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Country Profile 2005

KenyaThis Country Profile is a reference work, analysing thecountry�s history, politics, infrastructure and economy. It isrevised and updated annually. The Economist IntelligenceUnit�s Country Reports analyse current trends and provide atwo-year forecast.

The full publishing schedule for Country Profiles is nowavailable on our website at http://www.eiu.com/schedule

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ISSN 0269-4530

Symbols for 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.

NAIROBI

KisumuNakuru

Eldoret

NAIROBI

Mombasa

KisumuNakuru

Eldoret

LokitaungLokitaung

Lodwar

Marsabit

MaralalKitale

Kakamega

Bungoma

Kakamega

LondianiLondiani

KerichoHoma Bay

Narok

Naivasha Muranga

Machakos

Thika

Kisii

Narok

Magadi

Naivasha Muranga

EmbuNyeri

EmbuNyeri

KituiMachakos

NamangaNamanga

VoiTaveta Voi

TsavoTsavo

Garsen

Malindi

Kilifi

Kipini

Lamu

Garissa

Taveta

KwaleKwale

Thika

Kisii

Bungoma

IsioloIsiolo

Nanyuki MeruNanyukiNyahururuNyahururu Meru

WajirWajir

Moyale

Mandera

Moyale

Mandera

KENYA

UGANDA

SUDANETHIOPIA

SOMALIA

TANZANIA

INDIAN OCEAN

Lake Victoria

L. Turkana

Galana R.

Ath i R.

Pem

baCh

annel

UngwanaBay

L. BaringoL. Baringo

Pate I.

TanaR.

TanaR.

Tana R.

NORTHEASTERN

EASTERN

EASTERN

CENTRAL

EASTERNRIFT VALLEY

CENTRAL

WESTERNWESTERN

ANZANYANZA

RIFT VALLEYRIFT VALLEY

COAST

0 km 50 100 150 200

0 miles 50 100

' The Economist Intelligence Unit Limited 2005

August 2005

Main railway

Main road

International boundary

Province boundary

Main airport

Capital

Major town

Other town

Country Profile 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005

Comparative economic indicators, 2004

Gross domestic product(US$ bn)

Sources: Economist Intelligence Unit estimates; national sources.

0 5 10 15 20

Comoros

Djibouti

Burundi

Seychelles

Somalia

Eritrea

Rwanda

Madagascar

Mauritius

Ethiopia

Uganda

Tanzania

Kenya

0 200 400 600 800 1,000

Burundi

Ethiopia

Somalia

Rwanda

Madagascar

Tanzania

Eritrea

Uganda

Kenya

Comoros

Djibouti

Mauritius

Seychelles

0 5 10 15 20

Djibouti

Ethiopia

Uganda

Seychelles

Tanzania

Comoros

Mauritius

Burundi

Kenya

Rwanda

Madagascar

Somalia

Eritrea

-2 0 2 4 6 8 10 12

Seychelles

Eritrea

Somalia

Comoros

Djibouti

Rwanda

Mauritius

Kenya

Madagascar

Burundi

Uganda

Tanzania

Ethiopia

Gross domestic product(% change, year on year)


Consumer prices(% change, year on year)


Gross domestic product per head(US$)


8,818

5,174

Kenya 1

© The Economist Intelligence Unit Limited 2005 www.eiu.com Country Profile 2005

Contents

Kenya

3 Basic data

4 Politics4 Political background5 Recent political developments9 Constitution, institutions and administration10 Political forces12 International relations and defence

15 Resources and infrastructure15 Population16 Education17 Health18 Natural resources and the environment18 Transport, communications and the Internet21 Energy provision

22 The economy22 Economic structure24 Economic policy29 Economic performance

31 Economic sectors31 Agriculture34 Mining and semi-processing35 Manufacturing36 Construction36 Financial services38 Other services

39 The external sector39 Trade in goods40 Invisibles and the current account41 Capital flows and foreign debt43 Foreign reserves and the exchange rate

45 Regional overview45 Membership of organisations

53 Appendices53 Sources of information55 Reference tables55 Population55 Labour force55 Transport and communications56 National energy statistics56 Government finances

2 Kenya


57 Government revenue and expenditure57 Money supply57 Interest rates58 Gross domestic product58 Nominal gross domestic product by expenditure59 Gross domestic product by sector59 Consumer prices59 Average wage earnings per employee60 Agricultural production60 Forestry and fishing61 Minerals production61 Industrial production61 Construction statistics62 Banking statistics62 Tourism statistics62 Import and export prices63 Exports by value63 Main exports by volume64 Imports by value64 Main trading partners65 Balance of payments, IMF series66 External debt, World Bank series66 Net official development assistance67 Foreign reserves67 Exchange rates

Kenya 3


KenyaBasic data

569,259 sq km

28.7m (1999 national census), 31.9m (2003 mid-year estimate)

Population in �000, 1999 census

Nairobi (capital) 1,346Mombasa 465Kisumu 185Nakuru 163

African�Kikuyu 21%, Luhya 14%, Luo 13%, Kalenjin 11%, Kamba 11%, Kisii 6%,Meru 5%. Non-African�Asian, European, Arab 1%. Religions: Indigenous beliefs10%, Protestant 40%, Roman Catholic 30%, Muslim 20%

Tropical

Hottest month, February, 13-28°C; coldest month, July, 11-23°C; driest month,August, 24 mm average rainfall; wettest month, April, 266 mm average rainfall

English, Swahili and more than 40 local ethnic languages

Metric system

Kenya shilling (KSh)=100 cents. KSh20=1 Kenya pound (K£). Average exchangerate in 2004: KSh79.2:US$1. Exchange rate on 22nd August 2005: KSh75.7:US$1

July 1st-June 30th

3 hours ahead of GMT

January 1st; Good Friday; Easter Monday; May 1st; June 1st; Eid ul Fitr;Christmas holiday, December 25th-26th

Land area

Population

Main towns

Weather in Nairobi (altitude1,820 metres)

Languages

Measures

Currency

Fiscal year

Time

Public holidays

Climate

Ethnic groups

4 Kenya


Politics

Kenya�s political environment was transformed by the landslide victory ofMwai Kibaki and his National Rainbow Coalition (NARC) in the presidentialand legislative elections held on December 27th 2002. The Kenya AfricanNational Union (KANU) was pushed into opposition for the first time sinceindependence in 1963, and Daniel arap Moi�s 24-year reign was brought to aclose. The elections were described as largely free and fair, with little of theviolence and intimidation that marked the previous two polls in the 1990s. Thisbodes well for Kenya�s future elections. Mr Kibaki and his NARC governmenthave confronted major political and economic challenges, including ethnicdivisions, weak and corrupt institutions, a run-down infrastructure and astagnant economy. Government performance has been severely hampered byin-fighting within NARC, particularly over the proposed new constitution, andMr Kibaki was obliged to bring members of the opposition into government inmid-2004 in order to maintain his majority in parliament. Despite the politicaldivisions, initial economic reforms have been enacted and the economy isresponding. Kenya�s next presidential and legislative elections are scheduled totake place in December 2007.

Political background

The coastal region of what is now modern Kenya has developed through morethan five centuries of Indian Ocean trade, evolving into a sophisticated Swahiliculture with strong Arabic influences. In the mid-19th century trade to theinterior opened up the tribal lands of the Kikuyu, Luhya, Luo, Kalenjin andKamba, which remain the five largest ethnic groups. Kenya was declared aBritish protectorate in 1895 and white settlement started in the early 1900s. Thefirst genuine African nationalist movement, the Kenya African Union (KAU),was established in 1944, with Jomo Kenyatta, a Kikuyu, as its president. He wasjailed in 1953; a year after the Mau Mau�a secret society made up largely ofKikuyu�launched a guerrilla campaign against white settlers. Many thousandsdied during the Mau Mau rebellion, which lasted until 1956, although fewerthan 50 were white settlers. A constitutional conference was held in London in1960, leading to a transitional constitution permitting the formation of politicalparties and giving Africans a comfortable majority on the Legislative Council.KANU was formed, dominated by the Kikuyu and the Luo. Other politicians,wary of Kikuyu-Luo hegemony, formed the Kenya African Democratic Union(KADU). Mr Kenyatta was released in August 1961, led KANU to victory in thelegislative election of May 1963, and was appointed prime minister. A formaldeclaration of independence followed in December 1963.

Kenya became a republic in December 1964, with Mr Kenyatta as its firstpresident. The entire KADU membership had earlier defected to KANU, thusturning Kenya into a de facto one-party state. Mr Kenyatta was electedunopposed for a third presidential term in September 1974. He died inAugust 1978 at the age of 82. The presidency passed to Daniel arap Moi, aKalenjin from the Rift Valley region. A constitutional amendment in 1982 turned

Before independence

Early years of independence

Kenya 5


Kenya into a de jure one-party state. A coup attempt led by air-force personnel,apparently with strong Luo backing, was foiled later that year.

During the 1980s Mr Moi�s government became increasingly intolerant ofpolitical dissent, and constitutional amendments substantially increased thepresident�s powers. In 1988 Mr Moi was re-elected for a third term, butwidespread voting irregularities helped to discredit the one-party system, andcalls mounted for a return to a multiparty system. Following strong pressurefrom donors and popular protests in Nairobi the government relented, and inDecember 1991 parliament scrapped the constitutional amendment makingKenya a one-party state. However, despite widespread initial support for thenew opposition parties, Mr Moi took advantage of growing rivalry betweenthem. Combined with his control over the state-run media and the electoralcommission, he managed to win the 1992 and 1997 elections with relative ease.The opposition vote, although large, was hopelessly split.

Recent political developments

The constitution barred Mr Moi from standing again in 2002, but his attempt todictate the KANU succession weakened the party and contributed to its defeat.Mr Moi negotiated the merger of KANU and the opposition NationalDemocratic Party (NDP), led by Raila Odinga, in March 2002, to broaden itsappeal. However, in August 2002 Mr Moi alienated the NDP and other KANUfactions by appointing Uhuru Kenyatta, the inexperienced, 41-year-old son ofthe country�s first president, as KANU�s presidential candidate. The NDP walkedout of KANU, taking with it many KANU stalwarts, to form the LiberalDemocratic Party (LDP). At the same time, several opposition parties unitedunder the banner of the National Alliance of Kenya (NAK), led by Mwai Kibaki.The LDP joined with the NAK to form the National Rainbow Coalition (NARC)and confirmed Mr Kibaki as its presidential candidate. However, a secretMemorandum of Understanding between the two NARC segments purportedlyguaranteed the LDP an equal share of power and responsibility in the newgovernment. Mr Kibaki�s supposed failure to fulfil this promise fuelled a bitterdispute between the two NARC partners, which has never been fully resolved.

Presidential election, Dec 2002(% of vote)

Emilio Mwai Kibaki (National Rainbow Coalition) 62.2Uhuru Kenyatta (Kenya African National Union) 31.3Simeon Nyachae (Forum for the Restoration of Democracy-People) 5.9James Orengo (Social Democratic Party) 0.4David Ng�ethe (Chama Cha Uma) 0.1

Sources: www.electionworld.org; Daily Nation.

Mr Kibaki won a landslide victory in Kenya�s December 2002 presidentialelection, while NARC had a similarly convincing win in the parliamentary poll.Not only did this end the stagnant and corrupt presidency of Mr Moi, but italso gave Kenya a new ruling party for the first time since independence in1963. Mr Moi�s decision to stand down after electoral defeat, rather than subvert

Moi era

Opposition secures anoverwhelming election victory

KANU splits in the run-up tothe 2002 election

6 Kenya


the will of the people, partly helped to restore his image, and he has beenignored subsequently rather than pursued for his �past crimes�. Mr Kibaki,beaten into second place in the previous two elections, gained 3.65m votes�double the number for KANU�s Uhuru Kenyatta�and NARC took 125 of the210 directly elected seats in parliament, compared with KANU�s 64 seats. Some60% (over 10m) of registered voters cast a ballot. Despite some reports ofirregularities, the poll was described as mostly free and fair by local andinternational observers, and, unlike the previous two elections, was not marredby widespread political violence and intimidation.

Parliamentary election, Dec 2002(seats)

Directly elected Appointed TotalNational Rainbow Coalition 125 7 132Kenya African National Union 64 4 68Forum for the Restoration of Democracy-People 14 1 15

Safina 2 � 2Sisi Kwa Sisi 2 � 2

Forum for the Restoration of Democracy-Asili 2 � 2Shirikisho 1 � 1

Ex-officio � � 2Total 210 12 224

Sources: www.electionworld.org; Daily Nation.

The main challenge facing Mr Kibaki has been to fulfil NARC�s manifestocommitments to making primary-level education free, beating corruption,adopting a new constitution and reviving the economy, all while holding thecoalition together. NARC is an unprecedented alliance of diverse interests (byKenyan standards), which cuts across the boundaries of ethnicity and ideology.The main spur to unity was the electoral defeat of Mr Moi, but once this hadbeen achieved the forces acting on NARC have tended to promotefragmentation rather than unity.

It soon became clear that NARC was seriously divided between the largely pro-Kibaki NAK (the �original� opposition grouping) and the LDP, under its de factoleader, Mr Odinga, which had defected from KANU. The two factionsprofoundly disagree over the proposed new constitution, and in particular overwhether Kenya should stick with a presidential style of government, as hasbeen the case since independence�the NAK view�or switch to a prime-ministerial system, as favoured by the LDP. Kenya does not currently have aprime minister, but the final draft constitutional proposals that emerged fromthe National Constitutional Conference (held at Bomas, a town outside Nairobi)in March 2004 call for the creation of such a position, with strong executivepowers. The LDP�s stance is partly motivated by the belief that it is �owed� theprime-ministership under the terms of the pre-election Memorandum ofUnderstanding. The NAK opposed a powerful presidency during the Moi era,but is now keen to preserve Mr Kibaki�s authority. The Kibaki camp believesthat having twin centres of power would be a recipe for conflict and confusion.Mr Kibaki had originally promised a new constitution within 100 days of beingelected, but this was a forlorn hope and the deadline has been extended

The new president faces manychallenges

NARC factions disagree aboutthe proposed new constitution

Kenya 7


several times. Under the latest plan a new constitution is due by the end of2005, although further delays are possible (see Constitution, institutions andadministration).

NARC factions are also divided over whether the coalition should merge into asingle entity or retain its separate components. Mr Kibaki wishes to create asingle NARC entity (with himself as leader), but the LDP is strongly opposed,as are some elements in the NAK, such as the Forum for the Restoration ofDemocracy-Kenya (Ford-Kenya) and Charity Ngilu�s National Party of Kenya(NPK): they all have strong regional bases and fear losing their identity within asingle national organisation. The Kibaki camp called for grassroots NARCelections in February 2005, but shelved the issue owing to opposition fromother factions, including a court challenge. The LDP also planned its ownelections in June 2005 but has postponed them for fear of exacerbatingdivisions within the party. Exactly what NARC is and who can claim the nameremains an open question, and will become clearer only in the build-up to the2007 election. Coalition in-fighting over the constitution, the Memorandum ofUnderstanding and the future of NARC has spawned a climate of politicaluncertainty and made it more difficult for the president to push forward hislegislative agenda, hindering the drive towards improved governance.

Mr Kibaki, confronted by defections from the LDP ranks, reshuffled his cabinetin June 2004, bringing in elements from the opposition. The influx comprisedthe Forum for the Restoration of Democracy-People (Ford-People) andindividual KANU members of parliament (MPs), but it can hardly be describedas a �government of national unity�, as the regime has sought to do. Mr Kibakidemoted, but did not sack, several LDP ministers, but despite this snub theparty opted to remain in NARC (as it has consistently done). The reshuffleconfirmed that Mr Kibaki would not implement the pre-election Memorandumof Understanding with the LDP, although some LDP ministers have clearlymoved into the Kibaki camp. The reshuffle achieved its main aim of restoringthe president�s parliamentary majority, thereby giving him far greater (thoughnot total) control over the legislative agenda. Another feature of the reshufflewas the relative victory of the �old guard� over the �young Turks�. There arenow several ministers over 70 years old, including the president himself, butwhether or not the experience they offer is a positive force is a moot point.

Although the reshuffle strengthened Mr Kibaki�s position, tension between hissupporters and the LDP continued to mount in 2005 and it seemed as if thelong-mooted formal NARC split would finally happen, particularly when theLDP was largely excluded from the new parliamentary select committee on theconstitution (PSCC) that was named in March 2005. However, in a surprisemove, LDP MPs announced in June 2005 that they were returning to thegovernment fold and that the rebel MPs would switch back to the governmentbenches after a year away. The LDP was reluctant to lose its association withthe NARC name (which still seems to have some resonance with voters), andwas fearful that pro-government LDP ministers would desert the party.Although the LDP promises to play a more constructive role in government, itstill remains far away from the Kibaki camp over the constitution, however. The

There is also division aboutthe nature of the coalition

Mr Kibaki brings oppositionelements into government

LDP MPs return to the fold

8 Kenya


rapprochement may only be temporary: Mr Odinga described it as a tacticalretreat.

Important recent events

December 2002

Mr Kibaki�s landslide victory in Kenya�s December 2002 presidential election�accompanied by a similarly convincing win for the National Rainbow Coalition(NARC) in the parliamentary election�signals a major shift in Kenya�s politicalenvironment.

January 2003

The new government quickly meets its manifesto commitment to providing freeprimary-level education.

March-October 2003

NARC takes initial action against corruption by appointing the GoldenbergCommission of Inquiry into funds looted from the Central Bank of Kenya, passingtwo anti-corruption laws and sacking almost half the top judges.

November 2003

The IMF awards Kenya a new poverty reduction and growth facility (PRGF), worthUS$252m over three years, which unlocks other forms of multilateral and bilateralfunding. Donors in the consultative group pledge over US$4bn in support of theeconomic recovery programme.

March 2004

The National Constitutional Conference releases its final �zero� draft, based on aseparation of executive powers between the president and a putative prime minister.Those within NARC who are loyal to the president, Mwai Kibaki, oppose the zerodraft, although the Liberal Democratic Party (LDP) supports it. The constitutionalcourt rules that any new constitution must be subject to referendum.

June 2004

Mr Kibaki reshuffles his cabinet, demoting LDP ministers and bringing in membersof the opposition in order to build a new majority in parliament. The move issuccessful, but the situation remains volatile and the parliamentary arithmeticuncertain.

August-December 2004

The EU and the IMF defer budget support because of worries about ongoingcorruption. The EU suspension remains in place, although the IMF endorsed the firstyear of the PRGF in December 2004 and released promised funds.

January 2005

Uhuru Kenyatta is confirmed as leader of the Kenya African National Union (KANU)after internal elections, but these prove divisive and fuel an ongoing row with theloser, Nicholas Biwott.

April 2005

At the latest Consultative Group (CG) meeting, donors confirm that promised fundsare still available, but only if the government takes firm action on corruption.

Kenya 9


May 2005

Revised GDP data show the economy growing much faster than expected, providinga boost to the government, whose record on fulfilling its manifesto has been patchy.

June 2005

The LDP ends its rebellion within NARC, and rebel members of parliament return tothe government benches, but the rapprochement may be only temporary,particularly given the ongoing dispute over the constitution.

July 2005

The consensus bill on the constitution is adopted, giving parliament the power toamend the zero draft. It is likely that many presidential powers will be preserved.The Kenyan public will give their final verdict in a referendum due by the end of theyear.

