Report No. 25840-KE Kenya A Policy Agenda to Restore Growth August 18, 2003 Poverty Reduction and Economic Management 2 Country Department AFC05 Africa Region Document of the World Bank GOVERNMENT FISCAL YEAR July 1-June 30 CURRENCY EQUIVALENTS (Exchange Rate Effective August 15, 2003) Currency Unit Kenyan shillings (Ksh) US$1.00 = 76 Kenyan shillings Kenyan shillings 1.00 = US$0.01366 ABBREVIATIONS AND ACRONYMS AGOA African Growth and Opportunity Act of the United States CBS Central Bureau of Statistics COMESA Common Market for Eastern and Southern Africa CPI Consumer price index EAC East African Community EPZ Export Processing Zone FDI Foreign direct investment ICT Information and Communication Technology IFC International Finance Corporation IMF International Monetary Fund ISO Industrial Standards Organization IT Information technology KANU Kenyan African National Unity KBES Kenya Bureau of Standards KCC Kenya Cooperatives Creameries KIPPRA Kenya Institute for Public Policy Research and Analysis KIRDI Kenya Industrial Research and Development Institute KPLC Kenya Power and Lighting Company KTDA Kenya Tea Development Agency MTEF Medium-term expenditure framework NGO Nongovernmental organization REER Real effective exchange rate RPED Regional Program on Enterprise Development RSA Republic of South Africa SITC Standard International Trade Classification WTO World Trade Organization Vice President: Callisto Madavo Country Director: Makhtar Diop Sector Director: Paula Donovan Sector Manager: Robert Blake Task Team Leader: Miria Pigato CONTENTS SUMMARY AND RECOMMENDATIONS .................................................................i Introduction .................................................................i The 1990s: A Decade of Decline and Lost Opportunities .............................................................i A Strategy for The Recovery Of Growth ................................... iii Conclusion ....................................x 1. RECENT ECONOMIC DEVELOPMENTS ..................................1 A. Recent Macroeconomic Performance ...................................1l B. Trade Integration ....................................8 C. Financial Integration ...................................1 I D. Export Performance ................................... 12 E. Future Prospects ................................... 16 F. Summary and Recommendations ................................... 17 2. GROWTH AND POVERTY REDUCTION IN KENYA . .................................................... 19 A. Poverty In The 1990s ................................................................ 19 B. Growth Prospects ................................................................ 28 C. The Future Potential for Poverty Reduction ................................................................ 32 D. Summary and Recommendations ................................................................ 35 3. AGRICULTURE ................................................................ 37 A. Ov;rview, Structure and Performance of the Agriculture Sector ......................................... 37 B. Sectoral Perspectives ................................................................ 41 C. Summary and Recommendations ................................................................ 53 4. MANUFACTURING ................................................................ 57 A. Manufacturing Performance ................................................................ 57 B. Evidence from Surveys of Enterprises ................................................................. 60 C. Why Did the Manufacturing Sector Perform Poorly? .......................................................... 62 D. A Success Story: The Garment Sector and the Africa Growth and Opportunity Act ........... 65 E. Summary and Recommendations ................................................................ 68 5. SERVICES ................................................................ 71 A. Background ................................................................ 71 B. Information and Communication Services ................................................................ 72 C. Tourism ................................................................ 78 D. Summary and Recommendations ................................................................ 83 6. THE INVESTMENT CLIMATE ................................................................ 85 A. The Regulatory Framework ................................................................ 85 B. Governance ................................................................ 92 C. Infrastructure and Financial Services for Investment and Growth ..................................... 100 D. Conclusions ................................................................ 114 BIBLIOGRAPHY ................................................................ 181 ANNEXES Annex I: Revisiting Kenya's Poverty Lines, Welfare Measures And The Poverty Profile 115 Annex II: Kenyan Growth Prospects From An International Perspective ........................... 129 Annex III: Statistical Appendix ..................................................... 137 BOXES Box 1.1: Major Policy Reforms and External Events 1990-2003 ....................................... 3 Box 2.1: AIDS, Mortality and Growth in Kenya ...................................................... 30 Box 2.2: Basic Assumptions Underpinning the Growth Poverty Scenarios ........................ 32 Box 5.1: Telecommunications Framework ..................................................... 73 Box 5.2: Extending Universal Access In Chile ..................................................... 77 Box 6.1: Reform of Public Procurement ..................................................... 96 Box 6.2: How One Large Rail User Created its Own Solution ......................................... 105 Box 6.3: The Financial Sector in Kenya ..................................................... 113 FIGURES Figure 1.1: External Debt Indicators ..................................................... 7 Figure 1.2: ODA and Private Transfers ..................................................... 10 Figure 1.3: Kenya FDI Inflows, Outflows and Real GDP ..................................................... 11 Figure 1.4: Share of World Exports: Kenya, Vietnam and Malaysia ...................... ................ 13 Figure 1.5: Manufactures as a Share of Total Merchandise Exports Selected Countries ........ 13 Figure 1.6: Commodity Exports ..................................................... 14 Figure 1.7: Market Destination for Kenya's Exports ..................................................... 14 Figure 1.8: Export Performance and REER ..................................................... 15 Figure 1.9: Kenya-Prices Ratios ..................................................... 15 Figure 1.10: Unit Labor Costs by Sector ................................................................................... 16 Figure 2.1: Poverty in Kenya During the 1990s ............ 22 Figure 2.2: Predicted and Actual Long Run Annual Per Capita GDP Growth .28 Figure 2.3: Poverty Reduction and Growth in Kenya .35 Figure 3.1: Agriculture Domestic Terms of Trade .39 Figure 3.2: Agriculture Share of Government Expenditure .41 Figure 3.3: Coffee and Tea Exports .42 Figure 3.4: International Coffee and Tea Prices .43 Figure 3.5: Coffee Factory Operating Costs (Real) Murang's District .43 Figure 3.6: Horticultural Exports .45 Figure 3.7: Maize Prices in Capital City .47 Figure 3.8: Sugar Prices in 2001 .....................48.............................. 48 Figure 3.9: Live Animals and Meat Exports .50 Figure 3.10: Livestock Gross Marketing .50 Figure 3.11: Milk Prices .52 Figure 5.1: Annual Bed Nights by Location .79 Figure 5.2: Growth in Arrivals, 1990-99 .79 Figure 6.1: Kenya's Governance Indicators Compared with the Sub-Saharan Africa Average, 2000/01 .93 MAPS Map 2.1: Headcount Poverty Rates: Census-Based Location Level Estimates (Nairobi- Kibera Area) ..................................................... 25 Map 2.2: Example from the Coast: Poverty Incidence in the Watamu Area ........................ 26 Map 2.2a. Division-Level in Malindi District ..................................................... 26 Map 2.2b. Location-Level in Malindi Division ..................................................... 26 Map 2.2c. Sublocation Level in Watamu Location ..................................................... 26 TABLES Table 1-1: GDP Growth and Sectoral Contribution to Growth, (Constant 1982 Prices) ..............2 Table 1-2: Macroeconomic Indicators, 1990-2003 ......................................................4 Table 1-3: Composition of Expenditure .5 Table 1-4: Trade Policy Regimes in the East African Community .9 Table 1-5: The Inward FDI Performance and Potential Indexes: Selected Countries .12 Table 1-6: Kenya's Export Performance .12 Table 1-7: The External Environment for Kenya .17 Table 2-1: Sensitivity of the Poverty Line and Poverty Measure .21 Table 2-2: Social Indicators .23 Table 2-3: Province-Level Rural Overall Poverty Incidence Estimates .24 Table 2-4: Factors explaining Kenya's Predicted Growth Shortfall Relative to High-Performing Asian Economies (percentage points) .29 Table 2-5: Economic Growth Scenarios and Their Effect on Poverty and Inequality in 2015 ... 34 Table 3-1: Kenya Compared to Other Countries .39 Table 3-2: Horticultural Exports, 2001 .45 Table 4-1: Benchmarking Kenya's Industrial Performance .59 Table 4-2: Technological Structure of Manufactured Exports by Kenya and Comparators. 59 Table 4-3: Tertiary Technical Enrollments, 1985 and 1997 .64 Table 5-1: Services Sector: Real Growth and Share of GDP .71 Table 5-2: Exports of Nonfactor Services: Average annual rates of growth (in percent) and .72 Table 5-3: The Cost of Telkom Kenya Services .74 Table 6-1: Institutional Quality Scores for Kenya, 1985-2001 .93 Table 6-2: World Business Environment Survey Results .95 Table 6-3: Crime in Nairobi .97 Table 6-4: The Port of Mombasa: Performance Indicators .107 Table 6-5: Sources of Finance for Firms .112 This report was prepared by a team led by Miria Pigato (AFTP2) and comprising Lionel Demery (AFTPM), Johan Mistiaen (DECRG), Luc Christiaensen, Lucas Ojiambo, Sibel Kulaksiz, Eric Hawthom, and Wendy S. Ayres (AFTP2), Donald Mitchell (DECPG), Charles Kenny (CITST) and Andrew Singer and Sanjaya Lall (Consultants), and Samuel Gitonga contributed to Annex 111. The team visited Kenya in January 2003. Mr. Joseline Ogai, Ms. Monica Aoko and Mr Nelson Muturi from the Ministry of Finance, Government of Kenya, provided comments to the Concept Paper and advised the team. The report benefited from comments by its peer reviewers Quentin T. Wodon (AFTPM) and Edgardo Favaro (PREMEP) and from Mathew Wyatt (Department for Intemational Development, U.K.). The report was desk topped by Tanisha McGill with the contribution of Saba Solomon Tekle. Makhtar Diop (Country Director) and Fred Kilby (Sector Manager) provided guidance. Financial assistance from Department for Intemational Development (U.K.) is gratefully acknowledged. SUMMARY AND RECOMMENDATIONS INTRODUCTION 1. Kenya is experiencing a unique historical moment. On December 27, 2002 Kenyan voters elected their first new president in 24 years, thereby ending the political domination of the party that has ruled Kenya since independence. The new Government has already made a clear break from the past by its policy actions. Among these are adopting key legislation to improve governance, the reintroducing universal free primary education, and accelerating the constitutional reform process. 2. The government is developing a consultative economic recovery strategy aimed at translating its manifesto commitments into practical actions that will stimulate growth. This country economic memorandum (CEM)-the first since 1995-is a contribution to the government's economic recovery strategy and to its poverty reduction strategy paper (PRSP), which is also being finalized. It examines Kenya's economic performance during the past decade, and identifies the structural weaknesses that have contributed to the decline in productivity and the competitiveness of the economy during this period. It also recommends policy and institutional reforms to revitalize economic growth and to reduce poverty. 3. The message from the CEM is a sober one. Increased poverty is the legacy from almost two decades of slow growth. The burden of disease, particularly malaria and HIV/AIDS, is heavy and will constrain growth in the years to come. However, given the improved economic policy environment, the potential for growth of the economy is significantly better than the poor performance in the 1990s would indicate. But even in our high-case scenario Kenya is unlikely to reach the Millennium Development Goal of cutting in half by 2015 the proportion of Kenyans living in poverty in 1990. Reducing poverty will remain a tremendous challenge. 4. The CEM is organized into six chapters. Chapter I reviews recent economic developments and Kenya's integration with the world economy. Chapter 2 discusses trends in poverty and focuses on the long term economic factors that affect productivity and institutional effectiveness. Chapters 3-5 provide detailed analyses of the agricultural, manufacturing, and services sectors, identifying specific cross-sectoral issues and recommending policy and institutional reforms to promote broad-based economic growth. Finally, chapter 6 discusses the investment climate and its relationship to private sector investment. THE 1990S: A DECADE OF DECLINE AND LOST OPPORTUNITIES 5. For the first two decades after independence, Kenya pursued economic growth on the basis of an import substitution industrialization strategy, with the state playing an increasingly important role in the economy. The economy performed well, and per capita income grew by 2.3 percent a year. Agricultural growth came mainly from the smallholder farmers, who benefited from the redistribution of the land of former colonial estates; from subsidized credit, agricultural inputs, and marketing services; and from protection from imports. Industrial growth was stimulated by policies protecting industries from imports, while exports were increasingly taxed, directly and indirectly, to finance growing public sector expenditures. In summary, growth during that period was explained by the availability of land for expansion of agriculture, a buoyant world economy, the benefits of early stages of industrialization, and low population pressure. During the 1970s the economy was hit by a number of shocks. These included a fivefold increase in the price of oil, the boom and bust-cycle in coffee and tea prices, and the breakup of the East African regional agreement in 1977. But more importantly, the underlying stimulants of growth had run their course. In the absence of sustained investment and with limited scope for expanding into new lands, agricultural growth started declining in the 1980s. Productivity in the economy fell, and so did the growth in exports. By the end of the 1970s the rising share of the public sector in the economy and the low productivity of the state enterprises had become a drag on economic performance. 6. The limitations of import substitution policies and the lack of sustained economic reforms during the 1980s and 1990s led to a decline in economic performance. The government embarked on a series of structural adjustment programs starting in the early 1980s, and continuing into the late 1990s. However, efforts at sustaining fiscal stabilization and at reducing the role of government in the economy proved difficult. Adjustment programs were implemented at an uneven pace, and reversals occurred periodically. Overall, the programs did little to address in depth the underlying structure of relative prices and incentives in the economy, and consequently did little to stimulate growth. While exogenous factors (droughts and floods) contributed to volatile agricultural output, policy related factors-the poor sequencing of reforms, the absence of a coherent land policy, and misallocation of resources for agriculture-played a larger role. The manufacturing sector responded poorly to the trade and investment reforms of the early 1990s, revealing its lack of competitiveness. Investment stagnated and productivity declined. While reduced, the antiexport bias of policies continued. As a result, Kenya's share in world exports is now half of what it was in the 1980s. 7. A key policy failure during the 1980s and 1990s was the poor management of the economy. This is especially true of the public sector, which gave rise to an inequitable use of public resources. Kenya was relatively successful in reducing the fiscal deficit in the 1990s, but the burden of adjustment fell on capital investment which shrunk to 11 percent of government expenditures by the end of the 1990s compared to 20 percent at the beginning, while the wage bill increased from 29 percent to 38 percent of government spending. The mirror image of this was that, while revenues remained relatively high (representing 22-25 percent of GDP during the 1990s), the quality of services delivered by the public sector deteriorated, thus contributing to the fall in the productivity and the competitiveness of the economy as a whole. The public sector continues to dominate the delivery of energy, telecommunications, transportation, and water services. The lack of investment in the utilities and infrastructure combined with their poor management has significantly constrained the growth of the economy and contributed to the increases in poverty. Weak public financial management and procurement systems, ineffective systems of accountability (including through the courts), weak law enforcement, and relatively poor public service pay have fueled corruption and resulted in rising crime rates and deteriorating security. These problems have not only lowered the quality of life for the Kenyan citizens, but have also increased the cost of doing business in the country. Importantly, they have harmed the image of Kenya as a good place to do business in the international investment community. 8. Poverty increased during the 1990s. Reflecting these developments, the proportion of the population living in poverty increased from 48.4 percent in 1990 to 51.4 percent in 1997 and to 55.4 percent in 2001. The number of poor increased from 11.3 million in 1990 to 14.4 million in 1997 and 17.1 million in 2001. Inequality has remained high. The nonincome dimensions of poverty also deteriorated in Kenya during the 1990s, although Kenya's indicators of health and ii education are better than those of many other Sub-Saharan African countries. Primary school enrollment rates have declined since the early 1990s, although Kenya spends over 6 percent of its GDP on education, more than twice the low-income country average of about 3 percent of GDP. Partly because of the HIV/AIDS pandemic (the infection rate reached 13.5 percent of the adult population in 2000), life expectancy declined from 58 years in 1986 to 47 years in 2000, just above its level in 1960. The infection has a gender dimension in that girls and young women are more likely to be infected than men. Infant and child mortality have worsened. Gender disparities have persisted with women having on average, lower educational attainment, less access to health services, and a heavier workload than men. 9. The 1990s has also been a period of transformations that indicate the way forward. First, strong monetary management has produced low inflation and a stable exchange rate. Second, agriculture has responded with dynamism in the subsectors that have little direct government involvement, notably smallholder tea, smallholder dairy, and horticulture. This growth has occurred despite declining world prices in some markets (tea, for example) and a very competitive environment in others (horticulture). Third, Kenya has become a leader in the race to benefit from the U.S. African Growth and Opportunity Act (AGOA), and the garment industry is enjoying a spectacular recovery. Factors such as efficiently run export processing zones, good air and sea transport links to Asia and the United States, and a skilled workforce have facilitated the success of the garment industry. These attributes could become important in attracting other businesses as the investment climate improves. Finally, while the privatization program was stalled by a lack of political commitment, a number of initiatives to restructure public enterprises and to retrench personnel have been launched. These measures should enable the enterprises to become more efficient and more competitive. The preparatory work needed to reform competition policies and regulatory frameworks to allow private sector participation has progressed well. A STRATEGY FOR THE RECOVERY OF GROWTH Kenya's GDP growth potential 10. Given its current structure, the Kenyan economy can be expected to grow by about 4.5 percent per year. On the basis of findings from several cross-country studies, and of current economic and social conditions, we estimate that Kenya's long-run growth potential is low, around 2.0 percent per capita per year, translating into GDP growth of 4.5 percent per year. This is our base case. We also present a high-case scenario with a 3.3 percent per capita GDP growth per year, which could result from a strong supply response from the industrial and tourism sectors to rapid improvement in the investment climate. However, even in this high-case scenario growth is lower than that achieved in the recent past by the high-performing Asian economies. 11. Factors influencing the growth prospects. A number of factors explain this relatively low growth potential. First, the continued high fertility rate and the burden of disease are slowing growth by keeping the dependency ratio-the proportion of people either too old or too young to be employed-high. The recent increase in mortality reduces per capita economic growth by almost a percentage point. This is the approximate economic cost of malaria and of the HIV/AIDS pandemic. Second, with respect to gender, Kenyan women are completing fewer years of school and are far less likely to complete secondary school than are men. This results in lower labor female force participation in the nonwage economy and higher fertility. Third, the high level of corruption and the deterioration in institutions have harmed Kenya's growth iii prospects. Finally, past fiscal policy has constrained growth prospects, although recent corrections are encouraging. 12. Broad-based growth of agriculture is critical to substantially reduce poverty. Will the expected growth be sufficient to reduce poverty? Our analysis suggests that it is unlikely that Kenya can cut in half by 2015 the proportion of people living in poverty in 1990, even in the high-case growth scenario. Yet, more importantly, the poverty reducing potential of economic growth will critically depend on the nature of the growth path followed. While the industrial and service sectors may grow rapidly in the short-term with the improvement in governance and the investment climate, broad-based agricultural growth is critical for reducing poverty. Without success in fostering agricultural growth, poverty will remain unacceptably high during the coming decades, with the number of people living below the poverty line in 2015 roughly equal to that in 1997. 13. Reducing poverty will require reallocating public spending towards pro-poor programs, and eliminating obstacles to the full participation of women and other groups in the economy. Including the poor in the growth process will require reallocating spending to key public services, particularly health and education, and ensuring that the services actually reach the neediest. The government has already made primary education free for all. Refocusing on health services in view of the recent increases in mortality rates due to the HLV/AIDS pandemic, and encouraging girls to attend and stay in school, especially-secondary school, are important. While time constraints have prevented a full integration of gender issues in the proposed development strategy, this CEM does suggest that removing gender-related obstacles to growth could make a significant contribution in raising Kenya's long-term growth potential. More generally, it recognizes that inclusive policies will accelerate the pace of economic and social progress. This CEM has focused on analyzing existing information on living standards, which is the first step in monitoring the impact of programs intended to reduce poverty. The last nationally representative household survey was conducted six years ago. The Central Bureau of Statistics should initiate a new one as soon as it can develop an improved survey instrument. At the same time it should review and improve its methodologies for estimating household well-being and for deriving the poverty line. 14. This CEM recommends a number of policy and institutional reforms to promote growth and to ensure that the poor participate in and benefit from the growth. First, maintain a stable macroeconomic environment while improving the allocation of public spending and further opening up the economy. Second, improve food security, by increasing the productivity of smallholders and facilitating the move of smallholders away from production for subsistence towards more commercialized agriculture. A third set of recommendations, and key to the recovery of the manufacturing and tourism sectors, relates to improving the investment climate, by strengthening the competitive environment and building firms' capabilities, improving governance, and improving the delivery of energy, telecommunications, transportation, and water services. Achieving a sound macroeconomic environment and better allocating public resources 15. The continuation and deepening of sound macroeconomic policies are prerequisites for economic recovery and require building on the achievements of the previous administration in maintaining a stable macroeconomic environment with low and predictable inflation rates. This report has identified the following priorities: iv * First, reorient expenditures away from wages towards capital expenditures and delivery of services for poverty reduction. This is possibly the most important action that the government can take to revitalize growth. This will require resisting demands for wage increases, accelerating reform of the civil service, and adopting strong measures for expenditure monitoring and control. * Second, reduce the debt burden. Measures include accelerating the privatization program and using the proceeds to retire part of the domestic debt, and securing external financing for budgetary expenditures, particularly in the form of grants and concessional loans. * Third, allocate public spending according to the priorities identified through the PRSP consultations and in the ongoing public expenditure review. Finalizing the PRSP provides the opportunity to revisit the core poverty program-both the design of the program and arrangements to implement and protect it-making sure that it is consistent with pro-poor spending. * Fourth, pursue measures to increase private sector participation in provision of key infrastructural services. Little investment has made in the key parastatals such as telecommunications and energy during the past decade. They now require substantial new investment if they are to deliver services efficiently and reliably-which is essential to bring down costs to business and improve the competitiveness Kenya's economy. Given the government's budget constraints, private sector finance will be needed for investment. This will require measures, including privatization, to encourage private sector participation in the delivery of services. * Fifth, lower tariffs and increase the international integration of the Kenyan economy. Kenya is working with the other members of the EAC and of COMESA to remove internal obstacles to trade and to establish a common external tariff, thereby moving towards regional integration. Kenya should also accelerate the process of becoming more integrated in the world economy by lowering tariffs and other barriers to imports of goods from the rest of the world. This is crucial to encourage the medium and large manufacturing firms to become more efficient and competitive. Increasing agriculture productivity 16. While growth will come from all sectors of the economy, agricultural growth is particularly important to reduce poverty. More rapid agricultural growth than occurred during the 1990s is possible with prudent policy reforms and investments to lift long-term productivity and reduce the costs of inputs. Broad-based growth in the rural sector requires a holistic approach to agriculture and rural development. However, due to time constraints, this CEM has not covered several issues that are important for broad-based agricultural growth. Credit, research and extension, and input supply are not covered in detail and are priorities for future work. Policies to deal with the highly variable natural environment are not covered, but are taken up in other World Bank work. Land and water management, and issues related to environmental sustainability are obviously priorities in any agricultural strategy, as is fully integrating gender issues, which is discussed in the upcoming gender strategy. However, this CEM has identified a number of priorities for agricultural growth, and for ensuring that this growth includes smallholders and subsistence farmers: v * First, reconsider food security policies. A full liberalization of the maize market, with unrestricted imports from neighboring countries, would improve food security, as the poor are net buyers of these staples. At the same time, efforts to improve the productivity of smallholder maize producers should be pursued, particularly with respect to the supply of seeds and fertilizer. As to the sugar subsector, the Sugar Act should be amended to limit the Kenya Sugar Board to a regulatory role, curtailing its responsibility for industry operations. The development levy should be reduced and put under the supervision of elected representatives of growers and millers. The sector should be liberalized and factories privatized. * Second, reform the coffee sector. Smallholders are already benefiting from reforms in the tea and dairy sectors. It is now urgent to reform smallholder coffee marketing and processing so that farmers receive a larger share of final sales. First, an agency should be established for coffee along the lines of the Kenya Tea Development Agency to operate processing facilities, handle marketing, and provide inputs to farmers on credit. Second, the Coffee Act should be amended to allow the agency to operate as the agent for smallholders and to allow growers to sell coffee outside the auction if they wish. Third, update the register of producers and implement procedures to prevent side-selling by farmers who are attempting to avoid repaying input loans. Finally, make coffee research more demand driven and effective. * Third, support the livestock subsector. This sector is key to the livelihood of subsistence farmers and pastoralists and has large growth potential. Disease control is key to promoting growth of the livestock subsector. The government should monitor disease outbreaks and develop systems to facilitate a coordinated response to prevent diseases from spreading. The government also has a responsibility to ensure that private sector veterinarians and service providers are certified and perform in accordance with professional standards. The government should also work to help harmonize import standards among countries in the region, eliminate the numerous tolls on animal movements, and introduce a single permit for cattle movement. Enforcing laws against animal theft and generally improving security would also help promote livestock production. Lack of reliable water supplies in the arid and semiarid regions is a key constraint to the development of the livestock sector, and improving the sustainable management of water resources in these areas needs to be made a central priority. * Fourth, rationalize public expenditure. Preliminary findings from the ongoing public expenditure review also point to severe problems of misallocation of resources within the Ministry of Agriculture. About three-quarters of public spending in agriculture is in fact absorbed by parastatals to perform functions that in many cases have been designated as noncore. Only around 50 percent of the requirements for extension services that were believed to be essential in the PRSP are provided. Thus, it appears that a restructuring of spending in agriculture and a revival of reforms of parastatals is necessary-particularly in the context of the PRSP priorities. 17. Over the medium and long terms, commercialization of agriculture will lead to higher growth. Nonfarm employment is the path out of poverty for many of the rural poor, whether employed on large farms, or in nonfarm activities. The key to the development of a robust nonfarm sector is increased agricultural production. Incomes generated by agriculture are vi spent on agricultural inputs, processing of agricultural outputs, and consumer goods. The government's role in fostering a more commercialized agricultural sector should focus on improving the enabling environment, by improving rural roads, which will reduce transport costs; taking action to bring down the costs of electricity, which will reduce irrigation and factory operating costs; reducing fuel taxes which will reduce transport costs; and improving communication systems, which will facilitate trade and closer monitoring of markets. In addition, research that is responsive to producer demands is needed to develop new higher yielding, disease resistant crop varieties. Livestock research to deal with diseases endemic to the area is also required. Extension services need to be rationalized and access to credit, particularly for the smallholders, enhanced. The fraudulent practices of some input suppliers and marketing agents must also be eliminated. Strengthening the competitive environment and building firms' capabilities 18. Manufacturing. Increasing competitiveness in the manufacturing sector, requires more closely linking increases in wage to increases in productivity, and enhancing the flexibility of labor markets by, for example, introducing an appeal facility for employers. These are essential if firms are to again become profitable enough to increase investment and to create jobs. Measures to increase labor productivity include raising the quality and range of formal education, particularly at the technical level, stimulating greater employee training by enterprises, and improving the functioning of the training levy/grant system. 19. To increase the productivity of capital, firms must enhance their capacity to acquire and absorb technology. Three actions are recommended. First, strengthen the capabilities and technology support institutes by upgrading equipment, staff training, and ICT facilities; and encourage the institutes to develop stronger linkages with enterprises. Second, strengthen protection intellectual property rights by launching a campaign to raise public awareness of intellectual property rights issues, by intensifying control of counterfeiting, by introducing more rapid legal action and severe penalties, and by bringing counterfeiting penalties in line with those for patent infringement. Third, increase acquisition of technology through subcontracting arrangements and by attracting FDI. To attract foreign investors, it is important to finalize the new investment code (after removing the requirement for an investment license), to strengthen and centralize promotion activities, and to improve data collection. 20. The legal framework for competition and for intellectual property protection appears to be adequate. But the entities that implement and enforce the laws need to be strengthened by recruiting new staff and upgrading the skills of existing staff, and by improving the information base. Strengthening institutions is also important in areas such as commercial justice and financial sector supervision. Access to financial services can be increased by improving the legal protection of creditors, strengthening the judicial system (commercial courts), limiting recourse to court injunctions by borrowers, improving the protection of property rights (by facilitating registration of property liens and access to credit information), and facilitating claims on collateral. 