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Country Commercial Guides for FY 2000:
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CHAPTER II: ECONOMIC TRENDS AND OUTLOOK
A. MAJOR TRENDS AND OUTLOOK
1. OVERVIEW
Since the beginning of the 1990s, the government has made significant strides in the implementation of economic reform measures necessary to stabilize the economy and restore sustainable economic growth. By April 1994, the government had removed nearly all administrative controls on producer and retail prices, imports, foreign exchange and grain marketing. The lifting of price controls on petroleum products in October 1994 and permission for foreigners to invest in the Nairobi Stock Exchange in 1995 signaled the end of significant remaining controls. As a consequence of these reforms, the shilling exchange rate has stabilized, overall balance of payments has become favorable, the debt service ratio has declined, and foreign exchange reserves have increased. A high rate of real economic growth, however, remains elusive. With population growing at 2.6 percent annually, the projected rate of growth of 1.4 percent for 1999 is considerably below what is required for Kenya to significantly improve domestic standards of living.
SELECTED ECONOMIC INDICATORS, 1993-1998
Indicator
1994 1995 1996 1997 1998 1999* Growth in Real GDP, % 3.0 4.8 4.6 2.3 1.8 1.4 Rate of Inflation, % (Average Annual) 28.8 1.6 9.0 11.2 6.6 6.6 Exchange Rate, KShs/US$ (Average) 49.5 51.4 57.1 58.8 60.4 70.3Sources: Economic Survey, Central Bank of Kenya. *estimatedManagement of the financial sector, and banks in particular, has generally improved. Weak banks have either been closed or brought under statutory management, while irregular loans have been curbed.
Although the overall trend in economic reforms begun in 1992 has been positive, some problems have continued to arise. The agricultural sector has been set back by problems in the tea and coffee sub-sectors. Delays in civil service reform and downsizing have put strains on the government budget as projected revenues have failed to materialize. In July 1997, the IMF suspended its Enhanced Structural Adjustment Facility (ESAF) support to the country worth $180 million, citing poor economic governance by the Kenyan government. Since then, the GOK has been working to meet certain conditions set out by the IMF for resuming ESAF discussions. After successful conclusion of Article IV consultations in November 1999, the IMF Board agreed to open negotiations with Kenya on a Poverty Reduction and Growth Facility (PRGF).
Prospects for regional cooperation continue to improve. There has been renewed interest among the leaders of Kenya, Uganda, and Tanzania in strengthening the three-year-old East African Cooperation, with its secretariat in Arusha, Tanzania. In November 1999, leaders of the three countries signed the EAC treaty, which provides for the formation of an economic community and removal of trade barriers by November 2003. Rwanda and Burundi have expressed their interest in joining the community.
2. ECONOMIC REFORMS
After years of slow progress on economic reform, in 1993 the government embarked on substantive economic reform measures to achieve reasonable economic growth. In a relatively short period, the government instituted several measures to open the economy to market forces. By the end of the first quarter of 1994, the government had dismantled most foreign exchange controls, allowed a free-floating exchange rate, removed import licensing and liberalized domestic marketing of all major items including grain. At the same time, the government decontrolled prices of all major items except petroleum products, which were later decontrolled in October 1994. The measures helped spur faster economic growth, which peaked at 4.8 percent in 1995 before sliding to 4.6 percent in 1996. The economic downturn continued through 1997. During that year, the economy grew by 2.3 percent, a decline attributable to political and ethnic violence, poor weather and infrastructure problems. The IMF's decision to allow the ESAF to lapse contributed to investor uncertainty. These problems continued into 1998 and 1999 and helped to slow real GDP growth in those years to 1.8 percent and 1.4 percent, respectively.
Kenya is committed to an economic reform program whereby the private sector will become the engine of the country's future economic growth. This commitment is stressed in the government's blueprint for industrial transformation of the economy released February 1997 and in its Policy Framework Paper with the IMF and World Bank from early 1996. Despite its public commitment to reform, the government has been slow in implementing change. Privatization continues to move forward, but the government is years behind its own schedule. The government has also been slow in introducing public sector reform, including downsizing the civil service, and measures to address widespread corruption. The government also needs to take steps to improve the legal system, strengthen the police force and promote the rule of law.
3. MONETARY POLICY
The Central Bank of Kenya (CBK) was accorded greater control over monetary policy through legislation passed in 1996. Under the law, CBK has the twin principal objectives of maintaining price stability and administering the financial sector. In this regard, the bank continued to enforce monetary discipline begun in 1993 when inflation reached an unprecedented peak of 46 percent.
Tight monetary policy in the past five years resulted in high interest rates that reflected persistently high nominal discount rates on Treasury Bills. Interest on 91-day Treasury Bills increased from 21.5 percent in December 1996 to 26.4 percent in December 1997 before peaking in April 1998 at 27 percent. With inflation reduced to single digits in mid-1998 the Central Bank eased monetary supply by, among other measures, reducing the cash ratio requirement for financial institutions. Interest rates declined gradually from May 1998 through December 1998 when the rate on 91-day Treasury Bills was 12.5 percent. In late February 1999, the rate dropped to eight percent. However, the rate gradually increased to almost 20 percent as 1999 closed.
