Country Report

Kenya

September 2008

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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]

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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.

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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

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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 international 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.

Economic policy outlook

Policy trends With a new power-sharing regime in place, the government is expected to focus on policy and development: the budget for 2008/09 (July-June) and the new long-term strategy""Vision 2030""were both unveiled in June. Curbing runaway inflation while simultaneously facilitating recovery after post-election dislocation will remain a key short-term challenge. The first new budget under the grand coalition heralds a resumption of structural reforms after the election- related hiatus. Although the recent budget does not envisage any major sell-offs in 2008/09, the National Bank of Kenya is being lined up for privatisation, and there is a chance that additional shares will be sold in part-privatised firms, including KenGen and Safaricom. Investment in the transport, power and telecommunications network will be a key focus of the first five-year phase (July 2008-July 2013) of Vision 2030, which replaced the former Economic Recovery Strategy, on July 1st, as the government!s central policy framework. The coalition envisages a massive outlay of US$25bn in the first five years of the plan, in a range of key sectors, although it will be a struggle to secure enough funding. The continued prevalence of corruption will complicate relations with external financiers. There are no fundamental policy differences between the ODM and the PNU" both espouse free-market principles"but political feuding could hamper policy formulation and implementation, and there will be a new bout of policy paralysis if the coalition splits.

Fiscal policy Kenya!s budget is forecast to run a deficit of 5.3% of GDP in 2008/09, reflecting upward pressure on spending to accommodate post-election reconstruction, the resettlement of refugees, the enlarged cabinet, various new commissions of inquiry, higher wages, better service delivery and the rehabilitation of infrastructure. The deficit is the same as last year!s original budget projection,

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although the provisional final shortfall in 2007/08 is higher, at 6.1% of GDP, because of the election-related turmoil. The gap in 2007/08 was mostly funded by record privatisation inflows. The government may similarly struggle to meet its target in 2008/09, as slower economic growth will add uncertainty to the tax take, while the projected sale of infrastructure bonds worth KSh52bn (US$800m)"including KSh34bn from a debut international sovereign bond"is not certain to be a success. The global bond will not be issued until Kenya wins an upgrade from the international credit ratings agencies. Despite the formation of a unity government, more time will be needed to see if the coalition can work effectively. If the bonds fail to materialise, the government may be obliged to lift borrowing from domestic markets (from a projected 1.5% of GDP) or trim spending plans (with development outlays, as usual, being the most likely target). Alternatively, the government could embark on new privatisation, although the 2008/09 budget does not envisage any major sell-offs. Major tax rates were left unchanged in 2008/09"and there were some selected cuts" despite pressing revenue needs, in order not to choke off recovery.

Monetary policy Monetary policy will remain geared towards bringing underlying inflation (excluding food and energy prices) back below the official 5% target, although this ceiling has been breached for more than 12 consecutive months and climbed to a new high of 8.2% year on year in August, raising the threat of negative real interest rates. The new Monetary Policy Committee (MPC) of the Central Bank of Kenya (CBK) lifted the Central Bank Rate (CBR)"introduced in 2006 and reviewed every two months"by 25 basis points, to 9%, in June (the first change in ten months) in response to the upward creep in underlying inflation and temporary liquidity tightness linked to the recent Safaricom flotation. However, the MPC held the CBR at 9% in August, reflecting the official policy of keeping interest rates, and borrowing costs, as low as possible. Moreover, liquidity has rebounded, pushing up demand for Treasury securities and pushing down the key 91-day Treasury-bill rate"which is still the most closely watched"from 8.1% in July to 7.9% in August. However, we currently think that the MPC will be obliged to lift the CBR (by 25-50 basis points) in October and/or December owing to the strength of underlying inflation, which would put upward pressure on the interest-rate structure. Overall, we forecast that interest rates will be higher in 2008 than in 2007, but not by a large margin, before subsiding again in 2009.

Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2006 2007 2008 2009 Real GDP growth World 5.0 4.8 3.8 3.3 OECD 3.1 2.7 1.7 1.2 EU27 3.1 2.9 1.5 1.1 Exchange rates ¥:US$ 116.2 117.8 105.5 101.8 US$:€ 1.256 1.369 1.540 1.520 SDR:US$ 0.680 0.651 0.616 0.619

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International assumptions summary (% unless otherwise indicated) 2006 2007 2008 2009 Financial indicators € 3-month interbank rate 3.08 4.27 4.82 4.53 US$ 3-month Libor 5.19 5.30 2.84 2.99 Commodity prices Oil (Brent; US$/b) 65.4 72.7 110.0 91.0 Gold (US$/troy oz) 604.5 696.7 895.7 848.8 Tea (US$/kg) 1.9 2.1 2.4 2.3 Coffee (Arabica; US cents/lb) 114.4 123.5 137.5 105.8 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

We expect world GDP growth (on a purchasing power parity basis) to ease sharply in 2008-09, partly because of the US and EU slowdown. Growth in the key EU27 market is likely to subside to an average of 1.3% in 2008-09. The price outlook for Kenyan commodity exports is mixed: coffee and tea prices are forecast to rise in 2008 before subsiding in 2009. We now expect international oil prices to climb to US$110/barrel in 2008, to Kenya!s detriment as an importer, before dipping in 2009 as global demand eases.