Constitution, institutions and administration

Under the current constitution a president can serve for two five-year termsonly. The constitution was drawn up at independence and draws heavily onEnglish law, although it has been amended more than 30 times. The constitutiongives the president extensive powers and is not well adapted to multipartypolitics, despite the repeal in December 1991 of Section 2a, which hadformalised the one-party state. Under Mr Moi and his predecessor, Mr Kenyatta,the constitutional powers of the presidency were sharply increased: govern-ment policy was directed almost exclusively through the office of the president,which had the largest departmental budget and direct control of key areas ofsecurity and defence. Moreover, the president appoints judges, and the judicialsystem was hampered by widespread interference from the executive duringthe KANU era. There has been some improvement under Mr Kibaki, includinga purge of half the country�s top judges in October 2003 because of corruptionallegations.

There is widespread agreement that Kenya needs a new constitution, but thepath to devising one has been long and arduous, and has still not reached aconclusion. In 2000, under pressure from donors, the opposition and civilsociety, Mr Moi appointed an academic, Yash Pal Ghai, to chair the Constitutionof Kenya Review Commission (CKRC), a body charged with devising a newconstitution. Furthermore, a National Constitutional Conference (NCC),comprising 629 delegates, including all MPs and a broad swathe of civil society,was convened at Bomas. A first draft constitution, dating from September 2002,contained several controversial proposals, including the creation of the post ofexecutive prime minister.

Following NARC�s election victory in December 2002, the constitution soonemerged as one of the main issues dividing the constituent parties of the rulingcoalition. The Kibaki camp, despite seeking to weaken the presidency while inopposition, now opposes the loss of presidential powers, but the LDP (andmost of civil society) favours such a change. Attempts to find common groundproved fruitless, and the final �zero� draft that emerged from Bomas inMarch 2004 was not backed by the Kibaki camp. Apart from calling for the

The president has wide-ranging powers

Constitutional reform provescontroversial and slow moving

10 Kenya


transfer of executive powers to a prime minister, the zero draft included othercontroversial proposals, including the devolution of powers to district level; thecreation of a second, upper chamber of parliament; and the granting ofconstitutional recognition to Islamic kadhi courts, which is opposed by theChristian churches. Shortly after the zero draft was produced, the constitutionalcourt ruled that any new constitution must first be subject to a referendum.

Mr Kibaki subsequently moved to build support in parliament in favour ofamending the zero draft, and the mid-2004 reshuffle played a key part in thisprocess. A new Constitution of Kenya (Amendment) Bill, allowing parliamentto amend controversial parts of the zero draft, was endorsed by the legislaturein December 2004, despite a walkout by KANU and the LDP. The presidentgave his assent to the legislation in January 2005 and, after parliamentreconvened in March 2005 (following a long seasonal break), took effectivecontrol over the PSCC, charging it with devising a new consensual constitution(meaning one that is favoured by the Kibaki camp). The PSCC�s revision�theso-called �Kilifi� draft�was presented to parliament for debate in July 2005 andwas passed by a 102:61 margin. It retains most of the president�s powers, rejectsthe creation of an upper house of parliament and weakens plans fordevolution. The attorney-general is due to publish a final draft at the end ofAugust.

With the president having sufficient support in parliament, there are few routesleft for those opposed to his tampering with the zero draft. There have beenprotests organised by civil society, some of which have turned violent, but theirpower has been limited. The LDP and KANU will probably call for a �no� votein the referendum, but the Kibaki camp will campaign equally hard for a �yes�vote, and will benefit from its control over the state machinery. At present, areferendum is planned for November 2005, but the legal challenges surround-ing the new constitution are almost as daunting as the political ones. Furtherguidance from the courts will probably be needed and further delays are pos-sible. It is not so much the delay that has been destabilising, but the uncertainty.

Political forces

Kenya�s political environment was dominated by KANU for almost 40 years(1963-2002) while the opposition remained fractured. However, within thiscontext the political map was constantly being redrawn as political factionsformed a succession of temporary alliances, sometimes joining KANU andsometimes leaving it. Ethnicity has long played a key role in Kenyan politics,and the drive by successive governments to win the support of the country�smain tribes, particularly in the run-up to elections, has been a major factorbehind such party-hopping. Personal ambition has also played a part, butideological reasons are seldom the cause. As a result, most opposition leadershave served under a KANU administration at some stage. The only fixed andcertain feature was the all-powerful president. That Kenya remains riven byfactions, often though not exclusively based on ethnic or regional identity, isobvious from the wrangling that has bedevilled the new NARC administration.The political balance shifted yet again in June 2004, when Mr Kibaki brought

Mr Kibaki wins support for aconsensus bill

Politics is characterised byshifting allegiances

Kenya 11


members of the opposition into his cabinet, ending his reliance on the NAK�scoalition partner, the LDP (see Recent political developments). Further shifts inallegiance and the composition of government can be expected in the run-upto the scheduled 2007 elections.

KANU, formed in 1960, entered a period of self-examination after the 2002election defeat. The ex-president, Daniel arap Moi, stepped down as chairmanin early 2004, to be replaced on an acting basis by Uhuru Kenyatta. The partyfinally held long-awaited grassroots elections in January 2005 (15 years after thelast ones) but the process proved highly divisive, with Nicholas Biwott, one ofMr Moi�s former henchmen, challenging Mr Kenyatta for the leadership.Although Mr Kenyatta beat Mr Biwott by a 5:1 margin at a party conference inlate January, Mr Biwott alleged fraud and has continued to campaign againstthe result. When Mr Kenyatta named his shadow cabinet in July 2005 (two-and-a-half years after the election), Mr Biwott named an alternative team. Mr Biwotthas threatened to break away from KANU, and held talks with the Kibaki campabout joining the government (although these came to nothing in the end), butfor the moment he remains a divisive force within KANU, weakening theopposition�s effectiveness. Mr Biwott�s power partly stems from his strongsupport base within the Kalenjin ethnic group. KANU currently appears in noposition to take advantage of NARC�s internal problems or to mount aneffective challenge at the next election, but the party remains a large nationalorganisation and it may one day lead the government again.

Main political figures

Emilio Mwai Kibaki (aged 73)

Mr Kibaki, a trained economist, rose to high office in the Kenya African NationalUnion (KANU) government in the 1980s, but moved into opposition�under thebanner of his own Democratic Party�after the restoration of multiparty democracyin the early 1990s. Mr Kibaki, like Kenya�s first president, Jomo Kenyatta, is from thedominant Kikuyu tribe (unlike Mr Moi, who is a Kalenjin). Mr Kibaki remainsbroadly popular but has been criticised for his laid-back leadership style andapparent reluctance to control his squabbling ministers. The president also suffersfrom poor health, especially after a serious road accident in the run-up to the 2002election.

Arthur Moody Awori (aged 78)

Mr Awori was appointed vice-president in September 2003, following the death ofhis predecessor, Michael Wamalwa. Mr Awori, like Mr Wamalwa, is a member of theLuhya tribe, Kenya�s second largest. Mr Awori is respected as an elder statesman(hence his nickname of �Uncle Moody�) and is one of the few Liberal DemocraticParty (LDP) ministers who remains close to the president.

Raila Odinga (aged 58)

Mr Odinga commands considerable support among Luo voters. He is highlyambitious and has switched party allegiance several times. After leading the LDPinto the National Rainbow Coalition (NARC), he and his party fell out with thepresident on a range of issues. Mr Odinga feels that he is owed the putative post ofexecutive prime minister (proposed in the �zero� draft constitution).

KANU elects a new leader butis divided

12 Kenya


David Mwiraria (aged 64)

Mr Mwiraria, a close associate of the president, took over the Ministry of Financeafter NARC�s election victory. An economist by training, he has handled his docketwell, but his reputation has been tarnished by the exposure of new corruption in theawarding of state contracts.

Kiraitu Murungi (aged 57)

Mr Murungi, a human rights lawyer and long-term Moi opponent, heads theMinistry of Justice and Constitutional Affairs, with overall responsibility for theoffice of the attorney-general, the judiciary and the Electoral Commission. AlthoughMr Kibaki retained Amos Wako�a Moi appointee�as attorney-general, the positionis no longer of cabinet rank.

Kalonzo Musyoka (aged 51)

Mr Musyoka is one of the defectors from KANU who helped to form the LDP in therun-up to the 2002 election. He returned to the Ministry of Foreign Affairs, which hehad headed between 1993 and 1998. He was demoted to natural resources ministerin June 2004 but hopes to be the LDP�s presidential candidate in 2007.

Simeon Nyachae (aged 72)

Mr Nyachae, a former finance minister in the Moi era, leads the Forum for theRestoration of Democracy-People (Ford-People), the third-largest party in parliament.He returned to the cabinet as energy minister in the mid-2004 reshuffle and hasimpressed donors and the private sector with his commitment to reforms.

Uhuru Kenyatta (aged 43)

Mr Kenyatta, the leader of the former ruling party, KANU, and son of Kenya�s firstpresident, Jomo Kenyatta, is a successful businessman in his own right. He wasKANU�s losing candidate in the 2002 election, but won internal KANU elections inJanuary 2005 and is set to stand for the presidency again in 2007.

International relations and defence

The East African Community (EAC), which broke up in 1977�mainly because ofpersonal and ideological differences between the heads of state of its members,Kenya, Uganda and Tanzania�was officially relaunched on January 15th 2001.The EAC�s long-term plan calls for the creation, in order, of a customs union, acurrency union and a political federation. The first major step was taken inJanuary 2005 with the implementation of a customs union. This aims toeliminate all tariff and non-tariff barriers to internal trade within five years, andsets a common external tariff (see The external sector: Trade in goods). EACheads of state have also agreed to fast-track full political federation by 2010, butthis may be an overambitious target. EAC membership is also likely to beextended to Rwanda and Burundi.

Kenya has played a key mediating role in Somalia, which has been without acentral government since 1991, and in Sudan, where the civil war betweenNorth and South that has been ranging for more than 20 years may finally becoming to an end. However, the peace processes in both countries are stillfragile and could come unstuck. Kenya has been hosting Somalia�s parliament-

The EAC is revitalised

Kenya seeks peace in Somaliaand Sudan

Kenya 13


in-waiting, and in October 2004 delegates elected Abdullahi Yusuf as thenation�s new president. Somalia has long been acknowledged as a hotbed forterrorism, and Kenya views its return to normality as a vital ingredient forregional security.

Kenya has wholeheartedly backed the US-led �war on terror� since theSeptember 11th 2001 attacks on the World Trade Centre. Kenya too has directlysuffered from Islamic terrorists operating under the al-Qaida banner. The listincludes the bombing of the US embassy in Nairobi in 1998 (which killed about250 people), the suicide bomb attack on the Paradise Hotel near Mombasa inNovember 2002 (which left 13 dead) and the failed attempt at the same time tobring down an Israeli airliner using shoulder-launched missiles. Security riskswere again highlighted in May 2003, when warnings of further attacks led to asix-week suspension of commercial flights from the UK and negative traveladvisories by several Western countries. The advisories were withdrawn laterin the year, except for the one issued by the US, although its language has beensoftened. The US has also pledged US$40m to help to upgrade Kenya�s aviationinfrastructure and enhance airport security, and the two countries resumedtheir annual military exercises in 2004. Kenyan defence forces have also beenco-operating with the 2,000-strong US Horn of Africa task-force, created in 2002and based in Djibouti. According to US military sources, the task-force hasundertaken joint operations with Kenya along the long border with Somalia. Inan attempt to improve regional security, Kenya opened a new NationalCounter-Terrorism Centre, the first of its kind in Africa, in January 2004. It aimsto co-ordinate information from throughout the East Africa region. InSeptember 2004 the South African-based Institute of Security Studies listedKenya (along with Algeria, Uganda, Ethiopia and South Africa) as the countriesin Africa best equipped to deal with terrorism.

Apart from an attempted coup by the air force in 1982, Kenya�s armed forceshave not sought to dictate to politicians. In addition to the regular armed forcesthe government can call on a special security force, the 5,000-strong GeneralService Unit, which it frequently does in order to control demonstrations andpolitical rallies.

Regular military forces, mid-2004Army 20,000Navy 1,620

Air force 2,500Total 24,120

Source: International Institute for Strategic Studies, The Military Balance, 2004/05.

No threat from the Kenyansecurity forces

Kenya backs the global war onterror

14 Kenya


Security risk in Kenya

Terrorism

Islamic terrorists operating under the al-Qaida banner have launched three attacks inKenya: the car-bombing of the US embassy in Nairobi in 1998 (which left 250 dead,mostly Kenyans), the suicide bombing of the Paradise Hotel near Mombasa inNovember 2002 and the simultaneous attempt to bring down a civilian airlinerusing shoulder-launched missiles. Warnings of possible terrorist activity in May 2003led to a six-week suspension of commercial flights from the UK and the issuing ofnegative travel advisories by several Western countries. Most were withdrawn with-in months, although the US one remains in place but its language has been softened.Kenya remains particularly vulnerable to Islamic terrorism because of its long,porous border with Somalia, where the rule of law is weak and the fundamentalistpresence strong. A recent UN report has noted that the terrorist attacks in Kenya in2002 had been planned and prepared in neighbouring Somalia, and warned that theproliferation of arms in Somalia, mainly smuggled in from Yemen in violation of theUN arms embargo, represented a serious threat to neighbouring states, and thatfurther attacks in East Africa could be in the offing. More positively, Kenya has playeda key role in peace negotiations between Somalia�s factions and hosts the country�sgovernment-in-waiting. Kenya has suffered no further terrorist attacks, but foreignfirms and visitors are advised to check the UK government�s Foreign Office websitesfor the most recent advice on security and safety.

Crime

Crime has been a serious and growing problem in Kenya, particularly in Nairobi, inrecent years. Total crimes rose by 8.4% to 83,841 in 2004, with the number of assaults,the most common crime, rising by 17.3% to 15,715. Although much crime isopportunistic and low level, serious attacks have risen, including daytime �car-jackings� at traffic lights in central city areas, group raids on houses and, on occasion,direct armed attacks on businesspeople, including foreigners, at their workplaces. Tohelp to stem the rise in crime, the president, Mwai Kibaki, appointed a new policechief in April 2004, an ex-army officer, Brigadier Mohammed Hussein Ali. This movehas improved police effectiveness, and bank robberies have been virtuallyeliminated, for example, although armed criminals have moved on to easierpickings, placing businessmen and officials at risk. The sheer number of illegal gunsin the country (many having crossed from lawless Somalia) has fuelled the problem.Kenya plans major investment in the police force over the next five years, to create amodern, professional institution, but funding will be a problem.

Ethnic violence

Kenya continues to suffer from regular bouts of inter-ethnic conflict, and about150-200 people have been killed in several incidents in 2004 and 2005. Some clashesrelate to cattle-rustling, some to disputes between pastoralists and arable farmers,and some to a spillover of clan wars in neighbouring Somalia; all have beenexacerbated by the recent poor rainfall levels and the proliferation of small arms.Election-related violence was common in the 1990s, but the 2002 election waslargely peaceful, which bodes well for future polls. The latest murderous attack, inMarsabit District (in the north, towards the Ethiopian border), was one of the worstto date. In July 2005 armed raiders from the Borana ethnic group killed about

Kenya 15


60 Gabras, many of them schoolchildren on their way to Turbi primary school, in aclan conflict linked to cattle rustling. The central government has vowed to act butstruggles to impose its will in isolated rural areas with poor transport links. Some2,000 elite troops have been dispatched to the area to try to catch the killers andprevent revenge attacks.

Poor infrastructure

Perhaps the greatest threat to foreign businesspeople arises from car use. Kenya hasthe highest rate of road accidents in the world, with 510 fatal accidents per 100,000vehicles, largely owing to poor roads and transportation. Second-ranked South Africahas 260 fatal accidents per 100,000 vehicles; the UK figure is just 20. By comparison,the terrorist threat is negligible. In February 2004, in an attempt to improve itsappalling record, Kenya obliged matuta (minibus) owners to install new safetyequipment on their vehicles. This has led to a sharp rise in fares, to the detriment ofconsumers, but has cut road fatalities. Ongoing investment in road projects will alsohelp in the coming years.

Resources and infrastructure

Population

Population indicators, 2003Population (mid-year; m) 31.9Population growth rate (%)a 2.3

Life expectancy (years)b 44.6Urbanisation (%) 36.3

Projected population in 2025 (m)c 50.2

a 1995-2002; b 2002; c UN Development Programme, Human Development Report projection.

Source: World Bank, African Development Indicators, 2005; UN Development Programme, Human Development Report, 2004.

Kenya formerly had one of the fastest-growing populations in the world,although the rate of increase slowed from 3.8% in 1975-84 to 3.1% in 1985-94 and2.3% in 1995-2002. The decline reflects the success of earlier family-planningcampaigns, but also, more recently, the impact of the HIV/AIDS pandemic,which was declared a national disaster in 1999. Kenya�s population wasestimated to be 31.9m in mid-2003, according to the World Bank. Future growthwill be slowed because of HIV/AIDS: current estimates suggest that thepopulation will rise to 43m in 2020, whereas without HIV/AIDS it would havereached 48m.

Kenya�s population is heavily concentrated in the central and western regions,which contain the most fertile agricultural areas. Kenya is also a mix of manytribes, the largest being the Kikuyu (20.8%), the Luhya (14.4%), the Luo (12.4%),the Kalenjin (11.5%) and the Kamba (11.4%). In addition, Kenyan society ischaracterised by wide income disparities. In 1998-2002 the poorest 20% of thepopulation received only 6.0% of national income, while the richest 20% took49.1%.

Population growth has slowed

Wide regional and incomedisparities

16 Kenya


Distribution of population, 2000a

Province �000 % of totalRift Valley 6,991 24.4Eastern 4,643 16.2

Nyanza 4,397 15.3Central 3,705 12.9

Western 3,354 11.6Coast 2,491 8.7Nairobi 2,137 7.5

North-eastern 961 3.4Total 28,679 100.0

a Provisional estimates.

Source: Ministry of Planning and National Development, Population Census Report.

The stagnation of the economy and the rise in poverty was highlighted by thelatest Human Development Report of the UN Development Programme (UNDP),which ranked Kenya 148th out of 177 countries. Kenya�s score on the HumanDevelopment Index (HDI)�an amalgam of figures for life expectancy, adultliteracy, school enrolment and GDP per head�has fallen steadily in recent years,from 0.52 in 1995 to 0.49 in 2002. The report also ranked Kenya as one of the sixworst performers in terms of infant mortality, with the rate jumping from 99 to122 per 1,000 live births between 1990 and 2002. The fall in the country�sratings is not surprising given the lack of investment in health and education,and the decline in income per head. The number of people living below thepoverty line (of US$1 per day) is estimated to have increased from 11.3m (48.4%of the population) in 1990 to 17.1m (55.4% of the population) in 2001. As well asthe low GDP growth rates of recent years, other factors driving the fall in theHDI ranking were the country�s poor health and education services and itsHIV/AIDS crisis. Prospects are brighter in the medium term, provided that thegovernment implements the Economic Recovery Strategy for Wealth andEmployment Creation (ERSWEC), unveiled in mid-2003.

Development indicators, 2002Country HDI rank a HDI index a Life expectancyb Adult literacy c GDP per head d

Norway 1 0.956 78.9 100.0 36,600UK 12 0.936 78.2 100.0 26,150

South Africa 119 0.666 47.7 86.0 10,070Uganda 146 0.493 46.2 68.9 1,390Kenya 148 0.488 45.2 84.3 1,020Tanzania 162 0.407 43.3 77.1 580

a Human Development Index of the UN Development Programme. b At birth in years. c % of population aged 15 and above. d US$ at purchasingpower parity.

Source: UN Development Programme, Human Development Report, 2004.

