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ECONOMIC REFORMS FOR 1996 - 1998

The Policy Framework Paper

KENYAECONOMIC REFORMS FOR 1996-1998:

The Policy Framework PaperPrepared by the Government of Kenya in collaboration

with the IMF and the World BankFebruary 16, 1996

I. INTRODUCTION

1. Kenya faces a major challenge in reducingunemployment and poverty. The number of peopleunemployed is currently more than two million and at leastten million people are living in poverty. In addition, aroundone-half million people will enter the labor force each yearover the next decade. To achieve significant reductions inunemployment and poverty, the economy will require to growon average by over 6 percent a year for several years. It willalso be imperative that the Government places increasedemphasis on social services and adequately targetedinterventions in favour of the poor.

2. The Government is determined to meet this challengeand has in this respect initiated a number of reforms in thelast three years. The specific reforms which have beenimplemented so far include: decontrol of prices; removal ofimport licensing; removal of exchange controls; liberalisation

ECONOMIC PERFORMANCE

of pricing and movement of maize; liberalisation of thepetroleum market; and reform of the civil service.

3. This reform framework incorporates the policies andprogrammes that the Government is committed to pursue overthe next three years in order to deepen the reform process.This will create the conditions necessary to achieve the desiredrapid and sustainable economic growth.

II. ECONOMIC PERFORMANCE

Macroeconomic and Structural Policies

4. Sustained effort by the Government to tighten fiscal andmonetary policies since mid-l993 has been effective instabilizing the economy and contributing to the revival ofeconomic growth. Gross domestic product (GDP) grew byabout 3 percent in 1994 and by an estimated 5 percent in 1995.The fiscal deficit has been sharply reduced from over11 percent of GDP in 1992/93 to 2.6 percent in 1994/95.Expansion in money supply, though still high, has also beenreduced substantially. Inflation has been reduced substantially.Annual inflation (month over month) declined steadily froma peak of 62 percent in January 1994 to 6.9 percent inDecember 1995. However, after a small surplus in 1993, thecurrent account balance (excluding official transfers)deteriorated to a deficit of 0.4 percent of GDP in 1994, andfurther to an estimated 4.2 percent in 1995.


5. The tight control on the budget was accompanied bytax reforms aimed at reducing the tax rates and broadeningthe tax base. Expenditures have also been reoriented withmore resources allocated to non-wage recurrent outlays anddevelopment expenditures. Progress in controllingexpenditure has, however, been slow and some ministries havecontinued to spend in excess of their authorized limits.

6. With respect to structural reforms, the Government has,since mid-l993, made significant strides. It has eliminatedexchange controls including restrictions on inward portfolioinvestments and removed all trade restrictions, except for ashort list of a few products controlled for health, security andenvironmental reasons. The number of non-zero tariff rateshas been reduced from seven to five, and the maximum tariffreduced from 62 percent in 1993/94 to 40 percent in 1995/96.With the liberalisation of the maize market in December 1993and the petroleum market in October 1994, all price controlshave been abolished. Steps were also taken to strengthen thefinancial system, including enhanced prudential supervisionof commercial banks, the closure of financially unsound banks,and strict enforcement of statutory requirements of nonbankfinancial institutions (NBFIs), some of which were eithertransformed into banks or merged with existing banks. Firmactions were also taken to deal with the hitherto widespreadmismanagement and corruption in the financial systeminvolving access to credit from the Central Bank and budgetaryresources.


7. The Government has since 1992 been implementing amajor civil service reform programme aimed at reducing theoverall size of the civil service and achieving cost containment,and rendering the civil service more efficient by improvingworking conditions. To this end, the civil service has beentrimmed by over 33,000 since July 1993.

8. Privatisation of 211 non-strategic public enterprises hasstarted, with the Government divesting its holdings in over100 firms (including 43 tea factories in which it turned overthe bulk of its shareholdings to farmers) by the end of 1995.In addition, it has reduced its holdings in another sixenterprises, including Kenya Airways, Kenya CommercialBank and the National Bank of Kenya. The Government isalso making progress in parastatal reform. Initial steps torestructure key public enterprises like the Kenya PortsAuthority (KPA), Kenya Railways (KR), Kenya Power andLighting Company (KPLC) and Kenya Posts andTelecommunications Corporation (KPTC), have begun.However, further steps will need to be taken in order toaccelerate progress in this area and thereby improve on thelow investment efficiency that limits economic growth.


Social Policies

9. The Government has given clear priority to educationand health, and has taken a pragmatic approach in respect toprivate provision of these services. To date, Kenya hasachieved an average life expectancy of 58 and an infantmortality rate of 61 per thousand live births. Many challenges,however, remain. Secondary school enrolment is only29 percent of the relevant age-group. Child nutrition, aftershowing improvement during 1982-87, stagnated, and evendeteriorated in some areas. It is also estimated that thirty-four percent of the population under five is currently stunted.Child status indicators show significant differences accordingto the education of the mother, which is also a proxy for incomedifferences. While there is no indication of majordiscrimination against females in access to basic educationand health services, the completion rate for primary schooleducation is lower for females, and in times of economicdifficulty, female students are more likely to drop out ofprimary school. Girls from poor rural families typically donot attend secondary school. Moreover, female-headedhouseholds, i.e., those with no male support, experience highrates of severe poverty.

10. The lack of sustained economic growth has become theprimary constraint t o social improvement in Kenya. Inparticular, economic growth has not been sufficient to generateproductive employment opportunities to absorb the rapidlygrowing labour force. Unemployment in urban areas is

POLICY OBJECTIVES AND STRATEGIES

currently around 25 percent. About half of the rural populationis living in poverty, and have no access to the minimumrequirement of food and essential non-food commodities.

III. POLICY OBJECTIVES ANDSTRATEGIES FOR 1996-98

11. The key development challenge facing the Governmentover the next three years will be to create the conditions forrapid and sustained growth at a level which will result in asignificant reduction in unemployment and poverty. TheGovernment’s strategy to meet this challenge will be to:(a) maintain macroeconomic stability by strengtheningmonetary and public sector finance management, and byconsolidating fiscal discipline; (b) improve the efficiency ofthe public sector by accelerating and streamlining reform inthe civil service and public enterprises, and improving thedelivery of infrastructural services; (c) enhance external anddomestic competitiveness of the economy through furtherliberalisation of markets; (d) address the social aspects ofdevelopment particularly through targeted povertyinterventions and increased access of the poor to socialservices; and (e) eliminate corruption. The Governmentintends to move further away from direct participation ineconomic activity, and toward the provision of an enablingenvironment for private sector development with emphasison policies which are environmentally friendly and whichencourage labour-using growth.


