Kenya-dec 07

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					Department of Economics and Statistics/Tata Services Limited

                          KENYA - A COUNTRY STUDY

Kenya in Problem – Political Uncertainty Following Dec ’07 Elections

Kenya went to elections on December 27, 2007 and the ruling party, President Mwai
Kibaki’s party is stated to have won the elections. However, the opposition has refused
to recognize President Mwai Kibaki's election victory.

Hence, Kenya is currently facing a period of political and policy uncertainty as
opposition and government trade are accusing each other of vote-rigging and ethnic
cleansing. It is estimated that economic growth will drop to 5.6% in 2008, from an
estimated 6.3% in 2007, as capacity constraints are exposed, especially in
According to local human-rights groups more than 300 people have died in violence
following the elections, in which the incumbent, Mwai Kibaki, apparently staged a late
rally to beat his main rival, Raila Odinga, while between 75,000 and 100,000 people
have been displaced, with many fleeing across the border into Uganda.
The ethnic dimension to the violence is particularly worrying in a country that has
previously been seen as a bastion of stability in East Africa. A government spokesman
has claimed that Mr Odinga's supporters are "engaging in [calculated] ethnic cleansing",
while Mr Odinga has stated that the Kibaki administration is "guilty, directly, of
As per the EIU, ―In truth, Kenyan politics has always had a heavily ethnic dimension: the
formation of a multi-tribal alliance has long been considered the key to winning
elections, and in the 2007 poll both Mr Kibaki's Party of National Unity (PNU) and Raila
Odinga's Orange Democratic Movement (ODM) involved reasonably broad-based
Crucially, however, the ODM did not have much Kikuyu support, and some supporters
even used this as a selling-point, as some tribes feel that the Kikuyu have had too much
power, and have abused it, in the past.
The worry is that the violence unleashed by the flawed election process will prove
difficult to contain--even if international demands for an "election audit" are met--as the
bloodshed is in part a reaction to decades of Kikuyu dominance, and Luo
Adverse impact on Kenyan industry, particularly Tourism
The stakes are extremely high: Kenya's crucial tourism industry has already been
damaged, with the US warning tourists against all but essential travel to Kenya, and
Britain warning against travel in some areas.
Department of Economics and Statistics/Tata Services Limited
The Nairobi Stock Exchange's main 20-share index has dropped while the Kenyan
shilling was trading at a six-week low against the dollar; the country's weekly coffee
auction, scheduled to resume on January 8th after an annual break, has been deferred
by a week because of the unrest; and while large businesses have not been targeted
thus far, investor sentiment has also been dented.
The violence has affected operations at Kenyan ports, through which petrol supplies to
a range of central African states are routed. Uganda has already reported serious
shortages, with the price of a litre of gasoline rising from USh2,460 (US$1.45) to
USh4,000-5,000 in just 24 hours, while states ranging from Rwanda and Burundi to
eastern DRC and southern Sudan are also likely to be affected.

As it is……
Kenya ranks among the top ten most unequal countries in the world and the fifth in
Africa. Moreover, progress on poverty alleviation has been hampered by delays in
initiating major poverty reduction programs in the social and economic sectors. Also,
AIDS remains a major challenge. Covering an area of 5.8 lakh sq. km, it has a
population of about 33 mn growing at about 2.8% a year.

In addition the economy remains particularly vulnerable to external factors (FDI,
tourism, exports, etc). Kenya has been subject to two major terrorist attacks in recent
years, which has had a severe impact on the tourism industry.

Without a renewed flow of foreign investment and competitive gains in the external
markets, Kenya can only count on foreign aid and a better allocation of internal
resources to revive its economy.

Kenya is still perceived as one of the most corrupt country in the world, it ranks 129 out
of 146 countries in Transparency International ranking.

