Country Report 1St Quarter 2000 © the Economist Intelligence Unit Limited 2000

COUNTRY REPORT

Kenya

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1st quarter 2000

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Contents

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2000-01

11 The political scene

17 Economic policy

20 The domestic economy 21 Finance 23 Agriculture 26 Infrastructure and services

28 Foreign trade and payments

31 Trade data

List of tables

7 Forecast summary 18 Government budget outturn, Jul-Dec 19 Government domestic debt 20 Gross domestic product 20 Monetary indicators 29 Balance of payments 29 Foreign debt 31 Foreign trade

List of figures

11 Gross domestic product 11 Kenya shilling real exchange rates 20 Inflation and interest rates 23 Nairobi Stock Exchange Index

EIU Country Report 1st quarter 2000 © The Economist Intelligence Unit Limited 2000 . Kenya 3

March 8th 2000 Summary

1st quarter 2000

Outlook for 2000-01 The debate over who will succeed the president, Daniel arap Moi, is expected to intensify as rival factions jockey for position in the run-up to national party elections, tentatively scheduled for later in 2000. The stalled constitutional review process will remain central to the succession race. The campaign against corruption will continue to suffer setbacks. Insecurity is likely to increase as the general election approaches. The IMF will remain cautious about resuming aid. An improvement in fiscal discipline will be hampered by delays in reforming the civil service. Economic performance will remain poor in 2000. Real GDP is forecast to recover to 4.1% in 2001, largely because of the resumption of IMF funds, stronger growth in agriculture and manufacturing, and continuing growth in tourism. Weak export prices for the country’s major commodities and higher imports will return the overall current account to a deficit of 1.7% of GDP in 2000 and 2.4% of GDP in 2001.

The political scene The president has announced that KANU national elections will be held in 2000. KANU “B” has emerged as the strongest faction; the vice-president, George Saitoti, is the current front-runner to succeed President Moi. The opposition has failed to take advantage of the disputes within KANU. The constitutional review process has stalled. The campaign against corruption has continued, with an investigation into Nairobi City Council. Insecurity has increased: there have been violent killings and cattle-rustling in many districts.

Economic policy The IMF has given no indication of when funding might resume, but is likely to return to Kenya in the near future. Measures of fiscal discipline have been introduced, but proposals to lay off civil servants have been shelved. The government is behind in its debt-servicing obligations.

The domestic economy • Growth has remained poor across all sectors. Monetary policy has been relaxed. Leading banks have announced restructuring plans. Provisional census results have been released.

• Warnings of famine have been sounded and food aid is urgently required. The coffee and tea sectors are experiencing difficulties. The EU has failed to lift a ban on Kenyan fish exports.

• Management of the roads is to be passed to the Kenya Roads Board. Power shortages have continued.

Foreign trade and The East African Community has combined to face major problems. The payments current-account deficit has narrowed as imports and exports have continued to decline.

Editor: Pratibha Thaker All queries: Tel: (44.20) 7830 1007 Fax: (44.20) 7830 1023 Next report: Our next Country Report will be published in June

EIU Country Report 1st quarter 2000 © The Economist Intelligence Unit Limited 2000 4 Kenya

Political structure

Official name Republic of Kenya

Form of state Unitary republic

Legal system Based on English common law and the 1963 constitution; a new constitution is expected to be in place by December 2001

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

National elections December 1997 (presidential and legislative); next elections due by end-2002 (presidential and legislative)

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

National government The president and his cabinet, composed entirely of members of the ruling Kenya African National Union (KANU). Last major reshuffle in September 1999, when the number of ministries was reduced from 27 to 15

Political parties in parliament KANU (118 seats); Democratic Party (DP, 39 seats); National Development Party (NDP, 22 seats); Forum for the Restoration of Democracy (Ford)-Kenya (18 seats); Social Democratic Party (SDP, 14 seats); Safina (5 seats); Ford-People (3 seats); Ford-Asili (1 seat); Kenya Social Congress (KSC, 1 seat); Shirikisho (1 seat)

President & commander-in-chief Daniel arap Moi Vice-president George Saitoti

Key ministers Agriculture, livestock Chris Obure, Hussein & rural development Maalim Mohammed Education, science & technology Stephen Kalonzo Musyoka, Henry Kosgey Energy Francis Masakhalia, Francis Lotodo Environment & natural resources Kipng’eno arap N’geny, Francis Nyenze, Jackson Kalweo Finance & planning Chrysanthus Okemo, Gideon Ndambuki Foreign affairs & international co-operation Bonaya Adhi Godana Health Sam Ongeri, Amukowa Anangwe Home affairs, heritage & sport Noah Katana Ngala Information, transport & communications Musalia Mudavadi Labour and human resource development Kipkalia Kones, Joseph Ngutu Lands & settlement Joseph Nyagah Local government Joseph Kamotho Office of the president Marsden Madoka, Julius Sunkuli, Shariff Nassir, William ole Ntimama Roads & public works Andrew Kiptoon Tourism, trade & industry Nicholas Biwott Attorney-general Amos Wako

Head of the civil service Richard Leakey

Central Bank governor Micah Cheserem

Economic structure

Annual indicators

1995 1996 1997 1998 1999a GDP at market prices (KSh bn) 465.6 528.0 627.4 699.0 701.4 Real GDP growth (%) 4.4 4.1 2.1 1.8 1.4 Consumer price inflation (av; %) 0.8 8.8 12.0 5.8 3.0 Population (m) 26.9 27.8 28.7 29.6 30.6 Merchandise exports fob ($ m) 1,924 2,083 2,063 2,013 1,969 Merchandise imports fob ($ m) 2,674 2,598 2,949 3,029 2,888 Current-account balance ($ m) –401 –73 –377 –363 100 Reserves excl gold ($ m) 353 747 788 783 650c Total external debt ($ bn) 7.38 6.90 6.49 6.48a 6.02 Debt-service ratio, paid (%) 30.1 27.6 21.5 24.9a 25.4 Marketed tea production (‘000 tonnes) 244.5 257.2 220.7 294.2 290.0 Coffee production (‘000 tonnes) 95.8 103.2 68.0 51.3 64.3 Tourist departures (‘000) 785.7 800.5 744.3 672.0 n/a Exchange rate (av; KSh:$) 51.430 57.115 58.732 60.367 70.383c

March 3rd 2000 KSh73.65:$1

Origins of gross domestic product 1998b % of total Components of gross domestic product 1998b % of total Agriculture, forestry & fishing 26.0 Private consumption 74.5 Manufacturing 10.8 Government consumption 16.1 Trade, restaurants & hotels 21.8 Gross domestic investment 16.3 Transport, storage & communications 7.4 Stockbuilding 0.9 Government services 13.7 Exports of goods & services 24.6 Others (net) 20.3 Imports of goods & services –32.3 GDP at factor cost 100.0 GDP at market prices 100.0

Principal exports 1998b $ m Principal imports cif 1998b $ m Tea 546 Industrial machinery 518 Horticultural products 247 Refined petroleum products 270 Coffee 212 Crude petroleum 249 Petroleum products 151 Motor vehicles & chassis 243 Fish products 38 Iron & steel 131 Cement 24 Resins & plastics 118

Main destinations of exports 1998 % of total Main origins of imports 1998 % of total Uganda 16.1 UK 12.3 UK 13.4 UAE 9.0 Tanzania 13.3 US 8.4 Egypt 4.7 Japan 7.9 a EIU estimates. b Provisional estimate. c Actual.

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Quarterly indicators

1997 1998 1999 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Government finance (KSh m) Revenue & grants 42,217 44,355 59,842 42,607 46,829 45,430 67,251 42,516 Expenditure & net lending 47,504 51,040 48,093 45,336 53,313 43,308 65,349 42,721 Balance –5,287 –6,685 11,749 -2,729 –6,484 2,122 1,902 –205 Prices Consumer prices, Nairobi (1995=100) 121.7 130.9 132.0 128.9 124.2 128.9 133.2 133.7 % change, year on year 8.1 10.3 4.8 6.3 2.1 –1.5 0.9 3.7 Financial indicators Exchange rate KSh:$ (av) 63.21 60.60 60.91 59.57 60.38 62.78 69.36 74.40 KSh:$ (end-period) 62.68 59.89 59.48 60.04 61.91 64.91 72.91 77.07 Interest rates (%) Deposit (av) 17.28 17.55 20.68 19.02 16.35 10.87 8.34 8.32 Discount (end-period) 32.27 32.90 31.12 28.00 17.07 15.24 19.40 22.74 Lending (av) 29.58 29.97 30.47 29.74 27.78 22.62 20.82 21.83 Treasury-bill (av) 26.66 26.53 26.03 23.22 15.56 10.27 10.75 15.50 M1 (end-period; KSh bn) 91.04 85.28 84.52 86.74 94.10 103.29 104.24 103.15 % change, year on year 15.2 4.2 4.7 11.0 3.4 21.1 23.3 18.9 M2 (end-period; KSh bn) 278.67 270.27 270.53 278.26 285.14 294.67 292.17 285.89 % change, year on year 16.8 5.1 5.0 9.5 2.3 9.0 8.0 2.7 Stockmarket NSE 20 (1996=100) 3,461 3,337 2,908 2,863 2,962 2,815 2,765 2,428 % change in $ value, year on year 0.38 –3.57 –12.87 -1.54 3.47 -4.95 –1.78 –12.19 Sectoral trends Production (annual totals; ‘000 tonnes) Tea 221 ( 294 ) ( 220a ) Coffee: unroasted 87 ( 47 ) ( 75a ) Foreign trade (KSh m) Exports fob 28,370 29,680 33,699 29,302 32,162 31,532 31,915 n/a Imports cif 31,377 49,734 49,302 47,303 46,693 48,760 48,507 n/a Trade balance –3,007 –20,054 –15,603 –18,001 –14,531 –17,228 –16,592 n/a Foreign reserves Reserves excl gold (end-period; $ m) 787.9 806.6 771.6 827.7 783.1 697.3 657.8 687.2 a Estimate. Sources: FAO; IMF, International Financial Statistics.

