KENYA MACRO ECONOMIC EVOLUTION SINCE INDEPENDENCE by tyndale

VIEWS: 77 PAGES: 68

									KENYA:MACRO ECONOMIC EVOLUTION SINCE
INDEPENDENCE1

Arianna Legovini
November 2002




1
    This work is financed by UNDP. Please address your comments to alegovini@worldbank.org .
List of Figures
Figure 1    Economic Growth by Decade
Figure 2    Growth by Sector
Figure 3    Composition of Value Added
Figure 4    External Balance
Figure 5    Government
Figure 6    Money, Domestic Credit and Inflation
Figure 7    State-Owned Enterprises
Figure 8    Import and Export Duties
Figure 9    Terms of Trade
Figure 10   Real Interest Rate, Domestic Savings and Gross Capital Formation
Figure 11   International Aid
Figure 12   Interest Rate Spread
Figure 13   External Debt
Figure 14   Cereal Production
Figure 15   Coffee
Figure 16   Tea
Figure 17   Cut Flowers Exports
Figure 18   Foreign Direct Investment
Figure 19   International Tourism
Figure 20   Electric Power
Figure 21   Tax Revenues
Figure 22   Deficit Financing
Figure 23   Composition of Public Expenditures
Figure 24   Social Expenditures
Figure 25   Population Growth and Fertility
Figure 26   Mortality
Figure 27   Life expectancy and AIDS
Figure 28   Age Composition of the Population
Figure 29   Urban-Rural Distribution of the Population
Figure 30   Water Access
Figure 31   Nutritional Stunting
Figure 32   Immunizations
Figure 33   Adult Illiteracy
Figure 34   Primary Enrolment
Figure 35   Secondary Enrolment
Figure 36   Rural Poverty
Figure 37   Urban Poverty
Figure 38   Exchange Rate
Figure 39   Manufacturing
Figure 40   Proceeds from Privatization




                                                                               2
Macroeconomic outlook

Kenyan post-independence economic history can be divided into two periods. The first
from 1963 to the beginning of the 1980s is characterized by strong economic
performance and huge gains in social outcomes. A second period from the 1980s to the
present is typified by slow or negative growth, mounting macroeconomic imbalances and
significant losses in social welfare, notably rising poverty and falling life expectancy.
Failure to reform and the increased role of politics over policy are at the heart of this
structural break.


Macroeconomic trends
Kenya's economic growth was strong in the first two decades after independence and
weak or negative thereafter. Between 1963 and 1970, the economy grew at an average
real growth rate of 5 percent and from 1970 to 1980 at 8 percent (Figure 1 Economic
Growth by Decade). Economic growth delivered a real per capita GDP that was two-
thirds higher in 1980 than in 1963. In contrast, the following two decades are
characterized by a stagnating economy with average growth rates of 4 and 2 percent in
the 1990/80 and 2000/90 periods. By the year 2000, real per capita GDP had slightly
declined relative to 1980.

The transition from high to low growth affected all sectors. Agricultural growth fell from
5 percent in the 1970s to less than 1 percent in the 1990s. In the industrial sector, output
growth fell from a buoyant 11 percent in the 1970s to a mere 4 and 2 percent in the 1980s
and 1990s. Growth in the service sector declined as well from 8 percent in the 1970s to 5
and 3 percent in the 1980s and 1990s (Figure 2 Growth by Sector).

The relatively stronger performance of the service sector affected the composition of the
economy. Between 1963 and 2000, services gained share from 44 to 60 percent of value
added while the share of agriculture fell from about 38 to only 23 percent (Figure 3
Composition of Value Added). Employment in agriculture dropped accordingly from 87
percent of the labor force in 1963 to 77 percent in 1999.

The growth rates experienced in the 1970s were the result of a combination of favorable
factors. In agriculture, the newly independent government had successfully distributed
productive land to small farmers and promoted the cultivation of cash crops such as tea,
coffee, and hybrid maize and the development of dairy farming. As a result of this and
good market conditions, rural incomes rose by 5 percent a year from 1974 to 1982, and
the smallholders' share of coffee and tea production rose to 40 and 70 percent
respectively in the early 1980s, as did the varieties of maize produced (Swamy 1994). In
the 1963-1980 period, sustained commodity exports provided foreign exchange earnings,
which favored investment and capital imports (Figure 4 External balance). In industry, a
mutually benefiting alliance between business and the body politic provided the rationale
for implementing an industrial strategy based on import-substitution. The approach
afforded high barriers to entry to importers and disincentives to export growth. It
delivered high growth rates for the sector in the first years of implementation even though


                                                                                          3
it relied too heavily on capital intensive technology to provide for the growth in
employment policymakers had hoped for. It also set the basis for an inefficient and rent
seeking industrial sector.

Starting in the 1970s, several factors started to negatively affect Kenya’ growth potential.
Among them a series of trade shocks, poor macroeconomic responses, and a change in
the structure of the economy in which the government started to become an increasingly
dominating force.

Government expanded largely. Its expenditures increased by 60 percent in 1972-94
(Figure 5 Government). The fiscal imbalances that accompanied the expansion put
pressure on domestic credit and inflation. Domestic credit provided by the banking sector
expanded from 12 percent of GDP in 1966 to a peak of 56 percent in 1992. Money and
quasi money swelled from a low 27 percent of GDP in 1988 to a high 45 percent in 1997,
an election year. And, from a low average of 5 percent in the 1960s, inflation fluctuated
between 10 and 20 percent annually from the mid-1970s to the mid-1980s, and
accelerated further in the 1990s reaching a peak of 46 percent in 1993 (CPI) (Figure 6
Money, Domestic Credit and Inflation).

Changes in the structure of the economy were set off by a rapidly expanding state-owned
enterprise sector. Involved in manufacturing, financial services, and processing and
marketing of agricultural products, it engendered distortions and inefficiencies. Large
financing requirements of parastatals, combined with favoritisms from the state-owned
banking sector crowded out private sector production and investment. The absence of
productivity gains in the state-owned enterprise sector significantly lowered productivity
gains in the economy overall (Figure 7 State-Owned Enterprises). Furthermore the
oligopolistic industrial structure nurtured by state-owned enterprises and import
substitution policies increased inefficiencies and decreased the economy’s capacity to
adjust to changing external conditions.

Policy response was also weak. When the natural market afforded by the regional
customs zone with Uganda and Tanzania broke down in 1977, Kenya failed to implement
the needed policy shift towards a more export-oriented approach. Instead, it continued to
protect local business (Figure 8 Import and Export Duties). Even weaker was the
response to the oil crises.

The rapidly deteriorating terms of trade of the 1970s led to the balance of payments crises
of 1974 and 1978-80. With the first oil shock the terms of trade fell 24 percent (1972-75);
rose 41 percent in the next two years with the coffee boom; dropped again 28 percent
with the second oil shock; continued falling all through the 1980s another 30 percent; and
finally improved to pre-shock levels by 1994 and thereafter (Figure 9 Terms of Trade).
The external balance followed a similar pattern, falling in the red during the first oil
crisis, recovering during the coffee boom, and falling again in the aftermath of the second
oil shock. The deficit in the trade balance will persist to the present—with the exception
of 1994, the year after the 81 percent devaluation of the Kenyan Shilling (Figure 4
External Balance).



                                                                                          4
The government reacted to the crisis by imposing controls on bank lending, licenses on
foreign exchange transactions, import quotas, and price and interest rate controls. While
restrictions on domestic credit were later lifted, the others were made even more
stringent. These generated important distortions on economic activity and gave rise to
pervasive rent seeking (Durevall and Ndung’u 1999). Real interest rates were negative
from 1974-78, and domestic savings plummeted in 1975 and 1979 and never fully
recovered (Figure 10 Real Interest Rate, Domestic Savings and Gross Capital Formation).

The coffee boom of 1976-77, while easing the economic crisis, was used to delay the
necessary economic adjustment. Both fiscal and monetary variables expanded rapidly,
and so did state-owned enterprises. Government expenditures rose by a staggering 37
percent in the two years between 1977-79 (Figure 5 Government). Money (M2) grew 18
percent and domestic credit 23 percent in one year (1978/77). Investment of state-owned
enterprises rose a stunning 14 percentage points of gross domestic income between 1978
and 1982 (from 17 to 31 percent), adjusted downward after 1982 and climbed back to 31
percent by 1990 (Figure 7 State-Owned Enterprises).

As state-owned banks financed low-productivity public investments, investment
efficiency fell. Returns on public investment averaged a meager 0.2 percent as compared
to a 15 percent return on private investments (GoK 1982). Real interest rates followed an
upward trend from 1978 onwards and so did interest rate spreads reflecting the higher
levels of uncertainty in the economy, the increasing number of non performing loans and
low investors’ confidence (Figures 11 Interest Rate Spread). Domestic savings came
tumbling down from a high of 27 percent of GDP in 1977 to a low 3 percent in the year
2000 (compared to about 15 percent average in sub-Saharan Africa). Gross capital
formation followed a similar trend and from a high of 30 percent in 1978, fell to 12
percent in 2000 (Figure 10 Real Interest Rate, Domestic Savings and Gross Capital
Formation).

The second oil crisis and the severe droughts of 1979/80 helped trigger reforms. The
change in exchange rate policy from fixed to crawling peg was adopted to deal with the
appreciation of the real exchange rate. The policy switch was accompanied by fiscal
stabilization and interest rate adjustment. In one year (1981/80) deposit rates doubled,
and the overall budget deficit was cut by 3 percentage points (from 8 to 5% of GDP in
1982-83). Inflation fell from 21 to 11 percent (1983/82) and the external imbalance was
brought to zero in 1983 (from 8 percent of GDP in 1982). This is the time when Kenya
started becoming a favorite among international donors. Aid inflows more than doubled
during the 1980s (from 6 to 13% of GNI) (Figure 11 International Aid).

Partly due to the new availability of external financing, the stabilization was short-lived.
From 1986 onwards, fiscal expenditures kept rising and so did the debt. With deficits in
between 5 and 9 percent of GDP a year, the external debt jumped from 64 percent of
GDP in 1986 to 86 percent in 1992 (Figure 13 External Debt).




                                                                                          5
By 1992, the economy in a recession and elections coming up in December, a shift in
policy was required to try to bring the economy under control. Controls of foreign
exchange transactions were relaxed. A floating exchange rate was adopted. The 81
percent devaluation of the Kenyan Shilling in 1993 resulted in an overnight jump of the
external debt to 143 percent of GDP. Inflation fell back to pre-1970s levels. Fiscal
adjustment, which started in 1994 with severe cutting of expenditures, successfully
brought down the deficit to zero by 1999.

Economic performance in the 1990s and beginning of 2000 continued to be very poor.
High real interest rates combined with high transaction costs and high business
uncertainty resulted in low employment and slow output growth (IMF). Weak
macroeconomic management, slow progress in structural reforms and failure to address
governance issues are some of the reasons behind the continued economic downturn.
Further, these failures combined with the political upheaval that characterized the 1992
and 1997 elections deeply affected Kenya’s credibility in the international community, as
reflected in the fall of international aid back to pre-1980 levels.

In addition, Kenya suffered repeated exogenous shocks. Among them are the severe
droughts of 1984 and 1997-2000, the 1998 Niño floods and the rising HIV/AIDS virus
prevalence, which have contributed to loss of livestock, crops and income, and threatened
family structure and the viability of social services.

Recent market-oriented policies that have encompassed financial, trade and agricultural
market liberalization, as well as some divestment of state-owned enterprises have yet to
break the pattern of growth decline (see structural reforms section). Reputation and
structural issues continue to tax Kenya’s ability to attract foreign investment.


Major sectors
Agriculture
The majority of Kenyans depend on agriculture for their livelihood. Agriculture employs
77 percent of the labor force (1999), produces 23 percent of value added (2000), and 8
percent of merchandise exports. It also provides raw materials for Kenya's agro-
industries, which account for 70% of its industrial production. Large farms (more than 20
ha) account for 23 percent of agricultural output and 53 percent of marketed products,
since the small ones are mostly subsistence farms (Kiome and Ndiritu 1998).