21. Micro and small firms. The constraints on the growth of micro and small firms include lack of property rights which limits their ability to access external finance, inadequate infrastructure, and undeveloped business support services. While this CEM has not dealt in detail with the issues of micro and small firms and with the informal sector, it recognizes that they have a key role in the economic recovery. A key challenge will be to foster the growth of these firms so that they graduate from the informal to the formal sector. Further work needs to be done to vii explore ways of increasing their access to training, technology, and financial services, including credit. In this context, the government should aim to foster the development of private financial services in the country, rather than providing credit itself. 22. Tourism. For the tourism sector, the key issue is to improve security. Measures to address the high crime rates in Kenya need to start with broadly reforming the police force, through measures such as providing better pay, equipment, and support. Besides security, several specific sectoral actions may help in revitalizing tourism and broadening its benefits. Diversifying into community-based tourism and ecotourism, and attracting more tourists to little visited parks (for example, through differential pricing) could make tourism more effective in reducing poverty. Helping communities diversify into tourism would require technical assistance to set up small and medium size enterprises, access finance, train guides, and develop information materials. A strategy to promote tourism must include actions to protect the environment. Considerable scope exists for improved land management carried out in partnership with the private sector and communities. Improved coastal zone management is important to ensure that beach and coastal resources are protected. Government-private-community partnerships could play an important role in extending reserve areas around national parks for the benefit of all. Improving governance 23. The government has demonstrated its commitment to eliminating corruption and restoring the rule of law. Parliament passed in May 2003 two key pieces of legislation aimed at improving governance. The first of these defines corruption and economic crimes, and creates an independent Kenya Anti-Corruption Commission to investigate them. The second, the Public Officer Ethics Act, requires that all public officers adhere to codes of conduct, including declaring their assets. Three additional pieces of governance legislation were approved by cabinet in May 2003 and will be presented to parliament for enactment at the first opportunity. The public procurement and disposal of assets bill, addresses a set of problems that have contributed to corruption in the public procurement of goods. The government financial management bill addresses accountability in the management of public finances. The public audit bill creates a national audit office and adopts measures that will improve the quality and timeliness of audit reports and help parliament effectively oversee the management of public finances. The ongoing constitutional review will establish an improved framework for accountable government in Kenya, including stronger parliamentary institutions and a more independent judiciary. In the immediate future, dealing quickly with the suspicion and distrust surrounding many current judicial appointments-building on the appointment of the new chief justice and high court judges-is essential. Looking forward, a number of initiatives that will benefit the private sector-such as those intended to enhance debt recovery and land administration, to improve court recording and records management, and to strengthen alternative mechanisms of dispute resolution-should be given priority. 24. Government's actions so far have already had an important effect on investors' perceptions of the investment climate in Kenya by signaling a strong intention to reform. Recent issues of the International Country Risk Guide indicate that investors already perceive that Kenya is a better place to do business than it was under the previous government. They have in particular named institutional quality, including corruption and law and order, as having improved. Investors' perceptions will improve further once it is clear that reforms are having an impact in reducing uncertainty and lowering the costs of doing business. Effectively viii implementing the new anticorruption legislation will help in further improving perceptions and promoting investment. 25. The government has undertaken impressive measures to curb corruption. To obtain the full effect of these anticorruption measures and unleash Kenya's growth potential and significantly reduce poverty, fiscal austerity will also be necessary. Reducing corruption and ending the misallocation and misuse of public resources will free resources for public investment and provision of services. However, nearly half of government spending is on wages and interest payments, and these are not likely to be significantly reduced by improved oversight and budget management. In the short run, the government will need to adopt austerity measures and therefore make difficult choices to keep the budget deficit from expanding to levels that will require increased domestic borrowing, crowding out private borrowing. Improving the quality and efficiency of transportation, energy, water, and telecommunications services 26. Productivity growth in Kenya necessarily involves better quality and lower cost infrastructural services. This will require increased public spending as well as increased private provision. This CEM argues that the government should increase private sector participation, mostly through privatization. The parastatals after a long period of neglect now require significant new investments that the government cannot afford without cutting key programs intended to reduce poverty. Thus, difficult choices are necessary. The key recommended reforms include: * First, improve airport management, safety and security. Otherwise Nairobi will not be able to maintain its status as the major air transport hub in East Africa. Introducing private sector management of the airports (or concessions) is a model other countries have used successfully to improve the management of airports. Reviewing airport fees with the aim of bringing down costs to users is also important. Improving security is key to reaching Federal Aviation class status 1, allowing flights from and to the U.S. * Second, continue the significant institutional reforms initiated to reverse the deterioration in road quality. The government should set an accelerated timetable for road concessioning, starting with the northem corridor. The road levy fund has succeeded in slowing the pace of road deterioration. Its operations could be improved by reducing the audit backlog and improving public information on the use of the levy. Charges for heavy vehicles could possibly be increased and vehicle license collections improved. * Third, complete the privatization of the Kenya Railways by means of a long-term concession. * Fourth, convert the Kenya Ports Authority into a landlord port authority. Private provision and competition should be introduced into all services. Clearance processes and customs procedures should be radically simplified to reduce the scope for discretion and rent seeking and to reduce costs to port users. ix * Fifth, accelerate power sector reforms. After discussion of ongoing studies, the govemment should decide on and move towards implementation of the chosen option for private sector participation in the power sector. The government should also review the existing tariff regime and the current supply contracts with independent power producers, with a view towards lowering tariffs for users. * Sixth, approve an action plan and timetable for the full implementation of the detailed provisions of the Water Act 2002. Implementation of the Water Act 2002 has started with the establishment through a notice in the Kenya Gazette in March 2003 of the notice of the water services boards, the water services regulatory board, and the water services trust fund. This is a good start. Technical assistance may be sought to help implement the provisions of the act. * Finally, remove the remaining barriers to competition in the telecommunications sector. Telkom Kenya should then be privatized, but expectations about the proceeds need to be scaled back, given the difficult international telecommunications environment. Increasing access to rural areas is an important objective. Community broadcasting and mobile telephony are technologically appropriate and sustainable tools that will help in achieving this. Offering a reverse-auction subsidy to private mobile operators to roll out mobile footprint coverage could be considered. CONCLUSION 27. This report analyzed Kenya's growth experience in the 1990s and discussed future prospects for growth and poverty reduction. The 1990s has been a decade of decline and transformation. Poverty has increased and many social indicators have worsened. And yet, at the beginning of the new century, Kenya is still one of the most advanced countries in Africa. It has a geographically strategic position, a favorable climate, and a skilled and relatively well educated labor force. It has maintained macroeconomic stability, despite a lack of donor aid. It is a key player in the EAC and in the COMESA. It has a confident private sector and a free press. Most of all, it has a new democratically elected government that is committed to reform. But the challenges are great. The recent improvements in governance need to be grounded by legal and institutional changes. The reforms must be wide ranging, extending beyond the macroeconomic arena, and include redefining the role of the state in all sectors to keep pace with the advances in other countries. Most of all, the reforms must ensure that growth is broad based, allowing the poor to both contribute to and benefit from economic growth. x 1. RECENT ECONOMIC DEVELOPMENTS 1.1 Kenya gained independence from Great Britain in 1963, and Jomo Kenyatta, its first president, ruled the country until his death in 1978. Daniel Arap Moi, who remained in office for 24 years, succeeded him. During the past two decades Kenya, once the most prosperous and politically stable country in East Africa has experienced economic decline, a fall in living standards, and a deterioration in the quality of its institutions. On December 27, 2002 Kenyan voters elected a new president and ended the political domination of the country by the party that had ruled it since independence. The new government is now facing the formidable challenge of reversing years of economic mismanagement, increasing growth, and including all the people- and particularly the poor-in the development of the country. 1.2 This chapter provides a review of macroeconomic trends, (section A), the current status of trade and financial integration (sections B and C), the performance of exports (section D), future prospects (section E) and conclusions and recommendations (section F). A. RECENT MACROECONOMIC PERFORMANCE 1.3 Per capita income in Kenya is now below its level of 1990. During 1990-2001, Kenya's real GDP grew at an annual average rate of 2.2 percent (table 1.1). This was well below the average GDP growth rate of neighbors such as Uganda (6.8 percent) and Tanzania (3.1 percent). This was also lower than the Sub-Saharan Africa regional average (2.6 percent), and the average for low-income countries in general (3.4 percent) (World Bank, 2003). Kenya's weak economic performance coupled with population growth rates averaging 2.7 percent during the 1990s, led to a contraction in per capita income by an average of 0.5 percent per year. Three distinct phases in the growth performance can be discerned during the 1990s: * Economic mismanagement during 1990-93 negatively affected growth through high inflation rates and high interest rates. Per capita income contracted by 1.5 percent during the period. Concerns with a broad range of governance issues led both bilateral and multilateral donors to freeze aid and, in some cases, cancel their programs. Investor confidence also sank, linked to government's slow pace in implementing reforms (box 1.1). * Rapid recovery during 1994-97 was due to sustained implementation of reforms and buoyant world demand. GDP grew at an average annual rate of 3.3 percent during this period due to reforms that included the elimination of price and exchange controls and the removal of most trade restrictions. Agricultural marketing was liberalized, and by the end of 1995 the government divested its holdings in about 170 small nonstrategic public enterprises. Some 36,000 civil servants left the government's payroll, most through voluntary early retirement. Over the same period, the central bank took steps to reduce the use of overdrafts by commercial banks and to strengthen its autonomy and bank supervision. * Performance worsened during 1998-2001, due to wavering government commitment to reforms and several weather-related shocks. These included the severe droughts of 1997 and 2000 that reduced agriculture output and disrupted electricity generation, and the El Nifio floods in 1998. A drop in tourist arrivals and the withdrawal of capital due to political violence related to the 1997 elections negatively affected growth. In addition, a large number of teachers were recruited and salaries of civil servants were significantly increased. Commitment to privatization also faltered. In 1997, given the slow pace of implementation of the reforms, the International Monetary Fund (IMF) cancelled its Enhanced Structural Adjustment Facility. The World Bank followed, canceling in June 1998 its Structural Adjustment Credit. After a new attempt at governance reforms in early 2000, supported by the two institutions, a three-year PRGF and a World Bank's budget support credit went off track in November 2000. The programs were still off track at the time of the election at the end of 2002. 1.4 As discussed in chapters 3, 4, and 5, much of growth during the past two decades can be attributed to the expansion of services. The services sector grew by 3.0 percent during 1990- 2001, while agriculture grew by just 1.0 percent, and industry grew by 1.7 percent. Tourism is the largest contributor to the services sector. Finance and business services grew fastest in the mid-1990s, benefiting from the liberalization of the trade and foreign exchange regimes in the early 1990s. The industrial sector's performance was poor, reflecting a deterioration in the investment climate. Table 1-1: GDP Growth and Sectoral Contribution to Growth, (Constant 1982 Prices) Real GDP Growth Share in GDP Contribution to Growth 80-89 90-93 94-97 98-01 90-01 80-89 90-93 94-97 98-01 90-01 80-89 90-93 94-97 98-01 90-01 GDP 4.3 1.3 3.3 1.0 2.2 100.0 100.0 100.0 100.0 100.0 4.3 1.3 3.3 1.0 2.2 Agriculture 3.5 -1.0 3.4 0.5 1.0 31.8 28.9 27.3 26.7 27.6 1.1 -0.3 0.9 0.1 0.3 Industry 4.0 1.8 2.7 0.5 1.7 19.9 20.1 19.5 19.0 19.5 0.8 0.4 0.5 0.1 0.3 Manufctures 4.8 3.0 2.9 0.5 2.1 12.7 13.5 13.5 13.2 13.4 0.6 0.4 0.4 0.1 0.3 Services 5.0 3.3 4.3 1.5 3.0 48.3 51.0 53.2 54.3 52.8 2.4 1.2 1.8 0.8 1.6 Government services 4.9 3.1 1.5 0.7 1.8 14.9 15.7 15.3 14.6 15.2 0.7 0.5 0.2 0.1 03 GDP per capita 0.7 -1.5 1.6 1.0 -0.5 Source: Central Bureau of Statistics 2 Box 1ii: Major Policy Reforms and External Events 1990-2003 1990 Export processing zones authority established. 1991 The National Assembly amends the constitution to allow for multi-party elections. Donors freeze quick-disbursing aid because of fiscal and macro imbalances. 1992 Money supply is inflated by almost 80 percent to finance elections. Moi and KANU win multiparty elections. Goldenberg scandal: Asian businessman and the-then permanent secretary export nonexistent gold, claiming export compensation. The scam costs the Treasury some US$400 million (equivalent to 6.7 percent of 1992 GDP), sparking a financial crisis that still affects the economy. Banking scams added to the losses. 1993 New accord for a revived east African cooperation signed by Kenya, Tanzania and Uganda. Tea and coffee boards liberalized. Export subsidies abolished. Foreign exchange controls abolished. Capital markets partially liberalized. 1994 Last of price controls lifted. Influence of agricultural marketing boards reduced. Monopoly by Kenya Planter's cooperative on coffee milling ended. Tariff structure simplified, reducing the number of bands from eight to five. Managed floating exchange rate mechanisms adopted. Shares of National Bank of Kenya divested by the government. 1995 Kenya Revenue Authority established, merging the income tax, customs, and value-added tax commissions. Tax reforms introduced, reducing personal taxes by 20 percent. Road maintenance levy increased from Ksh 1.5 to Ksh 2 per liter of petrol. Controls on movements of all agricultural commodities were abolished. 1996 Three-year loan (US$215 million) under the Enhanced Structural Adjustment Facility approved by the IMF. Structural Adjustment Credit (US$125 million) approved by the World Bank. First tranche of US$80 million released. Amendment to the Central Bank of Kenya Act limiting government's access to credit to 5 percent of revenue enacted. Agricultural output reduced by a severe drought, with consequences to the economy. Over 42,000 public servants have left the civil service through voluntary early retirement or retirement from 1994 levels. 1997 Kenya Anti-Corruption Authority established. Release of second tranche of the ESAF loan suspended by the IMF, due to govemment failure to make greater progress on agreed reforms. Massive short-term private investment outflow. Coastal clashes cut tourism in half. Moi and KANU win multiparty elections. Teachers granted a pay increase and many new teachers hired, nullifying the positive impact on the budget of the civil service reforms. Enhancement of central Bank authority. New legislation says Govemor cannot be dismissed, unless fraud or mismanagement is proven. 1998 World Bank Structural Adjustment Credit closed without disbursement of the second tranche of US$45 million due to slow implementation of reforms. I I Agricultural output reduced by a severe drought and by floods:linked to El Nino, leading to declines in agricultural output. 1999 Govemment announces "change initiative" to address governance and public sector management concerns, and appoints change management team to key posts in the Office of the President, the ministry of finance, and other government ministries to manage the reform process. Number of ministries reduced from 27 to 15. Govemment introduces 18 percent VAT on several products and inputs. AIDS declared national disaster. 2000 First medium-term expenditure framework annual budget prepared for fiscal 2000/01-2002/03. US$210 million loan under the Poverty Reduction and Growth Facility of the IMF approved. Economic and Public Sector Reform Credit (US$150 million) approved by the Bank Kenya Anti-Corruption Authority suspended, following a court, ruling in December 2000 that the structure and powers of the authority violated the Kenyan Constitution. Banking prudential regulations revised to increase minimum capital levels. Agricultural and electricity output reduced by a severe drought; exports decline and imports increase. COMESA free trade agreement takes effect. Kenya declared AGOA eligible. 2001 'bisbursements under the IMF Poverty Reduction and Growth Facility suspended. Central tender board abolished, directorate of public procurement and public procurement appeals board created, and the practice of publicly announcing the results of the government tenders instituted. Key members of the change team dismissed. Trade regime fully liberalized and suspended duties eliminated (except on oil products). 2002 Mr. Kibaki and the National Rainbow Coalition win-the elections, ending the 40-year rule of KANU. 2003 Public Officer Ethics Act, and Anti-Corruption and Econohiic Crimes Act signed into law. 3 1.5 Investment and savings are low and falling. Weak economic growth has been accompanied by a decline in both savings and investment rates and by a strong increase in consumption. Gross domestic investment fell from 20 percent in the early 1990s to about 13 percent in 2001, with most of the decline occurring in public sector investment (table 1.2). From about 10 percent of GDP in the early part of the decade, public sector gross capital formation fell to just 5 percent of GDP in 2001, and is now substantially below the Sub-Saharan average of 7 percent. Private sector gross capital formation also fell from an average of 11 percent achieved in the early part of the decade to about 9 percent of GDP in 2001. This is well below the average for Sub-Saharan Africa of about 13 percent. In line with the declines in gross capital formation, gross national savings fell from an average of 14 percent of GDP in the first half of the decade to about 4 percent in 2001. By contrast, over the decade private consumption rose from 60 to 86 of GDP, increasingly financed, at the margin, by net current transfer and net factor income. 1.6 Revenues have declined since the mid-1990s. Revenues (excluding grants) declined from nearly 30 percent of GDP in 1996 to 22 percent in 2002, due partly to the slowdown in economic activity and an increase in tax evasion and partly to the decline in tax rates. The revenue decline coupled with and a collapse in donor financing complicated budget management. Table 1-2: Macroeconomic Indicators, 1990-2002 1990-93 1994-97 1998 1999 2000 2001 2002 (annual percentage change) Real GDP at market prices 1.8 3.7 1.6 1.3 -0.2 1.1 1.2 Inflation rate (national CPI, annual average) 28.2 12.8 6.7 5.8 10.0 5.8 2.0 (in percent of GDP) Gross domestic investment 19.9 20.0 17.4 16.2 15.4 14.5 13.5 * Private investment 10.1 11.6 10.4 9.7 9.1 8.8 ... Gross domestic savings 18.2 16.9 12.5 14.0 11.8 10.2 9.3 * Private savings n.a. 15.1 9.0 10.5 11.0 11.0 10.5 Total expenditure and net lending 1/ 32.2 31.6 29.5 27.6 23.0 27.4 25.0 * Interest payments 8.3 8.4 5.8 5.6 4.0 3.2 3.0 * Wage expenditures 9.3 9.0 9.5 8.8 8.6 8.1 8.5 * Capital expenditure 6.0 5.9 5.0 5.0 2.5 3.9 2.7 Total revenue 1/ 17.0 25.9 27.2 26.8 23.1 22.6 21.6 Overall balance (with grants) 1/ -13.4 -4.6 -1.5 0.0 0.7 -2.0 -2.2 Overall balance (without grants) 1/ -10.4 -5.7 -2.3 -0.7 0.2 -4.8 -3.4 Current account balance (with grants) -3.7 -3.1 -4.9 -2.2 -2.7 -3.5 -4.2 Current account balance (without grants) -1.5 -3.1 -4.9 -2.2 -3.6 -4.3 -4.2 Domestic debt, net (end of period) ... ... 20.6 20.5 21.2 19.6 21.9 Source: World Bank database, IMF Intemational Financial Statistics. Notes: n.a. means not available 1/ July-June fiscal year. 1.7 Domestic debt increased substantially to finance the growing public sector deficit. The revenue decline, coupled with poor expenditure and enforcement controls led to increased recourse to domestic financing and the accumulation of domestic arrears (or pending bills). The stock of gross domestic debt (in nominal terms) tripled, peaking at 44 percent of GDP in 1994. It declined to less than 20 percent of GDP in fiscal 2001 in association with a reduction of the deficit. However, worryingly it increased to 30 percent of GDP by the end of fiscal 2003. 4 Moreover, despite recent progress in lengthening maturities, half of the debt is still in the form of 91-day treasury bills. This high burden of debt will pose challenges for macroeconomic management during the short and medium terms. 1.8 The government mobilizes adequate revenues, which should allow it to finance critical social and capital expenditures, while maintaining a balanced budget. The government of Kenya mobilizes a higher share of GDP in revenues than the Sub-Saharan Africa average. The revenues if allocated appropriately would be adequate to finance critical social services and investment in infrastructure. During the 1990s, however, public sector wages and interest payments on domestic debt have absorbed a large and growing share of government expenditures. During 1990-99, spending on public sector wages rose from 29 percent to 38 percent of total government expenditures. The wage bill currently represents about 9 percent of GDP, which is significantly above the level in neighboring countries of around 5 percent (table 1.3 and table 111.5.4 in annex III). Over the same period, spending on interest payments increased from around 12-13 percent of expenditures in the 1980s to 27 percent of expenditures in the late 1990s. Although spending on interest payments has fallen since 2000 due to a drop in rates, spending on public sector wages and on interest payments combined still accounts for about 50 percent of government expenditures, leaving few resources for capital expenditures and delivery of essential services for poverty reduction. Thus, central government capital expenditures have fallen from about 20 percent of government expenditures in 1990 to 11 percent in 2001. Moreover, they have declined from about 6 percent of GDP in 1990 to less than 3 percent of GDP in 2001. Table 1-3: Composition of Expenditure (in percent of GDP) 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 KENYA Total expenditure and net lending 28.8 34.3 35.7 31.5 30.0 29.1 29.5 27.6 23.0 27.4 25.0 27.7 of which: Wages 8.8 9.0 8.6 9.9 9.2 8.4 9.5 8.8 8.6 8.1 8.5 9.2 Capital expenditure 5.5 6.1 6.7 6.7 5.6 4.6 5.0 5.0 2.5 3.9 2.7 3.4 TANZANIA Total expenditure and net lending 14.2 17.7 15.6 16.2 15.8 13.6 13.7 14.1 16.1 15.5 17.2 21.2 of which: Wages 2.7 3.4 3.4 3.7 4.1 4.2 3.9 3.4 3.9 3.8 3.8 4.1 Capital expenditure 2.4 3.7 3.2 2.8 3.2 2.3 3.5 3.9 5.0 3.5 3.2 5.9 UGANDA Total expenditure and net lending 21.2 18.6 18.6 16.7 16.2 16.8 16.4 18.0 26.8 20.7 25.9 25.4 ofwhich: Wages 1.7 1.6 1.9 2.5 2.7 3.4 3.4 4.2 4.2 4.6 5.5 5.7 Capital expenditure 9.4 10.2 9.7 7.5 7.1 6.8 6.7 7.3 14.2 7.5 10.4 10.1 SENEGAL Total expenditure and net lending 21.5 20.8 21.0 19.6 21.0 19.0 20.1 20.9 20.0 21.7 20.2 22.8 o/which: Wages 8.7 8.6 7.4 7.1 6.8 6.1 5.8 5.7 5.6 5.2 5.6 5.3 Capital expenditure 5.2 4.2 5.0 5.0 7.5 6.2 8.5 8.5 6.4 6.3 7.8 8.4 Note: Capital expenditure includes development and net lending. Source: World Bank database, IMF-lntemational Financial Statistics. 5 1.9 Due to spending a high proportion of the resources on wages and interest payments to service domestic debt, delivery of services has been poor. Despite collecting a higher share of revenues in relation to GDP than many other Sub-Saharan African countries, delivery of services in Kenya in many areas is worse than in the other countries. For example, although Kenya spends more than 5 percent of GDP on education, its gross primary school enrolment rates stand at only about 93 percent compared with an average of 112 percent in countries with similar levels of spending, and its gross secondary school enrolment rates stand at 28 percent compared with an average of 50 percent (Ministry of Education, Science, and Technology, 2003). Similarly, although Kenya spends a higher level of GDP on health services than do other Sub- Saharan African countries, its health outcomes are relatively poor. For example, infant mortality stands at 78 per 1,000 infants, compared with 58 in Ghana and 60 in Senegal (World Bank, 2003e). Moreover, infant mortality has risen from 62 in 1985 (Ministry of Health, 2003). 1.10 Budget management in the future will require difficult tradeoffs. Overall, the deficit (including grants) turned from a peak of 9.6 percent of GDP in fiscal year 1993, to a surplus in 2000 and back to a deficit again in 2001-02. The budget deficit is expected to grew substantially in fiscal 2003 and is projected to increase further in fiscal 2004 because, in particular, of increased spending for education (which is essential to reduce poverty), and increases in salaries for teachers and civil servants. In the short-run to avoid further increases in domestic borrowing that will choke off growth the government will need to adopt tough austerity measures and reduce government consumption. Difficult choices will have to be made to reorient expenditures towards the core functions of government and away from programs that are popular in the short- run, but which damage the country's long-term growth prospects. The government will have to reduce the size of the civil service to bring public consumption at a sustainable level. In addition, the government will not be able to finance essential investment in key parastatals, such as telecommunications and energy. Instead, privatization will be required to provide the resources necessary to improve delivery of essential infrastructural services. 1.11 In 2000, the government adopted a medium term expenditure framework, but has not used it effectively to shift spending towards priority programs for growth and poverty reduction. The medium term expenditure framework (MTEF) is a three-year program that provides the basis for making spending more effective and more oriented to expenditure categories with the highest potential to affect growth and to improve the quality of life for the majority of Kenyans. It is intended to strengthen the linkage between policy, planning and budgeting, and to improve monitoring of expenditures and public accountability. However, the MTEF has not been used effectively to shift spending towards priority programs. For example, the share of government expenditures devoted to health services fell from 8.4 percent in fiscal 2000 to 7.3 percent in fiscal 2001, before rising slightly to 7.6 percent in fiscal 2002 (Ministry of Health, 2003). The MTEF has not been supported in Kenya as in other countries through an annual public expenditure review process that evaluates budget strategy and performance, costs priority programs, suggests reallocations of expenditures, and recommends measures to strengthen pubic expenditure management systems. An initial public expenditure review was produced during the first few months of 2003, but not in time to influence the fiscal 2004 MTEF budget. The countries that have succeeded in aligning expenditure with priorities for poverty reduction have embedded the use of the MTEF and public expenditure reviews in their budget formulation processes. 6 1.12 The external debt is relatively low. Total external debt stood at US$7.1 160 Figure 1.1: External Debt Indicators billion in 1990 (87 percent of gross 140 120 domestic product, GDP) and at US$5.6 100 billion in 2001 (50 percent of GDP) (figure 80 l 60- 1.1).' During the decade the government 40 - continued to service its debt, bringing 20 - down the debt service payments from 34 0 0 r' %O cc percent of export of goods and services in 0 > C f° 1990 to 14 percent in 2001 (figure 1.1). | External debt/GDP * Debt service/exports This task was also facilitated by several debt reschedulings. 2 Kenya's external debt Source: World Development Indicators database. appears to be low by international standards and sustainable according to the criteria of the HlPC initiative. According to the new debt-sustainability analysis, in 2002 the net present value of debt to exports ratio was 111 percent and the debt service to export ratio was 11 percent (see IMF, 2003). 1.13 The government has pursued a tight monetary policy, which has succeeded in lowering the inflation rate. During the early 1990s, the money supply expanded rapidly to finance the electoral campaign triggering strong inflationary pressures. Improved economic management contributed to a decline of the inflation rate from a peak of 46 percent in 1993 to 2 percent in 2002. Since the mid-1990s, however, inflation has been volatile, reflecting increases in food prices associated with the droughts in 1997 and 2000, fluctuating petroleum prices, and movements in the exchange rate. The promulgation of the Central Bank of Kenya Act in 1996 limited the government's access to central bank credit to a maximum of 5 percent of the government's gross recurrent revenue. Subsequently, the share of credit to the private sector increased from 52 percent in 1990 to 73 percent in 2001, while the share going to the central government and to other public institutions declined from 37 percent to 28 percent. 1.14 Nominal interest rates have fallen in line with the drop in inflation (the 3-month treasury bill rate decreased from 33 percent in 1993 to 8.3 percent in December 2002). However, the gap between lending interest rates and deposit rates remains high. The gap reflects the high level of nonperforming loans in the state-owned banks and in small banks. The share of nonperforming loans in banks' portfolios peaked at 38 percent in 2000, before declining to 30 percent of gross loans at the end of July 2002, with state owned banks accounting for over 59 percent of nonperforming loans. The high proportion of nonperforming loans is due to the recent poor economic performance making it difficult for borrowers to repay, interference with licensing and other lending decisions, and difficulty with recovering loans through the judicial process. I Data are for calendar years. 2 In 1994, Kenya rescheduled on concessional terms debts of US$500 million it owed the Paris Club. In 1998 it also rescheduled part of its commercial debt with the London Club. The agreement provided for a cancellation of US$21 million of arrears and a rescheduling of US$49 million. In November 2000 the Paris Club agreed to reschedule about US$300 million of Kenya's arrears and maturities falling due during July 2000 to June 2001. The country completed a similar agreement with the London Club in early 2003, rescheduling US$ 45 million of debt. The debt reschedulings allowed the country to reduce its external debt outstanding and disbursed in the 1990s. 7 B. TRADE INTEGRATION 1.15 Protection has been reduced but is still relatively high. A result of the extensive trade and exchange reform of the early 1990s is that there are virtually no price and foreign exchange restrictions (with the exception of some import controls based on health, environmental and security concerns).3 4 The number of tariff bands has been reduced from 24 in 1988 (with a top rate of 170 percent) to 8 in 2002 (with rates ranging from 0 to a maximum of 35 percent, except sugar and wheat which are taxed at 100 percent and 60 percent respectively, see Chapter 3 ). All suspended duties, except on petroleum products, have been eliminated.5 The average import duty rate decreased from 21.4 percent in 1999/2000 to 16.9 percent in 2001/02 (IMF, 2002). However, in addition to tariffs, an import declaration fee of 2.75 percent is collected on all imports. 6 Protection is highest on consumer goods produced domestically, and lowest (0-5 percent) for capital goods and intermediate goods. The government has formulated a comprehensive reform of the trade system, to improve external competitiveness and to facilitate the introduction of a common external tariff for countries of the Common Market for Eastern and Southern Africa (COMESA) and the East African Community (EAC). The reform aims at reducing the number of nonzero tariff bands to four, capping by 2004 the top tariff rates to 25 percent, and further reducing the duty on raw materials and capital goods. 1.16 Kenya's trade openness is relatively high, but has not improved during the past twenty years. Countries that are integrated with the world economy tend to exhibit low tariffs (indicating less divergence between domestic and international prices) and a high trade to GDP ratio, or openness ratio. On the basis of these measures, Kenya's trade openness is relatively high, about 64 percent during 1995-2000, compared with 62 percent for Sub-Saharan Africa and 47 percent for low-income countries. However, this ratio has declined since the early 1990s and is roughly the same as it was some twenty years ago. This is in contrast with more dynamic countries in Africa and Asia, which have become significantly more open to trade over time (see table 11I.3 in annex III). 1.17 Kenya has deepened the process of regional integration. Kenya is a member of the World Trade Organization (WTO) and is participating in various subregional and regional 3 The govemment has abolished export duties, introduced export eamings retention schemes, improved the provision of short-term export finance and established the National Export Credit Guarantee Corporation. Licenses for the export of agricultural products are no longer required, though a number of special licenses are still needed for the export of minerals and precious stones and state trading in strategic agricultural goods. Since the liberalization of the foreign exchange in 1994, exporters are allowed to retain all foreign exchange proceeds in foreign currency accounts at commercial banks and to use them for business related expenses. Both Kenyans and residents can operate foreign currency accounts and borrow from the market. There are no restrictions on remittances of foreign investment income. 