                                   Key Economic Indicators
                                            2002       2003             2004    2005    2006
GDP at market prices (KSh bn)                 1,035.4          1,138.1 1,286.5 1,445.5 1,642.4
GDP (US$ bn)                                    13.1            15.0    16.2    19.1    22.8
Real GDP growth (%)                              0.5             2.9     5.1     5.7     6.1
Consumer price inflation (av; %)                 2.0             9.8    11.7    10.3    14.5
Population (m)                                  32.9            33.8    34.7    35.6    36.6
Exports of goods fob (US$ mn)                 2,162.0          2,412.2 2,720.7 3,239.8 3,438.2
Imports of goods fob (US$ mn)                 3,159.0          3,554.8 4,350.7 5,408.1 6,795.9
Current-account balance (US$ mn)              -117.7            146.3 -353.0 -495.1 -874.2
Department of Economics and Statistics/Tata Services Limited
Forex reserves excl gold (US$ mn)             1,068.0          1,481.9 1,519.3 1,798.8 2,415.8
Total external debt (US$ bn)                     6.1             6.9     6.9     6.2     6.9
Debt-service ratio, paid (%)                    16.3            15.8     7.9     4.5     6.1
Exchange rate (av) KSh:US$                     78.75            75.94   79.17   75.55   72.10
Source: EIU

… However, If all goes well

Manufacturing should receive a boost from Kenya's "Vision 2030", its long-term policy
framework due to be adopted early in 2008.
The new strategy aims to double the real GDP growth rate by 2012 and propel Kenya to
the ranks of middle-income countries by 2030, by focusing on six key sectors: tourism,
agriculture, manufacturing, trade, information technology and financial services.
However, substantial progress will have to be made on constraints such as high costs
and poor infrastructure before the sector can make a greater contribution to economic

Economic Forecast
Key indicators                                     2007    2008    2009    2010    2011     2012
Real GDP growth (%)                                6.3     5.6     5.4     5.1     4.8      4.5
Consumer price inflation (av; %)                   9.4     7.6     6.5     6.0     5.5      5.0
Budget balance (% of GDP)                          -3.7    -4.5    -3.4    -3.0    -2.3     -1.7
Current-account balance (% of GDP)                 -3.6    -3.2    -2.5    -1.7    -1.1     -1.0
Exchange rate KSh:US$ (av)                         67.79   71.54   74.50   77.00   80.50    82.50
Exchange rate KSh:€ (av)                           90.67   92.64   93.31   95.48   100.25   103.21
Source : EIU


Kenya is the regional hub for trade and finance in East Africa. However, the
country has been hampered by corruption and reliance upon primary goods whose
prices have remained low.

In 1997, the IMF suspended Kenya's Enhanced Structural Adjustment Program due to
the government's failure to maintain reforms and curb corruption. A severe drought in
1999-2000 compounded its problems. As a result, GDP contracted by 0.2% in 2000.

The IMF, which had resumed loans in 2000 to help Kenya through the drought, again
halted lending in 2001 when the government failed to institute several anti-corruption
Department of Economics and Statistics/Tata Services Limited

Despite the return of strong rains in 2001, weak commodity prices, endemic corruption,
and low investment limited Kenya's economic growth to 1.2% and 1.1% in 2001 and
2002 respectively.

In the Dec'02 elections, Daniel Arap MOI's 24-year-old reign ended, and a new
opposition government took on the daunting economic problems facing the nation.


The Kenyan economy has recovered from what has been one of its longest recessions.
GDP grew by 5.7% in 2005 and further to 6.1% in 2006 the highest for three decades-
according to the latest annual Economic Survey and this growth is expected to be
maintained in the medium-term.

Real GDP growth is estimated to be 6.3% in 2007, a fourth consecutive year of good
growth owing to broad-based expansion.

Economic growth in 2007-08 will continue to benefit from a broad-based expansion. Key
sectors such as tourism and telecommunications will continue to perform strongly, while
agriculture, especially the vital tea sector, is likely to grow faster than in 2006 unless
drought conditions return.
However, real GDP growth is forecast to slow to an average of just 5% in 2009-12,
owing partly to infrastructure capacity constraints.

