4 Italy ...... 34.8 24.8 19.5 United Kingdom ...... 23 20.1 21.0 Other ...... 150.3 138.4 152.2 Total Lending Countries ...... 2,923.40 2,995.60 3,308.1 International Organisations: IDA/IFAD ...... 3,532.00 3,867.40 4,362.11 EEC/EIB ...... 129.8 183.3 235.7 IMF ...... 909.6 857.8 950.4 ADF/AfDB ...... 811.1 938.6 1,165.4 Others ...... 112.8 103.4 103.5 Total International Organisations ...... 5,495.30 5,950.50 6,817.1 Commercial Banks ...... 600(4) 685.1 2,679.5 Export Credit ...... 175.8 176.8 187.7 Total External ...... 9,194.50 9,808.00 12,992.4 (KES millions) INTERNAL DEBT: Treasury Bills(2) ...... 132,047.00 267,693.00 299,406.15 Treasury Bonds...... 686,950.90 744,174.00 914,762.09 Non Interest bearing debt ...... 29,998.76 28,889.00 28,333.76 Others (includes stocks)(3) ...... 9,833.00 9,800.00 41,825.21 Less government deposits & on-lending ...... (90,260.29) (161,435.00) (205,516.29) Total Internal (net) ...... 768,569.26 889,121.00 1,078,810.92 Total debt (KES millions) ...... 1,517,729.68 1,732,683.00 2,217,315.62 ______Notes: (1) Provisional (2) Excludes repo bills. (3) Others consist of Central Bank of Kenya overdraft to the government of Kenya, cleared items awaiting transfer to PMG, commercial bank advances and tax reserve certificates. (4) Standard Bank Plc, one of the Managers for the offering of the Notes, was a lender for the US$600 million syndicated loan recorded in 2011/12. The government paid off the loan in full on 3 July 2014. Source: National Treasury/Central Bank of Kenya

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As at 30 June 2014, the central government guaranteed approximately US$516.1 million of the indebtedness of the non-financial public sector.

The table below sets out information on publicly guaranteed debt of the non-financial public sector at the dates indicated.

Agency Publicly Guaranteed Debt Year Loan Loan Balance At 30 June Contracted Creditor 2011 2012 2013 2014(1) (US$ millions) City Council of Nairobi ...... United 1985 States 3.40 2.59 1.70 0.85 Kenya Broadcasting Corporation ...... 1989 Japan 74.80 72.17 45.74 40.90 Telkom Kenya Ltd ...... 1990 Canada 4.50 4.36 4.10 4.00 Tana and Athi River Development Authority ...... 1990 Japan 32.83 30.04 20.82 17.41 East African Portland Cement ...... 1990 Japan 40.81 37.34 25.88 21.64 KenGen Ltd ...... 1995 Japan 73.91 70.64 51.65 46.19 1997 Japan 69.27 66.97 49.63 45.08 2004 Japan 131.01 134.83 106.81 102.49 2007 Japan 36.03 50.37 42.68 41.76 2010 Japan — 0.62 0.49 0.48 Kenya Ports Authority ...... 2007 Japan 0.01 54.76 111.71 150.26 Kenya Railways ...... 2008 IDA 45.00 45.62 45.00 45.00 Total ...... 511.58 570.30 506.20 516.06 ______Notes: (1) Provisional Source: National Treasury

Net external debt servicing charges rose from US$353.9 million in 2010/11 to US$409.0 million in 2011/12 while net internal debt servicing charges decreased by 5.4 per cent. to stand at US$1.7 billion in 2011/12. This may be attributed to longer maturity of treasury bonds that constitute the larger component of internal debt. Interest and loan receipts grew by 23.1 per cent from US$368.7 million in 2010/11 to US$427.5 million in 2011/12.

Net external debt servicing charges rose to US$422.5 million in 2012/13, while net internal debt servicing charges decreased by 23.0 per cent. to stand at US$1.3 billion in 2012/13.

Net external debt servicing charges rose from US$422.5 million in 2012/13 to US$450.7 million in 2013/14 and net internal debt servicing charges increased by 42.7 per cent. to US$1.8 billion in 2013/14. The government attributes this change to an increase in the nominal value of both external and internal debt. Interest and loan receipts declined by 32.4 per cent from US$22.9 million in 2012/13 to US$15.5 million in 2013/14.

The following table sets out a summary of central government debt service as at the dates indicated.

Year Ended Interest and Loan Repayment 30 June Annual Debt Servicing Charges(1) Receipts Net Servicing Charges (US$ millions) External Internal Total External Internal Total External Internal Total 2011 353.93 1,764.10 2,118.03 — 14.75 14.75 353.93 1,749.35 2,103.28 2012 408.96 1,664.84 2,073.81 — 18.50 18.50 408.96 1,646.35 2,055.31 2013(2) 422.50 1,281.06 1,703.56 — 22.87 22.87 422.50 1,258.19 1,680.69 2014(2) 450.72 1,360.19 1,810.91 __ 15.45 15.45 450.72 1,795.46 2,246.18 ______Notes: (1) Annual debt servicing charges = central government and guaranteed debt redemption + interest. (2) Provisional. Source: National Treasury

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The following table sets out the central government debt service for the periods indicated.

2012/13 2013/14(1) 2014/15(2) 2015/16(2) (KES millions) Domestic interest ...... 110,184 119,193 122,928 106,636 External interest ...... 11,051 15,076 23,144 22,395 Total interest ...... 121,235 134,269 146,072 129,031 External Principal Repayment ...... 23,993 29,181 81,936 33,058 Total Debt Service ...... 145,228 163,450 228,008 162,089 ______Notes: (1) Provisional. (2) Estimated. Source: National Treasury

Relations with the IMF

The IMF approved a three-year Extended Credit Facility (“ECF”) arrangement for Kenya on 31 January 2011 in an amount equivalent to SDR 325.68 million (US$508.7 million). The program was aimed at protecting Kenya’s external position, while allowing a gradual fiscal adjustment. The program was designed to help rebuild Kenya’s international reserves by supporting the conditions for sustainable growth while preserving macroeconomic stability and help address balance of payments financing needs and provide a reserve cushion to help Kenya deal with adverse shocks. On 9 December 2011, the IMF approved an augmentation of the ECF arrangement bringing the total to an amount equivalent to SDR 488.52 million (approximately US$748.4 million). On 2 December 2013, the IMF announced that it had completed its sixth review of Kenya’s economic program supported by the ECF and approved the immediate disbursement of an amount equivalent to SDR 71.921 million (approximately US$110.2 million), which brought total disbursements to the full arrangement amount of SDR 488.52 million. The IMF conducted its Article 4 Mission from 25 June 2014 to 9 July 2014 and published its report in October 2014. In November 2014, the government reached a preliminary agreement with the IMF for a blended Stand-By Arrangement and Standby Credit Facility (the “SBA-SCF”) in an amount of approximately US$750 million. The government expects the IMF executive board to make a final decision on the SBA-SCF arrangement in January 2015. The government intends to borrow under the SBA-SCF arrangement if the economy faces major external, security or weather-related shocks in the future. If approved, the SBA-SCF arrangement would be a one year rolling arrangement with provision for extension.

Debt Record

History of Debt Restructuring

Paris Club. Kenya has approached the Paris Club of creditors three times since 1990 to seek debt relief and a rescheduling of its external debt. The first debt rescheduling agreement was reached in January 1994 and granted debt relief with respect to US$535 million of indebtedness to bilateral creditors on non-concessional terms with an eight-year repayment period, including a one- year grace period. The amount covered by the first rescheduling agreement has been fully repaid. While the first rescheduling agreement was “flow” rescheduling, which limited the rescheduling to the debt servicing (principal plus interest) falling due within a specified period (consolidation period), the second rescheduling agreement received “stock” treatment, which takes into account the entire outstanding stock (principal plus accumulated arrears) and reprofiles it over an extended period of time. The second debt rescheduling agreement was signed in November 2000 and granted debt relief with respect to US$301 million of indebtedness to bilateral creditors, with maturities due from 1 July 2000 to 30 June 2001 (including the debt service payments in arrear as of 1 July 2000). As part of this rescheduling, Kenya received an extension of repayment of Official Development Assistance (“ODA”) of 20 years and an extension of repayment of non-ODA credits of 18 years, with a three-year grace period.

The third rescheduling agreement was signed in January 2004. Approximately US$353 million of debt owed to bilateral creditors was rescheduled and the Republic received an extension of repayment of ODA credits of 20 years, with a ten-year grace period, and an extension of repayment of non-ODA credits of 15 years, with a five-year grace period. The total stock of bilateral debt eligible under the agreement covered maturities falling due from 1 January 2004 to 31 December 2006 (including the debt service payments in arrear as of 31 December 2003).

London Club. Kenya has also received debt relief from the London Club creditors. In 1998, the London Club creditors rescheduled Kenya’s debts amounting to US$70 million over ten years, including a three year grace period, at prevailing market interest rates. In 2003-04, approximately US$23 million of debt owed to London Club creditors was rescheduled over two years at prevailing market interest rates.

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Bilateral Debts. Kenya has also received bilateral debt cancellations from Finland, Netherlands and China in various past years. In 2006, Kenya entered into a debt-for-development swap agreement with the Italian government amounting to US$44 million.

The Table below summarises the current status of the rescheduled debts.

Amount rescheduled Outstanding amount Rescheduling year Year ended 31 December 2013(1) (US $ million) Paris Club 1994 ...... 535 Nil 2000 ...... 301 208 2004 ...... 353 346 London Club 1998 ...... 70 Nil 2003 ...... 23 Nil ______Notes: (1) Provisional. Source: National Treasury

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TERMS AND CONDITIONS OF THE FURTHER NOTES

Terms and Conditions of the 2019 Further Notes

The following is the text of the Terms and Conditions of the 2019 Further Notes which, upon issue, will represent the terms and conditions applicable to all 2019 Further Notes, and, subject to completion and amendment, will be endorsed on each Further Certificate and will be attached and (subject to the provisions thereof) apply to each Further Global Note representing the 2019 Further Notes. Within the following section “Terms and Conditions of the 2019 Further Notes”, please note that the use of the term the “Notes” applies only to the 2019 Notes and that the use of the term the “Further Notes” applies only to the 2019 Notes. Elsewhere in the Prospectus, the use of the term the “Notes” applies to the 2019 Notes and the 2024 Notes together, and the term “Further Notes” applies to the 2019 Further Notes and the 2024 Further Notes together:

The US$250,000,000 5.875 per cent. Notes due 2019 (the “Further Notes”), to be consolidated and form a single series with the existing US$500,000,000 5.875 per cent. Notes due 2019 (the “Original Notes” and, together with the Further Notes, the “Notes”) issued by the Republic of Kenya (the “Issuer”) on 24 June 2014, are issued by the Issuer subject to and with the benefit of an agency agreement dated 24 June 2014 (the “Original Agency Agreement”) made between the Issuer, Citigroup Global Markets Deutschland AG as registrar (the “Registrar”), Citibank, N.A., London Branch as fiscal agent and principal paying agent (the “Fiscal Agent”), Citibank, N.A., London Branch as transfer agent (the “Transfer Agent”) and the other initial paying agents named in the Agency Agreement (together with the Fiscal Agent, the “Paying Agents”) and the other agents named in it (together with the Fiscal Agent, the Registrar, the Transfer Agent and the other Paying Agents, the “Agents”) as supplemented by a first supplemental agency agreement dated 3 December 2014 which was entered into in connection with the issue of the Further Notes (the “Supplemental Agency Agreement” and together with the Original Agency Agreement, the “Agency Agreement”). The Further Notes also have the benefit of a deed of covenant dated 24 June 2014 (the “Original Deed of Covenant”) executed by the Issuer in relation to the Original Notes, as supplemented by a supplemental deed of covenant dated 3 December 2014 and entered into in connection with the issue of the Further Notes (the “Supplemental Deed of Covenant”, together with the Original Deed of Covenant, as amended, restated or supplemented from time to time, the “Deed of Covenant”).

The statements in these Conditions include summaries of, and are subject to, the detailed provisions of and definitions in the Agency Agreement. Copies of the Agency Agreement and the Deed of Covenant are available for inspection during normal business hours by the holders of the Notes (the “Noteholders”) at the Specified Office (as defined in the Agency Agreement) of each of the Paying Agents. The Noteholders are entitled to the benefit of, are bound by, and are deemed to have notice of, all the provisions of the Agency Agreement applicable to them. References in these Conditions to the Fiscal Agent, the Registrar, the Paying Agents and the Agents shall include any successor appointed under the Agency Agreement.

1 Form, Denomination and Title

(a) Form and Denomination: The Notes are issued in registered form in denominations of US$200,000 and integral multiples of US$1,000 in excess thereof (each, an “Authorised Denomination”). A registered note certificate (each, a “Certificate”) will be issued to each Noteholder in respect of its registered holding of Notes. Each Certificate will be numbered serially with an identifying number which will be recorded on the relevant Certificate and in the register of Noteholders (the “Register”) which the Issuer will procure to be kept by the Registrar in accordance with the provisions of the Agency Agreement.

(b) Title: Title to the Notes passes only by registration in the Register. The holder of any Note will (except as otherwise required by law) be treated as its absolute owner for all purposes (whether or not it is overdue and regardless of any notice of ownership, trust or any interest or any writing on, or the theft or loss of, the Certificate issued in respect of it) and no person will be liable for so treating the holder. In these Conditions “Noteholder”, and in relation to a Note, “holder” means the person in whose name a Note is registered in the Register (or, in the case of a joint holding, the first named thereof).

2 Transfers of Notes and Issue of Certificates

(a) Transfers: Subject to Condition 2(d) and Condition 2(e), a Note may be transferred by depositing the Certificate issued in respect of that Note, with the form of transfer on the back duly completed and signed, at the Specified Office of the Registrar or any of the Transfer Agents together with such evidence as the Registrar or Transfer Agent may require to prove the title of the transferor and the authority of the individuals who have executed the form of transfer; provided however, that a Note may not be transferred unless the principal amount of the Notes transferred and (where not all of the Notes held by a Noteholder are being transferred) the principal amount of the Notes not transferred, are Authorised Denominations.

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(b) Delivery of new Certificates: Each new Certificate to be issued upon transfer or exchange of Notes will, within five business days of receipt by the Registrar or the Transfer Agent of the duly completed form of transfer endorsed on the relevant Certificate, be mailed by uninsured mail at the risk of the holder entitled to the Note to the address specified in the form of transfer. For the purposes of this Condition 2(b), “business day” shall mean a day on which banks are open for business in the city in which the Specified Office of the Registrar or the Transfer Agent with whom a Certificate is deposited in connection with a transfer is located.