Macroeconomic Objectives

12. The Government’s first priority is to maintain astable macroeconomic framework while continuing withstructural reforms necessary to accelerate economic growth.The key macroeconomic objectives for 1996-98 include:(a) achieving higher real GDP growth rising from an estimated5 percent in 1995 to nearly 6 percent in 1998; (b) limiting theannual rate of inflation (end of period) to no more than5 percent in 1996 and thereafter, close to the rate of inflationprojected for Kenya’s major trading partners; and(c) strengthening the external current account position(excluding official transfers) from a deficit of about 4.2 percentof GDP in 1995 to a deficit of about 1.4 percent of GDP in1996 and to 0.8 percent by 1998. Gross official reserves aretargeted to rise to the equivalent of 4.3 months of imports atend-l 998, up from 2.1 months at the end of 1995.

13. Stable macroeconomic conditions, liberalised markets,and more efficient operations of the strategic public enterprisesare expected to enhance the level and the efficiency of privateinvestment, and result in increased income and job creation.To achieve these objectives, Kenya will require an increase ingross fixed capital formation from 21.7 percent of GDP in1995 to 23.2 percent in 1998. The investment recovery willbe financed out of national saving, which is projected toincrease from about 20 percent of GDP in 1995 to 24.5 percentin 1998.


14. Over the period 1996-98, the agricultural sector isprojected to grow slightly above 4 percent per annum, with aslight decline in its share as percent of GDP by 1998.Government policies will seek to ensure that broad based ruraldevelopment is promoted through appropriate investment inrural infrastructure and agricultural research and extension.The manufacturing and the service sectors are projected togrow at around 7 percent per annum, reaching 18.2 and36.6 percent of GDP by 1998, respectively.

Monetary and Financial Sector Reforms

15. The primary objective of monetary policy will be tomaintain price stability. To achieve this objective, the CentralBank of Kenya (CBK) will seek to ensure that money supplyexpands at rates consistent with the growth of economicactivities. The Bank will continue to rely mainly on OpenMarket Operations (OMO) to manage the supply of moneyand credit to the economy. Interest rates in such operationswill be allowed to vary, as necessary, to achieve this goal.Credit to the financial institutions from the CBK will be keptlow. Foreign exchange intervention by the CBK will be limitedto smoothing out short-term fluctuations in the exchange rate.

16. A number of measures will be taken to strengthenmonetary policy management. Accordingly, the Governmentwill submit a Bill to Parliament by June 1996 to amend the


CBK Act and to give the Central Bank more autonomy. TheGovernment considers this to be critical to sustain pricestability. The Bill will define clearly the purposes of theCentral Bank and grant it sufficient powers to discharge itsresponsibilities more effectively. In addition, the CBK willseek to improve its capabilities to forecast accurately and ona timely basis the movements in reserve money. The Bank willalso strive to improve its intervention techniques in the moneyand foreign exchange markets.

17. Steps will be taken by the CBK to develop secondarymarkets in Treasury bills to increase the effectiveness offinancial markets. Preparatory work on the legal and technicalinfrastructure for the introduction of Repurchase Agreementinstruments (REPOs) will be undertaken in 1996. The CapitalMarkets Authority will also encourage the private sector toestablish a central depository for Treasury bills, which wouldensure an efficient delivery and payment system for the bills.An expanded role for the Nairobi Stock Exchange is envisaged,particularly through a widening of the range of financialinstruments traded on the exchange and assistance in theprivatisation of public enterprises.

18. To strengthen the broader financial system, the NationalSocial Security Fund (NSSF) will be converted into anautonomous pension fund and necessary legislation will be

POLICY OBJECTlVES AND STRATEGIES

presented to Parliament by end-December 1996. Thelegislation will stipulate, inter-alia, that members of the Boardbe elected by pensioners, and that the Board members electthe chairman. The conversion will be carried out with theassistance of the World Bank and other donor agencies andwill include, inter alia, strengthening of informationtechnology as well as an actuarial study by an external auditor.Meanwhile, the NSSF has been instructed to invest its revenuein government securities only, except for deposits in soundand stable financial institutions which will be limited to 15percent of NSSF’s total assets. An external audit of thefinancially troubled Kenya National Assurance (KNA) hasbeen completed and specific recommendations have beenmade for its restructuring by end-June 1996. The generalinsurance business of KNA will be liquidated and the lifeinsurance business will be operated as a closed fund. Thismeans that no new insurance will be issued and most of theexisting staff will be retrenched. Any financial impact willbe reflected in the 1996/97 budget. To consolidate thesoundness of the banking system, no new banking licenseswill be issued before end-1996 except for large new entrants,i.e., banks with capital larger than K Sh 1 billion who arejudged to offer credible competition to the existing large banks.Moreover, all prudential regulations will continue to be strictlyenforced.


Budgetary and Public Expenditure Policies

19. Fiscal policy will continue to be significantly tightenedwith the objective of lowering domestic debt and therebyfacilitating the reduction of interest rates. The overall budgetdeficit (on a commitment basis and excluding grants) istargeted to decline gradually from its 1994/95 level of2.6 percent of GDP to 1.9 percent of GDP in 1995/96 andfurther to 1.5 percent of GDP by 1997/98. In the process,overall revenue will slightly decrease from 31.7 percent ofGDP in 1994/95 to 30.9 percent in 1997/98. On theexpenditure side, the programme will focus on improving thequality and the sectoral allocation of public spending, as wellas strengthening of budgetary control and management.Development expenditure would be increased over the periodto help rehabilitate infrastructure, while recurrent expenditurewill be markedly reduced so that total expenditure woulddecline from 34.3 percent of GDP in 1994/95 to 32.3 per centin 1997/98. With the projected availability of grants andexternal financing and assuming budgetary support fromprogramme financing, this level of deficit will allow domesticdebt to be reduced from 28.1 percent of GDP in 1994/95 to18.4 percent in 1997/98. The retirement of domestic debt isessential to allow more credit to the private sector and areduction in real interest rates.