Economic growth Real GDP growth is forecast to subside to 4.1% in 2008 (from 7% in 2007), owing to the violent disruption to the free flow of goods, labour and money in the first two months of the year following the disputed election. Tourism is suffering the most, with visitor numbers down by 46% year on year in the first five months, while tea production fell by 22% in the same period because of inclement weather. The economy has largely returned to normal after the political settlement, but not all the losses"estimated at KSh100bn"can be recouped. It will take at least a year for tourism to recover. Most internal refugees (mainly farm-workers and their families) have now been resettled, but food-crop planting was badly affected this year and is likely to lead to much lower maize output, despite the satisfactory main rains season. The settlement, nevertheless, means that growth is likely to be fairly buoyant in 2008, spurred by transport and communications, wholesale and retail trade, manufacturing, construction, and financial services. In 2009 real GDP growth is forecast to rise to 4.5% as the economy recovers from this year!s traumas. Public-sector investment in capital projects will rise, but constraints such as infrastructure bottlenecks and weak governance (including corruption) will remain. Drought and terrorism represent ongoing risks.

Inflation Consumer prices rose by 27.6% year on year in August, spurred by higher prices for food (which accounts for half of the consumer price index) and energy. Inflation is down from a recent 31.5% peak in May, but after falls in June and July because of cheaper food, climbed again in August as the recent rise in electricity tariffs took effect. Global oil prices appear to be falling, but higher power costs and the prospective poor harvest will continue to drive inflation, although the year-on-year rate is likely to subside. We now forecast that inflation will average 25.1% in 2008 (slightly lower than our previous projection), before declining to 7% in 2009, assuming no new oil- or food-price shocks and the maintenance of political normality.

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Exchange rates The Kenya shilling has weakened steadily since June, averaging KSh66.7:US$1 in June and KSh67.7:US$1 in August (1.1% weaker year on year). The decline stems from several factors, including the recent strengthening of the US dollar, worries about high inflation and the budget deficit, the fading of the boost from the Safaricom privatisation, a downturn in foreign-exchange inflows from tea and tourism, and higher demand for foreign currency to pay for costly imported oil. Foreign-exchange reserves dipped slightly from a recent peak of US$3.3bn in June to US$3.2bn at the end of August, and sentiment has softened. We expect the shilling to continue the current trend of gradual depreciation during the remainder of 2008, to average KSh66.9:US$1 for the year as a whole, before sliding further, to KSh71:US$1, in 2009. However, a faster decline is possible if the political situation deteriorates anew.

External sector Post-election unrest and disruption, although now dissipated, will have a negative impact on the external accounts in 2008, leading to slower growth in both exports and imports of goods and services. Trade will rebound, provided that the political settlement holds, but the damage already caused (and the downturn in tea production due to early-season drought) suggests that export growth in 2008 will be modest. The recovery in imports is likely to continue, given reconstruction needs and high oil prices. We now expect the services surplus to decline in 2008 because of the sharp fall in tourism inflows (which are unlikely to recover until 2009 at best). However, trends in current transfers, mainly remittances from the diaspora"which are roughly twice the size of tourism earnings"are likely to remain positive. We continue to forecast that the current- account deficit will rise to 5.3% of GDP in 2008. Exports are expected to grow faster in 2009, but imports will also continue to rise, spurred by GDP growth, which is likely to result in a wider trade deficit. Tourism earnings are likely to recover in 2009 (politics permitting), but the rebound could be constrained by slower growth in Europe, the main source of holidaymakers. On balance, we project that the current-account deficit will subside to 4.5% of GDP in 2009.

Forecast summary (% unless otherwise indicated) 2006 a 2007 a 2008b 2009b Real GDP growth 6.4 7.0 4.1 4.5 Industrial production growth 5.1 6.8 3.0 3.8 Gross agricultural production growth 4.4 2.3 4.2 4.5 Consumer price inflation (av) 14.5 9.7 25.1 7.0 Lending rate (av) 13.6 13.3 14.0 13.6 Government balance (% of GDP) -2.1 -3.7 c -5.4 -5.2 Exports of goods fob (US$ bn) 3.5 4.1 4.7 5.2 Imports of goods fob (US$ bn) 6.8 8.4 9.5 10.1 Current-account balance (US$ bn) -0.5 -1.1 -1.9 -1.7 Current-account balance (% of GDP) -2.1 -4.0 -5.3 -4.5 External debt (year-end; US$ bn) 6.4 6.7 c 6.8 6.9 Exchange rate KSh:US$ (av) 72.10 67.32 66.94 70.98 Exchange rate KSh:¥100 (av) 62.04 57.16 63.47 69.76 Exchange rate KSh:€ (year-end) 91.58 91.52 97.02 111.75 Exchange rate KSh:SDR (year-end) 104.4 100.0 102.2 120.8 a Actual. b Economist Intelligence Unit forecasts. c Economist Intelligence Unit estimates.