The agriculture sector continues to play a dominant role, accounting for 26% of GDP in
2005. It grew by 5.5% in 2006 as against 6.8% in 2005. Lower production was due to
early-year drought. Growth was driven by improved performance in cereals, horticulture
and dairy products and adequate rainfall.

Industry (16% of GDP) also grew by 5.5% in 2006, led by manufacturing (10% of GDP),
which posted growth of 6.9%, the best for several years. Higher farm output also
boosted agro-industry, while domestic and export demand were both robust.

Tourism is a major component of the service sector, which accounts for about 50% of
GDP and continues to show rapid growth.

Structural reforms are being implemented since 2003 aimed at improving efficiency and
productivity in the coffee, pyrethrum and sugar and co-operative sub-sectors.

The overall fiscal situation is favourable as the government has succeeded in improving
revenue collections and in keeping the fiscal balance at a manageable level. The
government hopes to contain the budget deficit at 3.5% of GDP in the medium term.
Department of Economics and Statistics/Tata Services Limited
The government has sustained its emphasis on development of the private sector and
has taken important measures to enhance the investment environment for private-
sector activities.

Micro-financing is being considered as a possible way of meeting the financing
problems of the country's sizeable SME sector.

After a hiatus of 16 months the IMF has resumed lending under Kenya's poverty
reduction and growth facility (PRGF) and extended the programme until November.
Donors, however, will remain very concerned about corruption and weak governance.

Implementation of the Economic Recovery Strategy for Wealth and Employment
Creation (ERS) will be completed by end-2007.

In the meantime, the government intends to finalize Kenya Vision 2030, which will be
the basis for further policy development. This includes an ambitious goal to maintain
sustained 10% annual economic growth for the next 25 years.


Economic policy during the forecast period will continue to be guided by an IMF-style
framework, but not by a formal IMF programme, after Kenya completed a poverty
reduction and growth facility (PRGF) in November 2007.

In the final review, the IMF commended Kenya's macroeconomic performance and
structural reform initiatives, but granted several waivers for loan conditions not complied
with, including quantitative targets and structural targets.

Correcting these failings will be among the main policy challenges confronting the new
government after the election. Poor governance (especially corruption) will also remain
a serious challenge.

The IMF will continue to call for the investigation and prosecution of high-level graft.
Kenya may seek a policy support instrument (PSI) to follow the PRGF, as this would
maintain the IMF's seal of approval needed to access debt relief and other donor funds
without granting access to IMF funding (which is relatively small-scale and less urgently


The main economic challenge is to accelerate broad-based growth to help reduce
poverty and improve the delivery of public services, while securing fiscal discipline and
restoring price stability.

On the political front, the two main challenges will be political in-fighting within NARC
and the need to take decisive action against persistent high-level corruption.
Department of Economics and Statistics/Tata Services Limited

Inflation was very high in 2006 at 14.5% basically driven by food and energy prices.

There have been delays in implementing reforms in public expenditure and the financial
sector. Lack of necessary infrastructure and the current regulatory and legal framework
are still imposing a significant burden on private business activity and thereby hindering
faster growth.

Poverty alleviation has been hampered by delays in initiating social programmes and
weak donor support.

Kenya has the largest economy in East Africa. However, owing to impressive recent
economic growth in Uganda and the adoption of market-oriented economic reforms in
Tanzania, Kenya now has serious competition in the sub-region.

Kenya has also lost out on several years of limited access to external funding because
of governance concerns, whereas Tanzania and Uganda have both benefited from good
relations with the donor community.

However, the economies of the three members of the East African Community (EAC)
are becoming more interdependent following the implementation of a customs union in
January 2005.


Real GDP growth is forecast to be about 6% in 2007, a fourth consecutive year of solid
performance, owing to broad-based expansion.
Key sectors such as tourism and telecommunications are expected to continue to
perform strongly.
The main rains (March to June) were satisfactory and the main export crop – tea is
growing well. Thanks to good monsoons, other crops like maize and other food and
cash crops are expected to do well.
Reform initiatives, such as deregulation and privatization may not take off with great
momentum with elections due in December 2007.
The main risks to growth in 2007 are late-season drought and political instability in the
run-up to the elections (which would damage confidence).

