KENYA

Economy

Kenya has the largest economy in East Africa, but is now facing serious competition from both Uganda and Tanzania whose economies are growing in strength. Furthermore, conditions in Kenya have deteriorated significantly over the past decade because of the failure to sustain prudent macro-economic policies, the slow pace of structural reform, and the persistence of governance problems such as corruption, a deteriorating infrastructure and an inefficient parastatal sector. Investor and donor confidence has been adversely affected, there has been a rapid build-up of short-term debt, poverty has increased and social indicators deteriorated. However, since early 1998 Kenya has pursued generally cautious macroeconomic policies, and these have gone some way towards addressing weaknesses in the governance area.

The economy is heavily dependent on agriculture, which despite declining steadily over the past four decades, accounts for around 24% of GDP and 18% of wage employment in both agriculture and agro-industries. Almost half of all output is for subsistence and not marketed. Tourism is the second largest export earner after tea, but is periodically affected adversely by security concerns, and is constrained by a deteriorating transport infrastructure. The industrial sector, which accounts for around 10% of GDP is dominated by food-processing industries, most of which are located in the urban centres.

Kenya's GDP fell by 0.3% in the 12 months to November 2000, the first time the economy has contracted since independence in1963. The Central Bank of Kenya highlighted the prolonged drought and severe power rationing as major contributing factors. The bank said that the effects of poor infrastructure, the continued mismanagement of key agricultural institutions and insecurity had also played a role. Kenya's economy grew by an average of 6.0% per year in the 1960s, 6.6% in the 1970s and 4.2% in the 1980s.

The labour force comprises 14.6m people, more than a third of whom are unemployed or working in the informal sector. The government estimates that there are three to four million child labourers in the country, with children comprising 70% of the labour force in some sectors.

Agriculture dominates employment and is comprised of 50 per cent subsistence farming. There is an acute shortage of arable land and uneven distribution has resulted in most farmers working plots of two hectares or less. Landlessness, an annual population growth of 2.9 per cent and rapid urbanization, place increasing pressure on the ability of current food production and distribution to meet demand at affordable prices. In addition, there is an ecological risk to some of the most fertile areas of western and central Kenya, which are already severely overpopulated.

Maize is the most important food crop; sorghum, cassava, beans and fruit are also grown. The government's goal is to achieve self-sufficiency in major staples such as maize by 2010. Inadequate storage facilities, little irrigation, recurrent drought and lack of incentives and a severe shortage of arable land have restricted growth. The principal cash crops are tea, coffee (mainly arabica grown by smallholders), sugar, cotton, pyrethrum, sisal, tobacco, pineapples and wattle. The future of the sugar industry is threatened by cheap imports from neighbouring countries following the removal of regional trade barriers implemented by Comesa. Tea, coffee and horticultural produces provided 52% of merchandise exports revenue in 1999. In the year 2000 coffee production improved by 53%.

The rearing of livestock is dominant in the semi-arid regions to the north and east. Livestock and dairy products have been seriously affected by the three-year drought, which has led to the loss of over 40% of Kenya's cattle and 10-20% of its sheep and goats. Forestry and fishing are being developed with concessional aid.

Horticultural growth since the 1980s has been impressive, and most particularly over the past five years during which growth doubled. In 1999 it became the second-largest export earner, after tea, flowers making up the largest share.

The government is attempting to protect timber resources, which are being depleted because of wood fuel demands, and the pressure for land. The government estimates that only 70 per cent of Kenya's wood fuel demands are met by regenerative growth. Some 38 million cubic metres of wood, or one million tonnes of oil equivalent (toe), are believed to be consumed annually. Fishing resources remain underexploited.

Kenya is the most industrially developed country in East Africa; industry accounted for 13.2 per cent of GDP in 2000 and employs 8 per cent of the labour force. The sector is well diversified and boasts a comparatively wide range of manufacturing industries, with food processing the largest single activity. The sector faces a number of difficulties, notably a weak infrastructure, rising costs and import competition.

During the 1990s the government's industrial policy shifted away from import substitution and protectionism towards liberalization and privatization. In practice, this has led to the gradual removal of tariff barriers, encouraging competition and recognizing the role of the informal Jua Kali industrial sector. The public sector plays a relatively minor role in industry in Kenya.

The Eighth National Development Plan (1997-2001) aims to increase growth, investment and employment prospects in order to achieve a greater industrialized status. However, international backing was frozen in mid-1997 due to non-implementation and political concerns. Exploratory oil wells in the Rift Valley and northeastern provinces have produced positive results. Kenya has a 4.2 million tonne capacity oil refinery at Mombassa, which is a major foreign exchange earner.

The services sector generates the bulk of GDP and is a major source of employment. Tourism currently is Kenya’s third largest foreign-exchange earner after tea and horticulture, generating about 17.5% of export revenue, which is down from 33% in 1993-4 when the tourist industry peaked. Earnings from tourism rose to US$30.3bn in 1999, almost doubling earnings for 1998, but in the last two years only marginal gains have been registered. The tourist sector employs 150,000 people. Kenya's tourist assets are its wildlife, mostly accessible through a system of parks and reserves, extensive white sand beaches protected by coral reefs, and dramatic scenery from deserts to tropical rain forests.

Mining

Limited mining activity is centred on extraction of soda ash and fluorspar for export. Gemstones and limestone are also exploited commercially. Other minerals include silver, lead, gold, salt and chromite, but these are not yet commercially viable.

In August 2000 the IMF approved a three-year Poverty Reduction and Growth Facility (PRGF) worth US$ 198m, on the strength of the government's reform programme. Removing the constraints to growth and poverty reduction requires the continued pursuit of measures to improve governance, firm implementation of appropriate macroeconomic and structural reforms and significant reallocation of expenditure to priority areas, such as health and education. Specifically emphasis is being placed on speeding up the privatization process and on improving governance by way of anti-corruption measures, on streamlining the public service, on reducing the role of government in commercial activities, and prioritising public expenditure.

The significance of the IMF agreement to support the three-year PRGF programme was seen in its potential to normalize relations with the World Bank and other bilateral donors. These expectations saw a major setback in early 2001 when the IMF delayed the release of the second tranche following the government’s failure to live up to several crucial commitments on governance and backtracking on fundamental performance criteria, including the stalled privatization programme. The breakdown in the agreement with the IMF is expected to have far-reaching consequences for the economy.

In the recent budget, the two main policy initiatives were a) the removal of distortions in various markets with a view to making local manufacturers more competitive, and b) earmarking 10% of the budget for anti-poverty projects. A significant downscaling of the civil service is also planned.

Debt service remains a very large proportion of total expenditure at just over one-third, and more than double the development budget.

Regional  and International economic grouping/alliances:

Organization for African Unity (OAU)/African Union

EU-ACP Convention

World Trade Organization (WTO)

East African Community (EAC) – inaugurated in January 2001.

Inter-governmental Authority on Development (IGAD)

Common Market for Eastern and Southern Africa (Comesa)