The Central Bank relies on the cash ratio as an instrument of regulating money supply. No cash ratio is required for mortgage finance companies. The required commercial bank cash ratio was decreased from 20 to 18 percent in the third quarter of 1994. The minimum cash ratio was reduced further to 15 percent in October 1997 and to 13 percent in September 1998 in a bid to bring down high interest rates and stimulate investment. The liquidity ratio required of banks and non-bank financial institutions (NBFIs) was harmonized in July 1995. Since July 1997 the minimum liquidity ratio for all financial institutions has been 20 percent of deposit liabilities.
In regulating the financial sector, the Central Bank closed five locally-owned banks in the first half of 1995 when they failed to meet an increased paid-up capital requirements of seven percent introduced in December 1994. In the first quarter of 1995 the GOK imposed a foreign exchange exposure limit of 20 percent of a bank's capital. There were several cases of insolvency of banks in 1998 with five banks being placed under statutory management. A run on deposits at the fourth largest bank was stemmed by government intervention. By the end of 1998 the number of financial institutions under liquidation by the Deposit Protection Fund Board was 17.
In January 1997 the CBK lifted the embargo on establishment of new banks imposed in 1994. However, stringent new requirements regarding management qualifications and minimum capital requirements were introduced. In May 1997, the CBK rated 13 banks (26 percent of the total) as weak in their operations for the year 1996. Eighteen percent of the banks were considered excellent. Non-bank financial institutions (NBFIs) are required to gradually convert to banks. As of November 1999, the number of NBFIs was only 11, a substantial reduction from 32 that had existed in 1996. Some of the former NBFIs converted to banks while others merged with their parent commercial banks.
Kenya's budding Nairobi Stock Exchange has received government support. In January 1995, foreign participation of up to 40 percent was permitted through the Foreign Investors Board (FIB) window. The turnover of FIB as a proportion of total stock market turnover was 36 percent in 1997 and 35 percent in 1998. Over the same period, net foreign investment inflow through the exchange decreased from $26.8 million to $1.3 million. Activity at the stock exchange has been diversified through introduction of trading in new instruments, namely corporate bonds, commercial paper, and a floating rate one-year bond that was issued by the Central Bank in March 1997. Capital Market Authority, the regulatory body, in May 1997 issued regulations governing issuance of corporate bonds and commercial paper.
4. FINANCE
Kenya's financial sector is well diversified. By November 1999, there were 48 licensed and operational commercial banks, 11 non-bank financial institutions, four building societies, two mortgage finance companies and 48 foreign exchange bureaus. Other institutions include ten development finance companies, five representative offices of foreign banks, a capital markets authority, one securities exchange based in Nairobi, several pensions funds including the large state-owned National Social Security Fund (NSSF), a post office savings bank, 37 insurance companies, three re-insurance companies, one claim settling agent, 15 insurance surveyors, four risk managers, about 2,700 insurance agents, and over 3,000 poorly structured cooperative savings and credit unions. By the end of 1996, there were also 20 securities and equities brokerage firms, 15 investment advisers, and 57 hire purchase companies.
The banking sector is dominated by two multinational banks (Barclays and Standard Chartered) and two parastatal banks (Kenya Commercial and National). U.S.-owned Equator Bank has a subsidiary (Kenya Equity Management) and Citibank has a branch. Other U.S. banks have correspondence relationships with Kenyan banks.
The Capital Markets Authority regulates the stock market and the brokerage firms. The Nairobi Stock Exchange (NSE) handles 62 listed firms with a virtually nonexistent secondary capital market. The low listing is largely due to government requirements for detailed information many firms consider confidential. Requirements for financial discipline, availability of subsidized credit in the money market, disclosure and reporting requirements are some of the other factors militating against public quotation. The stock market, including stock-brokerage, was on January 1, 1995 opened up for direct foreign participation. The limit on foreign share ownership is 40 percent. Activity at the exchange has been boosted through floatation of government shares in diversified companies, by some KSH. 6.5 billion ($118 million) since 1992.
The Nairobi Stock Exchange trading floor is currently open but only with clearance of actual stock certificates. Plans are in place to introduce electronic trading, however. Merchant and investment banking is still underdeveloped despite the presence of such multinational banks as Barclays, Stanbic, Citibank, Equator Bank, and Standard Chartered. A local firm has established operations dealing with commercial paper and the secondary and tertiary market, but it is still in its infancy.
In the past, restrictive legislation and the government's interventionist approach in the insurance sector forestalled more flexibility in the insurance companies' investment strategy. However, the government has taken a more rational approach of late, which has broadened insurance companies' investment options.