20. Tax Reform. Steps will be taken to deepen the taxreform which is aimed at reducing the tax burden andbroadening the tax base. Maximum import duties will belowered further by July 1997, while income tax and VAT rateswill be lowered to the extent compatible with the deficit target.The tax base will be broadened by eliminating many of theexemptions from taxes and reducing the scope for tax evasion.In particular, the Government will take immediate steps to doaway with all discretionary import duty exemptions.Improving tax administration will continue to be an importantelement of the tax reform programme. In this respect, theGovernment will ensure the proper functioning of the newlyestablished Kenya Revenue Authority by improvingremuneration and funding its other operations and byempowering the Authority to freely hire and dismiss staff inorder to encourage diligence, honesty, and performance. Toenhance controls on customs revenues, the Government hasbegun a systematic ex-post reconciliation of actual receiptsof customs duties and those calculated by the Pre-shipmentInspection (PSI) firms.


21. Public Expenditure Reform. Further steps will betaken on expenditure reform involving strengtheningbudgetary controls and rationalising expenditures. Budgetarycontrols will be reinforced through increased transparency andaccountability. To this end, the Government will not enterinto any commitments which have not been included in theBudget and approved by Parliament. It will strictly enforceand, where necessary, strengthen procedures for the grantingof public procurement contracts and for external and domesticborrowing. In this respect, no exemption will be granted inthe requirement for the public tender of all contracts exceedingK Sh 10 million. Expenditures will be closely monitored ona monthly basis by the recently established unit at the Treasury,and the sanctions of the financial orders and regulations willbe strictly applied to Accounting Officers in ministries anddepartments that violate established recurrent and developmentceilings without explicit and prior written approval of theTreasury. Consistent with this, the Government will publishon a quarterly basis, the preliminary budgetary outturn. TheGovernment will also take steps to ensure that localgovernment expenditure processes are on a sound footing,particularly given the increased resources made available tothem through the authorization of a 50 percent increase in theservice rates on businesses.

22. The rationalisation of public expenditures will involvea shift in the allocation of public funds toward theGovernment’s basic functions of maintaining law and order

POLICY 0BJECTlVES AND STRATEGIES

and administering justice, financing broad-based educationand health services, providing economic infrastructure,supporting agricultural research and extension, and protectingthe environment. While recurrent expenditures will continueto be constrained, limits on the overall growth of the wagebill through civil service rationalisation, improvements in thecollection of appropriations-in-aid by ministries, and theshedding of non-essential government services, will permitsignificant real increases in non-wage operations andmaintenance expenditures, particularly for the basic functions.To this end, the Government will initiate, with assistance fromthe World Bank, a wide-ranging review of public expendituresduring the first half of 1996. This review will be the basis forspecific spending decisions in the 1996/97 to 1998/99 budgets.

23. Development expenditures (including net lending) willbe increased from their current level of just over 7 percent ofGDP. Full annual funding will be provided for all “core”projects and allocations to core functional areas will accountfor at least 75 percent of the development budget over thenext three years. Shortfalls in funding will be met byreallocating funding from non-core to core projects. TheGovernment will improve the project selection criteria toensure that all new projects are vetted before they areintroduced into the Public Investment Programme (PIP) inorder to ensure consistency with likely available resources,and that no project will be included in the budget which isnot contained in the PIP.


Civil Service Reform

24. The first of three phases of the seven-year programme ofthe Civil Service Reform Programme, which is intended toincrease the efficiency of the Service and to improvemanagement capacity, is now underway. As indicated earlier,in order to improve the efficiency of the Service, theprogramme involves the reduction of positions and staff,implementation of staffing norms for all cadres, improvedestablishment control, rationalisation of selected ministriesand pay reform. These actions will be taken consistent withbudgetary resource availability. In line with the Government’sprevious commitments, staff reduction measures and thecorresponding positions are to be reduced by 16,000 per yearover 1995/96 and 1996/97, through natural attrition, voluntaryretirement and position rationalisation. During the periodJanuary 1996 to June 1997, the Government will limit newhires to 3,000 per year maximum, i.e., no more than 1500between January and June 1996 and 3000 between July1996 and June 1997. This will imply net reductions in civilservice of 20,180 over the period January 1996-June 1997.

25. In light of emerging staff shortages in certain areas, theGovernment will ring-fence some of the most critical and well-trained but scarce junior staff. During 1996, the Governmentintends to carry out staff analysis and establish staffing normsfor key cadres. This, together with the results of the ministerial


staff rationalisation programmes, will enable the Governmentto develop a coherent programme of Civil Servicerationalisation for the period 1997/98 and beyond. Thisprogram will be developed by June 1997 taking account ofthe medium term budgetary outlook.

26. To increase personnel control, the Government iscommitted to the introduction of an Integrated Personnel andPayroll Database (IPPD) system in the Service. By mid-1997,the Government will have completed the first Phase of thisintroduction. Similarly, by the end of 1996, modalities willhave been worked out for the introduction of andimplementation of performance-related pay for identifiedcritical cadres. In addition, and as part of its effort to improveefficiency, the Government will identify key indicators forCivil Service Operations and Maintenance (O&M)requirements and give them priority in the recurrent budgetexpenditures beginning in 1996/97.

27. In the area of ministerial rationalisation, work hasalready been initiated in the ministries of Health (MOH),Finance (MOF), Lands and Settlements (MOLS), PublicWorks and Housing (MOPWH), Land Reclamation, Regionaland Water Development (MLRRWD) and Agriculture,Livestock Development and Marketing (MOALDM). ForMOH and MOALDM, implementation of these plans isunderway and is expected to be completed by the end of 1996.The rationalisation of the other four ministries is expected to


be completed by July 1997. The Government intends toidentify by July 1996, six additional ministries forrationalisation with emphasis on the development of staffing

.norms which can be applied to determine optimal staffinglevels. It is envisaged that the process of ministerialrationalisation will be complete by the end of 1998.

28. During the period 1996-98, increased attention will bepaid to training and human resource development in the CivilService. Training will be geared toward the development ofspecial skills in key areas , based o n the results of the staffing norms and ministerial rationalisation. Towards this end, theGovernment will seek to improve physical facilities in theexisting training institutions. Before the end of 1996, it isexpected that all critical training needs will have beenidentified and prioritised.