Where some but not all of the Notes in respect of which a Certificate is issued are to be transferred a new Certificate in respect of the Notes not so transferred will, within five business days of receipt by the Registrar or the Transfer Agent of the original Certificate, be mailed by uninsured mail at the risk of the holder of the Notes not so transferred to the address of such holder appearing on the Register or as specified in the form of transfer.

(c) Formalities free of charge: Registration of transfer of Notes will be effected without charge by or on behalf of the Issuer, the Registrar or any Transfer Agent but upon payment (or the giving of such indemnity as the Registrar or any Agent may reasonably require) in respect of any tax or other governmental charges which may be imposed in relation to such transfer.

(d) Closed Periods: No Noteholder may require the transfer of a Note to be registered during the period of 15 calendar days ending on (and including) the due date for any payment of principal or interest on that Note.

(e) Regulations: All transfers of Notes and entries on the Register will be made subject to the detailed regulations concerning transfer of Notes scheduled to the Agency Agreement. The regulations may be changed by the Issuer with the prior written approval of the Registrar. A copy of the current regulations will be mailed (free of charge) by the Registrar to any Noteholder upon request.

3 Status

The Notes constitute direct, unconditional, unsubordinated and (subject to the provisions of Condition 4) unsecured obligations of the Issuer and rank, and will rank, pari passu and without any preference among themselves, and at least pari passu with all other present and future unsubordinated and (subject as provided in Condition 4) unsecured obligations of the Issuer, save only for such obligations as may be preferred by mandatory provisions of applicable law. The Notes are backed by the full faith and credit of the Issuer.

4 Negative Pledge

(a) Negative Pledge: So long as any Note remains outstanding (as defined in the Agency Agreement) the Issuer will not, save for the exceptions set out below in Condition 4(c) create, incur, assume or permit to subsist any Security upon the whole or any part of its present or future assets or revenues to secure (i) any of its Public External Indebtedness, (ii) any Guarantees in respect of Public External Indebtedness or (iii) the Public External Indebtedness of any other person, without at the same time or prior thereto securing the Notes equally and rateably therewith or providing such other arrangement (whether or not comprising Security) as shall be approved by an Extraordinary Resolution of Noteholders or by a Written Resolution (as defined in Condition 13(a)). For the avoidance of doubt, any such approval shall not constitute a Reserved Matter (as defined in Condition 13(a)).

(b) Interpretation: In these Conditions:

(i) “Guarantee” means any obligation of a person to pay the Indebtedness of another person including, without limitation: an obligation to pay or purchase such Indebtedness, an obligation to lend money or to purchase or subscribe shares or other securities or to purchase assets or services in order to provide funds for the payment of such Indebtedness, an indemnity against the consequences of a default in the payment of such Indebtedness or any other agreement to be responsible for such Indebtedness;

(ii) “Extraordinary Resolution” means a resolution passed at a meeting of Noteholders (whether originally convened or resumed following an adjournment) duly convened and held in accordance with Schedule 6 (Provisions for Meetings of the Noteholders) to the Agency Agreement by a majority of not less than three quarters of the votes cast;

(iii) “Indebtedness” means any obligation (whether present or future) for the payment or repayment of money which has been borrowed or raised (including money raised by acceptances and leasing);

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(iv) “person” means any individual, company, corporation, firm, partnership, joint venture, association, organisation, trust or other juridical entity, state or agency of a state or other entity, whether or not having a separate legal personality;

(v) “Public External Indebtedness” means any Indebtedness which (i) is expressed, denominated or payable, or at the option of the relevant creditor may be payable, in any currency other than the lawful currency from time to time of the Republic of Kenya, and (ii) is in the form of, or is represented by, bonds, notes or other securities with a stated maturity of more than one year from the date of issue which are, or are capable of being, quoted, listed or ordinarily purchased or sold, dealt in or traded on any stock exchange, automated trading system, over-the-counter or other securities market; and

(vi) “Security” means any mortgage, pledge, lien, hypothecation, security interest or other charge or encumbrance including, without limitation, anything analogous to the foregoing under the laws of any jurisdiction.

(i) any Security upon property to secure Public External Indebtedness of the Issuer or any Guarantee by the Issuer of Public External Indebtedness of any other person incurred for the purpose of financing the acquisition or construction of such property and any renewal and extension of such Security which is limited to the original property covered thereby and which (in either case) secures any renewal or extension of the original secured financing;

(ii) any Security securing Public External Indebtedness of the Issuer or any Guarantee by the Issuer of Public External Indebtedness of any other person incurred for the purpose of financing all or part of the costs of the acquisition, construction or development of a project; provided that (A) the holders of such Public External Indebtedness or Guarantee expressly agree to limit their recourse to the assets and revenues of such project or the proceeds of insurance thereon as the principal source of repayments of such Public External Indebtedness and (B) the property over which such Security is granted consists solely of such assets and revenues; and

(iii) any Security securing the Public External Indebtedness of the Issuer or any Guarantee by the Issuer of Public External Indebtedness of any other person which was in existence on 24 June 2014.

5 Interest

(a) Interest Rate and Interest Payment Dates: The Further Notes, as with the Original Notes, bear interest from and including 24 June 2014 (the “Original Issue Date”) to but excluding the Maturity Date (as defined in Condition 7(a)) at the rate of 5.875 per cent. per annum (the “Rate of Interest”), payable semi-annually in arrear on 24 June and 24 December in each year (each, an “Interest Payment Date”), subject as provided in Condition 6(d). Each period beginning on (and including) the Original Issue Date or any Interest Payment Date and ending on (but excluding) the next Interest Payment Date is herein called, an “Interest Period”.

(b) Interest Accrual: Each Note will cease to bear interest from and including its due date for redemption unless, upon surrender of the Certificate representing such Note, payment of the principal in respect of the Note is improperly withheld or refused or unless default is otherwise made in respect of payment. In such event, interest will continue to accrue (both before and after judgment) until whichever is the earlier of:

(i) the date on which all amounts due in respect of such Note up to that date have been received by or on behalf of the relevant Noteholder; and

(ii) the day seven days after the date on which the full amount of the moneys payable in respect of such Notes has been received by the Fiscal Agent and notice to that effect has been given to the Noteholders in accordance with Condition 12 (except to the extent that there is any subsequent default in payment to the relevant Noteholders).

(c) Calculation of Interest: The amount of interest payable in respect of each Note for any Interest Period shall be calculated by applying the Rate of Interest to the principal amount of such Note, dividing the product by two and rounding the resulting figure to the nearest cent (half a cent being rounded upwards). If interest is required to be calculated for any period other than an Interest Period, it will be calculated on the basis of a year of 360 days consisting of 12 months of 30 days each and, in the case of an incomplete month, the actual number of days elapsed.

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6 Payments

(a) Payments in respect of Notes: Payment of principal and interest will be made by transfer to the registered account of the Noteholder or by a cheque in US dollars drawn on a bank that processes payments in US dollars mailed to the registered address of the Noteholder if it does not have a registered account. Payment of principal will only be made against surrender of the relevant Certificate at the Specified Office of any of the Paying Agents. Interest on Notes due on an Interest Payment Date will be paid to the Noteholder shown on the Register at the close of business on the date (the “record date”) being the fifteenth day before the due date for the payment of interest.

For the purposes of this Condition 6(a), a Noteholder’s “registered account” means the US dollar account maintained by or on its behalf with a bank that processes payments in US dollars, details of which appear on the Register at the close of business, in the case of principal, on the second Business Day (as defined below) before the due date for payment and, in the case of interest, on the relevant record date, and a Noteholder’s “registered address” means its address appearing on the Register at that time.

(b) Payments subject to Applicable Laws: Payments in respect of principal and interest on Notes are subject in all cases to any fiscal or other laws and regulations applicable in the place of payment, but without prejudice to the provisions of Condition 8.

(c) No commissions: No commissions or expenses shall be charged to the Noteholders in respect of any payments made in accordance with this Condition 6.

(d) Payment on Business Days: Where payment is to be made by transfer to a registered account, payment instructions (for value the due date or, if that is not a Business Day, for value the first following day which is a Business Day) will be initiated and, where payment is to be made by cheque, the cheque will be mailed, on the due date for payment or, in the case of a payment of principal, if later, on the Business Day on which the relevant Certificate is surrendered at the Specified Office of an Agent. If any date for payment in respect of a Note is not a Business Day, the Noteholder shall not be entitled to payment until the next following Business Day.

Noteholders will not be entitled to any interest or other payment for any delay after the due date in receiving the amount due if the due date is not a Business Day, if the Noteholder is late in surrendering its Certificate (if required to do so) or if a cheque mailed in accordance with this Condition 6(d) arrives after the due date for payment.

In this Condition 6, “Business Day” means a day (other than a Saturday or Sunday) on which commercial banks are open for general business in London, New York City and, in the case of surrender of a Certificate, in the place in which the Certificate is surrendered.

(e) Partial Payments: If the amount of principal or interest which is due on the Notes is not paid in full, the Registrar will annotate the Register with a record of the amount of principal or interest in fact paid.

(f) Agents: The names of the initial Agents and their initial Specified Offices are set out in the Agency Agreement. The Issuer reserves the right at any time to vary or terminate the appointment of any Agent and to appoint additional or other Agents; provided that, there will at all times be: (i) a Fiscal Agent, (ii) a Registrar, (iii) a Transfer Agent, (iv) a Paying Agent in a Member State of the EU (if any) that is not obliged to withhold or deduct tax pursuant to European Council Directive 2003/48/EC or any other directive implementing the conclusions of the ECOFIN Council Meeting of 26-27 November 2000 on the taxation of savings income or any law implementing or complying with, or introduced in order to conform to, such Directive and (v) such other agents as may be required by any stock exchange on which the Notes may be listed.

Notice of any termination or appointment and of any changes in Specified Offices will be given to the Noteholders promptly by the Issuer in accordance with Condition 12.

In acting under the Agency Agreement and in connection with the Notes, the Agents act solely as agents of the Issuer and do not assume any obligations towards or relationship of agency or trust for or with any of the Noteholders.

7 Redemption and Purchase

(a) Redemption at Maturity: Unless previously purchased and cancelled as provided below, the Issuer will redeem the Notes at their principal amount on 24 June 2019 (the “Maturity Date”).

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(b) Purchases and Cancellation: The Issuer may at any time purchase Notes in the open market or otherwise at any price and for any consideration. All Notes so purchased may be cancelled or resold. Any Notes so purchased, while held by or on behalf of the Issuer, shall not entitle the Noteholder to vote at any meeting of Noteholders and shall not be deemed outstanding for the purpose of such meetings. Any Notes cancelled shall not be reissued.

8 Taxation

(a) Payment without Withholding: All payments in respect of the Notes by or on behalf of the Issuer shall be made without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature (“Taxes”) imposed or levied by or on behalf of the Relevant Jurisdiction, unless the withholding or deduction of the Taxes is required by law. In that event, the Issuer will pay such additional amounts as may be necessary in order that the net amounts received by the Noteholders after the withholding or deduction shall equal the respective amounts which would have been receivable in respect of the Notes in the absence of the withholding or deduction, except that no additional amounts shall be payable in relation to any payment in respect of any Note:

(i) held by or on behalf of a Noteholder who is liable to the Taxes in respect of such Note by reason of his having some connection with the Relevant Jurisdiction other than the mere holding of the Note; or

(ii) in respect of which the Certificate representing it is surrendered for payment more than 30 days after the Relevant Date (as defined below), except to the extent that the relevant Noteholder would have been entitled to such additional amounts on surrendering the Certificate representing such Note for payment on the last day of such period of 30 days assuming, whether or not such is in fact the case, that day to have been a Business Day (as defined in Condition 6); or

(iii) where such withholding or deduction is imposed on a payment to an individual and is required to be made pursuant to European Council Directive 2003/48/EC or any other Directive implementing the conclusions of the ECOFIN Council Meeting of 26-27 November 2000 on the taxation of savings income or any law implementing or complying with, or introduced in order to conform to, such Directive; or

(iv) held by or on behalf of a Noteholder who would have been able to avoid such withholding or deduction by arranging to receive the relevant payment through another Paying Agent in a Member State of the EU.

(b) Interpretation: In these Conditions:

(i) “Relevant Date” in respect of any Note means the date on which the payment first becomes due but, if the full amount of the money payable has not been received by the Fiscal Agent on or before the due date, it means the date on which, the full amount of the money having been so received, notice to that effect has been duly given to the Noteholders by the Issuer in accordance with Condition 12; and

(ii) “Relevant Jurisdiction” means the Republic of Kenya or any political subdivision or any authority thereof or therein having power to tax in respect of payments in respect of the Notes.

(c) Additional Amounts: Any reference in these Conditions to any amounts in respect of the Notes shall be deemed also to refer to any additional amounts which may be payable under this Condition 8.

9 Prescription

Claims against the Issuer for payment in respect of the Notes will be prescribed and become void unless made within six years (in the case of principal) and five years (in the case of interest) from the Relevant Date (as defined in Condition 8).

10 Events of Default

(a) Events of Default: If any of the following events (“Events of Default”) shall have occurred and be continuing:

(i) Non-payment: (A) the Issuer fails to pay any principal on any of the Notes when due and payable and such failure continues for a period of 15 business days; or (B) the Issuer fails to pay any interest on any of the Notes or any amount due under Condition 8 when due and payable, and such failure continues for a period of 30 days; or

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(ii) Breach of Other Obligations: the Issuer does not perform or comply with any one or more of its other obligations in the Notes, the Agency Agreement or the Deed of Covenant, which default is incapable of remedy or is not remedied within 45 days following the service by any Noteholder on the Issuer of notice requiring the same to be remedied; or

(iii) Cross-default: (A) the acceleration of the maturity (other than by optional or mandatory prepayment or redemption) of any External Indebtedness of the Issuer, or (B) any default in the payment of principal of any External Indebtedness of the Issuer shall occur when and as the same shall become due and payable if such default shall continue beyond the initial grace period, if any, applicable thereto or (C) any default in the payment when due and called upon (after the expiry of any originally applicable grace period) of any Guarantee of the Issuer in respect of any External Indebtedness of any other person; provided that, the aggregate amount of the relevant External Indebtedness in respect of which one or more of the events mentioned in this paragraph (iii) have occurred equals or exceeds US$25,000,000 or its equivalent; or

(iv) Moratorium: a moratorium on the payment of principal of, or interest on, the External Indebtedness of the Issuer shall be declared by the Issuer; or

(v) IMF Membership: the Issuer shall cease to be a member of the International Monetary Fund (“IMF”) or shall cease to be eligible to use the general resources of the IMF; or

(vi) Validity: (A) the validity of the Notes shall be contested by the Issuer, or (B) the Issuer shall deny any of its obligations under the Notes (whether by a general suspension of payments or a moratorium on the payment of debt or otherwise) or (C) it shall be or become unlawful for the Issuer to perform or comply with all or any of its obligations set out in the Notes, including, without limitation, the payment of interest on the Notes, as a result of any change in law or regulation in the Republic of Kenya or any ruling of any court in the Republic of Kenya whose decision is final and unappealable or for any reason such obligations cease to be in full force and effect; or

(vii) Consents: if any authorisation, consent of, or filing or registration with, any governmental authority necessary for the performance of any payment obligation of the Issuer under the Notes, when due, ceases to be in full force and effect or remain valid and subsisting,

then the holders of at least 25 per cent. in aggregate principal amount of the outstanding Notes may, by notice in writing to the Issuer (with a copy to the Fiscal Agent), declare all the Notes to be immediately due and payable, whereupon they shall become immediately due and payable at their principal amount together with accrued interest without further action or formality. Notice of any such declaration shall promptly be given to all other Noteholders by the Issuer.