Education

Official data show that rising spending on education, especially under thegovernment of Mwai Kibaki, is helping to reverse the decline in educationalstandards. In particular, the new government reintroduced free primary-schooleducation in January 2003. Charges had been brought in during the 1990s,

The UNDP highlights thecountry�s decline

Higher spending improvesaccess to education

Kenya 17


leading to a decline in pupil numbers. Primary-school enrolment leapt by 16%in 2003, to 7.1m, and rose by an additional 4% in 2004, to 7.4m. The initiativehas been expensive but popular. Secondary-school enrolment is also rising, upby 7% in 2003 to 880,000 and 5% in 2004 to 913,000. In addition, Kenya had91,500 university students in 2004/05, about 9,500 higher than the previousyear, the bulk of whom attended the six main public institutions. There are alsoprivate universities. Other forms of tertiary education include technical traininginstitutions (43,000 students in 2004) and teacher training institutions(22,000 students in 2004). Literacy rates have risen over time, from 71% in 1990to 79% in 1997 and 84% in 2002.

Health

The government spent 1.7% of GDP on healthcare in 2001 and the private sector6.2% of GDP, according to the UN. Healthcare provision, particularly by thepublic sector, weakened in the 1990s owing to the downturn in governmentfinances, leading to investment by the private sector, although most of thepopulation are too poor to afford private care. The government has prioritisedsocial sectors, including healthcare, under the ERSWEC, but the proposal of thehealth minister, Charity Ngilu, for a new health insurance scheme to offeruniversal free care was dismissed in late 2004 on the grounds of cost. Thenumber of healthcare institutions rose by 4.6% to 4,767 in 2004 and the numberof beds climbed by 4% to nearly 66,000.

In Kenya, as in most African countries, HIV/AIDS is a serious problem. Therapid spread of the disease poses grave health problems and will havedamaging macroeconomic consequences, such as reduced savings, fallinglabour productivity and the loss of experienced workers. The nationalhealthcare system is being increasingly overstretched, as HIV/AIDS patientsnow occupy a significant majority of hospital beds; there were 150,000 deathsfrom the disease in 2003. HIV/AIDS has also played a key role in the decline inlife expectancy, which fell from 57 years in 1990 to just 45 years in 2003.However, the number of those thought to be infected was cut from over 2m to1.2m (6.7% of the adult population) in 2003 following a large-scale householdsurvey. Previous estimates had been derived from antenatal clinics. However,the two figures are calculated using different methodologies, both of whichhave strengths and weaknesses. Despite the apparent improvement, HIV/AIDSremains a very serious problem, and the key question of whether the numberof those infected is rising or falling remains unanswered. Regional evidencesuggests that it may have peaked at about 14% in Nyanza on the Ugandanborder, but may rise further in Nairobi (9%) and the Coast (6%), Central (5.9%),Rift Valley (5.2%) and Eastern (4.1%) districts. Despite the curse of HIV/AIDS,malaria remains the nation�s number one killer.

Healthcare proves problematic

AIDS remains a seriousproblem

18 Kenya


Natural resources and the environment

Kenya is not well endowed with mineral resources but has rich agriculturalland and abundant wildlife, a key draw for the tourism industry. However, inthe past three decades the country has suffered from accelerating deforestation,soil erosion, poaching, and domestic and industrial pollution. A particularproblem in the coming years is likely to be a shortage of water. Output from thefishing and forestry sectors in particular has declined substantially because ofresource degradation. As a consequence, the government is giving greaterpriority to policies that encourage sustainable resource use.

Kenya�s forests are diminishing fast. Overexploitation during the past 30 yearshas reduced the country�s timber resources by one-half. At present only 3% ofthe land is forested and it is estimated that 5,000 ha of forest are lost each year,not only to provide wood fuel but also as a result of clearance for agriculture,construction, tourism and industrial activities. An increase in soil erosion isaffecting agricultural productivity and contributing to the silting of dams. Thegradual conversion of land use to agriculture and other economic activities isalso rapidly reducing the country�s wide biodiversity. There are many unique orrare species of animals, plants and micro-organisms in Kenya, some of whichcould yield substantial economic benefits. Water resources are under pressureowing to overuse, not only for agricultural and domestic consumption but alsofor hydroelectric power. Ecological disruption of inland lakes, particularly LakeVictoria, is a major concern for the fishing industry. Pollution, overfishing andthe use of unauthorised fishing equipment have led to falling catches and haveendangered local fish species.

Transport, communications and the Internet

Kenya has a 64,000-km road network, connecting most parts of the country, butonly 9,000 km is paved (and therefore all-weather), while years of under-investment and corruption in the awarding of contracts have left the network ina poor state of repair. Despite its faults, however, the road network carries thevast bulk of domestic and foreign trade. The Kibaki government and donorshave prioritised the rehabilitation of the road infrastructure as a key part of thecountry�s development strategy. In April 2004 the World Bank approvedfunding of US$207m to support the Northern Corridor Transport Improvement(NCTI) project, 80% of which is to be spent on roads. The northern corridor,which runs from Mombasa to Nairobi and on to Malaba on the Ugandanborder, is not only Kenya�s most important transport route but is also a vitalartery for other countries in the region. The EU is separately fundingimprovements to another section of the road. The government also hopes toattract private investment to rehabilitate other northern corridor segments andfor long-term road maintenance. However, the construction of new roads ismoving slowly, impeded by cumbersome procurement procedures.

The road network

Kenya has rich agriculturalland and abundant wildlife

Kenya 19


Kenya has three international airports, Nairobi�s Jomo Kenyatta InternationalAirport (JKIA), Mombasa�s Moi International Airport (MIA), and EldoretInternational Airport. Other airports are Wilson in Nairobi, Malindi, Kakumaand Kisumu, and there are also more than 300 airstrips throughout the country.The NCTI project includes US$41m for aviation to upgrade facilities andenhance safety at JKIA and MIA, including the provision of perimeter fencingand the installation of new navigation, security and baggage-handlingequipment. The runway at JKIA will be extended, raising capacity from 2.5m to5.5m passengers per year. Domestic flights will be moved to the old Embakasiairport, allowing for the separation of inbound and outbound passengers atJKIA. A key objective behind the airport upgrade, particularly the new securityprovisions, is to win �category one� status from the US Federal AviationAuthority, thereby allowing for direct flights between JKIA and US airports.Direct flights would boost tourism and trade. This would allow JKIA tomaintain its status as a regional hub in the face of competition. However,airport improvement work has not yet started.

Kenya�s single-track railway system, which runs from Mombasa throughNairobi to the Ugandan border, is managed by Kenya Railway Corporation(KRC). Kenya and Uganda are jointly seeking a concessionaire to operate andinvest in their rail networks. Bidding opened in 2004 and a final award isexpected later in 2005. The winner will acquire rights to 1,920 km of track inKenya, which carried an average of 2.3m tonnes of freight and 4.7m passengersper year between 1999/2000 and 2002/03, and is expected to invest aboutKSh18bn (US$237m) in maintaining and rehabilitating rail assets. Freight traffichas fallen steadily, from 2.4m tonnes in 2000 to 1.9m tonnes in 2004, althoughpassenger traffic recovered in 2004 after two years of decline.

Kenya�s main seaport, Mombasa, has a deep-water port with 21 berths, andserves most of the East and Central African countries as well as internationalshipping lines. The port has extensive facilities, including cold storage,warehousing and container terminals. The Kenya Ports Authority (KPA)manages the port and inland container depots in Nairobi, Eldoret and Kisumu,while the terminals are managed by a private international firm on acontractual basis. Freight handled jumped by 12.6% in 2004, to 14.3m tonnes,but delays and inefficiency at the port, at the container depot in particular, arecited by the private sector as a major deterrent to business in Kenya. A studypublished in 2004 recommends that the KPA be given autonomous status, andthe government is looking at the option of turning Mombasa into a free portwithin five years.

Kenya�s inefficient fixed-line telephone system is in a state of disrepair owing tothe poor financial condition of the state-owned telecommunications company,Telkom Kenya (TK). This reflects weak management and significant overstaffing.The firm is scheduled for part-privatisation, although little progress is expecteduntil 2006, a year later than envisaged. A previous sell-off attempt in 2001came unstuck when the government deemed that bids were too low. TK�smonopoly over a range of services expired in mid-2004, but the proposedlicensing of a second national operator (SNO) fell apart in July, as the

Ports

Airports and railways

Telecommunications

20 Kenya


government rejected the winning bid by Telenor of Norway. It appears that thegovernment is reluctant to sanction competitors to TK in the fixed-line marketuntil the firm�s finances improve. However, the government did approve anopening of the Internet backbone segment in late 2004.

Africa: access to telephones and the Internet, 2003(per 1,000 people)

Fixed lines Mobile lines Internet usersSouth Africa 107 364 68Zimbabwe 26 32 43

Ghana 13 36 8Kenya 10 50 13Nigeria 7 26 6

Tanzania 4 25 7Uganda 2 30 5

Source: International Telecommunications Union.

While the number of fixed lines has fallen from a peak of 320,000 in 2002 tounder 280,000 currently, the mobile-phone segment has experienced aprolonged boom, with the number of subscribers surging from virtually zero in1998 to 2.6m in 2003 and 4.3m in 2004. The mobile-phone business isdominated by two players�Safaricom (a joint venture between TK and theUK�s Vodafone, which has about 60% of the market) and Kencell (a jointventure between the local Sameer group and Celtel). The award of a thirdmobile-phone licence has been accompanied by sustained controversy,including a series of court cases, some still ongoing. A Zimbabwean telecomscompany, Econet Wireless, originally won the licence in late 2003, for US$27m,in partnership with the Kenya National Federation of Co-operatives (KNFC), butimmediately faced a legal challenge from a disgruntled bidder, which wasdismissed in February 2004. Econet and the KNFC then fell out over theirshares in the joint venture and KNFC�s inability to raise its share of the funds.KNFC is still contesting its case in court. The Communications Commission ofKenya (CCK) finally endorsed Econet�s licence in November 2004, but the firmfaced a new challenge from the telecommunications ministry, which sought tohave the CCK award overruled. However, a court ruled in Econet�s favour inearly 2005. With the licence award in its pocket, Econet has started to roll out itsnetwork and aims to start services later in 2005.

Kenya now has a vibrant independent press, but prior to the adoption ofmultiparty democracy in the early 1990s independent journalists faced heavy-handed treatment, including imprisonment. Apart from one failed effort by thegovernment in 1998 to ban a group of opposition newspapers, there has been aconsiderable relaxation in the attitude of the authorities towards the media ingeneral. Two independent national newspapers, the Daily Nation and theStandard, maintain a high quality of reporting, as does a highly respectedweekly, The East African. The Nation Group was awarded a broadcasting licencein 2001 and subsequently launched a successful television station, joining twoother terrestrial channels, one state-owned (KBC) and the other independent(KTN). A number of private radio stations, some broadcasting in local

The press is relatively free

Kenya 21


languages, including Kameme FM (Kikuyu), Metro East FM (Hindi) and NationFM (Kalenjin), have also been established.

Energy provision

Installed power capacity remained unchanged, at 1,142 mw, between 2001 and2003, with hydroelectric dams accounting for 59%, oil-burning plants for 36%and geothermal resources for 5%. However, capacity climbed to 1,198 mw in2004 following the opening of a new 70-mw geothermal plant, Olkaria II. Thecontribution of hydropower in any one year can vary greatly, as output isvulnerable to drought. Hydroelectric production almost halved in 2000, atwhich time the Kenya Electricity Generating Company (KenGen, the state-owned power-generation firm) and independent power producers (IPPs)invested in new oil-burning facilities to make up the shortfall. Additional newcapacity will be needed in the years ahead, to avoid shortages, as demand isrising rapidly. Proposed schemes include the long-delayed Japanese-fundedSondu Miriu hydroelectric dam and additional geothermal plants. Kenya is aworld leader in geothermal energy and could generate 600 mw from thissource by 2017, meeting 25% of projected demand given sufficient investment.

Hydro and geothermal energy13

Coal and coke4

Liquid fuel83

Share of energy consumption by source, 2004(% of total)

Source: Ministry of Planning and National Development, Economic Survey, 2005.

The high cost of electricity and the large number of outages (11,000 a month)remain serious obstacles to economic activity. The liberalisation of the powersector in the 1990s was incomplete and offered little protection against thecorruption that bankrupted the state-owned distributor, the Kenya Power andLighting Company (KPLC), in the early 2000s. The problem was compoundedby drought in 1997 and 2000, which led KPLC to enter into high-cost contractswith IPPs for diesel-fired power plants. The company was bailed out by thegovernment and is now being restructured, with assistance from donors, as partof an ongoing overhaul of the entire power sector. This includes the proposedflotation of 30% of the more profitable KenGen on the Nairobi bourse later in2005.

Kenya relies on hydroelectricpower

Business suffers from high-costelectricity

22 Kenya


Kenya has no known hydrocarbon reserves, and all requirements are imported.Kenya Petroleum Refineries�a 50:50 joint venture between the government andseveral oil majors�operates the country�s sole oil refinery, in Mombasa. Thiscurrently meets 60% of local demand for petroleum products. A further link inthe energy chain is the Mombasa-Nairobi pipeline, operated by the state-runKenya Pipeline Company (KPC). Spurred by rising fuel demand, pipelinethroughput rose by 10% in 2004, to 3.3m cu metres.

Kenya�s 30-year search for oil has so far proved fruitless, although prospects arefavourable in some offshore locations. Exploration efforts suffered a minorblow in June 2004, when Australia�s Woodside pulled out from three offshorelicences following unsatisfactory survey results. However, Woodside remainscommitted to another four blocks, which have greater potential, in partnershipwith Dana (UK) and Star (owned by Australia�s Global Petroleum). The groupplans to start drilling in 2006, following promising surveys in 2005. Theeconomy would benefit greatly if any find were large enough to justifycommercial exploitation, as petroleum accounts for 20-25% of the nationalimport bill, although some experts hold that gas rather than oil is the mostlikely prize.

The economy

Economic structure

Main economic indicators, 2004Real GDP growth at market prices (%)a 4.3

Consumer price inflation (%)b 11.7Current-account balance (US$ m)a -370.0Total external debt (US$ bn)c 6.9

Average exchange rate (KSh:US$)b 79.2Population (m)d 33.47

a Official estimate. b Actual. c Economist Intelligence Unit estimate. d IMF, International FinancialStatistics mid-year estimate.

Sources: Economist Intelligence Unit, CountryData; Central Bureau of Statistics, Ministry of Planning and National Development,

Economic Survey, 2005; Central Bank of Kenya, Monthly Economic Reviews.

Agriculture remains the dominant sector in the Kenyan economy, accountingfor 22.6% of GDP (or 24.2% including fishing and forestry) and a significantproportion of employment (both directly and indirectly), although its relativeimportance has gradually declined over time. Farming output is diverse,consisting of various food crops and cash crops, and livestock. The mostproductive of Kenya�s farmlands are situated in the fertile central and westernregions; the rearing of livestock predominates in the semi-arid regions to thenorth and east.

Oil exploration has yet to paydividends

Economy is still dominated byagriculture

Kenya has an oil refinery andpipeline

Kenya 23


Origins of gross domestic product, 2004a

(% of total; constant 2001 prices)

Agriculture 24.2Transport, storage & communications 10.3

Wholesale & retail trade 10.1Manufacturing 9.9Financial services 3.8

Building & construction 3.6Others 38.1

a Provisional.

Source: Central Bureau of Statistics, Ministry of Planning and National Development, Economic Survey, 2005.

The government sees industrialisation as the main development challenge, butthe share of manufacturing has changed little since independence, andaccounted for 10% of GDP in 2004. Power and water sectors accounted for afurther 1.8% of GDP, and mining and quarrying for 0.5% of GDP. Industrialactivity is concentrated around the three largest urban centres, Nairobi,Mombasa and Kisumu. Manufacturing is dominated by food-processingindustries such as grain milling, beer production, and milk and sugar refining.Kenya also produces refined petroleum products from the Mombasa refinery,and has significant cement capacity. The large services sector is dominated bytrade, transport and communications and tourism, as well as by governmentservices. Kenya�s coastline and game parks are the main attractions for tourists.However, periodic security concerns and a deteriorating transport infra-structure has led to a downturn in visitor numbers, although arrivals picked upstrongly in 2003 and 2004 (see Economic sectors: Other services).

Comparative economic indicators, 2004Kenya Uganda Tanzania South Africa

GDP (US$ bn) 16.1 7.7 9.9 213.2

GDP per head (US$) 482 276 268 4,990Consumer price inflation (av; %) 11.7 3.3 6.7 4.3

Current-account balance (US$ m) -370 -254 -457 -6,982Merchandise exports fob (US$ m) 2,728 705 1,135 48,430Merchandise imports fob (US$ m) 4,320 1,460 2,282 48,545

Total external debt (US$ bn) 6.9 4.8 7.9 28.7Debt-service ratio (%) 12.4 8.4 7.0 9.4

Source: Economist Intelligence Unit, CountryData.

Kenya has the largest economy in East Africa, on both an absolute and a perhead basis. However, owing to impressive recent economic growth in Ugandaand the adoption of market-oriented economic reforms in Tanzania, Kenya nowhas serious competition in the subregion. Kenya has also lost out on severalyears of limited access to external funding because of governance concerns,whereas Tanzania and Uganda have both benefited from good relations withthe donor community. However, the economies of the three members of theEast African Community (EAC) are becoming more interdependent followingthe implementation of a customs union in January 2005. (see The externalsector: Trade in goods).

A growing challenge fromwithin the region

24 Kenya


Economic policy

Kenya�s erratic reforms and its on-off relations with donors have led to below-potential economic performance in the 1990s and beyond. Persistentunderinvestment and rampant corruption weakened the physical infrastructurewhile bloated parastatals drained the Treasury. Income per head fell andpoverty increased, while HIV/AIDS emerged as a public health crisis. Currently,an estimated 56% of the population lives on less than US$1 a day. Kenya agreedan IMF poverty reduction and growth facility (PRGF) in 2000, but it wassuspended in the same year because of the government�s failure to abide byagreed commitments, particularly tackling corruption. The new NationalRainbow Coalition (NARC) government, elected in December 2002, is com-mitted to deeper reforms. It unveiled an Economic Recovery Strategy for Wealthand Employment Creation (ERSWEC) in June 2003, with the aim of boostingGDP growth whilst also alleviating poverty.

The IMF awarded Kenya a three-year, US$250m PRGF in November 2003 tosupport the ERSWEC. The award boosted the government�s credibility andinvestor confidence, and allowed for renewed funding from other multilateraland bilateral donors such as the World Bank and the EU. It also paved the wayfor a new round of debt rescheduling with the Paris Club of official creditors(see The external sector: Capital flows and foreign debt). However, the PRGFcontains a long list of conditions, in terms of structural benchmarks andperformance criteria, which the government is struggling to meet, in particularthe passage of a new privatisation bill and the taking of firm action againstcorruption. As a result, payment of the second PRGF tranche in mid-2004 wasdeferred but, despite Kenya�s failure to meet all loan conditions, the IMF board,meeting in December 2004, endorsed progress made during the first year of thePRGF and authorised the release of the second and third loan tranches, worthUS$77m. Although the pace of reform has quickened from late 2004, there arestill serious concerns about corruption, and the privatisation bill remains stuckin parliament. As a result, the release of the fourth tranche cannot be taken forgranted. The IMF board is expected to make a decision in the near term.

Key commitments under the PRGF (2003-06)

Kenya�s key commitments under the new poverty reduction and growth facility are:• the complete elimination of domestic borrowing within three years;• a reduction of the public wage bill, probably by major retrenchment;• the redirection of spending towards poverty alleviation;• the strengthening of the financial sector, including a comprehensive revision of

banking legislation;• the liquidation or privatisation of state-owned enterprises;• a revision of the investment code;• ongoing trade liberalisation;• the taking of further steps towards improved governance;• the reform of the labour market; and• the updating of the Companies Act and other commercial legislation.