4 However, imports are subject to preshipment inspection for quality, quantity and prices and require a clean report of findings by a govemment appointed inspection agency. 5 In the fiscal 2000 budget Kenya introduced suspended duties-ad valorem duties levied temporarily on specific products at the discretion of the authorities. Imports which faced the highest suspended duties were maize (50 percent), rice (50 percent), sugar (70 percent), milk and cream (50 percent). The average effective import duty protection increased from 19.0 percent in 1998 to 21.4 percent in 1999. Suspended duties were eliminated in the fiscal 2001 budget. 6 The import declaration fee of 2.75 percent includes the fee for preshipment inspection (all import with an f.o.b. value of over US$5,000 are subject to preshipment inspection for quality, quantity, and price). Failure to obtain the preshipment inspection results in a penalty duty of 15 percent for nonvehicle imports and of 25 percent for vehicle imports. 8 initiatives, including the COMESA, the EAC, the Inter-governmental Authority on Development, and the African Union. These initiatives have different approaches to the integration process and a number of efforts are being put in place to minimize duplications and rationalize initiatives.' 1.18 Table 1.3 details the trade policy regimes within the newest block, the EAC. Liberalization of the trade regime has proceeded in a synchronized way in the three members of the EAC-Kenya, Uganda and Tanzania. An ongoing project is aimed at harmonizing customs procedures. A single bill of entry was recently adopted by member states and the number of documents for customs clearance was reduced from seven to one. A customs union is to be established by 2004. Last year Kenya and eight other countries within COMESA also launched a free trade initiative to establish a common external tariff by. 2004 that would coincide with the introduction of a common external tariff by the EAC.8 This will also require the harmonization of customs exemptions and export support regimes. Table 1-4: Trade Policy Regimes in the East African Community Policy change Status Kenya Uganda Tanzania Quantitative restrictions, price and Eliminated Eliminated Eliminated exchange controls Export duties Apply only to fish and timber. 20 Apply to coffee exports Abolished during 1986-94, but a 2 percent duty in raw hides, skins, and percent export tax reintroduced in scrap metal introduced in 2002/03 1996 on traditional exports. budget. Export promotion schemes . The main schemes were Main incentive schemes are the Investment incentives under the manufacturing under bond 1988; manufacturing under bond and Mining Act of 1998. Other Export Promotion Zones (EPZ) 1990; the fixed duty draw back incentives include EPZ; export and dutyNAT exemption scheme scheme. credit guarantee scheme 1990; and 1990. duty drawback schcme 1988. Export restrictions (licensing) Eliminated Eliminated except for charcoal, Eliminated, except for exports of whole fresh fish and timber. natural resources. No surrender requirements for exports except coffee. Maximum ad valorem rate 35 percent 15 percent. 25 percent Unweighted average tariff 16.6 percent 9 percent 14.3 percent VAT 16 percent 17 percent 20 percent Alternative minimum specific duties Specific duties applied to oil products. None None, except on sugar and minimum values Alterative minimum duties are applied to maize, wheat, sugar, rice, milk, alcohol. tobacco, textile, clothing, footwear. Other charges on imports Import declaration fee of 2.75 percent None Import license on sugar Suspended duties None Imported sugar for final 12 categories of imports (but not consumption for EAC members); rate varies between IO percent and 50 percent Anti-dumping, countervailing and Regulations introduced in 1999 in line Legislation in line with WTO Not applied yet. safeguard measures with WTO rules. arrangements. Rules of origin An EAC rules of origin being negotiated. Currently the countries rely on COMESA rules of origin. which requires that a certificate of origin must be produced as evidence that imports originate from the member states. However, goods produced within the EPZ are treated as foreign goods. Source: Ng'eno, 2002; [MF, 2002. 7 For example, COMESA is focusing on liberalizing trade among its member states, the EAC is attempting to create a customs union that will allow the free movement of goods across member Countries, and the Inter- governmental Authority on Development is concentrating on managing drought and controlling desertification, enhancing food security, and managing conflict. See Ministry of Trade and Industry (2002). a Other members include Djibouti, Egypt, Madagascar, Malawi, Mauritius, Sudan, Zambia, and Zimbabwe. 9 1.19 But important issues still to be addressed for effective regional cooperation. Despite recent progress, the process of regional integration is moving slowly: * First, the reduction of protection for some agricultural commodities and manufacturers and the consequent rise in imports, has led to trade disputes and claims of dumping. Some local industries and the people and communities that depend on them are resisting the move towards greater openness. * Second, the process of harmonizing investment incentives, the judicial and legal frameworks, and the tax systems is complex and is proceeding slower than anticipated. * Finally, the loss of revenue that derive from tariff reforms, which has important fiscal implications, may be contributing to government's reluctance to move quickly towards regional integration. Import duties still represent an important component of government revenues-around 17 percent of total tax revenue or about 7.5 percent of GDP. Given existing trade flows, the revenue loss deriving from eliminating internal EAC trade tariffs and from the adoption of a common external tariff would be insignificant, 0.03 percent of total tax revenue collection, according to a recent report (Ng'eno and others, 2002). However, establishing a common external tariff would have important fiscal consequences, which of course would be higher the lower the level of the common external tariff. The authors recommend that the EAC adopt a maximum common external tariff close to the current average of 20 percent for final goods, 5-10 percent for intermediate goods, and zero percent for primary goods. This would lead to a loss of about 10-20 percent of total annual tax revenues. The determination of the common external tariff would require a careful balance between revenue considerations and potential dynamic gains arising from improved trade. 1.20 The balance of payments improved. The current account deficit improved during 1998-01, reflecting improvements in the trade balance as well as the large Figure 1.2: ODA and Private Transfers inflows of private transfers 1,400 (USD$ million) (remittances and funds from private 1,200 NGOs), which doubled from US$409 ,0oo- million in 1995 to an estimated 0/ US$785 million in 2001 (figure 1.2). 400 - - The deficit deteriorated in 2002 2001 - . ... however due to a reduction in o private transfers associated with a drop in drought assistance. Export | -to,f,fIde,optassistwm ---- volume growth also slowed to 8.3 Source: OECD and World Bank data. percent in 2002 from 11.6 percent in 2001. Official transfers which had peaked in 1990, fell throughout the decade as donors channeled resources for development through NGOs rather than through the government.9 Lack of support from donors has resulted in a net outflow of long-term and medium-term official capital averaging almost 2 percent of GDP a year during 1995-2001. 9 Official development assistance and net official aid record the actual international transfer by the donor of financial resources or of goods and services valued at the cost to the donor, less any repayments of loan principal during the same period. Grants by official agencies of the members of the Development Assistance Committee are included, as are loans with a grant element of at least 25 percent, and technical cooperation and assistance. 10 By contrast, the high interest rates in the late 1990s have attracted increasing flows of short term capital. C. FINANCIAL INTEGRATION 1.21 Kenya's performance in attracting and retaining private external financing has been dismal. During 1990-92 Kenya received cumulative private capital flows of US$435 million. It then experienced a Figure 1.3: FDI Inflows, Outflows and real GDP complete reversal with US$ millions and percent outflows during 1993-99 02.5 amounting to US$728 million. 2 . Within this context, Kenya 20 managed to attract small flows Wa of EDI. The ratio of FDI to tas GDP was only 0.4 percent 60 during the 1 990s compared 40 lijn in 05 with the 1.9 percent Sub- 20 w o- Saharan Africa average. A m ic.F number of countries in Africa 2000 2001 (for example, Tanzania, reI onD Moe opptflows --utesa GDP gowth rote I Uganda, Mzcambiqu los e, y' Sout pefrac in attracting FDI reflects, to a certainextent, taia) Moz bhe atractedh Sourcem World Development Indicators and Global Development Finance significant amounts of EDI intdatabases. recent years, because of improvements in the investment climate and acceleration in the process of privatization (see table igi.3.22 in annex IH). Figure 1.3 shows the increasing trend in eDt outflows. Inflows remained relatively constant, with the exception of 2000, when one-time investment of US$1 11 million was made in mobile telephone infrastructure and license fees. FDI dropped to US$50 million in 2001. 1.22 In most respects, Kenya is missing out on the opportunities arising from global trends in capital flows. Kenya's low performance in attracting FDI reflects, to a certain extent, the slowdown in the world economy, which was exacerbated by the September 11,s2001 events, and a decline in new international investment, particularly the cross-border mergers and acquisitions. However, the worsening of security conditions and the deterioration in the investment climate have significantly contributed to the lack of interest by foreign investors. Kenya's ability in attracting FDI, as measured by its rankings on United Nations Conference on Trade and Development's inward performance index-the ratio between a country's global share in FDI and that of GDP-has declined significantly compared with other countries during the 1990s, with its rank falling from 90 to 117 of 140 countries between 1990 and 1998-2000.I0 The 10 The inward FDI performance index is the ratio of a country's share in global FDI flows to its share in global GDP. Countries with an index value of one receive FDI exactly in line with their relative economic size. Countries with an index value greater than one attract more FDI than may be expected on the basis of r'elative GDP. Countries with index values below one may suffer from instability, poor policy design and implementation, or competitive weaknesses in their economies. picture is confirmed by Kenya's position in United Nations Conference on Trade and Development's measure of FDI potential, in which it dropped from 120 to 124 (table 1.4).2 Table 1-5: The Inward FDI Performance and Potential Indexes: Selected Countries Performance Index Potential Index Score Rank (lower is better) Score 0-1 Rank (lower is better) 1988-90 1998-00 1988-90 1998-00 1988-90 1998-00 1988-90 1998-00 Kenya 0.5 0.2 90 117 0.127 0.168 120 124 Uganda 0.0 1.0 130 59 0.115 0.228 123 94 Ethiopia 0.1 0.5 118 97 0.085 0.171 135 122 Mozambique 0.3 1.8 109 23 0.068 0.178 137 118 Cote d'lvoire 0.4 0.9 101 64 0.15 0.195 107 107 Ghana 0.2 0.2 113 107 0.14 0.179 110 117 Vietnam 1.0 2.0 53 20 0.134 0.277 115 71 Honduras 1.2 1.0 49 53 0.155 0.232 101 93 Source: United Nations Conference on Trade and Development, 2002a. 1.23 Credit ratings, as measured by the institutional investor index, have been historically low in Kenya and worsened from 1997.12 Kenya ranked 103 among 151 countries by September 2002. By contrast, credit ratings of Tanzania and Uganda have shown a cyclical but rising trend. D. EXPORT PERFORMANCE 1.24 Table 1.5 reports various indicators of export perfor-nance during the last two decades. Overall, the share of exports has remained roughly at around 25 percent of GDP, with merchandise and services exports representing two-thirds and one-third of total exports respectively. Real exports growth rates turned negative during 1997-99, in association with a deterioration in the terms of trade. Table 1-6: Kenya's Export Performance 198089 1990-93 1994-97 1998 1999 2000 2001 2002 Share in world exports 0.049 0.032 0.030 0.027 0.025 0.020 0.023 Share in world exports oftop ten products 2.9 1.7 1.6 1.6 1.5 1.4 1.3 (in percent of GDP) Total exports (goods and nonfactor services) 25.3 31.3 32.6 24.9 25.3 24.8 28.4 24.6 Merchandise exports 15.1 14.9 21.0 17.6 16.6 16.1 18.0 15.6 Exports of nonfactor services 10.2 16.4 11.6 7.3 8.8 8.8 10.4 9.0 (real growth rate) Total exports (goods and nonfactor services) 3.0 43 7.7 -4.5 -5.5 2.1 8.2 -0.9 Merchandise exports 0.3 5.0 17.8 -2.3 -12.8 1.1 6.1 -0.8 Exports ofnonfactor services 7.0 3.9 -5.1 -9.3 12.2 4.0 12.1 -1.0 I The inward FDI performance index is an unweighted average of eight variables: GDP growth rate; GDP per capita; telephone lines per 1,000 inhabitants; commercial energy use per capita; share of research and development expenditures in gross national income; share of tertiary students in the population; and country risk. 12 Credit ratings is measured by the institutional investor index. The information for constructing the index is provided by 75-100 leading international banks which grade each country on a scale 0-100, with 100 representing the least chance of default. Individual responses are weighted using a formula that gives more importance to responses from banks with greater worldwide exposure. 12 Manufactured exports in percent of GDP 1.9 2.5 3.1 1.9 2.2 2.3 2.6 2.4 REER (annual percentage change) -2.7 -4.5 9.6 4.8 -8.1 6.7 5.2 -2.3 Terms of trade (annual percentage change) 1.1 0.7 3.3 -5.0 -1.3 -0.7 -2.6 -5.2 Source: UN COMTRADE Statistics; World Bank database. 1.25 Kenya's share in world markets is small, around 0.02 percent, and has been cut in half during the past twenty years, and the world market share of its top F 1.41: ShaofWoddExpor-Kenya, Vmumm andMalysi ten exports has declined even more (ln&x 199100) (figurel.4). The sharp fall in coffee exports has greatly contributed and there are signs of a long-term loss in 400 competitiveness in many other sectors. 3 - Countries such as Vietnam, which in -M .- _ _ 1990 had a similar share of world 100 exports, managed to perform much . better than Kenya (and gained increasing shares of the coffee market). Source: UN COMTRADE Statistics 1.26 Manufactured exports stagnated. In fast-growing developing countries the share of manufactures in merchandise exports ranges between 70-90 percent (figure algu 1 lJ: Heftwn a Sz ofTo4I r.nha. Eqw SdclctedCourntcs 1.5). In Kenya, manufactures have 90 ____-- represented around 10-12 percent of - merchandise exports during the past twenty years, reflecting the low 60 international competitiveness of the so manufacturing sector. However, in 4 2001 the ratio of manufactured exports ," . to total merchandise exports increased = ___ to 16.3 percent, the result of a 44 __ percent growth in garments exports. 5 -. 5g g M 1.27 The structure of exports and their performance in world markets Source: UN COMTRADE Statistics changed significantly in the late 1990s (figure 1.6). Tea increased its share of merchandise exports from 25 percent in 1980-85 to 29 percent in 1996-2001. More remarkable is the increase in the share of cut flowers (from 1.8 percent to 10 percent), in vegetables (from 2.3 percent to 7.4 percent), and outer garments (from 0.6 percent to 2.4 percent). The latter increased greatly in 2002, due to the response to the U.S. African Growth and Opportunity Act (see chapter 4). By contrast, between the 1980s and the late 1990s, the share of coffee in merchandise exports declined by 50 percent (from 33 percent to 16 percent), due both to lack of domestic reforms and a sharp decline in world prices (see chapter 3). 13 Particularly women's and men's outer garments of textile fabrics and men's cotton shirts. 13 Figure 1.6: Commodity Exports (Percent of Merchandise) 34 32 - > - . " 30 . 0 26 _ * ._A 24 22 20 , tt 16 14 12 Wa 6' 2..- Tea Cut flowers Vegetables Coffee Outer garments Fruits Bovine & equine Fish hides |i 1980-1985 1992001 Source: UN COMTRADE Statistics 1.28 The products that increased their share in merchandise exports were also the best performers in world markets. During 1996-2001 a number of commodities-tea, cut flowers and vegetables-outperformed the growth of world exports and increased their share in world markets. Thus, Kenya has maintained the top leadership as a tea exporter (24 percent of world market in 2001, up from 13 percent in 1980). The share of cut flowers and vegetables in world exports of these commodities jumped from 1.2 percent and 0.9 percent in 1980 to 4.2 percent and 1.6 percent in 2001. By contrast, the plunge in coffee exports was more severe than for other countries and Kenya's share of world coffee exports declined from 2.7 percent in 1980 to 1.3 percent in 2001. 1.29 Africa is now the dominant market for Kenya's total exports. During the 1990s an increasingly large share of Kenya's exports have gone to (ii perctet of total) markets in Africa (figure 1.7). 50( 45 While the main export markets 40 . . ' for primary commodities remain 3 -_ .. 30. the industrialized countries, 25- .n * r , - .' r - 20.. manufactured goods are , .* ;.. increasingly destined for African ,o * Ia- , countries. This reflects a deeper o regional integration but also a Europe U.S.A. Sub-Saharn Africa MiddleEast Asia loss of international I I!l 1980-SS M 192 competitiveness outside of E~8m2 Afrpetica. eness outside of Source: Central Bureau of Statistics Africa. Export Competitiveness 1.30 Export competitiveness has many aspects, not easily captured in a single indicator. This section discusses some of the most used indicators of external competitiveness. Other aspects, such as the cost of doing business, governance issues, and infrastructure problems are discussed in chapter 6 of the report. 14 1.31 The real effective exchange rate appreciated in the late 1990s. The most widely used measure of external competitiveness is the consumer price index (CPI) based on the real effective exchange rate (REER). The pattern followed by the REER Figure 1.8: ExportPerformance and REER shows that Kenya became more competitive during the early 140 - - 2,500 120 2,000 1990s, then became less so during 100 - 1,500 1996-98, then again became more 80 1,000 competitive following a 60 - 500 depreciation of the currency in 400 g g g g g g 1999, but again lost competitiveness thereafter (figure F- REER (Index 1990=100) - - - - Value of exports (USS millions) 1.8).14 Overall, between 1990 and 2001 the REER appreciated by 35 percent. The pattern exhibited by Source: World Bank data. export earnings appears to mirror, somewhat, but with a one-two year lag, movements in the REER.'5 Looking at the behavior of the REER in neighboring countries, it appears that exchange rate competitiveness worsened during the 1990s for Kenya but improved for Uganda, South Africa, and Ethiopia. 1.32 Two other indicators of competitiveness are the ratio Figure 1.9: enya - Price Rados between the prices of tradables 140 (ondex1990=100) and nontradables and that of 130 _ *_ 120 export prices to the price of 1 - nontradables (see figure 1.9). loo -_ Both indicators worsened during 90 so the 1990s, particularly after '0 1995, suggesting that the relative 60 attractiveness of producing for the domestic market, and in goods and servicesithata t- - -Ratio of expon pries to nontradable - Ratio of tradableto nontradable price goods and services that are not ,_______________________ __ _ tradable, increased significantly Source: Central Bank of Kenya and Central Bureau of Statistics. during the past decade. 14 A number of caveats should be kept in mind regarding the behavior of the REER. First, the choice of the base year is important. Second, the REER approach assumes that the equilibrium exchange rate remains unchanged over the period considered. Under this assumption, an increase in the value of the REER index means that competitiveness is worsening. 15 However, it is difficult to conclude with certainty that Kenya has lost competitiveness. The losses in competitiveness in the late 1990s appear to compensate for earlier gains. Thus, in 2001 the value of the 1990 REER index was 135, which roughly coincides with the value of the index during the early 1980s. 15 1.33 Unit labor costs show a strong increase. A further measure of competitiveness is given by the behavior of unit labor costs, defined as wage costs per F 1.10: Unit LaborCosts by Sector unit of output. While wage Index (1990=100) dynamics and the functioning of 250 _____ - the labor market will be discussed 200 in chapter 6, Figure 1.10 provides 200 an overall picture during 1990- 2001 of the behavior of unit labor 100 costs indices by sector. Unit labor costs increased by 20 percent for the manufacturing sector, 150 l- - h - Mamuilking O Tw,spo,t percent for the agriculture sector, and 45 percent for the transport Source: Central Bureau of Statistics. and communications sector. Indications are that real wages increased faster in the private sector than in public sector. E. FUTURE PROSPECTS 1.34 Prospects for the immediate future remain uncertain. Table 1.6 reports estimates of world trade and demand, and projections for the international demand for Kenya's products, given by the projected growth in imports among Kenya's trade partners.'6 Recent Bank forecasts suggest that world demand for Kenya's products (trade partners' growth) will rise by 5.5 percent during the next two years, despite political and economic uncertainties (World Bank, 2003). Interest rates, exemplified by the London interbank offered rate, are expected to decline in 2003- 04. Most commodity prices, including coffee, are expected to increase (the overall change in the export price index would average 4.5 percent a year). The combination of a recovery in export prices, a return to more normal weather conditions, an increase in external demand and an improvement in the investment climate, would contribute to a better external environment and augur well for an increase in export growth, which could average 6.5 percent during the next couple of years in Kenya. 16 For a specific country, world demand is measured as a weighted average of the real imports of all trade partners, weighted by their share in total exports of that country. 16 Table 1-7: The External Environment for Kenya (average annual percentage changes, unless otherwise indicated) 1991-96 1997-2002 2003-04 Real GDP growth World 2.3 2.5 2.8 OECD countries 1.9 2.3 2.4 Developing countries 3.1 3.3 4.3 Sub-Saharan Africa 1.9 2.8 3.5 Kenya 2.5 1.3 2.0 Export market indicators World trade growth 1/ 5.3 6.0 7.2 World exports I/ 6.1 5.8 6.9 OECD import demand 4.8 6.4 6.1 Developing country import demand 3.8 6.2 10.1 Market growth for Kenya 2/ 11.0 4.1 5.5 Kenya's exports (GNFS) 5.7 0.6 6.5 Terms of trade Developing countries -0.5 -0.4 -1.8 Sub-Saharan Africa 0.1 0.7 -2.2 Kenya 3.7 -2.1 2.4 Prices (1990=100) Export price indices 3.3 -2.1 4.5 Coffee 9.1 -3.5 9.2 Tea -0.3 0.9 5.6 Horticulture 5.5 10.1 8.5 Manufactures 2.7 -3.5 2.2 Import price indices -0.4 2.5 3.0 Food 4.8 -1.3 3.2 Memo: Manufactured unit value index (value of index; 1990=100) 109.8 104.3 107.1 London interbank offer rate (USS, 6 months) 5.0 4.8 2.3 Source: World Bank database. F. SUMMARY AND RECOMMENDATIONS 1.35 Kenya has admirably maintained macroeconomic stability in recent years, despite a lack of donor aid and other sources of official external finance. This has not led to economic growth, primarily because the burden of adjustment has fallen on capital and social expenditures, while the wage bill and expenditures on interest payments to service domestic debt have expanded. The high domestic debt burden has also contributed to high real interest rates, which has further discouraged private investment. Kenya's participation in the world economy has worsened in the last two decades or so. Trade openness, as measured by the ratio of trade to GDP, has stagnated. Real exports per capita have remained constant in the last decade, while they have more than doubled in East Asia and South Asia. The share of Kenya's exports in world exports is now half of what it was in the 1980s. The overall protection of the economy has declined but it is still high, particularly on goods that compete with domestically produced products. International competitiveness has declined because of the appreciation of the REER during the second part of the 1990s, a decline in the incentives to produce tradables, and a strong increase in unit labor costs. As for financial integration, Kenya has been completely marginalized. The ratio of FDI to GDP is one of the lowest in Africa. Credit ratings have been historically low in Kenya and have worsened since the mid-1990s. 1.36 On the positive side, exports of a number of commodities, such as tea and horticulture products, have grown strongly and gained market share. But others, notably coffee, have performed worse than in other countries. Notwithstanding its poor performance in international integration, Kenya is deepening the process of regional integration. Africa has substituted for 17 Europe as the main destination for Kenya's manufactured exports. Kenya is a dominant player in regional trade flows within both the EAC and COMESA. These two regional groups are working towards adopting a common external tariff and establishing customs unions by 2004. 1.37 Sound macroeconomic policies will continue to be essential for the recovery of growth. Recommendations include: * Reorient expenditures away from wages towards capital expenditures and delivery of services for poverty reduction. This is possibly the most important action that the government can take to help the growth recovery. This will require resisting demands for wage increases, accelerating reform of the civil service, and adopting strong measures for expenditure monitoring and control. * Reduce the debt burden. Measures include accelerating the privatization program and using the proceeds to retire part of the domestic debt, and securing external financing for budgetary expenditures, particularly in the form of grants and concessional loans. * Allocate public spending according to the priorities agreed in the PRSP and identified in the ongoing public expenditure review. Finalizing the PRSP provides the opportunity to revisit the core poverty program-both the design of the program and arrangements to implement and protect it-making sure that it is consistent with pro-poor spending. Spending for poverty-reducing priorities should not be based on incremental adjustments, as it has been the case in previous budgets, but should be sufficient to reach over time the desired improvements in welfare. The focus on using public expenditures to implement the PRSP priorities needs to be reinforced with appropriate policy and institutional reforms in the various sectors (for example, by privatizing the agriculture parastatals). * Pursue measures to increase private sector participation in provision of key infrastructural services. Little investment has made in the key parastatals such as telecommunications and energy during the past decade. They now require substantial new investment if they are to deliver services efficiently and reliably-which is essential to bring down costs to business and improve the competitiveness Kenya's economy. Given the government's budget constraints, private sector finance will be needed for investment. This will require measures, including privatization, to encourage private sector participation in the delivery of services. * Lower tariffs and increase the international integration of the Kenyan economy. At the macro level, the authorities will need to monitor the competitiveness of the exchange rate, particularly in view of the pressures that may come from increased donor assistance. Exchange rate movements (relatively to partner countries) should be monitored with a view to accelerating structural reforms to enhance competitiveness. Kenya should work with the other members of the EAC and of COMESA to remove internal obstacles to trade and to establish a common external tariff, thereby speeding regional integration. Kenya should also speed up the process of becoming more integrated in the world economy by lowering tariffs and other barriers to imports of goods from the rest of the world. 18 2. GROWTH AND POVERTY REDUCTION IN KENYA 2.1 This chapter reviews the prospects for growth and poverty reduction over the coming decade in Kenya. Section A revises recent consumption poverty estimates and provides a poverty profile for Kenya, using recently developed poverty mapping techniques. These show that poverty in Kenya is widespread and worsening. Even in the modem capital city of Nairobi, just under half the population is living below the poverty line. Section B assesses the longer run growth prospects for the Kenyan economy, drawing upon intemational cross-country evidence. The analysis suggests that long-run growth of per capita GDP is around 2 percent per year, although more rapid growth is likely as the economy recovers from stagnation. Finally, section C assesses the future prospects for reducing poverty in Kenya. Substantial economic growth will be necessary to reduce poverty in Kenya, and it is unlikely that by 2015 Kenya can cut by half the proportion of its population living in poverty from 1990s levels and achieve this key Millennium Development Goal. A. POVERTY IN THE 1990s 2.2 Establishing profiles and trends of poverty and inequality in Kenya present two challenges. First, household data are very outdated. The most recent data were collected six years ago in the 1997 welfare monitoring survey. Second, while the incidence of poverty most likely increased in the 1990s, sound statistical evidence for this trend is lacking because of survey noncomparability and welfare measurement problems.'7 This section assesses the extent of these problems, proposes a revised set of estimates and discusses some preliminary findings on poverty profiles and trends. Revisiting Kenya's poverty lines and welfare measure 2.3 Estimating poverty involves two steps: first, establishing a measure of economic well- being, and second, identifying a benchmark (or poverty line) to be applied to that measure, and below which individuals are considered to be poor. The criteria and methods used for setting poverty lines and the poverty measure can have substantial implications for policy.'8 2.4 Revising the poverty line. Official food and overall poverty lines are obtained from the 1997 welfare monitoring survey. The food poverty line is based on the monetary value of food baskets that allow basic minimum human nutrient requirements (set at 2,250 calories) to be met. The overall poverty line is obtained by adding the monetary value of two bundles of basic nonfood requirements to the food poverty line. The practical implementation of this approach has suffered from two main problems: 17 Earlier welfare monitoring survey data were collected in 1992 and 1994 but the respective poverty measures derived from them are neither very robust nor comparable (because of survey design changes and seasonality effects). 18 Poverty lines, although frequently treated as given, are in fact endogenously set and are crucial in any poverty assessment. For descriptions of different methodological approaches, discussion of best practices, and sensitivity assessments, see Atkinson (1993), Bidani and Ravallion (1994), Lanjouw (1996), Hentschel and Lanjouw (1996), Ravallion (1998), and Lanjouw and Lanjouw (2001). 19 * First, the food poverty lines uses a food basket obtained from the 1982 rural household budget survey.'9 To the extent that food consumption patterns have changed since then, the 1997 poverty estimates reported in Ministry of Finance and Planning (June 2000) could be inadequate (see annex I). * Second, the calculation of the overall poverty line is based on the average total expenditures of the 10 percent of households above the food poverty line and the 20 percent of households below. This is too wide a band for poverty line estimation. A preferred method is to take incremental percentage point expansions either side of the food poverty line and utilize the average set of mean total expenditures that are obtained. We have applied this approach and have obtained a lower overall poverty line for urban areas, although the rural poverty line remains broadly the same. 2.5 Revising the poverty measure. The poverty measure also presents some problems. In particular, it includes housing expenditure only for those urban households that reported paying rent but not for the other urban households and not for rural households.20 Thus, the poverty measure is not consistent or comparable across households. We have taken care of this problem by omitting housing expenditure altogether. As a result, the overall urban poverty line is adjusted downward by a sizable 10 percent (see table 2.1, technical details in annex I). The overall urban poverty headcount increases only marginally to 43 percent (from the 42 percent estimate that was obtained using the revised poverty line), suggesting that the relative incidence of renting in urban areas is fairly distribution neutral. Together, the revisions to both the poverty line and the welfare measure (given in the World Bank line of table 2.1) suggest that the incidence of urban poverty is somewhat less than government estimates (43 percent instead of 50 percent), although it is still a serious policy challenge.21 By contrast, the poverty incidence in rural areas is broadly unchanged. 19 There is reason to suspect changes in the consumption basket could have occurred. For example, the prices for the three main starch sources in the Kenyan diet have evolved quite differently since 1982. Average prices in 1997 increased by factors of 8.86 for bread, by 12.51 for maize, and by 14.17 for cereals (Ministry of Finance and Planning, June 2000). If these consumers view these food items as close substitutes, then these relative price changes are likely to have induced demand responses, and changes in the relative quantities consumed. 20 Two possible issues arise from this treatment. First, in urban areas this overestimates nonfood consumption of households who rent vis-a-vis those that own their dwelling. Second, this has the potential to distort rural versus urban comparisons of living standards, because expenditures of rural households will be understated. 21 Additional adjustments that could be made include the omission of durable goods and transfers, but these have only a marginal effect on the poverty lines and measures. 20 Table 2-1: Sensitivity of the Poverty Line and Poverty Measure Rural Urban Poverty line Poverty incidence Poverty line Poverty incidence (Ksh) (in percent) (Ksh) (in percent) Food poverty Ministry of Finance and Planning (June 2000) 927.09 50.58 1,253.90 38.37 Overall poverty Ministry of Finance and Planning (June 2000) 1,238.86 53.06 2,648.04 50.11 Revisions to overall poverty World Bank' 1,244.53 52.81 2,130.99 43.14 1/ Based on Ravallion's (1998) approach to setting the poverty line nonparametrically and correcting for biased inclusion of housing rents. Who are more likely to be poor? 2.6 Households that are large, headed by females, headed by adults with low educational attainment, or deriving most income from agriculture are more likely to be poor than others. In Kenya, as in other countries, poverty increases with household size (see annex I for details).22 Thus, households with a larger number of infants and children have a lower level of consumption, and thereby a higher probability of being poor. Female-headed households in urban areas are poorer than otherwise similar households. Not surprisingly, the education of both the household head and of the spouse appear to be important determinants of poverty. For example, an urban household whose head has at least some primary education has a level of consumption 20 percent higher than a comparable household whose head has no education at all. In rural areas, the gap is only 13 percent. As the level of education attained by the head and spouse increases, the effect on consumption also increase. Working in the nonfarm sector in rural areas is associated with a higher level of consumption. Wage workers, whether in the public or private sector, are better off than informal workers such as unpaid family workers. Land ownership, it is associated with higher levels of consumption in rural areas. Land owners can expect a 7 percent increase in consumption versus otherwise similar households, and each hectare of land brings an additional gain. Inequality 2.7 Kenya has a rather unequal distribution of income as shown by its Gini coefficient in 1997 of about 0.42.23 As with the poverty measures, estimates of inequality in Kenya must be interpreted with caution. Inequality measures are computed from household expenditure data that are outdated and were collected using a survey instrument that needs improvement.24 Higher quality data are also needed to improve the understanding of what determines inequality in Kenya 22 This analysis is based on the 1997 household survey. 