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Monthly review: September 2008 The political scene

PNU confronts internal The party of the president, Mwai Kibaki, the Party of National Unity (PNU)"the

divisions co-signatory of the post-election peace agreement to form a grand coalition with the Orange Democratic Movement (ODM)"is going through a testing period. A key challenge is to define the exact nature of the alliance, which com- prises 15 affiliates and was cobbled together in the run-up to last December!s poll, and especially whether or not the PNU should be opened to individual membership or remain a union of parties. A similar problem confronted the old National Rainbow Coalition (NARC), which brought Mr Kibaki to power in 2002: it was never properly resolved. Adding to the PNU!s sense of urgency, the new Political Parties Act that came into force on July 1st requires all parties to hold regular grassroots elections and to show a membership presence in each province (in return for the promise of public funding determined by strength in parliament). The PNU and its allies currently hold about half the seats in the 222-member parliament and the ODM the other half. In an attempt to strengthen the PNU in the run-up to the next election (due in 2012 at the latest), Mr Kibaki called on affiliate parties, in July, to disband and merge under the PNU umbrella. However, three parties, Narc-Kenya, Ford-Kenya and the Democratic Party, refused outright, while others, including the Kenya African National Union (KANU; led by the deputy prime minister, Uhuru Kenyatta), and ODM-Kenya (led by the vice-president, Kalonzo Musyoka) were wary. Part of the problem is that some parties want to keep their options open about who to support in the 2012 presidential election (when Mr Kibaki must retire, after two terms) but would effectively be obliged to back whoever emerged as the PNU standard-bearer if they lost their identities in the interim. To help to settle the impasse, the president named an inquiry team (led by the forestry minister, Noah Wekesa), which made a number of recommendations" including allowing both individual and party membership"that were subsequently adopted at a parliamentary group meeting in August. Opening the party to individual membership is a key element in complying with the Political Parties Act, otherwise the PNU could lose its official status. The parliamentary group, chaired by the president, also resolved to undertake a membership drive, hold grassroots elections in October and convene a national congress in November or December. However, this poses a potential challenge to affiliate parties, whose officials will not be allowed to stand for PNU posts and who may find their members being poached. Narc-Kenya, led by the justice minister, Martha Karua, is the most fiercely opposed and has threatened to sack any members who take part in PNU elections. Leaders of other key affiliates, especially KANU and ODM- Kenya, are, by contrast, taking an active part in the PNU!s restructuring, but it is not clear how this will affect their responsibilities to their existing parties. It is also doubtful if the PNU can function as both a distinct party and an umbrella group at the same time: further restructuring may be in prospect The ODM

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must, in addition, undertake grassroots elections under the new Act, and is also experiencing internal divisions, but is far more united than the PNU.

Economic policy

The monetary authorities keep The new Monetary Policy Committee (MPC) of the Central Bank of Kenya a key interest rate on hold (CBK) kept the Central Bank Rate (CBR) steady at 9% in early August after a 25-basis-point increase in June (July 2008, Economic policy). Some observers had expected another rise, owing to the persistence of high inflation and an upward trend in other rates, including the key 91-day Treasury-bill rate. How- ever, the MPC believed that the long delays in refunding over-subscribers to the Safaricom flotation in May were still contributing to tight liquidity in financial markets, but that this would dissipate soon, meaning that another rise in the CBR was not warranted. The Central Bank introduced the CBR in 2006 to set a new benchmark, instead of the 91-day T-bill rate (which is partly dependent on fiscal trends), although the latter remains the most closely watched. The MPC!s stance appears to have been appropriate, as diminishing liquidity constraints in August boosted demand for government securities (leading to oversubscriptions at weekly auctions, compared with under-subscriptions in June and July). This allowed the authorities to engineer a slide in T-bill rates, which may feed through into lower lending rates, in line with official policy of curbing borrowing costs. The 91-day T-bill rate hit a recent peak of 8.2% at the end of July, the highest since early 2006 (prompting many commercial banks to lift lending rates) but subsided gently thereafter, reaching 7.7% on August 28th.

Interest rates (%) 2008 Feb Mar Apr May Jun Jul Aug 91-day Treasury-bill rate 7.3 6.9 7.2 7.8 7.7 8.1 7.9

Sources: Central Bank of Kenya, Monthly Economic Review; Weekly Bulletin.

Although liquidity pressures have eased, the monetary authorities continue to confront high inflation. At the time of the MPC meeting in August, headline inflation had fallen for two consecutive months"from 31.5% year on year in May to 26.5% year on year in July"as food-price pressure (the main inflationary driver over the past year) subsided. However, inflation climbed again in August, to 27.6% year on year, after prices rose by 0.5% month on month (following falls in June and July) because of higher energy costs, reflecting the steep, 21% rise in electricity tariffs in July, which offset weaker global oil prices. Of particular concern, the rate of underlying inflation (excluding food and energy), which is the Central Bank!s preferred measure, rose to 8.2% year on year (and to 6.4% on a 12-month average basis) in August, breaching the 5% official ceiling for the 14th month in succession. With the CBR held at 9%, real interest rates have declined to a new low and, if underlying inflation continues to rise, may turn negative, which would discourage saving and promote borrowing, thus exacerbating the problem. The MPC may need to raise the CBR at its next meeting in October unless underlying inflation starts heading downwards.