Outlook for 2000-01

Forecast summary (% real change year on year unless otherwise indicated) 1998a 1999b 2000c 2001c GDP at factor cost 1.8 1.4 2.3 4.1 Agriculture 1.4 2.0 2.5 2.5 Industry 1.8 1.5 2.3 2.5 Services 2.0 1.3 2.5 5.3 Consumer price inflation (%) 5.8 3.0 6.5 6.0 Merchandise exports fob ($ m) 2,013 1,969 2,081 2107 of which: tea 472d 462 481 462 coffee 176d 163 183 151 Merchandise imports fob ($ m) 3,029 2,888 3,119 3,307 Tourism revenue ($ m) 250 305 350 390 Current-account balance ($ m) –363 100 –166 –236 Exchange rate (av; KSh:$) 60.4 70.4a 75.0 79.0

a Actual. b EIU estimates. c EIU forecasts. d Provisional estimates.

The succession debate will As the debate over who will succeed the president, Daniel arap Moi, intensifies, intensify— the incumbent vice-president, George Saitoti, remains the clear front-runner. Nevertheless, the renewed crusade against Mr Saitoti by fellow cabinet ministers is an indication that he is unlikely to be Mr Moi’s first choice. The attacks on Mr Saitoti by his cabinet colleague, Shariff Nassir, imply that there are powerful forces within the ruling Kenya African National Union (KANU) who do not wish to see Mr Saitoti succeed President Moi.

—and the party elections Responding to pressure from delegates attending a KANU meeting in December may cause serious upset 1999, Mr Moi announced that the long overdue national party elections would within KANU be held in 2000. The grass roots elections, tentatively scheduled to start in May, have the potential to cause serious upset within KANU. Divisions are beginning to emerge within the party and Mr Moi’s astute political skills will be put to the test as he attempts to unite KANU. On the conservative wing is KANU “B”, whose most influential members include Mr Saitoti and the ministers Nicholas Biwott and Joseph Kamotho. This faction will try to use its strong position to secure a victory in the party elections, in which case Mr Saitoti is likely to retain and consolidate his position as President Moi’s heir-apparent. Mr Saitoti’s strongest ally seems to be the Kikuyu constituency, which has recently come out strongly in his support, both in the motion of no confidence brought against him by Otieno Kajgwang, a National Development Party (NDP) member of parliament, and over the attacks by Mr Nassir. However, Mr Saitoti’s support from the Kikuyu will be his weak spot, as sentiment outside the Kikuyu constituency is generally opposed to the prospect of a Kikuyu president. He will also have to contend with Mwai Kibaki of the Democratic Party, who was the runner-up in the previous presidential election in 1997. Mr Saitoti’s Achilles’ heel, however, remains the unresolved Goldenberg fraud scandal, which his opponents will use against him on the campaign trail.

EIU Country Report 1st quarter 2000 © The Economist Intelligence Unit Limited 2000 8 Kenya

KANU “A” may perform At the other end of the spectrum is KANU “A”, which is made up mainly of well in the party reformers. If the electoral contest is relatively free, KANU “A” stands a good elections— chance of winning leading party positions, given its relative popularity at grass- roots level. It might subsequently provide the successor to Mr Moi. However, the faction has maintained a fairly low profile following the exit from government of the former finance minister, Simeon Nyachae, in February 1999. The vacuum created by an apparently dormant KANU “A” has given rise to other factions, KANU “C” and KANU “D”, which have attracted the younger and more radical party members and moderates, respectively.

—but victory will depend Whichever faction emerges victorious from the elections will largely depend on on the ability to its ability to negotiate and form alliances with other factions. Neither compromise Mr Saitoti nor Mr Nyachae are particularly known for their skill in negotiating compromise. Depending on whom Mr Moi chooses to back as his successor, KANU will either adopt a piecemeal approach to the elections in order to monitor and control the process, or call free and fair elections in which the people will have the opportunity to decide the president’s heir-apparent. The strongest KANU candidates will remain Mr Saitoti and Mr Nyachae, while another possible contender will be the information and transport minister, Musalia Mudavadi.

The constitutional review The constitutional review process will remain central to the presidential process will remain central succession race. Mr Moi has once again shown his political prowess by building to the succession race bridges with the NDP to form a parliamentary select committee to review and amend the flawed Constitution of Kenya Review Act. The act was the result of consultations involving a cross-section of stakeholders who investigated ways of implementing constitutional reform at what came to be known as the Safari Park IV talks. However, the resulting act failed to stipulate how the 25 seats on the commission that was to take responsibility for reviewing the constitution would be allocated. Following protracted disagreement among stakeholders over the distribution of seats, the constitutional reform process has stalled. The parliamentary select committee, led by KANU and the NDP, aims to break the deadlock by amending the flawed act.

A “people-driven” Disagreeing with parliament’s attempt to restart the process, representatives of constitution is sought by all major religious groups and mainstream political parties who participated in some the Safari Park talks have formed a parallel committee at Ufungamano House to put forward alternative plans on how to attain a wider consultative, “people- driven” constitutional review. The ability of the Ufungamano group to initiate a more grass-roots review of the constitution remains in considerable doubt, however, and the group is expected dissipate in the course of the year.

The campaign against The campaign against corruption is also expected to remain at the top of the corruption is facing political agenda. However, progress will be painfully slow. No action is being setbacks taken against the major culprits in the Goldenberg scandal, who were named in the reports of the Public Accounts Committee, the Public Investment Committee and the controller and auditor-general. Meanwhile, those named by the team investigating Nairobi City Council (NCC) as having defrauded the NCC of millions of shillings may also escape punishment. Thus, the Kenya

Anti-Corruption Authority has failed to come to grips—at least in any transparent manner—with major abuses, while receiving headlines for prosecuting minor offenders, thereby jeopardising its credibility.

Insecurity is likely to An increased wave of insecurity and unrest across the country is also expected increase as the general to increase the risk to the country’s overall political stability. Cattle-rustling election approaches among the Pokot, Turkana and Marakwet, as well as across the boarders into Ethiopia and Uganda, may increase as a result of what many observers view as the massive commercialisation of this hitherto cultural practice. The politically motivated clashes that rocked the country in 1993 and 1997 are likely to be repeated as the next general election (scheduled for late 2002) approaches—as indicated by the recent clashes in Laikipia and brief skirmishes in the Coast Province. Car-jackings and thuggery are on the increase not only in Nairobi, but are rapidly spreading into rural areas as poverty and unemployment continue to rise.

The IMF will remain A team from the IMF visited Kenya in late January-early February 2000 to cautious about discuss the timetable for negotiating a resumption of suspended funds. The team resuming funding left the country with no date fixed for the start of negotiations, much to the disappointment of the government, which had raised expectations that external assistance would be resumed in the near future, following the restoration of fiscal discipline and a favourable report of good governance by the reform team led by the head of the civil service, Richard Leakey. Although it is expected that the IMF will approve the resumption of financial support by June 2000, the Fund is likely to maintain a cautious attitude until it is clear that the remaining governance and institutional issues are being comprehensively addressed.

Tight fiscal policy will be Facing a severe financial squeeze and low economic activity, the government maintained will continue to pursue tight fiscal and monetary policies—at least in 2000. One of the greatest challenges facing the authorities is the pending reform of the civil service, which is vital for achieving sustainable fiscal discipline and a balanced budget by the end of the forecast period. The government has already made substantial progress by trimming the fiscal deficit to an estimated 1% of GDP in the 1999/2000 financial year (July-June), but most of the gain will be achieved by squeezing capital spending. In addition, the government is com- mitted to introducing more rigorous financial controls in the form of medium- term expenditure frameworks (MTEFs). These are now extensively promoted by the IMF in Africa, and will bring Kenya into line with other African countries with successful IMF programmes. Introducing MTEFs should force ministers to prioritise spending and, in conjunction with a much improved auditing system and moves towards publishing quarterly accounts from each ministry, should limit the scope for wasteful or fraudulent expenditure. Combined, these developments should meet the IMF’s main demands of the Kenyan government––real progress in controlling expenditure and tackling corruption. However, fiscal revenue will continue to be constrained by low economic activity and poor private-sector performance. The privatisation of state utilities, which it was hoped would bring in much needed revenue, is also not expected to make much progress in the forecast period, owing to the lack of external

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funding and an unfavourable investing environment. As a result, the budget deficit is forecast to remain at 1.5-2% of GDP in 2000/01.