Kenya�s economic reformshave been erratic

The IMF agrees a new deal

Kenya 25


Despite donor concerns, project funding has been forthcoming, especially fromthe World Bank. As at December 2004 the World Bank had 15 ongoing projectsin Kenya, representing a total commitment of US$761m, including six loansapproved in 2004, covering transport, water and sewerage, agriculture, smalland medium enterprises, energy and the financial sector, valued at US$382m intotal. The World Bank plans to approve an ERSWEC support credit in 2005,worth US$75m, focusing on public-spending management, agriculturalproductivity and private-sector competitiveness.

The new NARC government showed some initial enthusiasm in tacklingcorruption, passing two key pieces of legislation in April 2003: the Anti-Corruption and Economic Crimes Bill and the Public Officer Ethics Bill. Earlier,in February 2003, the government also established the GoldenbergCommission of Inquiry to investigate the looting of up to US$1bn from theCentral Bank of Kenya (CBK, the Central Bank) in the 1990s. In another keymove, the president, Mwai Kibaki, purged the judiciary in October 2003,sacking half the country�s top judges. However the war against corruption ranout of steam in 2004, and relations with donors deteriorated, as evidenceemerged in mid-year of massive new corruption, particularly in the award ofgovernment contracts. The UK High Commissioner, Sir Edward Clay, launched ascathing attack on corruption in July 2004, a stance endorsed by other donors,and the EU deferred the planned disbursement of KSh5bn (US$66m) towardsthe 2004/05 budget. Although Mr Kibaki finally appointed a former judge,Aaron Ringera, to head the Kenya Anti-Corruption Commission (KACC), thechief graft-fighting body, in August 2004, the battle against corruption appearedto have stalled.

This perception was reinforced in February 2005, when Sir Edward launched anew tirade against corruption and talked of the �massive looting� of publicfunds, mainly in the form of dubious contracts. Shortly afterwards, JohnGithongo, the respected permanent secretary for governance and ethics in thepresident�s office (and the former head of the local chapter of a Berlin-basednon-governmental organisation, Transparency International), resigned, furtherdenting the government�s credibility. The US and Germany suspended US$9min funding earmarked for anti-corruption programmes. To appease donors,Mr Kibaki implemented a minor cabinet reshuffle, switching Chris Murungaru(a �Young Turk�) from the high-profile national security docket to the morelowly transport portfolio, with John Michuki (an old hand) moving in thereverse direction. The switch paved the way for an ongoing audit of securitycontracts�many of which are alleged to be corrupt�which could not havetaken place if Mr Murungaru had remained in post.

In an attempt to convince donors that it was still serious about tacklingcorruption, the government unveiled a new, two-year, anti-graft plan at theConsultative Group for Kenya (CGK) meeting in April 2004. This commits thegovernment to enacting new and amended legislation, improving lawenforcement and stigmatising corruption via a national educational campaign.The government has also promised an independent audit of security projects (asource of many corruption allegations) and to produce the final report of the

Corruption remains a seriousproblem

The government adopts a newanti-graft plan

26 Kenya


Goldenberg Commission. A new public procurement law is also in the pipe-line. In addition, the KACC became fully operational in June 2005. However, itis still not clear whether Kenya is truly committed to dismantling corruptnetworks and prosecuting high-profile offenders. Unless concrete action is takensoon, relations with donors will again sour.

Corruption Perceptions Index 2004: selected countries in Sub-Saharan AfricaCountry 2004 ranking a 2004 score b 2003 score % change c

Botswana 31 6.0 5.7 5.3South Africa 44 4.6 4.4 4.5

Ghana 64 3.6 3.3 9.1Tanzania 90 2.8 2.5 12.0Uganda 102 2.6 2.2 18.2

Ethiopia 114 2.3 2.5 -8.0Zimbabwe 114 2.3 2.3 0.0

Kenya 129 2.1 1.9 10.5Nigeria 144 1.6 1.4 14.3

a Out of 146 countries. b Zero indicates totally corrupt; 10 indicates totally clean. c Between 2003and 2004.

Source: Transparency International.

Kenya�s score on the corruption perceptions index, produced by TransparencyInternational (TI), improved slightly, to 2.1 in 2004 from 1.9 in 2003 (where zerorepresents maximum corruption and 10 complete freedom from graft). Kenyathus moves out of the category of �acute and pervasive� corruption (under 2.0)and into the category of �rampant� corruption (2.0 to 3.0). Despite the modestimprovement, Kenya slipped to 129th position in 2004, from 122nd position in2003, owing to a rise in the number of countries ranked from 133 to 146. Kenyais still among the most corrupt countries in Sub-Saharan Africa, according to TI,and scores worse than its East African neighbours.

Fiscal consolidation is a key part of the reform programme. The ERSWEC callsfor a steady rise in domestic revenue through a widening of the tax net andimprovements to the collection capacity of the Kenya Revenue Authority (KRA),and for the redirection of spending from wages and interest payments towardssocial services and capital projects. The KRA has certainly been successful inraising tax revenue over the past two years, although better spendingmanagement has been slower to materialise. The latest public expenditurereview for 2004/05, presented to donors at the CGK meeting in April 2005,highlighted several failings. Key problems include the large number of stalledprojects and the related matter of unpaid bills.

Presenting the budget for fiscal year 2005/06 (July-June) on June 8th, thefinance minister, David Mwiraria, confirmed that Kenya�s fiscal policy wouldcontinue to focus on maintaining macroeconomic stability, fiscal consolidationand a switch in spending towards poverty alleviation. Mr Mwiraria isprojecting a fiscal deficit of KSh66.6bn (US$871m) in 2005/06, equivalent to3.4% of GDP. This compares with the budgeted deficit of 3.9% of GDP in2004/05, although the provisional outcome for the most recent fiscal yearsuggests a small surplus, of 0.5% of GDP, owing to higher than expected

Kenya improves on thecorruption perceptions index

The government isimplementing fiscal reform

The 2005/06 budget aims tocut poverty

Kenya 27


revenue collection and lower than expected spending. The projected shortfallin 2005/06 is to be financed from external sources (KSh23.4bn), thesecuritisation of domestic arrears and bank restructurings (KSh9.9bn), andprivatisation proceeds (KSh8bn). The remaining KSh25.3bn will be borroweddomestically. This is significantly higher than in 2004/05, but it appears that itwill be manageable without pushing up interest rates significantly.

Government finances(KSh bn, unless otherwise indicated)

Budget2005/06

Provisional outcome2004/05

Total revenue 354.0 305.4 Domestic revenue 326.1 293.4 Tax revenue 296.1 267.5 Other revenue 30.0 25.9 External grants 27.9 12.0Total expenditure 420.6 299.1 Recurrent spending 316.4 227.1 Development spending 104.2 72.0Balance -66.6 6.3% of GDP -3.4 0.5

Sources: Budget speech; Central Bank of Kenya.

In a break with past policy, the government is no longer factoring-in pledgeddonor funding, only funds actually committed, in a bid to end damaginguncertainty about when and if funds will be released and under whatconditions. However, it is likely that additional donor funding for the budgetwill be secured during the year. The World Bank and the Kenyan governmentare currently negotiating a KSh6bn package (the Economic Recovery StrategySupport Credit), geared mainly towards improving financial management andbudget preparation. Moreover, the KSh5bn pledged by the EU for 2004/05, butnot disbursed, as well as another KSh5bn for 2005/06, is potentially available,provided that the government passes the new procurement and privatisationbills within the next few months. Such funds would reduce the headline deficit,although planned proceeds from privatisation are unlikely to be realised in full,given the delays to date.

The 2005/06 budget will rely heavily on the ability of the KRA to raiseKSh296.1bn (US$3.9bn) in taxes�10.7% higher than the final outcome in2004/05. Other revenue is expected to amount to KSh30bn, taking the domestictotal to KSh326.1bn in 2005/06, representing 22.8% of GDP, slightly up from 22%of GDP in 2004/05. The 2005/06 budget assumes a second year of strong taxgrowth, based on a further pick-up in economic activity and rising corporateprofits. The KRA performed well in 2004/05: tax collection of KSh267.5bn was14.9% higher than initial budget calculations. If the KRA fails to meet its newtargets, domestic borrowing will be higher than planned, threatening higherinterest rates unless additional donor funds are forthcoming. Apart from highertax collection, the government has also factored privatisation receipts ofKSh8bn in to the 2005/06 budget. These will mainly come from the flotation of30% of the power firm, KenGen, later in 2005.

The Kenya Revenue Authorityfaces an ambitious target

The government is no longerfactoring-in pledged funding

28 Kenya


The finance minister has also promised that the government will startdismantling the plethora of regulations that hinder the conduct of privatebusiness in Kenya. According to Mr Mwiraria, 17 regulations will be scrapped in2005/06, including the trade licence, a number of import and export licences,and the horticultural crops development authority order licence. A further30 licences will be reviewed and amended in 2005/06, although about 550others will remain intact for the time being. The government has also promisedto review competition laws. The business community has given a largelyfavourable response to the budget, but continues to complain about delays inobtaining value-added tax (VAT) refunds, the poor state of the physicalinfrastructure (particularly the state of the roads and the delays at Mombasaport), and the high cost of power. However, Mr Mwiraria has promised funds toclear the VAT refund backlog and pointed out that infrastructure is now apriority sector.

Civil service wages will remain the key determinant of expenditure levels. Theyare estimated to have accounted for over 8% of GDP in 2004/05 (excludingparastatals), compared with about 5% of GDP in both Uganda and Tanzania.The 2005/06 budget factors in net wage rises of KSh4.9bn for teachers (as partof a long-term pay deal) and KSh2.1bn for civil servants, but the governmentalso hopes to cut the overall wage bill (as a percentage of GDP) throughdownsizing. The state needs to shed as many as 30,000 jobs, but this will bedifficult to achieve, as expensive redundancy packages will be needed to avertlabour unrest. The government is taking a hard line towards labour unions andhas seen off several strikes, including recent action by civil servants. Severalthousand strikers have been sacked, although unions are pressing for theirreinstatement.

The disposal of state assets is a key component of the reform programme,although progress has been slow. The sale of Kenya Airways in the late 1990swas successful, but the process stalled in the final years of the government ofDaniel arap Moi. Mr Kibaki and NARC promised to revive the process, butapart from the government cutting its share in Kenya Commercial Bank to 25%in mid-2004 by not taking up its allotment of a new rights issue, little else hashappened. The long-delayed privatisation bill became bogged down in parlia-ment, as legislators feared that foreigners would snap up Kenyan assets toocheaply. However, parliament finally passed the bill in August 2005, havingsecured a promise that most disposals would take place via flotations on thebourse, which is dominated by local players. The government plans to float30% of KenGen before the end of 2005 and may float a portion of TelkomKenya in 2006.

In 1996 the Treasury ceded greater control over monetary policy to the CentralBank. The CBK�s principal objectives have been to achieve low inflation andmaintain exchange-rate stability. Tighter monetary policy helped to bringinflation down to 2% in 2002, but the rate climbed to 9.8% in 2003 and 11.7% in2004 owing to rising food and fuel prices, although underlying inflation(excluding food and fuel) stayed below the self-imposed 5% ceiling. However,

Privatisation makes slowprogress

Monetary policy

The government plans toinitiate business deregulation

The wage bill is too high

Kenya 29


underlying inflation passed the 5% mark in mid-2005, reflecting rapid growth inprivate-sector credit expansion, at a rate of almost double the CBK�s 12% target.To stem inflationary pressures and to slow credit growth the CBK engineered arise in the benchmark 91-day Treasury-bill rate in late 2004. This surged fromunder 2% in mid-2004 to about 8.6% in early 2005, and has since remained atthis level. To assist policy implementation, the CBK proposes a new benchmarkinterest rate�the Central Bank rate�and is currently holding talks with privateplayers in the money markets with a view to introducing the rate later in 2005.The switch would also de-link interest rates from the public-sector borrowingrequirement and tie them to real macroeconomic variables. In an encouragingdevelopment for the deepening of domestic capital markets, Kenya introduceda new yield curve in October 2004, which should help to stabilise the marketfor government securities in the medium term.

Economic performance

Kenya�s economic performance was below potential in the 1980s and 1990sowing to a variety of problems, including intermittent drought, poor economicmanagement, rampant corruption, a lack of investment, a deteriorating infra-structure and on-off donor relations. GDP per head fell and poverty climbed.Hopes were high that the economy would revive quickly under the reform-minded Kibaki regime, but the initial results seemed disappointing. However, afundamental revision of national accounts statistics in May 2005 shows that theeconomy is gathering pace faster than expected, with real GDP growing from0.4% in 2002 and 2.8% in 2003 to a higher 4.3% in 2004 (although averagegrowth for 2000-04 still remains modest, at 2.5% annually). The data revisionupdates the base year from 1982 to 2001, to capture the changing sectoraldistribution of economic activity, and also brings in sectors that were notincluded before, such as horticulture and export processing zones, as well asthe informal sector. The revision also switches from factor cost to market prices,and therefore includes taxes less subsidies.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

1996 97 98 99 2000 01 02 03 04

Real GDP growth rates, 1996-2004(%, av)


New data show that GDP isgrowing faster than thought

30 Kenya


The main contributors to real GDP growth of 4.3% in 2004 were transport andcommunications, wholesale and retail trade, and restaurants and hotels, all ofwhich grew considerably faster than in 2003. This reflects a solid rise ininternational trade, the rapid roll-out of mobile phones and the strong recoveryin tourism. In 2004 there were also solid contributions from manufacturing,driven partly by garment exports, and from building and construction.However, the key agricultural sector grew by just 1.4%, as mid-year drought hitthe grain harvest, although both tea and horticulture performed strongly.Growth in 2004 also benefited from a rapid 22% rise in private-sector credit(fuelled by low interest rates prevailing at the time).

The new system of national accounts

The main features of the new system of national accounts are as follows:• the base year has been updated from 1982 to 2001, and will henceforth be

updated every five years;• sectoral weights have been revised to reflect structural changes in the economy,

and some activities not previously measured are now included;• GDP calculations are now based on market prices, not factor cost, and therefore

include taxes (less subsidies). The new system really measures gross domesticincome rather than gross domestic product; and

• the national accounts have been harmonised with other key data such as thebudget and the balance of payments.

The recovery shows no signs of abating in 2005, with trade, tourism, andtransport and communications all continuing to perform strongly. In addition, abumper grain harvest is forecast for the second half of the year after good rainsin May compensated for early-season drought, although tea output is stillsuffering from the impact of the dry spell. However, the ongoing strength of oilprices will dampen economic activity in 2005, and garment sales to the US areunder pressure because of increased Chinese competition. Other growthinhibitors include the poor state of the road network, congestion at the portand the high cost of electricity. Although investment in infrastructure is rising,these structural faults will take time to correct. The government forecastsgrowth of 5% in 2005, although the Economist Intelligence Unit is slightly morecautious and predicts expansion of a slightly lower 4.8%.

Gross domestic product by sector(% real change, year on year, unless otherwise indicated)

Share in 2004(%) 2002 2003 2004

Agriculture 24.2 0.4 2.4 1.4

Transport & communications 10.3 6.8 4.9 9.7Wholesale & retail trade 10.1 -2.3 1.2 9.5

Manufacturing 9.9 0.6 4.9 4.1Financial services 3.8 -1.8 1.7 1.5Building & construction 3.6 -2.6 1.7 3.5

Restaurants & hotels 1.1 4.7 -20.3 15.1Government services 14.8 0 2.6 1.8

GDP (incl others) 100 0.4 2.8 4.3

Source: Central Bank of Kenya, Monthly Economic Review.

Real GDP growth is projectedto increase in 2005

Kenya 31


Inflation trends in Kenya strongly reflect movements in food prices, whichcarry a 50% weighting in the consumer price index. Inflation fell significantly, to2% in 2002, from 5.8% in 2001, owing to lower food prices, subdued domesticdemand and tight monetary policy. However, inflation climbed rapidly, to 9.8%in 2003 and 11.6% in 2004, owing to the twin pressures of higher food and fuelprices. Inflation has continued to rise in 2005 for the same reasons, withaverage annual inflation reaching 15.2% in July 2005, although year-on-yearinflation fell to 10.7% in the same month and is expected to continue falling inthe second half of the year owing to the projected bumper food harvest. Weforecast average inflation of 12% in 2005. Underlying inflation (excluding foodand fuel) has also risen, passing the government�s 5% ceiling in June and July2005. This reflects the rapid rise in private-sector credit over the past 18 months,although this is now easing because of the rise in interest rates in 2005.

Food & drinks 50

Transport & communications 6Housing 12

Alcohol & tobacco 3

Recreation & education 6

Food & power 4 Others 10

Clothing & footwear 9

Inflation weights(% of total)

Source: Central Bank of Kenya.

Economic sectors

Agriculture

Farming and cattle-rearing are still important economic activities in Kenya,accounting (with forestry and fishing) for around 24% of GDP, and 18% of directwage employment in the formal sector, in 2004. Agriculture also generates jobsin agro-processing and the large informal sector. Almost one-half of allagricultural output is for subsistence and is therefore not marketed.Horticultural produce and tea are Kenya�s two single most valuable exports,accounting for 25% and 23% respectively of domestic exports in 2004. Coffeehas declined in importance owing to the slump in world prices, and accountedfor just 4.4% of domestic exports in 2004.

Food production fluctuates widely year by year in line with varying climaticconditions. Kenya experiences intermittent droughts and floods (often in thesame year) leading to large annual shifts in output and food importrequirements. Even in a good year, however, the country is not self-sufficient inbasic cereals. The problem is exacerbated by over-dependence on maize and a

Agriculture dominates theeconomy

Food prices have a largeimpact on inflation

32 Kenya


failure to diversify into more drought-resistant cereals such as sorghum andmillet. A mid-season drought in 2004 led to a sharp fall in grain output and anappeal for emergency food relief. However, the outlook for the main 2005harvest (in the second half of the year) is far brighter owing to good mid-seasonrains: the grain harvest is expected to rise by 37%, to 2.3m tonnes (comparedwith an average of 2.2m tonnes).

Cash crop production(�000 tonnes unless otherwise indicated)

2003 2004Jan-Apr

2004Jan-Apr

2005% change2004/05

Sugarcane 4,184.5 4,654.0 1,653.2 1,620.0 -2.0

Tea 293.7 324.6 117.5 113.9 -3.1Horticulture 133.2 166.1 59.5 82.9 39.3

Coffee 61.2 49.9 23.8 31.2 31.1

Sources: Central Bureau of Statistics; Kenya Sugar Authority; Horticulture Crops Development Association.

Since 1995 the tea sector, which is heavily dependent on weather conditionsand well distributed rainfall, has been one of the major contributors to Kenya�sexports. The sector has benefited from extensive reforms, particularly theliberalisation of tea marketing and the privatisation of the Kenya TeaDevelopment Authority (KTDA) in 2000, but has continued to suffer from poorinfrastructure and a lack of institutional and managerial capacity. Not-withstanding these impediments, production of tea has varied considerablyover the years. Tea output continued to climb sharply in 2004, despite the mid-season drought, with annual production rising by 10.5% to a record 325m kg.Export volumes performed even better, rising by 24%, to 334m kg. Demandwas strong in all the top export markets, including Pakistan (77m kg), Egypt(63m kg), the UK (50m kg) and Afghanistan (28m kg). Prospects for 2005 arenot as good because of early-season drought, with production 3% lower yearon year in the first four months of 2005. Smallholders, as opposed to estates,produce the majority of Kenya�s tea (this is also the case with coffee).