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NBK is the next candidate for The government confirmed in August that the next privatisation target was the

privatisation National Bank of Kenya (NBK), Kenya!s sixth largest bank, which is now profitable but was, for many years, a loss-maker because of politically-driven lending. The IMF has been recommending a sell-off for several years. A new, two-phase restructuring, approved by the cabinet, would see the National Social Security Fund (NSSF) selling a 25% stake (out of the NSSF!s 48% holding) to a strategic investor, via an open tender, by mid-2009, to generate funds for expansion. The second phase calls for flotation on the Nairobi Stock Exchange of the NSSF!s remaining 23% stake, plus 17% out of the government!s current 22% stake during the 2009/10 financial year. This would leave the government with a 5% holding, with the rest in private hands. However, there are two problems that could delay or scupper the deal. One is that the NSSF is opposed to selling its stake and claims not to have been properly consulted. It is unclear whether the government can force the NSSF, which is ostensibly run by an independent board of trustees, to sell or not. The argument has sparked a power struggle between the government and the NSSF: the labour minister, John Munyes, appointed Fred Rabongo as the NSSF!s new chief executive officer at the end of August, effectively dismissing Rachael Lumbasyo, but the NSSF board, backed by the civil service chief, Francis Muthaura, has blocked the change, at least for now, citing procedural flaws. A second potential problem is that a 25% share is a relatively small stake to offer a strategic investor, and although there is undoubtedly interest in the local banking sector (as evidenced by the recent merger of South Africa!s Stanbic and CFC banks, and Togo-based Ecobank!s takeover of EABS Bank"July 2008, Economic performance), prospective partners are likely to press for a bigger holding. Investors will nevertheless be drawn by NBK!s growing profitability: pre-tax profits jumped by 46% year on year in the first half of 2008 to KSh902m (US$13m)"after rising by 72% year on year to KSh1.61bn (US$23m) in full-year 2007"while provisions for bad debts fell by 31% to KSh240m. The NBK!s bad debt burden fell sharply in mid-2007 after the government converted KSh20bn in non-performing loans owed by parastatals into Treasury bonds.

Planned implementation of The minister of industrialisation, Henry Kosgey, has postponed the planned

new standards is delayed implementation of new standardisation marks for manufactured and imported products until March 1st 2009, from October 1st 2008 (after an earlier three- month delay), in response to calls from business to be given more time to comply. The marks, administered by the Kenya Bureau of Standards (Kebs), are designed to protect consumers and will have to be carried by all relevant products. Negotiations reached deadlock in mid-August, but a technical committee comprising the government, the Kenyan Association of Manufacturers and trade unions managed to reach consensus two weeks later. Mr Kosgey explained that the extra time would allow businesses to prepare for Christmas and clear existing stocks before the new standards are applied. The standardisation marks will have mixed consequences for business. They will certainly add to costs: manufacturers of fewer than ten products will pay KSh7,500 (US$107) per product per year, those producing ten or more will pay KSh5,000 (US$71) per product per year, and both groups will pay a KSh20,000

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(US$285) initial fee. Kebs plans to convene a special technical committee to clarify the situation with regard to soft drinks. Import standardisation marks (ISMs), which will apply to all products that "impact on health and safety" (such as food, electrical goods and toys) will be free, however. On the plus side, the scheme may see a reduction in the supply of, and demand for, counterfeit and sub-standard imports.

Economic performance

Standard and Poor's believes Standard & Poor!s (S&P), an international ratings agency, handed Kenya a small

Kenya's prospects are brighter vote of confidence in August by revising the country!s outlook from "stable" to "positive". This reflects, says the company, the formation of a grand coalition government in April following serious post-election unrest, the pick-up in economic growth, the maintenance of relatively prudent macroeconomic policies and the prospect of further structural reforms. S&P earlier lifted the outlook from "negative" to "stable" in March. However, the agency did not reverse the downgrade of Kenya!s long-term and short-term foreign currency credit ratings, which were cut from "B+" to "B" in February. S&P notes that, to warrant an upgrade, Kenya needs to enjoy a period of stable government, display "policy cogency" and keep the fiscal deficit under control. The outlook could be revised downwards again if political instability and civil violence return.

The Co-operative Bank plans The Co-operative Bank, a top-ten bank, plans to launch a KSh10bn initial public

an initial public offering offering (IPO) on the Nairobi Stock Exchange (NSE) on October 17th, the largest ever by a private firm in Kenya, to raise funds for expansion. To meet listing rules, the bank transformed in July from a co-operatively-owned venture into a limited liability company (The Co-operative Bank of Kenya Ltd), with 77% of the equity held by Co-op Holdings Co-operative Society (CHCS; representing 3,805 co-operative members) and 23% by individual members. The planned listing took another step forward in August after the Treasury granted the bank certain exemptions from disclosure rules in order to avoid the administrative headache of listing all 7m shareholders. The bank is also exempt from the bar on single shareholders owning more than a 25% stake in a bank, in order to accommodate the newly formed CHCS. The IPO still requires the approval of the capital markets authority and the NSE. Barring hitches, the offer will be the second-largest ever in Kenya, behind the Safaricom flotation in May, which raised KSh51bn (US$728m) for the government. However, the Co-operative Bank float, being one-fifth the size, is unlikely to cause the same liquidity disruptions as Safaricom. The details of the IPO remain to be finalised, but the bank will offer small investors a minimum guaranteed allocation in the event of oversubscription. Boosting the IPO!s likely appeal, the bank recently announced a 50% year-on-year rise in pre-tax profits to KSh1.68bn in the first half of 2008, which follows an 85% year-on-year rise to KSh2.32bn in 2007.