If the Issuer receives notice in writing from holders of at least 50 per cent. in aggregate principal amount of the outstanding Notes to the effect that the Event of Default or Events of Default giving rise to any above mentioned declaration of acceleration is or are cured following any such declaration and that such holders wish the relevant declaration to be withdrawn, the Issuer shall give notice thereof to the Noteholders (with a copy to the Fiscal Agent), whereupon the relevant declaration shall be withdrawn and shall have no further effect but without prejudice to any rights or obligations which may have arisen before the Issuer gives such notice (whether pursuant to these Conditions or otherwise). No such withdrawal shall affect any other or any subsequent Event of Default or any right of any Noteholder in relation thereto.

In this Condition 10, “External Indebtedness” means Indebtedness expressed or denominated or payable or which, at the option of the relevant creditor, may be payable in a currency other than the lawful currency from time to time of the Republic of Kenya.

11 Replacement of Certificates

If any Certificate is lost, stolen, mutilated, defaced or destroyed it may be replaced at the Specified Office of the Registrar upon payment by the claimant of the expenses incurred in connection with the replacement and on such terms as to evidence and indemnity as the Issuer may reasonably require. Mutilated or defaced Certificates must be surrendered before replacements will be issued.

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12 Notices

All notices to the Noteholders will be valid if mailed to them at their respective addresses in the Register at the time of publication of such notice by pre-paid first class mail (or any other manner approved by the Registrar (or the Fiscal Agent on its behalf), which may be by electronic transmission) and for so long as the Notes are listed on the Irish Stock Exchange and the rules of the Irish Stock Exchange so require, shall be sent to the Companies Announcement Office of the Irish Stock Exchange. Any such notice shall be deemed to have been given on the fourth week day (being a day other than a Saturday or Sunday) after being so mailed.

13 Meetings of Noteholders and Modification

(a) Meetings of Noteholders: The Agency Agreement contains provisions for convening meetings of the Noteholders to consider any matter affecting their interests, including the modification or abrogation by Extraordinary Resolution of any of these Conditions or any of the provisions of the Agency Agreement. Such a meeting may be convened by the Issuer and shall be convened by the Issuer upon the request in writing of Noteholders holding not less than 10 per cent. of the aggregate principal amount of the Notes for the time being outstanding (as defined in the Agency Agreement). The quorum at any meeting for passing an Extraordinary Resolution will be one or more persons present holding or representing more than 50 per cent. in principal amount of the Notes for the time being outstanding, or at any adjourned meeting one or more persons present whatever the principal amount of the Notes held or represented by him or them, except that at any meeting the business of which includes the modification or abrogation of certain of these Conditions or certain of the provisions of the Agency Agreement (including any proposal to change any date fixed for payment of principal or interest in respect of the Notes, to reduce the amount of principal or interest payable on any date in respect of the Notes, to alter the method of calculating the amount of any payment in respect of the Notes or the date for any such payment, to change the currency of payments under the Notes or to change the quorum requirements relating to meetings or the majority required to pass an Extraordinary Resolution (each, a “Reserved Matter”)) the necessary quorum for passing an Extraordinary Resolution will be one or more persons present holding or representing not less than two thirds, or at any adjourned meeting not less than one third, of the principal amount of the Notes for the time being outstanding. An Extraordinary Resolution passed at any meeting of the Noteholders will be binding on all Noteholders, whether or not they are present at the meeting.

In addition, the Agency Agreement contains provisions relating to Written Resolutions. A “Written Resolution” is a resolution in writing signed by or on behalf of the holders of at least 75 per cent. of the aggregate principal amount of the outstanding Notes, in the case of a Reserved Matter, or 66 ²/3 per cent. of the aggregate principal amount of the outstanding Notes, in the case of a matter other than a Reserved Matter. Any Written Resolution may be contained in one document or several documents in the same form, each signed by or on behalf of one or more Noteholders. Any Written Resolution shall be binding on all of the Noteholders, whether or not signed by them.

(b) Modification: The Fiscal Agent may agree, without the consent of the Noteholders, to any modification of any of the provisions of the Agency Agreement either (i) for the purpose of curing any ambiguity or of curing, correcting or supplementing any manifest or proven error or any other defective provision contained herein or therein or (ii) in any other manner which could not reasonably be expected to be prejudicial to the interests of the Noteholders, as determined in the sole opinion of the Issuer. Any modification shall be binding on the Noteholders and shall be notified by the Issuer to the Noteholders as soon as practicable thereafter in accordance with Condition 12.

14 Noteholders’ Committee

(a) Appointment: The Noteholders may, by a resolution passed at a meeting of Noteholders duly convened and held in accordance with the Agency Agreement by a majority of at least 50 per cent. in aggregate principal amount of the Notes then outstanding, or by notice in writing to the Issuer (with a copy to the Fiscal Agent) signed by or on behalf of the holders of at least 50 per cent. in aggregate principal amount of the Notes then outstanding (as defined in the Agency Agreement), appoint any person or persons as a committee to represent the interests of the Noteholders if any of the following events has occurred:

(i) an Event of Default;

(ii) any event or circumstance which could, with the giving of notice, lapse of time, the issuing of a certificate and/or fulfilment of any other requirement provided for in Condition 10 become an Event of Default;

(iii) any public announcement by the Issuer, to the effect that the Issuer is seeking or intends to seek a restructuring of the Notes (whether by amendment, exchange offer or otherwise); or

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(iv) with the agreement of the Issuer, at a time when the Issuer has reasonably reached the conclusion that its debt may no longer be sustainable while the Notes are outstanding;

provided however, that no such appointment shall be effective if the holders of more than 25 per cent. of the aggregate principal amount of the outstanding Notes have either (A) objected to such appointment by notice in writing to the Issuer (with a copy to the Fiscal Agent) during a specified period following notice of the appointment being given (if such notice of appointment is made by notice in writing to the Issuer) where such specified period shall be either 30 days or such other longer or shorter period as the committee may, acting in good faith, determine to be appropriate in the circumstances or (B) voted against such resolution at a meeting of Noteholders duly convened and held in accordance with the Agency Agreement. Such committee shall, if appointed by notice in writing to the Issuer, give notice of its appointment to all Noteholders in accordance with Condition 12 as soon as practicable after the notice is delivered to the Issuer. In appointing a person or persons as a committee to represent the interests of the Noteholders, the Noteholders may instruct a representative or representatives of the committee to form a committee with any person or persons appointed for similar purposes by other affected series of debt securities.

(b) Powers: Such committee in its discretion may, among other things, (i) engage legal advisers and financial advisers to assist it in representing the interests of the Noteholders, (ii) adopt such rules as it considers appropriate regarding its proceedings, (iii) enter into discussions with the Issuer and/or other creditors of the Issuer, (iv) designate one or more members of the committee to act as the main point(s) of contact with the Issuer and provide all relevant contact details to the Issuer, (v) determine whether or not there is an actual or potential conflict of interest between the interests of the Noteholders then outstanding and the interests of the holders of debt securities of any one or more other series issued by the Issuer and (vi) upon making a determination of the absence of any actual or potential conflict of interest between the interests of the Noteholders then outstanding and the interests of the holders of debt securities of any one or more other series issued by the Issuer, agree to transact business at a combined meeting of the committee and such other person or persons as may have been duly appointed as representatives of the holders of securities of each such other series. Except to the extent provided in this Condition 14(b), such committee shall not have the ability to exercise any powers or discretions which the Noteholders could themselves exercise.

15 Further Issues

The Issuer may from time to time, without the consent of the Noteholders, create and issue further notes having the same terms and conditions as the Notes in all respects (or in all respects except for the first payment of interest) so as to form a single series with the Notes, provided that either (i) such additional notes, for purposes of US federal income taxation (regardless of whether any holders of such notes are subject to the US federal income tax laws), are not treated as issued with original issue discount (or are issued with a de minimis amount of original issue discount as defined in US Treasury Regulation 1.1273-1(d)), or (ii) such additional securities are issued in a “qualified reopening” for US federal income tax purposes.

16 Governing Law, Arbitration and Enforcement

(a) Governing Law: The Agency Agreement and the Notes (including any non-contractual obligations arising from or in connection with them) are governed by, and will be construed in accordance with, English law.

(b) Arbitration: Any dispute arising out of or in connection with the Notes (including any dispute as to (i) the existence of the Notes, (ii) the validity or termination of the Notes, (iii) any non-contractual obligation arising out of or in connection with the Notes, (iv) the consequences of the nullity of the Notes or (v) this Condition 16(b)) (each, a “Dispute”) shall be referred to and finally resolved by arbitration under the Arbitration Rules of the London Court of International Arbitration (the “LCIA”) (the “Rules”) as at present in force and as modified by this Condition 16(b), which Rules, as so modified, are deemed incorporated by reference into this Condition 16(b). The number of arbitrators shall be three, one of whom shall be appointed by the claimant(s), one by the respondent(s) and the third of whom, who shall act as chairman, shall be nominated by the two party-nominated arbitrators, provided that if the claimant(s) or respondents(s) fail to nominate an arbitrator within the time limits specified by the Rules or the party-nominated arbitrators fail to nominate a chairman within 30 days of the nomination of the second party- nominated arbitrator, such arbitrator shall be appointed promptly by the LCIA. The seat of Arbitration shall be London, England and the language of the arbitration shall be English. The parties exclude the jurisdiction of the courts under Sections 45 and 69 of the Arbitration Act 1996.

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pursuant to Condition 16(b) and hereby undertakes that, in the event of the High Commissioner of the Republic of Kenya ceasing so to act or ceasing to be located in England, it will appoint another person as its agent for service of process in England for such purposes as soon as reasonably practicable thereafter. Nothing in these Conditions shall affect the right to serve Proceedings in any other manner permitted by law.

(d) Consent to Enforcement and Waiver of Immunity: Except as provided below in this Condition 16(d), to the extent the Issuer may in any jurisdiction claim for itself or its assets or revenues immunity from suit, arbitral award, judgment, execution, attachment (whether in aid of execution, before judgment or otherwise) or other legal process in respect of (i) any arbitration proceedings to resolve a Dispute under Condition 16(b) or (ii) any Proceedings, and to the extent that such immunity (whether or not claimed) may be attributed in any such jurisdiction to the Issuer or its assets or revenues, the Issuer agrees not to claim and irrevocably waives such immunity to the full extent permitted by the laws of such jurisdiction (and consents generally for the purposes of the State Immunity Act 1978 to the giving of any relief or the issue of any process in connection with any such proceedings). The Issuer does not hereby waive such immunity from execution or attachment in respect of (a) property, including any bank account, used by a diplomatic or consular mission of the Issuer or its special missions or delegations to international organisations, (b) property of a military character or in use for military purposes and in each case under the control of a military authority or defence agency of the Issuer or (c) property located in the Republic of Kenya.

17 Rights of Third Parties

No rights are conferred on any person under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of the Notes, but this does not affect any right or remedy of any person which exists or is available apart from that Act.

18 Currency Indemnity

If any sum due from the Issuer in respect of the Notes or any arbitration award or any order or judgment given or made in relation thereto has to be converted from the currency (the “First Currency”) in which the same is payable under these Conditions or such award, order or judgment into another currency (the “Second Currency”) for the purpose of (i) making or filing a claim or proof against the Issuer, (ii) obtaining an award, order or judgment in any arbitral tribunal or court or (iii) enforcing any award, order or judgment given or made in relation to the Notes, the Issuer shall indemnify each Noteholder, on the written demand of such Noteholder addressed to the Issuer and delivered to the Issuer or to the Specified Office of the Fiscal Agent, against any loss suffered as a result of any discrepancy between (x) the rate of exchange used for such purpose to convert the sum in question from the First Currency into the Second Currency and (y) the rate or rates of exchange at which such Noteholder may in the ordinary course of business purchase the First Currency with the Second Currency upon receipt of a sum paid to it in satisfaction, in whole or in part, of any such award, order, judgment, claim or proof. This indemnity constitutes a separate and independent obligation of the Issuer and shall give rise to a separate and independent cause of action.

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Terms and Conditions of the 2024 Further Notes

The following is the text of the Terms and Conditions of the 2024 Further Notes which, upon issue, will represent the terms and conditions applicable to all 2024 Further Notes, and, subject to completion and amendment, will be endorsed on each Further Certificate and will be attached and (subject to the provisions thereof) apply to each Further Global Note representing the 2024 Further Notes. Within the following section “Terms and conditions of the 2024 Further Notes”, please note that the use of the term the “Notes” applies only to the 2024 Further Note and that the use of the term “Further Notes” applies only to the 2014 Further Notes. Elsewhere in the prospectus, the use of the term the “Notes” applies to the 2019 Notes and the 2024 Notes together, and the term “Further Notes” applies to the 2019 Further Notes and the 2024 Further Notes together:

The US$500,000,000 6.875 per cent. Notes due 2024 (the “Further Notes”), to be consolidated and form a single series with the existing US$1,500,000,000 6.875 per cent. Notes due 2024 (the “Original Notes” and, together with the Further Notes, the “Notes”) issued by the Republic of Kenya (the “Issuer”) on 24 June 2014, are issued by the Issuer subject to and with the benefit of an agency agreement dated 24 June 2014 (the “Original Agency Agreement”) made between the Issuer, Citigroup Global Markets Deutschland AG as registrar (the “Registrar”), Citibank, N.A., London Branch as fiscal agent and principal paying agent (the “Fiscal Agent”), Citibank, N.A., London Branch as transfer agent (the “Transfer Agent”) and the other initial paying agents named in the Agency Agreement (together with the Fiscal Agent, the “Paying Agents”) and the other agents named in it (together with the Fiscal Agent, the Registrar, the Transfer Agent and the other Paying Agents, the “Agents”) as supplemented by a first supplemental agency agreement dated 3 December 2014 which was entered into in connection with the issue of the Further Notes (the “Supplemental Agency Agreement” and together with the Original Agency Agreement, the “Agency Agreement”). The Further Notes also have the benefit of a deed of covenant dated 24 June 2014 (the “Original Deed of Covenant”) executed by the Issuer in relation to the Original Notes, as supplemented by a supplemental deed of covenant dated 3 December 2014 and entered into in connection with the issue of the Further Notes (the “Supplemental Deed of Covenant”, together with the Original Deed of Covenant, as amended, restated or supplemented from time to time, the “Deed of Covenant”).