5. TRADE POLICY REFORM
Kenya's trade policy has been liberalized in recent years. Import licensing controls were dismantled in 1993, except for a small negative list based on health, environmental and security concerns. Imports are still, however, subject to some approvals. All imports with f.o.b. value of more than $5,000 are subject to pre-shipment inspection (PSI) for quality, quantity, and price and require a Clean Report of Findings by a government-appointed inspection agency (either Cotecna Inspections, Inc., Bureau Veritas-Bivac or SGS; for contact information, see Appendix E, Section 3). Commercial banks are required to ensure that importers have submitted Import Declaration Forms, invoices, and a Clean Report of Findings as well as a copy of the Customs entry before releasing foreign exchange to importers. Import declaration fee, which includes a PSI fee, is 2.75 percent of the export (f.o.b.) value. Effective June 1998, if importers fail to obtain inspection in advance, a penalty of 15 percent (25 percent for motor vehicles) is applied for local inspection.
Trade barriers on certain products are maintained by high import duties and value added tax. Kenya progressively reduced its number of customs duty bands (including the zero rate) from 8 to 4 between June1994 and June 1997. The maximum tariff rate fell from 45 percent in June 1994 to 25 percent in June 1997. However, the government adopted a more protectionist tariff regime in 1999 by increasing import and suspended duties on a wide range of products. Import duties were increased from 15 percent to 25 percent on a selected range of agricultural, livestock and horticultural products. Duty on textiles was increased from 25 to 30 percent. Kenya's import regulations on agricultural products are constantly changing, depending on politics, domestic supply, and demand. To address food security concerns, the government periodically prohibits exports of wheat and corn. Kenya has frequently applied prohibitively high tariffs or outright import bans on certain agricultural imports. A dairy import ban was lifted in mid-l997. However, as of December 1997, an ad valorem duty of 70 percent was levied on rice, sugar, and milk. The tariff on wheat was the higher of the following: (a) 75 percent ad valorem or (b) 50 percent ad valorem plus 3.75 Kenyan shillings per kg (approximately $56 a metric ton). In June 1998 a 5 percent suspended duty was imposed on imported fruits, vegetables and their products and on such non-agricultural items as paper and paper products, clothing, aluminum tubes, lamps and electric cables.
The standard value added tax (VAT) rate was reduced from 17 percent to 16 percent in June 1998. Discriminatory application of these taxes has in the past distorted trading, especially in sugar, maize, and milk powder. Procurement decisions can be dictated by donor-tied aid, or influenced by corruption. Customs and immigration rules are detailed and rigidly implemented. These restrictions have seriously inhibited Manufacturing Under Bond schemes. A strict constructionist attitude among customs officials often leads to delays in clearing both imports and exports.
6. FOREIGN EXCHANGE REFORM
In October 1993 the market and the official exchange rates were unified and floated on the open market when the rate was KSH 69 to the U.S. dollar. The shilling strengthened thereafter to an average U.S. dollar rate of 56 in 1994 and 51 in 1995, before declining to an average of 57 in 1996, 59 in 1997 and 60 in 1998. At the beginning of 2000, the shilling was exchanging at a rate of 72 to the U.S. dollar.
In February 1994, the government announced more liberal foreign exchange measures that eventually replaced the highly restrictive foreign exchange control legislation. All exporters are allowed to retain all foreign exchange proceeds in foreign currency accounts at commercial banks in Kenya. The retained proceeds may be used to finance business-related current expenses and debt service payments or sold to banks at the market-determined exchange rate. Banks are permitted to sell the foreign exchange they purchase in the retention market for their own accounts, and to offer forward-exchange contracts to exporters and importers at market-determined rates. No limits apply to the amount or period of cover. Beginning the last quarter of 1994, foreign exchange bureaus were licensed by the CBK primarily to serve the retail end of the foreign exchange market in competition with banks. There were 48 licensed foreign exchange bureaus by the end of 1999.
There are no official schemes for currency swaps or exchange rate guarantees for external debt servicing, except for the Exchange Risk Assumption Fund, which covers the foreign exchange losses associated with exchange fluctuations occurring after July 1, 1989 for three development finance institutions.
Kenyans and other residents can operate foreign currency accounts and borrow from the off-shore market. Restrictions on remittance of foreign investment income have been removed. Non-residents on a work permit in Kenya may operate foreign currency accounts and remit after-tax employment earnings without government approval.