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Higher first-half pre-tax profits reflected the broad trend in the sector, which emerged largely unscathed from post-election dislocation, although not all banks gained equally. Barclays (Kenya), the country!s largest by assets, posted a 21% year-on-year first-half profit rise to KSh4.3bn, but Standard Chartered (Kenya), the second largest, had to be content with a 1% rise to KSh2.3bn. Kenya Commercial Bank, the third largest (up by 69% to KSh3.5bn), and the fast-growing Equity Bank (up by 200% to KSh3.1bn) were among the biggest gainers. On bad debts, the CBK reports that non-performing loans dipped to 7.3% of total loans (net of interest suspended) in May 2008, from 13.4% a year earlier, and that the absolute level of bad debt fell to KSh43.4bn from KSh63.3bn over the period.

Rift Valley Railways The concessioning of the Kenya and Uganda railways in 2006 (February 2007, restructures The domestic economy: Transport) was intended to revive the antiquated and moribund network, but the new operator, Rift Valley Railways (RVR), led by Sheltham (South Africa), has struggled to bring about improvements and is in danger of losing its 25-year concession. The government, following a review in mid-2008, was minded to terminate the deal owing to RVR!s failure to meet a string of conditions, including making payments and achieving a minimum level of investment, although a compromise seems to have been reached. The Economic Survey, 2008 of the Ministry of Planning, National Development and Vision 2030 suggests that RVR performed relatively well on cargo handled, at least in Kenya if not in Uganda, with volumes up by 22% to 2.3m tonnes in 2007, but that politically sensitive passenger services, for which RVR has a five- year concession, declined. Moreover, all services have deteriorated in 2008, partly because of the destruction of railway infrastructure during post-election unrest in Kenya, but RVR has lacked funds to effect a recovery. RVR blamed its problems on the failure of development finance institutions"including the International Finance Corporation (IFC; the private-sector arm of the World Bank)"to disburse promised funding of US$64m, but the agencies lost confidence because of RVR!s poor management record to date.

Rail traffic 2004 2005 2006 2007 Freight cargo ('000 tonnes) 1,890 2,000 1,891 2,304 % change year on year -5.5 5.8 5.4 21.8 Passenger services (km m) 279 489 369 148 % change year on year -5.4 75.3 -24.5 -47.0

Source: Ministry of Planning, National Development and Vision 2030, Economic Survey, 2008.

RVR shareholders, fearful of losing the concession, embarked on major restructuring in August, forcing out the managing director, Roy Puffet (Sheltham), and appointing an Australian firm, Toll, (following a competitive tender) to take charge of management under a new chief executive officer, Kevin Whiteway. In addition, Brown Ondego, the former boss of the Kenya Ports Authority, was named executive chairman of RVR and the main public spokesman. These changes follow another overhaul in July, when Sheltham was obliged to cut its share in RVR from 60% to 35%, to accommodate Kenya!s Prime Fuels (15%) and Tanzania!s Mirambo (10%), which had both been part of

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the original RVR consortium in 2006 but which had been squeezed out by Sheltham. The dispute went to arbitration in London, which ruled against Sheltham. Other RVR shareholders include a local venture-capital group, Transcentury (20%), which played a key role in the restructuring, Kenya!s Centum (10%) and Australia!s Babcock & Brown (10%). The government has given initial approval to the reformed RVR, earning the firm another chance, but RVR must inject KSh2.8bn (US$40m) in new capital by the end of October or the concession may be forfeited. Development finance institutions have endorsed the restructuring but will probably want RVR to develop a better track record before disbursing funds, leaving shareholders to raise the necessary capital in time.

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Data and charts Annual data and forecast