23 The Gini coefficient measures the degree to which the cumulative distribution of expenditure (or income) diverges from a situation where each individual is equally well off (perfect equality). A value of zero in the Gini coefficient implies perfect equality and the closer the measure is to one, the more unequal the distribution. 24 An additional concern is the incidence of survey nonresponse in Kenya; it is plausible that richer households more often refuse to participate in a survey which would result in an underestimation of inequality (Mistiaen and Ravallion, 2003). 21 and the nature of the relationship between economic growth and inequality. Annex I shows the preliminary results of an exercise undertaken to understand the impact on inequality of reducing the price (or tax) of certain goods. It appears that reducing the price (or tax) of a number of goods-notably maize and sugar-would significantly reduce inequality. This is important given the presence of price distortions for these products (see chapter 3). While these results are preliminary and should be regarded with caution, they underscore the importance for policy purposes of updating the information on poverty and inequality in Kenya using improved survey instruments. Poverty and welfare trends during the 1990s 2.8 Poverty rose in Kenya during the 1990s. Tracking past poverty trends in Kenya is made difficult by the absence of comparable household survey data during thel990s. Nevertheless, we estimate that the proportion of the population living in poverty has risen from about 48.8 percent in 1990 to 55.4 percent in 2001. Poverty increased sharply during the early 1990s, declined during the mid- 1990s, and rose steadily since 1997 Figure 2.1: Poverty in Kenya During the 1990s (figure 2. 1).25 Thus, an additional 2.7 million people were living 60 - below the poverty line in 2001 than 5 - 55.40 were in 1997 (from 14.4 million in { - 1997 to 17.1 million in 2001). In 5 - the absence of an observed poverty ' 45 - rate in 1990, 48.8 percent is used in ; 40 the remainder of this report as the 1O -CI, le 1s 10 916 p benchmark by which to assess progress towards attaining the So-,o: B..k.gt.ff.sti.ates. Millennium Development Goal of halving poverty from its 1990 level by 2015 (a poverty target of 24.4 percent of the population living in poverty in 2015). 2.9 The nonincome dimensions of poverty also deteriorated in Kenya during the 1990s, although Kenya's indicators of health and education are better than those of many other Sub-Saharan African countries. Kenya's achievements in education have been impressive- adult illiteracy is among the lowest of any country in Sub-Saharan Africa. However, primary school enrollment rates have declined since the early 1990s, although Kenya spends over 6 percent of its GDP on education, more than twice the low-income country average of about 3 percent of GDP (table 2.2). Life expectancy has declined from 57 years in 1986 to 47 years in 2000, just above what it was in 1960. Infant and child mortality have worsened. HIV/AlDS prevalence peaked in 2000 at 13.4 percent. Gender disparities have persisted. On average, 25 As an altemative, we explore the evolution of poverty by taking the revised poverty estimate of the 1997 welfare monitoring survey, and the national account estimates of sectoral GDP growth rates during the 1990s. We apply the observed sectoral GDP and population growth rates to the 1997 distribution of household income to backcast the evolution of poverty to 1990 and to forecast it to 2001. The population is divided across the different sectors based on the sectoral employment of the household head in 1997. The basic assumptions underpinning these simulations are described in detail in box 2.3, section C, where we will use similar methods to simulate how future economic growth after 2001 will affect in poverty reduction. 22 women have fewer years of schooling, lower health status and a heavier work load than men (in rural areas women work 13 hours compared with eight hours for men). Table 2-2: Social Indicators Sub-Saharan Low Income Kenya Africa Countries 1990 2001' 1998-2001 1998-2001 Real GDP per capita (constant 1995 US$) 358.0 324.9 571.9 477.5 GDP per capita, PPP (current international $) 976.7 1,032.0 1,689.5 2,084.5 Aid per capita (current $) 50.8 17.0 20.4 9.3 Life expectancy at birth (years) 57.1 47.0 46.5 58.9 Fertility rate, total (births per woman) 5.6 4.4 5.2 3.6 Infant mortality (per 1,000 live births) 62 78 91 76 AIDS prevalence rate (percentage of adults) ... 13.0 9.0 2.0 Prevalence rate, for girls 15-24 ... 18.7 11.4 2.0 AIDS cases by year of reporting 7,672 2,565 Illiteracy (percentage of population over age 15) 29.2 16.7 37.4 36.8 Female 39.2 22.7 45.4 46.0 Male 19.0 10.5 29.3 27.7 Gross primary school enrollment rate 95.0 90.7 79.3 95.0 Girls 93.3 90.0 73.0 88.5 Boys 96.6 91.4 85.5 101.3 Access to improved water source (% of population) 40.0 49.0 55.4 75.6 Expenditure on education Percentage of GDP 6.7 6.2 3.4 3.4 Percentage of total govemment expenditures 17.2 184 Health expenditure, total Percentage of GDP 1.4 2.0 5.6 4.2 Percentage of total govemment expenditures 3.9 5.8 Source: Most data are from the World Bank World Development Indicators database or the IMF, 2002. Figures in italics are from the Govemment of Kenya Economic Survey 2002. A census-based subdistrict level poverty profile 2.10 The Central Bureau of Statistics is undertaking a study that applies a new technique combining information from the 1997 welfare monitoring survey with the geographical coverage provided by the 1999 population and housing census.26 The principal advantages of this technique is that it provides relatively accurate poverty estimates even at the provincial and 26 The basic idea behind the methodology is straightforward. First, using the 1997 welfare monitoring survey, regressions are estimated relating household expenditures with a number of socioeconomic variables that are contained in the census, such as household size, education levels, housing characteristics, and access to basic services. Household expenditures for all households covered in the census can be inferred by applying the 1997 welfare monitoring survey- based estimated relationships to the 1999 population and housing census socioeconomic (right-hand-side) variables. This in tum allows for estimation of poverty statistics in small geographical areas. For further details on the methodology and practical implementation of the approach, see Elbers, Lanjouw and Lanjouw (2002), Demombynes and others (2002), and Mistiaen and others (2002). 23 district levels and that it permits new estimates for 452 divisions and 2,208 locations.27 Table 2.3 compares estimates of poverty derived from the 1997 welfare monitoring survey and with those census-predicted. They are very close, and the associated standard errors (in parenthesis) are small, suggesting that census-based predictions are broadly accurate.28 Table 2-3: Province-Level Rural Overall Poverty Incidence Estimates 1997 welfare Census Predicted monitoring survey Central 0.314 0.311 (0.020) Coast 0.622 0.620 (0.024) Eastern 0.586 0.579 (0.010) Nyanza 0.630 0.635 (0.020) Rift Valley 0.501 0.537 (0.040) Westem 0.588 0.595 (0.020) Note: Estimates in per adult equivalent terms. Standard errors in parentheses. Poverty line set at 1,238.86 Kshs. Source: Central Bureau of Statistics 2.11 There is considerable geographical variation in the distribution of poverty within each province and district. This is true in both rural and urban areas, including Nairobi. Previously only a single poverty estimate, about 50 percent, was available for Nairobi's 2.2 million people. The census-based estimates suggest that the incidence of poverty within Nairobi range from lows of around 8 percent of people living in poverty in one location, to close to 65 percent of the population in another. Moreover, spatial visualization of these estimates indicate that poverty hotspots are frequently located directly adjacent to very affluent locations. For instance, map 2.1 reveals that both slums and very affluent neighborhoods exist in an area of about 64 square kilometers within Nairobi. While many in Kenya are familiar with this observation, much less is known (even anecdotally) about the existence of such hotspots in the rural areas of the country. 27 This does not include the three districts, 46 divisions and 219 locations in the Northeastern province that were not covered by the 1997 welfare monitoring survey. Further research is underway to extrapolate estimates for this province based on previous household surveys. It is strongly recommended that the next survey also covers the Northeastern province. 28 A similar comparison at the district level is hindered somewhat because new districts were created in the two- year span bridging the fielding of the 1997 welfare monitoring survey and population and housing census. Nonetheless, comparisons of unaffected districts confirm the results obtained at the provincial level. 24 Map 2.1: Headcount Poverty Rates: Census-Based Location Level Estimates (Nairobi-Kibera Area) v 5%. v0 30% ,41 - X n ,} ~~KILIMANiNVlESTLAN DS _| J*' e Ngong Road____<~ ~ 2 KENYATT OLF COURSEJ KIBERAs |, SERA NGOMBE - _ ,/5 \ -#~~~ \,KIBERA | , * ---.. >-~-.- - - \WlsonAerodrome Povwityincidentei !t,u.l.1 L LocafoNL evel_- % S°- 20%;-. 20%. 30% 1 va "30% 40% - Jt _ se/O Zi5% Xi f 25 Map 2.2: Example from the Coast: Poverty Incidence in the Watamu Area Map 2.2a. Division-Level in Malindi District Map 2.2b. Location-Level in Malindi Division j-- ;:- AINI- 0% ° A ' LAMUIF Poverty Incidence' T RIV, -20% - 30% E2,~~~~~~~~~~~~~~~~~~~~~20 30' 3535 35% - 40% 3, m ~~~~40% -60% MO60% -65% 65% - 70% L~ ~ M 70% - 7%5_. MALINDI w Estimate) KILIFI_mPoverty Incidence Watamu Location K0%L30% E]gs@-20- 30% ]30% - 35% [T3]%35% - 40% -40% - 60% 1!!40B1..--60 65% -70% l- Y -7MOMBASA - 60% - 65% *(Preliminary Estimatol Map 2.2c. Sublocation Level in Watamu Location A Watamu Location Poverty Incidence* i 20 20% - 30% Li30% - 35% 35% - 40% m40% -60% 60% - 65% JMAtbIc i65% -70% i70%- -75% lPreiminary Estimate) WAAU (sub4oc) 2.12 A second example is given by the Malindi district in the Coast province. It consists of three divisions, with Malindi division having the lowest proportion of people living in poverty, at 40-60 percent (map 2.2a). However, at the location level, poverty incidence is very heterogeneous ranging between 30 percent and 75 percent (map 2.2b). Watamu location along the coastline appears to be the least poor. But even in this area variation in poverty incidence is substantial at the sublocation level with the proportion of the population living in poverty 26 reaching 65 percent in Mbaraka, while this proportion falls to 20-30 percent in Watamu, where tourist hotels are located (map 2.2c). 2.13 These estimates of poverty incidence at previously unavailable levels of geographic detail provide an opportunity to understand what determines poverty outcomes. The Central Bureau of Statistics in collaboration with the World Bank is currently drawing up a research agenda to explore this question. A potentially useful practical application is to compare estimates of economic living standards with spatial patterns of other indicators of well-being, opportunity, and access, such as use of primary health care centers or rates of school enrollment. Such information will be important to policymakers who are implementing the poverty reduction strategy, by, for example, guiding decisions about where to situate new schools or health care facilities. Sociogeographic disaggregation of the poverty profile 2.14 The combination of data from the welfare monitoring survey and the census can provide information on many aspects of poverty. We have calculated measures for various socioeconomic subgroups of the population within an administrative area (following methodologies by Elbers, Lanjouw and Lanjouw, 2002). In particular, three socioeconomic dimensions of the geographic poverty profile of the coastal province are examined: gender, employment in agriculture, and level of education. The results, which confirm the findings from regression analysis on the determinants of poverty discussed in annex I, suggest the following: * Female-headed households are more likely to be poor than male-headed households. At the provincial level, 32 percent of families are headed by females. About 65 percent of these households are poor, compared with about 60 percent of male-headed households.29 While female-headed families are poorer on average, the differential in poverty incidence between female and male-headed households varies geographically. In some locations, headcount differentials are up to 10 and even 15 percent percentage points higher. * Households that derive most of their income farming are more likely to be poor than households that earn most income from nonfarm sources. Poverty rates of agricultural households are about 10 percentage points higher than of other households. Again, the geographical variation in this differential is considerable. Some very preliminary analysis suggests that poverty rates among agricultural households might be relatively higher in coastal locations where nonfarm employment opportunities are available, such as jobs in tourist establishments. By contrast, in the more remote rural locations poverty rates between the two groups are very similar. * Households with better educated members are less likely to be poor than others. About 70 percent of households whose head never attended school are living below the poverty line, but only 58 percent of those whose head completed primary school and 38 percent of those whose head completed secondary school are poor.30 The 29 A family was defined as a household with at least two members. 30 About 52 percent of the population of the Coast province belong to households whose head has never attended school, 37 percent whose head only attained primary schooling, and 11 percent whose head has secondary education or higher. 27 incidence of poverty among households headed by a person who has attained at least secondary education is consistently lower than that of other households, but across geographic locations the differential ranges from 5 to 40 percentage points. 2.15 This newly generated database of geographically disaggregated poverty estimates can be integrated with many other socioeconomic indicators and yield a richer and more detailed profile of poverty than was hitherto available. Moreover, this database provides a basis for further analysis into the determinants of well-being in Kenya, the geographic variation of poverty, and the potential impact of policies and programs intended to reduce poverty. B. GROWTH PROSPECTS 2.16 With over 50 percent of the rural population and 40 percent of the urban population living below the poverty line, reducing poverty sustainably will be possible only by expanding GDP and per capita incomes. The rise of poverty in Kenya is mainly due to low economic growth per capita. This section assesses the growth potential of the Kenyan economy. What growth can be expected over the coming decade? 2.17 Given its current structure, the Kenyan economy can be expected to grow by only about 4.5 percent per year. Assessing a country's growth potential (or frontier growth path) is a challenge, since it requires an understanding of how the economy will evolve well beyond its own history. ' Findings of four cross-country studies suggest that Kenya's long-run or frontier growth is around 2 percent per capita per year, translating into GDP growth of 4.5 Figure 2.2: Predicted and Actual Long Run Annual Per percent per year.32 Two of the four Capita GDP Growth studies (Sachs and Warner, and Dollar 3 and Kraay) predict Kenya's GDP per 2 3 24 Aaul1growth capita growth to be 1.9 percent per year k 2 1.9 2. (figure 2.2). The most recent (1990- A 1.71.7 2171.7 1997) data from O'Connell and Ndulu 2_ a. indicate that Kenya's potential per capita Q I growth is 2.0 percent per year. Taking a a different approach which utilizes o0 Kenyan GDP time series data, Njuguna O'Connell- Sachs-Warner Dolklr.Kry Klassen Mean of and others (2003) find that Kenya's (1960975) ) (1960p1907) (1960-92) ruon growth potential has declined in recent 31 One approach, and the one adopted here, is to use the determinants of growth across a range of countries. The approach involves estimating a cross-country regression, with country growth rates the dependent variable, and a set of explanatory variables covering initial conditions and key socioeconomic determinants-what may be termed the "deep" determinants of growth. Kenya's growth potential is derived by simply applying Kenyan values of the explanatory variables to the estimated regression. The details of how this is done are presented in annex IL. 32 The studies are Sachs and Warner, 1997; O'Connell and Ndulu, 2001; Dollar and Kraay, 2001; and Klasen, 2002. The studies by Sachs and Warner and O'Connell and Ndulu focus on African growth, which makes them particularly relevant to our present concern. The findings of Dollar and Kraay and Klasen are included because unlike the others they highlight the role played by inequality in constraining growth. 33 The word "predict" has a specific technical meaning as used here. It does not refer to predicting the future, but to regression-based estimates of variables. 28 years. While their results vary depending on the specification of the model, they conclude that the-potential early 2000s annual output growth to be between 1.9 and 2.3 percent-well below the rate emerging from the cross-country data. Their findings cannot be fully reconciled with the cross-country predictions, because their focus is on the short run growth potential rather than the long run potential. But they point to the same important policy conclusion: that structural changes are needed to raise Kenya's growth performance in the long term. 2.18 Kenya's growth potential appears to be below that of the high-performing Asian countries because of demographic factors and relatively poor economic policies. All the studies predict Kenya's long-run per capita growth potential to be between 3 and 4 percentage points below those of the high-performing Asian economies. This is somewhat surprising. In fact, Kenya's low initial year GDP relative to that of the Asian economies should give it a growth advantage. This so-called convergence effect is quite marked.34 It means that other things being equal Kenya should grow between 1.2 and 1.6 percentage pointsfaster than the Asian economies (table 2.4). But other things are not equal, and all the other determinants of economic growth specified in these studies reduce Kenya's growth prospects relative to those of the Asian economies. Two broad factors seem to explain most of Kenya's low growth potential: demographic factors and economic policy. Table 2-4: Factors explaining Kenya's Predicted Growth Shortfall Relative to High-Performing Asian Economies (percentage points) Political Initial Demo- stability/ Macro- Predicted Period year graphic institution Open- economic growth GDP factors Geography Shocks quality ness policy difference O'Connell and Ndulu 1965-89 1.60 -2.88 0.00 -0.84 0.03 n/a -1.03 -3.12 Sachs and Warner 1965-90 1.20 -1.61 -0.31 n/a -0.36 -2.35 -0.53 -3.97 Sources: staff calculations based on Sachs and Warner (1997) and O'Connell and Ndulu (2001). Factors influencing the growth prospects 2.19 Kenya's high population growth rate and heavy burden of disease are slowing growth. The high-performing Asian economies experienced a demographic transition in the 1960s, resulting in lower mortality and fertility, reduced age dependency ratios, and higher labor force participation of women.35 These factors helped to accelerate growth in the Asian economies. Kenya was one of the first African countries to begin a demographic transition. Population growth fell rapidly from independence up to the 1980s, but then it tapered off. The total fertility rate is now at 4.4, below the average for Sub-Saharan Africa but higher than in low income countries. But the recent increase in mortality is somehow unwinding the demographic transition-it is not clear yet what the effect of the HIV/AIDS-induced increase in mortality on fertility will be (see box 2.1). Besides the high dependency ratio, the disease burden that Kenyans have to bear is also a serious problem-both in itself and for the country's economic 34 Generally, the lower the initial GDP, the higher is the expected economic growth in following years. Other things constant, this would lead to a convergence in incomes across countries, with poorer countries growing faster than richer ones. 35 A demographic transition is a permanent decline in the death rate and a lagged decline in fertility. 29 prospects. Kenya's high level of mortality (and low life expectancy) compared with the high- performing Asian economies is shown by these studies to have a negative influence on its long- run growth (see annex II). According to the O'Connell-Ndulu results, the demographic factors explain almost 3 percentage points of Kenya's predicted growth shortfall relative to the high- performing Asian economies (table 2.4).36 Box 2.1: AIDS, Mortality and Growth in Kenya- -Dealing' with the HVIVAlDS ep,idemic is'a high'policy priority for Kenya. Reducing the incidence of the disease is both an end.in. itself and a means to accelerating the-pace of economic progress. But'the,connection between HIV/AIDS and growth is, not as .simple as: the cross-country growthmodels, suggest. First, demonstrating just how serious the HJV/AIDS 'epidemic is for Kenya is important. The table below shows that 17 percent of the urban population and 13 :percent ofth'e rural populatio'n is inifecte,d;ith,the virus, and that this has persisted for some time. While the share of the populationbinfected,has not, increased-since 1997, neither' is there any clear evidence of a decline. About 2 million ,Keriyans,w,ere estimated to be infected'in 2000..with HIV. As many as 1.5 million Kenyans have died from the disease since 1984. This. represents over a quarter. of total deaths between 1984 and 2001. In 2000 alone, over 300,000 Kenyans became, infected with he.HIV virus, and -180000 died fromiAIDS thai year Currently AIDS deaths represent about 40 percent of t6tal Kenyan mortality. --And this is increasingly a problem for women. The share of women amiong adults (ages- 15-49) living with HIV/AIDS increased from 55 percent in 1999 to 61 percent in 2001. The decline-in life expectanccy-experienced-in recent Kenyan history is,certainly due to the HIV/AIDS epidemic. Ke'nya-HIV/AIDS Trends (percent of population infected) , .. . . 1997 ' - '1998 1999- 2000 . 2001 U,,r,ban' 16.9: 18.1. . 17.8 17.5 17.0 Rur'al i .;9' 13.0 13;0 13.0 13.0 National 12.8 13.9 13.5 135. 13.1 Source: Central B'ureau 6f Statistics The impact of HIV/AIDS'.on the economy is complex, and is transmitted through a number of channels. The disease is -iihly_selective, tending to strike worki,ng age-ad"ults. It therefore not only reduces life-expectancy-and the rate of population growth,. it inicreases`-the age dependency.-ratios. It also'reduces the stock of kaiowledge and human abilities inhthe po puatinn that stimulate, long-r .economic-growth, -lowers household incomes so:that-children are less likely to 'stay in'school,'and, because ofthe risk `tatchildren-may become infected, diminishes incentives for parents to'invest in their;education.- -L'ess-educated childreri will, in turn-have less knowledge to pass on to their own children.: Researchers pp,l'i=g an deraping genieratio'n,s, model to data fromr South Africa havy estimated that if nothing is done to prevent and.trkeat-HIV/AIDS.an&dto keep orphans:in school, the'economy would completely colla'pse within four.generations- ell and oth,er,s, '2003j. `Apart from th,ese fundamental'demographic.effects, AIDS, can be expected to reduce, labor .prbiou,ctiv,ity(asa result of increased morbidity),increase spending6.n health care anid p,utpresure on 'fiscal resources '(as governm,nts:-seek to 'prevent new:infections treat people already infected, and provide a safety het for orphans and others' left without social .upport.due- to the death of adults),- and reduce household savings rates (households with ' members.infected by HIV/AIDS-tend to dissave as theirincormes.decline). These effects are certain to influence the 'growtih Oath-of the economy. Some indication of the likely- impact of-HIV/AIDS ,on growth can be gained from a recent 'stddy on-'South Africa by Arndt an-dLewis (2000). Using an economywide model, they explore the potential net effects of such complex.cha,nges on growth.. Tliey-c6onclude that the growth;over the 'coming decade will be significantly lower. kas`a result of HlV/AIDS,,and'project that by 2008 the economy wil .be- growing at.only I percent per-year, compared with 3. pe'rcent: in the absence of HIV/,AIDS. Although.South Africa-has a-higher ,HIV/AIDS- infection rate that does aenysa (19.09percent comparedwith.13.9,percent),,these'results give some indication ofthe likely impactofHIV/AIDS on' growi. h 2.20 The low level of female educational attainment contributes to the problem. The importance of population and health factors for economic growth points to a more general set of social conditions which constrain Kenyan growth. Klasen (2002) shows that girls' education, 36 These are life expectancy as birth, the age-dependency ratio, and the growth of the labor force. 30 - particularly secondary school education, is associated with more favorable growth outcomes. The fact that Kenyan women during 1960-92 did not complete as many years of schooling on average as did men accounts for almost a percentage point difference between the growth potential of Kenya and that of the high-performing Asian economies-amounting to one third of the total predicted difference.37 This finding stresses the economic as well as the social advantages to be gained in schooling girls, and encouraging such schooling at the secondary level. 2.21 Kenya's poor economic policies also hinders growth. Poor economic policies are also significantly slowing growth. The Sachs-Wamer data suggest that 75 percent of Kenya's growth shortfall is explained by its low openness (reflecting mainly the trade policy stance of the government). The O'Connell-Ndulu findings suggest that Kenya's high level of government consumption penalizes Kenya's growth potential. High government consumption financed through domestic borrowing may be crowding out private sector investment by increasing real interest rates. Given that the government can do little in the short-run to change the age structure of the population, it is all the more important that it adopt economic policies that encourage growth. Updating the growth predictions 2.22 The burden of disease just about cancels out the favorable impact on growth of improved economic policies, leaving the pace of economic advance largely unchanged. Most cross-country studies are ill-equipped to deal with the medium term because of their very long- run perspectives. The O'Connell-Ndulu (2000) assessment is relevant, given its half-decade empirical orientation and we have used this model to speculate about Kenya's growth path in the future. We update the explanatory variables of the model, using three main assumptions: first, economic policy variables improve substantially (details are provided in annex 1). 38 Second, life expectancy declines and the health status of the population worsens.39 Third, there are no changes in political stability and no shocks.40 With these assumptions, the model predicts a 37 Girls schooling is important because it contributes to reducing the fertility rate as women with more education (especially secondary school education) give birth at a later age, have healthier children, and bear fewer children 38 Revised data on the economic policy variables are applied: the black market exchange rate premium declines (from 19 percent to just 11 percent), inflation falls dramatically (from 20 percent to 4 percent), and government consumption falls from 17 percent of GDP to 13 percent. 39 The demographic determinants are updated to reflect the current situation: life expectancy has fallen from 57.1 years (at the close of the 1980s) to 49.3 years, the UN's estimate for the 2000-05; age dependency improves (from 1.0 to 0.9); and the growth potential of the labor force (relative to overall population growth) declines. 40 The assumption that there are no improvements in political stability for this experiment needs some explanation. As reported in table 6.1 in chapter 6, the overall mean of the quality of institutions, as measured for Kenya by the Intemational Country Risk Guide, has remained remarkably stable over the past couple of decades. But the components of this index have moved quite differently-govemment stability has sharply improved, the investment profile has improved marginally, and other dimensions (bureaucratic quality, corruption and law and order) have declined sharply. How this is interpreted in an assessment of growth prospects depends on what weight is assigned to each component. If they are given roughly equal weight, our assumption of no change in institution quality is justified. But if the corruption and law-and-order indicators are considered more telling in describing the investment and business climate, our growth assessment for the coming years will be optimistic. For simplicity, we have also assumed that no shocks occur. While this is unrealistic, it should be emphasized that we are not providing forecasts of growth, but conditional statements about Kenya's growth potential given the conditions that currently prevail. If the global economic environment changes (either favorably or not), clearly the growth path will be profoundly affected. 31 medium-run acceleration in growth of just 0.3 of a percentage point. Thus, Kenya's predicted growth increases from 2 percent per annum during 1990-97, to 2.3 percent in the early 2000s. This is not a big improvement, particularly considering the changes that the government is introducing to improve governance and economic policy. The sober message of this exercise is that an improvement in economic policies will have a positive impact on growth - but economic development will remain constrained by the deteriorating health of Kenyans. C. THE FUTURE POTENTIAL FOR POVERTY REDUCTION 2.23 We now turn to the most fundamental challenge of this report-shedding light on the potential of the Kenyan economy to reduce the proportion of its population living in poverty, and, more specifically, to achieve the Millennium Development Goal of cutting to 24.4 percent the proportion of the population living in poverty by 2015 from its level in 1990 of 48.8 percent. 2.24 We examine different growth scenarios and how they translates into poverty reduction. In particular, we explore the poverty reducing potential of three scenarios, the sectoral composition of their growth (agriculture, industry, and services), and the assumed mobility of the population across the different sectors over time. The basic assumptions underpinning the analysis are discussed in box 2.2. In each scenario, actual observed sectoral and population growth rates have been applied from 1997 to 2001. Box 2.2: Basic Assumptions Underpinning the Growth Poverty Scenarios First, the poverty reducing effect of the different growth scenarios is obtained by applying (sectoral) GDP growth rates to the income distribution observed in the 1997 household survey. Income was approximated by total expenditure per adult' equivalent, excluding rent. In using GDP growth rates to predict the evolution of household consumption, we assume that private consumption and GDP grow at similar rates. In a situation when invesunent must increase, it is likely that private consumption growth (and hence household incomes) will lag behind GDP growth. In the absence of two comparable household surveys, this assamption cannot be tested, though it is not uncommon in this kind of simulation exercise (Datt and Walker, 2002). Second, in each scenario, the period 1997-2015 is taken as our projection horizon. 2015 is the target year of the Millennium Development Goal. Observed real sectoral growth rates are applied to the 1997-2001 period and projected growth rates according to the different scenarios are applied to the period thereafter. Similarly, reported population growth rates have been used for projections between 1997 and 2001, while quinquennial population growth projections (2.31 percent between 2001 and 2005, 1.83 percent between 2005 and 2010, and 1.6 percent from 2010 until 2015) from the United Nations Populition Division were used thereafter. Third, within sector growth is assumed to be distribution neutral. Fourth, a national poverty line (1,368.85 Ksh) was derived by identifying the expenditure amount corresponding to the national poverty head count based on the 1997 rural and urban poverty lines, 51.4 percent. Fifth, the overall population in 1997 in Kenya is estimated at 28.1 million. By operating the actual population and sectoral growth rates on the 1997 income distribution, we estimate that 17.1 million people or 55.4 percent of the Kenyan population were poor in 2001. Sixth, the population'saemployment share in each sector is derived from the based on the sectoral employment of the household head. In 1997, 57 percent of the Kenyan population was employed in agriculture, 7 percent in industry, and 36 percent in services. 2.25 We start by examining the evolution of the poverty incidence if the economy were to continue from 2001 onwards at the average growth rate observed during the 1990-2001, I.e. 2.15 percent a year (scenario 1, table 2.5). Abstracting from any change in the sectoral employment shares, poverty incidence in 2015 is projected to be similar to the 2001 level, although the number of poor people would have increased by about 5.2 million to 22.3 million. 32 2.26 Next, we consider two scenarios: (1) the Kenyan economy grows at its long-term potential of 4.2 percent during 2001-15; and (2) the economy grows at its long-term potential, although with initial catch up growth (5.6 per cent) during the first five years after 2001.41 In addition, we explore how overall growth patterns change assuming (1) strong agricultural growth, (2) strong industrial growth, and (3) growth following the same sectoral growth pattern as observed during its best three-year period of the 1990s (1994-1996). Finally, we consider the expected poverty reduction if all sectors were to grow at twice their average rate during the 1990s (table 2.5). 2.27 Results are described in Table 2.4. Note that the difference in poverty reduction between the high and low agricultural growth scenarios is substantial. In the former scenario, poverty incidence would fall to 37.4 percent of the population (and to 34.1 per cent if there were also catch up growth) compared with 43.7 percent (and 40.8 percent with catch up growth) in the latter case. Inequality, as reflected in the Gini coefficient, would basically remain constant if agriculture grew strongly, while it would increase if agriculture grew at about the same pace as the overall population. Clearly, a growth scenario driven by strong agricultural growth generates faster poverty reduction and is more equitable. Given that the models assume that within sector inequality remains constant over time, it must be emphasized that to achieve higher poverty reduction, growth in agriculture must be broad based. 