Public Enterprise Reform

29. The Government considers the private sector as the onlybasis for sustainable long term economic growth.Accordingly, it will progressively reduce the role of the publicsector in the economy through rationalisation of public sectorfirms and an accelerated programme of privatisation.

30. Rationalisation of Major Parastatals. T h eGovernment intends to implement major rationalisation anddivestiture programmes for each of the key parastatals. In so


doing, the Government will seek to increase the role of theprivate sector through direct participation as well as throughdivestiture of non-core activities. Furthermore, tightbudgetary controls will be enforced on the parastatals. Thiswill be achieved by charging market rents for use of landsheld by the Government, applying a 2 percent fee to any newloan guarantees provided by the Government, requiringparastatals to be current on their financial obligations, andeliminating any existing arrears within the next three years.

31. National Cereals and Produce Board. The

Government will by end-1996 transform the National Cerealsand Produce Board (NCPB) into a commercially viable entityfree to make independent commercial decisions. Experts willbe engaged for this purpose. The experts are expected to beginwork by June 1996, based on terms of reference agreed withthe World Bank. Principles governing this commercialisation,including expanding the private sector role in maize marketing,and the interim operating rules for NCPB have been finalised.

32. Kenya Ports Authority.- To improve the efficiency ofKenya Ports Authority (KPA), the Government has requestedSingapore Port Authority (SPA) to manage and operate thecontainer terminal at the port of Mombasa. SPA has agreedin principle, and the necessary contract will be signed beforethe end of March 1996. KPA will also at that time havecompleted the re-negotiation for the two ten-year equipment

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maintenance contracts it entered into in 1994, limiting theduration of these contracts to five years and establishingperformance guarantees and penalties. A performance contractbetween the Government and KPA will be completed beforeApril 1996. The contract will include arrangements toimplement the recommendations of the ongoing staffrationalisation study.

33. Kenya Railways Corporation. A programme for the

restructuring of Kenya Railways (KR) which has already beeninitiated will be accelerated early in 1996, based on the paperto be considered by Cabinet in February 1996. It will includethe separation of passenger and freight services, thediscontinuation of loss-making services, the contracting outof locomotive maintenance, the divestiture of marine services,and staff reductions. The maintenance contracts will be signedby August 1996 and staff numbers will be reduced to 14,500by the end of 1996. A performance contract will be enteredinto before the end of May 1996.

34. Kenya Posts and Telecommunications Corporation.

The Government will issue, early in 1996, a policy statementspelling out the privatisation programme for Kenya Posts andTelecommunications Corporation (KPTC). Legislation willbe presented to Parliament in March 1996 seeking to splitKPTC into three separate entities: posts, telecommunications,and a regulatory authority. If approved, the three entities willbe established by December 1996. The Government will open

POLICY OBJECllVES AND STRATEGIES

to outside investors at least 30 percent of the capital of thenew telecommunications entity through the participation of astrategic investor and through public flotation. The entitywill also engage in joint ventures with private investors inactivities such as cellular telephones. As part of this process,KPTC has recently liberalised telecommunication servicesbeginning with pay phones and Very Small ApertureTerminals (VSAT) for private operators. KPTC will alsodivest its non-essential services including workshops andbuildings by September 1996.

35. Power Sector Companies. Legislation is now being

prepared to separate the regulatory and commercial functionsof the power sector, facilitate restructuring of the sector andpromote private investment. This will be presented to theParliament by the middle of 1996. An action plan is alsobeing formulated which will provide for the commencementof the separation of generation, transmission and distribution,and articulate the reforms in the organisation, managementand financial structure of the Kenya Power and LightingCompany (KPLC) and other power companies. Theimplementation of the action plan will commence in June 1996.Performance contracts for all power sector parastatals will beentered into for implementation commencing before the fourthquarter of 1996. Early in 1996, bids will be invited forinvestment by independent private producers in powergeneration.


36. Institutional Arrangements. To increase managerial

autonomy in public enterprises, a Government Order will beissued early in 1996 exempting key parastatals (excludingKenya Railways, which is already exempted, but includingKenya Airports Authority) from provisions of the StateCorporations Act. The Ministry of Finance has also begunfilling its staff positions charged with monitoring the reformprogramme.

Privatisation

37. The Government aims to complete by the end of 1997the divestiture of 1 all remaining (96 entities) “non-strategic”enterprises . This will be done in two roughly equalinstallments. In addition, in 1996 work will be initiated onthe divestiture of three formerly strategic enterprises: KenyaPipeline Corporation, Kenya Petroleum Refineries and NyayoBus Corporation. The Government is progressively reducingits holdings to a modest minority shareholding in the NationalBank of Kenya and Kenya Commercial Bank.

38. The Government will take steps to ensure access for awide spectrum of Kenyans in the ownership of enterprises tobe divested. In order to build and maintain public confidencein the programme, the Government is committed to ensuring

‘Privatisation" is understood to mean that the Government (including its various departments, ministries, holdingcompanies, agencies, etc.) has divested its holdings in the firm to 30 percent or below the blocking share asstipulated in the firms' articles of agreement.


the utmost possible transparency in the implementation ofdivestitures. To achieve this, where shareholders do not holdclearly established pre-emptive rights, the Government willemploy competitive bidding using transparent procedures: (i)firms (or their assets) to be sold will be widely publicized inadvance; (ii) pre-qualification criteria and rankingmethodology will be clearly publicized with the call for bids;(iii) bids will be opened publicly; and (iv) results will bepublished at the conclusion of each sale listing the terms ofsale, the offers received, and the price at which the sale tookplace. Quarterly reports will be prepared and published onthe implementation of the privatisation programme and onthe privatisation proceeds and their uses. Semi-annual auditson the privatisation proceeds and uses will also be preparedand made public.