7. CURRENT ECONOMIC SITUATION AND TRENDS
In 1996, the Kenyan economy was characterized by scarcity of foodstuffs and power shortages affecting industrial production. This rekindled inflationary pressures and forced the government to divert financial resources toward importation of famine-relief food. The high cost of domestic credit also had a negative impact on the economy. As a result, real GDP growth declined from 4.8 percent in 1995 to 4.6 percent in 1996. That began a three-year economic slump that has been aggravated by deteriorating infrastructure, high interest rates, politically instigated violence, lack of investor confidence and poor economic governance. The combined effect of these factors was a decrease in GDP growth rate to 2.3 percent in 1997, 1.8 percent in 1998, and an estimated 1.4 in 1999. The economic numbers for 1999 were dismal, fueled by crop failure in the 1998/99 short rains season and the rationing of electric power supply that began in September. While the rate of interest on 91-day Treasury Bills dropped dramatically, from 27 percent in May 1998 to around 8 percent in February 1999, lending rates by commercial banks remained high. Worse, as the end of 1999 approached, interest on 91-day Treasury Bills had increased to over 19 percent. As a result of government borrowing, interest rates are too high to stimulate borrowing for investment.
Tourism, once a growth industry in terms of visitors, foreign exchange earnings and job creation, has been on the decline. Total hotel occupancy in Kenya, a good indicator of the magnitude of tourism, has been on a general decline since 1994. This decline began to accelerate in August 1997 when politically motivated violence at the coast led to the closure of several hotels. Overall bed occupancy dropped by 16 percent in 1997. The slump in coastal tourism continued through 1998 with the hotel occupancy rate reported at a low 25 percent. However, there were signs of a turnaround in 1999 with occupancy rates increasing with some hotels reporting rates as high as 50 percent.
The economy is being increasingly hurt by the poor state of roads, unreliable power and water supplies, high interest rates charged by commercial banks on loans (averaging above 20 percent), and rampant corruption. High interest rates and inadequate funds for public buildings and construction projects hamper building and construction activities.
A number of measures have been adopted or proposed to improve the economic environment. An Electricity Regulation Board was appointed in 1998 to manage the opening up of the power sector to independent producers. An autonomous Kenya Roads Board has been proposed to develop and maintain all the roads in the country with extensive private sector participation. The Communications Commission of Kenya (CCK) was established to regulate a competitive telecommunications and broadcasting sector and became operational in 1999. A new advisory board to the Kenya Anti-Corruption Authority was named in January 1999 and President Moi appointed a director in March 1999, though by the end of the year the authority had yet to demonstrate that it was effectively tackling corruption.
B. PRINCIPAL GROWTH SECTORS
1. OVERVIEW
Kenya's main growth sectors include agriculture, tourism, power generation, and manufacturing. Agriculture is the mainstay of the Kenyan economy, providing livelihood to approximately 75 percent of the population. The agricultural sector currently contributes an estimated 25 percent of the GDP, and generates 60 percent of the total foreign exchange. The sector has strong linkages with the manufacturing sector offering opportunities in technology infrastructure such as packaging, storage, and transport while creating demand for such inputs as fertilizer, herbicides and fungicides.
In recent years, tourism competed with tea exports as Kenya's single largest foreign exchange earner. In 1996 the country was host to 800,500 tourists, who brought in about $448 million. In 1997 the number of tourists and earnings from tourism declined to 744,300 and $408 million, respectively. Tourism slumped further in 1998, with 672,000 earning the country $290 million. The sector offers investment opportunities in accommodation, recreation, and entertainment facilities, including hotels, health spas, holiday centers and ecotourism.
Horticulture -- producing flowers and fresh fruits and vegetables for the European market -- is the fourth largest earner of foreign exchange and the fastest growing sector in the Kenyan economy. The earlier appreciation of the Kenyan shilling against all major foreign currencies had adversely affected this sector as well as tourism. With the weakening of the shilling, it is expected this sector will continue to expand rapidly.
The manufacturing sector is one of the expanding sectors of the economy. The Government of Kenya pursues a policy of export promotion and has given priority to the manufacturing sector. Major opportunities exist for direct and joint venture investments in various sectors such as agro-processing, telecommunications, automotive components assembly, electronics, plastics, paper and paper products, chemicals, pharmaceuticals, and metal and engineering products. As a result of past import substitution policies, the manufacturing base in Kenya and neighboring countries is competitive rather than complementary.
The country has a reasonably well-established power generation network consisting of hydro, thermal, and geothermal plants. Demand for electricity energy is growing at an estimated 4.9 percent while generation is projected to grow at an annual rate of 10.3 percent for the next four years. The government is keen on developing both thermal and geothermal power sources to supplement hydropower generation. However, due to allegations of mismanagement and corruption, multilateral and bilateral donors in 1991 suspended funding for power generation projects. This created a gap in the funding pipeline for power generation and a consequent wide gap between existing and planned generating capacity and current and future demand. Brownouts and blackouts may become more frequent over the next several years until capacity catches up with demand. The World Bank in June 1997 approved a $125 million credit towards the development of Kenya's power sector. Sales opportunities currently exist in geothermal power equipment for an additional three plants that have been earmarked for immediate development.