Horticulture has grown rapidly since the mid-1980s, based on rising sales of cutflowers, vegetables and fruit, particularly to the European market. Kenyabecame Europe�s largest flower supplier in the 1990s, satisfying about 25% ofthe market. Production is largely immune to the vagaries of the climate becauseof the widespread use of irrigation. Flowers accounted for 53% of horticultureexport volumes in 2004, followed by vegetables with 35%, and fruit with 12%.The value of horticultural exports has continued to rise strongly in recent years,and is now the top or second-to-top export earner, depending on data source,earning just under US$500m in 2004, compared with US$279m in 2000 andUS$360m in 2002.

Most notably, the expansion of horticulture has been almost entirely driven bythe private sector, including foreign investors. Foreign investment (including thatby the main flower producers, Israel and the Netherlands) has also beenaccompanied by the transfer of production and marketing skills, enablingKenya to remain competitive despite the entry into the market of many otherproducing countries. Producer organisations, the Kenya Flower Council (KFC)

Kenya is a major tea producer

Horticulture grows rapidly

Kenya 33


and the smaller Fresh Produce Exporters Association of Kenya (FPEAK), alsoplay a key role in sector management. However, horticulture faces majorchallenges in the form of ever-tighter EU environmental standards and Kenya�shigh tax regime. The KFC and FPEAK warn that the large number of taxes andlevies facing growers could slow expansion. The situation has been aggravatedby the spike in world oil prices, which has pushed up freight and input costs.The KFC adopted a new code of practice in 2004 aimed at ensuring thatKenyan product is compliant with the European Retailers Protocol-GoodAgricultural Practices (Eurep-Gap) and EU hygiene rules. However, while largeproducers are able to meet such requirements, smaller producers risk beingsqueezed out.

Exports of fresh horticultural produce2000 2001 2002 2003 2004

Volume (�000 tonnes) 99.2 98.9 121.1 133.2 166.1Value (KSh bn) 13.9 20.2 26.7 28.8 32.6

Source: Horticultural Crop Development Authority.

Coffee was one of the country�s main exports until the mid-1980s, when outputstood at 120,000 tonnes. The country�s coffee is renowned for its high quality,and nearly 95% of the output is exported. Most of the coffee is produced bysmall-scale farmers (organised into co-operative societies, which vary in sizeand efficiency), although there is a significant number of coffee-growing estates.In recent years, however, the sector has suffered from drought, low worldprices, high costs of production and the delays in reforming the sector. The newCoffee Act of 2001 brought about the partial liberalisation of marketing butfailed to stem the decline. Coffee output fell by 18.5% in the 2003/04 crop year(October-February) to 53,000 tonnes, owing to the decline in world prices andlocal institutional failings, and as farmers switched to dairy and horticulture.There have been signs of a revival in 2004/05, with output estimated to haveincreased by 23% to 65,000 tonnes, attributed to better weather conditions andhigher world prices. However, the future of the sector remains uncertain, and aproposed revision of the Coffee Act in 2005, to establish a second marketingwindow (in the form of farm-gate sales) to complement the existing centralisedauction system, has become bogged down by a dispute between the co-operative movement and coffee marketers (dominated by international coffeetraders), with both sides having their supporters in the cabinet. Institutionalreform remains on the agenda, and it is likely that some form of farm-gate saleswindow will be introduced (with attendant potential costs and benefits), butwhether the current upturn in production can be sustained is uncertain,particularly given global overproduction.

Kenya fails to grow or refine enough sugar to meet domestic requirements,necessitating imports. At the same time, the country maintains stiff tradebarriers to protect high-cost local growers, to the detriment of consumers. Thesystem has proved unsatisfactory and the government has struggled to balancethe competing demands of producers, consumers, and traders. The situation iscomplicated by Kenya�s commitment to free trade within the Common Marketfor Eastern and Southern Africa (Comesa). Comesa sales to Kenya are currentlyregulated by quotas (although enforcement is lax and illegal dumping has taken

The sugar industry facescompetition from imports

The future of coffeeproduction is uncertain

34 Kenya


place), but these are due to expire in 2008. However, the threat posed by cheapimports has eased in 2005 owing to a rise in world sugar prices. Production ofrefined sugar fell by 9% in 2003 (largely because of a fall in sugarcane output),leading to higher imports, but the situation was reversed in 2004. Refined sugarproduction climbed by 15%, to 517m tonnes, and imports declined.

Refined sugar production, imports and consumption(�000 tonnes)

2001 2002 2003 2004Production 377.4 494.2 448.5 516.8Imports 249.3 130.0 182.2 164.0

Consumptiona 630.1 652.1 663.8 669.9

a Production and imports do not equal consumption in any particular year because of retained stocksand small volumes of exports.

Source: Kenya Sugar Board.

Mining and semi-processing

Mining and quarrying accounts for just 0.5% of GDP, the majority beingcontributed by the soda ash operation at Lake Magadi. Total mineral productionhit a recent low of 636,000 tonnes in 2001, but rose steadily to 1.11m tonnes in2004, largely because of a rise in soda ash output, which is set to continue. Inearly 2004 Magadi Soda, a subsidiary of the UK�s Brunner Mond Group andAfrica�s largest producer and exporter of soda ash, announced a US$97mexpansion programme covering 2004-05 in what is one of Kenya�s largestforeign-investment projects in recent years. Magadi Soda plans to construct a365,000-tonne/year high-purity soda ash plant (for use as a raw material inglass manufacture) geared to new markets in Asia, Africa and the Middle East.

Mineral production, 2004a

�000 tonnesSoda ash 355

Fluorspar 118Salt 27

Crushed refined soda 600Total (incl others) 1,107

a Provisional.


A Canadian mining company, Tiomin, finally secured official approval in mid-2004, after a decade of negotiations, for its plan to invest KSh11.5bn (US$144m)in the Kwale mineral sands project in Coast province. Tiomin forecastsproduction of 444,000 tonnes/year from the Kwale mineral sands project (overa 14-year period), including 330,000 tonnes of ilmenite, 77,000 tonnes of rutileand 37,000 tonnes of zircon. Ilmenite and rutile are used for making pigments�they impart brilliance, lustre and fade-resistance to paint�while zircon is usedin ceramic glazes and electronics. However, despite proposals to start con-struction in early 2005, work has yet to get under way (as at mid-2005) becauseof ongoing opposition from local people to relocation and the level ofcompensation offered, and also because of the confused legal environment for

Tiomin�s mining project isfinally approved

Soda ash production is on arising trend

Kenya 35


mining operations: the current law is more than 60 years old. To speed theTiomin venture and other proposed schemes, the government embarked on areview of mining laws in mid-2005, a process expected to take 12 months.

Manufacturing

Kenya is the most industrialised country in East Africa, even though manu-facturing accounts for just 10% of GDP. The sector grew rapidly afterindependence, based on a policy of import substitution, in particular forconsumer goods such as processed food, beverages and tobacco, textiles,petroleum products, electrical appliances and machinery, paper and printing, andsugar and confectionery. Policy shifted from import substitution to exportpromotion towards the end of the 1980s, and import tariffs were cut across theboard, although they remain an instrument of policy in some sectors,particularly maize and sugar. There is also a substantial informal sectorinvolved in small-scale manufacturing. Jua kali (literally �hot sun�) industriesoperate in fields as diverse as the fabrication of household goods, motor-vehicleparts and farming implements. Evidence suggests that this sector is expandingrapidly and accounts for a significant proportion of domestic manufacturing,contributing perhaps 18% of GDP. However, there is a lack of reliable statisticson the contribution of the jua kali sector.

Manufacturing growth slowed in the 1990s as producers confronted anincreasingly high cost environment, owing to the deterioration in the transportinfrastructure, expensive electricity and poor governance (including over-regulation and corruption). In order to bolster manufacturing, the newgovernment of Mwai Kibaki introduced favourable tax measures in the 2003/04budget (including the removal of duty on capital equipment and other rawmaterials). Driven by strong export demand, manufacturing grew, in real terms,by 4.9% in 2003 and 4.1% in 2004, while manufacturing exports climbed fromUS$218m in 2003 to US$292m in 2004. However, structural impedimentsremain and will take time to correct.

The biggest single boost to manufacturing in recent years has been Kenya�sinclusion in the list of beneficiaries of the African Growth and Opportunity Act(AGOA), a US government initiative. Kenya�s clothing sales to the USquadrupled between 2001 and 2004, to reach US$271m. The garment industrycomprises some 40-50 firms, of which about 90% are foreign owned, mostlybased in Kenya�s export processing zones (EPZs). They account for the bulk ofinvestment, sales and employment in the EPZs, where the number of jobs rosefrom 14,000 in 2001 to more than 30,000 in 2003. A further 120,000 Kenyansare thought to be indirectly employed in AGOA-related activities. However, EPZfirms have faced periodic labour unrest (over low wages), and variable powerand water supplies, leading to closures, although these have been more thanoffset by new entrants, at least to date.

AGOA leads to expansion inthe garment sector

Import substitution switchesto export promotion

Manufacturing growth ishampered by structural factors

36 Kenya


Garment exports to the US(US$ m)

2002 2003 2004Total exports to the US 189 249 352 Garments 122 176 271 Others 64 62 81

Sources: US Census Bureau; US International Trade Commission.

In 2004 the extension of AGOA to 2015 and, in particular, the extension ofthird-party textile sourcing until 2008 (after which Kenya will have to buytextile raw materials from fellow AGOA beneficiaries) gave a major boost togarment manufacture. However, a serious new challenge quickly emergedfollowing the end of the Multi-Fibre Arrangement in January 2005, which hasexposed Kenya (and others) to heightened competition from low-cost Asianproducers, particularly China. Although Kenyan textile sales to the US weresteady in the first four months of 2005 compared with a year earlier, the four-year growth spurt is at an end, and greater efficiency in the local industry willbe needed if sectoral growth is to be restored.

Construction

The construction industry enjoyed a period of prosperity in 1990-92 owing toan office-building boom in Nairobi, which altered the skyline of the capital.However, the boom proved short-lived, and both public and private investmentdeclined during the 1990s as the economy stagnated. Nairobi enjoyed anotherbuilding spurt after the US embassy bombing of 1998, but the constructionsector (3.6% of GDP in 2004) contracted in real terms in both 2000 and 2002.However, activity picked up following the election of the Kibaki regime in late2002 and the subsequent initiation of donor-funded infrastructure projects.Demand for new houses has also recovered. As a result, real growth in theconstruction sector rose from 1.7% in 2003 to 3.5% in 2004.

Financial servicesBanking indicators(KSh bn unless otherwise indicated)

May 2004 May 2005 % changeTotal assets 542.2 606.3 11.8 Loans 296.1 360.3 21.7 Government securities 129.0 121.1 -6.1Non-performing loans 72.6 71.1 -2.1 % of total advances 24.5 19.7 -

Source: Central Bank of Kenya, Monthly Economic Review, June 2005.

Kenya�s banking system weakened in the 1990s, burdened by state control andbad debts, but is recovering under a series of ongoing financial sector reformsinitiated by the Kibaki government, following its election in December 2002,and backed by the IMF. As at June 2005 the banking system comprised42 commercial banks (down from 44 in 2001 due to a liquidation and a

Structure of the financialsystem

Donor-funded projects boostactivity

Kenya 37


conversion), one non-bank financial institution, two mortgage financecompanies, two building societies and 89 foreign-exchange bureaux (a newmoratorium on additional foreign-exchange bureaux was imposed inJanuary 2005). Of the four main banks, two�Barclays and Standard Chartered�are subsidiaries of foreign banks and are by far the most profitable, while two �Kenya Commercial Bank (KCB) and the National Bank of Kenya (NBK)�aremainly state owned. The two state banks, after years of heavy losses due tounsafe lending, are in the midst of restructuring. The KCB has been partlyprivatised and returned to profitability, although the NBK will take longer toturn around.

There are signs of a pick-up in bank lending to the private sector as confidencebuilds, but intermediation margins remain high and banks are risk averse,particularly given that around one-quarter of total advances are non-performing loans (NPLs). The high level of NPLs will continue to be a majorchallenge for the banking system. However, asset quality is improving andNPLs declined from 24.5% in May 2004 to 19.7% in May 2005. The improvementin the ratio of NPLs to total advances was attributable to recoveries and write-offs of previous NPLs in the banking system. To deal with the high proportionof NPLs (59.8%), which are concentrated in five public-sector institutions, thegovernment has recently created a bank-restructuring unit at the Treasury tospearhead the restructuring of state-owned banks.

The government is planning a series of major financial sector reforms designedto raise efficiency and competition and to improve supervision, although thereis no fixed timetable, which will lead to delays. The state also proposes towithdraw completely from commercial banking, although this is unlikely tohappen soon. Recently, in June 2005, the CBK finalised plans for electronicmoney transfers between banks�Real Time Gross Settlement�allowing for theinstantaneous movement of funds. Moreover, the 2005/06 budget proposes toamend the Bills of Exchange Act to allow for electronic transfers�therebyspeeding cheque clearance from three days to one day. However, the proposedcentral bank amendment act (2004) remains stalled in parliament. Its provisionsinclude the introduction of the in duplum rule, to cap the amount of interestand charges that can be levied on NPLs. Legislators seek to make this retroactive(which would prove very costly for banks) but the president has not assented.

Nairobi Stock Exchange index(end of period; 1966 =100)

20041 Qtr 2 Qtr 3 Qtr 4 Qtr

20051 Qtr 2 Qtr

Nairobi Stock Exchange 20-share index 2,771 2,370 2,671 2,946 3,209 4,000

% change (qtr/qtr) 1.2 -14.4 12.7 10.3 8.9 24.6

Source: Central Bank of Kenya, Monthly Economic Review and Weekly Bulletin.

The Nairobi Stock Exchange (NSE) 20-share index was stagnant at a low level in2001 and 2002, but doubled in 2003, to average 2,738, as the installation of anew government boosted confidence and lower interest rates on governmentsecurities made equities more attractive. However, the index declined in thefirst half of 2004 as confidence evaporated, in particular because of renewed

The equity market is on arising trend

Financial sector reforms areplanned

38 Kenya


disputes between donors and the government over corruption. The market hassince risen steadily and was very bullish in the second quarter of 2005, rising to4,000 on July 1st, the first time that this threshold has been crossed since 1994.The bull run is based on several factors, including rising corporate profits acrossmost sectors, the upward revision of GDP growth figures (which has helped toboost confidence) and the tax incentives proposed for newly listed companiesin the recent 2005/06 budget. Market capitalisation has also grown strongly,reaching KSh409bn (US$5.4bn) on July 1st, about 50% higher than a year earlier.

The market has suffered a dearth of new listings in recent years�the last onebeing Mumias sugar in 2001, taking the total to 47�but the cut in corporationtax to 20% for five years for newly listed companies with at least a 40% localshareholding will encourage new entrants. A spokesman for one market player,Old Mutual, described the tax concession as the �greatest thing� that hadhappened to the bourse since its inception. The market will also benefit fromthe government�s intention to use the stock market as the main conduit forprivatisation. The planned flotation of 30% of the power firm, KenGen, on theNSE later in 2005 is likely to be the next new listing.

Other servicesTourist arrivals (excluding crossborder visitors)

2002 2003 2004Jan-Apr

2005Total 495,751 547,314 662,832 260,245

% change, year on year 0.6 10.4 21.1 31.1

Source: Kenya Tourist Board.

Tourism is a vital component of the Kenyan economy�supported by two maindestinations, the coastal region and the game parks. Restaurants and hotelsaccount for 1.1% of GDP, but the contribution of tourism is far greater than this,being spread across several sectors, transportation in particular, and couldamount to 10% of GDP in total. It is also an important employer and, in 2004,generated US$478m, ahead of tea. Foreign arrivals declined in the late1990s/early 2000s due to the crumbling infrastructure, increased competitionfrom other African destinations and terrorist attacks, such as the US embassybombing in 1998 and the Paradise Hotel suicide bombing in November 2002. Afresh terrorist threat was identified in 2003, leading to the temporarysuspension of commercial flights from the UK and the issuing by severalWestern governments of negative travel advisories for visits to Kenya. Mostwere withdrawn within six months, although a toned-down US warningremains in place. However, the impact of the negative advisories was less thanfeared, and despite a small dip in European arrivals�and the virtual cessationof European charter flights to Mombasa�-visitor numbers rose by 10.4%, to547,314, in 2003. To try to revitalise the tourism industry, the Kenya TouristBoard launched an aggressive marketing campaign in 2002.

Tourism grew strongly in 2004, with visitor numbers up by 21.1%, to 662,832, asthe sector benefited from the return of European charter traffic, and globalmarketing efforts. Average hotel occupancy reached 80-90% in city and

Tourism recovers strongly in2004

Kenya 39


upcountry establishments, and 60% along the coast. The upturn has continuedin 2005, with arrivals climbing by 31% year on year, to 260,000 in the first fourmonths of the year, and further growth is in prospect, provided that there areno major security scares. However, despite the sector�s buoyancy, the dearth ofinvestment in recent years has led to a shortage of high-class accommodation.Furthermore, the poor road infrastructure, including roads within nationalparks, and overall security problems continue to deter potential visitors.

The external sector

Trade in goods

Kenya has a relatively diverse export profile, led by tea and horticulturalproducts. Other key exports include garments, coffee, iron and steel, soda ash,fish, and plastics. Exports climbed by 11.4% in 2004, but imports rose faster, by21.9%, pushing the trade deficit from US$1.11bn in 2003 to US$1.65bn in 2004.According to the most recently published data, covering the 12 months toApril 2005, the trade deficit widened further, to just over US$2bn, as, onceagain, imports grew faster than exports. Imports surged by 31%, to almostUS$5bn, driven by strong growth in all import categories, including machineryand equipment (up by 31%), oil (up by 27%), chemicals (up by 32%) andmanufactures (up by 36%). Meanwhile, exports grew by 19%, to US$2.9bn, withmanufactures and re-exports posting the fastest growth rates, although sales ofthe top earners, tea and horticulture, also increased.

Foreign trade, 2004(US$ m)

Total exports fob (incl others) 2,728 Tea 456 Horticulture 417 Raw materials 406 Manufactures 292 Coffee 89 Re-exports 689Total imports cif (incl others) 4,351 Oil products 1,120 Machinery & transport equipment 1,027 Chemicals 746 Manufactures 686Trade balance -1,648

Source: Central Bank of Kenya, Monthly reports.

Other African countries are Kenya�s most important export destinations, withthe continent accounting for 46% of total sales in 2004, compared with 26% forthe EU. The rise in Africa�s share over the past decade reflects increased tradewith members of the Common Market for Eastern and Southern Africa(Comesa) and the East African Community (EAC), to which Kenya belongs. TheEAC, comprising also Uganda and Tanzania, accounted for 26% of foreign salesin 2003, the same as the EU. Kenya�s exports to Comesa and the EAC aredominated by manufactured goods, unlike its exports to the EU, which are

Kenya traditionally runs atrade deficit

Exports to Africa exceed thoseto the EU

40 Kenya


dominated by primary products. Kenya�s import profile is also diverse, with theMiddle East accounting for 28% in 2004, the Far East for 24% and the EU for24%. Africa, dominated by South Africa, supplied 14% of the total.

Main trading partners, 2004a

(% of total)

ExportsUganda 17.3UK 10.5Tanzania 8.4Netherlands 8.0ImportsUnited Arab Emirates 12.4South Africa 9.5Saudi Arabia 8.7UK 7.4

a Provisional.