Kenya is one of the few countries in Africa whose agricultural production has kept pace
with population growth. Yet, only 15 percent of Kenya's total land area is farmable, and
of this only about half is classified as first class land. Most of the good quality farming
land is in the Western Highlands, around Lake Victoria and Mount Kenya, and along the
coast. The Central Province (Kisii District in Nyanza Province and the Embu and Meru
Districts in Eastern Province) also engages in intensive cultivation. Irrigation projects are
limited to only about 11,735 hectares/ 29,000 acres or 1 percent of the land.




                                                                                           6
Maize is the principal staple crop, while wheat production can satisfy 70% of domestic
demand. Other important crops are millet, cassava, and sorghum. Cereal production grew
moderately until the late 1980s and started to decline thereafter following a similar
pattern in cereal prices (Figure 14 Cereal). Tea became the most important cash crop
overtaking the traditionally stronger coffee production and export. Tea production grew
steadily in the post independence period supported by raising prices (Figure 16 Tea).
Horticulture is a close second. Coffee continues to be an important export, but falling
prices, repeated droughts and controlled marketing have seriously hurt the sector. Coffee
production has been on a downward trend since the coffee boom of 1986, only recovering
somewhat during the coffee boom of 1995-97 (Figure 15 Coffee).

Kenya ranks second in the world in the production of sisal and fourth in the export of cut
flowers. The country supplies almost 70% of global demand for pyrethrum. Other
agricultural exports include cashew nuts, fruits and vegetables.

Beef and dairy cattle are also important to Kenya's agricultural economy. Kenya has one
of the most developed dairy industries in Sub-Saharan Africa, with an annual milk
production of some 2 billion liters. The fishing industry handled 121,984 tons of fish in
1987, mostly fresh water fish caught in Lake Victoria (Uwechue 1996).


 The flower industry: a success story. Horticulture—mainly fruits and cut flowers—has been
 one of Kenya’s success stories. In the post-independence period Kenya became England’s
 winter supplier of fruits and vegetables. The trade grew in the 1960’s with the increased
 frequency of tourist related airfreight transportation. The vegetable industry boomed in the
 1970s and continued to grow through the present.

 A small cut flower industry developed in the 1960s to cater to local hotel and restaurant needs.
 Partially subsidized by the government, a foreign company made large investments in
 irrigation and post-harvesting facilities in the late 1960s and started exporting to Europe. The
 industry grew steadily in the 1970s but it was not until the 1980s that large investments started
 pouring in and exports grow at high rates. During the 1980s, cut flower exports grew 380
 percent making Kenya the largest single winter supplier of cut flowers on the European
 market (Figure 17 Cut Flowers Exports). In the 1990s, exports doubled. Growth affected
 mostly rose plantings (from 27 hectares in 1990 to 550 in 1997), which helped increase the
 average export dollar earning per ton from $2,290 to $2,600.

 Today, Kenya represents about half of SSA’s cut flower exports (which grew from only $13
 million in 1980 to $200 million in 1998), and is the third largest exporter to the European
 market after the Netherlands and Israel. The success can be attributed to private sector
 initiative, non-governmental interference, strategic partnerships with international expertise,
 and good cooperation with complementary industries (transport, tourism, wholesale and
 retail).




                                                                                                     7
Industry
Import substitution was the strategy adopted by the government to support industrial
development. The strategy promoted capital-intensive technologies and kept Kenya out
of the labor-intensive manufactures, such as garments, footwear and light assemblies.
Protection of local industry gave rise to an over regulated, over concentrated and
uncompetitive industrial structure. The strategy worked in the short term and delivered
annual growth rates of 5 and 11 percent in the 1970s and 1980s. But with the fall of the
regional customs union, falling private sector investment in manufacturing and violence
against businesses after the failed 1982 coup attempt, industrial production collapsed
(Figure 2 Growth by Sector).

An overextended and monopolistic public sector became involved in both manufacturing
and services. Investment requirements of parastatals crowed out private investment and
decreased investment efficiency in the country. The World Bank estimates that
investment efficiency plunged by 70 percent in the last two decades, greatly affecting
growth potential in the Kenyan economy (WB 2001).

The large financing requirements from both central government and parastatals
contributed to the dramatic rise in real interest rates. Average real interest rates increased
from 2 to 5 to 13 percent respectively in the 1970s, 80s and 90s (Figure 12 Interest
Rates). The extremely high real lending rates that have characterized the economy of
recent have had a deleterious impact on economic activity. Private investment declined
from 15 to 8 percent of GDP between the 1980s and 1990s. Foreign direct investment,
which had risen steadily in the 1970s, fell from 84 to 14 million dollars in 1981/79 and
never recovered (Figure 18 Foreign Direct Investment). The amount contrasts with $200-
300 million per year flows into the smaller economies of Uganda and Tanzania (WB
2001).

The perceived weaknesses in investment climate are greatly to blame. The World
Economic Forum’s Africa Competitiveness Index ranks Kenya 22nd out of 24 countries
surveyed. Transparency International’s corruption perceptions index ranks Kenya at the
very top of its corruption scale (although below Uganda, which does not seem to be
penalized for it). Policy obstacles to doing business in Kenya include tax and customs
regulation and administration, and business licensing. In addition, a corrupt judicial
system provides little or no recourse against the breaking of contractual agreements.

Energy. The increase in energy prices since the oil chocks of the 1970s have negatively impacted
the country's economy both internally, by increasing costs of production and lowering incomes,
and externally, by worsening the balance of payments. Positive strides were made up to 1985 to
increase the share of electricity production from hydroelectric sources and away from oil sources.
The share increased from 50 to 98 percent in 1976-85 but fell back to 68 percent by 1998 as
repeated droughts made water supplies scarcer (Figure 20 Electric Power).
Yet unresolved, however, is the composition of the country’s energy supply, most of which
comes from wood or other biomass. The rapid growth in demand for fuel wood and charcoal is
environmentally unsustainable. Risks include deforestation, erosion and desertification. Most of
this demand comes from low-income groups, and cannot be reversed without a policy on
demonopolization of the energy market and subsidization of cleaner and more sustainable energy



                                                                                                8
supply (e.g. gas).

Services: Tourism
Tourism has been one of the pillars of economic development and one of the main
sources of foreign exchange for the country. Receipts for tourism tripled between 1980
and 1994 from $220 to $630 million. At its height, tourism represented 24 percent of
export earnings (1994). But civil violence and political unrest discouraged the flow of
high-market tourists thereafter, and by 1999, annual receipts were almost back to 1980
levels (Figure 19 International Tourism).

Particularly hurtful to the tourism industry were the civil unrest associated with the 1992
and 1997 elections, the August 1998 bomb attack on the US Embassy in Nairobi, as well
as the increased violence brought about by the inflow of refugees from neighboring
countries experiencing civil conflicts (including Sudan, Ethiopia and Somalia). These
conflicts impacted export markets, border security, tribal conflict, and expenditures for
refugee relief. Furthermore, the conflicts have provided an avenue for criminals to obtain
firearms (AK-47s, handguns and grenades) smuggled in through the Somalian, Sudanese
and Ethiopian borders. Increase in criminal activity in the latter part of the 1990s
(estimated 20% rise per year) and the murder of some 20 expatriates, combined with poor
law enforcement, have contributed to making Kenya a less preferred destination.

To revitalize the industry, the Kenyan Tourist Board (KTB) launched an aggressive
campaign to repair Kenya’s image and placed marketing representatives in four
international locations (USA, Germany, UK and Japan). This campaign is believed to
have reversed the free fall in tourism receipts that characterized the 1994-1998 period
(63% decline), and secured the 32 percent increase from 1998 to 2001. The 2002 receipts,
however, are being negatively affected by the aftermath of the September 11, 2001 attack
against the US, and by the scheduled elections at the end of the year.


Fiscal trends
The Kenyan government expanded quickly in the 1970 and 1980s. Between 1972 and
1994, total government expenditures rose by 12 percentage points of GDP (to 32%).
Expenditure contracted thereafter to 28 percent of GDP in 2001 (Figure 5 Government).
With one of the strongest revenue bases in Africa, revenues showed a similar growth
pattern through an increase in tax collection and a fall after 1996 (Figure 21 Tax
Revenues). Because of this unusually large tax base, and the stop-and-go relations with
international institutions (Figure 11 International Aid), Kenya is an exception in his
ability to finance the greatest part of its expenditures (and deficits) domestically (Figure
22 Deficit Financing).

Nonetheless, the Kenyan government failed to implement prudent fiscal policies. Budget
deficits averaged 4.5 percent of GDP in the 1970s, rose to a 5.5 percent average in the
1980s peaking at 9 percent in 1989. Deficits remained high until 1994. The large
financing requirements put continued pressure on inflation and exchange rates and
strained trade and financial liberalization policies. Stabilization succeeded in bringing


                                                                                          9
down the deficits in the latter part of the nineties (1% average) but they rose again in
2000-01. Of the four agreements entered with the IMF (1989, 1993, 1996 and 2000),
three could not be completed, and Kenya could only benefit from 50 percent of the
resources approved by the IMF (SDR648 million). Relations broke down in 1991, 1997
and 2001 for failure to maintain a satisfactory macroeconomic framework (Figure 11
International Aid). In all three occasions, the upcoming elections made political
considerations prevail.

Fiscal indiscipline has been the single largest problem in the Kenyan economy, one that
the government has not been able to tackle to date. While quite efficient in raising
revenues, the Kenyan state has been unable to curb the rise in expenditures. In a vicious
cycle, continued upward pressure on expenditures became a by-product of fiscal
indiscipline. The dollar denominated debt kept rising under the inflationary and exchange
rate appreciation impact of deficit financing, and so did interest payments on the debt.
Interest payments rose from 6 percent of expenditure in 1972 to 41 percent in the
aftermath of the 1993 devaluation, to fall back to 22 percent by 1998 (Figure 13 External
Debt).

Additional downward inflexibility on spending came from the large civil service (relative
to other low-income countries), and teachers’ salaries. Over the 1972-98 period, wages
and salaries captured one third of total expenditures or about 8 percent of GDP.
Notwithstanding the fall in real public wages, expanding public sector employment kept
the wage bill high and inflexible to stabilization efforts (Figure 23 Composition of Public
Expenditures). These inflexibilities are compounded by little will to control expenditures,
poor prioritizing of spending and weak resource allocation capacity.

Social expenditures grew rapidly in the second half of the 1960s increasing from 4 to 9
percent of GDP in 1967-71. The rise reflected the increase in education expenditures
associated with the expansion of primary education facilities (from 2 to 5%) and the
doubling of health expenditures (from 1 to 2%). Education and health expenditures
stabilized at around 6-7 percent and 2 percent respectively in the 1985-2000 period
(Figure 24 Social Expenditures).


Social Scenario

Social expenditures in Kenya are well above the sub-Saharan African (SSA) average. In
the 1993-99 period, at 2.4 percent of GDP, health expenditures compared favorably with
a 1.7 percent SSA average. Similarly, at 6.5 percent, education expenditures were 58
percent higher than the SSA average (IMF 2002a). Educational outcomes reflect the
fiscal effort while health outcomes do not.

Population
Kenya is one of the first African countries to have experienced a demographic transition.
From one of the highest rates in the region, population growth kept increasing from
independence to the beginning of the 1980s, when it started to taper off. Favorable


                                                                                        10
fertility changes started in conjunction with increased education levels among women,
rising costs of education and the economic growth of the previous two decades (Figure 25
Population Growth and Fertility). Between 1982 and 1992, fertility rates fell from 8 to 5
births per woman. Family planning efforts, which were put in place in the mid-eighties,
strengthened the trend.

Successful improvements in health conditions contributed to a significant decline in
mortality in the first two decades after independence. Between 1960 and 1986, life
expectancy at birth rose from 45 to 58 years. From 1960 to 1980, adult mortality fell 24
percent for males and 9 percent for females (Figure 26 Mortality). Infant and child
mortality dropped by 48 and 56 percent respectively. Trends reverse starting in 1990. As
adult mortality rates rose above those of 1960, and infant and child mortality worsened,
life expectancy in 1999 was barely above that which had prevailed in 1960 (48 years)
(Figure 27 Life expectancy and AIDS). HIV related deaths explain about half of the
increase in mortality between 1990 and 1999.

By the year 2000, population growth had fallen below the average for the sub-Saharan
African countries (2.6%) to an annual growth rate of about 2.4 percent. Change in the age
structure began to appear in the 1990 when the 0-14 age group share started to steadily
fall in favor of the working age group (Figure 28 Age Composition of the Population).
This change was accompanied by a gradual but steady shift of the population from rural
to urban areas. A quarter of the population urbanized in forty years (Figure 29 Urban-
Rural Distribution of the Population). Urban population quadrupled in just the last two
decades (from 2.5 to 10 million people) while rural population expanded by only one
half.