2.28 In a third set of scenarios, the Kenyan economy is also expected to grow at its long-term potential, but with labor moving across the different sectors in line with the urbanization rate projected by the UN Population Division.42 In particular, we assume that people adopt the existing sectoral employment shares in the urban areas (they shift from agriculture to industry and services) as they move from the countryside to the cities. The sectoral labor composition in rural and urban areas is assumed constant over time and the urbanization process is considered exogenous.43 As in the second set of scenarios, high broad-based agricultural growth scenarios are more poverty reducing than low agricultural growth scenarios. When the high agricultural growth scenario is combined with initial catch up growth, poverty declines to 31.3 per cent in 2015, the lowest level among all the different scenarios considered. In absolute numbers, this still leaves 12.5 million people in poverty or only about 2 million less than in 1997. 41 This scenario corresponds closely to the base case scenario considered by the IMF (2003) assuming that the economy continues to grow at 4.6 percent after 2008. 42 Following these projections, 47 per cent of the Kenyan population would live in urban areas by 2015 compared with 30 percent in 1997. 43 Important factors which could further accelerate the transformation of the occupational structure out of agriculture into non-agriculture even in rural areas are education and the proximity to market centers. 33 Table 2-5: Economic Growth Scenarios and Their Effect on Poverty and Inequality in 2015 Scenarios Growth rates Projected Poverty Head Projected Gini (percent) Count (percent) coefficient Agri- Industry Services GDP 2005 2010 2015 2015 culture Scenario 1: Historical growth (1990s) Average sectoral growth 1990-01 1.11 1.73 2.71 2.12 | 56.4 56.4 55.6 | 0.44 Scenario 2: Frontier growth without labor mobility (2a)best3-yeargrowthperiodduring 4.11 2.95 4.64 4.19 51.1 44.5 37.4 0.43 1990s (average 1994-96) corresponding to long term growth potential of 2 percent per capita2 (2b) doubling 1990-2001 sectoral 2.20 3.50 5.40 4.22 52.5 48.0 43.7 0.47 growth patterns corresponding to long term growth potential of 2 percent per capita7 (2c) as 2a but with 3.3 percent/cap 5.49 3.94 6.20 5.60 47.9 40.6 34.1 0.43 growth during first 5 years after 4.11 2.95 4.64 4.19 2001 (reflecting catch up growth) (2d) as 2b but with 3.3 percent/cap 2.91 4.63 7.15 5.60 49.9 45.4 40.8 0.47 growth during first 5 years after 2001 2.20 3.50 5.40 4.22 (reflecting catch up growth) Scenario 3: Frontier growth with labor mobility (3a) as (2a) but with sectoral 4.11 2.95 4.64 4.19 50.1 42.6 34.8 0.41 employment shifts following urbanization while keeping locational sectoral employment shares constant3 (3b)as(2b)butwithsectoral 2.20 3.50 5.40 4.22 51.3 45.3 38.6 0.43 employment shifts following urbanization while keeping locational sectoral employment shares constant (3c) as (2c) with sectoral employment 5.49 3.94 6.20 5.60 46.9 38.4 31.3 0.41 shifts following urbanization while 4.11 2.95 4.64 4.19 keeping locational sectoral employment shares constant (3d) as (2d) with sectoral employment 2.91 4.63 7.15 5.60 48.7 42.0 35.2 0.43 shifts following urbanization while 2.20 3.50 5.40 4.22 keeping locational sectoral employment shares constant 1/ All scenarios use the 1997 income distribution derived from the welfare monitoring survey as baseline; they use actual sectoral and population growth rates (World Bank data) until 2001 and the different growth scenarios thereafter. Quinquennial national population growth projections as well as projected urbanization rates are obtained from the UN Population Division. Population growth between 2000-05 is projected at 2.3 percent, between 2006-2010 at 1.83 percent and between 2011-2015 at 1.6 percent. 2/ The sectoral GDP decomposition in the (a) and (c) scenarios are based on the 1994-96 average (agriculture: 31.29 percent, industry: 16.59 percent, services: 52.11 percent) while the (b) and (d) scenarios use the 1997 sectoral GDP composition (agriculture: 27.35 percent, industry: 15.47 percent, services: 57.18 percent). 3/ Following projected urbanization rates and keeping sectoral employment shares in rural and- urban areas constant, employment in the agricultural, industrial and service sector is projected to grow at 0.95 percent, 3.54 percent and 3.48 percent respectively between 2000 and 2005, at 0.45 percent, 2.93 percent, and 2.88 percent between 2006 and 2010 and at 0.27 percent, 2.55 percent, and 2.51 percent between 2011 and 2015. Source: World Bank staff calculations. 34 2.29 The Millennium Development Goal of cutting in half the proportion of the population living in poverty by 2015 is not likely to be affained. Clearly, even in the best-case scenario (3c), the goal of cutting the proportion of Kenyans living in poverty to 24.4 percent of the population will not be attained. Even then-with the Kenyan economy sustaining its high agricultural, catch up growth path of 3.3 per cent per capita with labor mobility up to 2015- headcount poverty will remain significantly above the target (31 percent versus 24 percent-a shortfall of 7 percentage points, figure 2.4). 2.30 Broad-based growth of agriculture is critical to substantially reduce poverty. The poverty reducing potential of economic growth will critically depend on the nature of the growth path followed. Figure 2.3: Poverty Reduction and Growth in Kenya: Future Scenarios Without concerted GDP Growth Scenarios and Poverty Reduction efforts to Poverty projection based on growth frontier: foster 60 no sectoral labor mobility and low and high agricultural growth patterns agricultural 5 \ growth, 5 1 poverty levels 50 \ will remain unacceptably : 45 high during * the coming . 40 decades with the number of 34 poor people in o High agricultural growth 31 2015 roughly 30 and labor mobility the same as in 1997. In25 2015 poverty target = 24.4 % considering 20 . . . . . . . . ... the nature of 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 growth, it must also be Source: World Bank staff estimates. emphasized that to fully capture the poverty reducing effect of strong agricultural growth, this growth must be broad based and must include the vast majority of smallholders and subsistence farmers. D. SUMMARY AND RECOMMENDATIONS 2.31 This chapter has reviewed the 1997 poverty estimates, discussed poverty trends in the 1 990s and presented some preliminary findings on the determinants of poverty and on inequality. But obtaining a more accurate and robust poverty benchmark will require developing a new household survey, as well deeper analyses of the collected living standards data. The following are recommended: * Review methodologies used to derive the poverty line. The Central Bureau of Statistics needs to review its own methodologies in estimating household well-being and in deriving the poverty line. * Identify an appropriate poverty line through wide consultation with Kenyan stakeholders. A wider debate on the meaning and measurement of poverty in the 35 context of the social and economic conditions of Kenya is needed. The analysis and identification of appropriate poverty lines should be broadened to include researchers, policymakers, and the civil society at large. Such consultations should go beyond purely technical issues, but deal with how poverty is viewed in Kenya's social context. Future surveys should be tailored to enable researchers to test how closely subjective poverty lines (based on consumption adequacy as perceived by respondents) accord with objective poverty lines, such as those derived above (see Pradham and Ravallion, 2000). * Undertake a new household survey using an improved survey instrument as soon as possible. The Central Bureau of Statistics needs to review its choice of household survey instrument, and then to undertake a new households survey as soon as possible using an improved design. The last survey was undertaken in 1997, six years ago. New information is needed for the poverty baseline against which the success of future programs will be measured. 2.32 The chapter has also estimated different growth scenarios. Given current conditions, the growth potential in Kenya is significantly better than the performance during the 1990s. Cross- country evidence suggest that Kenyan per capita GDP should grow over the long-run at around 2 per cent per year. The key recommendations of this assessment of Kenya's growth prospects are: * Address Kenya's burden of disease and high mortality. The burden of disease and mortality are major impediments to accelerating growth. The recent increase in Kenyan mortality reduces economic growth by 0.7 of a percentage point, and this can be considered as an approximate measure of the cost of the HIV/AIDS epidemic and the persistent burden of malaria. Dealing with disease, and especially HIV/AIDS, is not only a priority in its own right, but is also important to stimulate pro-poor growth and to reduce poverty. * Intensify efforts to encourage girls to attend and stay in school, especially at the secondary level. Gender inequality in schooling is adversely affecting economic growth. Getting and keeping girls in school is not only an end in itself, but raises the growth potential of the economy. And it is an essential element of the demographic transition, encouraging higher labor force participation of women, lower fertility, and lower age dependency. * Continue efforts to improve economic policies and governance. Past fiscal policy stances have constrained growth. Growth will be enhanced if public sector reforms reduce the size of the wage bill (thus lowering government consumption), and redirect public spending towards capital investments and essential public services that reduce poverty. Key institutions (affecting for example law and order) have deteriorated in recent years, which has reduced Kenya's growth, and unless reversed will continue to slow growth below the estimate of 2 percent per capita per year. 36 3. AGRICULTURE 3.1 After two decades of sustained growth, the agriculture sector in Kenya performed poorly during the 1990s. This chapter discusses the reasons for the poor performance and suggests reforms to promote broad-based agricultural growth. It is divided into three parts. Section A describes the main features, trends, and policies characterizing the agriculture sector. Section B reviews the performance and policies in the important crop and livestock subsectors and provides specific recommendations. Section C provides conclusions and recommendations. The chapter is selective in its coverage of issues because this is an initial review, which will need to be followed by a more intensive assessment of the agricultural sector and the rural economy. Thus, issues related to credit, research and extension, and input supply are discussed only briefly. Forestry and fisheries, land and water management, and issues related to environmental sustainability are not covered in this report and will be the subjects of future work. The selective focus of this chapter does not intend to suggest that the topics that have been given limited coverage are not important. A. OVERVIEW, STRUCTURE AND PERFORMANCE OF THlE AGRICULTURE SECTOR 3.2 Kenya is still a rural society with an estimated 67 percent of the population living in rural areas.44 However, rural livelihoods are changing and more than half of the incomes of people living in rural areas now comes from nonfarm activities. Thus, many small farmers have transitioned to part-time farming with multiple sources of incomes. Agriculture accounts for about 25 percent of total GDP, 60 percent of total employment, and 75 percent of merchandise exports. Approximately 40 percent of agricultural GDP derives from livestock, 30 percent from food crops, and 30 percent from export crops. More than 80 percent of the poor live in rural areas, and the poorest are subsistence farmers and pastoralists. Female-headed households are almost twice as likely to be subsistence farmers as male-headed households and are more likely to be poor (Geda de Jong, Mwabu, Kimenyi, 2001). 3.3 Smallholder farmers account for 70 percent of marketed agricultural production, with the share in specific subsectors and crops varying greatly (smallholders produce 60 percent of tea, 15 percent of marketed maize, and 50 percent of coffee).45 Smallholders produce most dairy products, with subsistence farmers producing about 15 percent of the total.46 Large farms account for 30 percent of marketed agricultural production and typically have higher input use, better management, and higher crop yields than small farms. Yields of smallholder tea farmers, for example, are about two-thirds of estate yields, and yields of smallholder coffee farmers during 1990-98 averaged about one-half those of estates (Nyangito, 2001). The average land holdings for small and large farms are 1.2 and 700 hectares respectively. About 25 percent of all farms are between 20 and 50 hectares (Central Bureau of Statistics, 2001). 44 World Bank, World development indicators database. 45 Smaliholders are defined as having between 0.2 and 12 hectares of land by the Central Bureau of Statistics (2001). Large farms average around 700 hectares. 465 Based on discussions with staff of livestock department, Ministry of Agriculture. 37 3.4 Smallholder farmers are predominantly women who face even more severe constraints than male farmers. Because men are increasingly migrating from rural areas in search of work, women are assuming many of the responsibilities previously handled by men in tending livestock and crops. Women provide 75 percent of the labor for small-scale agriculture. Despite their roles in agriculture, they have limited access to credit from formal channels. The gender imbalance in agricultural land ownership can be directly attributed to Kenya's law of succession, which indicates that, when there is no will (the most common case), agricultural land is to be distributed according to the customary or religious laws of the deceased land owner. The traditional customary law, which provides for land to be passed on through the male lineage, implies that women do not have the right to inherit land.47 3.5 Kenya's growth of agricultural value added of 1.3 percent per year during 1990-2000 was well below the growth of more than 4 percent per year achieved during the 1980s. It was also below the agricultural growth rates of neighboring Tanzania and Uganda and of selected Asian comparators (table 3.1). Kenya's export growth was better at 4.0 percent per year in current U.S. dollars, but it was still below the average of nearby neighbors and Asian comparators. Rapid population growth has cut the amount of arable land per capita by almost half during the past 20 years. Nonetheless, Kenya has similar levels of arable land per person as do many other countries. The decline in available land per person has been partially offset by increased intensification of production, with both the number of tractors and fertilizer use per hectare more than doubling during the past 20 years. Fertilizer use (a very broad indicator of productivity) is less than one-third that in India, one-quarter that in Indonesia, and roughly one- tenth that in China or Vietnam. Value added per agricultural worker was about on par with neighboring countries but well below that of most Asian comparators. On balance, Kenya's agricultural endowments and input usage are equal to or better than those of Tanzania or Uganda, but well below those of Asian countries considered-especially with respect to the share of irrigated land, fertilizer usage, and tractors per hectare. Kenya is also more dependent on rainfed agriculture than most of the comparator countries, and this contributed to reduced output during the 1990s when weather was highly variable. 47 See the forthcoming World Bank, "Kenya Strategic Country Gender Assessment." 38 Table 3-1: Performance of Agriculture: Kenya Compared to Other Countries Kenya Tanzania Uganda China India Indonesia Vietnam Growth of agricultural value added, average 1.3 3.2 3.7 4.1 3.0 2.1 4.8 annual percent, 1990-2000 Agriculture productivity, value added per worker 225 189 353 321 397 736 240 1998-2000 in 1995 US$ Growth of agricultural exports, average percent 4.0 6.2 3.1 1.6 5.7 5.0 12.8 1989-91 to 1999-2001 Per capita gross national income 2000 USS 350 270 300 840 450 570 390 Rural share of population, percent 2000 67 72 86 68 72 59 76 Arable land as percent of land area, 1999 7.0 4.2 25.7 13.3 54.4 9.9 17.7 Arable land per capita, hectares 1997-99 .14 .12 .24 .10 .17 .09 .07 Irrigated land as percent of cropland 1997-99 1.5 3.3 0.1 39.0 33.6 15.5 41.3 Fertilizer use, hundred grams per hectare of 346 81 6 2,911 1,058 1,415 3,179 arable land 1997-99 Tractors per 100 square kilometers of arable 36 20 9 60 92 39 218 land, 1997-99 Source: World Bank, 2003a. 3.6 Agricultural prices remained roughly constant in real terms from the start to the end of the 1990s. Food prices increased at the same rate as the overall CPI from 1990 to 2000, and then declined in 2001 (IMF, 2002). The export terms of trade improved in the first half of the 1990s and then weakened from 1996 to 1998, Figure 3.1: Agriculture Domestic Terms of Trade but ended the decade higher than in 1990. Profitability in the agriculture sector declined significantly because the domestic terms of 120 trade deteriorated as input prices rose (figure o10 3 1)48 Seed and fertilizer prices rose 80 1 ,oo - percent from 1997 to 2001, fuel prices rose 90 50 percent, and animal feed prices rose 40 \ percent (Central Bureau of Statistics, 2002). - 80 The causes of the increases are not clearly 70i understood in light of low inflation and stable 60 exchange rates. International fertilizer prices SourceI Central 9 ura of Stasc 2000 fell during this period, with U.S. dollar nitrogen fertilizer prices declining by 16 percent and diammonium phosphate and triple superphosphate fertilizer prices falling by 26 percent (World Bank, 2003b). 3.7 Productivity declined due to a combination of exogenous and policy factors. The productivity of both land and labor in agriculture increased until about 1990 and has declined ever since (Gerdin, 2002). As already discussed in chapter 1, total factor productivity growth for the overall economy was negative during the 1990s and consistent with trends in agricultural productivity (Ndulu and O'Connell, 2000). Several reasons explain the poor performance of agriculture and the decline of land and labor productivity: 4t Calculated as the agricultural output index divided by the weighted average index of prices paid. 39 * Exogenous factors: Poor weather and declining world commodity Figure 3.2: Rainfall Variability, Ag GDP and GDP prices. Droughts and floods were particularly important negative factors during the 1990s, since 60 G aa 10 much of Kenya's agriculture is 40 8 rainfed (figure 3.2). Other 20 A' 6A - 6 negative factors included the 0o A 4 decline in global commodity -26d 7N\ W 4 prices, particularly of coffee. -6 * Declining fertility of land and poor -80 - -2 management of water resources. -100 -4 High and rising population density has contributed to rapid soil nutrient depletion and declining yields, which is leading to environmental degradation. In addition, poor management of water resources has affected irrigation development. While the legal framework is adequate, monitoring and protection of water catchments areas has been neglected.49 * Reduced use of hybrid maize. The private maize seed industry in Kenya has been slow to develop, despite liberalization, because the government still has a strong role in the industry and has almost exclusive rights to breeder seeds through the Kenya Seed Company. The favored treatment of the Kenya Seed Company has discouraged the private sector from actively participating in seed production, which has contributed to lower seed quality and use. Other problems such as fraudulent labeling further undermine the use of hybrid seeds. * Poor access to credit. In the past, the government provided subsidized credit to farmers through the Agricultural Finance Corporation and the Co-operative Bank. By 1995 the Agricultural Finance Corporation had collapsed due to poor loan repayments. The Co- operative Bank provided credit mainly to farmers producing cash crops, particularly coffee. A number of microfinance institutions are operating and new initiatives are underway, but they reach only a small proportion of smallholder farmers. Credit is not generally available to smallholder farmers through commercial channels, and when available, real interest rates are high. * Declining health status of the population. This has been made worse, in recent years, by the HIV/AIDS pandemic, which has contributed to the decline in labor productivity. * Poor infrastructure, particularly the rural road network. The resulting high transport costs reduce the competitiveness of bulky products and increase the cost of access to inputs and markets. Electricity in rural areas is expensive and often not available, which has reduced investments in cold storage facilities, irrigation, and processing. * Lack of a coherent land policy, covering land use and administration, land tenure, and land delivery systems. 49 See the Environmental Management and Coordination Act (1999) and the 1999 sessional paper number I on national policy on water resource management and development. 40 * Reduced effectiveness of extension services. The effectiveness of extension services declined throughout the 1990s due both to the ineffectiveness of the travel and visit extension model pursued and to reductions in the operational budgets of the Ministry of Agriculture (World Bank, 2000). Public expenditure and policy framework 3.8 Public spending declined. In the past, government heavily subsidized inputs and credit, and provided strong extension support. But, such high support was not Figure 3.3: Agriculture Share of Government sustainable, and the share of Expenditure government budget expenditures allocated to agriculture declined from 12 about 11 percent in the mid-1980s to ____ less than 4 percent in the late 1990s (figure 3.3). Services such as livestock vaccination, disease control, and _ artificial inseminations, which had been provided to farmers for low or no fees, were curtailed. The private sector has O,I begun to provide such services, but the Source: Ministry of Agriculture and Rural Development. level of services provided by the private sector has not reached the level provided by the government during the 1980s. 3.9 Although the government took substantial steps to liberalize agriculture and the economy during the 1990s, poor sequencing of and partial reforms often hampered efforts. Policy reforms since 1986 include liberalization of marketing and removal of price controls, deregulation of markets, and reduction in public spending.50 A number of subsectors such as cereals, seeds, fertilizers, and animal feed were commercialized or privatized. However, some of these reforms were ill-sequenced and poorly implemented. The curtailment of certain government services, such as livestock disease prevention and control, led to the resurgence of problems that had previously been contained. As discussed in the following section, prices of maize and sugar (basic food staples that account for a combined 47 percent of total calories in the average Kenyan diet) have been kept above world market levels through border measures and the reentry of the National Cereals and Produce Board as a purchaser of maize. Of the spending allocated to extension services, a large share went to central level administration, while funds for extension field offices were insufficient to meet their most basic operational needs. Research has not focused on smallholder production. Certain subsectors, such as coffee, continue to be plagued by inefficient and sometimes corrupt management of cooperatives, delayed payments to producers, and excessive marketing costs. B. SECTORAL PERSPECTIVES 3.10 This section examines the most important crops and livestock in each of the main subsectors (see table 111.7.2 in annex III). Some crops and livestock, such as rice, wheat, and poultry were not covered because of time constraints. They will be priorities in follow up work. 50 See the sessional paper number I of 1986 on economic management for renewed growth. 41 Among export crops, tea, coffee, and horticulture are examined. Tea production and export earnings continued to rise during the 1990s, while coffee production and export receipts declined dramatically. The poor performance of coffee was due partly to declines in world market prices, but more to the institutional arrangements governing the marketing of coffee, including poor management of the cooperatives. Horticultural exports did well and owe their success to a dynamic private sector that has innovated to stay competitive in the international market. Among important food crops, the analysis focuses on maize and sugar because they are importance in the diets (and household expenditures) of poor Kenyans and in production and marketing, and because they present important policy issues. The government remains more heavily involved in food crops than in most other agricultural subsectors, with maize and sugar producers protected from cheaper imports. Livestock production is the largest subsector of agriculture, with both cattle and dairy being important. Dairy farmers have successfully adjusted to the liberalization reforms, while beef cattle producers have problems with disease control, marketing, and exporting. Poultry production is growing, but it is still relatively small. Specific recommendations are included with the analysis of each crop or livestock, and this is followed with a conclusion and overall recommendations in section C. Export crops 3.11 Coffee and tea are Kenya's largest export earners, accounting for an average of US$580 million per year during 1990-2001 and 47 percent of total merchandise exports.5" Coffee plantations also employ about 60,000 workers and tea plantations employ about 80,000 workers (Central Bureau of Statistics, 2001). In addition, about 250,000 smallholder coffee growers and 360,000 smallholder tea growers earn cash incomes from the crops, in addition to a number of estate growers of both coffee and tea. 3.12 Exports of these important cash crops have diverged, with tea export earnings continuing on a rising trend, while coffee export earnings have declined Figure 3.4: Coffee and Tea Exports sharply (figure 3.4). Coffee production declined from a peak of 600 ___ 128,700 tons in fiscal 1988 to 51,700 MO tons in fiscal 2002, while tea production reached 294,000 tons in fiscal 2002-nearly double the level a 3 _ of fiscal 1988. Production of 200 - _, - '' , smallholders fell more rapidly than I00 that of estates, and it now accounts for o - less than half of total production, 1 1-Caffm -Toa32 compared to 60 percent a few years Source: UN Comtrade. ago. Output of smallholder tea producers continues to increase relative to that of estate producers and now exceeds 60 percent of total production. The smallholder coffee sector is on the verge of collapse, and without major reform, it likely will. Smallholder coffee growers have begun to remove their trees or interplant them with food crops such as maize and beans. 5' UN Comtrade data. 42 3.13 The difference in performance was partly due to international price movements. International coffee prices declined after 1997 due to the emergence of Vietnam as a ma or exporter, increased exports by Figure 3.5: International Coffee and Tea Prices Brazil following its currency devaluation in 1999, and stagnant 500 per capita coffee demand in the major consuming countries of 400_ _ Europe and in the United States 300 (figure 3.5). However, this price Z 00 _ - I decline was preceded by a sharp N _ increase from 1994 to 1997, l which provided large returns to 1990 1995 2000 coffee growers. By contrast, tea I_Coffeo(Armbica) - Tea(Av93A,dioW) prices remained relatively stable. _- _W__B.* 3.14 The coffee sector underwent reforms in 1993, which liberalized foreign exchange regulations, processing, milling, and brokering. Growers were then free to appoint their own pulping stations, millers, and marketing agents, but they were not permitted to sell cherry or parchment coffee except through a central auction and authorized marketing agent. A cooperative society was considered an agent in charge of issuing credit to growers, making advance and final payments for cherries and parchment, and providing management, inputs, and other services. The reforms led to new problems that now require attention. A new Coffee Act was approved in 2002, but the changes were not sufficient to correct important organization and incentive problems in the sector. Prior to reforms, the Coffee Board of Kenya had control over all the organizations involved in the delivery of services, including production inputs, extension, coffee pulping, storage, transportation, milling, marketing, and payments to farmers. After reforms the Coffee Board of Kenya continued to be responsible for regulatory and marketing functions, but not for delivering services, which became the responsibility of primary societies and cooperatives. Smallholder farmers are licensed to grow coffee under their cooperative societies. The farmers grow and deliver the ripened fresh coffee cherry or dried coffee berries (mbuni) to the coffee factory owned by the cooperative societies of which they are members. The coffee is processed into parchment, stored, and then transported to the cooperative societies for delivery for milling and sale at the auction. The proceeds from coffee sales are used to pay cooperative staff operating the coffee factories, and for services such as bookkeeping, credit, and supervision provided by the parent society. The cooperatives pay the farmers for their coffee after deducting costs for processing and marketing from the sales proceeds. 3.15 Operating costs of coffee factories increased uncontrollably after reforms (figure 3.6). Smallholder coffee farmer's share of sales proceeds fell to 30 percent from about Figure 3.6: Coffee Factory Operating 70 percent that they had been receiving Costs (Real) Murang's District before the reforms (and compared with 70 percent of sales proceeds received by 30,00 .... __e smallholder tea growers). A survey of 12 26.000 Ubked h factories in the main coffee growing area 20,000 near Mount Kenya showed that real MON operating costs increased by an average of ,0000 68 percent per year from fiscal 1991 to fiscal 5,O* 1997 (Nyangito, 2000) (figure 3.6). This 0 K was attributed primarily to mismanagement 1990/91 1991/92 199293 19931N 1994/95 1995/96 996/97 Soun:e: KIPPRA, 43 and deducting of expenses unrelated to coffee processing and marketing. 3.16 The success of the tea industry has been attributed to the supportive role of two institutions. The first, is the Tea Board of Kenya, which has followed a noninterference policy for estates, and the second is the Kenya Tea Development Agency (KTDA) (Nyangito, 2001). The smallholder tea subsector is under the supervision of the KTDA, which was converted from a government parastatal to a farmer-owned corporation in June 2000. The KTDA manages the 51 smallholder tea factories and the input supply and green leaf collection from smallholder growers cultivating an average of less than 1.0 hectares each. The KTDA receives 3 percent of the total proceeds from smallholder tea sales as a management contract. Producers may sell their tea either through the auction at Mombasa or directly to buyers. The KTDA provide inputs such as fertilizer to the smallholders, and deducts their value from the monthly green leaf payments. Variable costs are about 30 percent of the value of gross outputs, and fertilizer costs comprise almost half of variable costs. Smallholder farmers are given payment for a proportion of the estimated value of their green leaf each month that they deliver tea to the factory, and the balance in two payments after the factory has sold the tea and deducted its costs. A small amount of smallholder green leaf is sold to traders who then sell to estate factories. This most often occurs when the KTDA is unable to collect green leaf because of factory or transportation problems. A survey of tea farmers and factories in five districts in 1998 found that farmers received nearly 70 percent of gross sales. Factory expenses were about 23 percent, selling and distribution costs were 4 percent, and agricultural services and taxes were 2 percent (Nyangito and Kimura, 1999). 3.17 The solution to the coffee crisis is to gain control of processing and marketing costs and to increase the producer's share of sale proceeds. This will require professional management of processing and marketing of smallholder coffee, as is done with smallholder tea. Coffee estate operating costs processing and marketing costs are nearly the same 30 percent share of coffee sale proceeds as is the case for tea. Thus, smallholder coffee producers should be able to receive about 70 percent of coffee sale proceeds, if processing and marketing costs are properly managed. This would more than double incentives to farmers. The current system of coffee processing and marketing through more than 460 coffee societies and unions has led to mismanagement and abuse of responsibility. A more rigid contractual arrangement is needed, which engages the societies and unions in coffee processing but does not grant them financial management of coffee proceeds. The poverty implications of reforms to coffee processing and marketing are substantial because of the large number of smallholders and wage employees who depend on coffee production. 3.18 Other changes are also needed if coffee is to reach its potential. The Coffee Act approved in 2002 did not provide the same marketing flexibility to coffee producers as did the Tea Act to tea producers. Coffee producers are required to sell all coffee through the auction, while tea producers are free to sell either through the auction or privately. Allowing coffee producers the same freedom would permit some to develop marketing arrangements that would increase their overall earnings and reduce year-to-year variability in prices by permitting them to enter into long-term contracts with buyers. It would also permit the financing of inputs by international buyers who are currently discouraged from such financing because they are not assured that they will acquire the coffee at auction after having contributed to its production costs. Additional measures are likely to be needed to finance inputs for smallholders who are unable to get credit from commercial sources. A professionally managed and audited corporation could provide this service for smallholder coffee similar to that provided by the KTDA. The cost of professional management would probably be similar to the 3 percent of tea sales that is paid to the KTDA. 44 Recommendations * Create a management company along the lines of the KTDA to manage smallholder coffee processing, marketing, input supply, and extension. Require an annual independent audit by an accredited accounting firm. * Recruit an internationally recognized expert to manage the corporation and negotiate the necessary agreements with societies, unions, and input suppliers, as well as oversee the prompt payment of growers for their coffee. * Update the register of producers and implement necessary procedures to prevent side-selling by farmers who are attempting to avoid repaying input loans. * Amend the Coffee Act to allow the management company to operate as the agent for smallholders, and to allow producers to sell coffee outside the auction if they wish. Allowing sellers to market their output through alternative channels will also enable them to link directly with buyers of specialty coffees, who pay premium prices. * Make research more demand driven and effective. The most recent release of a new coffee variety, Ruiru 11, was in 1986. Horticulture 3.19 The Kenyan horticulture industry has grown steadily over the past two decades and represents a major export success in Africa (figure 3.7). Starting with basic Figure 3.7: Horticultural Exports advantages-a favorable climate and a relatively skilled labor force-the industry managed to attract substantial foreign investment, foreign technology 20 and expertise and to integrate them well with local skills. The industry is entirely dominated by the private sector, with the *o government playing only a facilitating a role. Over the years, Kenyan growers and exporters have managed to keep pace o with market trends and changing 1990 1992 1994 1996 1998 2000 technologies. Some segments of the industry-particularly flowers-have developed intensive relationships with overseas customers and have integrated freight forwarding, clearance, and importing activities; they have diversified their markets, providing direct sales to wholesalers in Europe, and to supermarket chains. 