Ministry of Finance, Planning and Economic Development The Background to the Budget 2010/11 Fiscal Year STRATEGIC PRIORITIES TO ACCELERATE GROWTH, EMPLOYMENT AND SOCIO-ECONOMIC TRANSFORMATION FOR PROSPERITY June 2010 Table of Contents LIST OF ACRONYMS ........................................................................................................................................... IV PART ONE: INTRODUCTION AND GLOBAL/REGIONAL DEVELOPMENTS AND PROSPECTS ..................................... 1 CHAPTER ONE .................................................................................................................................................... 2 1.0 INTRODUCTION ............................................................................................................................................ 2 CHAPTER TWO ................................................................................................................................................... 5 2.0 GLOBAL AND REGIONAL ECONOMIC DEVELOPMENTS AND PROSPECTS .................................................. 5 2.1 GLOBAL DEVELOPMENTS AND PROSPECTS .............................................................................................................. 5 2.2 GLOBAL ECONOMIC ACTIVITY .............................................................................................................................. 5 Global Growth ....................................................................................................................................................... 5 International Trade ............................................................................................................................................... 6 Global Inflation ..................................................................................................................................................... 8 2.3 REGIONAL DEVELOPMENTS AND PROSPECTS ........................................................................................................... 9 Sub-Saharan Africa ............................................................................................................................................... 9 East African Customs Union ................................................................................................................................ 10 East African Common Market ............................................................................................................................. 11 East African Monetary Union (EAMU) ................................................................................................................ 11 PART TWO: DOMESTIC ECONOMIC DEVELOPMENTS AND PROSPECTS ............................................................... 13 CHAPTER THREE ................................................................................................................................................ 14 3.0 ECONOMIC GROWTH ............................................................................................................................ 14 3.1 GDP GROWTH ................................................................................................................................................ 14 3.2 DETAILED SECTORAL GDP GROWTH PERFORMANCE .............................................................................................. 15 Agriculture, forestry and fishing sector ............................................................................................................... 16 Cash crops ........................................................................................................................................................................ 16 Food crops ........................................................................................................................................................................ 17 Fishing .............................................................................................................................................................................. 18 Industry ............................................................................................................................................................... 18 Services ............................................................................................................................................................... 19 CHAPTER FOUR ................................................................................................................................................. 22 4.0 MONETARY AND FINANCIAL SECTOR DEVELOPMENT ............................................................................ 22 4.1 THE MONETARY SECTOR .................................................................................................................................. 22 Monetary Policy .................................................................................................................................................. 22 Monetary Aggregates ....................................................................................................................................................... 22 Inflation ............................................................................................................................................................................ 23 Domestic Money Markets and Interest Rates ..................................................................................................... 24 Treasury Bonds Market .................................................................................................................................................... 25 Treasury Bills Market ........................................................................................................................................................ 25 The Repo and Reverse Repo Markets .............................................................................................................................. 26 i Lending Rates ................................................................................................................................................................... 27 Developments in the Foreign Exchange Market ................................................................................................. 29 Exchange Rate .................................................................................................................................................................. 29 Volume of Foreign Exchange Transactions ....................................................................................................................... 30 4.2 THE FINANCIAL SECTOR .................................................................................................................................... 32 Banking Sector .................................................................................................................................................... 32 Commercial bank credit to the private sector .................................................................................................................. 33 Non-bank financial sector ................................................................................................................................... 35 Insurance .......................................................................................................................................................................... 35 Credit institutions ............................................................................................................................................................. 37 Agricultural Credit Facility ................................................................................................................................................ 44 Capital Markets ................................................................................................................................................................ 44 Secondary Markets ........................................................................................................................................................... 45 Pension reform ................................................................................................................................................................. 47 CHAPTER FIVE ................................................................................................................................................... 49 5.0 THE EXTERNAL SECTOR ......................................................................................................................... 49 5.1 OVERALL BALANCE OF PAYMENTS POSITION ......................................................................................................... 49 5.2 CURRENT ACCOUNT POSITION ........................................................................................................................... 49 Trade Balance ..................................................................................................................................................... 49 Exports ............................................................................................................................................................................. 49 Imports ............................................................................................................................................................................