Health
Basic health service provision was set as a priority at independence. But after the
significant gains achieved in the 1963-1980 period, the HIV crisis combined with poor
pay for medical staff, deteriorating physical infrastructure, and scarcity of medical
facilities made the health system incapable of meeting the increased demands put upon it.

Overall, at 546 per ten thousand females and 591 per ten thousand males, Kenya’s adult
mortality is significantly above the average for SSA countries (453 and 499 respectively,
WDI) and much above that of low-income countries (258 and 288, WDI).

Most services are provided by the Ministry of Health, and some by the private sector and
church organizations. In 1996, there were 3,058 health institutions, up from 2,925 in the
previous year. Since 1989, privatization has reduced government commitment to public
health. Also in 1989, a cost-recovery program known as the Facility Improvement Fund
introduced fees for inpatient and outpatient services at all hospitals and health centers.

Most Kenyan illnesses are either transmitted through insects or through water
contamination. Malaria and respiratory diseases account for the majority of illnesses and
deaths, despite the long-standing practice of distributing free malaria prophylaxis and
spraying mosquito-infested areas. Rates of parasitic and other intestinal diseases are very


                                                                                        11
high. Yet, not enough progress has been made in improving water and sanitation
facilities. Urban access to clean water rose 27 percentage points between 1986 and 2000
to 87 percent of the population, but rural access to water is extremely low (31%) and only
grew modestly in the period (10 percentage points) (Figure 30 Water Access). Access to
running water in Nairobi slums is only 22 percent.

Children afflictions include measles, gastroenteritis, colitis, kwashiorkor, tetanus, and
whooping cough. Infant and child death rates fell substantially in the post independence
period but the fall has tapered off in part because of increased incidence of AIDS cases.
Malnutrition continues to be widespread (22%). Nutritional stunting is estimated to have
risen 54 percent in 1977-82 and fallen 11 percent in 1983-1998. At 33 percent, stunting
remains high (Figure 31 Nutritional Stunting). Parasitic infections and other intestinal
diseases lower the nutritional value of increased food supplies. One study estimates that
widespread control of intestinal diseases would significantly increase school attendance
and achievement (Kremer 2002). The evolution of immunization rates looks erratic, with
great swings in coverage from one year to the next. DPT and measles immunization rates
fell from above 65 percent of children (12 months or below) in 1985, to below 30 percent
in 1988. They rose again above 70 percent in 1996, fell back to below 40 percent
coverage in 1997 and rose again to 79 percent in 1999 (Figure 32 Immunizations).
Epidemic diseases, such as smallpox and cholera, have been controlled.

HIV/AIDS is one of the threats to economic recovery. It is estimated that 13-14 percent
of the population is infected with HIV (about 4 million people), 80-90% of cases in the
15-49 age group. Incidence varies across regions and social groups. Higher infection rates
are observed in urban areas (16% vs. 11% in rural areas), the military (20-40%), sex
workers (50-80%) and drug users (n/a) (WHO 2000). The highest regional incidence is
found in Thika and Busia (33 and 34%). The epidemic has claimed one million lives
already and about 180,000 are now dying every year. The number of orphans is estimated
between 800,000 and one million children. (NACC 2000).

HIV/AIDS is affecting family welfare, economic growth and social services. Even before
death, the family income stream is reduced as affected members reduce hours of work or
are left without work altogether. At their death, high burial costs add to loss of income.
Many children are left to care for themselves. HIV infections in the labor force affect
rates of absenteeism, which have been estimated to have reduced employer’s profits by 4
percent. Increased deaths have lowered economic performance.

The demands made by HIV on the health system have seriously strained capacity. In
2000, 50 percent of hospital beds were occupied by AIDS patients, a staggering statistics.

In 1999, AIDS was declared a national disaster and the National AIDS Control Council
established. A decentralized approach to AIDS prevention is in place.




                                                                                       12
Education
Kenya’s achievements in education have been impressive. Adult illiteracy fell steadily in
the last forty years from 50 to 18 percent of the population. Although not yet closed, the
illiteracy gender gap was reduced significantly from 30 to 13 percentage points (Figure
33 Adult Illiteracy).

Large gains in primary enrollment were achieved in the first two decades after
independence (gross enrollment growing from 47 to 115 percent). Critical was the role
played by community organizations (harambee), which have been responsible for
building about two thirds of the schools.

The trend reversed in the next two decades, lowering gross enrollment to 91 percent
(2001). The reversal is due to increases in the cost of education and poverty levels, as
well as a tapering off of delays in enrollment age. Nonetheless, it is in this latter period
that the primary level average gender gap for the country as a whole was closed, although
great regional variation remains (Figure 34 Primary Enrolment).

Gains in secondary school enrollment can be observed up to the outset of the 1990s.
Gross secondary enrollment grew from 2 percent in 1960 to a peak of 28 percent of
secondary school age children in 1991. The drop in enrollment since 1991 has been
substantial and can be attributed to both rising costs of education and a lowering of
employment opportunities (Figure 35 Secondary Enrolment). Increasing urban poverty
and AIDS played a role in educational outcomes by lowering living standards and leaving
many children orphans and unattended. In the slums of Nairobi, for example, two thirds
of adolescents (>12) do not live with their parents (APHRC 2002).


Poverty
During the period for which poverty data are available, no progress was made in reducing
poverty. Rather, a rise in poverty level in the second half of the 1990s from 45 to 52
percent in 1992-97 can be observed. Rural poverty rates remained fairly stable in the
1982-94 period at around 47 percent of the population and rose to 53 percent by 1997
(Figure 36 Rural Poverty Incidence). The rural poor are subsistence farmers, and the
totality of the one million nomads living in the arid lands of Kenya, which represent
about 60% of total land area. The better off groups in rural areas were formal sector
employees (13% of households) and export crop farmers (5% of households) (WB 1995).

Critical are the changes in urban poverty, which escalated from 31 percent in 1992 to 49
percent in 1997 (Figure 37 Urban Poverty Incidence). Poverty in Nairobi doubled from a
quarter to one half of the population. The pattern is common to all other major cities in
Kenya with the possible exception of Mombasa (CBS 2000). High rates of urbanization
combined with poor economic conditions and neglect of urban informal settlements help
explain the trend in urban poverty. In Nairobi, informal settlements house more than half
of the population and most of the labor force but cover only five percent of the land.
Conditions in these settlements are pitiable and deteriorating. Housing as well has



                                                                                         13
become scarcer and more expensive. Access to water, electricity, sewerage and solid
waste collection are denied, and churches and NGOs provide the few available
educational and health services. For example, access to electricity is 18 percent in the
slums versus 60 percent in Nairobi overall; three forth of slum residents buy their
drinking water from selling points while the same proportion have it piped to their homes
in Nairobi overall; and only 7 percent of slum residents have flush toilets (vs. Nairobi’s
56%). As a result, slum residents are at high risk of disease and death. Child mortality in
the slums is more than twice that of Nairobi overall and almost one third of children is
orphan of mother, father or both. In addition, slum residents suffer from very high
unemployment rates (in excess of 40 percent of working age population) (APHRC
2002).


Structural reforms
The period 1980-84 marked the first and failed attempt at economic adjustment: partly
because commitment to reform was limited to a few top civil servants, the government
failed to carry out trade reforms and liberalize grain marketing. Broader consensus was
achieved during a second period of adjustment in the second half of the 1980s and some
trade liberalization measures were successfully put into place. Not so for agricultural
reforms that lagged severely behind. Implementation remained weak and commitment
uneven. One major flaw was that structural adjustment took place within an environment
of severe fiscal laxity (Swamy 1994). The beginning of the 1990s marked a third wave of
reform when interest rates were liberalized and exchange rates allowed to float. Fiscal
adjustment followed in the 1994-1999 period. Limited progress was also made in
reducing government intervention in the economy by privatizing state-owned enterprises,
and liberalizing agricultural markets.

Agricultural Policies
The strategy for economic development of post-independence Kenya was based on the
strengthening of smallholder agriculture. Half a million hectares of land was used to
resettle 34 thousand farming families. Farmers were given incentives to engage in tea,
coffee and hybrid maize production and, as a result of large farmers lobbying efforts,
competitive prices offered for their output (about 90% on average of international prices).
The policies quickly delivered increased agricultural output (5% annual increase in the
1970s) and contributed to overall economic growth (Figure 2 Growth by Sector).

Marketing parastatals, among which the National Cereal and Produce Board, and the Tea
and Coffee Boards, controlled interregional movements of coffee, tea, cotton, milk,
wheat, rice, and sugar, and kept producer prices above market pricing. These parastatals
became one important source of fiscal imbalance and of rents for public officials in
charge of licensing grain movements. By 1987, the National Cereal and Produce Board,
for example, had accumulated debt equivalent to 5 percent of GDP, later written off by
the central government.

In a first period of reforms (1980-84) the government failed to take any action to
liberalize agricultural markets. It was only in the latter half of the 1980s that some modest


                                                                                          14
progress was made. The government pulled out of output marketing for some products,
eliminated the monopoly on paper held by the cotton marketing board, de-licensed the
commercial import of fertilizers and liberalized fertilizer prices.

Many problems remained. The unwillingness to reform the National Cereals and
Produce Board continued to drain fiscal resources. Even though the Board was to become
a buyer of last resort, the price offered by the Board were set higher than market, which
meant that producers sold most of their product to it. Throughout the 1980s, the Board
accumulated reserves 50-60 percent above target.

Some advance was made when many of the Board’s buying centers were closed of
quantity of maize movements without a license increased. But the situation quickly
reversed when in 1992 movement controls were re-imposed and price set above import
parity.

Coffee
Coffee, Kenya’s traditional export crop, has been regulated by the Coffee Board of
Kenya (CBK), which held a monopoly on coffee marketing. Regulation covered most
stages of coffee processing. Cooperatives would provide credit to farmers during the
planting season. The farmers were required to deliver the produce to the cooperatives’
pulping stations, which had regional monopoly over pulping and milling, and which
would auction the product through CBK at the Nairobi Coffee Exchange.

The sector has been suffering from monopolistic practices that have fed inefficiencies in
the cooperatives and delivered little profits to the farmers (as little as 10% of selling
price). The sector has further suffered from repeated droughts, falling international prices
and weak infrastructure.

In 2001, faced by the need to revitalize the declining coffee sector (one third fall in
exports in 2000/1995) the Coffee Act introduced competitive practices in the milling and
marketing of coffee. In 2002, the government announced the end to the Coffee Board’s
marketing activities and the retrenchment of 90 percent of its staff, hopefully ending
decades of state control over the coffee market.

Tea
Tea has grown in recent history to be the largest single export item. The sector was
liberalized in 2000 with the privatization of the Kenya Tea Development Authority
(KTDA) and competitive practices introduced to the marketing of tea. In combination
with favorable market conditions, reforms led to high growth rates in tea production.


Trade liberalization
Imports
Import substitution has formed the backbone of industrial policy in much of Kenya post-
colonial history. Indeed a system of tariffs to protect local manufacturing had been in
place since the 1940s and 1950s, and protection perpetuated thereafter, in one form or


                                                                                         15
another. Import duties averaged 3.4 percent of GDP in the 1972-77 (customs union)
period, rose to 4.5 percent in 1978-1984, and fell back to 3.3 in 1985-92 and 3.6 percent
in 1992-98 (Figure 8 Import and Export Duties).

In 1967, with the creation of the customs union with Uganda and Tanzania, protection
was ensured through a system of import quotas, which, in addition to providing barriers
to entry, was also a source of rents. The system was kept in place even after the fall of the
regional customs union in 1977 when Tanzania closed its border and Ugandan dealt with
internal civil instability. Kenya’s export markets were hard hit.

The forth development plan for 1979-84 recognized the need of a more outward-oriented
approach and called for the elimination of quantitative restrictions, and lowering and
simplification of tariffs. In 1980-85, items were clearly allocated to restricted and
unrestricted categories, the share of imports without quantitative restrictions doubled to
48 percent and average tariff reduced by 8 percent. Reforms, however, stalled early on
and revenues from import duties rose rather than decline in the period. During the foreign
exchange crisis of 1982-84, tariffs further increased by 10 percent (Swamy 1994).