3.20 In 2001, horticultural exports reached 23.6 billion Ksh (US$300 million), with cut flowers accounting for over half of the total, fresh Table 3-2: Horticultural Exports, 2001 vegetables accounting for 35 percent, and fruits Billion Ksh Share (%) accounting for almost 11 percent (table 3.2). Real Cut flowers 12.7 53.8 exports increased 63 percent in 2001 due to value Vegetables 8.4 35.6 additions from improved packaging of vegetables FritS 2.5 10.6 into ready-to-eat portions, coupled with higher values for cut flowers from direct marketing rather Source: Central Bureau of Statistics, 2002. 45 than auction sales. The horticultural sector faces stiff competition from other African exporters, especially from COMESA countries. Continued success depends on producers being sensitive to market demand and being able to adjust quickly to changing trends. Recommendations The government should continue to play a facilitating role, focusing on improving laws and regulations for foreign direct investment, lowering operating costs (such as power), and improving infrastructure for the sector. However, private initiative must continue driving the industry to ensure continuous growth. Food crops 3.21 Maize is the basic food staple in the diet of Kenyans, accounting for 36 percent of total calories. For people living at the poverty line, maize accounts for 58 percent of calories and 28 percent of food expenditures.52 53 Almost all rural households grow maize for consumption, and more than half are also net buyers of maize. Among the lowest income quintile of rural households, more than 80 percent are net maize buyers. Among urban households, virtually all are net buyers of maize according to a 1995 survey of Nairobi consumers. Maize is politically sensitive because of its importance to the poor, and because it is an important cash crop for large farm holders. More than 83 percent of marketed maize is sold by the largest 10 percent of farms (Jayne and others, 2000). Thus, the government, faced with a policy dilemma of keeping maize prices low to benefit the poor or supporting prices to benefit large maize farmers, has often chosen the latter course. 3.22 Maize production has been stagnant since the mid-1980s and imports have been increasing. An estimated 3.5 million smallholders produce about 75 percent of Kenya's maize, and about 1,000 large farms who produce the remaining 25 percent. Large and small maize farmers are about equally productive and adopt hybrid maize and fertilizer in equal proportions (Karanja, Jayne, and Strasberg, 1998). Increasing maize productivity would reduce maize prices, improve household food security, and free resources to produce other more profitable crops for the rapidly growing urban population. Higher productivity will require more intensive production, development and adoption of improved hybrid seeds, higher fertilizer use, and expanded irrigation in favorable areas. Other factors which contribute to maize productivity in Kenya include proximity to roads, education, extension, and the presence of a male in the household. Karanja, Jayne, and Strasberg (1998) found that high interzonal productivity differences exist, which suggests the potential for overall productivity growth is considerable. 3.23 Maize marketing was liberalized beginning in 1988 and by December 1993 it was fully liberalized. That policy change was intended to allow maize to be imported freely, subject to tariffs, and to pernit the free movement of maize within Kenya (Ministry of Agriculture and Rural Development, 2000). The National Cereals and Produce Board, which had been the monopoly buyer of maize, was fully commercialized, its staff downsized, and its activities 52 Wheat is the second food staple after maize. Wheat is particularly consumed in urban areas. The annual production meets some 50 percent of local demand. Rice is also consumed, and is produced in six main irrigated areas, mostly under the control of the National Irrigation Board. 53 Ministry of Finance and Planning, 2000. 46 undertaken only on a commercial basis. Between 1994 and 1999, the marketing and pricing of maize was increasingly done by the private sector as they were allowed to have a greater role in maize transport, storage, and processing. Real maize prices declined by 25 percent in the 1995- 99 period compared with the 1985-93 period, and maize became more readily available in retail markets (Jayne and others, 2000). However, the reform process was controversial and doubts about the effects on farmers and consumers probably contributed to the government's decision in 1999 to bring back the state-run National Cereals and Produce Board to manage the government's strategic reserve of maize on a commercial basis.54 Import tariffs, border restrictions on maize shipments, and occasional import bans have been used to support prices at higher than world market levels despite the negative impact on the poor (Jayne and others, 2000; and Institute of Economic Affairs, 2001). 3.24 Maize prices in Kenya remain higher than in neighboring countries. Wholesale maize prices in Nairobi averaged 33 percent higher than in neighboring capital cities during January 1996 to July 2000 (figure 3.8). Producer prices in the major maize growing areas were also well above those in neighboring Figure 3.8: Maize Prices in Capital City countries-44 percent higher than Ethiopia, 47 percent higher than in Zambia, and 48 percent higher than in South Africa. Imports from 250 COMESA countries face a 3 percent duty while I imports from non-COMESA countries face a 30 . ,0- percent duty. However, trucked imports are _i sometimes prevented from neighboring Uganda and Tanzania. The margin between 0 international maize prices and Kenyan prices widened during the 1990s and remains large K.oy. Elbiopi Zzmbi. Zi=b.bscSouobAArk. Mozbiqe despite minimal import duties from COMESA countries. The poverty impact of high maize prices is substantial because of the large share Source: Jayne and others, 2000. of maize in the food expenditures of the poor. More than half of the population in Kenya is living below the poverty line. Yet, they pay roughly 33 percent more for their basic staple than people in neighboring countries. 3.25 Kenya, like many other countries in Africa, has struggled with providing food security for its population. Food security basically entails ensuring that adequate supplies of food are available in the market at reasonable prices, and that people have adequate means to acquire the food. Governments can create entitlements for the poor and for those who have suffered temporary income shocks due to adverse weather or other calamities. In Kenya, government policy to achieve household food security has been to encourage farmers to produce maize. Instead, farmers should be encouraged to produce whatever commodity is most profitable, and use their earnings to buy a variety of food products. However, because of the large number of smallholders who produce maize and its importance in the diet, it is also important to improve maize productivity and reduce average per unit production costs. 54 The government maintains a strategic maize reserve stock of up to 3 million 90 kilogram bags and a strategic fund of US$6 million. 47 Recommendations * Fully liberalize the maize market, allowing unrestricted imports from neighboring countries. This will reduce the cost of the basic food staple for all consumers, disproportionately benefiting the poor. * Liberalize the hybrid maize seed industry. This will encourage the development of private sector competition, which should lead to production and distribution of higher quality seeds. Proper labeling of hybrid maize seeds needs to be enforced. * Take action to raise maize productivity. Factors that determine maize productivity, such as hybrid seed quality and price, fertilizer quality and prices, and extension services should be examined to determine whether policy changes can be made to improve the quality or lower the prices of these factors of production. Sugar 3.26 The sugar industry in Kenya is heavily protected by 100 percent duties on imports from non-COMESA countries, and by quotas on imports from COMESA countries. Some Figure 3.9: Sugar Prices in 2001 producers, millers, and traders make large profits from this protection, while consumers bear the 60 burden by paying higher prices than necessary (figure. 3.9). The additional cost of sugar to 40_ consumers in 2001 was approximately US$172 &30 million-a little less than US$6 per person.55 Sugar 20 is a basic staple in the diet, accounting for 11 1_ percent of total calories. If the sector were fully CIF M_b F. a l liberalized, sugar prices would decline sharply, 3F. b "e sm. BOW food expenditures on sugar would decline, and food poverty headcounts would diminish. 3.27 The sugar sector was developed with government assistance, and five of the seven sugar factories are government parastatals. Of the remaining two, the largest is the Mumias Sugar Company which is a share company, with nearly one-third owned by the government. It accounts for 60 percent of total Kenyan sugar production and has production costs that could make it competitive with imports. The sugar subsector has been partially liberalized since 1995, but the government still controls the industry through the Kenya Sugar Board, which is under the control of the Ministry of Agriculture. Approximately 29,000 individuals are employed by the sugar industry, and an additional 40,000 smallholders grow sugar cane on an outgrower basis. 3.28 A new Sugar Act became effective in April 2002, which created the Kenya Sugar Board to replace the previous Kenya Sugar Authority. The act continued the broad authority of the Sugar Board and the Minister of Agriculture to control all aspects of the sugar industry (production, manufacturing, marketing, imports, and exports of sugar, and its by-products). One provision, which likely assures compliance with the dictates of the Sugar Board, provides for 5s Computed as annual consumption of 600,000 tons multiplied by the price difference between sugar imports (cif Mombasa) and the ex-factory price (22.48 Ksh per kilogram). Assumes that transport costs from Mombasa to the main consuming areas are equal to the same as from the western producing areas. 48 annual renewal of licenses for all sugar and jaggery mills. Another provision that may discourage investors, stipulates that any privatized sugar mill must have at least 51 percent grower ownership and representation on the board of directors. The act authorizes the board to impose a sugar development levy on all domestically produced and imported sugar. The development levy, currently 7 percent, generates annual revenues of about US$19 million; it is under the control of the Sugar Board, and can be used to support research, develop the industry, rehabilitate factories, and other activities that the board specifies. 3.29 About one-third of the 600,000 tons of sugar consumed per year are imported, with sugar imports from countries of COMESA subject to a VAT of 18 percent and a development levy of 7 percent, and a duty of 100 percent on sugar imports above a quota of 200,000 metric tons per year. Imports from countries outside of COMESA face a 100 percent duty plus the 18 VAT and 7 percent development levy (Kenya Sugar Board, 2001). In 2001, imports from COMESA countries rose sharply and accounted for 40 percent of total imports. Subsequently, a temporary quota was negotiated with COMESA countries to limit imports. Letting imports grow would lead to a decline of domestic sugar prices to the level of import prices plus VAT and development levy. This would be politically difficult, as it would undermine high producer prices, which are set by negotiations between producers and management of sugar factories.56 3.30 Kenya lost its preferential Africa, Caribbean and Pacific sugar quota to the EU a number of years ago because it did not file the required documents to invoke the force majeure clause when it failed to meet its quota. The quota, which was granted under the Lomd Convention of 1975, allows certain African, Caribbean and Pacific countries to export sugar to the EU at the internal EU price, which is more than double the world market price. Kenya has been attempting to regain its quota for the past several years, and the EU has granted Kenya a temporary quota of 11,000 tons under its special preference program. The quota must be met by domestic production, but Kenya is free to import sugar to meet domestic demand. The approximate value of the quota is given by the EU quota price of US$0.25 per pound of sugar compared to the world market price of US$0.08 per pound (approximately US$4 million). The proceeds from the sales to the EU under the agreement are added to the sugar development funds under the direction of the Sugar Board. 3.31 The sugar subsector is rife with conflicts of interest that make reforms difficult. The government owns one-third of the largest sugar company and it profits from the high protection afforded the industry through high import duties. Five other sugar factories are government parastatals, which are under consideration for privatization, but they are unlikely to find buyers because of their poor condition and high operating costs. Producers receive high prices for their cane through negotiated agreements with sugar factories that are in most cases also parastatals. Without the protection of high prices, some factories would be unprofitable and either have to close or incur large losses. The Sugar Board (under the authority of the Ministry of Agriculture) currently controls the proceeds of the sugar development levy. While reforming the sugar sector would be politically difficult, not doing so means that consumers pay twice as much for their sugar as they would under a fully liberalized system. 56 The Council of Ministers of the COMESA has just granted a one-year extension to continue levying 100 per cent duty on sugar imports above the quota of 200,000 metric tons per year and 60 per cent duty on imported wheat flour. These measures are meant to protect the sugar and wheat growers and processors, whose performance in recent times has been affected by illegal imports. 49 Recommendations * Amend the Sugar Act to limit the Kenya Sugar Board to a regulatory role, rather than giving it overall responsibility for all aspects of industry operation, as is currently the case. * Reduce the development levy to levels comparable to the levies imposed on other crops for research and development (the development levy on coffee is currently I percent). * Liberalize the sector and privatize the factories. Part of the industry would still be able to compete in a liberalized environment after some restructuring. However, some sugar factories unable to compete would close and some sugar growers would need to produce other crops. This would entail some loss of jobs to sugar factory workers and lower incomes to cane growers, but the costs would be much less than the current high costs of sugar to consumers. Livestock 3.32 The livestock sector underwent major changes during the early 1990s when the government liberalized marketing and abruptly withdrew from providing disease control, veterinary, and other services. The private sector was not prepared to quickly provide these services and this led to an increase in disease and a reduction in output and gross marketing (figure 3. 10). Disease control, dipping Figure 3.10: Live Animals and Meat Exports stations, and vaccination programs became community based, sometimes with the assistance of NGOs, however 20 their sustainability and coverage remains a A concern. Increased diseases and a lack of F\ confidence in the government's inspection 2 and certification procedures reduced 8 8 livestock exports to the lucrative Middle / East markets, thus depressing livestock 4 prices in the local market. Gross 0 marketing of livestock and products has o 9ss 90 1995 200 begun to recover, but remains below the S-.cFAOTfT levels prior to liberalization. Exports of live animals and meat are well below levels reached in the 1980s (figure 3.1 1). 3.33 Beef cattle are trailed or trucked Figure 3.11: Livestock Gross Marketing to the main markets in Nairobi and other urban areas and slaughtered. The long distances and poor grazing conditions 4160 1 encountered along the trail mean that 140 trailed animals arrive in poor conditions 120 and receive low prices. Regulations 80so against livestock movement to prevent 60 movement of stolen animals combined W 40 with the numerous tolls make the m 20, movement of cattle expensive. Inadequate o90 1985 199 1995 2000 slaughtering facilities is another factor S...: Crn41 Burc ofStfta 50 keeping supplies of meat in the major markets low and prices high, while cattle prices in producing areas remain low. 3.34 The cattle rearing areas in the arid and semiarid regions of Kenya have high rates of poverty and have been among the hardest hit by the withdrawal of government services. The collapse of the parastatal Kenya Meat Corporation meant the loss of processed meat exports and this contributed to a surplus of cattle being sold in the domestic market. Financial arrears and declining demand for processed meat make it unlikely that the meat processing facility will reopen. However, live animal are preferred by importers, and a consortium of livestock exporters and foreign importers are working to improve disease control and certification, and are planning quarantine areas, with the intention of resuming regular livestock exports. 3.35 The sharp reduction in government services to the livestock sector following liberalization of marketing in the early 1990s caused an initial increase in livestock disease and reduction in output and quality. However, the private sector and NGOs are now providing many of these services, and the government no longer needs to provide routine disease control and veterinary services. Also, it has not done an adequate job of inspection and certification of disease-free animals for export, but the private sector is beginning to develop its own system. Recommendations * Monitor disease outbreaks and develop systems to facilitate a coordinated response to prevent diseases from spreading. The government also has a responsibility to ensure that private sector veterinarians and service providers are certified and provide services in accordance with professional standards. * Improve infrastructure to reduce the cost of livestock movement, marketing, and processing. The government can also assist by providing land to quarantine cattle prior to disease inspection and certification. * Improve port facilities at Lamu in northern Kenya to lower costs of live animal exports and reduce the cost of feed imports for animals awaiting certification for export. * Work to harmonize import standards among countries in the region. This would assist exports. * Eliminate the numerous tolls on animal movements and permit the use of a single permit for cattle movement. This would substantially reduce marketing costs. * Enforce laws against animal theft and, generally, improve security. This would reduce the risk of livestock raising. 51 Dairy 3.36 Smallholder dairy has been one of the successes of the liberalization of marketing. Kenya Co-operatives Creameries (KCC) was virtually the only buyer and processor of milk in Kenya until marketing was liberalized in the early 1990s. Since then, KCC's share of milk marketing has declined, and most of its processing plants operate at less than 30 percent of capacity. The decline was due to Figure 3.12: Milk Prices competition from small-scale raw milk sellers, increased competition from private milk processors, and the poor record of 30l payment by KCC, which often did not pay M 25- . farmers for their milk for up to six months < 20 A after delivery. KCC continues to operate in 15 some milk deficit areas and converts surplus 0__ milk during peak production periods into . ,o- powder for later reconstitution. Real milk 5 s prices rose immediately after marketing o liberalization, but have since declined 9 1990 1995 2000 (figure 3.12). Now 80-85 percent of milk is sold in unprocessed form directly to consumers. 3.37 Smallholder dairy is an important driver of rural incomes and employment. Total milk production is estimated to be about 3 million tons per year from about 3 million dairy cows. Dairy accounts for about 15 percent of agricultural GDP. According to official government statistics, smallholders own 83 percent of all dairy cattle, with households holding an average of about 2.5 cattle. A recent survey of 8,000 rural households by the Smallholder Dairy Project-a joint research project of the Ministry of Agriculture and Livestock Development, Kenya Agricultural Research Institute, and the International Livestock Research Institute-suggests that the number of dairy cattle and total milk production may be double the official estimates.57 Smallholder dairy farmers earn twice as much income from milk production as from other agricultural activities or from rural labor, according to these surveys. Holding dairy cattle also provides additional benefits. Dairy cows provide insurance against emergencies, an inflation- proof store of savings, and they produce the manure that allows sustained multiple cropping on smallholdings, thereby contributing to food security on farms with cattle. The research shows that The research of the Smallholder Dairy Project also shows that 50 percent of dairy farmers in many areas hire full-time dairy workers, and that 60 percent hire some workers. 3.38 Consumers have benefited from lower prices and higher quality milk products since liberalization. Most consumers report preferring raw milk because it contains the butter-fat that is skimmed off during processing. Moreover, the price of raw milk is 25-50 percent lower than that of processed milk. Most raw milk is sold directly by the farmer to consumers and to restaurants. Small traders, some of whom are licensed and some of whom are not, handle 25-30 percent of milk sales. Most operate from fixed premises (milk bars), but some operate as small- scale mobile traders (including hawkers). The selling of milk is estimated to create two full time 57 The Smaliholder Dairy Project conducts research and development work to support development of smaliholder dairy production. Core funding for the project comes from the Department for International Development of the United Kingdom. 52 jobs'per 100 liters handled daily, at a monthly income of Ksh 5,000. This is higher than the minimum wage and about equal to monthly wages for low-skilled laborers. According to the surveys of the Smallholder Dairy Project, both licensed and unlicensed traders sell milk of similar quality and bacteria counts. Since all urban and most rural households boil milk before consuming it, the public health risk from raw milk appears to be small. Since the selling of raw milk.in urban areas is illegal, small traders often use cheap containers for transporting milk to reduce the loss should such containers be confiscated by the authorities. This often leads to the use of containers, such as fuel cans, which may contain substances that can contaminate milk. 3.39 Services to the dairy industry declined following the liberalization of marketing, as the government largely withdrew from provision of veterinary and artificial insemination services. The government provided free or heavily subsidized services from 1966 until the mid- 1980s, when budgetary constraints caused the government to reconsider its policies. Individuals and farmers' groups are gradually starting to provide such services, but farmers have been slow to use them due to their high cost (Odhiambo and others, 2003). Local communities, which were supposed to operate communal dips after the government stopped providing the services, have been only partially successful in maintaining and operating the dips; more than half are no longer operating. East coast fever limits dairy production in some areas, as the government provides vaccination services only in the coast provinces where the disease is most common. 3.40 The main constraints to growth of the dairy sub-sector include poor roads, lack of adequate feed, lack of veterinary services, and outdated regulations that encourage unsafe handling practices by small traders. Contrary to reports in the press, imports of dairy products amount to less than I percent of dairy products sold in the country and do not currently pose a threat to producers. Rather, poor roads that limit the range over which milk can be profitability transported and which limit access to and raise the costs of veterinary and artificial insemination services, lack of adequate feed, and outdated regulations that encourage unsafe handling practices by small traders constrain the growth of the industry. Demand for milk is expected to grow rapidly due to rapid population growth and a high income elasticity of demand for milk (estimated to be 0.8 percent). Demand may grow more rapidly than supply unless the constraints on production and marketing are eased. Recommendations * Support the smallholder dairy sector by legalizing the sale of raw milk in urban areas. This would reduce the incentives for milk sellers to use cheap unsanitary containers in order to avoid loss due to confiscation. * Improve rural infrastructure, especially rural roads in order to reduce transport and other costs. C. SUMMARY AND RECOMMENDATIONS 3.41 The performance of agriculture during the 1990s suggests that market-driven and private sector-led growth can be the key to the recovery of agricultural growth. The commodities that grew the most rapidly in output and exports during the 1990s were those led by the private sector-smallholder tea, smallholder dairy, and horticulture. This growth occurred despite a very competitive international market (horticulture) and declining world market prices (tea). Many other crops-coffee, maize, sugar-had strong government or cooperative union 53 involvement and slow output growth. The coffee subsector was severely constrained by the rapidly increasing marketing and processing costs of cooperative unions and delayed payments to farmers. Maize and sugar producers were protected from international competition, but managed only modest output growth during the 1990s. Maize production stagnated because of reduced hybrid seed and fertilizer use. Sugar production expanded into marginal areas because of high cane prices supported by government, while global and regional price signals were indicating that the industry should contract to areas where the costs of producing are low. Lack of confidence in the government's animal health certification procedures contributed to the decline in livestock exports. 3.42 Public spending in agriculture needs to be restructured. Large public expenditures on subsidized inputs and services during the 1980s have not provided a strong foundation for continued agricultural growth. The large share of the government's budget expenditures directed to agriculture during the 1980s was not sustainable and did not raise the long-term output growth of the sector. Spending in agriculture was severely cut during the 1990s, and this certainly contributed to the decline of the sector. However, preliminary findings from the ongoing public expenditure review also point to severe problems of misallocation of resources within the Ministry of Agriculture. About three-quarters of public spending in agriculture is in fact absorbed by parastatals to perform functions that in many cases have been designated as noncore. Only around 50 percent of the requirements for extension services that were believed to be essential in the PRSP are provided. Thus, it appears that any request for increasing government expenditure-particularly in the context of PRSP priorities-must be associated with a restructuring of spending in agriculture and a revival of parastatal reforms. 3.43 Creating a favorable environment for the private sector and making specific subsector policy changes can increase broad-based agricultural growth. Smallholders are already benefiting from the reforms in the tea and dairy subsectors. Currently, the highest priority is reforming smallholder coffee marketing and processing so that farmers receive a larger share of final sales. Smallholder coffee farmers receive about 30 percent of export earnings while smallholder tea producers receive 70 percent, despite similar marketing and processing cost structures. A professionally managed authority should be established for coffee patterned after the KTDA to operate processing facilities, handle marketing, and provide inputs to farmers on credit. Coffee production and exports would likely double. Further growth could be expected as farmers improved husbandry, replaced aging trees, and increased use of fertilizers and chemicals. 3.44 Food security policies need to be reconsidered. The government maintains a maize buffer stock to be used in case of domestic crop failure and a financial reserve to purchase food from international or neighboring suppliers. However, the government's policy of supporting maize and sugar prices-basic staples which account for 47 percent of total calories in the Kenyan diet-above those of neighboring countries reduces household food security by increasing the prices of basic staples. Maize prices were nearly one-third higher in Nairobi than in neighboring capital cities during 1996-2000 and sugar prices are double world market levels. Imports should be allowed to reduce food prices to benefit the poor. Farmers should be encouraged to produce the most profitable crop rather than being encouraged to produce maize for food self-sufficiency. Maize productivity should be increased through improved hybrid seeds, improved infrastructure (especially rural roads) and reduced costs of important purchased inputs such as fertilizer. 3.45 The livestock sector remains important for subsistence farmers and pastoralists. The subsector has the potential to grow and the government has a key role to play to make it 54 happen. Improving infrastructure to reduce the cost of livestock movement, marketing, and processing is important. Providing land to quarantine cattle prior to disease inspection and certification would also help. The government needs to monitor disease outbreaks and be able to coordinate a response to prevent diseases from spreading. It also has a responsibility to ensure that private sector veterinarians and service providers are certified and perform in accordance with professional practice. Improved port facilities at Lamu in northern Kenya would lower costs of live animal exports and reduce the cost of feed imports for animals awaiting certification for export. Efforts to help harmonize import standards among countries in the region, elimination of numerous tolls on animal movements, and the introduction of a single permit for cattle movement would help promote marketing and help to raise prices to producers. Finally, enforcement of laws against animal theft would reduce the risk of livestock raising. 3.46 In the long term, nonfarm employment is the path out of poverty for many of the rural poor. Arable land per capita has declined by nearly half over the past 20 years because of rapid population growth and subdivision of farms acquired through inheritance. Future growth will need to come from more intensive agricultural production, which depends on increased input use, improved crop varieties, and higher yields. More intensive agricultural production will need to come primarily from increased commercialization of agriculture among the medium and large- scale farmers who have the resources to expand production where incentives provide the justification. Smallholder and subsistence farmers will best be able to diversify and raise their incomes through off-farm employment. Substantial evidence shows that the relationship between increased employment in rural nonfarm activities and reduced rural poverty is strong (Lanjouw, 1998; Reardon and others, 1998, Collier and others, 1986). Increased off-farm earnings can also increase farm output by providing capital for purchased inputs. Research in Ghana and Uganda has shown that nonfarm activities are linked to falling poverty rates for both male and female- headed households, but the rate of decline is faster for female-headed households (World Bank, 2002c). The key to the developing a robust nonfarm sector is to increase agricultural production to generate incomes which are spent on consumer goods, inputs supplied to the agricultural sector, and processing of agricultural output. Because agriculture is the engine of growth in the rural nonfarm economy, the policies that promote agricultural growth also promote the rural nonfarm economy. 3.47 A more intensive and commercially oriented agricultural sector requires increased profitability, which will need to come from reduced input costs and higher yields. The profitability of agriculture deteriorated sharply in the late 1990s due to sharply higher input costs that appear unrelated to domestic inflation rates, exchange rate movements, or international commodity prices. Fertilizer prices, for example, rose 80 percent from 1997-2001 while international dollar fertilizer prices fell by roughly 20 percent. The reasons for these increases need to be fully understood, and if they are related to a lack of competition among input suppliers, as some suggest, then efforts need to be made to increase competition. Other input costs also need to be reduced to increase the profitability of the sector. This can be done by improving rural roads, which will reduce transport costs; taking action to bring down the costs of electricity, which will reduce irrigation and factory operating costs; reducing fuel taxes which will reduce transport costs; and improving communication systems, which will facilitate trade and closer monitoring of markets. While this report has not discussed in detail agriculture services and inputs (extension, research, credit) they are important. Improved research that is more responsive to producer demands is needed to develop new crop varieties that are higher yielding and more disease resistant. Livestock research to deal with diseases endemic to the area is also required. A stable macroeconomic environment and a fairly valued exchange rate are also essential to a more market oriented and intensive agriculture. The agricultural sector may not 55 return to the high growth rates of the 1970s and 1980s because most land in the high-potential areas is already under production. However, more rapid growth than occurred during the 1 990s is possible with prudent policy reforms and investments to lift the long-term productivity of the sector and reduce input costs. 