Market Liberalisation

39. Trade Reform. The Government will continue withthe following process of trade and investment liberalisation.Import tariffs will be further realigned, with the aim ofachieving by July 1997 no more than three non-zero rates,and a lower trade weighted average tariff. The discriminatoryelements of the supplementary levy on sugar will be eliminatedby December 1996. The suspended duty on petroleumimports, introduced in November 1994 to give temporaryprotection to Kenya Petroleum Refineries Limited following


the petroleum market liberalisation, will be eliminated byOctober 1996, contingent on the completion of the LPG importunloading pipeline (see para 54). Specific duties on cerealimports will be abolished by end-l996. By that time anti-dumping legislation consistent with the World TradeOrganisation (WTO) rules will be presented to Parliament,and anti-dumping duties on cereal imports will be imposed inaccordance with the law. The Government will also workwith Uganda and Tanzania, under the framework of thePermanent Tripartite Commission for East AfricanCooperation, toward an eventual goal of an East Africancommon external tariff and harmonized investmentregulations, as well as a more active use of regional currencies.40. Given its commitment to export-oriented growth, theGovernment intends to implement a strategy for industrialdevelopment that is intended to develop and diversify Kenya’sindustrial exports . The strategy will focus on creating theconditions to encourage private investment in activities whereKenya could be competitive. Underpinning this strategy willbe a broad based effort, through appropriate training andincentives, to make all relevant Government agencies activepromoters of investment and trade. The policy instruments toenable such growth will include simplification of licensingand tax regulations and procedures, and provision of improvedinfrastructure services. Effective enforcement of the low andsimple tariff structure will reduce uncertainty and promoteinvestment in areas where Kenya has a comparative advantage.


41. Domestic Market Liberalisation. The Governmentwill undertake further reforms to ease restrictions on businessentry and operations while putting in place appropriatesafeguards against anti-competitive behavior. This will beachieved by rationalisation and a reduction in the number ofnational and local fees and licenses required for newbusinesses, and through minimising restrictions on retail andwholesale trade and investment under various legislation.Actions on this front will be taken within the context of reformsof the fiscal base of local authorities. The Government is alsocommitted to taking corrective measures to ensure thatfarmers, consumers and traders benefit from a liberalisedmarket. In this respect, the liberalisation of maize marketingand the establishment of a competitive seed industry will becrucial. To speed up resolution of commercial cases, theGovernment intends to introduce additional courts in majortowns.

Sectoral Policies and Programmes

42. Agriculture. The main aim of agricultural sector policywill be to accelerate agricultural growth, increase small-holderproductivity, and expand rural employment. With thesubstantial deregulation of the domestic markets for allagricultural commodities, this objective will be pursued undera liberalised system where the private sector plays the keyrole in production, marketing and processing. The


Government has already liberalised the seed subsector;additional measures will be taken to strengthen the subsector,including the establishment of financially sustainable breederand foundation seed units at the research centers of KARI,and the improvement of plant health, quality and quarantineservices and facilities through the operationalisation of theKenya Plant Health and Inspectorate Services (KEPHIS).

43. The Government is also taking steps to improve theoperations of Kenya Cooperative Creameries (KCC), with aview to improving its financial viability and enhancing thefarmers’ role in the management of the affairs of the

organization.

44. Consistent with these changes is the proposedrestructuring of MOALDM which will be completed by theend of 1996. This will reorient the role and strategic functionsof the Ministry so as to effectively facilitate private sectorinitiatives, with emphasis on providing strengthened research,extension and other essential services to farmers. A numberof services, such as tractor hire and some veterinary services,will be privatised and cost recovery introduced for others.KARI, which plays an important role in the generation anddissemination of knowledge and related technology, will alsobe restructured durin g 1996/97 within the context of the jointdonor financed Second National Agricultural Research Project(NARP II). This restructuring will include the review and


streamlining of user charges in order to reflect acceptable cost-sharing and cost-recovery in the financing of research. Tostrengthen the application of science and technology toagricultural development, the existing legislative frameworkwill be reviewed; in this respect, a review of the Science andTechnology Act (Cap.250 ) has already been initiated.

45. Food security is of paramount concern to theGovernment. To this objective, the Government will maintaina strategic maize reserve stock of up to 3 million 90-kilogrambags and will develop rules governing its management. Whileit is expected that the actions of private traders will serve tostabilize the maize market in most years, under exceptionalsituations, the Government will supplement these privateefforts to reduce uncertainty and ensure food security byfinancing purchases and sales of maize.

46. Environment. The National Environmental ActionPlan (NEAP), which was formally adopted by the Governmentin June 1994, sets the framework for dealing with the crucialurban, rural and coastal environmental problems which needto be urgently addressed. Since its completion, the challengehas been to translate NEAP’s broad concerns aboutenvironmental management into an operation programme ofeffective policy, legislative and institutional action. TheGovernment will soon be presenting to Parliament, as aSessional Paper, a comprehensive environmental programme.

POLICY OBJECTlVES AND STRATEGIES

An action plan to operationalise this programme, includingthe establishment of an institutional framework, will beinitiated before the middle of 1996. The Government iscurrently preparing an environmental legislation which, afterbroad-based consultation, will be presented to Parliament bythe end of the third quarter of 1996. It is the Government’sintention to establish a Land Use Commission to address landtenure and land use policy issues, with a view to improvingsustainable agricultural productivity and the food securitysituation, as well as in ensuring that biodiversity considerationsare properly considered in land-use decisions.

47. The Government is particularly concerned about thestate of the woodlands. The decline in areas of indigenoushigh forests and the degradation of biodiversity and forestproduct resources within them has reached critical levels. Theuse of woodlands in arid and semi-arid lands as grazing areasand wood fuel continues to accelerate. Industrial plantationshave been inadequately restocked and lack production-orientedmanagement. The Government’s Forestry Policy Statementaddresses these various concerns, particularly inadequaterestocking which is addressed by requiring loggers to replantclear-felled plantations. The Policy Statement will bepresented as a Sessional Paper to Parliament in March 1996.Necessary supportive amendments to the Forest Act will bepresented to Parliament in September 1996.


48. The Government is in the process of updating the policyon wildlife conservation and management (as contained inSessional Paper No. 3 of 1975) and the Wildlife Conservationand Management (Amendment) Act of 1989 to respond tochanging conditions and objectives of wildlife and biodiversityconservation. The new policy framework centers on threemain goals: (i) conserving of biological diversity andrepresentative indigenous ecosystems; (ii) promotingenvironmentally sustainable tourism; and (iii) promotingcompatible land use in priority biodiversity areas, andchanneling the benefits thereof to the local communities. Arevised policy and legislation will delineate the roles andresponsibilities of the Kenya Wildlife Service and of otherGovernment and non-Government stakeholders in theimplementation of this participatory approach. The draftpolicy is being prepared by the Kenya Wildlife Service and isexpected to be approved by the middle of 1996, with therevised legislation to be presented to Parliament by the end of1996.