A second stage of trade liberalization started in 1987. The reform aimed at instituting
automatic licensing for a large number of import items, and reducing tariffs. By 1991,
only 22 percent of items representing 5 percent of imports were subject to quantitative
restrictions. Tariff categories were halved to 12 and tariff spread reduced (the highest
tariff falling from 135 to 60%) (Swamy 1994). Production weighted tariffs fell from 62 to
46 percent in 1989-1992.

In 1993-94, the government removed import licensing and foreign exchange controls and
implemented customs management reforms. The latter reforms were responsible for
increasing revenues by at least one third more than can be explained by changes in trade,
exemptions, and tariff rates (Glenday 2000). The elimination of import licensing was
important to reduce rent-seeking activity. The liberalization was supported by a real
exchange rate depreciation of 10 percent between 1987 and 1990 that reflected a 9
percent fall in the terms of trade (Figure 38 Exchange Rate).

During a policy setback at the end of the 1990s, the government introduced suspended
duties on several products and increased import duties on agricultural crops.

A new wave of trade reforms was triggered by Kenya co-founding and joining of the
Common Market for Eastern and Southern Africa (COMESA). In 2001, the government
formulated a comprehensive tariff reform to improve Kenya’s external position, simplify
duties and facilitate collection in view of joining the common external tariff of COMESA
in 2004. Licenses for export of agricultural products were removed, while others for
minerals and precious stones were retained. The top import tariff was reduced from 40 to
35 percent (except for a 100 percent duty on sugar imports) and the number of tariff
bands cut from 9 to 8 (IMF 2002a). As a result the average unweighted tariff declined
from 18 to 16.6 percent (2001/2000).




                                                                                          16
Yet, Kenya compares poorly with its neighbors. Tanzania and Uganda have half as many
tariff bands, lower maximum tariff (25% and 15% respectively) and lower unweighted
average tariffs. However, because Kenya has a stronger revenue base than either of these
two trading partners, import tariffs represent a smaller share in total Kenyan revenues.
This implies that the fiscal cost of lowering tariffs is relatively lower for Kenya than for
Uganda and Tanzania. Indeed, reaching a uniform set of tariffs is estimated to cost
Kenyan tax revenues no more than 5 percent, while it could affect Uganda’s and
Tanzania’s by as much as 20 percent (Ng’eno 2002). Kenya has also most to gain from
integration given that it is the most sophisticated of the three economies with the greatest
regional export potential.

Exports
During much of Kenyan post-independence history, a strong anti-export bias existed. The
flat rebate export compensation scheme put into place in 1974 was ineffective and only
benefited large exporters. It was only in the late1980s that some schemes started to be
introduced to strengthen the incentive to export. In 1988, a manufacturing under bond
(MUB) was instituted to allow customs authorities to waive import duties on imported
inputs used in the production of export goods. In 1990, a duty/VAT import exemption
was applied to firms with export contracts and past export performance; and the Export
Promotion Zones (EPZ) were approved.

The impact of these measures appears negligible. MUB and EPZ only accounted for one
percent of exports in 1993-1998. The duty exemption has benefited exporters for an
equivalent 35 percent of total exports (Glenday and Ndii 2000). Kenya did experience an
export surge from 2 to 8 percent of GDP between 1988 and 1993 (Figure 39
Manufacturing) but this coincided with the sharp depreciation of the Kenya shilling, a fall
in real wages, and the abolition of trade licensing and foreign exchange allocations.
Export performance deteriorated thereafter.

The measures also suffer from a great deal of discretion and lack of transparency. One
famous example is the 1992 Goldenberg scandal where Asian businessman Kamlesh
Pattni and then-permanent secretary in the ministry of finance Dr. Wilfred Koinange
allegedly exported nonexistent gold, claiming more than 2 billion shillings in export
compensation from the Treasury. Following the scandal, export subsidies were abolished.

Manufactured products have been on a falling trend as a share of both GDP and total
exports. The decline represents a loss of competitiveness of Kenyan products. The sector
has been hurt by high real interest rates, low investment, antiquated technology, low
productivity, and rising labor costs.

Overall exports of goods and services have also fallen since 1994 (Figure 4 External
Balance). Droughts have been mainly responsible for the fall in export volume. A loss in
competitive position, including rising labor costs and a fall in the price of tradables
relative to nontradables, has contributed to the decline. Delays in the agricultural reforms
and changes in commodity pricing (falling coffee prices and rising tea prices) affected




                                                                                         17
export composition. Coffee lost a 5 percent share (2000/1995), and tea and horticultural
goods gained.

In term of destination, Kenya shifted away from trade with the European Union toward
increased trade with EAC and COMESA partners. In 1990-2000, the EU share of Kenyan
exports fell by a third while EAC and COMESA export share grew fourfold and by one
half respectively. Uganda and Tanzania alone now represent for Kenya more than a
quarter of its exports (but only about 1 percent of its imports). This happened despite the
fact that Uganda and Tanzania imposed suspended and excise duties on some Kenyan
goods (20% and 10% respectively) contrary to the East African Cooperation/Community,
by which they were expected to grant duty free access to Kenyan goods already in the
mid 1990s (Ng’eno 2002). Exports to the US had also steadily fallen from 1990 to 2000.
In the latter year, Kenya became eligible for duty- and quota-free textile and apparel
exports to the US under the US African Growth Opportunity Act (AGOA). This may
revive some trade with the US although Kenya has no comparative advantage on these
goods. Indeed many cotton mills have closed unable to compete with cheap second-hand
imports.

Financial liberalization
Kenya has a fairly well developed banking system that comprises 47 banks, 5 nonbank
financial institutions, 4 building societies and 47 exchange bureaus. The four largest
banks hold 55 percent of gross assets and deposits (IMF 2002b). Two of these banks are
foreign-owned and private and two are local and partially government-owned. Since its
creation in 1982, banking supervision has been under the responsibility of the Central
Bank of Kenya (CBK). Prudential regulation has traditionally been weak but has been
strengthened in recent history. However, regulatory enforcement is lacking and continued
political interference in the court system hinders efforts of banks and liquidators to
resolve lending and contractual disputes. The Capital Markets Authority controls
licensing and supervising of brokerage, asset management, rating and other capital
market institutions.

Financial controls and political interests have distorted banking in Kenya. The “political
banks” were local institutions founded by the business and political elites to exploit
contacts in parastatals to enlarge their deposits and engage in murky development
schemes. Furthermore, development finance institutions were set up by the government
in the 1960-70s, which specialized in lending to particular sectors. Among them was the
Agricultural Credit Corporation. Without exception, poor portfolio decisions rendered
these institutions unprofitable and financially unsustainable.

Initial reforms in the banking sector in the early 1980s responded to the concern that
foreign owned banks had a majority share in the Kenyan market. Financial institutions
proliferated as licensing requirements were relaxed. Lack in uniformity in banking
regulation across different types if institutions allowed near bank financial intermediaries
to avoid interest rate ceilings and attract deposits from commercial banks by offering
higher deposit rates. In 1986, poorly enforced regulations on capital and reserve
requirements resulted in the failing of four commercial bank groups that owned large


                                                                                         18
near bank financial intermediaries (Swamy 1994). By 1989, many more financial
institutions were on the brink of failing.

In that year, the government reformed the banking laws. It narrowed regulatory gaps,
strengthened licensing and capital requirements, created deposit insurance, set minimum
reporting requirements, and increased penalties. The Central Bank capacity to enforce
regulation was strengthened and nine small banks were restructured. Nevertheless,
political interference kept taxing the Central Bank enforcement capacity and many more
institutions grew in distress.

Financial liberalization started in 1990 with the removal of all charges and fees from the
ceiling of commercial bank rates, which allowed the effective interest rate to exceed the
ceiling. In 1991, the auction market for government bills and bonds was established. Still
the government arranged most transactions directly with financial institutions to try to
minimize interest payments (Swamy 1994). These arrangements impeded the
development of secondary markets for government paper. Other reforms included the
establishment of a cash reserve ratio and the imposition of liquidity ratios on commercial
banks and other financial intermediaries. In 1999, prudential regulation was strengthened
to safeguard against major risk activities of the banks and capital requirement for
financial institutions raised from KSh 75 million to KSh 300 million, effective January
2002, and KSh500 million, effective in 2005 (IMF 2002b).

To date, the restructuring of the banking system and the establishment of a strong
regulatory enforcement mechanisms remain on the unfinished agenda. As a result, the
banking system remains fragile and vulnerable to the extremely high and growing ratio of
non-performing loans (41% in 2001 up from 25% in 1998 and 20% in 1997) (IMF 2001b,
Oxan 1998). These loans are held predominantly by public banks, which have
traditionally given credit priority to parastatals, irrespectively of sound financial practice.
Public banks display a level of unprovisioned non-performing loans equal to 260 percent
of equity capital. This is one of the factors behind high real interest rates. The
restructuring of these banks remains an issue. In addition, the segmentation of the
market—where large banks cater to multinational concerns and state-companies to public
lending—perpetuates rigidities and inefficiencies in the allocation of credit.

Parastatal sector reforms
By the 1980s, the government held interests in 250 commercial enterprises and held
majority interest in at least half of them. They represented about a tenth of GDP but
contributed nothing to economic growth. Indeed productivity growth among parastatals
was negative in the period. Taxed by economic inefficiency, they imposed a heavy
burden on the budget and on public banks, which held the majority of their debt. They
also contributed 28 percent to the trade deficit.

In 1991, the government announced its intention to rationalize the parastatal sector. At
that time the government held stake in 240 commercially oriented enterprises. Of these
33 were deemed strategic and five of them earmarked for restructuring. The government
would divest from the remaining 207 enterprises. The medium term target was modest,


                                                                                            19
with only 10 firms set for privatization and only 5 actually privatized by 1995. But
privatization continued through the 1990s with a total of 165 enterprises being sold or
liquidated. The economic impact of divestment was small because, with the exception of
Kenya Airways sold in 1996, the remaining were small or medium enterprises (Figure 40
Proceeds from Privatization). Furthermore, transactions lacked transparency, political
support was weak, strategy unclear and institutional and administrative arrangements
inadequate (IFC 2000).

In 2000, the government announced a renewed privatization strategy, which took into
account previous experience and focused on increasing private sector participation in the
enterprises previously deemed strategic. Thus, the government approved the privatization
of telecommunications (Telkom Kenya), energy (KPLC, the Kenya Pipeline Company,
and Kengen), transports (Mombasa Port and Kenya Railways), banking (Kenya
Commercial Bank and Kenya Reinsurance), sugar and water. After a good start and
progress made on preparing for privatization, the program stalled. The most salient
example is that of Telkom Kenya, which had even been earmarked as a priority. As part
of a successful bidding process, the Mount Kenya consortium won a 49 percent stake in
Telkom Kenya with a 325 million dollar bid in 2001. But the process was derailed in
mid-course, when the government announced the breaking off of negotiations on the
basis of political reasons (Oxan 2001). This was a costly course of action. Kenya not only
lost international credibility and fiscal revenues but also missed a window of opportunity
to repair the poor state of telecommunications in the country.




                                                                                       20
Political and economic events since independence

Year Political events                                  Economic policies and shocks Relations with IMF and World
                                                                                    Bank
1960 The Kenya African National Union (KANU)
     inaugurated
1961 Kenyatta released from prison and elected
     President
1963 Legislative elections: KANU victory.          Import quotas established.
     Independence declared in December
1964 Kenya becomes a republic. De facto one party
     state
1966 Odinga resigns from the vice-presidency to
     form the Kenya People's Union (KPU)
1967                                              Treaty for East African
                                                  Cooperation signed with Uganda
                                                  and Tanzania.
1969 M'boya, KANU secretary-general, assassinated.
     Luo-Kikuyu enmity escalates. KPU banned,
     and its principal leaders, including Odinga and
     seven other party representatives, detained.

1973                                                   Oil shock.
1974 Kenyatta reelected unopposed to a third
     presidential term.
1975                                                                                    GoK seeks IMF and WB quick-
                                                                                        disbursing support
                                                       Government introduces controls
                                                       on bank lending, licensing of
                                                       foreign exchange transactions,
                                                       import quotas, and price and
                                                       interest rate controls
1976                                                   Coffee boom.
1977 Tanzania closes border with Kenya.                Breakage of the customs union
                                                       with Uganda and Tanzania.