Production to remove 2003a 2004a 2005a 2006a 2007 a 2008b 2009b GDP Nominal GDP (US$ m) 14,987 16,249 19,132 22,779 27,584 35,798 37,526 Nominal GDP (KSh bn) 1,138.1 1,286.5 1,445.5 1,642.4 1,856.9 2,396.3 2,663.7 Real GDP growth (%) 2.9 5.1 5.8 6.4 7.0 4.1 4.5 Expenditure on GDP (% real change) Private consumption 2.2 2.4 6.4 7.6 7.3 4.0 2.5 Government consumption 6.0 0.6 -0.6 1.5 7.2 8.0 8.5 Gross fixed investment -8.0 7.3 27.8 18.5 13.3 7.8 8.5 Exports of goods & services 7.2 12.8 9.7 3.4 6.0 4.5 3.5 Imports of goods & services -0.1 12.3 15.0 18.2 12.7 9.0 5.0 Origin of GDP (% real change) Agriculture 2.4 1.7 6.9 4.4 2.3 4.2 4.5 Industry 6.2 4.2 4.4 5.1 6.8 3.0 3.8 Services 2.3 6.9 5.7 7.6 9.0 4.3 4.6 Population and income Population (m) 33.8 34.7 35.6 36.6 37.5 38.6 39.6 GDP per head (US$ at PPP) 1,239 1,272 1,375 1,470 1,572 1,629 1,695 Fiscal indicators (% of GDP) Central government revenuec 20.8 22.3 22.3 21.9 22.8 d 21.8 22.2 Central government expenditure 24.1 22.7 22.2 24.0 26.5 d 27.2 27.5 Central government balance -3.3 -0.4 0.1 -2.1 -3.7 d -5.4 -5.2 Public debt 65.1 60.9 51.5 46.3 48.7 d 52.1 50.2 Prices and financial indicators Exchange rate KSh:US$ (end-period) 76.14 77.34 72.37 69.40 62.68 63.00 75.00 Exchange rate KSh:€ (end-period) 96.04 104.71 85.36 91.58 91.52 97.02 111.75 Consumer prices (end-period; %) 8.4 16.2 7.6 15.6 9.6 22.0 9.0 Stock of money M1 (% change) 29.5 8.4 10.3 26.4 27.4 42.0 25.6 Stock of money M2 (% change) 11.9 13.7 10.0 18.0 18.5 25.2 16.7 Lending interest rate (av; %) 16.6 12.5 12.9 13.6 13.3 14.0 13.6 Current account (US$ m) Trade balance -1,156 -1,625 -2,140 -3,253 -4,258 -4,742 -4,880 Goods: exports fob 2,412 2,726 3,462 3,516 4,123 4,743 5,195 Goods: imports fob -3,569 -4,351 -5,602 -6,770 -8,381 -9,485 -10,074 Services balance 507 617 743 1,060 1,240 1,121 1,314 Income balance -89 -127 -108 -70 -192 -257 -268 Current transfers balance 870 1,002 1,253 1,785 2,108 1,985 2,150 Current-account balance 133 -132 -252 -479 -1,102 -1,893 -1,683 External debt (US$ m) Debt stock 6,869 6,914 6,434 6,381 6,699 d 6,840 6,884 Debt service paid 579 356 538 433 363 d 346 378 Principal repayments 446 271 447 340 248 d 224 249 Interest 133 85 91 94 115 d 122 129 International reserves (US$ m) Total international reserves 1,482 1,520 1,799 2,416 3,355 3,116 3,401 a Actual. b Economist Intelligence Unit forecasts. c Period is fiscal year. d Economist Intelligence Unit estimate. Source: IMF, International Financial Statistics.

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Quarterly data

Production to remove 2006 2007 2008 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Central government finance (KSh m) Revenue & grants 77,730 92,425 98,842 123,528 99,255 n/a n/a n/a Expenditure & net lending 97,584 108,920 97,339 122,675 102,086 n/a n/a n/a Balance -19,854 -16,495 1,503 853 -2,831 n/a n/a n/a Prices Consumer prices (2000=100) 162.7 169.7 180.2 180.1 183.1 189.2 189.2 189.2 Consumer prices (% change, year on year) 11.8 15.3 7.4 7.7 12.6 11.5 5.0 5.0 Financial indicators Exchange rate KSh:US$ (av) 73.13 71.02 69.60 67.45 67.01 65.21 67.83 n/a Exchange rate KSh:US$ (end-period) 72.68 69.40 68.78 66.56 66.97 62.68 62.85 n/a Deposit rate (av; %) 4.85 4.98 5.16 5.10 5.29 5.11 5.14 n/a Lending rate (av; %) 13.63 13.89 13.66 13.32 13.07 13.32 13.89 n/a Treasury-bill rate (av; %) 6.16 6.20 6.26 6.70 n/a n/a n/a n/a M1 (end-period; KSh bn) 266.1 291.7 295.1 339.2 350.1 371.8 378.7 n/a M1 (% change, year on year) 20.5 26.4 21.8 31.8 31.6 27.4 28.3 n/a M2 (end-period; KSh bn) 620.9 645.6 669.5 699.4 723.6 765.0 800.6 n/a M2 (% change, year on year) 17.9 18.0 17.6 17.7 16.6 18.5 19.6 n/a Stockmarket NSE 20 (1996=100) 4,880 5,646 5,134 5,147 5,146 5,445 4,843 5,186 Stockmarket index (% change, year on year) 27.3 42.1 25.2 20.8 5.5 -3.6 -5.7 0.8 Foreign trade (KSh m) Exports fob 68,072 62,388 68,607 68,325 68,840 68,824 83,196 80,236 Imports cif 133,920 142,053 151,039 145,290 154,255 154,539 175,593 161,620 Trade balance -65,849 -79,665 -82,432 -76,964 -85,415 -85,715 -92,397 -81,384 Foreign reserves (US$ m) Reserves excl gold (end-period) 2,403 2,416 2,590 2,723 2,821 3,355 3,422 n/a

Sources: IMF, International Financial Statistics; Central Bank of Kenya, Monthly Economic Review; Bloomberg.