49. Road Transport. The Government recognizes thatinadequate maintenance over many years has led to asignificant deterioration in the road network. The introductionof a special levy on motor fuels in 1994 to be earmarked forroad development and maintenance was a major step to dealwith this problem. The activities to be financed by the fundare contained in the relevant Act. The Government will also

P O L I C Y OBJECT IVES AND STRATEGIES

ensure that at least 50 percent of the funds required for routineand periodic road maintenance (including urban areas) willbe provided in the budgetary allocations in 1995/96. Thislevel will be progressively raised to fully finance routine andperiodic road maintenance by the turn of the century.

50. A strategic plan for the road sector is now being preparedfor approval by the Government in June 1996, and outlinesthe framework for: (i) capacity building and increased use ofthe private sector in both roads maintenance and construction;(ii) plans for provision of adequate and sustainable fundingfor road maintenance; (iii) provide guidelines for transparentmanagement and use of the fund; and (iv) setting prioritiesfor roads investments.

5 1. Water. Draft legislation amending the Water Act willbe presented to Parliament to address concerns regardingnational water resources management and planning. ANational Water Policy Paper is also being prepared forGovernment approval. A comprehensive investment plan forthe rehabilitation and extension of existing water supplyschemes, many of which are in poor condition as a result ofinadequate maintenance by financially weak operatingagencies, has also been recently prepared and is now beingimplemented. The low level of cost recovery has been a majorfactor contributing to inadequate maintenance. To addressthis, the Government will progressively implement its policy


of charging urban consumers water tariffs sufficient to covercapital amortization and O&M costs, while setting rural tariffsto cover O&M costs only.

52. Energy. The implementation of a sound policyframework and an appropriate investment programme toaddress the increasingly serious shortfalls in power supply isof high priority to the Government. The Government has,therefore, prepared a rolling five-year least cost investmentprogramme comprising urgent investments in powergeneration, transmission and distribution as well asinvestments to facilitate importation of liquid petroleum gas(LPG) and the transportation of other petroleum products.Construction of five power stations, two of which will bedeveloped and operated by the private sector, will add a totalof 338 MW to existing capacity at the turn of the century.The Government attaches great importance to ruralelectrification and is therefore also reviewing cost-effectiveoptions for providing electricity to the rural areas, includingpolicies to encourage the use of renewable energy resources(e.g. wood fuels, photo-voltaics and windmills).

53. To mobilize resources required to supplement externalborrowing in financing the power sector investmentprogramme and to encourage economic consumption ofelectricity, tariffs will be adjusted to ultimately cover long-run marginal costs (LRMC). As an interim measure, tariffs

POLICY OBJECTlVES AND STRATEGIES .

will be raised to 75 percent of LRMC by the beginning ofJune 1996 following resolution of outstanding administrative/legal issues. An update of the November 1993 Tariff Study,to be completed in the third quarter of 1996, will provide thebasis for the Government to establish the magnitude andphasing of further adjustments required to achieve LRMC aftertaking due consideration of the cost of power from independentpower producers and the sector’s overall financing

requirements.

54. Deregulation of the procurement, distribution andpricing of petroleum products was announced in October 1994.The objective of the deregulation was to create a morecompetitive environment which would improve the availabilityof petroleum products and lower prices in the long-term.Because of the lack of import facilities for LPG, temporary(two year) arrangements were made for: (i) the annualprocessing of about 1.6 million tons of crude oil by the refineryto ensure production of about 250,000 tons of the currentannual demand for LPG; and (ii) protection of the refinery bylevying duties on imported products. To achieve the fullbenefits of deregulation, removal of the following existingconstraints to competition is required: (a) urgent constructionof LPG import facilities comprising pipeline connectionbetween the Shimanzi Oil Terminal and the new storage tanksand rail/road loading facilities to be constructed at Mombasa;(b) review and implementation of options for continued use


of the petroleum products pipeline as a common carrier; and(c) installation of a product testing laboratory in Mombasa.Part of the LPG import facilities, to be constructed on a prioritybasis, include the LPG unloading pipeline from Shimanzi OilTerminal to Mombasa Refinery Compound wall and thevapour return line from that point. As indicated in paragraph39, suspended duties on petroleum imports will be completelyremoved by October 1996, contingent on completion of theLPG import unloading pipeline.

55. Population. Kenya has been pursuing an activepopulation policy. While there has been remarkable successin reducing fertility over the last decade, the population ofKenya is still growing at a high rate of around 3 percent perannum. Continued emphasis will thus be placed on familyplanning service delivery to achieve higher contraceptive useand on the promotion of programmes such as social marketingand community-based delivery to address demand for theseservices. To ensure better coverage of the population in thedelivery of these services, greater reliance will be placed onprivate and other non-government entities. To reflect this,the Government is in the process of restructuring the NationalCouncil for Population and Development (NCPD) to de-emphasize its role in service delivery and to turn it into apolicy-making, coordinating and advocacy entity. Over thelonger run, following the U.N. Cairo Conference onPopulation, Kenya will emphasize the integration of


population policy into the overall policy framework. Thiswill include specific interventions in primary education andreproductive health, particularly for disadvantaged families.

56. Health. The Government is firmly committed tomajor reforms in the health sector. The recently preparedHealth Policy Framework sets out a comprehensive approachto improve the quality and availability of health services,including specific measures to be undertaken over the nextthree years, namely, (i) the adoption of a strategy to reducethe prevalence of disease among the population; (ii) thedecentralization of financial and administrative authority todistricts, beginning in the first half of 1996; (iii) the shiftingof a larger share of the financial burden of curative care fromthe Ministry of Health’s (MOH) budget to insurance schemesof the National Hospital Insurance Fund (NHIF) 1 andcompeting private financial entities; (iv) an increase inresources devoted to the completion, maintenance and repairof existing facilities and equipment; (v) the strengthening ofkey health management information systems at the districtlevel; and (vi) the restructuring of the MOH to support thesereforms. The budget of the MOH will continue to reflect theshift to preventive health care away from hospital care,particularly Kenyatta National Hospital where efforts areunderway to improve its efficiency and financial autonomy.The Government is committed to limit the share of MOH’s‘The Government is currently reviewing the scope for expanded enrollment and coverage in the NHIF. The newdraft Bill of the NHIF reflects an intention to include self-employed and the Jua Kali (Informal) sector.


budget to the hospital to 12 percent beginning 1996/97, subjectto adequate progress being made in ensuring other facilitiesare in place to serve the Nairobi area. Efforts to improve thequality of health services under constrained budgetaryconditions requires that funds be mobilised through increaseduser charges. The contribution of user charges will thereforehave to be raised from their current level of 12 percent ofMOH’s non-wage recurrent budget to about 18 percent in1997/98.