1978 Kenyatta dies in August, aged 82, and replaced
     by Vice President Daniel Arap Moi.

1979 In November, Moi won national elections           End of the coffee boom. Severe Enter stand-by agreement with the
     running as the sole candidate.                    droughts 79/80. Oil shock.     IMF in August. First WB SAC.

1982 Kenya's National Assembly declares KANU the Creation of the Central Bank of Second WB SAC.
     sole legal party. Press censorship and political Kenya. Change in exchange rate
     detentions increase. Attempted coup in August regime (fixed to crawling).
     by the Kenyan Air Force. Odinga linked to the
     coup attempt and placed under house arrest.




                                                                                                     21
Year Political events                                Economic policies and shocks Relations with IMF and World
                                                                                      Bank
1983 The Minister of Constitutional Affairs, Charles Tanzania calls for opening trade
     Njonjo, accused by Moi of seeking the           relations with Kenya.
     presidency through foreign intervention. Njono
     forced to resign his seat. In September, with
     only 48% of the electorate casting ballots, Moi
     is re-elected for a second term, unopposed.


1984 Increased dissent                                 Severe drought.
1986 Student unrest and pamphleteering. Closing of Coffee boom.                 WB approves agricultural sector
     the University of Nairobi. Rise of left-wing                               loan.
     opposition, Mwakenya (Union of Nationalists
     to Liberate Kenya). Many parliamentarians
     arrested and accused of being connected with
     Mwakenya. The right to a secret ballot
     overturned and replaced by "line-up" voting in
     preliminary elections. Presidential power
     further strengthened in December, when
     parliament passes a constitutional amendment
     to increase the president's power over the civil
     service and the judiciary, including the power to
     dismiss the Attorney General without recourse.




1988 In view of national elections, Moi dissolves the                           WB approves industry sector loan.
     National Assembly and releases 10 political
     prisoners. Moi dismisses preliminary public
     elections and is summarily re-elected president.
     Contesters are jailed (Mwakenya and NCCK).
     The Minister of Transportation and
     Communication is forced to resign and expelled
     from the KANU for openly criticizing election
     abuses. Constitutional amendments
     promulgated in July giving the president the
     power to dismiss senior judges. Legal authority
     to detain without trial increased from 24 hours
     to 14 days.



1989                                                                            ESAF agreement with IMF. WB
                                                                                approves financial sector loan




                                                                                              22
Year Political events                                Economic policies and shocks Relations with IMF and World
                                                                                        Bank
1990 Opposition to Moi's one-party rule grows. In    Dual exchange rate in place        WB approves second agricultural
     July, Charles Rubia, Matiba and Raila Odinga, (official and market rate).          and export development sector
     son of the former Vice President, arrested and Government abolished all            loans.
     detained without trial and their public "pro-   charges and fees from the ceiling
     democracy" rallies banned. Riots in the central on commercial bank loan rates,
     province. KANU Delegates' Conference in         allowing effective rates to exceed
     December votes to keep a one-party system.      ceilings.
     Government-sponsored national dialogue set in
     motion to facilitate broader democracy in spite
     of one-party rule. Public discontent with the
     government and KANU increases. In August,
     Oginga Odinga and six prominent opposition
     leaders, form the Forum for Restoration of
     Democracy (FORD) with extensive multi-
     ethnic support. The new movement
     immediately gains the public's support.




1991 In special KANU conference in December, Moi                                      International donors suspend $350
     accepts demands for a multi-party state. KANU                                    million in quick-disbursing loans
     votes to allow only one candidate per seat, to be                                from the IMF. WB approves
     chosen by secret ballot. The National Assembly                                   education sector loan.
     amends the constitution to allow for multi-party
     elections. President appoints the 11 members of
     the Electoral Commission. Constitutional
     amendment requires presidential candidate to
     win 25% of the vote in at least 5 (out of 8)
     provinces, in addition to overall plurality.




                                                                                                     23
Year Political events                                    Economic policies and shocks Relations with IMF and World
                                                                                         Bank
1992 Two main opposition parties: Mwai Kibaki's          KANU inflates money supply by
     Democratic Party and Odinga's FORD. Smaller 76% to finance electoral
     parties include the Social Democratic Party, the campaign. Treasury subventions
     Kenya National Democratic Alliance, the             and financial scams to cover
     People's Union of Justice and New Order and expenses of senior government
     Islamic Party of Kenya. FORD stages the             figures. Goldenberg scandal:
     country's first legal opposition rally in 22 years. Asian businessman Kamlesh
     Civil unrest breaks out in the west central         Pattni and then-permanent
     region. Kalenjin warriors attack Kisii tea          secretary in the ministry of
     farmers, disrupting tea production. Outbreaks of finance Dr. Wilfred Koinange
     violence continues to mount over the following allegedly export nonexistent
     two years, seeming to confirm the government's gold, claiming more than 2
     predictions that multi-party politics would         billion shillings in export
     exacerbate ethnic tension and eventually            compensation from the Treasury.
     splinter the country along tribal lines.
     Opposition parties claim the government is
     inciting the violence. Estimated 2,300 people
     dead and 25,000 displaced. In March women
     protesters attacked by police with tear gas and
     batons during a hunger strike to liberate
     political prisoners. Demonstrations in Kisumu,
     Odinga's stronghold, and the western town of
     Homa Bay. New protests in Nairobi.
     In the December elections, Moi retains his
     position with 36.35% of the presidential
     election votes (Kenneth Matiba takes 26%,
     Mwai Kibaki 19.45%, and Oginga Odinga
     17.48%). Opposition gains 88 out of 188 seats
     in Parliament. Opposition protests the
     presidential election results, calling them
     invalid on the grounds of gross procedural
     irregularities.

1993 President Moi sworn in on January 4, 1993, for Kenyan Shilling allowed to float. ESAF agreement with IMF.
     another five-year term.                        Coffee boom. New accord for the
                                                    revived East African
                                                    Cooperation signed by Kenya,
                                                    Uganda and Tanzania.


1994 FORD disintegrates into rival ethnic factions:                                International aid resumes in
     FORD-Asili (Kikuyu), FORD-Kenya (Luo and                                      December.
     Abaluhya).
1995                                                                               International aid stops over
                                                                                   corruption and fiscal
                                                                                   mismanagement disputes




                                                                                                  24
Year Political events                              Economic policies and shocks Relations with IMF and World
                                                                                Bank
1996 24 opposition MPs defect to KANU (1996/93).                                Government officials charged
     Their special by-election wins KANU 12 seats.                              with fraud as part of anti-
     Within his cabinet, Moi promotes KANU-B                                    corruption campaign to break
     (Saitoti, Biwott) and demotes KANU-A                                       Nairobi's standoff with the IMF
     (Nyachae). President reappoints 7 of the 11                                and the World Bank.
     members of the Electoral Commission.                                       ESAF agreement with IMF. WB
     Reapportionment of constituencies.                                         approves $127 million SAC (first
                                                                                tranche released).

1997 Harassment of opposition leaders: rally permits Massive short-term private         IMF suspends $220 million ESAF
     denied, entrance in some districts blocked,     investment outflow. KSh drops program. IMF calls for increased
     campaign meetings disrupted. Opposition         25%. Coastal clashes reduce        privatization effort, independence
     fragments. FORD-Kenya loses its Luo             tourism in half. Legislation gives for the state tax collection agency
     followers to Raila Odinga's National            the governor of the Central Bank and an anti-corruption authority.
     Development Party. FORD-Asili self-destructs enhanced autonomy. He cannot Concerns include budget deficit,
     as Kenneth Matiba boycotts elections. The       be dismissed unless fraud or       slow growth, rising inflation and
     Democratic Party loses its Kamba supporters to mismanagement is proven. East currency depreciation. WB does
     a revamped Social Democratic Party (SDP).       African Cooperation strategy for not release SAC second tranche
     Calls for constitutional reform to decrease     1997-2000 published.               because of government lack of
     presidential and provincial administration                                         compliance with conditions
     powers. July rally by the National Convention                                      (December).
     Executive Council put down by police, 20-25
     dead, buys international dismay. New round of
     ethnic clashes in August. Moi accepts limited
     electoral reform. December 29-30: elections.
     Moi wins with 41% of the vote, runner-up
     Kibaki gets 31%. For the legislatives, only 40%
     of the incumbents regain their seats in
     Parliament.




1998                                                  Drought
1999                                                  Drought. AIDS declared national
                                                      disaster. Government introduces
                                                      18% VAT on several products
                                                      and inputs. East African
                                                      Community agreement signed by
                                                      Kenya, Tanzania and Uganda to
                                                      remove internal tariffs, eliminate
                                                      non-tariff barriers, adopt
                                                      Common External Tariff, and
                                                      harmonize trade documentation
                                                      procedures.




                                                                                                       25
 Year Political events                                 Economic policies and shocks Relations with IMF and World
                                                                                          Bank
 2000                                                  Failure to privatize Kenya         198 million dollars poverty
                                                       Telkom. High Court declares        reduction and growth facility
                                                       Anti-Corruption Authority          (PRGF) signed with the IMF in
                                                       unconstitutional. Parliament       August. $150 million Economic
                                                       rejects Public Service (Code of and Public Sector Reform Credit
                                                       Ethics) Bill. Kenya joins the Free approved by the World Bank (first
                                                       Trade Area of the Common           tranche released in August). IMF
                                                       Market of Eastern and Southern increases support to 247 million
                                                       Africa (COMESA). Kenya             during October's drought.
                                                       declared AGOA eligible.
                                                       Banking prudential regulation
                                                       revised increasing minimum
                                                       capital levels.



 2001                                                  Fall of tourism revenue             IMF withdraws financial support
                                                       following Sept 11 attacks in the in January. Government yet to
                                                       US. Low coffee prices.              meet conditionality for second and
                                                       Elimination of all suspended        third tranches of the Economic
                                                       duties (except on oil products) and Public Sector Reform Credit.
                                                       and reduction of tariff bands       PRSP not completed. Government
                                                       from 13 to 9. Average               appoints foreign consultants to
                                                       unweighted tariff falls from 18 to assess corruption.
                                                       17 percent. The approval of the
                                                       Central Bank of Kenya (Donde)
                                                       Act seeks to control interest rates
                                                       and threatens access to bank
                                                       credit.



 2002 President Daniel arap Moi set to retire before   Anti-corruption and Economic
      the end of 2002. Constitutional review. The      Crimes Bill fails to pass.
      Kenya African National Union (Kanu) absorbs      Government expands VAT to all
      the National Development Party. The              goods and services. Minister of
      opposition National Alliance for Change is       Agriculture announces end to
      formed comprising Mwai Kibaki's Democratic       Coffee Board of Kenya
      Party, the National Party of Kenya led by        marketing practices and 90%
      Charity Ngilu, and Ford-Kenya headed by          retrenchment of its staff.
      Kijana Wamalwa, Saba Saba Asili and Ford-
      Asili. Smaller opposition alliance Ford-
      People/Safina comprises Ford-People's Simeon
      Nyachae and Paul Muite's Safina party.




Sources:
University of Pennsylvania website                     IMF 2002
Barkan and Ng'ethe 1998.                               Oxford Analytica, various
                                                       articles
Barkan, Joel various articles                          Ng'eno 2002




                                                                                                         26
References

African Population and Health Research Center, “Population and Health Dynamics in
Nairobi’s Informal Settlements” 2002.

Barkan, Joel

Barkan, Joel and Njunguna Ng'ethe "Kenya tries again" African Ambiguities 1998.

Central Bureau of Statistics (CBS), “Economic Survey”, 2000.

Central Bureau of Statistics (CBS), “Economic Survey”, 2002.

Durevall, Dick and Njunguna S. Ndung’u “A Dynamic Model of Inflation for Kenya,
1974-1996” Research Department, International Monetary Fund, WP/99/97, 1999.

Kiome R. M. and C.G. Ndiritu “Investing in International Agricultural Research
Lessons from Kenya”. Paper presented at the ICW (25 - 31 October 1998)1.

Economist Intelligence Unit, 1998, Country Profile. Kenya, The Unit: London, pp.19-20.

Glenday, Graham. "Trade Liberalization and Customs Revenues: Does trade
liberalization lead to lower customs revenues? The case of Kenya." HIID June 2000.