56 4. MANUFACTURING 4.1 While Kenya remains the most industrialized country in East Africa, the performance of its manufacturing sector in the 1990s has been characterized by stagnation in output and investment and by low capacity utilization. The recent spectacular recovery of the garment sector is an exception, and it is due to the significant quota and tariff advantages granted by the African Growth Opportunity Act (AGOA) of the United States. This chapter reviews the performance of the manufacturing sector in Kenya in light of international comparisons and findings from surveys of enterprises (section A, B, and C). Section D discusses the revival of the garment sector and the sustainability of its revival. Section E provides a summary of the issues. A. MANUFACTURING PERFORMANCE Output and productivity have stagnated 4.2 As discussed in chapter 1, the share of manufacturing output remained roughly stable at around 13 percent of GDP during the past two decades. However, the growth rate of manufacturing value added fell from 4.8 percent per year during the 1980s to 2.1 percent per year during the 1990s. Gross capital formation in manufacturing peaked at 5 percent of GDP during 1995-96, declining then to around 3 percent of GDP by the end of the 1990s, the same level as a decade earlier (see table I11.2.5 in annex III). Manufactured exports represented on average 2-2.5 percent of GDP during the past 20 years. Overall the sector is characterized by low value added, low capacity to create employment, and high wages. It is heavily dependent on imports of intermediate and capital goods and it has weak backward linkages with local suppliers. ManufacturinF growth in Kenya has been driven by increases in factor inputs, not rising productivity.5 Food processing industries represent the most important subsector (with almost 40 percent of manufacturing output), followed by textiles and clothing, metal and machinery, wood and furniture, printing and paper products, and smaller subsectors such as leather products, clay and glass, chemical and petroleum.59 The informal sector has absorbed the excess supply of labor 4.3 Overall, the manufacturing sector employs half a million people, of which 220,000 are in the formal sector (representing some 14 percent of total wage employment). The rest of the Ss See International Monetary Fund (1999). Total factor productivity in the manufacturing sector grew at an annual rate of 0.8 percent during 1973-98, accounting for 14 percent of the sector growth. However, performance was uneven during different periods. Thus, total factor productivity remained constant during 1973-80, when the 10 percent expansion in the manufacturing sector was supported by increases in factor inputs. Growth of total factor productivity was 2.5 percent a year during 1981-90, and this contributed more than one-half of the sector's growth in value added. The situation reversed in 1991-98, and total factor productivity fell by 0.5 percent a year with capital accumulation becoming the main contributor of the growth of value added. Gerdin (1997) found that productivity growth was almost nonexistent (-0.12 percent) during 1964-94. 59 Food processing includes meat and dairy products, canned vegetables, fish, oils and fats, grain mill products, bakery products, sugar, miscellaneous foods, beverage and tobacco. Textile and garments includes clothing. Wood and furniture includes wood and cork products, furniture and fixture. Metal and machinery includes metal products, nonelectrical machinery, electrical machinery. 57 employed are in the informal sector, which includes all semiorganized and unregulated small 60 activities. 0 Informal firms fabricate consumer goods for low-income households, farming instruments, and motor vehicle parts. While few reliable statistics about the informal sector exist, it appears that it is expanding rapidly, and it now accounts for a significant proportion of domestic manufacturing. Employment growth in the formal manufacturing sector was slow during the 1990s, at about 2 percent a year and real value added per employee was virtually stagnant over the decade. By contrast, employment in the informal sector grew rapidly; by the end of the 1990s twice as many people worked in the informal sector as in the formal manufacturing sector. 4.4 The government has long recognized the importance of small-scale enterprises in creating employment. Policies to promote this sector were stipulated in various sessional papers issued in 1986, 1992 and 1997. A number of initiatives followed, aimed at improving the enabling environment, expanding access to credit, and improving access to technical training and of business services. The newly-formed National Association for Technology Transfer and Entrepreneurial Training and the Department of Micro and Small Enterprise Development are focusing on increasing training and business development services for micro and small enterprises. A new sessional paper is under preparation to provide a new strategic framework. However, the development of the informal sector must be synchronized with that of the formal sector, and both must be aimed at meeting the critical challenge of creating jobs for the expanding labor force. Kenya is a better industrial performer than its neighbor, but it is losing rank 4.5 Table 4.1, which shows indicators and rankings of industrial performance, suggests that Kenya is still a better industrial performer than are its immediate neighbors. Most of the indicators also improved during 1985-98. However, Kenya's performance has been worse than other countries, including countries of Sub-Saharan Africa, and it has been dropping in rank. As discussed in chapter 1, Kenya has barely reduced its reliance on primary exports during the past two decades. By contrast, the share of manufactures has grown rapidly and to very high levels in East Asian and in Latin America countries. 60 About 4.6 million people were employed in 2001 in the infonnal sector (including 1.6 million in cities and 3 million people in rural areas). This is about 70 percent of all workers. Employment in the informal sector has been rising by about 12 percent a year during the past 5 years, while employment in the formal sector has hardly grown at all. 61 Kenya has a strong microfinance industry, involving a specialized commercial bank, savings and credit cooperatives, and a number of NGOs and informal groups. However, these serve primarily urban microenterprises, and do not reach the rural small enterprises. A microfinance law that would allow microfinance institutions to mobilize savings has been stalled at the central bank. 58 Table 4-1: Benchmarking Kenya's Industrial Performance (values and ranks out of 80 countries in 1985 and 87 countries in 1998)1 Manufiacturing value added Manufactured exports per MediuJ/high tech Medium/high tech per capita capita products in manu. products in exports (constant USS and rank) (current USS and rank) value added (percent and rank) (percent and rank) 1985 1998 1985 1998 1985 1998 1985 1998 Kenya 32 (74) 37 (77) 17 (65) 28 (74) 28 (50) 24 (65) 3.2 (54) 7.6 (55) Tanzania 31(75) 16 (85) 2.6 (78) 3 (83) 24 (58) 25(63) 2.3 (58) 1.5 (76) Uganda 10(79) 24 (81) 0.2 (80) 0.9 (87) 11(77) 15 (76) 0.2 (76) 0.8 (83) South Africa (RSA) 366 (38) 557 (45) 158 (35) 322 (48) 44(30) 44(33) 16.6 (31) 26(34) Nigeria 84(66) 62 (74) 2.6 (79) 1.5 (85) 34(38) 38 (40) 0.1 (78) 1.5 (77) Mauritius 182 (51) 739 (38) 400.(29) 1,434 (29) 12(73) 12 (81) 3.4 (52) 1.4 (78) Malaysia 368.(37) 936(32) 550(24) 2,973(20) 47(24) 60(11) 21(26) 65.(6) Thailand 167 (55) 584 (44) 71 (45) 731 (34) 18(66) 39(38) 14(33) 45(25) India 44(72) 65 (72) 8.1 (70) 26(75) 56(9) 59(12) 9.8 (37) 16(40) China 101 (63) 287 (55) 5.8 (74) 135 (52) 49(19) 51 (22) 4 (48) 36(29) Memo Item: values and percentages by region Sub-Saharan Africa 83 92 25 45 38.6 37.6 24.8 30.8 (including RSA) Sub-Saharan Africa 49 40 8 14 26.5 24.2 13.0 12.7 (excluding RSA) MENA 202 392 96 220 30.7 36.8 15.6 22.5 South Asia 42 65 9 32 49.8 52.7 12.0 15.8 LAC 462 771 116 404 42.5 39.7 31.8 56.9 EastAsia 145 387 84 409 44.3 54.4 39.1 59.7 Developing world 147 300 60.2 242.2 42.5 48.7 33.5 53.8 All countries 619 1094 292.5 821.0 56.8 58.7 57.7 63.8 1/ The ranking is from I to 80, with I being the best. Source: United Nations Industrial Development Organization, 2003. 4.6 The technological structure of Kenyan manufactured exports improved between 1985 and 2000, with resource based manufactures losing ground, mainly to low technology products (table 4.2). However, little progress has been made in moving towards production of medium or high technology goods. Several high technology exports (electronic circuits and telecom apparatus) are reexports; local productive capacity in these activities is nonexistent. Thus, their growing share does not mean sophisticated industrial capabilities are growing. Exports of complex engineering and electronics products, which indicate that firms are participating in the global value chains of leading multinationals, are absent in Kenya. Such participation has, however, driven rapid export and employment growth in many developing countries in all regions (United Nations Conference on Trade and Development, 2002). Table 4-2: Technological Structure of Manufactured Exports by Kenya and Comparators (in percent) 1985 2000 High Medium Low tech Resource High Medium Low tech Resource tech tech based tech tech based Kenya 2.0 6.8 12.1 79.0 5.5 9.5 27.6 57.5 Ghana 0.8 2.0 0.8 96.4 1.0 5.5 12.7 80.8 South Africa 9.0 21.2 16.5 53A4 6.1 33.8 16.6 43.4 Nigeria 2.6 3.0 8.6 85.8 0.5 60.3 24.4 14.8 Egypt 1.1 1.7 35.2 62.0 2.4 10.9 31.9 54.8 Morocco 0.7 15.4 28.7 55.2 11.7 14.8 43.3 30.2 World 11.6 28.5 14.2 19.4 22.9 29.6 15.6 15.6 Source: Calculated from the UN Comtrade database, based on export values for each country. 59 B. EVIDENCE FROM SURVEYS OF ENTERPRISES 4.7 The World Bank's Regional Program on Enterprise Development (RPED) surveyed firms in 1993, 1994, 1995, and 2003 in Kenya to investigate whether the private sector is growing and whether government policies are having a positive impact on firm productivity.62 The surveys included a total of 274 firms (75 percent in the formal and 25 percent in the informal sector) in four key areas: food processing, textiles and garments, wood working, and metal working. Together these sectors cover about 73 percent of manufacturing employment. A Kenya Manufacturing Enterprise Survey, consistent with the 1995 RPED survey, was undertaken in 2000, covering 223 firms and focusing on the same four subsectors (Soberdom, 2001). The survey results reveal a number of important findings. 4.8 First, the structure of manufacturing changed little during the 1990s, reflecting specific historical characteristics. Thus, small and micro firms continue to operate with family labor, face strong competition, and generate most employment opportunities. Females run a relatively high percentage of such firms (22 percent in 2000). By contrast, medium and large enterprises are mostly male owned, and they operate in a relatively protected environment. 4.9 Second, pressures to improve productivity have remained weak and the opening up of the economy has had little effect on the competitive position of medium and large firms. Their acquisition and use of technology licenses has been almost nonexistent. Productivity of labor is now lower than during the mid-1990s. Compared with the early 1990s, large firms in 2000 continue to be more capital intensive, more export-oriented, and twice as productive as smaller firms. The 2000 survey confirmed that labor productivity differentials across subsectors and firm sizes is substantial.63 Thus, labor productivity in food processing was found to be 62 percent higher than in wood working and furniture making and about 125 percent higher than in textile and garment manufacturing. Labor productivity increases with firm size, and this is associated with capital intensity.64 4.10 Third, investment was low throughout the 1990s. Investment growth is an important indicator of how firms are reacting to structural reforms and other policy changes. Investment was low both in the early 1990s and in 2000. Half of the firms covered in the 2000 survey were not investing at all and the rest were investing very little. Moreover, the investment rate of firms 62 The mandate of the RPED is to carry out investment climate assessments for the Africa Region. Surveys are carried out every 3-5 years. The Kenya survey was undertaken jointly by the Economics Department of Goteborg University and Nairobi University and the Kenya Associations of Manufacturers. Results are collected in Bigsten, Arne, and Peter Kimuyu (eds.) (2002). A new survey was taken by the RPED group and KIPPRA in early 2003 and a summary report is being finalized. 63 The authors also look at total factor productivity across sectors. They find that the food processing industry has the highest total factor productivity, followed by bakery, and wood working. The textile subsector has the lowest total factor productivity; the average total factor productivity in the textile sector is about 40 percent lower than in the benchmark category, which is the metal and machinery industry. The gap between food and textiles is such that the total factor productivity of the latter is 57 percent lower than that of the former. Foreign ownership and firm age appear to have no significant effect on total factor productivity. By contrast, education has an effect: a one-year increase in the average education of the workforce increases value added by about 14 percent, everything else being equal. 64 This relationship is true for firms up to 50 employees-for these firms, a I percent increase in the labor force is associated with a 0.8 percent increase in the capital labor ratio; the relationship is weaker for larger firms. 60 that did invest was very low at 0.12 percent, just sufficient to offset depreciation.65 The smallest firms were the least likely to invest. Only a very small percentage of firms were investing to expand. Food processing businesses had the highest investment rate, and the textile industry had the lowest. Moreover, very few firms were specializing in exports. Food processing firms were the most export-oriented of firms, exporting around 20 percent of their output. None of the micro firms exported their goods, while 70 percent of the large firms did, primarily to regional markets. 4.11 Finally, wages increase with firm size, irrespective of other conditions. In Kenya, statutory minimum wages are set by the government, but they do not appear to be binding in the formal sector, or in small enterprises.66 For example, the 1999 micro and small enterprise survey found that the firms paid their workers an average of 2.7 times the minimum wage (4.5 times in urban areas and 0.8 time in rural areas). However, further work needs to be undertaken to assess the impact of wage determination mechanisms on employment. In recent years both minimum wages and average wages have increased faster than the growth of labor productivity, and this has likely been a factor in the dramatic rise in informal sector employment versus that in the formal sector. What appears from the surveys of enterprises is that wages increase with firm size, though women earn less than men in firms of all sizes. Large firms employ higher-skilled workers, and the returns to workers with longer experience and better education are higher in these firms than in small ones. Higher wages are strongly associated with higher productivity in larger firms. Tenure also increases with firm size, suggesting that large firms pay higher wages in part to reduce turnover and training costs. The surveys found a strong positive firm size-wage effect that persists even after controlling for labor skills, working conditions, and the presence of trade unions. It is likely that firms share rents with the workers to increase potential profits through increased productivity, or to maintain the loyalty, cooperation Figure 4.1: Earnings by Firm Size and Skills 1999 and morale of their employees. 25000 4.12 Figure 4.1 provides a 20000 snapshot of mean earnings by size 7 15000 of the firm and level of skills found loooo1 in the 2000 survey.67 The data show 5000 that employees with similar skills 0 earn more the larger the firm for Micro Small Medium Large/Macro which they work. Unskilled Firm Size workers earn twice the average if --*-Skilled -U- Unskilled they work for large firms, rather than micro firms.68 Skilled workers Source: Soberdom, 2001. 65 The investment rate is defined as the investment expenditure divided by the replacement value of the capital stock. 66 At the end of 2002, at current exchange rates, minimum monthly wages ranged from US$21 for unskilled workers to US$50 for a machine attendant, to US$84 for a salesman. The wages actually negotiated by companies in recent collective agreements tend to be considerably higher than the minimum levels. For example, at the end of 2002, wages in the knitwear sector ranged from US$39 to US$89 per month. Wages in food processing ranged between US$45 and US$85. Multinational companies producing consumer goods paid the best salaries ranging from US$150 to US$386. 67 Earnings is the sum of monthly wages and non-wage payments such as housing allowance, food and other allowances as applicable. 68 Unskilled laborers include unskilled office workers, cleaners and guards, and unskilled production workers. Skilled laborers are managers, professionals, sales personnel, supervisors, and skilled industry-specific employees. 61 in large firms earn almost four times as much as those in micro firms. The mean earnings of skilled workers are less than 30 percent higher than those of unskilled workers in micro firms; but about 130 percent higher than the earnings of unskilled workers in large firms. 4.13 The most important problems for firms are insufficient demand, lack of access to credit, power shortages, and corruption. Respondents to the 2000 survey ranked their firm's three biggest problems. The most frequently cited problem was insufficient demand, followed by lack of access to credit, followed by power shortages and corruption. Micro and small firms stated that insufficient demand and access to credit were their most serious problems. Capacity utilization remained low throughout the 1990s for most firms (because of lack of demand). Small and micro firms obtained loans from relatives and friends, and as trade credit and advance payments from large firms. Large firms by contrast did not name lack of access to credit to be among their most critical constraints. They relied to a large extent on trade credit for financing. Large firms specified power shortages to be among their most serious constraints, a particular problem during 1999-2000, when the drought reduced the generation of hydropower. Large firms were also more likely than micro and small firms to identify corruption as a major problem. Corruption was especially problematic in obtaining public service connections (55 percent of firms reported always or frequently making unofficial payments), in customs (47 percent), licenses, in permit processing (44 percent), and in tax collection (38 percent). Preliminary results from the 2003 survey indicate that firms are most concerned widespread corruption, high interest rates, poor infrastructure, and crime. C. WHY DID THE MANUFACTURING SECTOR PERFORM POORLY? 4.14 Trade liberalization negatively affected most manufacturing firms, revealing their inability to compete. Both aggregate statistics and firm-level data point indicate that manufacturing firms responded poorly to the trade liberalization and investment reforms of the early 1990s. Protection was reduced, though only partially-and in fact it is still high. But many firms closed down, partly because of unfair competition from imports due to massive duty evasion. Some smaller firms found it profitable to move into trading activities. The depreciation of the exchange rate in 1993-94, while improving incentives for exports, raised the cost of imported inputs and reduced firms' profitability. It also encouraged entry into the import- competing sector by micro and small enterprises, which could provide cheaper and lesser quality consumer products. But many informal firms were not viable and soon went out of business, or, to avoid taxes, decided not to expand. 4.15 Trade liberalization did not stimulate private sector investment. International experience shows that liberalization tends to stimulate short-run output growth and exports. This is what happened in Kenya during 1994-96. However, the main channel through which trade liberalization affects long-term growth is by stimulating investment, rather than by increasing the efficiency of production factors. In Kenya, private sector investment as a share of GDP stagnated throughout the 1990s. Part of the reason for the poor investment response may be that manufacturers were able to employ underutilized capacity in production. However, investment were also constrained by the high cost of imported inputs, rising interest rates and, particularly for the smaller firms, lack of access to credit. 4.16 Rising unit labor costs have reduced the competitiveness of manufacturing firms. During 1990-94 real wages declined by some 40 percent of their initial value, suggesting that workers bore most of the adjustment costs. However, this decline was followed by a 30 percent 62 increase during 1995-2001. Figure 4.2 shows that the index for private sector real wages (with base 1990=100) increased from 61 in 1994 to 151 in 2001. Unit labor costs declined by about 8 percent during 1990-94. Prices of manufactured goods moved in the opposite direction. The manufacturing price index increased by 20 percent during 1990-95. But during the next six years it declined by 16 percent. Thus, it appears that the profitability of manufacturing firms declined in the late 1990s. Figure 4.2: Real Wages in the Figure 4.3: Unit Labor Costs and Prices in the Manufacturing Sector (Index 1990=100) Manufacturing Sector (Index 1990=100) 120 100 _ .15 6° - - -- 130 - 60 . 'I 40 100 - 20 80- - 0 o .- g 9 ., .c r- 1, o - 70 o0 o ' a, o 0' s 0 05 0 0 o I- Private sector- - - - -.Pubcse| Unicolabor costs - Manufactuting price index Source: Cental Bureau of Statistics. Source: Centrl Bureau of Statistics. 4.17 Kenya has a literate workforce relative to other countries of Sub-Saharan Africa, but school enrollments and the quality of training have been declining. As described in Chapter 2, illiteracy rates have fallen over time and are under half the rate for Sub-Saharan Africa as a whole. However, the imposition of fees in 1985 led to a fall in primary school enrollment (introduction of free primary education by the new government has already led to a substantial increase in enrollment). Moreover, more than half the children who enroll in school do not complete primary school (Institute of Economic Affairs, 2001). Gross secondary enrollment grew from 2 percent in 1960 to a peak of 28 percent of the age group in 1991. Since then enrollment has dropped substantially, likely due to the rising costs of education and a fall in employment opportunities. Transition rates from primary to secondary schools (defined as the percentage of primary school graduates who enroll in secondary schools) also declined during the 1990s. 4.18 Tertiary level enrollments in Kenya have stagnated and are at the low end for Sub- Saharan Africa, itself much lower than in other parts of the developing world. Another disturbing trend is the low and declining level of tertiary level enrollment in technical subjects (science, mathematics, computing and engineering) (table 4.3). This provides the base for high- level skills needed for industrial development and for the use of new technologies, and the erosion seen in Kenya may be very damaging in the long term. 63 Table 4-3: Tertiary Technical Enrollments, 1985 and 1997 (total numbers, dist ribution and growth rates) 1985 1997 Developing country Developing country Annual growth rate '000 share, in percent '000 share, in percent 1985-97), in percent Kenya 5.5 0.1 4.6 0.1 -2.2 Ghana 1.9 0.0 2.1 0.0 1.3 Senegal 3.3 0.1 4.4 0.1 3.7 Nigeria 23.5 0.5 63.3 0.9 13.2 South Africa 68.9 1.4 68.1 1.0 -0.1 Zimbabwe 0.9 0.0 9.5 0.1 34.3 Algeria 29.8 0.6 115.1 1.7 18.4 Egypt 75 1.6 69.6 1.0 -0.9 Morocco 56.8 1.2 66.7 1.0 2.0 Source: UNESCO. 4.19 The quality of industrial training is inadequate. Industrial training is supported through a levy-grant system, run by the official National Industrial Training Council. 9 The council reimburses a proportion of the costs of approved training undertaken in specified facilities by employers, but the levels of reimbursement are much lower than the actual costs to employers, so the program provides little incentive to employers to release their staff for training. The government does not offer finance or incentives to private enterprises to invest in in-house training, and private firms invest relatively little in this form of training. Quality of training is affected by the low salaries of trainers, which lead to high turnover, while obsolete equipment affects the quality and relevance of the training given. Government industrialization policy 4.20 The government's long-term strategy is to promote sustainable growth with a strong industrial base. The 1997 sessional paper, "Industrial Transformation to the year 2020" lays out the foundations for this strategy, which is based on promoting small and medium size firms in areas where Kenya has a comparative advantage and on encouraging the development of capital and technology intensive enterprises with high value-added potential. The strategy is basically sound as it recognizes that the private sector is to play the leading role, while the government's role is to facilitate the industrialization process. However, a number of criticisms of the strategy have been made. For example, the industrialization policy gives insufficient attention to the- importance of costs and product quality for competitiveness. Nor does it address the fiscal implications of the policy. A number of its specific proposals are also questionable (for example, credit subsidies to small scale enterprises and direct lending by the central bank to priority industrial projects). More fundamentally, the strategy has few suggestions on how to improve the. investment climate, especially on how to reduce corruption and rent seeking behavior among government officials. These criticism helped to inform the industrial policy presented in the 2000 interim PRSP. This document, in addition to measures to improve the business environment (for example, introducing a single business permit and reviewing licensing provisions), gives prominence to good governance and improved financial management, audit controls, and procurement rules as key to promote industrial growth. 69 The levy rates vary by industry. In banking and general engineering the levy is Ksh 250 per employee per half year. In chemicals and general processing the rate is Ksh 300. In food processing and plantations the rate is Ksh 150. In motor engineering and textiles the levy is Ksh 200. In building construction and civil engineering the rate is 0.25 percent of contract values for contracts of over Ksh I million. 64 D. A SUCCESS STORY: THE GARMENT SECTOR AND THE AFRICA GROWTH AND OPPORTUNITY ACT 4.21 Despite the poor performance of the manufacturing sector overall, the garment subsector has grown spectacularly during the past two years. The textile and garment industry was seriously affected by the liberalization policies of the early 1990s, which reduced tariffs on imports and allowed used clothes to be imported. The cotton ginning industry collapsed and many textile firms closed. Output of the garment industry-which is concentrated in the export processing zones (EPZs)-contracted by 11 percent per year during 1990-98, and by the end of the 1990s the industry employed only about 6,000 workers. The situation changed completely in 2000, when Kenya became eligible to export garments to the United States under the Africa Growth and Opportunity Act (AGOA). Foreign investment in the EPZs, which had declined by 16 percent during 1998-2000, rose in 2001 by 42 percent to reach US$114 million. Entrepreneurs already experienced in exporting to the U.S. market were responsible for virtually all the FDI flowing into Kenya's textile and garment industry. Many of these entrepreneurs relocated production from countries of the Middle East and from Sri Lanka. During 2002, employment in the industry reached 25,000 workers, and another 15,000 jobs are expected to be created in 2003. Exports increased from US$10 million in 1999 to US$127 in 2002 and are expected to reach US$200 million in 2003. Given the failure of Kenya to attract significant FDI in other sectors, the success of the garment industry is noteworthy. 4.22 The reason for this exceptional success lies in the act itself. As described in box 4.2, AGOA provides exceptionally attractive market access concessions for garments assembled in Sub-Saharan Africa, particularly the 28 least developed countries in Africa. The concession allows the least developed countries to source the cloth they use from anywhere in the world. This concession is intended as a short-term measure to allow these countries to catch up and is due to expire in September 2004. AGOA offers a huge potential competitive advantage to a factory assembling in Kenya, compared to its main competitors, assembling in Asia. The duty and quota benefit is valued at approximately US$1-2 per typical garment. Considering that the typical market price for sewing such a garment is often around US$1, it is clear that the advantage is very substantial. This is why AGOA has resulted in such dramatic growth in garment exports from Africa to the United States.70 4.23 Several factors allowed Kenya to quickly become a leader in the race to take advantage of the benefits of AGOA: Kenya moved fast to establish its visa system. Before countries can be certified to export under AGOA they must establish a visa system through which a government agency verifies that each shipment has indeed been assembled locally (to prevent garments assembled in Asia being labeled as assembled in Africa). Customs is responsible for issuing the visa but the industry through the Kenya Association of Manufacturers operates the monitoring system. Kenya was the second country to be certified to export garments under AGOA, only six days after Mauritius, and was the first African least developed country to achieve this status. 70 The European Union has also taken a measure recently to open its markets to manufactured exports from poorer African countries. In February 2001, it implemented its Everything but Arms concession, again giving these countries duty-free and quota-free access to European markets. However, this concession applies only to the world's poorest 48 nations, and Kenya is not among them. Hence AGOA is much more important to Kenya right now. 65 o A working EPZ system was already in place. This gives garment investors tax-free status and access to fast-track clearances. Moreover, both ready-to-use standard factories and serviced plots are available in various EPZs in Kenya, including in the Mombasa area close to the port; in Nairobi, where labor is abundant and where expatriate managers can be attracted; and at the Athi River, around 40 kilometers from Nairobi, an EPZ with space and good facilities. o Transport links both to Asia and the United States are adequate. Mombasa port is well served by regular shipping services. Cloth can be brought reasonably quickly from Asia. Garments can be sent rapidly to the U.S. Nairobi is a major airline hub. Customers, suppliers, factory managers, and others can fly at short notice to and from Asia and the United States to address urgent issues. o Kenyan workers are relatively well educated and speak English. Since all garment factories rely on expatriate supervisors and technicians, being able to communicate in English is a great advantage. Factory managers report that Kenyan workers learn quickly. Although Kenya does not have the lowest labor costs in Africa, productivity in the garment sector is comparable to that of Madagascar or South Africa, and is not far from that of India, though it is still only 70 percent of that achieved in China. Labor costs represent only around 8 percent of the total free on board cost of a typical garment, such as a casual shirt. 4.24 The big issue facing the industry now is uncertainty as to how long the AGOA concession for least developed countries will last. There are two sources of uncertainty. The more immediate concern is the expiration in September 2004 of the least developed country concession on source of cloth. The other concern is the ending in 2005 of the Multifiber Agreement. Box 4.1: The African Growth and Opportunity Act The African Growth and Opportunity Act was signed into law in the U.S. on May 18, 2000. AGOA extends in time the existing preferential access enjoyed by Sub-Saharan Africa countries under the Generalized System of Preferences. AGOA also broadens the range of products for which preferential access is granted to include petroleum products (which, however, face very low tariffs), and, more significantly, apparel products and a range of industrial and other products (footwear, some agricultural products, and others). While the Generalized System of Preferences covered 17 percent of Sub-Saharan Africa exports in 2000, AGOA covers an estimated 72 percent Rules of origin require that apparel be assembled in eligible Sub-Saharan Africa countries using yarn and fabric produced in the U.S. or in Africa. However, while there is no cap on garments made from U.S. cloth, there is a global cap on garments made with African cloth. Initially this corresponded to 1.5 percent of overall U.S. imports, but it was increased to 3.5 percent of overall imports over an 8-year period. An additional concession applies only to the 28 least developed countries (with a GNP per capita in 1998 under US$1,500). Unlike the richer group, these poorer countries can use cloth from anywhere until September, 2004. On August 6, 2002, President Bush signed AGOA II, which improves 6n the original AGOA by adding a number of products (knit to shape sweaters, merino wool sweaters). The duty free cap will be increased from 1.5'percent to 3 percent, but the second 1.5 percent will only. be available for Sub-Saharan Africa apparel exported to the U.S. made of fabric produced in Sub-Saharan Africa or in the U.S. Source: Mattoo and Subramanian (2002). 4.25 If the least developed country concession is indeed ended next year, then countries such as Kenya could be in serious trouble. Cloth from the United States is generally too expensive to serve as an alternative to Asian cloth. Currently, the only African countries that produce cloth of suitable quality to use in garments for export are Mauritius and South Africa. 66 Both are expected to use their limited capacities for their own fast-growing export garment industry. The existing mills in Kenya producing for the domestic market cannot be economically converted to produce cloth of the quality required for the U.S. market. Starting in late 2004, Kenya and other least developed countries may face serious shortages of cloth or may have to pay substantial price premiums, or both. Although a factory assembling a garment for export under AGOA can expect recoup the investment costs in around 2-3 years, production of cloth is much more capital-intensive, and at least 6-10 years are needed to recover the investment costs. With the Multifiber Agreement ending in 2005, investors are understandably wary of investing in facilities to produce cloth in Africa, given the seemingly short period during which they will enjoy the advantages of AGOA. 4.26 The second concern is the ending of the Multifiber Agreement in 2005. The AGOA concessions as a whole were intended to end in 2008. President Bush has recently announced that he will ask Congress to extend AGOA until 2015. However, some producers are now more worried about the end of the Multifiber Agreement in 2005 than about the potential expiration of AGOA in 2008. Once the Multifiber Agreement ends all quantitative quotas will be lifted. The worry is that countries such as China and other large Asian countries will be able to dominate the market by aggressively pricing their products. Even the 16 percent duty advantage given by AGOA may not be sufficient to keep the production of garments in Africa. 4.27 Reasons for optimism. India took about 12 to 15 years to raise its levels of productivity sufficiently to be able to compete with China. The productivity levels of Kenya's industry are not far behind those in India. But the industry right now faces considerable uncertainty. To gain time to catch up, Kenya and other African least developed countries intend to submit a formal request for special and differential treatment to the WTO ministerial meeting to be held in September 2003 in Cancun, Mexico.7' Internal constraints will need to be addressed in the medium term to allow the growth to continue 4.28 The main concern will probably be skill development. The basic skill required in the garment assembly industry is sewing-machine operation. Most factories hire applicants with no previous experience and train them onsite to operate the sewing machines, a process that typically requires six weeks. In the absence of pre-employment training in operating the sewing-machines, this system works reasonably well. However, along with other Kenyan firms, factories have to pay a training levy into a central fund. The problem with this system, they claim, is that the established rules and procedures make it difficult to be reimbursed from the fund for expenses related to onsite training. The other specialized skills required within the factories are provided by expatriate, mainly Asian, employees on term contracts (for example, supervisors, machine repair technicians, laundry operatives, quality control specialists, and the like). This arrangement is expensive. Therefore, if Kenya's garment industry is to compete in the long term, it will need to replace expatriate experts with Kenyans trained in these skills. 