Economic performance will The prospects for economic growth prospects are essentially unchanged in deteriorate 2000-01. A combination of unfavourable macroeconomic fundamentals, dysfunctional institutions, collapsed infrastructure, lack of donor funds, and low private-sector confidence will continue to depress overall economic activity. Potential investors will also continue their wait-and-see approach, and overall investment activity will remain low. Public consumption is expected to remain weak, owing to spending constraints, and private consumption is also forecast to remain subdued, as disposable income continues to be squeezed by rising unemployment. Assuming favourable weather the agricultural sector will grow by 2.5% per year in 2000-01, following estimated growth of 2% in 1999. The tourism sector, already suffering from increasing competition from neighbouring countries, the country’s poor infrastructure, and occasional bandit attacks on tourists and their vehicles-which are widely covered in the national and foreign press-is not expected to make a significant recovery this year. Overall, the economy is now forecast to grow by 2.3%. GDP growth recovers to 4.1% in 2001, largely as a result of the resumption of IMF funds, stronger growth in agriculture and manufacturing, and the continuing growth of tourism.

The shilling will appreciate Fuelled by the prospect of the resumption of IMF aid, the shilling appreciated in the second half of 2000 from about KSh75:$1 in December 1999 to KSh68:$1 in late January and early February 2000. Although the shilling has stabilised, as expected, at about KSh73:$1, the foreign-exchange market will remain volatile throughout the year, as it is an extremely thin market. In the first half of 2000 the shilling is expected to depreciate to about KSh75:$1, and thereafter appreciate to reach KSh72:$1, as earnings from major exports improve and foreign aid resumes in the second half of the year.

Inflation will stabilise Although inflation was extremely low in the first half of 1999, from July in 2000-01 onwards it started to creep up gradually, a trend that has been maintained into the first two months of 2000. This upward move in the inflation rate has been driven by the increased cost of basic foodstuffs, rises in the prices of petroleum products and the effects of the depreciation of the Kenyan shilling in the first half of year. However, these trends should have now worked their way through the system and the rate of inflation should start to stabilise in the second half of 2000. As greater co-ordination of fiscal and monetary policy is now seen as an important aspect of overall government economic policy and the fiscal deficit has been brought under control, inflation should remain relatively stable into 2001, at around 5-7%, even though economic growth should have started to pick up by then.

The current account will Prospects for the current account are fairly poor. Exports are not expected to return to deficit make significant gains, because of continuing weak commodity prices for coffee and tea. However, exports of horticultural and oil products will remain buoyant, partly offsetting the declining performance of the traditional categories. Total exports are forecast to rise to remain at around $2bn in 2000.

In 2001 export earnings will rise to just over $2bn, as both export volume and prices experience an upturn. Imports are also forecast to rise in the forecast period, reflecting higher oil prices and the gentle recovery of economic activity. Although tourism receipts should pick up in 2000-01, rising invisibles outflows (largely owing to higher transport costs) and an increasing trade deficit, will return the overall current-account to a deficit of 1.7% of GDP in 2000 and 2.4% of GDP in 2001, following the estimated surplus of 1% of GDP in 1999.

Financing options will Financing the current-account deficit and principal repayments due on foreign remain limited in 2000 debt will continue to pose problems. With no new IMF credit, it will be extremely difficult for Kenya to obtain substantial donor funding. Commercial and multilateral creditors will remain cautious. On a positive note, the resumption of IMF lending, which is forecast to take place in the latter part of 2000, should make it much easier for the government to finance both its current account and debt-service obligations by paving the way for other bilateral donors to resume lending to Kenya.

The political scene

The battle to succeed As the president, Daniel arap Moi, enters the final stretch of his second term in Daniel arap Moi office, the succession battle has intensified. Under Section 2A of the con- intensifies— stitution, the president is allowed to hold office for a maximum of two five- year terms. President Moi’s term of office expires in late 2002 when the next general election is scheduled to be held. He has publicly stated that he intends to retire after the election, and in a rare press conference in February 2000 he declared that if he had a suitable successor he would have retired already. However, several cabinet ministers, including Shariff Nassir, Andrew Kiptoon and Julius Sunkuli, continue to call for the constitution to be amended to allow Mr Moi to remain in office after the next election. Whether Mr Moi will agree to this will become clearer after the forthcoming national elections for the ruling Kenya Afrian National Union (KANU).

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—as the president Mr Moi will be concerned to ensure that his successor as KANU leader is a party announces KANU national man strong enough to win the presidential election, and to assure him a elections peaceful and litigation-free retirement. Addressing a meeting of KANU delegates in the capital, Nairobi, on December 20th 1999, President Moi announced that the long-awaited national party elections would be held in 2000. Although KANU’s constitution Despite a stipulates that national party elections should be held every five years, they were last held in 1988. Since then a number of piecemeal and frequently controversial elections have been held at branch and sub-branch levels, leading to mounting discontent among the party rank and file.

KANU leadership at national level

National chairman: Daniel arap Moi

First national vice-chairman: George Saitoti

Second national vice-chairman: Ndolo Ayah

Secretary-general: Joseph Kamotho

Treasurer: Japheth Lijodi

Organising secretary: Stephen Kalonzo Musyoka

National vice-chairman: Njoroge Mungai

Assistant secretary-general: Noah Katana Ngala

Assistant organising secretary: Hussein Maalim Mohammed

Assistant national treasurer: Vacant, following the death of Davidson Kuguru

KANU “B” emerges the The national elections, which are tentatively scheduled to start in May 2000, stronger faction— are likely to rock the party to its foundations. There is no doubt that KANU “B” has emerged the stronger faction, following the resignation of the former finance minister, Simeon Nyachae, in early 1999 and the subsequent cabinet reshuffle in September 1999. KANU “B” is associated with the vice-president, George Saitoti, and influential ministers including Nicholas Biwott, Joseph Kamotho, Chrysanthus Okemo, and Julius Sunkuli. Members of KANU “A” are thought to include party rebels such as Mr Nyachae, Kipkalia Kones and William Ole Ntimama. KANU “C” is believed to include more radical parliamentary members, such as Cyrus Jirongo, Kipruto Arap Kirwa and Tony Ndilinge, whereas KANU “D” attracts party moderates.

—and Mr Saitoti as the When and if the elections are finally called, KANU “B” will no doubt seek to current front-runner use its current strong position to secure victory. In this case the vice-president for president— is likely to retain and consolidate his position as Mr Moi’s successor. Mr Saitoti remains the KANU front-runner for the presidency. He will need to develop nationwide support to win the presidential election, but he can count on the Maasai constituency and a substantial portion of a more formidable ally, the Kikuyu, who would be persuaded to vote for KANU if that was the best way of returning a Kikuyu to the presidency. However, support from the Kikuyu will

also be Mr Saitoti’s weak spot, as other ethnic groups oppose the return of the Kikuyu to power. In addition, he will have to contend with Mwai Kibaki of the opposition Democratic Party (DP), who will be making his third attempt to win the presidency. Mr Saitoti’s Achilles’ heel remains the Goldenberg fraud scandal, in which the issue of his involvement remains unresolved (2nd quarter 1998, pages 11-12; 4th quarter 1998, page 13). He has so far successfully shrugged off a motion of no confidence sponsored by Otieno Kajgwang, a National Development Party (NDP) member of parliament, but, given the scale of the scandal and the high stakes involved in the race for the presidency, his competitors will ensure that the Goldenberg issue comes back to haunt Mr Saitoti on the campaign trail.

Ethnic origin of prominent members of KANU

Kalenjin group

Tugen: Daniel arap Moi, Mark Too Keiyo: Nicholas Biwott Nandi: Henry Kosgey, Kipruto Kirwa Kipsigis: Kipkalia Kones, Kipng’eno arap N’geny Pokot: Francis Lotodo

Non-Kalenjin group

Kikuyu: Joseph Kamotho, Charles Njonjo, George Saitoti Luhya: Musalia Mudavadi, Chrysanthus Okemo, Francis Masakhalia Kisii: Sam Ongeri, Simeon Nyachae, Chris Obure Kamba:, Stephen Musyoka Maasai: William ole Ntimana, Julius Sunkuli Embu: Joseph Nyagah Boran/Gabra: Bonaya Godana

—although he has recently Mr Nassir has revived the campaign for a constitutional amendment pre- come under attack venting the vice-president from automatically acceding to power should the presidency become vacant. Mr Nassir declared that the forthcoming national party elections would be used to weed out leaders with “shady backgrounds and bring in clean people”. He has provoked strong criticism from mainly opposition MPs in Central Province, who accuse him of running a campaign against the Kikuyu. Significantly, however, no KANU heavyweight has come out openly either in support or in defence of the besieged Mr Saitoti. Mr Nassir’s attack implies that there are powerful members of KANU who do not wish Mr Saitoti to succeed President Moi because of his ethnic origin. However, Mr Saitoti is prepared for a tough fight, and it will be difficult for Mr Moi to withdraw his support from the vice-president.