2. TOURISM
Tourism is Kenya's second largest foreign exchange earner after all agricultural exports -- coffee, tea, horticulture, etc. Tourism levels stagnated in 1993-94, due in large part to the appreciation of the shilling and the consequent increased cost of goods and services plus security concerns. Nevertheless, the country received an estimated 785,700 tourists in 1995 earning about $486 million which was below the 1994 earnings of $501 million from 807,600 tourists. Europeans account for over 50 percent of Kenya's tourists, Americans for less than 10 percent. The 1996 tourism earnings of $448 were 65 percent of the combined revenues from coffee and tea exports. Bed occupancy rates increased from 43.7 percent in 1995 to 44.6 percent in 1996 and to 51.6 percent in 1997. However, declining total availability of accommodation contributed to the higher occupancy rates. For example, total available bed-nights decreased by 16 percent in 1997.
The coastal beaches, wildlife, and unique scenery are Kenya's main attractions. Unfortunately, crime, disintegrating infrastructure, and growing competition from neighboring countries threaten a rapid expansion of this potentially lucrative industry. On the other hand, political pressures stemming from competing land uses between humans and animals make conservation a high profile issue. Fiscal incentives in the tourism industry and liberalization of the foreign exchange regime are likely to reduce costs in the industry and make Kenya an attractive destination.
3. ENERGY/POWER GENERATION
In 1998 the country had an installed capacity of hydro (600MW), thermal oil (219 MW) and geothermal electricity (45 MW). The total power supply was 4,545 GWH, including 146 GWH imported from Uganda. The sole national power distributor started rationing electricity in September 1999 due to lower generating capacity resulting from insufficient rainfall and a breakdown of one thermal generating facility. In the year 2000, the country now requires 949 megawatts to meet national demand. Renewable energy sources are largely undeveloped. The country depends on imported solar panels. Animatics, which sells panels from ARCO Solar Company, is one of several major solar companies operating in the country. Biomass, though cheaper to use and in plentiful supply in rural Kenya, remains untapped.
After more than 30 years of exploration, no commercially viable petroleum deposits have been discovered in Kenya. GOK parastatals are involved in petroleum operations including refining and bulk transportation; pricing modalities are liberalized. At the marketing level, seven private international and local oil companies are involved. The seven oil companies together with the government-owned National Oil Corporation are licensed to purchase crude oil and to market petroleum products. In late 1994, the government decontrolled petroleum prices but imposed a road maintenance tax on gasoline and diesel. The new tax replaces all toll stations except those at the international borders.
The 31-year-old Kenya Petroleum Refineries, Ltd., (KPR) refines crude oil into LPG, gasoline, jet fuel, kerosene, diesel, gas oil and fuel oil. The refinery has a total throughput of 2.08 million metric tons (95,000 barrels per stream day) and is operating at about 65 percent of plant capacity.
Due to the lack of any facilities to import and store LPG, a product essential for cooking and lighting, the refinery runs a crude mix to maximize LPG production. The government owns 50 percent of the share capital of the refinery, while the balance is spread evenly among Shell International (U.K.) Inc., Caltex and Mobil. The government provides management with assistance from Shell in an advisory role. The government recognizes the need to upgrade the technology in the aging refinery if it is to compete effectively with other refined product suppliers. KPR has an uphill task to reduce the lead content in gasoline. In the past, the refinery has been able to do this using the installed plant and equipment. Further improvements would require substantial rehabilitation work and the substitution of expensive non-lead additives to produce unleaded gasoline. Petroleum products (white oils) are transported inland mainly by pipeline. The 14-inch Mombasa-Nairobi-Eldoret pipeline and the extension to Kisumu belongs to the government-owned Kenya Pipeline Company (KPC). Kenya plans in principle to extend the pipeline from Eldoret to Uganda.
Kenya spends over 24 percent of its foreign exchange earnings on imports of crude oil and petroleum products. Preliminary figures for 1998 show that the country imported fuels and lubricants valued at $532 million, an equivalent of over 17.5 percent of the total imports. Total energy demand in Kenya is growing at about 3.7 percent a year; the country is therefore looking for alternative sources. Geothermal power has been identified as a good possibility for the future.
4. MANUFACTURING
Kenya's manufacturing sector policy was initially focused on import substitution. This policy, however, has recently been replaced by export-oriented manufacturing. Specific opportunities are available in the following activities:
Paper Products: Kenya imports about 20,000 tons of coated white lined chipboard and other boards for packaging, and 5,000 tons of newsprint, waste paper, printed paper, and other types for local consumption. Investment opportunities exist in paper production using forest products, bagasse, sisal waste, straw, and waste paper.
Metal and Engineering: Kenya has built up a substantial basic metal sector making a variety of downstream products from local and imported steel scrap, steel billets, and hot rolled coils. The country possesses a broad-based metal products sector and imports approximately 277,000 tons of various metals annually. There are various opportunities in the development of a nucleus foundry.
Vehicle Parts and Assembly: The country's active motor vehicle population is approximately 401,000. Following import liberalization and reduction of duty on completely knocked-down vehicles (CKDs), new entrants each year have more than doubled from about 12,400 in 1993 to 28,664 in 1996. Manufacture of components for use in local assembly and for export to regional markets is expanding.