Trade with the EAC is expected to continue rising, following theimplementation of a new customs union from January 1st 2005. This aims toeliminate all tariff and non-tariff barriers to internal trade within five years, andsets a three-band common external tariff (CET) of 25% for finished goods, 10%for intermediate goods and zero for raw materials, although several namedgoods, farm products in particular, attract higher rates This obliged Kenya to cutits top rate from 35%, although Uganda and Tanzania had to raise theirs. Withregard to intra-EAC trade, Kenya agreed to immediate duty-free entry for allTanzanian and Ugandan goods, but several hundred Kenyan products will stillface duties in Uganda (of 10%) and Tanzania (of between 2% and 20%) for fiveyears. The asymmetry is designed to protect the less-developed industrialsectors in Kenya�s two neighbours. The CET has proved to be the mostcontentious issue, and although the customs union has been implemented,negotiations are still continuing over exactly which goods should be in whichcategory (Uganda wants many intermediate goods zero-rated, for example, butKenya objects) and what exemptions should be allowed. The CET almostcaused a major trade row between Kenya and Pakistan (the main tea buyer)over duties on imported rice. After talks, the EAC agreed to let Kenya maintainits current lower rice tariff of 35%, instead of raising it to 70%, for a two-yearperiod. The customs union is seen as the first step towards fuller economic andpolitical union. EAC plans call for the introduction of a common market, acommon currency and, eventually, full political federation, which is currentlyscheduled to take place by 2010, although delays are likely. The EAC is alsoconsidering extending membership to Rwanda and Burundi.

Invisibles and the current account

Kenya typically runs a current-account deficit�averaging US$248m annuallybetween 1998 and 2002, according to the IMF�as invisible earnings fromtourism, transportation services and private transfers are insufficient tocompensate for the merchandise trade deficit. However, in contrast to the usual

Kenya runs current-accountdeficits

Kenya signs a customs unionagreement with EAC members

Kenya 41


pattern, Kenya recorded a small current-account surplus in 2003, of US$68m, asthe trade gap narrowed and the invisibles surplus widened. Tourism receiptsclimbed by 18.5%, to US$340m; private transfers leapt by 30%, to US$750m; andofficial grants rose from zero to US$67m. Private transfers (remittances by thediaspora) are a very important component of the current account, althoughthey tend to be volatile and depend to some degree on confidence in thegovernment. The upturn in remittances in 2003 reflected the rise in confidencefollowing the election of the new National Rainbow Coalition (NARC) govern-ment in December 2002. The current account is estimated to have returned to adeficit in 2004, of US$370m, as the surging trade deficit was accompanied by alargely constant invisible surplus. Although tourism receipts grew strongly, by41%, to US$478m, private transfers dipped to US$737m. The decline in privatetransfers probably reflects a loss of confidence in the government, due todisputes with donors over corruption and political in-fighting over theconstitution. The contribution of the diaspora remains very important, but isnevertheless on a declining trend. The latest figures for the year to April 2005show the current-account deficit widening to US$884m.

Balance of payments(US$ m; year to end-April)

2004 2005 % changeMerchandise exports fob 2,452 2,938 19.8Merchandise imports cif -3,778 -4,962 -31.3

Trade balance -1,326 -2,024 -52.6Invisible trade (net) 1,192 1,140 -4.4

Current-account balance -134 -884 -560.0Capital account 316 1,027 225.0Overall balance 182 142 -22.0

Source: Central Bank of Kenya, Monthly Economic Review, July 2004.

Capital flows and foreign debt

Kenya has struggled to attract foreign direct investment (FDI), especiallycompared to its East African neighbours, with levels tumbling to US$5m in2001 and US$28m in 2002, as confidence in the government of the formerpresident, Daniel arap Moi, reached a nadir. Investors have also been deterredby widespread corruption, over-regulation and the government�s on-offrelations with donors. FDI picked up to US$82m in 2003, according to theWorld Investment Report by the UN Conference on Trade and Development(UNCTAD), reflecting a recovery in confidence under the new NARC govern-ment, but still remained significantly lower than in Tanzania and Uganda.Although final figures for 2004 are not available, reports suggest that FDIdeclined because of investor caution about the ability of the NARC governmentto push through promised structural reforms and the continuing high cost ofdoing business in Kenya. In September 2004 the World Bank and the UK�sDepartment for Overseas Development criticised administrative and legalbarriers to business and the poor state of the infrastructure. They called forstronger administration of �customs, ports, utilities, courts and other regulatorybodies�. Corruption and insecurity are also serious deterrents to investment.Parliament�s approval of a new Investment Promotion Bill in 2004 and the

Foreign direct investmentinflows remain at a low level

42 Kenya


promise of deregulation made in the 2005/06 budget will help to improve theinvestment climate.

Foreign direct investment inflows into Sub-Saharan Africa(US$ m)

2000 2001 2002 2003 2003 stockKenya 111 5 28 82 1,046Uganda 275 229 249 283 2,042Tanzania 282 467 240 248 2,583

Total FDI into Sub-Saharan Africa 5,810 14,126 8,149 9,250 111,638

Source: UN Conference on Trade and Development, World Investment Report 2004.

Kenya�s external debt stocks declined steadily, from US$6.8bn in 1998 toUS$5.6bn in 2001, as donor funding dried up in the face of failed economicreforms, but climbed to US$6.1bn in 2002 and US$6.8bn in 2003, according tothe World Bank. The rise reflects the re-engagement of bilateral and multilateraldonors following the election of Mr Kibaki in December 2002, a build-up inarrears and cross-currency valuation effects (largely due to the weak US dollar).Long-term publicly guaranteed debt remains the main component, but its shareslipped to 85% of the total in 2003 owing to a sharp, 23%, rise in short-term debtto US$926m. The use of IMF credit also rose, by 27%, to US$112m, reflecting theFund�s re-engagement in Kenya. Despite the rise in debt, the main indicatorsimproved in 2003: external debt as a proportion of gross national income slidto 47.5% and the debt-service ratio fell to 15.8%. The Economist Intelligence Unitestimates that external debt edged up to US$7bn in 2004, but that the debt-service ratio slid to 12.5%, reflecting higher export receipts and the Paris Clubrescheduling that took place in January 2004.

Multilateral58.20

Bilateral36.76

Export credit3.76

Commercial loans0.66

Composition of external debt by creditor(% of total)


In November 2003 multilateral and bilateral donors reacted positively to thenegotiation of a new poverty reduction and growth facility (PRGF) betweenKenya and the IMF, and at a Consultative Group for Kenya (CGK) meeting theypledged US$4.1bn over three years to support the government�s economicrecovery strategy (ERSWEC). However, while some project funding has goneahead, disbursements have been much less than pledged because of the clashbetween donors and the government over persistent corruption and the low

Donors pledge massive sumsfor reform and reconstruction

Foreign debt rises in 2004

Kenya 43


pace of economic reform. Donors reiterated their willingness to continue sup-porting the ERSWEC at the latest CGK meeting in April 2005, and said that thepromised money was still available, but only if the government first makesclear progress in the fight against corruption. The government unveiled a new,two-year anti-graft plan at the CGK in April, but although donors are hopeful,actions, rather than words, will be needed. There are also doubts over whetherKenya has the institutional capacity to absorb the full level of pledged funds.

IMF endorsement of the ERSWEC in November 2003 also paved the way fordebt rescheduling by the Paris Club of official creditors and, in January 2004,members agreed to reschedule US$350m of the US$484m due for repaymentbetween 2004 and 2006. Kenya�s Paris Club debt totals about US$1.6bn, makingit the country�s second largest creditor after the World Bank. The latest ParisClub rescheduling (like the previous treatment in 2000) applied Houston terms,which means that interest payments on commercial debt remain linked tomarket rates. Kenya did not seek the more favourable Naples terms, despitebeing eligible, for fear of alienating commercial lenders and export creditagencies. However, Kenya does not qualify for more substantial relief affordedby the IMF-World Bank�s heavily indebted poor countries (HIPC) initiative.Kenya is not high on the World Bank and bilateral creditors� list for prioritytreatment in the application of debt relief: it is not debt-distressed and does notyet have a solid record on economic reform with the IMF.

Kenya�s external debt is sustainable

The IMF, prior to awarding a three-year poverty reduction and growth facility (PRGF)in November 2003, subjected Kenya to a debt-sustainability assessment. This foundthat Kenya�s debt was sustainable even without a Paris Club treatment, with the netpresent value of the debt-to-exports ratio rising from 109% in 2003 to 132% in 2011,before subsiding. Rescheduling on Houston terms does not alter the trend, but cutsthe figures to 103% in 2003 and 126% in 2011. A key factor in Kenya�s debtsustainability is the high proportion of concessional lending, which accounted for68% of total external obligations at end-2003. The IMF warns, however, that thislargely positive outlook could be undermined by lower than expected export growthor exchange-rate instability.

Foreign reserves and the exchange rate

In 1993 Kenya abolished the official exchange rate for the shilling anddismantled the CBK�s controls on the foreign-exchange market. The Kenyanshilling fell rapidly against the US dollar between 1997 and 2000, fromKSh58.7:US$1 to KSh76.2:US$1, but has subsequently steadied. The exchange rateweakened slightly in 2001 and 2002, to about KSh79:US$1, but strengthened by4% in 2003, to KSh75.9:US$1, largely because of weakness in the US currency. Bycontrast, the shilling depreciated by 15.4% against the euro in 2003, therebymaintaining competitiveness in a key export market. The shilling resumed itspath of gradual depreciation against the US dollar in 2004, and hit a new recordlow of KSh82.5:US$1 in late August, but this prompted intervention by the CBKto counter what it perceived as speculative forces. The intervention, coupledwith stronger than expected current-account earnings, led to renewed

The Kenyan shilling has beenstable since 2000

The Paris Club agrees debtrescheduling

44 Kenya


appreciation later in the year, while the average exchange rate for 2004 as awhole was KSh79.2:US$1. However, while the shilling fell by almost 5% againstthe dollar in 2004, it again fell more rapidly against the euro, by 14.6%. The CBKfavours a policy of gradual depreciation, in order to maintain externalcompetitiveness, but is prepared to let the currency move in line withfundamentals provided that there is no evidence of speculation.

The shilling strengthened to KSh76.5:US$1 in the first half of 2005, as a result ofseveral factors: continued strong earnings from exports and tourism; theendorsement by the IMF, in December 2004, of the first year of the PRGF (andthe subsequent disbursal of US$77m in January 2005); and the rise in localinterest rates (which makes the shilling a more attractive proposition). Thecurrent strength of the shilling also reflects healthy levels of foreign-exchangereserves�these hit a record of US$1.52bn in December 2004, before decliningslightly, but rose again to a new peak of US$1.53bn in May 2005. Import coverremains healthy, at about 3.5 months.

Kenya 45


Regional overview

Membership of organisations

The African Union (AU) is the successor to the Organisation of African Unity(OAU) and is based in the Ethiopian capital, Addis Ababa. The AU was formallylaunched in July 2002 at a meeting of African heads of state in the SouthAfrican city of Durban. This came two years after the AU�s formation was firstagreed in Togo in July 2000 and followed a one-year transitional period thatbegan after the ratification of the constitutive act of the AU by two-thirds of themember states in May 2001. The AU is modelled on the EU and has ambitiousplans for a parliament, a central bank, a single currency, a court of justice andan investment bank. The most advanced of these is for a Pan-AfricanParliament, which held its first session in South Africa in October 2004,although it will not play a legislative role for five years. The president iscurrently Gertrude Mongella from Tanzania. The AU also aims to havecommon defence, foreign and communications policies, based loosely on thoseof the EU. Even if these goals are not fulfilled, the organisation fills the need fora forum for discussing the continent�s problems and the idea of pan-Africanunity exerts a strong hold over member countries. In practical terms, the mosthigh-profile AU event is the annual conference of heads of state, which ishosted by the member state that is due to hold the chairmanship of theorganisation for the following year. The day-to-day affairs of the AU aremanaged by the AU commission, which is modelled on the EU commissionand was endorsed by the AU heads of state summit in July 2003. Thecommission is headed by the former Malian president, Alpha Konaré, aided bya deputy, Patrick Mazimhaka of Rwanda, both of whom were elected at thesummit. There are also seven appointed AU commissioners.

One of the main problems facing the AU is that many of the proposed newinstitutions and policy co-ordination mechanisms are costly and cannot befunded within the AU�s current resource allocations. To help to counter this, atthe July 2004 Annual Summit Mr Konaré presented a 2004-07 StrategicFramework aimed at launching Africa into the 21st century. Under this, memberstates are supposed to pledge 0.5% of GDP to fund the AU, which will allow itto double the staff at its headquarters and to push ahead with theimplementation of the New Partnership for Africa�s Development (Nepad). Thisis a potential bone of contention with the South African government, which iskeen for Nepad to remain in its South African headquarters. However, to date,many members still fail to pay their membership dues so further commitments,other than from external donors, are unlikely. In December 2003 donors andexternal lenders expressed their full support for the AU�s initiatives and thecreation of new institutions.

The main criticism levelled at the OAU in the last decade was that little realaction resulted from its policy announcements. There are concerns that the AU,like its predecessor, will be undermined by a lack of real commitment to itsinitiatives among the 53 member states, many of which suffer from very weakgovernance. This problem is further compounded by the fact that many

African Union (AU)

46 Kenya


member states are unlikely to give up the sovereignty required to make severalof the proposed initiatives�such as a single currency or a court of justice�operate effectively.

The AU will also battle to overcome opposition to the principle of non-interference, which has been a major hindrance to the resolution of conflicts onthe continent and is a contentious issue among member governments.Although non-interference was enshrined in the old OAU, this is not the casewith the AU, which has set up a Peace and Security Council (PSC; to replace theOAU�s Mechanism for Conflict Prevention, Management and Resolution)modelled on the UN Security Council. It is envisaged that the PSC will sanctionmilitary intervention in member states in cases of genocide, unconstitutionalchanges of government and gross human rights abuse. The proposed militaryintervention by the AU is to be through a standing armed force, which isprojected to comprise five battalions by 2010 and has already received somefunding from both the EU and the US. Even without the establishment of thePSC, since May 2003 the AU has had an observer mission in Burundi, led bySouth Africa and including troops from Mozambique and Ethiopia, to helpenforce a peace agreement in Burundi�s civil war. An AU observer mission wasalso sent to the Darfur region of Sudan in July 2004, and a protection force isbeing deployed. If this is increased, to become a real peacekeeping force, itcould prove to be the first real test of the AU�s commitment to intervening inmember countries� domestic affairs.

The East African Community (EAC) is the regional inter-governmentalorganisation of its three member states, Kenya, Tanzania and Uganda. Itcollapsed acrimoniously in 1977 and discussions on how to revive regional co-operation led to an agreement to establish a Permanent Tripartite Commissionfor East Africa in 1993. Eight years later, the EAC was formally relaunched, onJanuary 15th 2001. The EAC aims eventually to create a common market on thelines of the European Community, with a progressive reduction of tariffs, theeasing of labour movement, the harmonisation of economic policy andmonetary union. In practice, progress has been slow. Tanzania and Uganda fearthat they will be unable to compete with Kenyan goods following an opening-up of their own markets.

Some tripartite agreements have already been executed, including the removalof non-tariff barriers on crossborder trade and the harmonisation of standardsand goods specifications within the region. Since the co-operation agreementwas signed, Kenya, Uganda and Tanzania have tried to harmonise their fiscaland monetary policies, and this has included the adoption of measures toavoid double taxation and prevent tax evasion. Other harmonisation measuresinclude pre- (and post-) budget consultation between finance ministers; thesynchronisation of the budget day in the three countries; the establishment of aMonetary Affairs Committee comprising the three central banks; and co-operation on capital and securities regulation. The East African BusinessCouncil has been established to promote trade and investment, drawingmembers from private-sector organisations in the region. Lawyers have formedtheir own forum, the East African Law Society, and the East African SecuritiesRegulatory Authority has also been established. Various other institutions have

East African Community (EAC)

Kenya 47


recently been formed and the three countries are considering joint projects inenergy and road and rail transport.

Despite numerous delays and fears of further stalling, the members of the EACsigned a customs union agreement on March 2nd 2004. This aims to eliminateall tariff and non-tariff barriers to internal trade within five years, and sets athree-band, common external tariff (CET) of 25% for finished goods; 10% forintermediate goods; and zero for raw materials. Kenya was obliged to cut its toprate (of 35%) but Tanzania and Uganda had to raise theirs (from 12.5% and 7.5%respectively), which was one of the many contentious issues that doggednegotiations. Members can also nominate sensitive goods to which the CETdoes not apply.

Kenya will allow duty-free entry for all Tanzanian and Ugandan goods, butover 400 Kenyan products sold to Uganda will continue to attract an initialduty of 10%, while more than 800 products sold to Tanzania will attract aninitial duty of between 2% and 25%. These duties will be phased out over fiveyears. This imbalance recognises the relatively advanced state of Kenyanindustry and is designed to give the others time to catch up, but the asymmetryhas angered some Kenyan manufacturers. However, their fears that Kenya willbe swamped by Tanzanian and Ugandan products appear far-fetched and it ismore likely that Kenya will still be the dominant regional manufacturer by theend of the five-year period. Kenyan exporters are also concerned aboutTanzania�s simultaneous commitment to free trade within the South AfricanDevelopment Community (SADC) and fear that cheap South African goodswill enter the country via Tanzania. However, the EAC customs union includesrules of origin whereby products qualifying for internal free trade must containat least 35% local content, although inefficiencies in monitoring may lead to acertain amount of leakage. The EAC also contains anti-dumping safeguards andother lines of defence.

The East African parliament and respective national parliaments werescheduled to ratify the customs union by mid-2004, but this has not yet takenplace. The union has therefore yet to come into force and much haggling overthe fine print is set to continue. Such is the depth of concern about the Kenyanthreat among the business communities in Uganda and Tanzania that non-tariffbarriers are likely to be maintained, and could even be increased, as tariffs arelowered. As a result, further delays cannot be ruled out. According to the EAC�slong-term plan, the customs union is not an end in itself but is a forerunner tothe creation (in order) of a common market, a currency union and a politicalfederation. The three countries had a combined population of 95m in 2003,with a combined GDP of about US$22bn.

Based in Lusaka, Zambia, the Common Market for Eastern and Southern Africa(Comesa), is the successor organisation to the regional Preferential Trading Area(PTA), and came into force on December 8th 1994 with 12 members. Comesanow has 19 members: Angola, Burundi, Comoros, the Democratic Republic ofCongo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Madagascar, Malawi, Mauritius,Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe. TheComesa region has a total population of around 385m and an estimated GDP

Common Market for Easternand Southern Africa (Comesa)

48 Kenya


of US$170bn. Lesotho, Mozambique and Tanzania have all withdrawn fromComesa since 1997 to concentrate on their membership of the Southern AfricanDevelopment Community (SADC), while Namibia withdrew in July 2003,stating that its industries were too weak to compete with Comesa�s Free TradeArea (FTA). South Africa�s decision not to join Comesa makes SADCmembership more attractive to its main trading partners.

The original PTA, launched in 1981, aimed to liberalise trade and encourage co-operation in industry, agriculture, transport and communications. Comesa�sprincipal aims build on these ideals; its main goals are to eliminate thestructural and institutional weaknesses of member states and to promote thepolitical security and stability necessary for sustained development, bothindividually and collectively as a regional bloc. These aims are to be achievedthrough monetary union with a single currency and a common central bank.The creation of an FTA on October 31st 2000 was to be a major step towardsachieving them. By mid-2004 eleven of the 19 members had agreed toparticipate (Burundi, Djibouti, Egypt, Kenya, Madagascar, Malawi, Mauritius,Rwanda, Sudan, Zambia and Zimbabwe), with Swaziland being granted aderogation to participate on a non-reciprocal basis (in order to reciprocate,Swaziland would require the permission of other member states of theSouthern African Customs Union, to which it also belongs).