Mr Nyachae remains a KANU “A” may be down, but it will continue to remain a political force. The possible candidate for the former finance minister, Mr Nyachae, remains a possible candidate for the presidency presidency because of his commendable performance at the Treasury, where he showed remarkable zeal in the fight against corruption. Since leaving the government in February 1999, Mr Nyachae has been an active critic of the government and has turned himself into the most high-profile rebel in KANU.

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For tactical reasons, he has preferred to remain within KANU, and his strategy seems to be to wait until the time is right to stage a rebellion within the party. However, his room for manoeuvre is limited, as was demonstrated by his dismissal as KANU’s Kisii branch chairman in 1999. Mr Nyachae appears to believe that in a fair election he would have a reasonable chance of success. Although this prospect cannot be ruled out entirely, it should be noted that a number of KANU politicians said to be allied to KANU “A”, notably Mr Ntimama, Mr Kones and Dalmas Otieno, are facing challenges from candidates believed to be sponsored by KANU “B”. It is also known that Mr Nyachae has been courting the more radical and younger members of KANU “C”. When the time of the election comes, Mr Nyachae’s candidature will inevitably cause disruption within the party, as this faction is likely to throw its weight behind him. Within KANU, another possible contender is the information minister, Musalia Mudavadi, who would probably be acceptable to a Kenyan middle-of-the-road constituency. Although he enjoys the advantages of youth and the support of the numerically strong Luhya constituency, he has not shown great enthusiasm for the contest, nor does he have the support of the KANU kingmakers.

KANU may adopt a Most observers believe that KANU will adopt a piecemeal approach to the piecemeal approach elections in order to monitor and control the electoral process. Whatever the prospects of each faction, KANU is likely to emerge considerably weaker from the national elections. President Moi’s control of the party, and of the succession debate, seems likely to diminish rapidly, and the lack of a reliable candidate for the succession will probably cause him to delay the KANU national elections.

The opposition fails to take Ironically, the opposition has lost credibility and is not able to take advantage advantage of the situation of the prospects of a weak KANU to offer the country alternative leadership. Opposition candidates, including Mr Kibaki (DP), Raila Odinga (NDP), Kijana Wamalwa (Forum for the Restoration of Democracy-Kenya) and Kenneth Matiba (Saba Saba Asili), seem to have attracted the support of some regional voting blocs. However, with the possible exception of Mr Kibaki, they are not expected to emerge as strong contenders in the 2002 presidential election.

The constitutional reform The revival of the constitutional reform process is central to the succession process has stalled— issue and, given the widespread desire by Kenyans for constitutional reform, it is important that the review process be open and inclusive. Following the approval by the president in 1999 of the Constitution of Kenya Review Act agreed at Safari Park, which set out the basis of a national constitutional debate to be led by a 25-member commission, the reform process has stalled because the act failed to stipulate how the seats on the commission were to be divided among the various stakeholder groups.

—and a parliamentary In a bid to break the deadlock, in December 1999 President Moi convened committee is to review the inter-party talks to agree on the way forward and a possible amendment of the constitution act— flawed act. Unable to reconcile KANU’s view that the National Assembly (parliament) should review the act and the rest of the stakeholders’ opinion that the constitutional review be “people-driven”, KANU moved rapidly to

support a proposal by the NDP leader, Mr Odinga, to form a 27-member parliamentary select committee to examine the amendment of the act. KANU’s influence in the review of the act was strengthened by the fact that a number of opposition legislators, notably those from the DP and the SDP, did not take their seats on the committee. The committee, led by Mr Odinga, has already completed its work and is expected to present its recommendations to parliament soon.

—with a rival committee However, some committee members have accused it of not operating in a set up by opposition transparent manner. Representatives of all the major religious groups and members mainstream opposition parties who had participated at the Safari Park talks subsequently set up a parallel committee at Ufungamano House with a view to holding meetings with stakeholders to revive the constitutional reform process. This group has argued that, by using parliament to conduct the review of the constitution, the process is no longer people-driven, and that it was only the religious leadership in Kenya that could “give the constitutional review process the neutrality it deserves”.

Parliament seeks autonomy In late 1999 parliament passed a constitutional amendment bill which seeks to through a new commission give the legislature greater autonomy. The bill proposes the establishment of a Parliamentary Service Commission, with the clerk of the Assembly as its chief executive and the speaker as its chairman. If approved, the commission will take over the president’s powers to set the parliamentary calendar and to summon and dissolve the House. It will also take over from the attorney- general the authority to draft new laws, commission investigations and prosecute people named in the reports of the Public Accounts Committee (PAC), Public Investments Committee (PIC), and the auditor and controller- general. The Parliamentary Service Commission will manage the Assembly’s staffing, publications and security business, will assume responsibility for preparing financial estimates for approval by the legislature and handle tenders for parliamentary contracts.

The establishment of the commission is a welcome step in the constitutional reform process and an important move towards the development of democratic institutions in Kenya, as it seeks not only to strengthen the legislative arm of the government, but also to ensure the effective separation of powers between the legislature and the executive.

The campaign against The campaign against corruption has continued. In February 2000 the PIC corruption is gaining steam forwarded to the head of the civil service, Richard Leakey, a list of individuals whom it accused of misappropriating public funds and whom it considered unfit to hold public office. The list included President Moi’s personal aide, Joshua Kulei, the cabinet minister, Kipng’eno arap N’geny, in his capacity as managing director of the now defunct Kenya Posts and Telecommunications Corporation, Samuel Muindi, who was formerly managing trustee of the National Social Security Fund, the former cabinet minister and chairman of the Kenya Bureau of Standards, Elijah Mwangale, and the chairman of the Nzoia Sugar Company, Wilfred Koinange. Little action is expected to be taken in respect of these accusations—hardly any of the previous recommendations of

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the PIC, the PAC, or even the auditor and controller-general have been implemented. Although the findings of these reports do not constitute proof of guilt, if the government is serious in its effort to stamp out corruption, it needs to investigate the allegations and hand over the matter to the attorney-general for prosecution—which so far has not happened.

Nairobi City Council is In December 1999 the minister for local government, Joseph Kamotho, investigated— appointed a team chaired by a former town clerk and Kenya’s ambassador to Washington, J P Mbugua, to investigate the affairs of the problem-ridden Nairobi City Council (NCC). The team’s findings revealed that the NCC was riddled with corruption, and cited several cases of blunder, gross mismanagement and sheer incompetence, which had crippled the operations of the council. The report noted that the NCC’s effectiveness and general delivery of services to Nairobi residents had deteriorated to the extent that “the local authority cannot be relied on to meaningfully contribute to the economic and social development of Kenya”.

—and an interim oversight In mid-February, noting that the council’s failure to provide adequate services board is appointed to Nairobi residents or to use its revenue responsibly was a matter of national concern, President Moi undertook a number of measures for salvaging the council. He appointed a three-member interim oversight board (chaired by Jimna Mbaru) to oversee all financial transactions undertaken by the NCC— which will report directly to Mr Leakey. Several councillors have described the appointment of the board as unconstitutional. In response to President Moi’s measures, the Kenya Anti-Corruption Authority has moved quickly to investigate corruption at the NCC.

Insecurity rises The recent wave of killings in Laikipia and Nyandarua districts, reminiscent of the politically instigated tribal clashes that erupted in the Rift Valley in 1991-97, is having major security implications for communities living in the area. Tension began to mount in Laikipia when neighbouring Samburu and Pokot herdsmen invaded private land in search of more fertile areas. Although the violence seems to be directed at members of the Kikuyu community, a government statement dismissed them as simply acts of banditry. What is more worrying is the inertia shown by the provincial administration in stopping the violence, and the apparent failure of the government to guarantee security to its citizens, regardless of where they live or their political affiliation. Other outbreaks of insecurity include cattle-rustling between the Pokot and the Marakwet, and recent clashes at the coast. The incidence of car-jackings in Nairobi is also increasing.

It was reported in late February that the Office of the UN High Commissioner for Refugees had repatriated some 350 Somali refugees from camps in northern Kenya. Instability in Somalia over the past decade has regularly caused trouble in Kenya’s north-eastern region, the majority of whose citizens are ethnic Somalis. President Moi has in the past made inflammatory statements about the refugees, declaring that they are a source of insecurity and calling for their repatriation.

Mr Moi addresses the In mid-February President Moi made a five-day visit to the US for the first time National Summit on Africa in a decade to attend the National Summit on Africa, organised by the Global Coalition for Africa, a privately funded non-governmental organisation. Mr Moi addressed the summit in his capacity as chairman of the Common Market for Eastern and Southern Africa (Comesa), outlining the progress that Kenya had made in implementing reforms, but emphasising that further external support was needed to help the process of liberalisation. He also met officials of the US Treasury, the IMF and World Bank.