1 Form, Denomination and Title

2 Transfers of Notes and Issue of Certificates

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the form of transfer. For the purposes of this Condition 2(b), “business day” shall mean a day on which banks are open for business in the city in which the Specified Office of the Registrar or the Transfer Agent with whom a Certificate is deposited in connection with a transfer is located.

3 Status

4 Negative Pledge

(b) Interpretation: In these Conditions:

(iii) “Indebtedness” means any obligation (whether present or future) for the payment or repayment of money which has been borrowed or raised (including money raised by acceptances and leasing);

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(v) “Public External Indebtedness” means any Indebtedness which (i) is expressed, denominated or payable, or at the option of the relevant creditor may be payable, in any currency other than the lawful currency from time to time of the Republic of Kenya, and (ii) is in the form of, or is represented by, bonds, Notes or other securities with a stated maturity of more than one year from the date of issue which are, or are capable of being, quoted, listed or ordinarily purchased or sold, dealt in or traded on any stock exchange, automated trading system, over-the-counter or other securities market; and

(iii) any Security securing the Public External Indebtedness of the Issuer or any Guarantee by the Issuer of Public External Indebtedness of any other person which was in existence on 24 June 2014.

5 Interest

(a) Interest Rate and Interest Payment Dates: The Further Notes, as with the Original Notes, bear interest from and including 24 June 2014 (the “Original Issue Date”) to but excluding the Maturity Date (as defined in Condition 7(a)) at the rate of 6.875 per cent. per annum (the “Rate of Interest”), payable semi-annually in arrear on 24 June and 24 December in each year (each, an “Interest Payment Date”), subject as provided in Condition 6(d). Each period beginning on (and including) the Original Issue Date or any Interest Payment Date and ending on (but excluding) the next Interest Payment Date is herein called, an “Interest Period”.

(i) the date on which all amounts due in respect of such Note up to that date have been received by or on behalf of the relevant Noteholder; and

6 Payments

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against surrender of the relevant Certificate at the Specified Office of any of the Paying Agents. Interest on Notes due on an Interest Payment Date will be paid to the Noteholder shown on the Register at the close of business on the date (the “record date”) being the fifteenth day before the due date for the payment of interest.

(c) No commissions: No commissions or expenses shall be charged to the Noteholders in respect of any payments made in accordance with this Condition 6.

Notice of any termination or appointment and of any changes in Specified Offices will be given to the Noteholders promptly by the Issuer in accordance with Condition 12.

7 Redemption and Purchase

(a) Redemption at Maturity: Unless previously purchased and cancelled as provided below, the Issuer will redeem the Notes at their principal amount on 24 June 2024 (the “Maturity Date”).

(b) Purchases and Cancellation: The Issuer may at any time purchase Notes in the open market or otherwise at any price and for any consideration. All Notes so purchased may be cancelled or resold. Any Notes so purchased, while held by or on behalf of the Issuer, shall not entitle the holder of the Notes to vote at any meeting of Noteholders and shall not be deemed outstanding for the purpose of such meetings. Any Notes cancelled shall not be reissued.

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8 Taxation

(b) Interpretation: In these Conditions:

(ii) “Relevant Jurisdiction” means the Republic of Kenya or any political subdivision or any authority thereof or therein having power to tax in respect of payments in respect of the Notes.

(c) Additional Amounts: Any reference in these Conditions to any amounts in respect of the Notes shall be deemed also to refer to any additional amounts which may be payable under this Condition 8.

9 Prescription

10 Events of Default

(a) Events of Default: If any of the following events (“Events of Default”) shall have occurred and be continuing:

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(iv) Moratorium: a moratorium on the payment of principal of, or interest on, the External Indebtedness of the Issuer shall be declared by the Issuer; or

(v) IMF Membership: the Issuer shall cease to be a member of the International Monetary Fund (“IMF”) or shall cease to be eligible to use the general resources of the IMF; or

11 Replacement of Certificates

12 Notices

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13 Meetings of Noteholders and Modification

In addition, the Agency Agreement contains provisions relating to Written Resolutions. A “Written Resolution” is a resolution in writing signed by or on behalf of the holders of at least 75 per cent. of the aggregate principal amount of 2 the outstanding Notes, in the case of a Reserved Matter, or 66 /3 per cent. of the aggregate principal amount of the outstanding Notes, in the case of a matter other than a Reserved Matter. Any Written Resolution may be contained in one document or several documents in the same form, each signed by or on behalf of one or more Noteholders. Any Written Resolution shall be binding on all of the Noteholders, whether or not signed by them.

14 Noteholders’ Committee

(i) an Event of Default;

(iii) any public announcement by the Issuer, to the effect that the Issuer is seeking or intends to seek a restructuring of the Notes (whether by amendment, exchange offer or otherwise); or

(iv) with the agreement of the Issuer, at a time when the Issuer has reasonably reached the conclusion that its debt may no longer be sustainable while the Notes are outstanding;

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accordance with the Agency Agreement. Such committee shall, if appointed by notice in writing to the Issuer, give notice of its appointment to all Noteholders in accordance with Condition 12 as soon as practicable after the notice is delivered to the Issuer. In appointing a person or persons as a committee to represent the interests of the Noteholders, the Noteholders may instruct a representative or representatives of the committee to form a committee with any person or persons appointed for similar purposes by other affected series of debt securities.

15 Further Issues

The Issuer may from time to time, without the consent of the Noteholders, create and issue further Notes having the same terms and conditions as the Notes in all respects (or in all respects except for the first payment of interest) so as to form a single series with the Notes, provided that either (i) such additional Notes, for purposes of US federal income taxation (regardless of whether any holders of such Notes are subject to the US federal income tax laws), are not treated as issued with original issue discount (or are issued with a de minimis amount of original issue discount as defined in US Treasury Regulation 1.1273- 1(d)), or (ii) such additional securities are issued in a “qualified reopening” for US federal income tax purposes.

16 Governing Law, Arbitration and Enforcement

(b) Arbitration: Any dispute arising out of or in connection with the Notes (including any dispute as to (i) the existence of the Notes, (ii) the validity or termination of the Notes, (iii) any non-contractual obligation arising out of or in connection with the Notes, (iv) the consequences of the nullity of the Notes or (v) this Condition 16(b)) (each, a “Dispute”) shall be referred to and finally resolved by arbitration under the Arbitration Rules of the London Court of International Arbitration (the “LCIA”) (the “Rules”) as at present in force and as modified by this Condition 16(b), which Rules, as so modified, are deemed incorporated by reference into this Condition 16(b). The number of arbitrators shall be three, one of whom shall be appointed by the claimant(s), one by the respondent(s) and the third of whom, who shall act as chairman, shall be nominated by the two party-nominated arbitrators, provided that if the claimant(s) or respondents(s) fail to nominate an arbitrator within the time limits specified by the Rules or the party- nominated arbitrators fail to nominate a chairman within 30 days of the nomination of the second party-nominated arbitrator, such arbitrator shall be appointed promptly by the LCIA. The seat of Arbitration shall be London, England and the language of the arbitration shall be English. The parties exclude the jurisdiction of the courts under Sections 45 and 69 of the Arbitration Act 1996.

(c) Appointment of Process Agent: The Issuer has appointed the High Commissioner of the Republic of Kenya in London, presently located at 45 Portland Place, London W1B 1AS as its agent for service of process in relation to any proceedings (“Proceedings”) before the English courts permitted by the Rules in connection with any arbitral proceedings pursuant to Condition 16(b), or in connection with the enforcement of any arbitral award rendered pursuant to Condition 16(b) and hereby undertakes that, in the event of the High Commissioner of the Republic of Kenya ceasing so to act or ceasing to be located in England, it will appoint another person as its agent for service of process in England for such purposes as soon as reasonably practicable thereafter. Nothing in these Conditions shall affect the right to serve Proceedings in any other manner permitted by law.

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such immunity (whether or not claimed) may be attributed in any such jurisdiction to the Issuer or its assets or revenues, the Issuer agrees not to claim and irrevocably waives such immunity to the full extent permitted by the laws of such jurisdiction (and consents generally for the purposes of the State Immunity Act 1978 to the giving of any relief or the issue of any process in connection with any such proceedings). The Issuer does not hereby waive such immunity from execution or attachment in respect of (a) property, including any bank account, used by a diplomatic or consular mission of the Issuer or its special missions or delegations to international organisations, (b) property of a military character or in use for military purposes and in each case under the control of a military authority or defence agency of the Issuer or (c) property located in the Republic of Kenya.

17 Rights of Third Parties

18 Currency Indemnity

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THE GLOBAL NOTES

The Global Notes contain the following provisions which apply to the Notes in respect of which they are issued whilst they are represented by the Global Notes, some of which modify the effect of the Terms and Conditions of the Further Notes. Terms defined in the Terms and Conditions of the Further Notes have the same meaning in paragraphs 1 to 6 below.

1 Accountholders

For so long as any of the Notes are represented by one or more Global Notes, each person (other than another clearing system) who is for the time being shown in the records of DTC or Euroclear or Clearstream, Luxembourg (as the case may be) as the holder of a particular aggregate principal amount of such Notes (each an “Accountholder”) (in which regard any certificate or other document issued by DTC or Euroclear or Clearstream, Luxembourg (as the case may be) as to the aggregate principal amount of such Notes standing to the account of any person shall be conclusive and binding for all purposes) shall be treated as the holder of such aggregate principal amount of such Notes (and the expression “Noteholders” and references to “holding of Notes” and to “holder of Notes” shall be construed accordingly) for all purposes other than with respect to payments on such Notes, the right to which shall be vested, as against Kenya, solely in the nominee for the relevant clearing system (the “Relevant Nominee”) in accordance with and subject to the terms of the Global Notes. Each Accountholder must look solely to DTC or Euroclear or Clearstream, Luxembourg, as the case may be, for its share of each payment made to the Relevant Nominee.

2 Cancellation

Cancellation of any Note following its purchase by Kenya will be effected by reduction in the aggregate principal amount of the Notes in the register of Noteholders.

3 Payments

Payments of principal and interest in respect of Notes represented by a Global Note will be made, in the case of payment of principal, against presentation and surrender of such Global Note to or to the order of the Fiscal Agent, or such other Agent as shall have been notified to the holders of one or more Global Note for such purpose.

All payments in respect of the Notes represented by a Global Note will be made to, or to the order of, the person whose name is entered on the Register at the close of business on the Clearing System Business Day immediately prior to the date for payment, where Clearing System Business Day means Monday to Friday inclusive except 25 December and 1 January.

Holders of book-entry interests in the Notes held through DTC will receive, to the extent received by the Fiscal Agent, all distributions of amounts with respect to book-entry interests in such Notes from the Fiscal Agent through DTC. Distributions in the United States will be subject to relevant US tax laws and regulations.

A record of each payment made will be entered in the register of Noteholders by or on behalf of the Fiscal Agent and shall be prima facie evidence that payment has been made.

4 Notices

So long as the Notes are represented by a Global Note and such Global Note is held on behalf of a clearing system, notices to Noteholders may be given by delivery of the relevant notice to that clearing system for communication by it to entitled Accountholders in substitution for notification as required by Condition 12 (Notices) as set forth herein. See “Terms and Conditions of the Further Notes”. Any such notice shall be deemed to have been given to the Noteholders on the day after the day on which such notice is delivered to DTC.

Whilst any of the Notes held by a Noteholder are represented by a Global Note, notices to be given by such Noteholder may be given by such Noteholder (where applicable) through DTC and otherwise in such manner as the Fiscal Agent and DTC may approve for this purpose.

The Issuer shall also ensure that notices are duly given or published in a manner which complies with the rules and regulations of any stock exchange or other relevant authority on which the Notes are for the time being listed. Any notice shall be deemed to have been given on the day after being so mailed or on the date of publication or, if so published more than once or on different dates, on the date of the first publication.

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5 Registration of Title

Registration of title to Notes in a name other than that of the Relevant Nominee will not be permitted unless DTC notifies Kenya that it is unwilling or unable to continue as a clearing system in connection with a Global Note or DTC ceases to be a clearing agency registered under the US Securities Exchange Act of 1934, as amended (the “Exchange Act”) and in each case a successor clearing system is not appointed by Kenya within 90 days after receiving such notice from DTC or becoming aware that DTC is no longer so registered. In these circumstances, title to a Note may be transferred into the names of holders notified by the Relevant Nominee in accordance with the Conditions, except that Certificates in respect of Notes so transferred may not be available until 21 days after the request for transfer is duly made.

The Registrar will not register title to the Notes in a name other than that of the Relevant Nominee for a period of 15 calendar days preceding the due date for any payment of principal, or interest in respect of the Notes.

6 Transfers

Transfers of book-entry interests in the notes will be effected through the records of Euroclear, Clearstream, Luxembourg and DTC and their respective participants in accordance with the rules and procedures of Euroclear, Clearstream, Luxembourg and DTC and their respective direct and indirect participants, as more fully described under “Clearing and Settlement Arrangements”.

7. Fungibility

The Further Notes shall be consolidated and form a single series with the Original Notes on and from their date of issue and the ISINs and CUSIP numbers assigned to the Further Global Notes are accordingly the same as those assigned to the equivalent Original Notes in global form. The Conditions shall also be construed accordingly.