The eleven FTA members have removed all barriers to intra-regional trade,although they retain tariffs on imports from outside Comesa, and the Rwandangovernment has stated that it will only offer zero tariffs on goods produced byComesa countries participating in the FTA. To encourage other members to jointhe FTA, a fund was created in 2002 to compensate those countries facingrevenue loss, although the source and extent of this funding is not clear. Indeed,this fund does not appear to have been used when Burundi and Rwandajoined in early 2004, with both countries estimating large drops in customsrevenue as a result of participating.

The reluctance of most of the remaining eight member countries outside of theFTA to join, coupled with intense disagreements over a Common ExternalTariff (CET), is jeopardising any chance of the organisation meeting its objectiveof a customs union by December 2004. Senior members at the Comesasecretariat have reportedly acknowledged that the customs union will have tobe delayed into 2005 at least. The target of full monetary union by 2025remains, but seems similarly improbable.

Between 2001 and 2003 trade among Comesa FTA countries grew by 48%,compared with growth of 22% among Comesa countries as a whole. Intra-regional trade was valued at US$5.3bn in 2003. In 2002 intra-Comesa trade as aproportion of total trade ranged from 4.3% for the Seychelles to 18% for Kenya.Over the past 30 years the share of Comesa exports as a percentage of intra-regional exports has grown only slightly, from 9% in 1970 to 10.7% in 2002(although these figures do not capture the high level of illegal crossbordertrade). Reasons for the low level of intra-Comesa trade include a lack ofpolitical commitment and political stability in member countries, and weakbalance-of-payments and foreign-reserves positions. In some cases there arehardly any official trade links between member states. Egypt, Kenya, Uganda

Kenya 49


and Zimbabwe accounted for 58.8% of the trade between members of Comesain 2002.

As industry and manufacturing are generally poorly developed, manymembers are unprepared to reduce tariffs further for fear of undermining localindustries (Tanzania�s main reason for leaving) and fiscal revenue collection. Afurther constraint has been the strict and cumbersome rules of origin, whichare open to conflicting interpretations, and there have been some instances ofmember countries refusing to honour the relevant certificate of origin presentedwith Comesa imports. In addition to these impediments, progress towards freetrade is hampered by political tensions between member states.

Regional free-trade areas like Comesa�s FTA aim to increase intra-regionalcommerce, leading to higher economic growth rates, but they attract criticismfrom many who feel that this cannot be achieved while supply-sideconstraints�such as poor infrastructure, inefficient transport links, loweducation and skills levels, and cumbersome bureaucracy�remain. Comesa hasconcentrated on trade integration, but the lack of uniformity in investmentcodes and regulatory arrangements has been an impediment to crossbordertrade and investment. The commitment to Comesa of many of its members isweak and meetings are frequently cancelled. Moreover, attempts at promotingcrossborder investment and monetary harmonisation have been superseded byinitiatives introduced by the East African Community and SADC.

Under the old PTA system, a multilateral clearing facility was established and aPTA unit of account (UAPTA), equivalent to the IMF�s SDR, was used to settledebts between members, the balance being payable in US dollars. In 1997 theUAPTA was replaced by the Comesa dollar, which is pegged to the US dollar. AComesa court was officially opened in March 2001, although it had beenestablished three years earlier. In theory, the court, which aims to be anindependent arbitrator in trade-related disputes, has jurisdiction over nationalcourts, but in practice it does not have the powers to enforce its rulings and hasbeen hamstrung by a lack of finance. Comesa also set up the African TradeInsurance Agency (ATI) in 2001. Financed by a US$5m start-up loan from theWorld Bank, the ATI aims to provide political risk cover for investors in allmember countries. In November 2002 Comesa, along with other Eastern andSouthern African regional integration organisations, established the Inter-regional Co-ordinating Committee (IRCC) to promote regional economicintegration and the integrated management of natural resources, transport andcommunications.

The Intergovernmental Authority on Drought and Development (IGADD), thebrainchild of the then president of Djibouti, Hassan Gouled Aptidon, wasestablished in January 1986 with six East African members: Djibouti (where thesecretariat is based), Ethiopia, Kenya, Somalia, Sudan and Uganda. Its aim wasto co-ordinate and channel funding into agricultural development and thealleviation of drought and desertification. Progress on development andenvironmental projects was slow, but the organisation made headway as aforum for regional politics and facilitated the successful reconciliation ofSomalia and Ethiopia in 1988. However, regional events in 1991 undermined

Intergovernmental Authorityon Development (IGAD)

50 Kenya


IGADD: the presidents of Ethiopia and Somalia were overthrown, Eritreagained independence, and the self-proclaimed Somaliland Republic emerged.

Although IGADD gained a seventh member, Eritrea, in September 1993, itachieved little success in its attempts to help resolve internal conflicts in Sudanand Somalia. Thus, in March 1996, at a summit in Nairobi, IGADD renameditself the Intergovernmental Authority on Development (IGAD) and adopted anew charter proclaiming conflict resolution to be its priority. IGAD also pledgedto pay more attention to economic integration. However, with the outbreak ofwar between Ethiopia and Eritrea in May 1998, Sudan�s increasingly tenserelations with both Eritrea and Uganda, and with Ethiopia and Eritreasupporting different factions in the civil conflict in Somalia, the organisationwas severely handicapped in the late 1990s.

IGAD�s fortunes have improved since the turn of the decade. The uneasy UN-monitored peace between Ethiopia and Eritrea has held, and progress has beenmade in the quest for peace in Sudan. The latter culminated in the agreement,signed in Machakos, Kenya, in July 2002, that a referendum on self-determination for the south would be held after a six-year interim period. Afterthe resumption of fighting a few months later, IGAD quickly brokered aceasefire, which was swiftly followed by the resumption of talks. However, it isUS pressure on both sides, as well as US influence over the debate withinIGAD, rather than IGAD itself, that has been moving the rapprochement ahead.IGAD�s ongoing Somali reconciliation talks finally bore fruit in September 2004,with the creation of a new, 275-member, Federal Transitional Parliament and theselection of a house speaker and interim president. Long-term prospects for theSomali peace process will remain poor for the moment, but the recent progresshas offered greater hope than at any point in the last decade. Additionally,IGAD holds regular discussions on economic integration and infrastructural co-operation, but given the tensions between its members they are unlikely toresult in concrete action.

The initiative to form the Indian Ocean Rim Association for Regional Co-operation (IOR-ARC) was launched at an inter-governmental meeting in 1995. In1997 the association�s charter was signed in Port-Louis, Mauritius. The IOR-ARCaims to promote regional economic co-operation through trade liberalisation,investment and the development of infrastructure and tourism. The organis-ation�s 18 full members are Australia, Bangladesh, India, Indonesia, Iran, Kenya,Madagascar, Malaysia, Mauritius, Mozambique, Oman, Singapore, South Africa,Sri Lanka, Tanzania, Thailand, the United Arab Emirates and Yemen. Seychelleswithdrew from the organisation on July 1st 2oo3. Dialogue members (thosewho may attend meetings and have general trading interests in the region) areChina, Egypt, Japan, France and the UK. Sri Lanka currently holds the IOR-ARCchairmanship (2003-05) and its foreign minister, Lakshman Kadirgamar, will sitas executive director until 2005. Iran will hold the chairmanship for the 2005-06 period, commencing at the IOR-ARC�s next annual meeting in Tehran in2005. The IOR-ARC is solely concerned with opportunities to promote tradeand investment, and deliberately avoids issues with political ramifications.

Indian Ocean Rim Associationfor Regional Co-operation

(IOR-ARC)

Kenya 51


A new, 20-year, convention was signed in June 2000 in Cotonou, Benin,offering a group of 77 African, Caribbean and Pacific (ACP) countriespreferential trade and aid links with the EU. The Cotonou Convention replacedLomé IV, a convention that was signed in 1989 and replaced previousagreements signed in 1975, 1979 and 1984. Although similar to the Loméconventions, the new convention has a stronger political dimension. Respect forhuman rights, democratic principles and the rule of law were essentialcomponents of Lomé IV. Under the Cotonou agreement, the ACP countrieshave also agreed to promote good governance, combat corruption and try toprevent illegal immigration into the EU. A revision of the Cotonou Conventionis made possible every five years by a special clause. Negotiations between theACP countries and the EU for the review and adaptation of the accord shouldstart in autumn 2004 and be completed in February 2005.

Under previous conventions, ACP products, whether agricultural or industrial,entered the EU duty-free, although four agricultural products�beef, sugar,bananas and rum�were subject to a more restrictive system of tariff quotas.Because the type of trade agreement established by the Cotonou Conventiondoes not comply with the rules of the World Trade Organisation (WTO), thenew agreement offers a negotiating framework for tailor-made regional free-trade agreements known as Economic Partnership Agreements (EPAs), underwhich ACP countries, preferably within existing economic groupings, willgradually open their domestic markets to European products. Given theadjustment costs involved, a preparatory period of eight years (2000-2008) hasbeen agreed, during which the old system of preferences will continue to apply.However, under existing global trading rules, the 33 African countries classifiedas least developed countries will still have the option of entering the EU�sgeneralised system of preferences (GSP). Unlike the Lomé Convention, the GSP,which benefits all developing countries, complies with the rules of the WTObecause it is based on the twin principles of non-reciprocity and non-discrimination. In September 2003 the ACP countries and the WTO signed anagreement at the Cancun trade round, whereby the WTO will provide trainingand technical assistance to ACP countries as a form of mutual co-operation.

The European Development Fund (EDF) will remain the main source ofmultilateral European aid to the ACP countries. Under the new convention,EDF instruments have been regrouped and rationalised into two programmes:one to provide grants for long-term development schemes being carried outeither at the national or the regional level, with additional support available inthe event of a fall in export earnings, and the other to finance risk capital andloans to the private sector. The ninth EDF will total �13.5bn (US$12.9bn). Inaddition, about �10bn left undisbursed from previous programmes will remainavailable until 2007, and the European Investment Bank will provide �1.7bn.The financial protocols are concluded for a period of five years, with the ninthEDF running from 2000 to 2005. The Cotonou Convention finally entered intoforce in April 2003 with all 15 EU members and 76 ACP nations (not Somalia)ratifying the treaty. A month later the ACP representatives signed the BrusselsDeclaration, which calls for the timely and effective implementation of EDFfunds. This represents a commitment towards the efficient disbursement of EDF

Cotonou Convention

52 Kenya


resources for the benefit of ACP countries. In June 2004, at the 4th Summit ofACP Heads of State, the ACP Council of Ministers was mandated to ensure theeffective co-ordination and coherence of EPA negotiations within the ACP andbetween various ACP regions, as well as with the WTO negotiations, so as toensure unity.

Kenya 53


Appendices

Sources of information

Central Bank of Kenya, Monthly Economic Review

Central Bank of Kenya, Annual Report

Ministry of Planning and National Development, Development Plan 1998-2002

Ministry of Planning and National Development, Economic Survey (annual)

Ministry of Planning and National Development, Statistical Abstract (annual)

The Economic Survey is the most comprehensive of the national publications. Itis produced each year in June or July and brings together a wide range ofstatistical data relevant to the economy, on both the macroeconomic and thesectoral levels. In most cases, the Economic Survey presents five years of figuresup to the last full year before publication. It contains more than 200 separatetables and, although not always presented in a readily accessible form, mostrequired data can eventually be retrieved from these. Some sections, such asthose on energy and manufacturing, are notably weaker than others. Thepublication�s one big drawback is that it is difficult to judge the reliability of thedata given, particularly at the sectoral level, and it is usually not possible torefer back to the source of the data.

The Monthly Economic Review, produced by the Central Bank of Kenya, is awell-presented and up-to-date source for a wide range of monetary data on thedomestic economy. It includes tables and charts on exchange rates and interestrates, money supply, domestic debt, bank ratios, public finances and thebalance of payments. It is available at www.africaonline.co.ke/cbk/.

The Statistical Abstract, published each year, presents a wide range of nationaldata over a longer timeframe than the Economic Survey. Much of the data ispresented in ten-year time series.

It is often said that international statistics on African countries are in someways superior to national data. However, this overlooks the fact that theprincipal international sources, such as the IMF�s International FinancialStatistics, draw almost exclusively on national sources. This is unavoidable,since they do not have the resources or the remit to gather and collate theirown figures on domestic money supply, credit, public finances and trade. It istherefore not surprising that international and national sources tend to tell thesame story (with a few exceptions, such as Nigeria, where the volume of oilexports is disputed, and Angola, where 20 years of civil war have created anenormous parallel non-oil economy that dwarfs the formal sector). One furthercomplication is that the IMF and the World Bank produce internal documentswhich can sometimes be obtained informally at their regional offices; theseoften form the basis for lending decisions by the institutions� boards ofdirectors, and tend to diverge more widely from national data than do thestatistics that they release to the general public.

National statistical sources

International statistical sources

54 Kenya


For Kenya, divergence is not generally a problem. The main internationalsources other than International Financial Statistics are three annual publicationsfrom the World Bank, Global Development Finance, World Tables and Trends inDeveloping Economies, and the OECD�s Geographical Distribution of FinancialFlows to Aid Recipients. For information on the financial sector (such as balance-sheet totals, net profit, board directors and shareholdings in institutions), theGeneva-based Sifida Investment Company produces the useful African BankingDirectory. Data on energy provision can be obtained from Energy DataAssociates, Bishops Walk House, 19-23 High Street, Pinner, Middlesex HA5 5PJ.

Daily Nation, Nairobi (www.nationaudio.com/News/DailyNation/Today/)

East African Standard (daily), Nairobi

The People (daily), Nairobi

The East African (weekly), Nairobi, Kampala and Dar es Salaam(www.nationaudio.com/News/EastAfrican/Current/index.htm)

Finance (weekly), Nairobi

East African Alternatives (bi-monthly), Nairobi

IMF, Kenya: Selected Issues and Statistical Appendix, July and December 2003

UN, Common Country Assessment for Kenya, March 1998

Republic of Kenya, National Poverty Eradication Plan, 1998

World Bank, Kenya Poverty Assessment, March 1995

Jonah Anguka, Absolute Power: The Ouko Murder Mystery, Pen Press,London, 1998

Diana Hunt, The Impending Crisis in Kenya: The Case for Land Reform, Gower,Aldershot, 1984

International Institute for Strategic Studies, The Military Balance, London

Andrew Morton, Moi: The Making of an African Statesman, Michael O�MaraBooks, London, 1998 (currently the subject of a libel action by Richard Kwach)

Smith Hempstone, Rogue Ambassador, University of the South Press, Sewanee,Tennessee, 1997

Chester Stern, Dr Iain West�s Casebook, Little, Brown, London, 1996 (the chapteron the Ouko murder is currently the subject of a libel action by NicholasBiwott)

David Throup and Charles Hornsby, Multiparty Politics in Kenya, J. Currey,Oxford, EAEP, Nairobi, and Ohio University Press, Athens, Ohio, 1998

Select bibliography andwebsites

Kenya 55


Reference tables

Population(m unless otherwise indicated)

2000 2001 2002 2003 2004Total 30.69 31.36 32.04 32.73 33.47 % change 2.3 2.2 2.2 2.2 2.3

Source: IMF, International Financial Statistics.

Labour force(�000 unless otherwise indicated)

2000 2001 2002 2003 2004 a

Informal sector 4,191.1 4,667.3 5,101.6 5,532.7 5,970.6Private sector 1,002.8 1,018.7 1,040.9 1,068.6 1,106.3 Agriculture & forestry 251.3 254.7 256.3 259.6 264.8 Manufacturing 182.9 183.1 196.4 208.7 211.0 Community, social & personal services 247.8 256.5 261.5 265.6 276.6 Trade, restaurants & hotels 149.1 150.8 151.4 156.7 161.7

Public sectorb 692.5 658.5 658.8 659.1 657.4 Community, social & personal services 485.3 463.1 465.5 468.2 469.2 Agriculture & forestry 60.9 57.8 57.3 56.5 55.8 Transport & communications 39.7 38.1 37.8 37.6 37.6 Manufacturing 35.8 33.5 33.4 33.0 31.0

Self-employed & unpaid family workers 65.3 65.4 65.5 65.7 65.8Total 5951.8 6409.8 6866.8 7325.7 7800.1

a Provisional. b Revision of public-sector employment.


Transport and communications2000 2001 2002 2003 2004 a

RailPassenger journeys (�000) 4,200 5,517 4,794 4,401 5,657Freight carried (�000 tonnes) 2,400 2,330 2,227 1,999 1,890RoadNew motor vehicle registrations 20,236 26,024 32,638 33,768 42,482

ShippingFreight handled at Mombasa port (�000 tonnes) 9,127 10,601 10,564 11,931 12,920Air (Nairobi & Mombasa plus others)Passengers carried (�000) 4383 4329 4474 4747 5610Freight carried (�000 tonnes) 165,818 149,474 208,540 210,586 236,259

CommunicationsNew radios sold & licensed (�000) 85 69 62 n/a n/aNew television sets sold & licensed (�000) 38 37 35 n/a n/aAverage daily newspaper circulation (�000) English 78,844 78,335 82,067 86,508 82,433 Swahili 10,007 9,622 9,255 8,686 7,792Other newspapers (�000) English weeklies 1,297 1,283 1,311 1,505 1,315

a Provisional.


56 Kenya


National energy statisticsa

(�000 tonnes oil equivalent unless otherwise indicated)

2000 2001 2002 2003 2004 b

Net trade in petroleum products 2,789 2,624 2,248 3,135 3,419

Local energy production 167 194 282 322 343 Hydro power 135 155 244 279 259 Geothermal power 32 39 39 43 85

Stock changes & production losses -341 -238 57 -1,007 -1,045Total energy consumption 2,700 2,655 2,707 2,559 2,840 Coal & coke 66 66 99 92 108 Liquid fuels 2,448 2,385 2,306 2,130 2,374 Hydro & geothermal 186 204 303 338 357

Local production (% of total consumption) 6 7 10 13 12Energy consumption per head (kg oil equivalent) 89 86 86 80 87

a Excluding fuel wood and charcoal. b Provisional.


Government financesa

(KSh m unless otherwise indicated)

2000/01 2001/02 2002/03 2003/04b 2004/05 c

Current revenue 192,505 185,325 204,954 256,131 274,619

Current expenditure 176,530 197,116 213,785 232,945 297,307Current balance 15,975 -11,790 -8,831 23,186 -22,687Capital revenue 7,318 2,538 783 740 1,774

Capital expenditure 33,068 27,057 33,606 28,011 50,754Net lending 2,372 199 247 4,610 1,402

External grants 12,461 11,538 15,866 11,840 18,647Overall balance 314 -24,970 -26,035 3,145 -54,424 % of GDP 0 -2 -3 0 -4

FinancingExternal loans (net) 11,425 14,717 16,393 5,646 13,459Total domestic borrowing 678 39,703 46,923 8,809 -7,559 Long term (net) 6,095 61,748 55,951 28,033 -8,916 Short term (net) -5,417 -22,045 -9,028 -19,224 1,357Change in cash balances (- indicates increase) -12,363 -30,660 -37,266 -17,607 48,524

a Fiscal years starting July 1st. b Provisional. c Estimates.