Economic policy

The IMF gives no indication Following a visit to Washington by Treasury officials in November 1999, and a of when funding will subsequent invitation to the president, Daniel arap Moi, from the managing resume— director of the IMF, Michel Camdessus, to attend a meeting in Libreville, Gabon, on relations between Africa and the IMF, there were high hopes that the political decision to resume financial assistance to Kenya had been made and that the Fund’s visit to Kenya in January-February 2000 would simply determine when. Unfortunately for the government, the IMF team left Kenya with no indication of when it would resume lending. The disbursement of loans was halted in 1997—the IMF gave as reasons for its decision poor governance, economic mismanagement and the lack of progress in the Goldenberg fraud investigation.

The IMF team came to Kenya to review progress in improving governance and to discuss an economic programme on which to base a new poverty reduction and growth facility (PRGF)—the successor to the enhanced structural adjustment facility (ESAF). The discussions focused mainly on fiscal developments and prospects for the current year, as well as on efforts being made by the Kenyan authorities to develop a programme aimed at reducing poverty and promoting high sustainable growth. The programme includes a medium-term expenditure framework (MTEF) and key structural reforms outlined in an interim poverty reduction strategy paper, to replace the policy framework paper. This will underpin possible financial support from the IMF, World Bank and other donors. The visiting IMF team also reviewed budgetary performance in the first six months of the 1999/2000 financial year (July- December), as well as more general developments within the Kenyan economy.

—but looks forward to In a hastily arranged press conference on February 3rd, President Moi accused returning to Kenya in the the donors of shifting the goal posts. New issues have indeed been raised by near future the IMF, including the circumstances surrounding the sale of the state-owned multi-million cellular phone company, Safaricom. It is understood that the licence was given virtually free of charge and without competitive bidding. Human rights and constitutional reform are other reasons given for the suspension of IMF funding. In a diplomatically phrased statement the IMF’s senior representative in Kenya remarked that the IMF welcomed recent steps taken by the government to improve governance, but that both the Fund and the government had recognised that much remained to be done. However, he declared that the IMF looked forward to returning to Kenya in the near future.

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A coalition of opposition politicians, civic leaders and professionals, calling itself the Stakeholders Support Group (SSG), has appealed to the IMF and wider donor community not to release financial assistance to Kenya because the government has not yet fulfilled its pledge to implement economic or constitutional reforms. The SSG fears that if the PRGF is granted under the current conditions, ordinary Kenyans will be left to pay the costs, and has declared that Mr Moi’s regime has “proved totally incapable of any progressive reform”.

Measures to impose fiscal In the first half of 1999/2000 the Ministry of Finance appointed financial discipline are introduced controllers to each ministry to take responsibility for ensuring fiscal discipline and to submit monthly audits to the Treasury. The permanent secretary to the finance ministry also announced that the quarterly accounts of each ministry would be made public in order to improve accountability and reduce opportunities for corruption. Efforts to introduce fiscal reform continued in early 2000, when the budgeting process was further rationalised. The ministry of Finance, working closely with other ministries and think-tanks has adopted the MTEF—which replaces the previous forward-rolling budgeting system and whose aim is to move revenue and expenditure more closely into balance and achieve fiscal discipline. The MTEF secretariat is chaired by the financial secretary and comprises a macroeconomic group and a sectoral group. Each ministry is now required to prioritise its requirements for resource allocation. The new budgeting approach is directly linked to the priorities contained in the poverty reduction strategy paper.

There are signs of improved The effort to achieve fiscal discipline has been successful in some areas. The fiscal discipline at the government is running a nearly balanced budget on a commitments and cash Treasury basis. This position provoked an IMF official to argue that prudent management of fiscal revenue and real reductions in non-essential expenditure could tide Kenya over until the end of the current financial year on June 30th. It appears likely, therefore, that IMF funding to Kenya will not be resumed until the next financial year 2000/01.

Government budget outturn, Jul-Dec (KSh bn unless otherwise indicated) 1998/99 1999/2000a Revenue & grants 89.4 87.7 Tax revenue 73.7 73.2 Non–tax revenue 5.5 3.7 Other (incl grants & aid) 10.2 10.8 Expenditure & lending 92.5 88.2 Recurrent 75.9 73.3 Development 16.6 14.9 Balance (commitments basis) –3.1 –0.5 % of GDP –0.4 –0.1 Balance (cash basis) –2.7 –0.2 % of GDP –0.4 0.0

a Provisional. Source: Central Bank of Kenya, Monthly Economic Review, February 2000.

—but the impending civil The pending reform of the civil service continues to present the greatest hurdle service job cuts are shelved to achieving a balanced budget. It is estimated that salaries and wages consume around 60% of Kenya’s monthly budget of KSh12bn, which is equivalent to approximately 7.8% of GDP (50% higher than the Sub-Saharan Africa average). This huge wage bill is one of the most important factors contributing to the government’s high domestic debt burden, and the authorities have in the past been forced to finance the budget deficit by issuing high interest-bearing government securities. A reform team set up by Richard Leakey, the head of the civil service, prepared a comprehensive plan for the IMF which proposed laying off up to 70% of the 532,000 workers in the public service—the greatest cuts to be in the Teachers’ Service Commission (an estimated 40,000 teachers) and the Office of the President (13,000 jobs). The government needs financing for reforming the civil service, and is therefore unlikely to implement reforms as long as the IMF keeps its doors closed to Kenya. The impending civil service job cuts have consequently been shelved once more, because of a lack of funds to cover the severance payments.

Government domestic debt (KSh bn) 1998 1999 Dec Jun Deca Total government debt 183.0 176.9 195.9 of which: T-bills 120.4 101.7 121.3 Treasury bonds 48.4 28.2 28.4 long-term stocks 3.6 3.4 3.0 Less government deposits & advances to parastatals 32.0 24.0 32.5 Net domestic debtb 151.0 152.9 163.4

a Provisional. b Includes monetary policy T-bills. Source: Central Bank of Kenya, Monthly Economic Review, February 2000.

The Kenya Revenue The Kenya Revenue Authority (KRA) has failed to meet revenue collection Authority misses revenue targets for the second consecutive quarter. The commissioner-general of the targets again KRA, John Msafari, announced in February that the authority had managed to collected KShs41.87bn in October-December 1999, compared with a target of KShs44.13bn. However, revenue collection was 1.4% higher than in October- December 1998. Mr Msafari said that the authority had enforced stringent measures to ensure maximum collection, including a crackdown on the diversion of transit cargo into the local market, and that revenue from import duty had increased by 2% and value-added tax by 5% The substantial shortfall in fiscal revenue is blamed on the worsening performance of the economy. In a move aimed against conmen pretending to be officers of the KRA, from the beginning of March officers will be required to sign registers whenever they visit taxpayers.

The domestic economy

Economic trends

Growth remains low across Economic activity remained depressed in almost all the main sectors of the all sectors economy in 1999. The Central Bank of Kenya (CBK) estimates real GDP growth in the 12 months to end-November 1999 at 1.4%. Tourism recorded a marginal increase in its rate of growth in this period (from 2.5% to 3%), but growth in the agricultural sector remained depressed at 1.4%; most of the major sectors (coffee and livestock) experienced problems. The effects of the economic recession were felt most in manufacturing, where growth declined to 0.8% in the same period. The CBK attributed the slow rate of growth to structural factors, in particular inefficiencies within the transport and telecommunications sectors, and government operations.

Gross domestic product (% real change, year on year) 1998 1998a 1999a Agriculture 1.5 1.6 1.4 Manufacturing 1.3 1.3 1.1 Trade, restaurants & hotels 2.5 2.7 2.9 Financial services 3.2 3.3 2.8 Government services 0.8 0.9 0.7 GDP incl others 1.8 1.7 1.4

a 12 months to end-November; provisional figures. Source: Central Bank of Kenya, Monthly Economic Review, February 2000.

The CBK relaxes monetary The Central Bank has continued to relax its tight monetary policy: broad policy money supply (M3) grew by 9% (an estimated Ksh34.3bn) in 1999, year on year, compared with 4.6% in 1998. In particular, net domestic assets increased by 1.7% while net foreign assets increased by 9.2% in the same period—a significant net outflow. It appears that the Central Bank is no longer pursuing a strictly independent monetary policy, and that it is working closely with the Treasury to relax its rigid control over money supply.

Monetary indicators (% unless otherwise indicated) 1999 2000 May Jun Jul Aug Sep Oct Nov Dec Jan 91-day T-bill rate 9.6 11.3 14.5 14.8 15.8 17.6 18.1 20.0 20.3 Overdraft ratea 20.5 20.9 21.0 22.0 22.5 23.1 24.8 25.6 14.8 Money supplyb (M3) 4.3 6.4 6.7 2.6 2.3 0.4 0.2 2.3 9.2 Monthly underlying inflation 4.5 5.0 4.9 5.9 6.6 6.6 7.3 7.6 8.2 a Commercial bank average. b % change, year on year. Source: Central Bureau of Statistics, Leading Economic Indicators, January 2000.