Electrical Equipment: Manufacture of electrical equipment in Kenya is limited. Investment potential exists for the production of fractional horsepower motors, circuit breakers, transformers and switchgears, capacitors, resistors, and integrated circuit boards.
Electronics: Key opportunities for direct investment, joint ventures and subcontracting exist in the assembly of a wide range of electronic goods in Kenya. These include the production of: consumer electronics, such as color televisions, VCRs, printers, floppy disk drives, printed circuit boards, computer power supplies, transmission equipment, and industry support items, including cables, cords, and metal plating.
Plastics, Chemicals and Pharmaceuticals: There are many investment opportunities in chemicals, pharmaceuticals and fertilizers. These include production of PVC granules from ethyl alcohol; formaldehyde from methanol; melanin from urea; cuprous for coffee bean disease; caustic soda and chlorine-based products; and active carbon.
5. OTHER SECTORS
Agriculture: Kenya is basically an agricultural country. In order to feed itself, further development in the sector is essential. Only eight percent of its landmass is arable. In order to maintain per capita food production levels, more modern agricultural methods and inputs are required, as well as expanded large and small scale irrigation schemes. Therefore, growth in the agricultural sector is important in the near, medium, and long-terms.
Telecommunications: A modern telecommunications system will be important if Kenya is to continue to play a regional role and as a gateway to East and Central Africa. Liberalization of the sector began in 1999 with establishment of an independent regulator, the breakup of the monopoly service provider and the selection of a second mobile cellular service provider. It is expected that telecommunications will become a significant growth sector in the future.
Computers and peripherals: These will become more important as Kenya's economy grows. The reduction in June 1995 of duties and VAT on computers and the need for Kenyan companies to become more competitive in the computer age should help increase this sector's development. Growth in this sector is expected.
Health Care: Requirements in this sector will steadily increase with a growing economy and population. With the high level of HIV/AIDS in certain segments of the sexually active population, the development of full-blown AIDS and associated medical care will only expand. However, even though the need may greatly expand, the ability to pay may not.
Other Infrastructure Development: There will be a need to overhaul the highway system and modernize airports. This development will depend upon availability of World Bank, African Development Bank, and other multilateral and bilateral funding.
C. GOVERNMENT ROLE IN THE ECONOMY
Privatization and parastatal reforms started in earnest in 1993. By September 1998, the GOK had divested its interests in 165 enterprises out of a 1992 list of 207 parastatals designated for privatization. However, most of these firms are small and the government has moved very slowly on privatizing the large, "strategic" parastatals. The Kenya Railways Corporation has allowed private contractors to provide maintenance services. Kenya Airways was privatized in 1996. Since then, there have been some opportunities in the area of "add ons" such as FAX and telex services. The GOK has introduced reforms to ensure more transparency in parastatal privatization and to strengthen an otherwise inefficient Parastatal Reform Executive Secretariat. The GOK has stated it intends to periodically review the parastatal reform process in order to make it more transparent and responsive to local needs. This trend is expected to continue creating opportunities for U.S. firms.
As the GOK continues with the privatization process, it will have to make hard decisions concerning the Railways Corporation, Ports Authority, Kenya Power and Lighting Company, and other parastatals that continue to be a drain on the budget. Commercialization or privatization of these state-owned infrastructure entities will not be easy.
Since the 1992 multiparty elections, the Government of Kenya has consistently strived to maintain policy measures that will consolidate and reinforce fiscal and monetary discipline for economic growth. Some of these measures include control of government expenditure, budget deficit reduction, and programmed restructuring of the economy in favor of private enterprise. One significant measure in terms of enhanced GOK revenue collection was the establishment of the Kenya Revenue Authority to consolidate the collection of taxes and other fees. The authority became operational in July 1995.
D. BALANCE OF PAYMENTS
Between 1997 and 1998, Kenya's overall balance of payments position improved from a $13 million deficit to a $74 million surplus. Although the Central Bank estimates that Kenya maintained its surplus position in 1999, the surplus fell by nearly 65 percent to $26 million. The driving force behind the overall balance in recent years has been the capital account. Between 1997 and 1998, despite a nearly 20 percent increase in the current account deficit (from $387 million to $463 million), the capital account surplus improved by nearly 44 percent (from $374 million to $537 million), thanks to increased net private inflows. However, in 1999, with a decline in investor confidence, these flows appear to have reversed, resulting in a 32 percent decline in the capital account surplus (from $537 million to $364 million). The reduction in the surplus on the capital account overwhelmed the nearly 27 percent improvement on the current account deficit (which shrank from $463 million to an estimated $339 million).
Between 1998 and 1999, Kenya's import bill declined by 4.2 percent (from $3,337 million to $3,198 million), while its earnings for exports of goods and services declined by only 0.5 percent (from $2,875 million to $2,860 million). Although export volumes of tea and coffee remained relatively unchanged, earnings were down as a result of a decline in the prices for these commodities.