Glenday, Graham and David Ndii, “Export Platforms in Kenya” EAGER, African
Economic Policy, Discussion Paper Number 43, July 2000.

Government of Kenya, “Government Working Party on Public Expenditures”, 1982.

International Finance Corporation, Monograph 2000.

International Monetary Fund, “Staff Report for the 2001 Article IV Consultation”
Country Report No. 02/85, April 2002a.

International Monetary Fund, “Kenya: Selected Issues and Statistical Appendix” Country
Report No. 02/84, April 2002b.

Kaplan, Irving & et al. 1976. Area Handbook for Kenya, Second Ed., U.S. Government
Printing Office: Washington, D.C. pp. 136-142.

Ng’eno, Nehemiah, “The Status of Regional Trade Liberalization in East Africa”, African
Center for Economic Growth, June 2002.

Oxford Analytica Brief, “KENYA: Donors Relations” Feb 1, 2002: 5.



                                                                                     27
Oxford Analytica Brief, “KENYA: Vulnerable Banks” Nov 27, 1998 : 5.

National AIDS Control Council (NACC) “The Kenya National HIV/AIDS Strategic Plan
200-2005”, October 2000.

Steven Block and C. Peter Timmer. "Agriculture and Economic Growth: Conceptual
Issues and the Kenyan Experience." HIID, November 1994.

Swamy, Gurushi “Kenya: Structural Adjustment in the 1980s” Policy Research Working
Paper, World Bank, 1994.

Thoen, Ronaldt, Steven Jaffee, Catherine Dolan and Fatoumata Ba, “Equatorial Rose:
The Kenyan-European Cut Flower Supply Chain” Working paper 2000.

United Nations “Common Country Assessment for Kenya” 2001.

World Bank “Growth and Structural Change in Kenya: A Basic Economic Report,”
Report No. 3350-KE, Eastern Africa Regional Office 1982.

World Bank, various policy notes, 2001.

World Health Organization (WHO) “Kenya: Epidemiological Fact Sheets on HIV/AIDS
and sexually transmitted infections” 2000 Update (revised).

Uwechue, Ralph (ed.) 1996. Africa Today, Third Edition, Africa Books Limited.




                                                                                     28
FIGURE       1


                                  Economic growth by decade


     9.00
                                   8.01
     8.00
                                                        Constant GDP growth    Constant GDP per capita growth
     7.00

     6.00
                  5.04
     5.00
                                            4.08               4.07

     4.00

     3.00

                           1.69                                                           1.67
     2.00

     1.00                                                               0.52


     0.00
                                                                                                   -0.79
     -1.00
                 1970/63          1980/70                     1990/80                  2000/1990
                                                   Decade
FIGURE       2


                                              Growth by sector


     12.00                                                  Industrial growth     Service growth   Agricultural growth
                                      10.61


     10.00



      8.00                                    7.61


                        6.26

   % 6.00        5.23                                5.33
                                                                                4.90

                                                                       3.95
                                                                                       3.66
      4.00                                                                                                   3.26

                               2.44
                                                                                                      1.77
      2.00
                                                                                                                     0.68


      0.00
                   1970/63              1980/70                           1990/80                      2000/1990
                                                        Decade




                                                                                                                            30
           FIGURE              3


                                                                               Composition of Value Added

           70
                                     Industry, value added (% of GDP)


           60                        Agriculture, value added (% of GDP)


                                     Services, etc., value added (% of GDP)

           50



           40
% of GDP




           30



           20



           10



            0
                1958   1960   1962     1964    1966    1968     1970    1972   1974   1976   1978   1980   1982   1984   1986   1988   1990   1992   1994   1996   1998   2000        2002

                                                                                                    Year
                                                                                                                                                                                 31
FIGURE                 4


                                                                                        External Balance

            50



            40



            30



            20
 % of GDP




            10                                                                                                                                                    KSh devaluation

                                                                                                                                   Coffee Boom           Goldenberg                 Capital flight
                                                                                Coffee Boom

                                                                                                    Drought              Drought                                                                Drought
             0
               60


                       62


                               64


                                       66


                                               68


                                                       70


                                                               72


                                                                           74


                                                                                   76


                                                                                           78


                                                                                                       80


                                                                                                                 82


                                                                                                                         84


                                                                                                                                 86


                                                                                                                                            88


                                                                                                                                                    90


                                                                                                                                                             92


                                                                                                                                                                         94


                                                                                                                                                                                  96


                                                                                                                                                                                             98


                                                                                                                                                                                                        00


                                                                                                                                                                                                                02
            19


                    19


                            19


                                    19


                                            19


                                                    19


                                                            19


                                                                        19


                                                                                19


                                                                                        19


                                                                                                    19


                                                                                                              19


                                                                                                                      19


                                                                                                                              19


                                                                                                                                         19


                                                                                                                                                 19


                                                                                                                                                          19


                                                                                                                                                                      19


                                                                                                                                                                               19


                                                                                                                                                                                          19


                                                                                                                                                                                                     20


                                                                                                                                                                                                             20
            -10                                             Oil shock


                                                                                              Oil shock




            -20
                                                                                                              Year

             Exports of goods and services (% of GDP)                    Imports of goods and services (% of GDP)                          External balance on goods and services (% of GDP)




                                                                                                                                                                                                                     32
FIGURE                 5

                                                                          Size of Government

            70
                                                                                                                                  KSh devaluation

            60
                           Total revenues   Total expenditures        Budget surplus
            50


            40


            30
 % of GDP




            20


            10
                                                            Coffee boom

             0
                  1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
            -10
                                                                                                                           1992                                      2002
                                                                             1979        1982 coup   1986 student
                                                                                         attempt     unrest
                                                                                                                    1988
            -20
                                                                                                                                                    1997 elections


            -30
                                                                                       Year




                                                                                                                                                                            33
FIGURE             6


                                                                   Money, Domestic Credit and Inflation

     60                                                                                                                                                                                      1


     50
                                                                                                                                                        KSh devaluation


     40

                                                                                                                                       1990 Interest
     30                                                                                                                                rate
                                                                                                                                       liberalization


     20
 %




     10


      0
        60


                 62


                          64


                                  66


                                           68


                                                      70


                                                              72


                                                                      74


                                                                              76


                                                                                      78


                                                                                               80


                                                                                                       82


                                                                                                               84


                                                                                                                       86


                                                                                                                               88


                                                                                                                                         90


                                                                                                                                                   92


                                                                                                                                                            94


                                                                                                                                                                     96


                                                                                                                                                                             98


                                                                                                                                                                                     00
     19


              19


                       19


                               19


                                        19


                                                   19


                                                           19


                                                                   19


                                                                           19


                                                                                   19


                                                                                            19


                                                                                                    19


                                                                                                            19


                                                                                                                    19


                                                                                                                            19


                                                                                                                                      19


                                                                                                                                                19


                                                                                                                                                         19


                                                                                                                                                                  19


                                                                                                                                                                          19


                                                                                                                                                                                  20
     -10


     -20


     -30                                                                                                                                                                                     0
           Inflation, consumer prices (annual %)                              Domestic credit provided by banking sector (% of GDP)                 Money and quasi money (M2) as % of GDP
           Budget surplus                                                     | Election year




                                                                                                                                                                                                 34
        FIGURE              7

                                                                           State-owned enterprises

35                                                                                                                                                                              25000000000


30
                                                                                                                                                                                20000000000

25


                                                                                                                                                                                15000000000
20


15
                                                                                                                                                                                10000000000


10

                                                                                                                                                                                5000000000
 5


 0                                                                                                                                                                              0
   60

           62

                   64

                           66

                                   68

                                           70

                                                   72

                                                           74

                                                                   76

                                                                           78

                                                                                   80

                                                                                           82

                                                                                                   84

                                                                                                           86

                                                                                                                   88

                                                                                                                           90

                                                                                                                                   92

                                                                                                                                           94

                                                                                                                                                   96

                                                                                                                                                           98

                                                                                                                                                                   00

                                                                                                                                                                           02
19

        19

                19

                        19

                                19

                                        19

                                                19

                                                        19

                                                                19

                                                                        19

                                                                                19

                                                                                        19

                                                                                                19

                                                                                                        19

                                                                                                                19

                                                                                                                        19

                                                                                                                                19

                                                                                                                                        19

                                                                                                                                                19

                                                                                                                                                        19

                                                                                                                                                                20

                                                                                                                                                                        20
                                                                                        Year

                State-owned enterprises, credit (% of gross domestic credit)                     State-owned enterprises, employment (% of total)
                State-owned enterprises, investment (% of GDI)                                   State-owned enterprises, economic activity (current LCU)
                State-owned enterprises, investment (current LCU)

                                                                                                                                                                                    35
FIGURE             8


                                                                        Import and export duties

     35
                                  1967                                     1977                  1980-85 Share of imports w/o        1987-92 Automatic            1993-94 Import                     2001 Kenya co-
                                  Customs                                  Breaking of           quantitative restrictions doubled   licensing. Tariff            licensing and                      founds COMESA.
                                  Union with                               the Customs           and average tariff reduced by 8     reduction. Only 5 % of       foreign                            Licenses for export
                                  Uganda and                               Union                 percent                             imports subject to           exchange                           of agricultural
     30                           Tanzania                                                                                           quantitative restrictions.   controls                           products removed,
                                                                                                                                     Tariff categories halved     removed.                           Top import tariff
                                                                                                                                     to 12 and tariff spread      Customs                            reduced from 40 to
                                                                                                                                     reduced. Production          management                         35 percent.
                                                                                                                                     weighted tariffs fall from   reforms.                           Number of tariff
                                                                                                                                     62 to 46 %.                                                     bands cut from 9
     25                                                                                                                                                                                              to 8.




     20
 %




     15



     10



      5



      0
        60


                  62


                          64


                                  66


                                          68


                                                  70


                                                          72


                                                                  74


                                                                          76


                                                                                  78


                                                                                            80


                                                                                                      82


                                                                                                                  84


                                                                                                                              86


                                                                                                                                        88


                                                                                                                                                    90


                                                                                                                                                                 92


                                                                                                                                                                          94


                                                                                                                                                                                      96


                                                                                                                                                                                              98


                                                                                                                                                                                                      00


                                                                                                                                                                                                               02
     19


               19


                       19


                               19


                                       19


                                               19


                                                       19


                                                               19


                                                                       19


                                                                               19


                                                                                         19


                                                                                                   19


                                                                                                               19


                                                                                                                           19


                                                                                                                                     19


                                                                                                                                                 19


                                                                                                                                                              19


                                                                                                                                                                       19


                                                                                                                                                                                   19


                                                                                                                                                                                           19


                                                                                                                                                                                                   20


                                                                                                                                                                                                            20
     -5
                                                                                                   Year

             Export duties (% of exports)              Export duties (% of tax revenue)                      Import duties (% of imports)                              Import duties (% of tax revenue)




                                                                                                                                                                                                                           36
FIGURE              9


                                                     Terms of trade and external balance

         160                                                                                                                                               20

                             Terms of trade (goods and services, 1995 = 100)           External balance on goods and services (% of GDP)
         140                                                       Coffee Boom
                                                                                                                                                           16



         120                                                                                                                                               12
                                                                                                                                   Coffee Boom



                                                                           Oil shock                                Floating KSh
         100                                                                                                                                               8
                                                                           Drought




                                                                                                                                                                 % of GDP
                                                       Oil shock
                                                                                                Coffee Boom                                      Drought
 Index




         80                                                                                                                                                4

                                                                                            Drought


         60                                                                                                                                                0



         40                                                                                                                                                -4



         20                                                                                                                                                -8



          0                                                                                                                                                -12
               1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002




                                                                                                                                                                            37
FIGURE                  10


                                    The Real Interest Rate, Domestic Savings and Gross Capital Formation

            35
                                             Gross domestic savings (% of GDP)                          Gross capital formation (% of GDP)                   Real interest rate (%)

            30


            25


            20
 % of GDP




            15


            10


             5                                                                                                                              Liberalization
                                                                                                                                              of interest
                                                                                                                                                 rates
                                                                             Coffee boom