This expansion, in excess of real economic growth, is reflected in the first signs of rising price inflation, as evidenced in the overall month-on-month figures, which reflect rising food prices and provide the first indications of underlying rises to come. Overall month-on-month inflation accelerated to 8.7% in January of this year from 7.6% in September and only 1.2% in March, while the annual rate rose from 3.5% in December to 4.3% in January

Net government credit Net government credit from the banking sector continued to decline in 1999, from the banking system resulting in a substantial drop in 91-day Treasury-bill yields in the first quarter declines of 2000. At the beginning of March, 91-day T-bill yields were approximately 10.94%, down from 20% in December 1999. To prevent any short-term instability to the downward trend of interest rates, the Central Bank continues to encourage the corporate sector to raise its funding requirements through the issuance of commercial paper. Commercial paper interest rates are normally pegged to 91-day T-bill rates, and tend to lie between the T-bill rate and the base rate of commercial banks. The government’s lower level of borrowing from the banking system began to be felt from January 2000, and led to the decision by private-sector agents, including banks, brokers, portfolio managers and investment advisers to stop the selling of Treasury bonds. This move in effect suspended a strategy initiated by the former finance minister, Simeon Nyachae, in his budget speech for the 1998/99 financial year (July-June) to shift the weight of government borrowing from short-term to long-term credit. This was to be done by repaying the stock of short-term T-bills, and lengthening the maturity of domestic debt by encouraging conversion of the bulk of T-bills accumulated since the 1993 inflation crisis to Treasury bonds. Although the floating-rate bonds have been trading at a premium, they have not been particularly attractive to domestic institutional investors, especially commercial banks, who prefer short-term liquidity positions for operational and speculative motives.

Finance

Bad debts reach 36% of The status of the banking sector’s non-performing loans, estimated at gross loans Ksh103.5bn (equivalent to 36% of gross loans) at the end of 1999, has continued to be a major threat to the stability of the banking sector. The situation has been exacerbated by unrealistic provisioning for bad loans by most commercial banks. Annual results of three of the leading commercial banks—Barclays Bank of Kenya, Kenya Commercial Bank (KCB) and National Bank of Kenya—show a marked decline in profitability in 1999.

The leading banks KCB and Barclays Bank have both announced restructuring plans aimed at announce restructuring reducing the number of staff and closing down unprofitable branches. After plans years of excellent results the banks are now faced with an intensely competitive market environment, and have been forced to cut operating costs while improving their efficiency in order to compete with the leaner and more focused corporate entities which have better returns. The business community is looking keenly at the banks’ financial results, which have to be declared in the first quarter of 2000. Most are expected to show a decline in profitability

because of the difficult economic environment, low yields on T-bills in the early part of 1999 and strict bad loan provisions imposed by a more vigilant Central Bank, as well as a harsh economic environment in which weak companies are going under. Co-operative Bank has also indicated plans to restructure, while the National Bank has received injections of cash from the government to keep it afloat.

KCB is set to close 95 branches and pay Ksh1.5bn to pay off 1,300 staff over a three-year period, while Barclays Bank has set aside Ksh12bn and will close 13 branches. Co-operative Bank, which is still recovering from the damage caused when the US embassy was bombed in 1998, is expected to follow suit. KCB is also set to acquire a strategic partner who will buy a 26% stake in the company, with the International Finance Corporation buying a 9% stake. Barclays has restructured its merchant finance arm, transforming Barclays Merchant Finance into a department, as the low volume of business could not justify the maintenance of a larger operation. The proposed restructuring will improve the banks’ efficiency, and is likely to lead in time to a more sustainable profitability. Standard Chartered, which was restructured several years ago, achieved profits growth of 21% in 1999, which has been attributed to an increase in efficiency boosted by a networked electronic banking capacity.

Smaller banks double up The smaller banks, most of which serve niche markets, have started to merge in to survive a bid for survival. Faced with the Central Bank’s minimal capital requirement of Ksh200m by 2001, as well as high operational costs, they are aware of the need to achieve economies of scale. Although the mergers have created three new banks, each with capital of at least Ksh250m—Guardian Bank, Paramount Universal and Euro-Daima Bank—the Central Bank plans to continue to raise the capital threshold by Ksh50m annually until 2005. This will force several institutions to seek further injections of capital or to merge. Fidelity, with capital of Ksh95m, and Southern Credit (Ksh95m), are thought to be discussing merger, although the CBK is refusing to confirm this. Most observers are, however, sceptical about prospects for some of the newly merged banks. They believe that the mergers forced by the introduction of a Ksh200m minimum capital requirement will not be enough to spare Kenyan institutions a further round of consolidation, or even closures. In a banking industry where more than 30% of assets are non-performing, the assignment of debt provisions poses a major challenge to the new institutions.

The prospects of salvaging Of the five banks placed under statutory management by the CBK in 1998 after failed banks remain dim failing to meet their financial obligations, four remain closed and in the care of Central Bank receivers. Of these, only one has any prospect of reopening by April 2000, while a second may be salvaged in due course. The remaining two have little hope of recovery. The only one of the original five to have reopened is Trust Bank, which survived by reaching an agreement with its larger customers on a staggered limited compensation.

A fraud crisis hits the Banks have been experiencing a new fraud crisis. Fraudsters have been using banking industry stolen banker’s cheques and company notepaper to issue false instructions to banks to transfer money to fraudulent accounts both locally and abroad. In a

warning issued in early March, the Central Bank advised commercial banks not to act on any cash transfer instructions until it had confirmed that it was genuine. Business people are also advised not to release goods paid through banker’s cheques until the cheques have been verified and cleared.

The NSE remains depressed The level of activity at the Nairobi Stock Exchange (NSE) in January-February 2000 remained depressed, contrary to the expectations that the announcement of year-end financial results would rally prices upwards and boost turnover. A number of leading companies have already announced a decline in levels of profitability compared with 1998. The foreign investors’ board registered dramatic gains in turnover estimated at Ksh113.6bn (35.2% of total turnover) in January 2000. However, the NSE bulletin for January 2000 observed that “all activity on the foreign investors’ board represents only one direction— outflows”. This implies that the turnover figure represented an escalation of capital flight from the Nairobi market. The main factors behind the depressed activity at the NSE during 1999 is likely to be the increase in T-bill rates, which had risen to more than 20% by December 1999: speculative investors are likely to have responded to the opportunities created by higher returns in the money market and shifted their portfolios accordingly. As returns on the benchmark 91-day T-bills continue to decline it is expected that the stockmarket may stage a slight recovery.

Agriculture

Warnings of famine are There have again been warnings of famine. In early February 2000 the UN sounded again— World Food Programme reported that because the rains had failed the food situation in the north and east of the country was particularly acute, and funds were urgently needed to provide food aid. In a report to donor organisations and foreign governments signed by the head of the civil service, Richard Leakey, the government has said that it needs about Ksh4.5bn to combat the expected food shortage. Indications show that Kenya will experience a large maize deficit (close to 400,000 tonnes) in 2000. The main causes include the unpredictable weather, poor seed quality and idle land (owing to poor security in some of the grain-growing areas). The government is reluctant to remove

the 25% duty levied on maize imports. However, even if the duty is waived, imported maize may still be higher priced than domestically produced maize because of a 50% suspended duty, import charges and transportation costs.

—and food aid is urgently Early warning assessments reveal that 1.8m people in 29 of Kenya’s 54 districts required face hunger. An average of 20,000 tonnes of food aid (about 220,000 90-kg bags) is now required in the affected districts. The districts received more than 300,000 bags of food aid, worth Ksh500m, between July and October 1999. An additional Ksh560m (equivalent to 373,000 90-kg bags) was made available for the purchase of maize for famine relief, which was sufficient to last until early February. Relief and urgent rehabilitation support are required until after June 2000: Ksh3.2bn for food and another Ksh1.32bn for immediate relief.

Meanwhile, the prices of beans is expected to remain relatively low, because of exceptionally high imports from Ethiopia, Tanzania and Uganda. The long- term implications for domestic production will not become clear until the main rainy season (April-June), when estimates of the area under crop may be available. Beef production continues to experience market fluctuations because of insecurity and livestock rustling in most pastoralist areas, including Laikipia, Pokot, Turkana and Markwet districts (see The political scene). Cattle rustling is a serious social and political menace which the government must address to restore security and achieve economic development.

The coffee industry Coffee production has been seriously disrupted following the eruption of experiences major violent and protracted clashes between rival groups of farmers in the main disruptions growing areas of Central Province. The warring farmers are locked in what appears to be a wrangle over the management of co-operative societies and have destroyed property worth millions of shillings, while some have resorted to uprooting their coffee bushes. Annual coffee output, which in the 1990s declined to around 55,000 tonnes because of weak world market prices, high production costs and high charges for handling, processing and marketing, showed signs of recovery in 1999. In 1999 coffee production was estimated at an average of 6,042 tonnes/month, compared with a monthly average of 4,654 tonnes in 1998. World coffee prices are projected to remain depressed for some time because of large supplies in the market. Kenya’s prospects of increasing the price of its coffee lie in its ability to maintain the high quality for which it was previously known, when it could fetch premium prices above those for coffee from other countries.