SELECTED EXTERNAL SECTOR INDICATORS,
US$ Millions (unless indicated)Indicator
1996 1997 1998 1999 (E) Overall Balance of Payments 398 -13 74 26 Current Account Balance -93 -387 -463 -339 Capital Account Balance 491 374 537 364 Foreign Exchange Reserves (official) 860 788 83 746 Months of Import Cover (Number) 3.6 2.9 3.0 2.8 Debt Service as % of Exports of Goods and Services 24.6 21.5 20.6 N/ASource: Central Bank of Kenya E = estimated, N/A = not availableOfficial foreign exchange reserves at the end of 1998 were $783 million, the equivalent of three months of import cover, which were little changed from a year earlier. Commercial banks and the public held $317 million in foreign exchange in addition to the official reserves. The Central Bank estimates that at the end of 1999, official reserves stood at $746 million, or about 2.8 months of import cover, while the commercial banks and public held $361 million in foreign exchange.
The debt service ratio (stock of public sector debt as a proportion of exports of goods and services) declined from 1996 to 1998. As of December 1996, the ratio was 24.6 percent before declining to 21.5 percent in 1997 and to 21.4 percent by December 1998. The external debt at the end of 1998 was US$5.3 billion, of which 55% was owed to multilateral lenders, 39 percent to bilateral lenders and 6 percent to commercial banks and in the form of export credits. Although the Central Bank has not yet released figures for 1999, analysts expect that the debt service ratio may have risen.
E. INFRASTRUCTURE SITUATION
1. OVERVIEW
The GOK recognizes the critical role of an efficient infrastructure in economic development. Recent economic development policy documents emphasize the vital role of efficiency in the management of transport, utilities, and bank/financial services in achieving a rapid and sustained economic growth and accelerating development of industry. At one time, Kenya had one of the best infrastructures in Africa. For a variety of reasons, this infrastructure has deteriorated and failed to keep up with increasing demands. With assistance from the World Bank, the European Union, African Development Bank (ADB), and other multilateral and bilateral donors, the Government is implementing reforms aimed at increasing the efficiency of existing facilities through improved maintenance, rehabilitation, upgrading, and expansion.
2. TRANSPORT
a) Airports: Kenya has a reasonably well-developed international and domestic air transport infrastructure. The country has three international airports: Nairobi's Jomo Kenyatta International Airport (JKIA), Mombasa's Moi International Airport and Eldoret International Airport which became operational in April 1997. Other airports are Wilson in Nairobi, Malindi and Kisumu. There are also more than 300 airstrips throughout the country. JKIA serves more than 30 airlines providing scheduled services to international cities. In addition to passenger handling services, it has air cargo handling facilities, including chilling facilities for storage of cut flowers bound for Europe. Wilson Airport in Nairobi handles light aircraft and general aviation, and is the busiest in Africa.
b) Seaports: The Port of Mombasa, with a rated annual capacity of 22 million tons, is Kenya's main seaport and serves most East and Central African countries. It is a deep-water port with 21 berths, two bulk oil jetties and dry bulk wharves that can handle all size ships. The port offers specialized facilities, including cold storage, warehousing, and container terminal. It serves most international shipping lines and has an average annual freight throughput of about 8.1 million tons, of which 72 percent are imports. Kenya Ports Authority (KPA) manages the port operations. There are plans to replace or refurbish some of the equipment at the port. A private international firm has been contracted to manage and operate the container terminal in Mombasa. Inland container depots, managed by KPA, exist in Nairobi, Eldoret, and Kisumu.
c) Road Network: Kenya has an extensive road network of approximately 95,000 miles connecting most parts of the country. Road transport network accounts for over 80 percent of Kenya's total passenger and freight transport. Paved roads connect all major commercial centers. The current state of the roads is deplorable, as necessary periodic and routine maintenance has long been lacking. Causes of poor roads in Kenya include inadequate funding from the GOK, reflected in a sharp drop in the share of road maintenance expenditure to total expenditure on roads. In 1994, the GOK legislated a road maintenance levy to raise additional funds. In collaboration with donors, the GOK recently launched an ambitious project -- Roads 2000 -- that involves linking up all the major and minor roads countrywide to one another. The project is expected to be completed in another 2-3 years, at a total cost of $245 million. Twenty thousand kilometers of roads in six urban centers will also be rehabilitated under the project. All bidders for the various components of the project were international companies, except four -- one fully locally-owned and the other three having Kenyan interests.