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CLEARING AND SETTLEMENT ARRANGEMENTS

Kenya has obtained the information in this section from sources it believes to be reliable, including from DTC, Euroclear and Clearstream, Luxembourg. Kenya confirms that it has accurately reproduced such information and that, so far as it is aware and is able to ascertain from information published by third parties, it has omitted no facts which would render the reproduced information inaccurate or misleading. Kenya takes no responsibility, however, for the accuracy of this information. Although DTC, Euroclear and Clearstream, Luxembourg have agreed to the following procedures in order to facilitate transfers of interests in the Unrestricted Further Global Note and in the Restricted Further Global Note among participants of DTC, Euroclear and Clearstream, Luxembourg, they are under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. Neither Kenya nor the Fiscal Agent will have any responsibility for the performance by DTC, Euroclear or Clearstream, Luxembourg or their respective participants or indirect participants of their respective obligations under the rules and procedures governing their operations.

DTC

DTC is a limited-purpose trust company organised under the New York Banking Law, a “banking organisation” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code and a “clearing agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities for its participating organisations (“DTC Participants”) and to facilitate the clearance and settlement of securities transactions between DTC Participants through electronic book-entry changes in accounts of its DTC Participants, thereby eliminating the need for physical movement of certificates. DTC Participants include securities brokers and dealers, brokers, banks, trust companies and clearing corporations and may include certain other organisations, Indirect access to the DTC system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly (“Indirect DTC Participants”).

Because DTC can only act on behalf of DTC Participants, who in turn act on behalf of Indirect DTC Participants and certain banks, the ability of a person having a beneficial interest in a note to pledge such interest to persons or entities that do not participate in the DTC system, or otherwise take actions in respect of such interest, may be affected by the lack of a physical certificate of such interest. The Rules applicable to DTC and its Participants are on file with the US Securities and Exchange Commission.

Euroclear and Clearstream, Luxembourg

Euroclear and Clearstream, Luxembourg hold securities for participating organisations, and facilitate the clearance and settlement of securities transactions between their respective participants, through electronic book- entry changes in accounts of such participants. Euroclear and Clearstream, Luxembourg provide to their participants, among other things, services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. Euroclear and Clearstream, Luxembourg interface with domestic securities markets. Euroclear and Clearstream, Luxembourg participants are recognised financial institutions such as underwriters, securities brokers and dealers, banks, trust companies and certain other organisations and include the Managers. Indirect access to Euroclear or Clearstream, Luxembourg is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodian relationship with a Euroclear or Clearstream, Luxembourg participant, either directly or indirectly.

Book-Entry Ownership

Euroclear and Clearstream, Luxembourg

The Unrestricted Further Global Notes will have an ISIN and a Common Code and will be registered in the name of a nominee for, and deposited with a common depositary on behalf of Euroclear and Clearstream, Luxembourg. The address of Euroclear is 1 Boulevard du Roi Albert II. B1210 Brussels, Belgium, and the address of Clearstream, Luxembourg is 42 Avenue J.F. Kennedy. L-l855, Luxembourg.

DTC

The Restricted Further Global Notes will have a CUSIP number and will be deposited with a custodian (the “Custodian”) for and registered in the name of Cede & Co., as nominee of DTC. The Custodian and DTC will electronically record the principal amount of the Notes held within the DTC system. The address of the DTC is 55 Water Street, New York, New York 10041, USA.

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Relationship of Participants with Clearing Systems

Each of the persons shown in the records of Euroclear, Clearstream, Luxembourg or DTC as the holder of a Note evidenced by a Global Note must look solely to Euroclear, Clearstream, Luxembourg or DTC (as the case may be) for his share of each payment made by Kenya to the holder of such Global Note and in relation to all other rights arising under the Global Note, subject to and in accordance with the respective rules and procedures of Euroclear, Clearstream, Luxembourg or DTC (as the case may be). Kenya expects that, upon receipt of any payment in respect of Notes evidenced by a Global Note, the common depositary by whom such Global Note is held, or nominee in whose name it is registered, will immediately credit the relevant participants’ or account holders’ accounts in the relevant clearing system with payments in amounts proportionate to their respective beneficial interests in the principal amount of the relevant Global Note as shown on the records of the relevant clearing system or its nominee. Kenya also expects that payments by direct participants in any clearing system to owners of beneficial interests in any Global Note held through such direct participants in any clearing system will be governed by standing instructions and customary practices. Save as aforesaid, such persons shall have no claim directly against Kenya in respect of payments due on the Notes for so long as the Notes are evidenced by such Global Note and the obligations of Kenya will be discharged by payment to the registered holder of such Global Note in respect of each amount so paid. None of Kenya, the Fiscal Agent or any agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of ownership interests in any Global Note or for maintaining, supervising or reviewing any records relating to such ownership interests.

Settlement and Transfer of Notes

Subject to the rules and procedures of each applicable clearing system, purchases of Notes held within a clearing system must be made by or through direct participants, which will receive a credit for such Notes on the clearing system’s records. The ownership interest of each actual purchaser of each such Note (the “Beneficial Owner”) will in turn be recorded on the direct and indirect participants’ records. Beneficial Owners will not receive written confirmation from any clearing system of their purchase, but Beneficial Owners are expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the direct or indirect participant through which such Beneficial Owner entered into the transaction. Transfers of ownership interests in Notes held within the clearing system will be effected by entries made on the books of participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in such Notes, unless and until interests in any Global Note held within a clearing system are exchanged for interests evidenced by a definitive note certificate.

No clearing system has knowledge of the actual Beneficial Owners of the Notes held within such clearing system and their records will reflect only the identity of the direct participants to whose accounts such Notes are credited, which may or may not be the Beneficial Owners. The participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by the clearing systems to direct participants, by direct participants to indirect participants, and by direct participants and indirect participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

The laws of some jurisdictions may require that certain persons take physical delivery in definitive form of securities. Consequently, the ability to transfer interests in a Global Note to such persons may be limited. Because DTC can only act on behalf of DTC Participants, who in turn act on behalf of Indirect DTC Participants, the ability of a person having an interest in a Restricted Global Note to pledge such interest to persons or entities that do not participate in DTC, or otherwise take actions in respect of such interest, may be affected by a lack of physical certificate in respect of such interest.

Investors that hold their interests in the Notes through DTC will follow the settlement practices applicable to global bond issues. Investors’ securities custody accounts will be credited with their holdings against payment in same-day funds on the settlement date.

Investors that hold their interests in the Notes through Clearstream, Luxembourg or Euroclear accounts will follow the settlement procedures applicable to conventional Eurobonds in registered form. The interests will be credited to the securities custody accounts on the settlement date against payment in same-day funds.

Secondary Market Trading

Since the purchaser determines the place of delivery, it is important to establish at the time of trade where both the purchaser’s and seller’s accounts are located to ensure that settlement can be made on the desire value date.

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Trading between DTC Participants

Secondary market trading between DTC Participants will be settled using the procedures applicable to global bond issues in same-day funds.

Trading between Euroclear and/or Clearstream, Luxembourg participants

Secondary market trading between Euroclear participants and/or Clearstream, Luxembourg participants will be settled using the procedures applicable to conventional Eurobonds in same-day funds.

Trading between DTC seller and Euroclear or Clearstream, Luxembourg purchaser

When Notes are to be transferred from the account of a DTC Participant to the account of a Clearstream, Luxembourg or Euroclear participant, the purchaser will send instructions to Clearstream, Luxembourg or Euroclear through a Clearstream, Luxembourg or Euroclear participant, as the case may be, at least one business day prior to settlement. Clearstream, Luxembourg or the Euroclear operator will instruct its respective depositary to receive the Notes against payment. Payment will include interest accrued on such beneficial interest on the Note from and including the last interest payment date to and excluding the settlement date. Payment will then be made by the depositary to the DTC Participant’s account against delivery of Notes. After settlement has been completed, the Notes will be credited to the respective clearing system, and by the clearing system, in accordance with its usual procedures, to the Clearstream, Luxembourg or Euroclear participant’s account. The securities credit will appear the next day (European time) and the cash debit will be back-valued to, and the interest on the Note will accrue from, the value date (which would be the preceding day when settlement occurred in New York). If settlement is not completed on the intended value date (i.e., the trade fails), the Clearstream, Luxembourg or Euroclear cash debit will be valued instead as of the actual settlement date.

Euroclear and Clearstream, Luxembourg participants will need to make available to the respective clearing system the funds necessary to process same-day funds settlement. The most direct means of doing so is to preposition funds for settlement, either from cash on-hand or existing lines of credit. Under this approach, participants may take on credit exposure to the Euroclear operator or Clearstream, Luxembourg until the interests in the Note are credited to their accounts one day later.

As an alternative, if Clearstream, Luxembourg or Euroclear has extended a line of credit to a Clearstream, Luxembourg or Euroclear participant, as the case may be, such participant may elect not to pre-position funds and may allow that credit line to be drawn upon to finance settlement. Under this procedure, Clearstream, Luxembourg participants or Euroclear participants purchasing interests in a Note would incur overdraft charges for one day, assuming they cleared the overdraft when the interest in the Note were credited to their accounts. However, interest on the Note would accrue from the value date. Therefore, in many cases, the investment income on the interest in the Note would accrue from the value date. Therefore, in many cases, the investment income on the interest in the Note earned during that one-day period may substantially reduce or offset the amount of such overdraft charges, although this result will depend on each participant’s particular cost of funds.

Since the settlement is taking place during New York business hours, DTC Participants can employ their usual procedures for transferring interests in the Global Notes to the respective depositaries of Clearstream, Luxembourg or Euroclear for the benefit of Clearstream, Luxembourg participants or Euroclear participants. The sale proceeds will be available to the DTC seller on the settlement date. Thus, to the DTC Participants, a cross- market sale transaction will settle no differently than a trade between two DTC Participants.

Trading between Clearstream, Luxembourg or Euroclear Seller and DTC purchaser

Due to time zones differences in their favour, Clearstream, Luxembourg and Euroclear participants may employ their customary procedures for transactions in which interests in a Note are to be transferred by their respective clearing system, through its respective depositary, to a DTC Participant, as the case may be, at least one business day prior to settlement. In these cases, Clearstream, Luxembourg or Euroclear will instruct its respective depositary to deliver the interest in the Note to the DTC Participant’s account against payment. Payment will include interest accrued on such beneficial interest in the Note from and including the interest payment date to and excluding the settlement date. The payment will then be reflected in the account of the Clearstream, Luxembourg participant or Euroclear participant the following day, and receipt of the cash proceeds in the Clearstream, Luxembourg or Euroclear participant’s account would be back-valued at the value date (which would be the preceding day, when settlement occurred in New York). Should the Clearstream, Luxembourg or Euroclear participant have a line of credit in its respective clearing system and elect to be in debit in anticipation of receipt of the sale proceeds in its account, the back-valuation will extinguish any overdraft charges occurred over that one-day period. If settlement is not completed on the intended value date (i.e., the trade fails), receipt of the cash proceeds in the Clearstream, Luxembourg or Euroclear participant’s account would instead be valued as of the actual settlement date.

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Finally, day traders that use Clearstream, Luxembourg or Euroclear to purchase interests in a Note from DTC Participants for delivery to Clearstream, Luxembourg participants or Euroclear participants should note that these trades will automatically fail on the sale side unless affirmative action is taken. At least three techniques should be readily available to eliminate this potential problem:

 borrowing through Clearstream, Luxembourg or Euroclear for one day (until the purchase side of the day trade is reflected in their Clearstream, Luxembourg or Euroclear accounts) in accordance with the clearing system’s customary procedures;

 borrowing the interests in the United States from a DTC Participant no later than one day prior to settlement, which would give the interests sufficient time to be reflected in their Clearstream, Luxembourg or Euroclear account in order to settle the sale side of the trade; or

 staggering the value date for the buy and sell sides of the trade so that the value date for the purchase from the DTC Participant is at least one day prior to the value date for the sale to the Clearstream, Luxembourg participant or Euroclear participant.

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TRANSFER RESTRICTIONS

Because of the following restrictions, purchasers are advised to consult legal counsel prior to making any offer, resale, pledge or other transfer of the Further Notes offered hereby.

The Further Notes have not been registered under the Securities Act, and may not be offered or sold in the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. Accordingly, the Notes are being offered and sold (1) in the United States only to QIBs within the meaning of Rule 144A under the Securities Act and (2) outside the United States in offshore transactions pursuant to Regulation S under the Securities Act. Terms used herein that are defined in Rule 144A or Regulation S under the Securities Act are used herein as defined therein, as applicable.

General

Transfers will be subject to the transfer restrictions contained in the legend appearing on the face of such Further Note, as set out below.

The Restricted Further Global Notes will bear a legend substantially identical to that set out below, and neither a Restricted Further Global Note nor any beneficial interest in the Restricted Further Global Notes may be transferred except in compliance with the transfer restrictions set forth in such legend.

A beneficial interest in the Restricted Further Global Notes may be transferred to a person who wishes to take delivery of such beneficial interest through the Unrestricted Further Global Notes only upon receipt by the Registrar of a written certification from the transferor (in the form scheduled to the applicable Agency Agreement) to the effect that such transfer is being made in accordance with Regulation S or Rule 144 (if available) under the Securities Act.

Any beneficial interest in either the Restricted Further Global Notes or the Unrestricted Further Global Notes that is transferred to a person who takes delivery in the form of a beneficial interest in the other Further Global Note will, upon transfer, cease to be a beneficial interest in such Further Global Note and become a beneficial interest in the other Further Global Note and, accordingly, will thereafter be subject to all transfer restrictions and other procedures applicable to a beneficial interest in such other Further Global Note for so long as such person retains such an interest.

Kenya is a foreign government as defined in Rule 405 under the Securities Act and is eligible to register securities on Schedule B of the Securities Act. Therefore Kenya is not subject to the information provision requirements of Rule 144A(d)(4)(i) under the Securities Act.

Restricted Further Notes

Each prospective purchaser of Further Notes in reliance on Rule 144A (a “144A Offeree”), by accepting delivery of this Prospectus, will be deemed to have represented, agreed and acknowledged as follows:

such 144A Offeree acknowledges that this Prospectus is personal to such 144A Offeree and does not constitute an offer to any other person or to the public generally to subscribe for or otherwise acquire Further Notes. Distribution of this Prospectus, or disclosure of any of its contents to any person other than such 144A Offeree and those persons, if any, retained to advise such 144A Offeree with respect thereto and other persons meeting the requirements of Rule 144A or Regulation S is unauthorised, and any disclosure of any of its contents, without the prior written consent of Kenya, is prohibited; and

such 144A Offeree agrees to make no photocopies of this Prospectus or any documents referred to herein.