57. To address the problem of AIDS and other sexuallytransmitted diseases, the Government is implementing aNational AIDS and Sexually Transmitted Disease ControlProgramme (NASCP), and has prioritized capacity buildingat national and district levels to integrate AIDS into thedevelopment plans. Steps are also being taken to minimizethe socio-economic impact of HIV/AIDS and to strengthenHIV/AIDS epidemiological surveillance. A Policy Paper onAIDS is being finalised, which includes appropriateinstitutional arrangements to coordinate the implementationof the NASCP. As part of a pilot project supported by donors,non-governmental organisations (NGOs) are beginning to playa key role in control and prevention of sexually transmittedinfections. All annual district health plans include fundsearmarked for NGO activities, and the authority to incurexpenditures has been delegated to the District Medical Officerfor ten districts and municipalities.


58. Nutrition. Recent evidence points to high rates ofinfant mortality and some deterioration in already adverse childnutritional status indicators. Anaemia and malnourishmentamong women are also significant, although the precise extentis unknown. To reverse these trends, the Government willreview all nutritional interventions to shift its financing tomore cost-effective programmes targeted at infants, pre-schoolchildren and pregnant women, particularly in rural areas, withselected interventions for older children in poor districts. Thiswill include examining the role of communities in financingthe school feeding programme to ensure its sustainability,assessing and monitoring the nutritional situation, preventingspecific micro-nutrient deficiency, improving young childrenfeeding, and caring for socially and economically deprivednutritional vulnerable groups.

59. Education. The Government’s principal objectives inthis sector over the next three years will be to reverse the recentdeclines in primary and secondary enrolment and completionrates, particularly of girls from poor households, and toimprove the quality of education at all levels. This will involvea reallocation of public expenditures from university educationtoward disadvantaged students in primary and secondaryeducation, and an increase in the effectiveness of theseexpenditures. Means-tested bursary programmes to secondaryschools will be expanded in 1996/97. The Government willalso work out arrangements and plan to introduce a bursaryprogramme directed at girls in primary schools--especially

POLICY OBJECTIVES AN0 STRATEGIES

those at the upper primary level in rural and slum areas.Initiatives for pre-primary education and early childhooddevelopment will also be strengthened. To improve the qualityof education, the Government will maintain its policy of notrecruiting new untrained teachers at the primary level.

60. The Government has in place policies to encourage theparticipation of the private sector in the establishment and.operations of educational institutions. The Government is alsoencouraging the sector to enhance its participation in theproduction of all educational materials. To this end, thecapacity of the Kenya Institute of Education (KIE) will bestrengthened and a review of policies on publishingeducational materials prepared by the Institute will be carriedout, with the aim of enabling the private sector to participateeffectively with the two parastatals publishing educationalbooks, that is, Jomo Kenyatta Foundation (JKF) and KenyaLiterature Bureau (KLB).

61. Enhancing the efficiency and responsiveness ofeducational institutions through the decentralisation ofdecision-making will be an important objective. This will beachieved by increasing the capacity, responsibility andaccountability of local authorities and of boards andcommittees of educational institutions for fundingarrangements and management performance. In this context,the Government is establishing Provincial Education Boards,


strengthening District Educational Boards and reviewing andrationalising the responsibilities of the Teachers ServiceCommission (TSC). Changes at TSC will involvedecentralising its functions more appropriately at the schoolor local level and strengthening TSC’s capacity to managemore appropriately those handled centrally. In addition, theEducation Acts and regulations are being reviewed and a planof action prepared to decentralise management and financialdecision-making, permitting councils and boards ofeducational institutions to determine fees from 1996/97.

62. Consistent with the decentralisation strategy,determination of fees to supplement Government grants tomeet especially the actual cost of tuition, accommodation andcatering, will be fully devolved to University Councils for the1996/97 academic year. Reforms have also been recentlyundertaken in the administration of Student Loan Schemes.The Higher Education Loans Board (HELB), which has nowtaken over the functions of the former Student Loan SchemeUnit from the Ministry of Education (MOE), will make fulluse of its enhanced legal powers for loan recovery. The Boardintends to progressively increase the role of commercial banksin lending to students, initially as contractors for loandisbursements and recovery, with the long-term aim ofencouraging them to accept some portion of the repaymentrisk.


63. In the area of skills training, the Government, throughthe Ministry of Research, Technical Training and Technology(MRTT&T) aims at improving the capacity of Kenya’stechnical training institutions. This will be done through theupdating of equipment in the training institutions as well asthe improvement of their management. In addition to theseefforts, the Government, through the MRTT&T, plans todevelop a national Skills Training Strategy through a processinvolving all key stakeholders.

Women in Development

64. The Government will continue its efforts to ensure thatwomen participate and benefit equally from the developmentprocess through their integration into mainstream activities.Recent studies show that women are not grossly discriminatedagainst in Kenya, but there are subtle differences which havea cumulative effect on the welfare of women, such as drop-out rates of primary education, and low enrollment andcompletion rates for secondary and higher levels of education.Women are also disadvantaged in their access to land, and areparticularly vulnerable in the event of divorce, separation orbeing widowed.

65. Efforts to improve opportunities for women willcontinue to focus on increasing their access to education andhealth. Given the increasingly important role played by


women in the rural sector, the Government will also step upits efforts to redesign agricultural extension services to provideinformation directly relevant and accessible to rural women.The budget-neutral recruitment of women as extension staff,use of women’s groups to disseminate technical information,and integration of home economic messages and informationon appropriate labor-saving technologies are importantcomponents of the latter. The Government will initiate waysand means to improve access of women to productiveresources such as agricultural inputs, water, fuel wood, creditand skills. Towards this goal the Government will supportrural water supply systems that feature communityparticipation and NGO involvement, and that can significantlyimprove the quality of life of women and the community as awhole. In addition, the Government will ensure that womenin the small and medium enterprise sectors have access toexisting skills upgrading training of the Jua Kali (InformalSector) programme so as to address their specific needs.