d) Railways: Kenya Railways Corporation (KR), a parastatal, manages Kenya's single-track railway system, which runs from Mombasa through Nairobi to the Ugandan border, with a branch to central Kenya. The corporation, like most Kenyan parastatals, has heavy operational losses with consequent deterioration of services. South African Railways has provided on a lease-hire basis ten 1,200-ton haulage capacity locomotives for cargo shunting between Nairobi and Mombasa. World Bank's IDA and the British Overseas Development Administration are funding a railways rehabilitation program to make KR commercially viable. IDA has agreed to provide a $60 million facility for the railway restructuring. The GOK has designated KR as a strategic parastatal so, to date, has allowed only the corporation's maintenance services to be privatized. In the June 1997 budget, however, the Finance Minister stated that the GOK would open up the railways to private sector participation through privatization and by limiting the state parastatal's role to owning and regulating lines while leasing locomotives to private sector operators.
e) Pipeline: Kenya Pipeline Company, another strategic parastatal, operates a UK-funded white petroleum products pipeline. Currently the pipeline runs between the Port of Mombasa, where the petroleum refinery is located, and Kisumu and Eldoret in western Kenya through Nairobi. Kenya roads are used to haul cargo to and from neighboring land-locked countries and parts of Tanzania. However, recently, as a measure to reduce road congestion and increase revenue to the Kenya Pipeline, the GOK has tried to institute a policy whereby white petroleum products for export are taken off the pipeline at Eldoret instead of being trucked from Mombasa. The GOK also has plans to extend the pipeline to Uganda.
3. UTILITIES
a) Telecommunications: The Communications Commission of Kenya (CCK) was established in 1999 to regulate telecommunications and radio communications in the country. The commission also regulates postal services. In July 1999, Kenya Posts and Telecommunications Corporation was split into Telkom Kenya, a telecommunication corporation, and Postal Corporation of Kenya, a postal services corporation. Kencell, a joint venture between Vivendi of France and Sameer of Kenya, won the second cellular license bid in late 1999 to provide GSM services in competition with Safaricom, the Telkom subsidiary. The government plans to sell up to 49 percent of Telkom Kenya to a strategic partner before an initial public offer is made on the Nairobi Stock Exchange. With the right competitive environment, the potential for private sector investments in telecommunications is enormous.
b) Electricity: Kenya's electricity services are provided by Kenya Power and Lighting Company (KPLC), another "strategic" GOK parastatal. The company has similar management and operational problems as other parastatals with resultant deterioration of services. KPLC will in the future concentrate on power supply and distribution, leaving generation functions to another parastatal company that was invigorated at the beginning of 1997, the Kenya Power Company (now Kenya Electricity Generating Company). Power outages and brownouts have become increasingly common due to occasional drought and constant breakdowns of aging equipment, which is poorly maintained. Equipment replacement funds are still being sought. Hydro, geothermal and thermal steam provide the country with 864 megawatts (MW) of electric energy. An additional 30 MW are imported from Uganda each year. Two separate international companies were licensed at the beginning of 1997 to produce another 43 MW of power from a thermal plant in Mombasa and 45.5 MW from a diesel plant in Nairobi. Unfortunately, the Mombasa plant was out of commission beginning in April 1999 because of a breakdown in its turbines. It was back in operation by the end of 1999. Power is supplied at 240 volts, 50 Hz single phase, and 450 volts, 50 Hz three phase. The standard electrical plug is the British three-blade plug.
c) Water and Sewage: In Kenya's major towns, local authorities provide sewage and drainage systems for residential and commercial use. Water is supplied by local authorities and other licensed suppliers. Increased demand for water in Kenya's main urban areas has led to multimillion-dollar water projects in Nairobi and Mombasa. Water shortages have become a permanent feature although water quality has been maintained at acceptable international standards. However, visitors are still advised to filter and boil, distill drinking water, or purchase bottled water.
4. BANK/FINANCIAL SERVICES
Kenya has a well-developed financial sector with 56 licensed national and internationally affiliated banks. Five of the licensed banks are under statutory management while two are not operational. These banks offer a range of services including: mail and cable fund transfer, export and import finance, letters of credit, and purchase and sale of shares and stocks among other services. Most of the banks are competent in international banking practices and provide merchant banking services. Their services, although often lacking up-to-date information technology, are within acceptable levels. Financial consultancy and management in the country are still in infancy, but the pioneers have versatile and international backgrounds. It is anticipated that major banks will continue to modernize their data processing equipment and use faster data transfer means, including satellite links to outlying branches.
5. HEALTH SERVICES
The country has a widespread health service network. Services are concentrated mainly in urban areas; they are sparsely available in rural areas. Sophisticated medical treatment is only available in Kenya's two main cities of Nairobi and Mombasa where most of the qualified medical practitioners are resident. Although the country has a contingent of internationally trained medical personnel, they are few in number and lack modern equipment backup and highly trained support medical staff. Nairobi Hospital and Aga Khan Hospital in Nairobi provide some of the most modern medical services in the country, but are overstretched. For additional details, see Chapter IX - "Business Infrastructure."
6. HOUSING/OFFICE SPACE
Quality, reasonably-priced residential and office accommodation is readily available in Nairobi and Mombasa. New housing developments are cropping up, mostly with adequate utilities. Utility connections, telephone and FAX lines can usually be obtained, though delays are common.
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