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Country Report Kenya September 2008 Economist Intelligence Unit 26 Red Lion Square London WC1R 4HQ United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For 60 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where the latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group. London New York Hong Kong The Economist Intelligence Unit The Economist Intelligence Unit The Economist Intelligence Unit 26 Red Lion Square The Economist Building 60/F, Central Plaza London 111 West 57th Street 18 Harbour Road WC1R 4HQ New York Wanchai United Kingdom NY 10019, US Hong Kong Tel: (44.20) 7576 8000 Tel: (1.212) 554 0600 Tel: (852) 2585 3888 Fax: (44.20) 7576 8500 Fax: (1.212) 586 0248 Fax: (852) 2802 7638 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected] Website: www.eiu.com Electronic delivery This publication can be viewed by subscribing online at www.store.eiu.com. Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, online databases and as direct feeds to corporate intranets. For further information, please contact your nearest Economist Intelligence Unit office. Copyright © 2008 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author's and the publisher's ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it. ISSN 0269-4239 Symbols for tables "n/a" means not available; "–" means not applicable Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK. Kenya 1 Kenya Executive summary 2 Highlights Outlook for 2008-09 3 Political outlook 4 Economic policy outlook 5 Economic forecast Monthly review: September 2008 8 The political scene 9 Economic policy 11 Economic performance Data and charts 14 Annual data and forecast 15 Quarterly data 16 Monthly data 18 Annual trends charts 19 Monthly trends charts Country snapshot 20 Political structure Editors: Pratibha Thaker (editor); Christopher Eads (consulting editor) Editorial closing date: September 8th 2008 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected] Next report: To request the latest schedule, e-mail [email protected] Monthly Report September 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008 2 Kenya Executive summary Highlights September 2008 Outlook for 2008-09 • Kenya!s new broad-based coalition government is now in place, with Mwai Kibaki as president and his main rival, Raila Odinga, as prime minister, but a new bout of in-fighting cannot be discounted. • The new government will refocus on structural reforms, including privatisation and deregulation. However, political feuding could hamper policy implementation, and corruption will remain a challenge. • Real GDP growth is expected to subside to 4.1% in 2008, owing to post- election disruption in the early part of the year and a sharp fall in tourism, before rebounding slightly to 4.5% in 2009. • Inflation is expected to soar to 25.1% in 2008 owing to the sustained rise in food and energy prices, but will subside to 7% in 2009 assuming no new oil- or food-price shocks and the maintenance of political normality. • The current-account deficit is forecast to widen to 5.3% of GDP in 2008, owing to disruption to trade and a sharp fall in tourism receipts, before easing to 4.5% of GDP in 2009. Monthly review • Mr Kibaki!s Party of National Unity (PNU) is being restructured to allow for individual membership and grassroots elections, but the process is causing tension among some member parties that fear losing their distinct identity. • The Central Bank of Kenya!s Monetary Policy Committee held the Central Bank Rate at 9% in August, while the key 91-day Treasury-bill rate retreated as liquidity tightness caused by the Safaricom flotation dissipated. • The National Bank of Kenya is the next privatisation target. A strategic investor will be offered a 25% share, followed by a flotation of 40% on the stock exchange. However, opposition from the NSSF could cause delay. • The government has given manufacturers and importers until March 1st 2009 to comply with new certification requirements being administered by the Kenya Bureau of Standards in the interests of consumer protection. • Inflation climbed to 27.6% year on year in August, spurred by a rise in electricity tariffs. Underlying inflation rose to 8.2% year on year, confronting the authorities with the prospect of negative real rates. • Rift Valley Railways, the private railway operator, has restructured ownership and management in an attempt to keep their concession, after failing to meet conditions. Monthly Report September 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008 Kenya 3 Outlook for 2008-09 Political outlook Domestic politics A broad-based government of national unity, a grand coalition between the Party of National Unity (PNU), led by the president, Mwai Kibaki, and the Orange Democratic Movement (ODM), led by the prime minister, Raila Odinga, was formed in April, pulling Kenya back from the brink of renewed violence after the disputed election. Several hurdles have been overcome but significant challenges remain. There is a mood of cautious optimism at present, and the ODM will inject fresh vigour into the administration, but the coalition faces a number of potential pitfalls. There is a danger that the new administration will mimic the previous one" also an alliance between Mr Kibaki and Mr Odinga, until they split in 2005, although their power relationship has changed. Mr Odinga is now in a far stronger position, having achieved his long-cherished aim of being prime minister (a post abolished in 1964) with the executive authority to "co-ordinate and supervise the execution of government functions". He cannot be sacked by the president, only by parliament, under the terms of the power-sharing deal. Nevertheless, the PNU has managed to retain most of the key ministries, even though parliamentary forces are evenly balanced. Arguments over Mr Odinga!s exact role and his position in the leadership hierarchy will persist. His relationship with the vice-president, Kalonzo Musyoka (the leader of the Orange Democratic Movement-Kenya"ODM-K), who allied himself with Mr Kibaki after the December poll and is ostensibly the "leader of government business" in parliament, could be the most problematic. Mr Musyoka will be the nominal second-in-command to the president, but Mr Odinga will wield greater political power. The grand coalition is scheduled to last until 2012, but there is no certainty that it will, given the obstacles that lie ahead and the likely battle for influence. Dealing with corruption will be a major challenge. The recent suspension of the finance minister, Amos Kimunya, because of alleged graft offers hope of a new commitment to tackle the scourge, but there is also a danger that the ODM and the PNU will use alleged corruption simply to score political points. A second massive challenge is posed by ongoing negotiations over fundamental issues such as land reform and a new constitution. Kenya is supposed to have a new constitution within a year, and the ODM will prioritise this, but the timescale seems over-ambitious and could spark major disagreements. The ODM will press for a fundamental overhaul, covering the presidency, parliament, regions and local councils"with the aim of spreading power"and will take advantage of having a sympathetic parliamentary speaker (elected from the ranks of the ODM) to pursue this agenda. Meanwhile, Mr Kibaki and his advisers will resist a significant transfer of authority. The power-sharing arrangement makes no provision for another election"the Kriegler inquiry into the December poll may change electoral practice but will not change the outcome"but the grand coalition will collapse if either side Monthly Report September 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008 4 Kenya formally pulls out: realistically, this applies only to the ODM. This would be a dangerous development and would lead to calls for a fresh election, with all the attendant risks. The Economist Intelligence Unit currently believes that the coalition will hold during the forecast period (if not until 2012), despite the inevitable arguments that lie ahead, because, from the perspective of both sides, a share of power is better than having no power at all. It is to be hoped that all Kenyan politicians, having witnessed the prospect of national meltdown"against their expectations"will be more watchful in future. International relations The emergence of a grand coalition government will improve Kenya!s inter- national standing and lift the threat of targeted sanctions (such as travel bans) by the West. The receipt of substantial donor assistance will, however, depend on Kenya reviving the fight against corruption. The power-sharing deal has been widely welcomed and serves as a possible model for conflict-riven African states, although the gains will be lost if the deal unravels. Kenya!s rediscovered credibility will come as a relief to neighbouring countries that rely on local business and transport networks, and will boost efforts towards regional integration, especially within the East African Community.