Economic forecast
Key indicators                                      2006 2007 2008 2009 2010 2011
Real GDP growth (%)                                 6.1  6.3  5.6  5.4  5.1  4.8
Consumer price inflation (av; %)                    14.5 9.0  7.0  6.5  6.0  5.0
Department of Economics and Statistics/Tata Services Limited
Budget balance (% of GDP)                           -2.1 -3.9 -5.0 -4.0 -3.7 -3.1
Current-account balance (% of GDP)                  -3.8 -4.2 -3.4 -3.3 -2.7 -2.3
Exchange rate KSh:US$ (av)                          72.10 68.98 72.87 74.50 77.00 80.50

Manufacturing Sector

Kenya is the most industrialized country in East Africa, even though manufacturing
accounted for just 14% of GDP in 2005.

The biggest single boost to manufacturing in recent years has been Kenya's inclusion in
the list of beneficiaries of the African Growth and Opportunity Act (AGOA), a US
government initiative launched in 2000.

The sector grew rapidly after independence, based on a policy of import substitution,
especially for consumer goods like processed food, beverages and tobacco, textiles,
petroleum products, electrical appliances and machinery, paper and printing, etc.

Jua kali (literally ―hot sun‖) industries operate in fields as diverse as the fabrication of
household goods, motor-vehicle parts and farming implements. Evidence suggests that
this sector is expanding rapidly and accounts for a significant proportion of domestic
manufacturing. However, there is a lack of reliable statistics in this area.
In order to bolster manufacturing, the government introduced favourable tax measures
in the 2003-04 budget (including the removal of duty on capital equipment and other raw
materials), followed by additional measures in the 2005/06 and 2006/07 budgets.
Helped by strong export demand, manufacturing has responded and grew in real terms
by 6% in 2003, by 4.5% in 2004 and by 5% in 2005. Similarly, manufacturing exports
climbed from US $218 mn in 2003 to US $350 mn in 2005.
However, the sector continues to confront structural impediments, particularly in
infrastructure, which will take time to correct. Additional challenges include high
electricity costs and a strong shilling, particularly in 2006.
Coca-Cola, plans to invest US$135m in Kenya over the next five years. Its new plans
for Kenya follow a $38 mn restructuring and expansion project in 2004, which led to the
opening of a modern bottling plant in Embakasi, near Nairobi, in April 2005. Coca-Cola
faces competition in the local market, but remains the dominant player.

Power Sector

Electricity consumption is growing rapidly (by about 5% a year) but generation, which
totals about 950 mw is struggling to keep pace, especially given the heavy reliance on
hydroelectricity, which is vulnerable to drought.
Department of Economics and Statistics/Tata Services Limited
Power production during Jan-July 2007 was up by 10.6% on the year-earlier period,
mainly reflecting a large rise in hydroelectric output (to 57% of total production) after
good rains refilled dams.
The share of thermal power generation, which is mainly the preserve of independent
power producers (IPPs), dipped to 27% as a result, while geothermal's share fell to just
under 16%.

The main power generator is KenGen (70% state-owned), which operates the
hydroelectric dams. Most thermal generation, by comparison, is undertaken by
independent power producers (IPPs), which entered the market in the late 1990s in
response to drought.

Despite the rise in hydroelectric and total output, which is helping KenGen to meet
growing demand for power, the government is still keen to retain links to IPPs. In
October 2007 it granted a two-year extension to the contract awarded to Aggreko in
early 2006 for 100 mw of thermal capacity, which was needed to cope with drought at
the time.

To lift future supply, KenGen plans to commission new hydroelectric capacity (at Sondu
Miru) within two years and is also expanding geothermal power, in partnership with the
private sector.

Supplies may be adequate, but the high cost of electricity and the large number of
outages (11,000 a month) remain serious obstacles to economic activity.