             0
               60


                       62


                               64


                                       66


                                               68


                                                       70


                                                               72


                                                                       74


                                                                                    76


                                                                                            78


                                                                                                     80


                                                                                                              82


                                                                                                                      84


                                                                                                                              86


                                                                                                                                      88


                                                                                                                                              90


                                                                                                                                                        92


                                                                                                                                                                   94


                                                                                                                                                                           96


                                                                                                                                                                                   98


                                                                                                                                                                                           00
            19


                    19


                            19


                                    19


                                            19


                                                    19


                                                            19


                                                                    19


                                                                                 19


                                                                                         19


                                                                                                  19


                                                                                                           19


                                                                                                                   19


                                                                                                                           19


                                                                                                                                   19


                                                                                                                                           19


                                                                                                                                                     19


                                                                                                                                                                19


                                                                                                                                                                        19


                                                                                                                                                                                19


                                                                                                                                                                                        20
             -5

                                                                     Oil shock              Oil shock

            -10
                                                                                                           Year




                                                                                                                                                                                                38
FIGURE         11


                                                               International Aid

 25                                                                                                                                                         1




                                                                                                            1993 ESAF

 20

                                                                                                     1991 Aid
                                                                                                     suspended


                                                                                      1989 ESAF

 15                                                                                                                     1995 Aid
                                                                                                                        suspended




                                                                                                   1990
                                                                                                   WB                       1996 ESAF
                                                                                                   Agr. &
 10                                                                                                Expor
                                                                                                                                    1997 Aid
                                                                                                   tSect
                                                   1979 IMF                               1989                                      suspended
                                                                                                   or
                                                   Standby                                WB
                                                                                                   Loans
                                                   Agreement                              Fin.
                                                                                          Sector                                            2000 PRGF
                                                                 1982               1988 Loan
                                                                 WB           1986 WB
                                                                 SAC          WB Ind.
  5                                                                           Agr. Sector                                                       2001 Aid
                                                                              Secto Loan                                                        suspended
                                                  1979                                                                    1996
                                                                              r
                                                  WB                                                                      WB
                                                                              Loan                                                       2000 WB
                                                  SAC                                                                     SAC
                                                                                                                                         Economic Support
                                                                                                                                         Recovery Credit



  0                                                                                                                                                         0
      1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

                                               Aid (% of GNI)           IMF agreements




                                                                                                                                                                39
FIGURE           12


                                                                    Interest rate spread

     35

                      Interest rate spread (lending rate minus LIBOR)              Interest rate spread (lending rate minus deposit rate)
     30


     25


     20


     15                                                      Government imposes controls
                                                             on bank lending, licenses on
 %




                                                             foreign exchange transactions,
                                                             and price and interest rate
                                                             controls.
     10


      5
                                                                                                                        Liberalizatio
                                                                                                                        n of interest
                                                                                                                           rates

      0
       60


             62


                      64


                            66


                                   68


                                          70


                                                 72


                                                        74


                                                               76


                                                                           78


                                                                                      80


                                                                                               82


                                                                                                      84


                                                                                                            86


                                                                                                                  88


                                                                                                                          90


                                                                                                                                        92


                                                                                                                                              94


                                                                                                                                                    96


                                                                                                                                                          98


                                                                                                                                                                00


                                                                                                                                                                      02
     19


            19


                  19


                           19


                                 19


                                        19


                                               19


                                                      19


                                                             19


                                                                        19


                                                                                   19


                                                                                              19


                                                                                                     19


                                                                                                           19


                                                                                                                 19


                                                                                                                        19


                                                                                                                                   19


                                                                                                                                             19


                                                                                                                                                   19


                                                                                                                                                         19


                                                                                                                                                               20


                                                                                                                                                                     20
      -5


     -10
                                                                                              Year




                                                                                                                                                                           40
FIGURE          13


                                             External debt, interest payments and the exchange rate

     160                                                                                                                                        Crawling
                                                                                                                                                                                      90
                                                                                                                                                peg to
                                                                                                                                                floating ER
                                                                                                                                                regime
     140                                                                                                                                                                              80


                                                                                                                                                                                      70
     120

                                                                                                                                                                                      60
     100




                                                                                                                                                                                           LCU per $
                                                                                                                                                                                      50
 %




     80
                                                                                                                                                                                      40

     60
                                                                                                                                                                                      30

     40
                                                                                             Fixed to                                                                                 20
                                                                                             crawling
                                                                                             peg ER
                                                                                             regime
     20                                                                                                                                                                               10


      0                                                                                                                                                                               0
        60

                62

                        64

                                66

                                        68

                                                70

                                                        72

                                                                74

                                                                        76

                                                                                78

                                                                                        80

                                                                                                82

                                                                                                           84

                                                                                                                   86

                                                                                                                           88

                                                                                                                                   90

                                                                                                                                           92

                                                                                                                                                   94

                                                                                                                                                                 96

                                                                                                                                                                         98

                                                                                                                                                                                 00
     19

             19

                     19

                             19

                                     19

                                             19

                                                     19

                                                             19

                                                                     19

                                                                             19

                                                                                     19

                                                                                             19

                                                                                                        19

                                                                                                                19

                                                                                                                        19

                                                                                                                                19

                                                                                                                                        19

                                                                                                                                                19

                                                                                                                                                              19

                                                                                                                                                                      19

                                                                                                                                                                              20
                                                                                             Year

       External debt, total (DOD, % of GDP)                    Interest payments (% of total expenditure)                       Official exchange rate (LCU per US$, period average)




                                                                                                                                                                                                       41
FIGURE                    14


                                                                                Cereal

                                                                                                                                                          160

               5500000
                                                                                                                                                          140


                                                                                                                                                          120
               4500000


                                                                                                                                                          100




                                                                                                                                                                $ per 100 Kg
 Metric tons




               3500000
                                                                                                                                                          80


                                                                                Drough                                                      Drough
               2500000                                                                                                                                    60


                                                                                                Drough
                                                                                                                                                          40

               1500000
                                                                                                                                                          20


               500000                                                                                                                                     0
                         1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
                                                                                         Year

               Cereal production (metric tons)   Cereal prices ($ per 100 Kg)       Poly. (Cereal prices ($ per 100 Kg))   Poly. (Cereal production (metric tons) )




                                                                                                                                                                               42
FIGURE 15

                                                                                      Coffee

             150                                                    Coffee
                                                                                                                                                          500
                                                                    Boom


                                                                                                                                                          450

             130
                                                                                                                                                          400

                                                                                                 Coffee Boom
                                                                                                                                                          350
             110
                                                                                                                                  Coffee Boom




                                                                                                                                                                USD per 100 Kg
                                                                                                                                                          300
 '000 tons




             90                                                                                                                                           250


                                                                             Drough                                                                       200

             70
                                                                                                                                                Drought   150
                                                                                                                                                El Nino
                                                                                                                                                floods

                                                                                                                                                          100
             50

                                                                                                                                                          50


             30                                                                                                                                           0
                   1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
                                                                                       Year

                                    Coffee production ('000 tons)      Coffee prices ($ per 100 Kg)       Poly. (Coffee production ('000 tons))




                                                                                                                                                                                 43
FIGURE 16

                                                                           Tea

             350                                                                                                                    700
                                                                                                                     2000 Sale of
                                                                                                                     Kenyan Tea
                                                                                                                     Development
                                                                                                                     Authority

             300                                                                                                                    600



             250                                                                                                                    500




                                                                                                                                          USD per 100 Kg
             200                                                                                                                    400
 '000 tons




             150                                                                                                                    300



             100                                                                                                                    200



             50                                                                                                                     100



              0                                                                                                                     0
                   1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
                                                                          Year

                                                   Tea production ('000 tons)    Tea prices ($ per 100 Kg)




                                                                                                                                                           44
FIGURE            17


                                                  Exports of cut flowers (tons)

        40000



        35000



        30000
                                                                                                               Draugh
                                                                                                               t/
                                                                                                               El Nino


        25000
 Tons




        20000



        15000



        10000



        5000



           0
                1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
                                                                    Year




                                                                                                                            45
         FIGURE             18


                                                                     Foreign Direct Investment

     8


     7


     6


     5
%




     4


     3


     2


     1


     0
       60


               62


                       64


                                66


                                        68


                                                70


                                                        72


                                                                74


                                                                        76


                                                                                78


                                                                                        80


                                                                                                82


                                                                                                        84


                                                                                                                86


                                                                                                                        88


                                                                                                                                90


                                                                                                                                        92


                                                                                                                                                94


                                                                                                                                                        96


                                                                                                                                                                98


                                                                                                                                                                        00


                                                                                                                                                                                 02
    19


            19


                    19


                             19


                                     19


                                             19


                                                     19


                                                             19


                                                                     19


                                                                             19


                                                                                     19


                                                                                             19


                                                                                                     19


                                                                                                             19


                                                                                                                     19


                                                                                                                             19


                                                                                                                                     19


                                                                                                                                             19


                                                                                                                                                     19


                                                                                                                                                             19


                                                                                                                                                                     20


                                                                                                                                                                              20
                                                                                             Year

                            Foreign direct investment, net inflows (% of GDP)                Foreign direct investment, net inflows (% of gross capital formation)
                                                                                                                                                                             46
                        FIGURE           19


                                                                                        International Tourism

                      700



                      600



                      500
Current US$ Million




                      400



                      300



                      200



                      100



                       0
                         60


                                 62


                                         64


                                                 66


                                                         68


                                                                 70


                                                                         72


                                                                                 74


                                                                                         76


                                                                                                 78


                                                                                                         80


                                                                                                                 82


                                                                                                                         84


                                                                                                                                 86


                                                                                                                                         88


                                                                                                                                                 90


                                                                                                                                                         92


                                                                                                                                                                 94


                                                                                                                                                                         96


                                                                                                                                                                                 98


                                                                                                                                                                                         00


                                                                                                                                                                                                  02
                      19


                              19


                                      19


                                              19


                                                      19


                                                              19


                                                                      19


                                                                              19


                                                                                      19


                                                                                              19


                                                                                                      19


                                                                                                              19


                                                                                                                      19


                                                                                                                              19


                                                                                                                                      19


                                                                                                                                              19


                                                                                                                                                      19


                                                                                                                                                              19


                                                                                                                                                                      19


                                                                                                                                                                              19


                                                                                                                                                                                      20


                                                                                                                                                                                               20
                                                                                                              Year

                                                         International tourism, expenditures (current US$)               International tourism, receipts (current US$)
                                                                                                                                                                                              47
                   FIGURE           20


                                                                    Electric power consumption and production


                 180                                                                                                                                                                                 100

                                                                                                                                                                                                     90
                 160
                                                                                                                                                                                                     80

                 140                                                                                                                                                                                 70
KWH per capita




                                                                                                                                                                                                     60
                 120




                                                                                                                                                                                                           %
                                                                                                                                                                                                     50
                 100
                                                                                                                                                                                                     40


                  80                                                                                                                                                                                 30

                                                                                                                                                                                                     20
                  60
                                                                                                                                                                                                     10

                  40                                                                                                                                                                                 0
                   60

                         62

                               64

                                     66

                                                 68

                                                          70

                                                                   72

                                                                            74

                                                                                     76

                                                                                                78

                                                                                                      80

                                                                                                            82

                                                                                                                   84

                                                                                                                         86

                                                                                                                                   88

                                                                                                                                            90

                                                                                                                                                    92

                                                                                                                                                             94

                                                                                                                                                                      96

                                                                                                                                                                               98

                                                                                                                                                                                        00

                                                                                                                                                                                               02
                 19

                        19

                              19

                                    19

                                               19

                                                        19

                                                                 19

                                                                          19

                                                                                   19

                                                                                            19

                                                                                                     19

                                                                                                           19

                                                                                                                  19

                                                                                                                        19

                                                                                                                                19

                                                                                                                                         19

                                                                                                                                                  19

                                                                                                                                                           19

                                                                                                                                                                    19

                                                                                                                                                                             19

                                                                                                                                                                                      20

                                                                                                                                                                                              20
                                                                                                           Year

                                         Electric power consumption (kwh per capita)                                         Electric power production (kwh per capita)
                                         Draught                                                                             Electricity production from hydroelectric sources (% of total)
                                         Electricity production from oil sources (% of total)
                                                                                                                                                                                                    48
                FIGURE    21


                                                      Composition of revenues

           30




           25




           20
% of GDP




           15




           10




           5




           0
                1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
                                                                           Year

                                                  Tax revenue (% of GDP)     Nontax revenue (% of GDP)
                                                                                                                     49
  FIGURE         22