Monthly Report September 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008 16 Kenya

Monthly data

Production to remove Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Exchange rate KSh:US$ (av) 2006 72.21 71.80 72.28 71.30 71.76 73.41 73.66 72.87 72.87 72.29 71.13 69.63 2007 69.88 69.62 69.29 68.58 67.19 66.57 67.07 66.95 67.02 66.85 65.49 63.30 2008 68.08 70.50 64.92 62.26 n/a n/a n/a n/a n/a n/a n/a n/a Exchange rate KSh:US$ (end-period) 2006 71.98 73.20 71.87 71.16 72.27 73.88 73.62 72.62 72.68 72.02 69.95 69.40 2007 70.54 69.73 68.78 68.31 66.97 66.56 67.51 66.99 66.97 67.10 64.42 62.68 2008 70.56 68.98 62.85 62.14 n/a n/a n/a n/a n/a n/a n/a n/a Central government revenue (KSh m) 2006 34,905 20,988 28,029 24,615 33,069 47,773 22,910 24,988 29,832 30,134 29,452 32,839 2007 31,328 30,723 36,791 36,459 34,679 52,390 34,172 31,792 33,291 n/a n/a n/a 2008 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Central government expenditure (KSh m) 2006 29,689 26,908 35,689 23,128 37,114 43,468 34,197 34,860 28,527 39,790 36,616 32,514 2007 26,156 38,111 33,072 32,349 31,678 58,648 29,296 40,316 32,474 n/a n/a n/a 2008 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Central government balance (KSh m) 2006 5,216 -5,920 -7,660 1,487 -4,045 4,305 -11,287 -9,872 1,305 -9,656 -7,164 325 2007 5,172 -7,388 3,719 4,110 3,001 -6,258 4,876 -8,524 817 n/a n/a n/a 2008 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a M1 (% change, year on year) 2006 14.3 17.9 17.3 26.8 21.7 18.6 18.5 17.0 20.5 23.3 25.2 26.4 2007 23.0 21.9 21.8 11.2 29.3 31.8 28.6 33.7 31.6 25.1 26.8 27.4 2008 29.3 30.9 28.3 31.9 n/a n/a n/a n/a n/a n/a n/a n/a M2 (% change, year on year) 2006 10.9 12.4 12.4 16.4 15.7 17.2 18.6 16.1 17.9 18.2 17.8 18.0 2007 18.1 16.6 17.6 14.4 16.4 17.7 14.6 17.6 16.6 15.6 15.7 18.5 2008 22.2 23.0 19.6 21.1 n/a n/a n/a n/a n/a n/a n/a n/a Deposit rate (end-period; %) 2006 5.6 5.5 5.7 5.3 5.0 5.0 5.1 4.8 4.7 4.9 4.9 5.1 2007 5.2 5.1 5.2 5.1 5.1 5.1 5.2 5.3 5.3 5.1 5.1 5.2 2008 5.1 5.1 5.2 5.1 n/a n/a n/a n/a n/a n/a n/a n/a Lending rate (end-period; %) 2006 13.2 13.3 13.3 13.5 14.0 13.8 13.7 13.6 13.5 14.0 13.9 13.7 2007 13.8 13.6 13.6 13.4 13.4 13.1 13.3 13.0 12.9 13.2 13.4 13.3 2008 13.8 13.8 14.1 13.9 n/a n/a n/a n/a n/a n/a n/a n/a Stockmarket NSE 20 (1996=100) 2006 4,172 4,057 4,102 4,025 4,350 4,260 4,259 4,486 4,880 5,314 5,615 5,646 2007 5,774 5,387 5,134 5,199 5,002 5,147 5,340 5,372 5,146 4,971 5,235 5,445 2008 4,713 5,072 4,843 5,336 5,176 5,186 4,868 n/a n/a n/a n/a n/a Consumer prices (av; % change, year on year) 2006 15.4 18.8 19.1 14.9 13.1 10.9 10.2 11.5 13.8 15.6 14.6 15.6 2007 9.7 6.8 5.9 5.6 6.4 11.1 13.5 12.4 11.7 10.6 11.8 12.0 2008 18.2 19.1 21.8 26.6 31.5 n/a n/a n/a n/a n/a n/a n/a Goods exports fob (KSh m) 2006 17,178 18,040 21,124 17,909 21,400 21,789 23,208 23,309 21,555 19,910 22,852 19,626 2007 20,878 24,217 23,513 20,467 25,044 22,814 23,685 23,891 21,264 24,684 26,074 18,066 2008 23,754 32,327 27,115 29,186 25,740 25,310 n/a n/a n/a n/a n/a n/a

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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Goods imports cif (KSh m) 2006 39,630 38,542 40,698 47,275 42,434 42,310 39,870 49,881 44,169 47,887 49,152 45,014 2007 48,294 56,917 45,827 43,589 51,499 50,201 53,191 52,604 48,460 59,050 57,732 37,757 2008 64,341 58,051 53,201 54,785 56,877 49,957 n/a n/a n/a n/a n/a n/a Trade balance fob-cif (KSh m) 2006 -22,452 -20,503 -19,573 -29,366 -21,034 -20,521 -16,663 -26,573 -22,613 -27,977 -26,300 -25,388 2007 -27,417 -32,701 -22,315 -23,123 -26,455 -27,387 -29,506 -28,713 -27,196 -34,366 -31,658 -19,691 2008 -40,587 -25,724 -26,085 -25,599 -31,138 -24,647 n/a n/a n/a n/a n/a n/a Foreign-exchange reserves excl gold (US$ m) 2006 1,929 1,919 1,982 2,124 2,162 2,353 2,432 2,431 2,403 2,401 2,441 2,416 2007 2,466 2,501 2,590 2,685 2,683 2,723 2,809 2,780 2,820 2,854 2,972 3,355 2008 3,523 3,461 3,422 3,391 n/a n/a n/a n/a n/a n/a n/a n/a

Sources: IMF, International Financial Statistics; Haver Analytics.