Hydrocarbon Reserves
Kenya has no known hydrocarbon reserves, and all requirements are imported. Kenya
Petroleum Refineries—a 50:50 joint venture between the government and several oil
majors—operates an oil refinery in Mombasa. This currently meets 60% of local
demand for petroleum products.

Kenya's 30-year search for oil has so far proved fruitless, although prospects are
favourable, especially offshore.


Soda ash production is on a rising trend

Mining and quarrying accounts for just 0.5% of GDP, the majority being contributed by
the soda ash operation at Lake Magadi.
Output of soda ash continues to rise steadily. As per government data, production
reached 3.74 lakh tonnes in 2006, up by 3.8% on the 2005 total. However, because of
Department of Economics and Statistics/Tata Services Limited
rising world prices the value of production rose by almost 20% to KSh4.5bn over the
same period, and soda ash output therefore accounted for some 68% of the total value
of Kenyan mineral production.
In 2004 Magadi Soda, owned by Tata Chemicals and Africa's largest producer and
exporter of soda ash, announced a US$97m expansion programme to construct a
365,000-tonne/year high-purity soda ash plant (for use as a raw material in glass
manufacture), geared to new markets in Asia, Africa and the Middle East.
Mineral production, 2006
                                                                      '000 tonnes
Soda ash                                                              374.2
Fluorspar                                                             132
Salt                                                                  35
Crushed refined soda                                                  662.9
Source: Ministry of Planning and National Development, Economic Survey, 2007

Tiomin’s mining project
In one of the largest potential mining developments to date, a Canadian mining
company, Tiomin, finally secured official approval in 2004, after a decade of
negotiations, for its plan to invest about US$178m in the Kwale mineral sands project in
Coast province.

Tiomin forecasts production of 330,000 tonnes/year of ilmenite, 75,000 tonnes/year of
rutile and 40,000 tonnes/year of zircon over a 14-year period. Ilmenite and rutile are
used for making pigments, which impart brilliance, lustre and fade-resistance to paint
while zircon is used in ceramic glazes and electronics.
However, in Jan 2007 Tiomin raised doubts about the project estimated to cost US $178
mn over 14 years because of delays in securing access to the site and other contractual
Tiomin had requested full use of the site from Dec. 2006 at the latest, warning of serious
cost overruns if this were not the case, but the government proved slow to act against
disgruntled locals (who rejected fairly generous relocation terms), notwithstanding a
court order over giving the authorities permission to carry out compulsory purchases.
These delays, combined with the failure to reach final agreement on port tariffs or the
extension of the existing mining lease to cover all the land involved in the project,
threatened to derail the scheme.
However, in April 2007 Chinese mining giant Jinchuan paid US $9.4 mn for an
additional 10.1% of Tiomin, thereby generating working capital for the project. The
Chinese firm, which bought an initial 9.9% stake in Tiomin for $6.5 mn in April 2006 also
secured an 18-month option to acquire a further 10% of Tiomin for $14.8 mn.
Department of Economics and Statistics/Tata Services Limited

Tourism is a vital component of the Kenyan economy in terms of contribution to GDP
growth, the balance of payments and employment. Beach holidays at the coast and
safaris at inland game parks are the two main attractions.
Visitor arrivals (by air and sea) rose by 14.5% year on year, to 9.5 lakh in 2006, with the
largest number (171,000) coming from the UK.

The number should easily surpass 1 mn for the first time this year, following an 12.7%
year-on-year rise to nearly 580,000 in the first half of 2007. Total tourism earnings
(including from crossborder travellers) rose from US$579 mn in 2005 to $612 mn in
2006, making the sector the largest single foreign-exchange earner (after remittances).

There is a risk that expansion could be held back by limitations in the quantity and
quality of tourism accommodation and related infrastructure (such as poor roads in
game parks) because of insufficient investment.

Thus tourism is one of the six key sectors targeted in the government's "Vision 2030"
programme, due to be adopted in 2008.

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