Each purchaser of Restricted Further Notes within the United States, by accepting delivery of this Prospectus, will be deemed to have represented, agreed and acknowledged as follows:

the purchaser (i) is a QIB, (ii) is acquiring the Further Notes for its own account or for the account of a QIB and (iii) is aware that the sale of the Further Notes to it is being made in reliance on Rule 144A. If it is acquiring any Further Notes for the account of one or more QIBs, it represents that it has sole investment discretion with respect to each such account and that it has full power to make the herein acknowledgments, representations and agreements on behalf of each such account;

the purchaser understands that such Restricted Further Notes are being offered only in a transaction not involving any public offering in the United States within the meaning of the Securities Act, such Restricted Further Notes have not been and will

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not be registered under the Securities Act or any other applicable State securities laws, the purchaser acknowledges that such Restricted Further Note is a “restricted security” (as defined in Rule 144(a)(3) under the Securities Act) and that (i) if in the future the purchaser decides to offer, resell, pledge or otherwise transfer such Restricted Further Notes, such Restricted Further Notes may be offered, sold, pledged or otherwise transferred only (A) in the United States to a person that the seller reasonably believes is a QIB purchasing for its own account in a transaction meeting the requirements of Rule 144A whom the seller has notified, in each case, that the offer, resale, pledge or other transfer is being made in reliance on Rule 144A, (B) in an offshore transaction in accordance with Rule 903 or Rule 904 of Regulation S, (C) pursuant to an exemption from registration under the Securities Act provided by Rule 144 thereunder (if available) but only upon delivery to Kenya of an opinion of counsel in form and scope satisfactory to Kenya or (D) to Kenya; in each case in accordance with any applicable securities laws of any state of the United States, and (ii) no representation can be made as to the availability at any time of the exemption provided by Rule 144 for the resale of the Further Notes; the purchaser agrees that it will deliver to each person to whom it transfers Further Notes notice of any restriction on transfer of such Further Notes; the purchaser understands that the Restricted Further Notes offered hereby will bear a legend to the following effect, unless Kenya determines otherwise in accordance with applicable law:

THE NOTES REPRESENTED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT) OR WITH ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE OR OTHER JURISDICTION OF THE UNITED STATES. THE HOLDER HEREOF, BY PURCHASING THE NOTES REPRESENTED HEREBY, AGREES FOR THE BENEFIT OF THE ISSUER THAT THE NOTES REPRESENTED HEREBY MAY BE REOFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY IN COMPLIANCE WITH THE SECURITIES ACT AND OTHER APPLICABLE LAWS AND ONLY (1) PURSUANT TO RULE 144A UNDER THE SECURITIES ACT (RULE 144A) TO A PERSON THAT THE HOLDER AND ANY PERSON ACTING ON ITS BEHALF REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT PURCHASING FOR ITS OWN ACCOUNT OR A PERSON PURCHASING FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER WHOM THE HOLDER HAS INFORMED, IN EACH CASE, THAT THE REOFFER, RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (2) IN AN OFFSHORE TRANSACTION WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT (REGULATION S) IN ACCORDANCE WITH RULE 903 OR RULE 904 OF REGULATION S, (3) PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE) OR (4) TO THE ISSUER, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAW OF ANY STATE OF THE UNITED STATES. NO REPRESENTATION CAN BE MADE AS TO THE AVAILABILITY OF THE EXEMPTION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT FOR RESALE OF THIS NOTE.

THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE NOTES IN RESPECT HEREOF OF THE RESALE RESTRICTIONS REFERRED TO ABOVE. TRANSFER IN VIOLATION OF THE FOREGOING WILL BE OF NO FORCE OR EFFECT, WILL BE VOID AB INITIO, AND WILL NOT OPERATE TO TRANSFER ANY RIGHTS TO THE TRANSFEREE, NOTWITHSTANDING ANY INSTRUCTIONS TO THE CONTRARY TO THE ISSUER OF THIS NOTE, THE FISCAL AGENT OR ANY INTERMEDIARY. NO REPRESENTATION CAN BE MADE AS TO THE AVAILABILITY OF ANY EXEMPTION UNDER THE SECURITIES ACT FOR RESALES OF THIS NOTE.

THIS NOTE AND RELATED DOCUMENTATION MAY BE AMENDED OR SUPPLEMENTED FROM TIME TO TIME TO MODIFY THE RESTRICTIONS ON AND PROCEDURES FOR RESALES AND OTHER TRANSFERS OF THIS NOTE TO REFLECT ANY CHANGE IN APPLICABLE LAW OR REGULATION (OR THE INTERPRETATION THEREOF) OR IN PRACTICES RELATING TO THE RESALE OR TRANSFERS OF RESTRICTED SECURITIES GENERALLY. BY THE ACCEPTANCE OF THIS NOTE, THE HOLDER HEREOF SHALL BE DEEMED TO HAVE AGREED TO ANY SUCH AMENDMENT OR SUPPLEMENT; the purchaser understands that Further Notes offered in reliance on Rule 144A will be represented by a Restricted Further Global Note. Before any interest in a Further Note represented by a Restricted Further Global Note may be offered, sold, pledged or otherwise transferred to a person who takes delivery in the form of an interest in an Unrestricted Further Global

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Note, it will be required to provide the Registrar with a written certification (in the form provided in the applicable Agency Agreement) as to compliance with applicable securities laws; and

the purchaser understands that Kenya, the Registrar and the Managers and their affiliates and others will rely upon the truth and accuracy of the foregoing acknowledgements, representations and agreements.

For so long as the Further Notes are held in global form, Noteholders may not require transfers to be registered during the period beginning on the third business day before the due date for any payment of principal or interest in respect of such Further Notes.

Prospective purchasers are hereby notified that sellers of the Further Notes may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A.

Unrestricted Further Notes

Each purchaser of Further Notes outside the United States pursuant to Regulation S, by accepting delivery of this Prospectus and the Unrestricted Further Notes, will be deemed to have represented, agreed and acknowledged as follows:

it is, or at the time Unrestricted Further Notes are purchased will be, the beneficial owner of such Unrestricted Further Notes; it is located outside the United States (within the meaning of Regulation S), and it is not an affiliate of Kenya or a person acting on behalf of such an affiliate;

such Unrestricted Further Notes have not been and will not be registered under the Securities Act and may not be offered, sold, pledged or otherwise transferred within the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act;

Kenya, the Registrar, the Managers and their affiliates, and others will rely upon the truth and accuracy of the foregoing acknowledgments, representations and agreements;

the Further Notes offered in reliance on Regulation S will be represented by the Unrestricted Further Global Notes;

none of Kenya, the Managers or any person representing any such entity has made any representation to it with respect to any such entity or the offering or sale of any Notes, other than the information in this Prospectus; and

the Further Notes, while represented by the Unrestricted Further Global Notes, or if issued in exchange for an interest in the Unrestricted Further Global Notes or for Further Note Certificates, will bear a legend to the following effect:

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE US SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT), OR, EXCEPT FOR LISTING OF THE SECURITIES ON THE IRISH STOCK EXCHANGE, WITH ANY SECURITIES REGULATORY AUTHORITY OF ANY JURISDICTION AND, ACCORDINGLY MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE DELIVERED IN THE UNITED STATES (AS THOSE TERMS ARE DEFINED IN REGULATION S UNDER THE SECURITIES ACT) EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

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TAXATION

The following is a general description of certain tax considerations relating to the Further Notes. It does not purport to be a complete analysis of all tax considerations relating to the Further Notes. Prospective purchasers of Further Notes should consult their tax advisers as to the consequences under the tax laws of the country of which they are resident for tax purposes and the tax laws of the Republic of Kenya of acquiring, holding and disposing of Further Notes and receiving payments of interest, principal and/or other amounts under the Further Notes. This summary is based upon the law in effect on the date of this Prospectus and is subject to any change in law that may take effect after such date.

The Republic of Kenya

Income Tax in Kenya is charged under the provisions of the Income Tax Act (Chapter 470, Laws of Kenya) (“ITA”). Pursuant to section 3 of the ITA, income tax is chargeable on all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya. Interest payable on the Further Notes has been exempted from income tax under section 13(2) of the ITA by virtue of the Gazette Notice 86/2014 dated 18 June 2014 (the “Exemption”). The Exemption came into effect upon publication in the Kenya Gazette and has been laid before Parliament in accordance with the Statutory Instruments Act, 2013.

If this Exemption ceases to be in force for any reason, interest income earned on the Further Notes by a person, whether resident or non-resident, could become subject to income tax in Kenya. In such circumstances, the government would be obliged to deduct withholding tax at the rate then prevailing. The current rate applicable to interest income is fifteen per cent. (15%) of the gross amount payable. Under the terms and conditions of the Further Notes, the Issuer is required to pay additional amounts so that the Noteholders will receive the full net amount which they would otherwise have received had there been no deduction of income tax.

United States Federal Income Taxation

Generally

The following is a summary of certain US federal income tax consequences to original purchasers of the Further Notes of the purchase, ownership and disposition of the Further Notes by a US Holder (as defined below). This summary is based upon tax laws of the United States, including the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations thereunder, published rulings and court decisions, all as of the date hereof and all subject to change at any time, possibly with retroactive effect. No assurances can be given that any changes in these laws or authorities will not affect the accuracy of the discussions set forth in this summary.

This summary does not purport to discuss all aspects of US federal income taxation that may be relevant to, or the actual tax effect that any of the matters described herein will have on, the acquisition, ownership or disposition of Further Notes by a particular investor in light of that investor’s individual circumstances, such as investors whose functional currency is not the US dollar or certain types of investors subject to special tax rules (e.g., financial institutions, insurance companies, dealers in securities or currencies, investors liable for the alternative minimum tax, individual retirement accounts and other tax-deferred accounts, certain securities and currency traders, regulated investment companies, pension plans, and tax-exempt organisations and investors that hold Further Notes as a position in a “straddle,” “conversion,” “hedging,” “integrated” or “constructive sale” transaction for US federal income tax purposes). In addition, this summary does not discuss any non-US, state, or local tax considerations. This summary only applies to investors that hold Further Notes as “capital assets” (generally, property held for investment) within the meaning of the US Internal Revenue Code of 1986, as amended (the “Code”) and who acquire the Further Notes in the offer at the issue price of the Further Notes (the “Issue Price”).

For purposes of this summary, the term “US Holder” means a beneficial owner of a Further Note who, for US federal income tax purposes, is an individual citizen or resident of the United States, a corporation created or organised in or under the laws of the United States, any state of the United States or the District of Columbia, an estate whose income is subject to US federal income tax regardless of its source or a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more “United States persons,” as defined for US federal income tax purposes, have the authority to control all substantial decisions of the trust or the trust has in effect a valid election to be treated as a United States person.

If a partnership (or other entity treated as a partnership for US federal income tax purposes) holds the Further Notes, the tax treatment of a partner in such partnership will generally depend upon the status of the partner and the activities of the partnership. Prospective purchasers that are entities treated as partnerships for US federal income tax purposes should consult their tax advisers concerning the US federal income tax consequences to their partners of the acquisition, ownership and disposition of Further Notes by the partnership. As used herein, the term “non-US Holder” means a beneficial owner of a Further Note that is neither a US Holder nor a partnership for US federal income tax purposes.

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THE SUMMARY OF US FEDERAL INCOME TAX CONSEQUENCES SET OUT BELOW IS FOR GENERAL INFORMATION ONLY. ALL PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX ADVISERS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF ACQUIRING, OWNING, AND DISPOSING OF THE NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL, NON-US AND OTHER TAX LAWS AND POSSIBLE CHANGES IN TAX LAW.

Qualified Reopening and Issue Price of the Further Notes

Kenya intends to treat the 2019 Further Notes as being issued in a “qualified reopening” of the 2019 Original Notes and the 2024 Further Notes as being issued in a qualified reopening of the 2024 Original Notes. For US federal income tax purposes, debt instruments issued in a qualified reopening are deemed to be part of the same issue as the original debt instruments. Because the Original Notes are publicly traded (within the meaning of Treasury Regulations section 1.1273-2(f)), the issuance of the Further Notes is within six months of the issuance of the Original Notes, and the Original Notes traded at a premium when the price of the Further Notes was established (or, if earlier, the announcement date), the Further Notes would be treated as having the same issue date and the same initial issue price (100.00 per cent. of face value) as the Original Notes. The Original Notes were issued at 100.00 per cent. of their face value, which represented no discount from their stated principal amount. As a result, the Original Notes were issued without original issue discount (“OID”). Because the Further Notes have the same issue price as the Original Notes, they also would be treated as issued without OID. The remainder of this discussion assumes the correctness of the treatment described in this paragraph.

Pre-Issuance Accrued Interest

Kenya attributes a portion of the Issue Price of the Further Notes to the amount of interest accrued from and including 24 June 2014 to but excluding the Closing Date. Kenya intends to take the position that a portion of the December 24, 2014 interest payment equal to the 2019 Accrued Interest will be treated as a return of the pre-issuance accrued interest and not as an amount payable on the 2019 Further Notes and that a portion of the December 24, 2014 interest payment equal to the 2024 Accrued Interest will be treated as a return of the pre-issuance accrued interest and not as an amount payable on the 2024 Further Notes. Accordingly, the payment of the 2019 Accrued Interest and 2024 Accrued Interest should not be treated as taxable interest income to US Holders. Prospective purchasers are urged to consult their tax advisors with respect to the tax treatment of the 2019 Accrued Interest and 2024 Accrued Interest.

Payments of Interest and Additional Amounts

Payments of interest on a Further Note generally will be taxable to a US Holder as ordinary income at the time they are received or accrued, depending on the US Holder’s regular method of tax accounting. In addition to interest on a Further Note, if withholding taxes are imposed on payments of interest, the Issuer may be required to pay additional amounts to US Holders so that US holders receive the same amounts they would have received had no withholding taxes been imposed. If taxes are withheld from a payment of interest on the Further Notes, a US Holder will be required to include the amount of any such tax withheld as ordinary income, even though such holder did not in fact receive it, as well as any additional amounts paid in respect of such tax withheld.

Subject to certain limitations, a US Holder generally will be entitled to a credit against its US federal income tax liability, or a deduction in computing its US federal taxable income, for Kenyan income taxes withheld by the Issuer. For purposes of the foreign tax credit limitation, foreign source income generally is categorized in one of two “baskets”, and the credit for foreign taxes on income in any basket is limited to US federal income tax allocable to that income. Interest (and any additional amounts paid) on the Further Notes will constitute income from sources outside the United States. Under the foreign tax credit rules, that interest generally will be classified as “passive category income” (or, in certain cases, as “general category income”), which is relevant in computing the foreign tax credit allowable to a US Holder under the US federal income tax laws. Prospective purchasers should consult their tax advisers concerning the foreign tax credit implications of the payment of these Kenyan taxes.