                                                     Budget deficit financing

         8


         6


         4


         2


% of GDP 0


        -2


        -4


        -6


        -8
             1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
                                                                Year

       Overall budget surplus, including grants (% of GDP)   Financing from abroad (% of GDP)   Domestic financing, total (% of GDP)
                                                                                                                                       50
  FIGURE           23


                              Composition of public expenditures (wage and non-wage)

           35



           30



           25



           20

% of GDP

           15



           10



           5



           0
                1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
                                                                   Year

                              Wages and Salaries (% of GDP)   Expenditure net of wages and salaries (%of GDP)
                                                                                                                     51
FIGURE                  24

                                                                  Social Expenditures


            12




            10




             8
 % of GDP




             6




             4




             2




             0
                 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
                                                                             Year

                       Education Expenditures   Health Expenditures   Housing, community & Social welfare expenditures   Total social expenditures




                                                                                                                                                     52
                             FIGURE 25

                                                                                   Population growth and fertility
                             9                                                                                                                                                     80



                             8
                                                                                                                                                                                   70



                             7
                                                                                                                                                                                   60


                             6
Annual % and no. of births




                                                                                                                                                                                   50




                                                                                                                                                                                        % of females>15
                             5

                                                                                                                                                                                   40

                             4

                                                                                                                                                                                   30
                             3


                                                                                                                                                                                   20
                             2



                                                                                                                                                                                   10
                             1
                                        Population growth (annual %)   Fertility rate, total (births per woman)   Illiteracy rate, adult female (% of females ages 15 and above)

                             0                                                                                                                                                     0
                                 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
                                                                                                                                                                                   53
FIGURE            26


                                                                                             Mortality

   700
                                     Mortality rate, adult, female (per 10,000 female adults)
                                     Mortality rate, adult, male (per 10,000 male adults)
                                     Mortality rate, infant (per 1,000 live births)
   600                               Mortality rate, under-5 (per 1,000 live births)




   500




   400
                                                                                                                                                                     Decentralized
                                                                                                                                                                       mortality
                                                                                                                                                                       reporting
                                                                                                                                                                      put in place
   300

                                                                                                                                 Beginning of
                                                                                                                                 AIDS related
                                                                                                                                    deaths
   200




   100




    0
         1958   1960   1962   1964     1966     1968     1970    1972     1974        1976   1978   1980   1982   1984   1986   1988    1990    1992   1994   1996       1998        2000   2002

                                                                                                    Year




                                                                                                                                                                                                   54
FIGURE                     27


                                                                               Life expectancy and AIDS

        65                                                                                                                                                                           20000
                                  Life expectancy at birth, female (years)

                                  Life expectancy at birth, male (years)                                                                                                             18000

        60                        Life expectancy at birth, total (years)
                                                                                                                                                                                     16000
                                  Reported AIDS cases (WHO Epidemiological factsheet
                                  2000)
                                                                                                                                                                                     14000
        55

                                                                                                                                                                                     12000
Years




        50                                                                                                                                                                           10000


                                                                                                                                                                                     8000

        45
                                                                                                                                                                                     6000


                                                                                                                                                                                     4000
        40

                                                                                                                                                                                     2000


        35                                                                                                                                                                           0
             1958   1960   1962   1964    1966    1968    1970    1972      1974   1976   1978   1980   1982   1984   1986   1988   1990   1992   1994   1996   1998   2000   2002

                                                                                                 Year                                                                                        55
                    FIGURE       28

                                                                  Population Age Composition


             100%


             90%


             80%


             70%


             60%
% of total




             50%


             40%


             30%


             20%


             10%


              0%
                60


                      62


                            64


                                  66


                                        68


                                              70


                                                      72


                                                             74


                                                                      76


                                                                            78


                                                                                   80


                                                                                          82


                                                                                                  84


                                                                                                        86


                                                                                                               88


                                                                                                                      90


                                                                                                                             92


                                                                                                                                    94


                                                                                                                                           96


                                                                                                                                                    98


                                                                                                                                                          00


                                                                                                                                                                02
                                                                                                                                                                     56
               19


                     19


                           19


                                 19


                                       19


                                             19


                                                    19


                                                           19


                                                                  19


                                                                           19


                                                                                 19


                                                                                         19


                                                                                                19


                                                                                                       19


                                                                                                              19


                                                                                                                     19


                                                                                                                           19


                                                                                                                                  19


                                                                                                                                         19


                                                                                                                                                   19


                                                                                                                                                         20


                                                                                                                                                               20
                                       Population 0-14 (% of total)    Population 15-64 (% of total)   Population ages 65 and above (% of total)
             FIGURE        29


                                                        Population Urban/Rural Distribution

             100%


             90%


             80%


             70%


             60%
% of total




             50%


             40%


             30%


             20%


             10%


              0%
                60


                      62


                            64


                                  66


                                        68


                                              70


                                                    72


                                                           74


                                                                 76


                                                                        78


                                                                               80


                                                                                      82


                                                                                             84


                                                                                                     86


                                                                                                            88


                                                                                                                   90


                                                                                                                            92


                                                                                                                                  94


                                                                                                                                        96


                                                                                                                                              98


                                                                                                                                                    00


                                                                                                                                                              02
               19


                     19


                           19


                                 19


                                       19


                                             19


                                                   19


                                                          19


                                                                19


                                                                      19


                                                                             19


                                                                                    19


                                                                                            19


                                                                                                   19


                                                                                                          19


                                                                                                                 19


                                                                                                                           19


                                                                                                                                 19


                                                                                                                                       19


                                                                                                                                             19


                                                                                                                                                   20


                                                                                                                                                          20
                                                           Urban population (%of total)    Rural population (% of total)
                                                                                                                                                         57
FIGURE      30


                                                                Water access

                                                                                      89
                                                                                                                                    87
   90


   80


   70
                                        61

   60
                                                                                                               49
   50
                                                                 40

   40
                                                                                                                           31
                    27
   30                                                                        25
                                21

   20


   10


   0
                         1985                                         1990                                          2000

         Improved water source (% of population with access)                  Improved water source, rural (% of rural population with access)
         Improved water source, urban (% of urban population with access)




                                                                                                                                                 58
FIGURE   31


                                  Nutritional stunting


   40
                                        37

                                                                    34
   35                                                                           33
                                                        32


   30
                            27

                24
   25



   20



   15



   10



   5



   0
         1977        1979        1982            1987        1994        1998




                                                                                     59
FIGURE          32

                                                                     Immunizations

    90

    85
                            Immunization, DPT (% of children under 12 months)
                            Immunization, measles (% of children under 12 months)
    80

    75

    70

    65

    60
%




    55

    50

    45

    40

    35

    30

    25
         1984        1986           1988              1990              1992           1994   1996   1998   2000   2002

                                                                                Year
                                                                                                                          60
            FIGURE          33

                                                             Adult illiteracy by gender

    80

                                                                        Illiteracy rate, adult female (% of females ages 15 and
                                                                        above)
                                                                        Illiteracy rate, adult male (% of males ages 15 and above)
    70
                                                                        Illiteracy rate, adult total (% of people ages 15 and
                                                                        above)


    60




    50
%




    40




    30




    20




    10




     0                                                                                                                                                    61
     1968    1970    1972        1974   1976   1978   1980    1982   1984          1986   1988      1990       1992       1994       1996   1998   2000   2002
                                                                            Year
      FIGURE            34


                                                           Primary School Enrollment

    140



    120



    100



     80
%




     60



     40
                                                                                                      School enrollment, primary (% gross)

                                                                                                      School enrollment, primary, female (% gross)
     20
                                                                                                      School enrollment, primary, male (% gross)


      0
          1960   1962   1964   1966   1968   1970   1972   1974   1976   1978   1980   1982   1984   1986   1988   1990   1992   1994   1996   1998     2000
                                                                                Year

                                                                                                                                                   62
         FIGURE            35

                                                                        Secondary School Enrollment


    35


                            School enrollment, secondary (% gross)
    30
                            School enrollment, secondary, female (% gross)
                            School enrollment, secondary, male (% gross)
    25



    20
%




    15



    10



     5



     0
     60


              62


                      64


                                66


                                       68


                                               70


                                                        72


                                                                74


                                                                        76


                                                                                 78


                                                                                          80


                                                                                                82


                                                                                                       84


                                                                                                             86


                                                                                                                   88


                                                                                                                         90


                                                                                                                               92


                                                                                                                                     94


                                                                                                                                           96


                                                                                                                                                 98


                                                                                                                                                       00


                                                                                                                                                                 02
    19


           19


                    19


                            19


                                     19


                                             19


                                                      19


                                                              19


                                                                      19


                                                                               19


                                                                                         19


                                                                                               19


                                                                                                      19


                                                                                                            19


                                                                                                                  19


                                                                                                                        19


                                                                                                                              19


                                                                                                                                    19


                                                                                                                                          19


                                                                                                                                                19


                                                                                                                                                      20


                                                                                                                                                             20
                                                                                               Year


         Source: World Bank 1960-1996; Ministry of Education 1997-1999.; CBS 2001-2002
                                                                                                                                                            63
     FIGURE    36

                                           Rural poverty incidence


55


50                                                                           52.93
                     47.89
                                    47.9

45                                                            46.75



40


 35


 30


 25


     20

              1982
                             1992                                                    Rural poverty
                                     Year              1994
                                                                      1997



                                                                                               64
FIGURE        37

                                        Urban poverty incidence



         60


                                                                                      49.2
         50
                                                                               50.2


         40
                                 29.3
                                                        28.95

         30               26.5
                                                 25.9

          20



          10

                                                                                                   Urban poverty
              0

                   1992                                                                      Nairobi
                                          1994
                                   Year                                 1997


                                             Nairobi    Urban poverty

                                                                                                                   65
FIGURE            38


                                                                           The exchange rate

 90


 80


 70


                                                                                                                                      KSh devaluation
 60


 50


 40


 30


 20


 10


  0
    60


            62


                    64


                            66


                                    68


                                            70


                                                    72


                                                            74


                                                                    76


                                                                            78


                                                                                    80


                                                                                            82


                                                                                                    84


                                                                                                            86


                                                                                                                     88


                                                                                                                             90


                                                                                                                                     92


                                                                                                                                             94


                                                                                                                                                           96


                                                                                                                                                                   98


                                                                                                                                                                           00
 19


         19


                 19


                         19


                                 19


                                         19


                                                 19


                                                         19


                                                                 19


                                                                         19


                                                                                 19


                                                                                         19


                                                                                                 19


                                                                                                         19


                                                                                                                  19


                                                                                                                          19


                                                                                                                                  19


                                                                                                                                          19


                                                                                                                                                        19


                                                                                                                                                                19


                                                                                                                                                                        20
                                         Official exchange rate (LCU per US$, period average)                    Inflation, consumer prices (annual %)




                                                                                                                                                                                66
FIGURE                  39


                                                                                      Manufactures

            14



            12



            10


                                                                                                                                                 KSh devaluation
             8
 % of GDP




             6



             4



             2



             0
               60


                       62


                               64


                                       66


                                               68


                                                       70


                                                               72


                                                                       74


                                                                               76


                                                                                       78


                                                                                               80


                                                                                                       82


                                                                                                                84


                                                                                                                        86


                                                                                                                                88


                                                                                                                                        90


                                                                                                                                                92


                                                                                                                                                        94


                                                                                                                                                                  96


                                                                                                                                                                          98


                                                                                                                                                                                  00


                                                                                                                                                                                          02
            19


                    19


                            19


                                    19


                                            19


                                                    19


                                                            19


                                                                    19


                                                                            19


                                                                                    19


                                                                                            19


                                                                                                    19


                                                                                                             19


                                                                                                                     19


                                                                                                                             19


                                                                                                                                     19


                                                                                                                                             19


                                                                                                                                                     19


                                                                                                                                                               19


                                                                                                                                                                       19


                                                                                                                                                                               20


                                                                                                                                                                                       20
                                                                                                    Year

                                                            Manufactures exports (% of GDP)                 Manufacturing, value added (% of GDP)




                                                                                                                                                                                               67
FIGURE                40


                                          Proceeds from privatization (US$)

               160


                                                                   Sale of Kenya
               140



               120



               100
 US$ Million




                80



                60



                40



                20



                 0
                     1990   1991   1992   1993     1994     1995       1996        1997   1998   1999   2000
                                                            Year




                                                                                                               68

								
To top