Kenya 57


Government revenue and expenditure(KSh m unless otherwise indicated)

2000/01 2001/02 2002/03a 2003/04 a 2004/05 b

Revenue 207,141 188,623 205,737 256,871 276,393 Income tax 53,429 55,862 66,744 70,862 78,777 Indirect tax 109,650 106,829 111,529 132,307 133,180 Other revenue & income 44,062 25,930 27,464 54,443 64,436Expenditure 267,992 308,977 303,674 352,682 428,719 Current expenditure 176,530 197,116 213,785 232,945 297,307 Consumption of goods & services 115,296 127,770 139,010 156,086 184,362 Total interest payments (foreign & domestic) 24,426 29,851 35,563 27,743 33,696 Transfers & others 36,609 39,295 39,013 49,116 79,249 Capital expenditure 33,068 27,057 33,606 28,011 50,754 Gross fixed capital formation 28,603 25,789 25,684 24,071 33,156 Capital transfers 4,465 1,268 7,922 3,940 17,598 Public debt redemption 56,078 85,407 56,035 87,115 79,256

Key fiscal trends (% of GDP)Total government expenditure 21.7 21.6 23.8 22.9 33.7Current government revenue 19.9 18.1 19.7 20.8 21.6Overall deficit 0 -2.2 -2.5 0.3 -4.3

a Provisional. b Official estimates.


Money supply(KSh m unless otherwise indicated; end-period)

2000 2001 2002 2003 2004Money (M1) incl others 118,968 126,332 149,712 194,119 210,910 % change, year on year 8.6 6.2 18.5 29.7 8.6Quasi-money 224,051 225,233 242,968 245,313 289,256

Money (M2) 343,019 351,565 392,680 439,432 500,166 % change, year on year 4.5 2.5 11.7 11.9 13.8

Source :IMF, International Financial Statistics.

Interest rates(%; period averages unless otherwise indicated)

2000 2001 2002 2003 2004Lending interest rate (%) 22.3 19.7 18.4 16.6 12.5Deposit interest rate (%) 8.1 6.6 5.5 4.1 2.4

Money-market interest rate (%) 12.1 12.6 8.9 3.5 3.2


58 Kenya


Gross domestic product(market prices)

2000 2001 2002 2003 2004Total (US$ m)At current prices 12,705 13,059 13,191 15,036 16,131

Total (KSh m)At current prices 967,838 1,025,918 1,038,764 1,141,780 1,277,145At constant (2001) prices 982,855 1,025,918 1,029,978 1,058,470 1,104,356 % change, year on year 0.6 4.4 0.4 2.8 4.3Per head (KSh)At current prices 32,025 32,714 32,147 32,339 32,995At constant (2001) prices 5,607 5,982 6,083 6,982 7,135 % change, year on year -1.6 2.2 -1.7 0.6 2.0

Sources: Central Bank of Kenya; IMF, International Financial Statistics.

Nominal gross domestic product by expenditure(KSh m at current prices; % of total in brackets)

2000 2001 2002 2003 2004Private consumption 757,727 812,269 814,919 868,547 954,645

(78.3) (79.2) (78.5) (76.1) (74.7)

Government consumption 145,701 159,536 173,297 202,937 216,563(15.1) (15.6) (16.7) (17.8) (17.0)

Gross fixed investment 161,714 185,187 177,781 179,248 208,248(16.7) (18.1) (17.1) (15.7) (16.3)

Stockbuilding -19,642 -13,228 -53,099 -29,386 14,424(-2.0) (-1.3) (-5.1) (-2.6) (1.1)

Exports of goods & services 214,831 228,054 252,208 281,394 357,243(22.2) (22.2) (24.3) (24.6) (28.0)

Imports of goods & services 292,493 345,899 326,340 360,960 473,982(30.2) (33.7) (31.4) (31.6) (37.1)

GDP 967,838 1,025,918 1,038,765 1,141,780 1,277,145


Kenya 59


Gross domestic product by sector(% of GDP)

2000 2001 2002 2003 2004 a

Agriculture, forestry & fishing 28.4 27.0 24.9 24.6 24.2Transport & communications 8.9 9.6 10.1 9.9 10.3

Wholesale & retail trade 9.0 9.1 9.0 9.1 10.1Manufacturing 10.3 9.7 9.8 9.6 9.9

Education 5.9 6.1 7.3 7.9 7.8Real estate, renting & business services 5.5 5.7 6.0 5.9 5.7

Public administration and defence 4.6 4.6 4.4 4.4 4.5Financial intermediation 3.5 4.1 3.6 4.3 3.8Building & construction 2.8 3.1 3.1 3.2 3.6

Health & social work 2.1 2.3 2.6 2.6 2.5Electricity & water 1.9 1.9 2.0 2.1 1.8

Restaurants & hotels 1.2 1.2 1.2 0.9 1.1Mining & quarrying 0.4 0.5 0.5 0.5 0.5

a Provisional.


Consumer prices(1997=100 unless otherwise indicated; annual averages)

2000 2001 2002 2003 2004Lower income inflation 8.8 3.6 1.7 10.8 14.4

Middle-upper income inflation 6.4 4.3 2.1 4.8 8.0Overall index (2000=100) 10.0 5.8 2.0 9.8 11.6


Average wage earnings per employee(KSh per year unless otherwise indicated)

2000 2001 2002 2003 2004a

Private sector 161,613 186,707 213,871 247,168 291,364 % change 6.0 15.5 14.5 15.5 17.8Public sector 168,956 193,827 223,925 244,771 279,313 % change 14.7 14.7 15.5 9.3 14.1

a Provisional.


60 Kenya


Agricultural productiona

(KSh m unless otherwise indicated)

2000 2001 2002 2003 2004b

Cereals 5,617 8,761 6,398 5,767 10,013 Maize 2,915 6,142 4,451 3,336 6,880 �000 tonnes 201.2 461.5 398.0 280.5 448.5 Wheat 1,133 1,429 987 1,375 1,864 �000 tonnes 70.5 77.7 57.3 72.0 84.1

Other crops 72,853 75,175 77,534 79,714 91,703 Coffee 11,282 6,424 5,441 5,957 7,285 �000 tonnes 98.0 54.6 45.5 61.2 49.9 Tea 35,970 38,565 33,415 34,631 41,212 �000 tonnes 236.3 294.6 287.1 293.7 324.6 Sisal 810 957 938 1,061 1,275 �000 tonnes 21.4 23.2 22.1 24.8 26.5Livestock & products 13,949 15,555 19,041 18,979 20,566 Cattle & calves 8,040 9,079 11,824 11,476 11,284 �000 head 2,870 1,952 1,854 1,669 1,641 Dairy produce 2,051 1,920 2,469 2,846 4,385 m litres 137 148 178 203 274Total 92,419 99,491 102,973 104,369 122,282

a Marketed. b Provisional.


Forestry and fishing2000 2001 2002 2003 2004 a

Forestry (�000 ha)Area felledb 1.0 1.0 1.0 1.5 2.0Area plantedb 4.0 4.0 6.7 7.8 9.3Wood processed (�000 cu metres) 216.8 197.2 162.0 243.2 213.0 Softwood 216.8 197.2 162.0 183.1 213.0 Hardwood 0.0 0.0 0.0 0.0 0.0Fish landed (tonnes) 202,639 164,261 128,227 119,655 124,352 Freshwater 197,876 157,810 121,366 112,687 117,160 Marine 3,779 5,141 5,570 5,819 5,943 Crustaceans 777 1,033 939 756 867 Other marine products 207 277 352 393 382

a Provisional. b Plantation area.


Kenya 61


Minerals production2000 2001 2002 2003 2004a

Volume (�000 tonnes)Soda ash 238.2 297.8 304.1 352.6 355.1Fluorspar 100.1 118.9 85.0 80.2 117.9Salt 16.4 5.7 18.8 21.2 26.6Crushed refined soda 382.6 207.6 474.0 576.1 600.2

Value (KSh m) 3,611 4,754 4,735 5,065 5,356 Soda ash 1,956 2,716 2,729 3,100 3,526 Fluorspar 628 727 633 504 999 Salt 52 99 61 61 106 Crushed refined soda 42 23 38 46 51

a Provisional.


Industrial production(�000 tonnes unless otherwise indicated)

2000 2001 2002 2003 2004 a

Refined petroleum products 2,013 1,696 1,581 1,492 1,703Cement 1,367 1,319 1,537 1,649 1,873

Sugar 402 377 494 448 517Maize meal 154 135 141 190 204

Wheat flour 189 181 240 246 259Rice 4.9 4.6 4.0 4.4 5.0

Beer (m litres) 203 184 192 222 238Spirits (�000 litres) 19,366 20,400 18,632 13,941 14,331Industrial output index (1976=100) 281.4 283.1 286.6 290.6 298.5 % change -1.5 0.8 1.2 1.4 2.7

a Provisional.


Construction statistics2000 2001 2002 2003 2004 a

Reported building work completed (KSh m)b

Private 1,216 1,025 1,395 1,426 2,295Public 16.0 29.1 28.0 49.9 29.9

Government expenditure on roads (KSh m)c

New construction 2,624 2,622 2,614 4,341 9,716Maintenance & repair 6,696 8,042 6,005 6,122 3,450

Cement consumption (�000 tonnes) 1,067 1,089 1,212 1,267 1,418Employment in building & construction (�000) 78.6 76.7 76.5 76.6 77.3

a Provisional. b Nairobi, Mombasa, Nakuru, Kisumu and Malindi. c Fiscal years starting July 1st.


62 Kenya


Banking statistics(KSh m unless otherwise indicated; year-end)

2000 2001 2002 2003 2004Central Bank assetsForeign exchange 69,934 82,238 81,211 111,301 116,155Advances to banks 4,884 1,362 7,484 674 67Advances to government 8,595 42,853 43,867 44,630 48,008Others (incl Treasury bills & bonds) 57,642 24,023 21,827 19,834 12,387

Central Bank liabilitiesCurrency 51,914 53,080 62,525 63,179 70,967Deposits 75,525 73,103 70,833 88,067 81,267Others 8,275 2,925 4,600 11,669 6,331Commercial banksDeposit liabilities 294,924 302,895 334,976 378,391 423,826Liquid assets 125,721 137,855 147,786 186,224 179,425Current liquidity ratio (%) 43 46 44 49 42

Source: Central Bureau of Statistics, Ministry Planning and National Development, Economic Survey, 2005.

Tourism statistics2000 2001 2002 2003 2004a

Visitor departures (�000) 995.2 990.9 1,013.4 1,022.9 1,320.1Average length of stay (days) 8.7 8.4 8.5 8.4 13.0

Beds occupied (�000 bed-nights) Germany 605 541 721 420 466 Kenya 794 740 656 739 1,190 UK 559 606 591 324 516 Switzerland 175 175 218 126 146Beds available (�000 bed-nights) 9,382 8,328 8,183 7,766 10,030

Bed occupancy rate (%) 39.3 40.3 42.0 33.6 37.8

a Provisional.


Import and export prices(Feb-Mar 1982=100 unless otherwise indicated; annual averages)

2000 2001 2002 2003 2004a

Exports 620 637 657 620 638 % change 7.6 2.7 3.1 -5.6 2.9

Imports 739 807 847 762 824 % change 10.7 9.2 5.0 -10.0 8.1Terms of tradeAll items 84 79 78 81 77

a Provisional.


Kenya 63


Exports by value(KSh m; fob)

2000 2001 2002 2003 2004a

Horticultural productsb 21,216 19,846 28,334 36,485 39,541Tea 33,150 34,485 34,376 33,005 36,072

Iron & steel 2,605 3,673 4,122 4,047 7,532Coffee 11,707 7,460 6,541 6,286 6,944

Soda ash 1,440 1,993 2,127 2,392 5,359Fish & fish products 2,953 3,858 4,205 4,010 4,178

Plastics 2,104 2,572 2,990 2,598 3,136Essential oils 2,116 2,470 2,452 2,838 3,121Tobacco & tobacco products 2,167 2,887 3,454 2,982 2,951

Animal & vegetable oils 1,204 1,298 2,277 2,410 2,505Cement 1,358 1,031 1,479 1,976 1,959

Footwear 1,140 1,204 1,549 1,457 1,789Sisal 606 728 792 906 1,119Leather 486 576 601 1,018 1,115

Petroleum products 9,429 12,345 3,896 69 1,104Total incl others 119,764 121,434 131,394 136,698 159,061

a Provisional. b Include cut flowers, fruits and vegetables, both fresh and processed.


Main exports by volume(�000 tonnes unless otherwise indicated)

2000 2001 2002 2003 2004a

Cement 301 233 292 385 398

Horticultural productsb 194 193 263 294 275Soda ash 236 274 302 331 572

Tea 217 270 273 262 275Coffee 87 64 49 59 50Fish & fish products 17 19 18 19 18

Petroleum products (m litres) 1,155 845 338 3 44

a Provisional. b Includes cut flowers, fruits and vegetables, both fresh and processed.


64 Kenya


Imports by value(KSh m; cif)

2000 2001 2002 2003 2004a

Industrial machinery 39,438 37,933 25,474 32,764 43,516Refined petroleum products 21,773 26,035 22,065 39,493 43,056

Crude petroleum 41,907 31,179 23,940 25,415 45,954Motor vehicles 9,659 14,524 14,382 17,955 24,361

Vegetable oils & fats 8,016 10,125 14,333 13,332 8,063Iron & steel 8,604 11,969 11,115 12,504 21,265

Resin & plastics 8,446 9,131 8,816 11,211 15,420Pharmaceuticals 5,976 7,188 8,678 9,728 11,607Wheat (unmilled) 6,989 7,515 5,577 6,099 6,754

Maize 4,664 3,342 229 1,417 4,647Sugars, molasses and honey 2,730 6,648 3,074 4,334 3,545

Fertilisers 5,448 6,307 5,497 6,524 11,079Paper & paper products 2,613 3,978 3,319 5,409 5,283Total incl others 247,804 290,108 257,710 281,844 364,205

a Provisional.


Main trading partners(KSh m)

2000 2001 2002 2003 2004a

Exports to:

Uganda 24,186 30,040 31,280 30,668 37,060

UK 18,655 16,382 19,607 21,525 22,413

Tanzania 11,092 13,511 14,181 14,588 17,921

Netherlands 7,293 9,912 11,012 14,139 17,094

Pakistan 9,987 8,877 8,341 9,153 11,359

EU 40,029 39,979 45,795 52,159 56,785

Imports from:

United Arab Emirates 48,212 41,465 29,060 31,918 45,012

South Africa 16,586 7,636 17,805 23,309 34,627

Saudi Arabia 15,004 15,773 13,446 24,305 31,529

UK 25,136 21,989 21,138 19,621 27,124

Japan 12,514 14,436 17,242 18,611 24,138

EU 75,653 72,028 83,090 66,840 86,897

a Provisional.


Kenya 65


Balance of payments, IMF series(US$ m)

1999 2000 2001 2002 2003Goods: exports fob 1,756.7 1,782.2 1,891.4 2,162.5 2,412.2Goods: imports fob -2,731.8 -3,044.0 -3,238.2 -3,159.0 -3,554.8

Trade balance -975.1 -1,261.8 -1,346.8 -996.5 -1,142.6Services: credit 934.5 993.4 1,089.4 1,018.1 1,153.2

Services: debit -570.4 -718.7 -765.8 -645.9 -670.9Income: credit 31.7 45.0 46.1 35.4 59.6

Income: debit -190.9 -178.1 -167.3 -178.2 -147.8Current transfers: credit 685.3 926.6 804.8 632.1 818.6Current transfers: debit -4.7 -5.8 -1.6 -1.9 -2.3

Current-account balance -89.6 -199.4 -341.2 -136.9 67.8Direct investment in Kenya 13.8 110.9 5.3 27.6 81.7

Direct investment abroad 0.0 0.0 0.0 -7.4 -2.1Inward portfolio investment (incl

bonds) -8.0 -3.5 5.5 5.3 0.9Outward portfolio investment 0.0 -10.9 -6.9 -10.0 -38.6

Other investment assets -89.8 -55.7 -86.4 -132.6 67.4Other investment liabilities 249.7 228.9 230.6 -56.7 431.7

Financial balance 165.7 269.7 148.1 -173.9 41.9Capital account credit 55.4 49.6 51.5 82.1 163.0Capital account debit 0.0 0.0 0.0 0.0 0.0

Capital account balance 55.4 49.6 51.5 81.2 163.0Net errors & omissions -165.5 -127.1 151.7 213.2 -211.9

Overall balance -34.0 -7.2 10.0 -16.4 425.2Financing (� indicates inflow)Movement of reserves 34.0 7.2 -10.0 16.4 -425.2Use of IMF credit & loans -60.0 1.3 -23.6 -18.4 16.7Exceptional financing 102.7 113.0 181.4 36.5 -29.3


66 Kenya


External debt, World Bank series(US$ m unless otherwise indicated; debt stocks as at year-end)

1999 2000 2001 2002 2003Public medium- & long-term 5,340.0 5,080.0 4,760.0 5,220.0 5,700.0Private medium- & long-term 220.0 175.0 109.0 48.8 23.7

Total medium- & long-term debt 5,560.0 5,255.0 4,869.0 5,268.8 5,723.7 Official creditors 4,810.0 4,600.0 4,450.0 4,910.0 5,280.0 Bilateral 1,900.0 1,760.0 1,690.0 1,950.0 2,030.0 Multilateral 2,910.0 2,840.0 2,760.0 2,960.0 3,250.0 Private creditors 750.0 655.0 419.0 358.8 443.7

Short-term debt 779.0 798.0 606.0 753.0 926.0 Interest arrears 68.8 46.7 37.7 54.2 37.3Use of IMF credit 132.0 127.0 98.8 87.8 112.0

Total external debt 6,471.0 6,180.0 5,573.8 6,109.6 6,761.7Principal repayments 520.8 393.4 374.7 419.2 448.6

Interest payments 173.9 141.8 111.0 116.1 125.2 Short-term debt 40.1 41.4 26.2 19.5 23.8Total debt service 693.7 535.4 485.4 535.1 573.9

Ratios (%)Total external debt/GDP 50.2 48.6 42.7 46.3 45.0Debt-service ratio, paida 25.5 19.0 16.0 16.6 15.8

Note. Long-term debt is defined as having original maturity of more than one year.

a Debt service as a percentage of earnings from exports of goods and services.

Source: World Bank, Global Development Finance, 2005.

Net official development assistancea

(US$ m)

1999 2000 2001 2002 2003BilateralJapan 58.6 66.9 46.7 17.4 -6.6Belgium 5.8 8.6 4.1 7.9 6.4UK 55.0 73.1 55.1 54.4 79.4US 38.9 45.9 43.4 102.4 111.2Germany 37.2 38.4 32.5 27.1 35.4

MultilateralIDA 55.1 141.5 80.9 23.6 74.3EC 11.0 18.6 72.7 33.0 16.7ADF 4.5 1.8 8.7 -0.2 -0.4Total 310.1 512.1 463.5 393.1 483.5 Grants 335.9 340.1 406.8 402.4 466.2

a Disbursements minus repayments. Official development assistance is defined as grants and loanswith at least a 25% grant element, provided by OECD and OPEC member countries and multilateralagencies, and administered with the aim of providing development and welfare in the recipientcountry.

Source: OECD, Geographical Distribution of Financial Flows to Aid Recipients, 2005.

Kenya 67


Foreign reserves(US$ m; end-period)

2000 2001 2002 2003 2004Total reserves incl gold 897.8 1,065.0 1,068.2 1,482.1 1,519.5Total international reserves excl

gold 897.7 1,064.9 1,068.0 1,481.9 1,519.3

Gold, national valuation 0.1 0.1 0.2 0.2 0.2


Exchange rates(KSh per unit of currency unless otherwise indicated; annual averages)

2000 2001 2002 2003 2004US$ 76.2 78.6 78.7 75.9 79.2

£ 115.3 113.1 118.0 124.0 145.0A$ 44.2 40.6 42.8 49.2 58.2

R 11.0 9.1 7.5 10.0 12.3� 70.4 70.4 74.4 86.0 98.5¥ 0.707 0.646 0.628 0.655 0.732


Editors: Pratibha Thaker (editor); Christopher Eads (consulting editor)Editorial closing date: August 22nd 2005

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected]

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