Bond Premium

If a Further Note is purchased at a price in excess of such Further Note’s stated principal amount (excluding any amounts that are treated as pre-issuance accrued interest as described above under “—Pre-Issuance Accrued Interest”), a US Holder will have bond premium with respect to that Further Note in amount equal to such excess. US Holders that acquire Further Notes in this offering are therefore expected to have bond premium. A US Holder generally may elect to amortise bond premium over the term of the Further Note on a constant yield basis. An electing US Holder generally amortises the bond premium by offsetting the stated interest allocable to an accrual period with the premium allocable to that accrual period. If a US Holder does not elect to amortise bond premium, the US Holder must include the full amount of each interest payment in income in accordance with its regular method of accounting (as discussed above) and will receive a tax benefit from the bond premium only in computing its gain or loss upon the sale or other disposition or payment of the principal amount of the Further Note. An election to amortise

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bond premium will apply to amortisable bond premium on all notes and other bonds, the interest on which is includible in the US Holder’s gross income, held at the beginning of the US Holder’s first taxable year to which the election applies or is thereafter acquired. The election may be revoked only with the consent of the US Internal Revenue Service (“IRS”).

Sale, Exchange, Retirement or Other Taxable Disposition of a Further Note

A US Holder generally will recognise gain or loss upon the sale, exchange, retirement or other taxable disposition of a Further Note (including payments as a result of an acceleration) in an amount equal to the difference between the amount realised upon that sale, exchange, retirement or other taxable disposition (other than amounts representing accrued and unpaid interest not previously included in income, which will be taxable as interest income) and the US Holder’s adjusted tax basis in the Further Note. The amount realised is the sum of cash plus the fair market value of any property received upon the sale, exchange, retirement or other taxable disposition of a Further Note. A US Holder’s adjusted tax basis in a Further Note generally will equal the US Holder’s initial investment in the Further Note (excluding any amounts allocable to interest accrued prior to the Closing Date) less any amortised bond premium or principal payments previously received by the US Holder. Gain or loss on the sale, exchange, retirement or other taxable disposition of a Further Note generally will be capital gain or loss, and will be long-term capital gain or loss if the Further Note is held by the US Holder for more than one year. The ability of a US Holder to offset capital losses against ordinary income is limited. Any capital gain or loss recognised on sale, exchange, retirement or other taxable disposition of a Further Note by a US Holder generally will be treated as income or loss from sources within the United States for foreign tax credit limitation purposes. Therefore, US Holders may not be able to claim a credit for any Kenyan tax imposed upon a sale, exchange, retirement or other taxable disposition of a Further Note unless (subject to special limits) such holder has other income from foreign sources and certain other requirements are met. Prospective purchasers should consult their tax advisers as to the foreign tax credit implications of the sale, exchange, retirement or other taxable disposition of Further Notes.

Tax on Net Investment Income

A US Holder that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from such tax, will be subject to a 3.8 per cent. tax on the lesser of (i) the US Holder’s “net investment income” (or, in the case of an estate or trust, the “undistributed net investment income”) for the relevant taxable year and (ii) the excess of the US Holder’s modified adjusted gross income for the taxable year (or, in the case of an estate or trust, the US Holder’s adjusted gross income for the taxable year) over a certain threshold (which in the case of individuals will be between US$125,000 and US$250,000, depending on the individual’s circumstances). A US Holder’s net investment income generally will include its interest income and its net gains from the disposition of a Further Note, unless such interest income or net gains are derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain passive or trading activities).

Information with Respect to Foreign Financial Assets

US taxpayers that own “specified foreign financial assets,” including debt of foreign entities, with an aggregate value in excess of $50,000 on the last day of the taxable year, or $75,000 at any time during the taxable year generally will be required to file information reports with respect to such assets with their US federal income tax returns. Depending on the holder’s circumstances, higher threshold amounts may apply. “Specified foreign financial assets” include any financial accounts maintained by foreign financial institutions, as well as any of the following, but only if they are not held in accounts maintained by certain financial institutions: (i) stocks and securities issued by non-US persons, (ii) financial instruments and contracts held for investment that have non-US issuers or counterparties and (iii) interests in non-US entities. The Further Notes may be treated as specified foreign financial assets and US Holders may be subject to this information reporting regime. Failure to file information reports may subject US Holders to penalties. US Holders should consult their own tax advisors regarding their obligation to file information reports with respect to the Further Notes.

Non-US Holders

Payments of Interest and Additional Amounts

Subject to the discussion below of backup withholding, payments of interest and any additional amounts on the Further Notes generally are not subject to US federal income tax, including withholding tax, if paid to a “non-US Holder”, as defined above, unless the interest is effectively connected with such non-US Holder’s conduct of a trade or business within the United States (or, if an income tax treaty applies, the interest is attributable to a permanent establishment or fixed place of business maintained by such non-US Holder within the United States). In that case, the non-US Holder generally will be subject to US federal income tax in respect of such interest in the same manner as a US Holder, as described above. A non-US Holder that is a corporation may, in certain circumstances, also be subject to an additional “branch profits tax” in respect of any such effectively connected interest income currently imposed at a 30 per cent. rate (or, if attributable to a permanent establishment maintained by such non- US Holder within the United States, a lower rate under an applicable tax treaty).

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Sale, Exchange, Retirement or Other Taxable Disposition of a Further Note

Subject to the discussion below of backup withholding, a non-US Holder generally will not be subject to US federal income or withholding tax on any gain realised on the sale, exchange, retirement or other taxable disposition of a Note unless: (1) the gain is effectively connected with the conduct by such non-US Holder of a trade or business within the United States (or, if an income tax treaty applies, the gain is attributable to a permanent establishment or fixed base in the United States.), or (2) such non-US Holder is a non-resident alien individual, who is present in the United States for 183 or more days in the taxable year of the disposition and certain other conditions are met. Non-US Holders who are described under (1) above generally will be subject to US federal income tax on such gain in the same manner as a US Holder and, if the non-US Holder is a foreign corporation, such holder may also be subject to the branch profits tax as described above. Non-US Holders described under (2) above generally will be subject to a flat 30 per cent. tax on the gain derived from the sale, exchange, retirement or other taxable disposition of Notes, which may be offset by certain US capital losses (notwithstanding the fact that such holder is not considered a US resident for US federal income tax purposes). Any amount attributable to accrued but unpaid interest on the Notes generally will be treated in the same manner as payments of interest, as described above under “—Payments of Interest and Additional Amounts.”

Backup Withholding and Information Reporting

In general, information reporting requirements will apply to payments of principal and interest and any additional amounts on the Further Notes to non-corporate US Holders if such payments are made within the United States or by or through a custodian or nominee that is a “US Controlled Person,” as defined below. Backup withholding will apply to such payments if a US Holder fails to provide an accurate taxpayer identification number or, certification of exempt status or, in the case of interest payments and the accrual of interest, fails to certify that it is not subject to backup withholding or is notified by the IRS that it has failed to report all interest and dividends required to be shown on its US federal income tax returns.

Non-US Holders are generally exempt from these withholding and reporting requirements (assuming that the gain or income is otherwise exempt from US federal income tax), but such non-US Holders may be required to comply with certification and identification procedures in order to prove their exemption. If a non-US Holder holds a Further Note through a foreign partnership, these certification procedures would generally be applied to such holder as a partner. The payment of proceeds of a sale or redemption of Further Notes effected at the US office of a broker generally will be subject to the information reporting and backup withholding rules, unless such non-US Holder establishes an exemption. In addition, the information reporting rules will apply to payments of proceeds of a sale or redemption effected at a non-US office of a broker that is a US Controlled Person, as defined below, unless the broker has documentary evidence that the holder or beneficial owner is not a US Holder (and has no actual knowledge or reason to know to the contrary) or the holder or beneficial owner otherwise establishes an exemption.

As used herein, the term “US Controlled Person” means:

 a “United States person;”

 a controlled foreign corporation for US federal income tax purposes;

 a non-US person 50 per cent. or more of whose gross income is derived for tax purposes from the conduct of a US trade or business for a specified three-year period; or

 a non-US partnership in which United States persons hold more than 50 per cent. of the income or capital interests or which is engaged in the conduct of a US trade or business.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a holder of a Further Note generally will be allowed as a refund or a credit against the holder’s US federal income tax liability as long as the holder provides the required information to the IRS in a timely manner.

EU Directive on the Taxation of Savings Income

Under the Savings Directive, EU Member States are required, from 1 July 2005, to provide to the tax authorities of another EU Member State details of certain payments of interest (or similar income) paid by or secured for a person established within its jurisdiction to (or for the benefit of) an individual resident, or certain types of entity established, in that other EU Member State. However, for a transitional period, Luxembourg and Austria will (unless during that period they elect otherwise) instead operate a withholding system in relation to such payments. The current rate of withholding under the Directive is 35 per cent. The transitional period is to terminate at the end of the first full fiscal year following agreement by certain non-EU countries to exchange information procedures relating to interest and other similar income. The Luxembourg government has announced its intention to elect out of the withholding system in favour of automatic exchange of information with effect from 1 January 2015.

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The Council of the European Union has adopted the Amending Directive which will, when implemented, amend and broaden the scope of the requirements of the Savings Directive described above. The Amending Directive will expand the range of payments covered by the Savings Directive, in particular to include additional types of income payable on securities, and the circumstances in which payments must be reported or paid subject to withholding. For example, payments made to (or for the benefit of) (i) an entity or legal arrangement effectively managed in an EU Member State that is not subject to effective taxation, or (ii) a person, entity or legal arrangement established or effectively managed outside of the EU (and outside any third country or territory that has adopted similar measures to the Savings Directive) which indirectly benefit an individual resident in an EU Member State, may fall within the scope of the Savings Directive, as amended. The Amending Directive requires EU Member States to adopt national legislation necessary to comply with it by 1 January 2016, which legislation must apply from 1 January 2017.

A number of non-EU countries and certain dependent or associated territories of certain EU Member States have adopted similar measures to the Savings Directive.

The Proposed Financial Transactions Tax (“FTT”)

The European Commission has published a proposal for a Directive for a common FTT in Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia (the “participating Member States”). The proposed FTT has very broad scope and could, if introduced in the form proposed by the European Commission, apply to certain dealings in the Further Notes (including secondary market transactions) in certain circumstances.

Under the current European Commission proposal the FTT could apply in certain circumstances to persons both within and outside of the participating Member States. Generally, it would apply to certain dealings in the Further Notes where at least one party is a financial institution, and at least one party is established in a participating Member State. A financial institution may be, or be deemed to be, “established” in a participating Member State in a broad range of circumstances, including (a) by transacting with a person established in a participating Member State or (b) where the financial instrument which is subject to the dealings is issued in a participating Member State.

Notwithstanding the European Commission proposals, a statement made by the participating Member States (other than Slovenia) indicates that a progressive implementation of the FTT is being considered, and that the FTT may initially apply only to transactions involving shares and certain derivatives, with implementation occurring by 1 January 2016. However, full details are not available.

The proposed FTT remains subject to negotiation between the participating Member States, and as such may be altered prior to any implementation, and the timing remains unclear. Additional EU Member States may decide to participate. Prospective holders of the Further Notes are advised to seek their own professional advice in relation to the FTT.

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PLAN OF DISTRIBUTION

Each of the managers named in the table (the “Managers”) has, pursuant to Subscription Agreements (the “Subscription Agreements”) dated 28 November 2014 severally (but not jointly) agreed to subscribe or procure subscribers for the principal amount of Further Notes set out opposite its name in the table below at the issue price of 103.524 per cent. of the principal amount of the 2019 Further Notes plus the 2019 Accrued Interest and at the issue price of 107.041 per cent. of the principal amount of the 2024 Further Notes plus the 2024 Accrued Interest, less a management and underwriting commission.

Principal Principal Amount 2019 Amount 2024 Managers Further Notes Further Notes Barclays Bank PLC ...... US$83,333,333 US$166,666,666 J.P. Morgan Securities plc ...... US$83,333,333 US$166,666,666 Standard Bank Plc ...... US$83,333,334 US$166,666,668 Total: US$250,000,000 US$500,000,000

Kenya has agreed to indemnify the Managers against certain liabilities (including liabilities under the Securities Act) incurred in connection with the issue of the Further Notes. The Subscription Agreements may be terminated in certain circumstances prior to payment of the net subscription money in respect of the Further Notes to Kenya.

To the extent that the Joint Lead Managers intend to effect any sales of the Further Notes in the United States, they will do so through their respective selling agents, or through one or more US registered broker-dealers or as otherwise permitted by applicable US law.

United States

The Further Notes have not been and will not be registered under the Securities Act and may not be offered or sold within the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. Accordingly, the Managers have agreed, severally (but not jointly), to offer the Further Notes for resale in the United States initially only (1) to persons they reasonably believe to be QIBs purchasing for their own account or for the account of a QIB in reliance on Rule 144A, or (2) outside the United States in offshore transactions in reliance on Regulation S. Terms used in this paragraph have the respective meanings given to them by Regulation S.

In addition, until 40 days after the commencement of the offering, an offer or sale of Further Notes within the United States by any dealer (whether or not participating in the offering) may violate the registration requirements of the Securities Act if such offer or sale is made otherwise than in accordance with Rule 144A under the Securities Act.

Each Manager has represented and agreed severally (but not jointly), that, except as permitted by the Subscription Agreements, it has not offered and sold, and will not offer and sell, the Further Notes by means of any general solicitation or advertising in the United States or otherwise in any manner involving a public offering within the meaning of Section 4(a)(2) of the Securities Act. Accordingly, neither such Manager nor its affiliates, nor any persons acting on its or their behalf, have engaged or will engage in any directed selling efforts (as defined in Regulation S) with respect to the Further Notes, and such Manager, its affiliates and any persons acting on its or their behalf have complied and will comply with the offering restrictions requirement of Regulation S.

United Kingdom

Each Manager has represented and agreed, that:

(a) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the United Kingdom Financial Services and Markets Act 2000 (“FSMA”)) received by it in connection with the issue or sale of any Further Notes in circumstances in which Section 21(1) of the FSMA does not apply to Kenya; and

(b) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Further Notes in, from or otherwise involving the United Kingdom.