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Annual trends charts

Production to remove Annual trends charts

Real GDP growth Consumer price inflation (% change) (av; %)

Kenya Sub-Saharan Africa World Kenya Sub-Saharan Africa World 7.5 30.0

6.5 25.0

5.5 20.0

4.5 15.0

3.5 10.0

2.5 5.0

1.5 0.0 2003 04 05 06 07 08 09 2003 04 05 06 07 08 09

Source: Economist Intelligence Unit. Source: Economist Intelligence Unit.

Public debt Current-account balance (% of GDP) (% of GDP)

Kenya Sub-Saharan Africa World Kenya Sub-Saharan Africa 70.0 4.0 3.0 60.0 2.0 50.0 1.0 40.0 0.0 -1.0 30.0 -2.0 20.0 -3.0 -4.0 10.0 -5.0 0.0 -6.0 2003 04 05 06 07 08 09 2003 04 05 06 07 08 09

Source: Economist Intelligence Unit. Source: Economist Intelligence Unit.

Main destinations of exports, 2007 Main origins of imports, 2007 (share of total) (share of total)

Other Uganda Other UAE 57.2% 16.6% 62.6% 11.0%

Saudi Arabia 10.1% UK 9.8% South Africa 8.6% US 8.3% US 7.7%

Netherlands 8.0%

Source: Economist Intelligence Unit. Source: Economist Intelligence Unit.

Monthly trends charts

Production to remove Monthly trends charts

Exchange rate Consumer price inflation (KSh:US$; av) (% change, year on year)

80.0 35.0 78.0 30.0 76.0 74.0 25.0 72.0 20.0 70.0 68.0 15.0 66.0 10.0 64.0 5.0 62.0 60.0 0.0 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr 2005 06 07 08 2005 06 07 08 Source: Economist Intelligence Unit. Source: Economist Intelligence Unit.

Government finances Interest rates (KSh m) (av; %)

Expenditure Revenue Balance Deposit rate Lending rate 60,000 16.0 50,000 14.0

40,000 12.0 30,000 10.0 20,000 8.0 10,000 6.0 0 -10,000 4.0 -20,000 2.0 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr 2005 06 07 2005 06 07 08 Source: Economist Intelligence Unit. Source: Economist Intelligence Unit.

Foreign trade Foreign-exchange reserves (US$ m; goods only) (US$ m)

Exports Imports Balance 4,000 80,000 3,500 60,000

40,000 3,000

20,000 2,500 0 2,000 -20,000 1,500 -40,000

-60,000 1,000 Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr 2005 06 07 08 2005 06 07 08

Source: Economist Intelligence Unit. Source: Economist Intelligence Unit.

Country snapshot Political structure

Official name Republic of Kenya

Form of state Unitary republic

Legal system Based on English common law and the 1963 constitution; new draft constitutions were published in 2002 and 2005 (the latter was rejected in a referendum)

National legislature Unicameral National Assembly of 210 elected members plus 12 nominated members, the attorney-general and the speaker; a multiparty system was introduced in December 1991

National elections December 2007; next presidential and legislative elections are to be held in December 2012

Head of state President, directly elected by simple majority and at least 25% of the vote in five of Kenya!s eight provinces

National government The president and his cabinet, comprising a grand coalition between the Party of National Unity (PNU) and the Orange Democratic Movement (ODM), and allied parties

Political parties in parliament Orange Democratic Movement (ODM), Party of National Unity (PNU), ODM-Kenya (ODM-K), Kenya African National Union (KANU), Safina, National Rainbow Coalition- Kenya (NARC-Kenya), National Rainbow Coalition (NARC), Democratic Party, Forum for the Restoration of Democracy-Kenya (Ford-Kenya), New Ford-Kenya, Ford-People, Ford- Asili, Sisi Kwa Sisi, Mazingira

President & commander-in-chief Emilio Mwai Kibaki (PNU) Vice-president & home affairs Kalonzo Musyoka (ODM-K) Prime minister Raila Odinga (ODM) Deputy prime minister & trade Uhuru Kenyatta (PNU) Deputy prime minister & local government Musalia Mudavadi (ODM)

Key ministers Agriculture William Ruto (ODM) Co-operative development Joseph Nyaga (ODM) Defence Yusuf Mohamed Haji (PNU) Education Sam Ongeri (PNU) Energy Kiraitu Murungi (PNU) Finance John Michuki (PNU), acting Foreign affairs Moses Wetangula (PNU) Information & communication Samuel Lesuron Poghisio (PNU) Internal security George Saitoti (PNU) Justice & constitutional affairs Martha Karua (PNU) Labour John Munyes (PNU) Land James Orengo (ODM) Medical services Anyang Nyong!o (ODM) Planning, National Development & Vision 2030 Wycliffe Ambetsa Oparanya (ODM) Roads Chris Obure (ODM), acting To u r i s m Najib Balala (ODM) Transport Chirau Ali Mwakwere (PNU) Water & irrigation Charity Ngilu (ODM)

Central Bank governor Njuguna Ndung!u