Country Report Kenya Kenya at a glance: 2003-04 OVERVIEW Despite the landslide victory won by the new president, Mwai Kibaki, and the National Rainbow Coalition (Narc), his new regime confronts formidable challenges. Apart from reviving the moribund economy and fulfilling election pledges to tackle corruption, provide free primary education and finalise the constitutional review, Mr Kibaki has the difficult task of holding his broad- based coalition together. The Narc contains many highly ambitious politicians and, although Mr Kibaki is expected to co-ordinate the talent at his disposal skilfully, he is old and in poor health. The main challenge may come from Raila Odinga who, though loyal to date, would like to become prime minister. The post does not currently exist but is a key element of the proposed new constitution, which also calls for a weaker president. The issue may generate a considerable dispute within the party. More rapid progress is expected on tackling corruption, a key demand of the IMF. We expect external financial support to resume by mid-year, which will help stimulate more rapid economic growth over the forecast period. Key changes from last month Political outlook • The government has launched a special commission to re-investigate the so- called Goldenberg scandal. The collapse of the Nairobi-based Euro Bank has led to the replacement of the governor of the Central Bank of Kenya, Nahashon Nyagah, by Andrew Mullei. Mr Nyagah was forced to resign after the loss of KSh1.4bn (US$18m) of public funds deposited in the bank by various government institutions. Economic policy outlook • Tight fiscal and monetary policies will continue to shape economic policy.. Economic forecast • The country’s economic prospects are unchanged from last month: real GDP is forecast to edge up in 2003-04, supported by external funds and investor confidence. March 2003 The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where the latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group. 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Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author's and the publisher's ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it. ISSN 0269-4239 Symbols in tables “n/a” means not available; “–” means not applicable Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK. Kenya 1 Outlook for 2003-04 Political outlook Domestic politics Kenya’s political environment has been transformed by the landslide victories won by Mwai Kibaki and his National Rainbow Coalition (Narc) in the presidential and legislative elections held on December 27th 2002. The Kenya African National Union (KANU) was pushed into opposition for the first time since independence in 1963 and Daniel Arap Moi’s 24-year reign was brought to a close. The challenges confronting Mr Kibaki and his Narc government are, nevertheless, daunting. The new regime has inherited a run-down infrastructure, weak and corrupt institutions, a country riven with ethnic divisions, and one of Africa’s worst-performing economies. Furthermore, apart from fulfilling specific electoral pledges to tackle corruption, introduce universal, free primary education, and complete the constitutional review process, Mr Kibaki faces the task of holding his broad-based coalition together. Narc membership is exceedingly diverse and cuts across traditional boundaries of ethnicity and ideology. It also includes many opportunists, including defectors from KANU, who are seeking to prolong their own political careers. The main inspiration for party unity was the defeat of the old regime, but with this objective achieved, the forces acting on the Narc will tend to promote fragmentation. As part of the government’s war on corruption, it launched at the beginning of March a special commission to re-investigate the biggest corruption case in Kenya’s history, the so-called Goldenberg scandal of 1991. The scandal involved the pay-out of KSh68bn (US$1bn) for fictitious exports of gold and diamonds. At the centre of the affair is a local businessman, Kamlesh Pattni, who is accused of defrauding the government of Ksh22bn. There can be no doubt that a satisfactory conclusion of the Goldenberg scandal, which also involves some members of Mr Kibaki’s government, will be a demonstration of the new government’s commitment to tackling corruption at the highest level. The collapse of the Nairobi-based Euro Bank has led to the replacement of the governor of the Central Bank of Kenya, Nahashon Nyagah, by Andrew Mullei. Mr Nyagah resigned after the loss of KSh1.4bn (US$18m) of public funds deposited in Euro Bank by a number of government institutions (Kenyatta National Hospital, the Postal Corporation, Kenya Sugar Authority and the National Social Security Fund among others), which were subsequently lent to politically connected individuals. The Euro Bank scandal is likely to prompt resignations (and prosecutions) of other members of the Kibaki cabinet that served in the Moi government. International relations The international community welcomed the smooth transition of power and Mr Kibaki’s promise of fundamental economic reforms and efforts to combat corruption. The new government’s efforts to date on both reforms and corruption is viewed positively by the World Bank and IMF, and the government has good prospects of normalising relations with them, especially the IMF. External assistance is likely to resume by mid-2003, provided the Country Report March 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 2 Kenya government does not weaken in its commitment to fight corruption and restructure parastatal enterprises. On a less encouraging note, both the US and the UK have again warned that Kenya is a soft target for possible further terrorist attacks. This will undoubtedly delay the recovery of the country’s tourism sector, following a very poor winter season. Economic policy outlook Policy trends The state of Kenya’s economy will challenge the abilities of the new finance minister, David Mwiraria, as he attempts to produce a coherent set of policies and honour electoral promises. In the short-term, the government’s strategy relies on the restoration of donor support. High-level talks were held with visiting IMF and World Bank delegations to Nairobi in mid-January. There are three main preconditions for IMF support: the passage of anti-corruption legislation, the prosecution of high-profile offenders and a renewed commitment to privatisation. The government appears dedicated to meeting these demands, and the Economist Intelligence Unit expects negotiations on a new IMF programme to start in April or May, followed by the resumption of funding in mid-year. The government is currently redrafting the poverty reduction strategy paper prepared in 2000, and is expected to focus it on job creation and sustainable development. IMF approval would release non-project support from the World Bank and allow access to Paris Club debt rescheduling. Progress with the sale of key state assets including Telkom Kenya, the Kenya Railways Corporation, the Kenya Ports Authority and Kenya Commercial Bank may prove slower. The government wishes to restore them to profitability (in order to get a better price) and will initially concentrate on commercialisation rather than privatisation. The more favourable policy environment is expected to raise foreign direct investment from its current low level, especially if progress is made in tackling corruption and repairing dilapidated infrastructure. Fiscal policy Although external assistance, including budgetary support, may resume in mid- 2003, it may take longer to come through. Faced with severe resource constraints, Mr Mwiraria will be obliged to follow fairly tight fiscal policy in the next fiscal year (July 2003-June 2004). The deficit has mounted steadily in fiscal year 2002/03 and continues to do so—the result of both pre-election spending by the outgoing regime and the need for the incoming administration to fulfil its promises, especially on education. The targeted deficit of around KSh34bn (US$435m; 4% of GDP) is overoptimistic, and Mr Mwiraria recently forecast a full-year deficit of KSh57bn (7% of GDP).