Dubai International Financial Centre

Each Manager has represented and agreed that it has not offered and will not offer the Further Notes to any person in the Dubai International Financial Centre in breach of the DIFC Markets Law No.1 of 2012 unless such offer is (i) an “Exempt Offer” in

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accordance with section 2 (Offer of Securities) of the Market Rules of the DFSA Rulebook and (ii) made only to persons who meet the Professional Client criteria set out in Rule 2.3.2 of the DFSA Conduct of Business Module of the DFSA Rulebook.

Republic of Italy

The offering of the Further Notes has not been registered with the Commissione Nazionale per le Società e la Borsa (“CONSOB”) pursuant to Italian securities legislation and, accordingly, each Manager has represented and warranted that, save as set out below, it has not offered or sold, and will not offer or sell, any Further Notes in the Republic of Italy in a solicitation to the public and that sales of the Further Notes in the Republic of Italy shall be effected in accordance with all Italian securities, tax and exchange control and other applicable laws and regulation.

Accordingly, each Manager has represented and agreed that it will not offer, sell or deliver any Further Notes or distribute copies of the Prospectus and any other document relating to the Further Notes in the Republic of Italy except:

(a) to “Professional Investors”, as defined in Article 31.2 of CONSOB Regulation No. 11522 of 1 July 1998, as amended (“Regulation No. 11522”), pursuant to Article 30.2 and 100 of Legislative Decree No. 58 of 24 February 1998, as amended (“Decree No. 58”);

(b) that it may offer, sell or deliver Further Notes or distribute copies of any Prospectus relating to such Further Notes in a solicitation to the public in the period commencing on the date of publication of such Prospectus, provided that such Prospectus has been approved in accordance with the European Directive 2003/71/ EC, as implemented in Italy under Decree No. 58 and CONSOB Regulation No. 11971 of 14 May 1999, as amended (“Regulation No. 11971”), and ending on the date which is 12 months after the date of publication of such Prospectus; and

(c) in any other circumstances where an express exemption from compliance with the solicitation restrictions applies, as provided under Decree No. 58 or Regulation No. 11971.

Any such offer, sale or delivery of the Further Notes or distribution of copies of this Prospectus or any other document relating to the Further Notes in the Republic of Italy must be:

(a) made by investment firms, banks or financial intermediaries permitted to conduct such activities in the Republic of Italy in accordance with Legislative Decree No. 385 of 1 September 1993 as amended (the “Banking Act”), Decree No. 58, Regulation No. 11522 and any other applicable laws and regulations;

(b) in compliance with Article 129 of the Banking Act and the implementing guidelines of the Bank of Italy, as amended, pursuant to which the Bank of Italy may request information on the offering or issue of securities in Italy or by Italian persons outside of Italy; and

(c) in compliance with any other applicable notification requirement or limitation which may be imposed by CONSOB or the Bank of Italy.

Hong Kong

Each Manager has represented and agreed that:

(a) it has not offered or sold and will not offer or sell in Hong Kong, by means of any document, any Further Notes other than (i) to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571) (the “SFO”) and any rules made under the SFO; or (ii) in other circumstances which do not result in the document being a “Prospectus” as defined in the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of that Ordinance; and

(b) it has not issued or had in its possession for the purposes of issue, and will not issue or have in its possession for the purposes of issue (in each case whether in Hong Kong or elsewhere), any advertisement, invitation or document relating to the Further Notes, which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to the Further Notes which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” as defined in the SFO and any rules made under the SFO.

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Singapore

Each Manager has acknowledged that the Prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, each Manager has represented, warranted and agreed that it has not offered or sold any Further Notes or caused such Further Notes to be made the subject of an invitation for subscription or purchase and will not offer or sell such Further Notes or cause such Further Notes to be made the subject of an invitation for subscription or purchase, and has not circulated or distributed, nor will it circulate or distribute, the Prospectus or any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of such Further Notes, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), (ii) to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275, of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

Where the Further Notes are subscribed or purchased under Section 275 by a relevant person which is:

(a) a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or

(b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an individual who is an accredited investor, securities (as defined in Section 239(1) of the SFA) of that corporation or the beneficiaries’ rights and interest in that trust (howsoever described) shall not be transferable for six months after that corporation or that trust has acquired the Further Notes under Section 275 except:

(i) to an institutional investor or to a relevant person defined in Section 275(2) of the SFA, or to any person arising from an offer referred to in Section 275(1A) or Section 276(4)(i)(B) of the SFA;

(ii) where no consideration is or will be given for the transfer;

(iii) where the transfer is by operation of law;

(iv) as specified in Section 276(7) of the SFA; or

(v) as specified in Regulation 32 of the Securities and Futures (Offer of Investments) (Shares and Debentures) Regulations 2005 of Singapore.

Republic of Kenya

This Prospectus and the initial offering of Further Notes has not been and will not be approved by the Capital Markets Authority in Kenya and the Further Notes will not be listed on the Nairobi Securities Exchange when they are issued. The Further Notes may not be issued, offered or sold in Kenya.

South Africa

Each Manager has represented and agreed that it will not offer or sell any Further Notes, it will not solicit any offers for subscription for or sale of any of the Further Notes, and it will not make an “offer to the public” (as such expression is defined in section 95(1)(h) of the South African Companies Act, 2008 (and which expression includes any section of the public)) of any of the Further Notes (whether for subscription, purchase or sale) in South Africa.

Accordingly, this Prospectus does not, nor does it intend to, constitute a “registered prospectus” (as that term is defined in section 95(1)(k) of the South African Companies Act, 2008) prepared and registered under the South African Companies Act, 2008, and accordingly no offer of Further Notes will be made or any Further Notes sold to any prospective investors in South Africa other than pursuant to section 96(1) of the SA Companies Act and the Exchange Control Regulations and/or applicable laws and regulations of South Africa in force from time to time.

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State of Qatar (excluding the Qatar Financial Centre)

Each Manager has represented and agreed that it has not offered or sold, and will not offer or sell, directly or indirectly, any Further Notes in the State of Qatar, except (i) in compliance with all applicable laws and regulations of the State of Qatar and (ii) through persons or corporate entities authorised and licensed to provide investment advice and/or engage in brokerage activity and/or trade in respect of foreign securities in the State of Qatar. The Prospectus has not been reviewed or approved beforehand by the Qatar Central Bank or the Qatar Financial Markets Authority and is only intended for specific recipients in compliance with the foregoing.

Switzerland

Each Manager has represented and agreed that it will not publicly offer, as such term is defined or interpreted under the Swiss Code of Obligations, sell or advertise, directly or indirectly, the Further Notes in, into or from Switzerland and agrees and undertakes that it will not publicly distribute or otherwise make publicly available in Switzerland this Prospectus or any other offering or marketing material relating to the Further Notes.

This Prospectus is not intended to constitute an offer or solicitation to purchase or invest in the Further Notes described herein. The Further Notes may not be publicly offered, distributed, sold or advertised, directly or indirectly, in, into or from Switzerland and will not be listed on the SIX Swiss Exchange or on any other exchange or regulated trading facility in Switzerland. Neither this Prospectus nor any offering or marketing material relating to the Further Notes constitutes a prospectus as such term is understood pursuant to article 652a or article 1156 of the Swiss Code of Obligations or a listing prospectus within the meaning of the listing rules of the SIX Swiss Exchange or any other regulated trading facility in Switzerland or a simplified prospectus or a prospectus as such term is defined in the Swiss Collective Investment Schemes Act, and neither this Prospectus nor any other offering or marketing material relating to the Further Notes may be publicly distributed or otherwise made publicly available in Switzerland.

Neither this Prospectus nor any other offering or marketing material relating to the offering, the Issuer or the Further Notes has been or will be filed with or approved by any Swiss regulatory authority. The Further Notes are not subject to the supervision by any Swiss regulatory authority, e.g., Swiss Financial Markets Supervisory Authority FINMA, and investors in the Further Notes will not benefit from protection or supervision by such authority.

United Arab Emirates (excluding the Dubai International Financial Centre)

Each Manager has represented and agreed that the Further Notes have not been and will not be offered, sold or publicly promoted or advertised by it in the United Arab Emirates other than in compliance with any laws applicable in the United Arab Emirates governing the issue, offering and sale of securities.

General

No action has been taken by Kenya or any of the Managers that would, or is intended to, permit a public offer of the Further Notes in any country or jurisdiction where any such action for that purpose is required. Accordingly, each Manager has undertaken that it will not, directly or indirectly, offer or sell any Further Notes or distribute or publish any offering circular, Prospectus, form of application, advertisement or other document or information in any country or jurisdiction except under circumstances that will, to the best of its knowledge and belief, result in compliance with any applicable laws and regulations and all offers and sales of Further Notes by it will be made on the same terms.

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GENERAL INFORMATION

Contact Information

The address of the Republic of Kenya, acting through the National Treasury is: The National Treasury, Harambee Avenue, Nairobi, GPO 00100. The telephone number of Kenya is +254 20 225 2299.

Listing

Application has been made to the Irish Stock Exchange for the Further Notes to be admitted to the Official List and trading on the Main Securities Market. The listing of the Further Notes is expected to be granted on or around the Issue Date. The total expenses related to the admission to trading of the Further Notes are expected to be approximately 4,000 euros.

Arthur Cox Listing Services Limited is acting solely in its capacity as listing agent for the Issuer in relation to the Notes and is not itself seeking admission of the Further Notes to the Official List of the Irish Stock Exchange or to trading on the Main Securities Market of the Irish Stock Exchange.

In addition, the Issuer intends to make an application, after the Further Notes are issued, for the Further Notes to be listed on the Fixed Income Securities Market Segment of the Nairobi Securities Exchange. However, the Further Notes will not be traded on the Fixed Income Securities Market Segment of the Nairobi Securities Exchange, unless appropriate protocols are put in place after the Further Notes are issued.

Indication of Yield

Based upon a re-offer price of 103.524 per cent. of the principal amount of the 2019 Further Notes and a re-offer price of 107.041 per cent. of the principal amount of the 2024 Further Notes, the yield of the 2019 Further Notes is 5.000 per cent. and the yield of the 2024 Further Notes is 5.900 per cent., in each case on an annual basis. The yields are calculated at the Issue Date. They are not an indication of future yields.

Authorisations

Kenya has obtained all necessary consents, approvals and authorisations in connection with the issue and performance of its obligations under the Notes. The government’s power to borrow has been duly exercised in accordance with the PFMA.

Documents on Display

For so long as any Notes shall be outstanding, physical copies of: (i) Kenya’s budget for the current fiscal year and each of the fiscal years ended 30 June 2013 and 30 June 2012, (ii) the applicable Agency Agreement and (iii) the applicable Deed of Covenant may be inspected during normal business hours at the specified offices of the Fiscal Agent.

Clearing Systems

The Further Notes have been accepted for clearance through Euroclear, Clearstream, Luxembourg and DTC. The Unrestricted Further Global Notes have been accepted for clearance through Euroclear and Clearstream, Luxembourg under the Common Code No. 102895185 and the ISIN XS1028951850 for the 2019 Unrestricted Further Note and under Common Code No. 102895240 and the ISIN XS1028952403 for the 2024 Unrestricted Further Note. The Restricted Further Global Notes have been accepted for clearance through DTC. The CUSIP number is 491798 AF1, the ISIN is US491798AF18 and Common Code is 098266372 for the 2019 Restricted Further Global Note and the CUSIP number is 491798 AE4, the ISIN is US491798AE43 and Common Code is 098266429 for the 2024 Restricted Further Global Notes. The address of Euroclear is 1 Boulevard du Roi Albert II, B. 1210 Brussels, Belgium, the address of Clearstream, Luxembourg is Avenue J.F. Kennedy, L-1855, Luxembourg and the address of DTC is 55 Water Street, New York, NY, 10041, USA. The ISINs and CUSIP numbers assigned to the Further Global Notes are the same as those designated to the equivalent Original Notes in global form.

Litigation

Save as disclosed on page 31 under the heading Legal Proceedings, Kenya is not involved in, and has not been involved for 12 months prior to the date of this Prospectus in, any governmental, legal or arbitration proceedings which may have or have had in the recent past a significant effect on its financial position nor, so far as Kenya is aware, is any such proceeding pending or threatened.

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Material Change

Since the end of the last fiscal year on 30 June 2014, save for the reintroduction of capital gains tax, which will take effect on 1 January 2015, as described in the section “Public Finance—Revenues and Expenditures”, there has been no significant change in Kenya’s (a) tax and budgetary systems, (b) gross public debt or the maturity structure or currency of its outstanding debt and debt payment record (c) foreign trade and balance of payment figures (d) foreign exchange reserves including any potential encumbrances to such foreign exchange reserves as forward contracts or derivatives (e) financial position and resources including liquid deposits available in domestic currency and (f) income and expenditure figures.

Interest of Natural and Legal Persons

So far as the Issuer is aware, no person involved in the offer or the Further Notes has an interest material to the offer.

Managers transacting with the Issuer

Certain of the Managers and their affiliates have engaged, and may in the future engage in investment banking and/or commercial banking transactions with, and may perform services to, the Issuer and its affiliates in the ordinary course of business.

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ISSUER

Republic of Kenya, acting through the National Treasury The National Treasury P.O. Box 30007 GPO 00100 Harambee Avenue Nairobi, Kenya

JOINT LEAD MANAGERS AND JOINT BOOKRUNNERS

Barclays Bank PLC J.P. Morgan Securities plc Standard Bank Plc 5 The North Colonnade 25 Bank Street 20 Gresham Street Canary Wharf Canary Wharf London EC2V 7JE London E14 4BB London E14 5JP United Kingdom United Kingdom United Kingdom

FISCAL, TRANSFER AND PAYING AGENT REGISTRAR

Citibank, N.A., London Branch Citigroup Global Markets Deutschland AG Citigroup Centre Frankfurter Welle Canada Square Reuterweg 16 London E14 5LB Frankfurt am Main United Kingdom Germany

LEGAL ADVISERS

To Kenya as to English law and US law To Kenya as to Kenyan law

Dentons UKMEA LLP Dentons US LLP Anjarwalla & Khanna One Fleet Place 1221 Sixth Avenue ALN House, Eldama Ravine Gardens, London EC4M 7WS New York, New York 10020 Off Eldama Ravine Road, Westlands United Kingdom United States Nairobi, Kenya

To the Managers as to English and US law To the Managers as to Kenyan law

Freshfields Bruckhaus Deringer LLP Kaplan & Stratton 65 Fleet Street 9th Floor, Williamson House, London EC4Y 1HS P.O. Box 40111 United Kingdom Fourth Ngong Ave, Nairobi, Kenya

LISTING AGENT

Arthur Cox Listing Services Limited Earlsfort Centre Earlsfort Terrace Dublin 2, Ireland