The costs of coffee production in Kenya are high because of coffee berry and leaf rust diseases. Some 30% of the total cost of production goes towards disease control. However, efforts are being made to increase production of the new disease-resistant variety, Ruiru 11, which will enable these costs to be reduced. Production costs are made higher by the high transaction costs of coffee-processors and marketing intermediaries. The high operating costs incurred by co-operative societies, millers and (through rampant mismanagement) the Coffee Board of Kenya (CBK) are thought to be responsible for the recent spate of violence and unrest in the sector, especially in Central Province. The government has partly addressed this problem by changing the management of the CBK, and plans are under way to revise the

Coffee Act, under which the CBK has the monopoly on delivering services to farmers and regulating the industry. The major change in the act will be the separation of the CBK’s regulation and research role from its marketing function. It is hoped that this will allow the institutions involved in the provision of services to be more efficient, thereby reducing transaction costs and aiding the recovery of Kenya’s coffee industry.

The tea industry is in Tea production, Kenya’s leading foreign-exchange earner, has expanded hugely, turmoil because of drought reaching more than 200,000 tonnes/year in recent years. However, annual and frost— output fluctuates, mainly because of climatic factors, although the area under cultivation continues to expand. Output is expected to decline substantially in 2000 because of drought and frost in the major producing regions of the Rift Valley province. Frost in Nandi district (Western Kenya) has destroyed more than half of the tea crop, causing farmers heavy losses. Reports indicate that the worst affected are the multinational tea companies, including Eastern Produce Kenya, George Williamson and Nandi Tea. Production in the area has fallen from 500,000 kg/day to 100,000 kg/day, and may decline further if the frosts continue. Some factories have closed down and sent most of their workers on leave until the situation improves.

—and a dispute over Furthermore, a recent row over import tariffs between Kenya and Egypt caused import tariffs sales to collapse at the Mombasa tea auction. Buyers were offering 20 cents/kg (about KShs15/kg) less for the type of tea usually bought by Egypt, which is Kenya’s third largest customer. The reason for the collapse of the Mombasa tea auction is a report that Kenyan tea valued at more than $20m, was being held at Port Said in Egypt. Industry sources said that the tariff dispute arose after Egypt joined the Common Market for Eastern and Southern Africa (Comesa) and therefore became entitled to preferential tariffs, which the Kenyan authorities would not recognise. This prompted Egypt to argue that Kenya had taken too long to reduce the tariffs on some Egyptian imports. In retaliation, Egypt has blocked Kenya’s tea exports. Kenya is now expected to apply preferential tariffs to specific Egyptian imports, in accordance with the tariff levels set by Comesa.

Kenya’s tea exports are marketed primarily to Pakistan, the UK and Egypt. A stagnation of, or decline in, demand in these traditional markets and significant increases in production would affect prices negatively, which would be a disincentive to raise production in the future. Growth in output is also likely to be affected by congestion in the tea factories due to increased production without any expansion in processing capacity. The Kenya Tea Development Authority (KTDA) used to play a leading role in the development of tea factories for small-scale farmers, but if it were privatised it would probably be less effective in this area. The private sector will therefore have to play a greater role in expanding tea-processing capacity to match the increase in production by small-scale farmers. The poor road network in the producing areas hinders the delivery of tea leaves from farms to processing factories, thereby resulting in wastage.

The EU maintains the ban A team of EU inspectors visited Kenya in January to evaluate the fishing on fish exports from Kenya industry’s progress in improving hygiene and quality standards aimed at getting the ban lifted on fish exports from Kenya to the EU. The ban was imposed in March 1999, following reports that fishermen on Lake Victoria were using industrial pesticides to catch fish. The sweeping ban also includes sea fish, and coastal fisherman have suffered as a result. The EU team’s report concluded that progress was unsatisfactory, and the ban has not lifted.

The ban has seriously affected the region’s industry. Tanzania and Uganda both recorded annual fish export earnings of about $50m in 1998, while Kenya’s EU exports were about $41.5m. According to fishery sources, total losses for the Kenyan industry could be as much as $83m. Moreover, a recent fisheries report indicates that fish prices at Lake Victoria have dropped by more than 60% and that the workforce in fish-processing factories has declined by 50%. Related areas, such as transport, have also been affected. The EU did, however, lift the embargo on Tanzanian fish products, saying that Tanzania had met most of the conditions set for a resumption of exports. The EU wants the number of fish- landing beaches on Kenya’s portion of Lake Victoria to be significantly reduced and modernised. Local fishermen have resisted this proposal, arguing that it will lead to unemployment among local fishermen and encourage what they regard as the monopolistic tendencies of the giant, mostly foreign-owned, fish- processing factories. Larger processors have been criticised for operating as a cartel. The situation has now turned violent: an Asian businessman, whose company at Kisumu remained the sole operator after his competitors had been forced out of business by the ban, was recently murdered.

Infrastructure and services

An audit into the roads The management of resources for the road sector generated from the fuel levy ministry arouses concern— continues to cause serious concern, especially as Kenya’s roads are in a poor state. A report by the controller and auditor-general in late 1999, carried out at the insistence of road project donors, confirmed the existence of false contracts authorised by the Ministry of Roads and Public Works. The audit examined the 1997/98 fiscal year (July-June) and noted that expenditure on road contracts, at Ksh3.8bn, was higher than revenue of Ksh3.4bn. The report found cases of embezzlement, which it attributed to the inadequate supervision or improper execution of projects. It also listed work not carried out and contracts awarded without being put out to tender; one company was given a contract worth Ksh100m without any document to verify that the work had been carried out. The report further noted that Ksh980m had been written into the Ministry of Roads’ budget for 1997/98 to pay invoices, while in the current fiscal year Ksh1.1bn have been earmarked for exactly the same work. As a result, the roads ministry has almost no funds left to allocate to new projects out of the fuel tax revenue, which until 2001 has been almost entirely set aside for dubious contracts.

A further report issued by the Ministry of Public Works in December 1999 revealed that the government had paid 16 contractors a total of Ksh11.2bn to rehabilitate roads countrywide in projects that have generally not been carried

out, are stalled or are far behind schedule. This fact emerged soon after representatives of the Association of Engineering Consultants met the head of the civil service, Richard Leakey, to express their unhappiness with the situation, which was crippling road building and repairs. The main issues discussed during the meeting centred on corruption, inflated costing and shoddy work.

—and resource In response to the poor state of the road sector in Kenya, key stakeholders (the management passes to the government, Kenya Wildlife Service (KWS), local authorities and donors) are Kenya Roads Board finalising details of the Kenya Roads Board, which will assume responsibility for managing the resources of the entire roads sector. The board will allocate resources to three agencies: the Department of Roads within the Ministry of Public Works, which will be responsible for classified roads; the KWS, which will continue to manage all roads within the national parks and game reserves; and the district roads committees, which will manage the rest of the road network. The public works ministry will confine itself to matters relating to policy and regulation of the sector. The establishment of the Kenya Roads Board may be an important step towards the eventual privatisation of the sector.

Telkom Kenya invests in Telkom Kenya, the newly created telecoms service provider, has announced more lines that it is installing a new toll switch in Nairobi to facilitate the connection of new telephone operators. The facility consists of 5,460 trunks (channels), which will help to improve both international and local telephone calls. Commissioning the facility in December 1999, the chairman of Telkom, Ndolo Ayah, said that the new facility was part of the company’s strategy of providing infrastructure to enable the second mobile telephone operator (Kencell Communications, a joint venture between the French company Vivendi Telecom International and Sameer Investments) and others to be connected. The company said that a further 9,540 trunks, which are already complete and awaiting testing, were to be added, making telephone calls cheaper and quicker. Other benefits include improved call completion, shorter call set-up, the ability to support intelligent network services and Y2K compliance.

The new switch shortens the number of stages that a customer has to go through in making a call from five to three. Built at a cost of KSh125m ($1.7m), it will also ease traffic in Nairobi. Telkom is obliged by law to offer the facility to any company licensed by the Communications Commission of Kenya. Other telecoms infrastructure expansion projects are to be carried out in Mombasa, Eldoret, Kisumu, Nyeri and Nakuru, at a cost of $10m, and are due to be completed by the middle of 2000.

Power cuts persist In November and December 1999 Kenya Power and Lighting Company (KPLC) announced a series of power cuts as a result of supply shortfalls caused by an unprecedented drop in water levels in the reservoirs feeding Kenya’s main hydropower stations (4th quarter 1999, page 22). Without significant new investment and generators, KPLC would have to introduce severe electricity rationing during the dry months of January-March. Business reacted with alarm to reports that the provision of power could be restricted to as few as three days a week. The chairman of the Kenya Association of Manufacturers,

Chris Kirubi, predicted job losses and said that about KSh10bn a year was already lost because of the poor state of the roads and power rationing.