Youth in Development

66. About 15.5 million people or 60 percent of Kenya’spopulation are young people below twenty-five years of age.Of this total, around 5 million are below 6 years, over 5 millionare in primary schools, about 600,000 in secondary schoolsand about 50,000 are in local and overseas universities. Thereare also well over 4 million youths outside the school system,either as unemployed or undertaking small-scale incomegenerating activities, in both rural and urban areas.


67. The Government recognises that the most importantresource is its people. It is necessary therefore that steps aretaken to give the youth correct guidance so that they may growinto useful citizens and leaders of tomorrow. Moreimportantly, steps must be taken to harness the energies andtalents of the youth by directing them into productive activities.Towards this objective, the Government will in the period1996-98, strive to develop appropriate programmes tailoredin particular to help alleviate the unemployment problemamong the youth. This will involve designing and funding ofyouth development programmes and projects through YouthSelf-Help Groups which already exist in both rural and urbanareas. The District Development Committee (DDC)mechanism will play an important role in this regard.Targeted Poverty Interventions

68. While the policies in support of growth and the socialsectors are designed to ensure that the benefits of developmentreach the poor, targeted interventions will be required toprovide income support to those who cannot wait until thegrowth process gathers full steam as well as those who cannotreadily participate in it because of special handicaps, such asgeographical isolation. The most important targetedinterventions will be in rural areas where the need for wageemployment is most acute. In this respect, the Governmentwill allocate funds to expand its intensive rehabilitation andmaintenance of minor roads, given the importance of these


roads and their current state of disrepair. Flexibility will bebuilt into the scheme to enhance it during drought years. TheGovernment will also develop community-based modalitiesfor providing support to the rehabilitation and maintenanceof water projects, including boreholes, water pans and dams,and will seek to establish a pilot water fund in 1997. Specialattention is being given to the poor in arid areas throughprogrammes designed to meet their basic needs and to increasetheir integration with the rest of the economy, Specialemphasis will be placed on the rehabilitation of stock routeson a selective basis, improvements in drought managementand relief, and on the immunisation and school health andfeeding programs.

69. Sanitation and safe water needs of the urban poorrequires urgent attention. The Government will take steps todeal with these needs by licensing a larger number of kiosksand by supporting, financially and technically, community-based initiatives in waste removal and sanitation. To helpalleviate the related shelter problem in urban areas, access tolow-cost housing will be encouraged through cooperativesocieties.

70. The informal sector is the main source of income forabout a quarter of rural households and possibly more in urbanareas, and energising the sector is an effective means ofreducing poverty. It is, however, constrained by limited accessto formal credit and laws and regulations which often lead to

DATA REPORTING AND STATISTICAL ISSUES

harassment. To help alleviate the credit constraint, theGovernment will encourage the expansion by donors of micro-enterprise schemes, and will seek to ensure that women groupsin both urban and rural areas are specifically targeted. In orderto address sector needs, the Government has mounted anational Jua Kali programme aimed at addressing issues relatedto safe working sites, skills upgrading, access to power andwater, access roads, land allocation, and marketing. Thisprogramme has helped many artisans gain access to theseservices although it has been constrained by financiallimitations. The Government aims at expanding andintensifying the programme which, as well as emphasizingaddressing the above issues, will seek support of donors toexpand and improve delivery systems of micro-enterpriselending schemes and involve a review of laws and regulationsinhibiting the sector and undertaking appropriate amendments.

IV. DATA REPORTING AND STATISTICALISSUES

71. The quality of economic data base is generallysatisfactory in Kenya. In the medium term, the Governmentwill: (i) strengthen the Central Bureau of Statistics and allocatesufficient financial resources to construct a quarterlycomposite index of economic activity, re-base constant pricenational accounts data, and compile a producer price index;(ii) take measures to improve the timeliness of the recordingof reliable economic statistics, especially those relating to

EXTERNAL FINANCING REQUIREMENT

balance of payments and external financing of the governmentexpenditure and the real sector.

V. EXTERNAL FINANCINGREQUIREMENTS

72. The current account balance, excluding official transfers,is projected to show a cumulative deficit of about US$310million over the period 1996-98 (Table 2). Together with thescheduled amortization payments and the targeted build-upof international reserves, Kenya’s external financingrequirement is estimated at about US$2.4 billion over the three-year period. It is expected that private capital inflows, mainlyfrom foreign direct investments and short-term trade credits,would amount to around US$300 million. Potential project financing of ofof US$1.5 billion is identified from bilateral andmultilateral donor agencies, in the form of grants (US$O.4billion) and concessional loans (US$ 1.1 billion) subject toconfirmation at the Consultative Group meeting. After takinginto account already identified external financing, a financinggap of about US$550 million remains for the period 1996-98.The gap for 1996 is estimated at US$224 million. It is expectedthat the gap will be closed by disbursements under a WorldBank Structural Adjustment Credit (SAC) and associatedInternational Development Association (IDA) reflow,disbursements under the IMF Enhanced Structural AdjustmentFacility (ESAF) and commitments made at the March 1996Consultative Group meeting.

EXTERNAL FINANCING REQUIREMENT

73. At end-1995, the external debt of Kenya’s public sectoramounted to about US$6.4 billion, or about 80 percent of GDP.Kenya borrowed extensively on non-concessional terms inthe second half of the 1980s; since that time, new borrowingshave been on concessional terms. In present value terms, in1995 the external debt amounted to 191 percent of exportsand the external public debt service was equivalent to 24.9percent of exports of goods and services. Consistent with thelower current account deficits associated with the medium termbalance of payments scenario described above, the externaldebt will decline as a percentage of GDP. In addition, as theolder non-concessional debt is being repaid and new financingis provided on concessional terms, the overall concessionalityof the external debt is expected to increase over the mediumterm. As a result of these two factors, the present value of thedebt will decline to 83 percent of exports by 2005 along withthe ratio of debt service payments to exports of goods andservices which would fall to less than 10 percent.

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