Emergency generators were subsequently commissioned to allow KPLC to combat peak-hour shortfalls, which forestalled the prospect of severe interruptions, especially during the critical months of January and February. The new generation facilities will remain in place until about May, when it should be possible to increase the generation of hydroelectric power to full capacity. Power rationing has already been lifted in Coast Province, following the commissioning of the 70-mw Kipevu 1 diesel plant in January and the resumption in February of operations by the Westmont Power barge-mounted plant, which has been undergoing repairs since April 1999. The Kipevu 1 power plant is owned by the Kenya Electricity Generating Company, the country’s main generator of hydroelectric power. Westmont, a Malaysian company, has been contracted by KPLC to supplement supplies. According to a statement issued by KPLC, power rationing at the Coast ceased immediately.

A Kenya Airways aircraft On January 31st a Kenya Airways Airbus crashed two minutes after take-off, off crashes the coast of Abidjan, Côte d’Ivoire, killing 159 passengers. Ten passengers survived the crash. Barely a week before the crash, Kenya Airways had announced that it would invest KSh52bn in a five-year programme to upgrade its fleet, including phasing out the ageing Airbus-310 aircraft and replacing them with new Airbus-B767-300s. Kenya Airways had gained a reputation as an airline with a good safety record. Investigations into what caused the accident are still under way.

Foreign trade and payments

The EAC faces major On November 30th 1999 the heads of state of Kenya, Uganda and Tanzania obstacles signed a treaty setting up the new East African Co-operation (EAC; 4th quarter 1999, page 24), but shelved for four years the issue of reducing tariffs between member states, thereby potentially sharpening the internal debate about their membership of the Common Market for Eastern and Southern Africa (Comesa). The 21 Comesa member countries are expected to set up a common market, with no customs barriers, as early as October 2000. However, there is a high probability that Tanzania will pull out of Comesa. Kenya, meanwhile, considers membership of Comesa as more beneficial to its interests, and this became clear during the visit to the US by the president, Daniel arap Moi, in February 2000, when, as the current chairman of Comesa, he delivered a keynote address at a summit organised by the Global Coalition for Africa (see The political scene). Given these seemingly irreconcilable differences of opinion between Kenya and Tanzania, the EAC faces major problems.

The presence of UN A report in the Financial Times in mid-January estimated that the direct and agencies earns indirect benefits accruing to Kenya from the presence of UN agencies amounts Kenya $350m to more than $350m, which in terms of foreign-exchange earnings is second only to tea. Nairobi is one of the UN’s four global headquarters and hosts the head offices of the UN Environment Programme (UNEP) and the UN Centre

for Human Settlements, Habitat. The report argues that Kenya’s strategic advantage as a regional hub has shielded the economy from isolation, despite several years of decaying infrastructure, economic mismanagement, corruption and crime. Of the $350m, less than half originates from direct programme assistance; the rest comes from myriad spin-offs, including transport and infrastructure services ($32m), salaries ($130m), house rents ($10m), international conferences, mailing and telecommunications services ($3m), and secondary employment, including gardeners, guards and drivers ($6m). This excludes the trickle-down effect of the many international non-governmental organisations, media houses and consultants that abound in Nairobi.

Balance of payments ($ m) 1999 1998 Jun Dec Exports (fob) 2,012 1,926 1,911 Imports (cif) –3,337 –3,072 –3,031 Trade balance –1,325 –1,146 –1,120 Services (net) 862 868 950 Tourism 291 254 304 Others 571 614 645 Current-account balance –463 –278 –171 Capital account balance 519 215 177 Long-term 6 –56 –245 Short-term & others 513 271 422 Overall balance 57 –63 6 Source: Central Bank of Kenya, Monthly Economic Review, February 2000.

The current-account deficit The current-account deficit narrowed further in 1999, reaching $171m by the narrows further end of the year, from $463m in 1998, largely due to an improvement on the trade deficit and an increase in services inflows. On the external trade front, with the exception of horticultural products and oil, which increased by $25m and $17m, respectively, total exports continued to decline in 1999 owing to the depressed performance of the economy, including the dilapidated state of infrastructure, and weak world prices for the country’s main export commodities, tea and coffee. All major categories of imports, except manufactured goods and machinery also declined.

Foreign debt (Ksh bn) 1998 1999 Jun Jun Dec Bilateral 121.7 149.0 144.8 Multilateral 182.0 235.1 234.9 Commercial banks 29.0 35.9 30.9 Export credit 3.6 3.9 3.9 Total 336.3 423.9 414.5 Source: Central Bank of Kenya, Monthly Economic Review, February 2000.

The government is behind Although external grants increased by $77m in 1999, the government is in its debt servicing reported to be at least three months behind schedule in servicing its external debt obligations. Kenya’s monthly external debt-servicing costs are estimated at $50m. But though two-thirds of Kenya’s total debt is external, two-thirds of all interest payments are on domestic debt, which claims more than 20% of recurrent expenditure.

Trade data

Foreign trade ($ m) Total South Africa UK Japan US Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Imports cif 1996 1997 1996 1997 1996 1997 1996 1997 1996 1997 Food 185.0 399.1 9.1 141.4 14.6 19.5 1.3 0.1 21.0 27.2 of which: cereals & products 119.4 317.0 0.9 126.8 3.9 8.7 1.2 0.0 20.0 25.5 sugar & preparations 29.4 24.8 4.1 9.6 4.0 4.1 0.0 0.0 0.4 0.4 Textile fibres & waste 25.5 34.9 3.8 3.4 4.7 11.2 0.9 0.6 0.4 1.6 Petroleum & productsa 443.5 511.7 29.4 25.3 4.8 3.2 0.1 0.1 0.5 0.5 Animal & vegetable oils & fats 136.2 132.4 0.0 0.5 0.5 0.9 0.0 0.0 0.5 2.8 Chemicals 473.1 493.7 54.1 51.6 54.4 53.6 5.0 3.9 50.0 44.5 Rubber manufactures 24.9 30.4 0.7 0.6 3.5 5.2 4.2 6.2 1.8 0.9 Paper & manufactures 65.0 69.8 10.1 10.7 5.5 5.7 0.3 0.3 0.7 1.0 Textile yarn, cloth & mnfrs 40.3 49.4 1.0 1.8 3.9 4.8 2.8 0.5 1.5 0.5 Non-metallic mineral mnfrs 36.6 32.9 1.6 1.3 3.9 4.3 0.8 0.8 0.4 0.3 Iron & steel 158.6 185.0 25.5 33.0 20.6 10.2 25.1 44.2 0.2 1.3 Non-ferrous metals 41.2 45.3 10.9 20.0 5.5 5.0 0.1 0.2 0.3 0.0 Metal manufactures 59.9 53.0 2.4 2.9 11.2 11.3 2.9 2.7 1.2 2.2 Machinery & transport eqpt 865.8 988.4 41.2 59.4 171.4 170.3 157.1 178.8 55.8 146.6 of which: road vehicles 305.7 293.6 13.3 19.3 40.5 29.8 124.3 136.9 4.4 9.5 other transport 43.6 130.0 1.8 2.2 5.9 11.4 0.0 0.5 19.4 99.6 Scientific instruments etc 48.7 57.7 1.0 1.4 15.0 18.1 3.8 7.0 5.1 3.5 Total incl others 2,749.6 3,278.4 209.4 374.8 358.9 370.6 205.3 246.9 147.0 242.6

Total Uganda Tanzania UK Germany Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Exports fob 1996 1997 1996 1997 1996 1997 1996 1997 1996 1997 Food 1,043.0 1,000.4 45.3 40.9 34.2 32.4 190.2 209.0 141.8 121.0 of which: fish & preps 57.6 52.7 0.1 0.0 0.0 0.0 1.5 0.6 5.3 5.2 fruit & vegetables & preps 156.9 148.7 0.4 0.8 0.3 1.2 44.6 43.0 10.5 10.5 coffee 288.4 289.4 0.5 0.3 0.4 0.1 16.7 31.2 124.1 103.7 tea 399.0 419.0 0.2 0.1 1.7 1.0 126.4 133.6 1.8 1.5 Crude animal & vegetable materials 118.6 114.6 2.2 0.5 1.8 1.3 11.7 15.8 7.9 7.1 Petroleum products 138.9 181.7 65.3 65.4 16.2 18.5 0.0 0.0 0.0 0.0 Chemicals 128.4 128.4 33.9 36.4 45.1 47.6 0.7 0.9 0.0 0.0 Non-metallic mineral mnfrs 69.9 63.1 24.6 10.4 4.6 3.7 0.5 0.5 0.5 0.4 Iron & steel 91.9 89.0 29.0 31.6 43.3 37.0 0.0 0.0 0.1 0.0 Total incl others 1,992.2 1,959.4 306.0 279.7 238.7 238.6 215.6 237.6 154.2 131.0 a Imports from UAE, $194.6m and $283.5m respectively. Source: UN, External Trade Statistics, series D.