4.29 Non cloth inputs will need to be produced locally. Most factories source virtually everything they use from Asia. A few have attempted to develop local sources of services and 71 This covers a complex set of 145 specific provisions, aimed at giving special treatment to developing countries within the general WTO rules. 67 supplies, for instance laundry services, embroidery, sewing threads, buttons and polythene bags. To compete in the long term and to maximize employment benefits in this sector, more backward and forward linkages need to be developed. 4.30 Like others, this industry is negatively affected by the generally high costs of doing business in Kenya. The garment assembly industry uses substantial electricity, which is both expensive and unreliable in Kenya, so most factories have standby generators. Washing of jeans in particular demands a lot of water, which is also expensive in Kenya. Port and transport costs are high, certainly in comparison with Asian competitors. With the concessions granted under AGOA, the costs of these inputs are not significant enough to discourage production. Over time, however, they may lessen the attractiveness of Kenya to garment producers. E. SUMMARY AND RECOMMENDATIONS 4.31 This chapter has evaluated the performance of the Kenyan manufacturing sector during the 1990s. The period was characterized by stagnation in both investment and productivity. The formal sector in particular scarcely grew, while the informal sector expanded rapidly. Kenya remains a better industrial performer than its neighbors in East Africa, but has not kept pace with other countries in Sub-Saharan Africa and in other regions. And while the technological structure has improved, exports remain concentrated in the low technology categories. 4.32 Survey data confirm that the manufacturing sector remains polarized. On one side are the many young micro and small firms that face strong competition but are unable to increase their productivity. On the other side are the medium and large-size enterprises that have considerable market power and export to regional markets, but despite a lowering of tariffs are still relatively protected from external competition. Unit labor costs have increased significantly since the mid- 1990s, which has contributed to the low profitability of the manufacturing sector. Findings from the surveys of enterprises suggest that the large firms pay higher wages to attract qualified and experienced workers, and to reduce turnover and therefore training costs. The firm size-wage differentials are large and significant after controlling for other variables (labor quality, working conditions, and the like). Firms appear to share rents with their workers in order to maintain loyalty and cooperation and to increase potential profits through increased productivity. 4.33 AGOA has since 2000 led to a dramatic increase in investment in an industry, that had been in steep decline. The benefits of quota-free access to U.S. markets provided through AGOA will, however, vanish in 2005 when the Multi-fiber Agreement comes to an end. Moreover, the AGOA requirement that garments be assembled after 2004 using cloth produced in Africa is likely to constrain the growth of Kenyan apparel exports. The longer-term issue is whether Kenyan apparel producers will be able to compete effectively with Asian manufacturers starting in 2008 when AGOA is scheduled to end. The long-term sustainability of apparel exports-as well as of other manufactures-depends on the Kenyan industry raising its productivity to that of the countries with which it competes. This will require efforts to upgrade skills and technology as quickly as possible, since raising productivity will require time. Efforts will also have to be taken to eliminate logistics bottlenecks along the supply chain to better link input suppliers to production centers and outputs to markets. Overall, raising the quality and quantity of formal education, reducing dropout rates, and introducing flexible curricula related to the needs of industry are important. In addition, efforts will be needed to encourage students at the tertiary level to enroll in technical and management subjects and to persuade qualified Kenyans living overseas to return. 68 4.34 A summary of the recommendations to improve productivity in the manufacturing sector is as follows. * Improve the enabling environment for micro and small firms, to facilitate the graduation of these firms from the informal to the formal sector. In this context, Increasing access to credit appears to be a priority. The government should aim at increasing financial deepening, rather than providing credit itself. Provision of business support services is also important. * Increase the competitiveness and productivity of the medium and large firms, by lowering entry barriers, further liberalizing trade, improving infrastructure, facilitating the acquisition and use of technology licenses, and improving access to quality training opportunities are priorities. * Review the mechanisms of wage determination and assess their impact on employment creation. The government should engage with the private sector (representatives of both the workers and firms) on issues such as the minimum wage, its impact on employment creation and the link between wages and productivity increases. * Improve the quantity and quality of training by: (a) encouraging enterprises to offer training to employees, perhaps by providing tax or other incentives; (b) involving enterprises more closely in managing industrial training institutions; (c) improving the functioning of the training levy/grant system and restructuring the National Industrial Training Council to make it more autonomous; and (d) upgrading the skills and qualifications of staff of the council and allow it to use international trainers until the shortage of qualified Kenyan trainers can be overcome. 69 5. SERVICES 5.1 The services sector has been a significant source of growth and of employment creation in recent years. An acceleration of this growth, particularly of the private services sector, is crucial for the recovery of the entire economy, given the strong linkages that services have with other sectors. This chapter reviews the recent performance of two of the most promising subsectors, information and telecommunication (ICTs) services and tourism. It then examines recent government proposals for reform and recommends a number of revisions. A. BACKGROUND 5.2 Services as a whole represent half of real GDP. In relation to countries at a similar level of income, Kenya has a large nongovemment services sector representing more than two- thirds of total services. The most important subsectors are trade, restaurants and hotels, transport and communications, and financial services. Kenya also has a growing business services sector, based in part on its role as a regional hub for transport and consulting services. While services have increased their importance in terms of GDP, in recent years productivity has declined, due in large part to mismanagement of state owned enterprises, which dominate infrastructure and communications. 5.3 Services are also a significant source of employment. Nongovemment services alone account for 40 percent of nonagricultural employment, and are well represented in better-paid employment opportunities. It should be noted that the picture is not as positive when looking at the gender breakdown of employment in the services sector. While women are over-represented in the low paid personal services, and account for about half of employment in government services, fewer than 10 percent of paid employees in the transport and communications sectors are women. Table 5-1: Services Sector: Real Growth and Share of GDP Rates of growth Share to GDP 1991-96 1997-01 1990-01 1991-96 1997-01 1990-01 Services (at constant 1982 prices) 3.8 1.8 3.0 52.3 54.1 52.8 of which: Government services 2.2 0.8 1.8 15.6 14.6 15.2 Trade, restaurants, and hotels 4.3 2.1 3.2 11.4 12.5 11.8 Transport, storage, and communications 2.9 1.9 2.6 6.1 6.1 6.1 Financial institutions 6.7 2.4 4.9 9.3 10.5 9.7 Other services 3.6 1.5 3.0 3.4 3.4 3.4 Domestic services 10.0 4.2 7.8 2.2 2.8 2.4 Source: Central Bureau of Statistics. 71 5.4 Services also contribute significantly to exports. Exports of nonfactor services represented during the 1 990s about 29 percent of GDP and 32 percent of total exports.74 Exports of government services account for less than one third of export services. Commercial services-about 60 percent of which are travel, and transport, insurance, royalties, and business related service-account for the rest. These also include telecom, financial and computer services, which are often associated with the process of globalization. Table 5-2: Exports of Nonfactor Services Rates of growth Share to total exports Share to GDP 91-96 97-01 91-01 91-96 97-01 91-01 91-96 97-01 91-01 Total exports (GNFS) 5.7 -0.3 3.0 100.0 100.0 100.0 32.5 26.2 29.6 Exports of nonfactor services -3.8 3.0 -0.7 44.3 33.3 39.3 14.3 8.7 11.8 Transportation n.a. 8.4 4.0 n.a. 12.7 7.5 n.a. 3.3 2.1 Travel 0.0 -6.1 -2.8 18.2 10.9 14.9 5.9 2.8 4.5 Govemment services -10.8 13.5 0.3 10.4 8.3 9.4 3.4 2.2 2.8 Private services 1.9 5.6 3.6 2.7 1.5 2.1 0.9 0.4 0.7 Source: IMF. 5.5 This chapter focuses on travel and communications, while infrastructure and financial services are discussed in chapter 6. In the Kenyan context, travel is dominated by the tourism sector, and is a major source of income and employment. Although less significant in terms of a direct contribution to GDP, the communications subsector offers significant development potential through the exploitation of advances in information and communications technologies. It would therefore benefit from sector policy reform. B. INFORMATION AND COMMUNICATION SERVICES 5.6 Kenya's performance in the fixed telecommunication sector is poor, mostly due to the weak management and financial performance of the government-owned monopoly telecom company, Telkom Kenya Limited. Approximately 2 percent of homes in Kenya have fixed lines, and these are overwhelmingly located in a limited number of urban areas (about 60 percent of all telephones are in Nairobi). In addition, the cost of these services is high and the quality is low. International calls are expensive and outgoing call volumes are low. Service provision is inefficient and waiting time for new fixed services is above eight years. By contrast, the mobile network has expanded quickly, since the Telecommunications Act of 1998 opened the way for investment by the private sector. At the end of 2002 1.3 million people subscribed to mobile services, dwarfing the approximately 300,000 customers of Telkom Kenya. 5.7 Telecommunication services in Kenya are provided by Telkom Kenya, a state corporation that is commercially operated. In 2000 in an attempt to introduce some competition three companies were awarded regional fixed line licenses in competition with Telkom Kenya. 74 Kenya's specific commitments under the General Agreement on Trade in Services covers services in communication, finance, tourism, travel, and transport. Horizontal commitments set limitations on market access as they require foreign service providers to incorporate or establish the business locally (see WTO, 2000). 75 Government services and domestic services are only briefly discussed in this report, as they are discussed in other Bank reports. 72 However, none of these companies began operations, claiming that they could not operate and meet license payments in the poor environment that then characterized the global telecommunications sector. Telkom Kenya thus keeps its monopoly over fixed voice as well as international services. Box 5.1: Telecommunicatifons Fram'eworhk The entire telecom sector is' being restructured. Until 1999, the Kenya Post and Telecom Corporation, a state owned' firm, provided both postal and telecom services and regulated the 'provisioni of these services. Parliament passed the Kenya Communications Act in 1998 to liberalize the sector; -This-.provided-for the division in 1999 of the corporation into three separate entities: Telkdm Kenya Ltd.,-.a telecomimunications: company; the, Postal Corporation of Kenya; and the Commrunications Comrnission of Kenya whichwvould. be the regulatory authority for the sector. Safaricom, a subsidiary of Telknit Kenya, in late 1999 started the first cellular phone service. Kencell, a joint venture between Vivendi of France and.Sameer of Kenya; wonp a'second bid.to provide: mobile phone services. In 2000 .the goveniment planned to sell up to 49 percent of Telkom Kenya to a strategic partner. However, it rejected the winning bid of US$305 rmillion andsought unsuccessfully to negotiate.a better offer from the second highest bidder; Currently Telecom Policy provides exclusivity to Telkom Kehya in.the provision of international, national and Nairobi traffic up to July 2003.. A number of recent government initiatives to provide leadership in the sector have included the establishment of a national comrmunications secretariat, the-launch of an e-readiness.assessment, and preseritation of ICT matters in the PRSP and the national development plan. A number of private sector groups have formed in parallel to address the issues, including the Telecommunications Service Providers Association the ICT Committee of the Kenya Private Sector Founidation, and the Kenya Information Society. The potential to- develop policy initiatives under a ministry responsible for ICT (perhaps also responsible for. broadcastig) and pnvate umbrella group on ICT is good.76 Source: Government of Kenya. 5.8 International experience suggests that the monopoly on international data and voice traffic keeps the average cost of all services higher than would be the case with competition and that it reduces the efficiency and quality of service provision. Telkom Kenya has 65 employees per 1,000 lines compared to a standard benchmark of 4 employees per 1,000 lines. The regulator, Communications Commission of Kenya, has fined Telkom Kenya for missing targets named in the license for rollout of lines and public payphones (it installed only 66 out of the 5,000 it promised). The regulator has also allowed other operators to provide public payphone services and inter-corporate data exchange in response to service failures on the part of the monopoly. Telkom Kenya also cross subsidizes the costs of local calls and rentals of 300,000 fixed line users with revenues from the far larger number of mobile phone users and the 220,000 Internet users who pay inflated data transmission prices (through charges on Internet service providers). 5.9 Despite the low level of telecommunications development in Sub-Saharan Africa, telecommunications have grown rapidly in a number of countries following privatization of the parastatal, including in Guinea, Cote D'Ivoire, Ghana and Senegal. In Senegal, for example, the number of main lines in use doubled from 84,000 to 166,000 in the three years following privatization, while connection charges were cut. In May 2003, Sonatel, Senegal's telecommunications operator, announced reductions in rates for international calls and for connecting to the Internet. A one-minute call to other African countries dropped by 15 percent, from US$0.44 cents to US$0.37 cents per minute at the regular day rate. Similarly, a one-minute 76 Responsibility for broadcasting is split between the Ministry of Inforrnation and Tourism and the Ministry of Transport and Communications. 73 call to destinations outside of Africa dropped from US$0.47 to US$0.40 cents. Such a call costs US$1.46 from Kenya, US$0.19 from South Africa, and US$0.42 from Ghana. In Senegal, rates for Internet connection for 30 hours have just been lowered from US$36 to US$24 per month. The fixed charge per month for Internet access in Kenya is US$100, and US$50 in Ghana. Table 5.3 shows the pricing structure of Telkom Kenya's services in 2002 compared with that of OECD countries. Table 5-3: Cost of Telkom Kenya Services Compared to Costs in OECD countries, 2002 Telkom Kenya OECD country range Residential monthly subscription US$5.59 US$9-18 Local call (US$ per minute) US$0.086 US$0.023-0.053 National long distance call (US$ per minute) US$0.24-0.30 US$0.10 Call to the U.S. (US$ per minute) US$1.46 US$0.33 Source: Data for Telkom Kenya from Telkom Kenya, data for OECD countries from International Telecomunications Union. 5.10 Telkom Kenya's current license suggests that the monopoly will be maintained up to 2004. However, the government has indicated that it may move quickly to introduce competition in the international segrnent, which will force Telkom Kenya to lower rates for international calls far more rapidly than the expected deadline, reducing revenues from this source.7 Given the problems of politically-dictated underinvestment in the network and overstaffing, a global telecommunications slump, and new competition, the outlook for Telkom Kenya is poor. 5.11 Performance of other ICT subsectors is mixed. Kenya's postal service is suffering from slow economic growth, underinvestment, and increased competition from 46 courier firms. The liberalized broadcasting sector has recently grown vigorously. Already, 23 radio and 12 television stations have been licensed. Kenya Broadcasting Corporation, the public broadcast corporation, reaches homes in 90 percent of the country, and a number of regional stations broadcast programs in local languages. The computer (hardware and software) market is also growing. It expanded from US$5.9 million in 1993 to US$40.6 million in 1998 (Government of Kenya, 2002a). A recent survey has found that about 87 percent of organizations in Nairobi have an email address (although outside of Nairobi only 60 percent have one), that the country has about 1,000 cyber cafes, and that 15 percent of the workforce in Nairobi use computers (Ministry of Finance and Planning, 2002). Is adoption of ICTs likely to expand? 5.12 The ICT skills base is poor but expanding. Approximately 310 people per year in Kenya earn Bachelor of Science degrees in computer science, information science, and electrical and electronic engineering. A further 70 receive post graduate diplomas or degrees (Institute of Economic Affairs, 2002). Kenya has 17 institutes of technology, and over 1,000 commercial institutes and technical training institutes (Ministry of Finance and Planning, 2002). About 56 percent of surveyed institutions in Nairobi have also developed in-house training for ICT applications. However, the feasibility for more broad-based training through Kenya's school system is currently limited. Most primary schools in Kenya lack access to a telephone and only 77 Telkom Kenya is already suffering from competitive pressures from mobile service providers. Telkom Kenya has built up significant arrears with the mobile companies. 74 about 2 percent of Kenya's secondary schools have Internet access (ICT Plan Working Group, 2001). The high cost of expanding this access suggests that mass training in Internet use is not achievable in the short run.7 5.13 Other factors are likely to slow the adoption of advanced information technology applications. Cost is clearly one such factor, followed by weak transport and financial networks and institutional barriers, which reduce the utility of such applications. For example, only about 60,000 people in Kenya (0.2 percent of the population) hold credit cards. To use a credit card to undertake an e-transaction, requires photocopying passport pages and the credit card itself and faxing these pages along with an authorization for payment to the website owner for verification at its bank. The government has some way to go to move from a lagging to a catalytic role in the use of ICTs in the country. For example, while the Kenya Revenue Authority will now accept electronic records, only 32 percent of government departments in Nairobi had registered domain names, and just 4.3 percent of government departments outside Nairobi do (Ministry of Finance and Planning, 2002). Government ICT policy 5.14 The government's draft policy statement on ICT, discussions with staff of the Ministry of Communications in January 2003, and a review of the government's draft Strategy for Economic Recovery suggest that the government plans to pursue the following key actions to foster development of the ICT sector: * Remove most of the remaining monopoly rights of Kenya Telkom * Commit to privatize Kenya Telkom * Introduce a third in mobile operator * Develop a plan for increasing access to computers in schools and for rolling out telephone services to unserved areas * Support with an international partner the installation of a submarine fiber optic cable on the east coast of Kenya linking to cables to the south and the north of the region * Support the creation of software parks * Draft bills dealing with e-commerce, consumer protection, and cybercrime * Create a framework for e-government that will support the electronic submission and dissemination of government documents. 5.15 The government's stance in favor of immediately and fully opening the sector is extremely important for modernizing the entire economy. Section 5(5) of the Kenya Communications Act of 1998 allows for the introduction of competition across the sector by ministerial gazette notice, even in subsectors now dominated by a monopoly. Kenya now has an opportunity to implement a state of the art regulatory model by opening up competition in all 78 It costs between US$78-104 per student to equip a classroom with one computer per 20 students. By comparison, the government spends US$2 per year for each student in the primary system, and only 34 cents per student on development expenditure. The govemment spends about US$11.70 per year for each student in the secondary system, but only 5 cents of that goes to development expenditure. 75 aspects of information infrastructure, placing limits only where there is a natural scarcity of supply-primarily in the allocation of radio spectrum. Communications Commission of Kenya already has significant capacity, which could, with technical assistance, successfully support the introduction of a fully competitive model. Naturally, competition will increase the complexity of the regulatory framework and there is a need for a number of detailed regulatory improvements, including with regard to interconnection. Greater transparency and consistency in regulatory decision making are also needed.79 Communications Commission of Kenya itself has identified a number of these areas where it requires capacity building to implement a new strategic plan. By contrast, issuance of a specific second national operator license, or the revival of existing subnational fixed licenses, are not priorities. Full introduction of competition should allow for the development of local fixed and mobile services where they are in highest demand. 5.16 Plans to privatize Telkom Kenya itself, important both at a political level and to encourage sector growth, will have to be designed with care. Emphasis should be placed on developing a design that is will encourage future sector growth, rather than on maximizing sale proceeds. Even so, given the current global telecommunications environment and a local environment of significantly increased competition, privatization of an inefficient fixed line provider will be complex. In particular, the significant overstaffing of Telkom Kenya is likely to require some painful short-term reductions in staff. To gain the acceptance of the employees, the government may wish to consider options for allowing employees to benefit directly from the privatization, such as reserving a percentage of shares for employees at a preferential price. 5.17 The government's plan to expand telephone services to the rural areas is important. However, plans to expand access in rural areas should be based on a realistic assessment of the needs of citizens and the ability of the economy to bear the costs. For example, while (near) universal telephone access might be a realistic and valuable goal for even the poorest areas in the country, the same might not be true for Internet access. The Internet is more difficult and expensive than telephony to provide on a nationwide basis, as it requires electricity, computers, modems, and access to skilled technical support for users. International experience also suggests that a phased approach to rural access should be put into place after full competition has been introduced, starting with basic communications services where the costs are lowest and where the benefit-cost ratios are highest. Given that mobile operators in Kenya already reach 50 percent of the population, a first step may be to increase coverage to a greater percentage of the population. An active secondary market for scratch-cards already exists in Kenya, and it is likely that considerably improved public access to telephony through resale of time on mobile telephones in rural areas would quickly follow. A reverse-subsidy mechanism used by Chile to extend access would be one model to achieve these rollout goals (box 5.2). 5.18 International telecommunications issues. While a submarine cable on the east coast of Kenya linking to cables to the south and the north of the region would significantly reduce data transport costs in the long term, the long-distance data traffic segment has been one of the hardest hit sectors of the global telecommunications industry, and many of the companies once involved are no longer operating. The government may wish to coordinate with neighboring governments to ensure that a critical mass in the regional Internet industry is achieved by removing any barriers to linking Kenya's existing Internet exchange point with ones to be constructed in Uganda and Tanzania. This will create a large local market that will attract regional companies to 79 For example, cellular operators are currently asked to implement some universal services, such as the providing global service for mobiles public phones without a subsidy scheme being in place. 76 host their sites locally, thus lowering international data connectivity costs and speeding response times. 5.19 The government's decision to withdraw idle broadcast frequencies and reallocate them is welcome, if they are offered to applicants under a transparent, equitable regime. Licenses should be issued to private firms through a transparent, competitive evaluation of factors such as service coverage, public service commitments, and price offered for the license. Community licenses should be issued on the basis of such factors as the level of community involvement and interest, sustainability of business plans, and willingness to provide public services and access. Licenses can be issued to private broadcasters on the basis of their programming or their commitments to produce and broadcast educational and information programs and programs with local content. Box 5.2: Extending Universal Access In Chile In 1988, fewer than 20 percent of Chile's households had telephones. With the introduction of private competition and the advance of technology, by 2000 about 75 percent had telephones, and all but I percent of the remaining households were served by a public telephone. While most were served by competitive private providers without government support, ten percent of households gained access to a public phone through a government-financed scheme, which used a competitive reverse-auction subsidy to encourage private providers to install public phones in unserved areas. The bidder requiring the lowest subsidy to provide telecommunications services at a given cost and quality to particular locales was given that subsidy. Under the subsidy scheme, 2.2 million people gained access to telephony at the cost of US$22 million in public funds, which attracted an additional US$139 million in private investment. Source: Wellenius, 2001. 5.20 The government's decision to withdraw idle broadcast frequencies and reallocate them is welcome, if they are offered to applicants under a transparent, equitable regime. Licenses should be issued to private firms through a transparent, competitive evaluation of factors such as service coverage, public service commitments, and price offered for the license. Community licenses should be issued on the basis of such factors as the level of community involvement and interest, sustainability of business plans, and willingness to provide public services and access. Licenses can be issued to private broadcasters on the basis of their programming or their commitments to produce and broadcast educational and information programs and programs with local content. 5.21 The government information technology services department needs to upgrade its capacity. Sector experts and specialists in the reform of management systems also have an important role to play in the short term in each department where IT is to be introduced to ensure that the procedural changes related to the introduction of IT are carried out effectively. They should have prior experience in introducing IT into their sector or in other government departments. The focus of government efforts in using ICT, as suggested above, should be to improve government back-office functions, to foster interactions with large businesses which are likely to have the capacity to use advanced ICT, and to post key information to improve transparency. This alone is a significant agenda, which, if carried out, would act as a catalyst to increase private sector use of ICT while also improving governance and efficiency. 5.22 Plans to actively support the establishment of ICT-based industrial parks through tax breaks and other incentives needs to be approached with caution. The record of such parks is mixed, with the costs of government support frequently outweighing the benefits of 77 increased investment (Dedrick and Kraemer, 2000). At this point, efforts to improve the broader environment to encourage development and use of ICT should be the priority. At the same time, however, punitive taxation of ICT sector inputs should be reduced. Components for personal computers attract a higher duty than completed units, one reason why only 4 percent of the total hardware employed is locally assembled (Ministry of Finance and Planning, 2002). Further, although the duty on computers has been lowered to 3 percent, other computer equipment such as data processing equipment and related ICT hardware such as routers and switches (both of which are powered by microprocessors) carry duties ranging from 15 to 35 percent. To reduce the possibility that the same equipment attracts duties at different rates and to encourage sector growth, import duties should be harmonized at a common rate, and temporary export of ICT equipment for repair (even if it is returned with a different serial number) should not carry duties. 5.23 Finally, there is also a role for government support for the development of ICT skills. It is not currently economically feasible for the government to roll out Internet access to primary and secondary schools for use as a major pedagogical tool. However, the government should support the rollout of the Internet in tertiary institutions. And, since people with ICT skills in general earn higher than wages than those without such skills, there is a role for private institutions to offer courses and diplomas in ICT-related subjects. C. TOURISM 5.24 Tourism is central to Kenya's economy but its recent performance has been disappointing. The Kenya Tourism Federation estimates that, directly and indirectly, tourism accounts for about 9 percent of GDP and 18 percent of foreign exchange earnings in Kenya. It also estimates that it may account for some 11 percent of government revenue and 500,000 jobs in the formal and informal sectors (180,000 directly and a further 320,000 indirectly employed).50 However, recent performance has been disappointing, with stagnation in the early 1990s followed by a slump in the late 1990s. Table 5.2 shows that within exports of nonfactor services, travel- which is essentially tourism-declined from 5.9 percent of GDP in 1991-96 to 2.8 percent of GDP in 1997-01."9 During this period, the number of days that visitors stayed fell by about 24 percent and Kenya dropped far behind other countries of the region (figures 5.1 and 5.2). 5.25 Long-term factors, exacerbated by recent security problems, account for the decline. These long-term factors include deteriorating infrastructure, growing crime and corruption, declining public health, degrading environmental conditions, and weak marketing. More immediate factors include the civil unrest during the 1997 elections, the August 1998 terrorist attack on the U.S. embassy in Nairobi, violence associated with the inflow of refugees from neighboring countries experiencing ciVil conflicts, and the introduction of visa requirements (Ikiara and others, 2001). 5.26 Because they are responsible for client welfare and because planning holidays requires a lead time of 12-15 months, package holiday operators are highly risk averse and price sensitive. so The tourism industry is also a significant source of FDI. Approximately 78 percent of coastal hotels and 66 percent of those in Nairobi and the national parks have some foreign investment (although under 20 percent are fully foreign-owned). 119 In 1998, the Kenyan Tourism Board launched a campaign to improve Kenya's image abroad. The campaign was partially successful in reversing some of the fall in tourism revenues. 78 A I percent rise in relative prices in a destination leads to a 3-5 percent loss in bookings to alternative destinations. Political or civil instability or changes in policy such as unexpectedly introducing new taxes or tariffs and requirements for visas can therefore create significant problems for the industry. The dramatic drop in tourist arrivals from the European Union since 1997 (primarily beach-bound vacationers) is strong evidence that potential security risks are important to tour operators, who have been made legally responsible for tourist safety through EU legislation. Figure 5.1: Annual Bed Nights by Location Figure 5.2: Growth in Arrivals, 1990-99 7,000 5,000 South Afica 5,000 'in.' ..e 4,000 z'3.000 l! Tiia j2,000 1,000 Mauntius 0 1991 1997 2001 Kay * Other * Nairobi 0 Coastal 0 100 200 300 400 500 600 Source: Central Bureau of Statistics and World Tourism Organization data. 5.27 Despite the overall stagnation of tourism, the number of visits to parks and game reserves has grown, although visits are concentrated in a few parks. The number of visits increased by 21 percent during 1997-2001, with the top six parks accounting for 54 percent of total visits in 2001. By contrast, only one half of Kenya's public parks had any visitors services at all (Weaver, 1999). Use is also concentrated within parks. 5.28 The high concentration of visits to a small number of parks threatens the sustainability of all parks. For example, of the 57 parks overseen or managed by the Kenya Wildlife Service, only six collect more in entrance and leasing fees than they cost to maintain. Of particular concern is the sustainability of significant areas outside of the national park system that cover approximately 6 percent of the country. The large animals that are most important in attracting tourists naturally range over larger areas than those covered by the parks. For example, the Maasai Mara, which is reported to generate as much as 15 percent of tourist revenue, has been threatened by declining migration of animals in part because wetlands outside the park used for dry-season grazing have been converted into farmland. Some estimates suggest that, since 1980, animal populations in the Maasai Mara ecosystem have declined by over 50 percent, with wildebeest populations declining from 119,000 to 22,000 during 1977-97. This ecosystem is particularly vulnerable because this land can be productively used for crop production. While wildlife resources are the source of much of the country's comparative advantage, competition for land is perhaps the most important long-term issue facing Kenya's tourism industry. For example, 71 percent of tourists departing Kenya in a recent survey stated that nature and wildlife were among principal attractions for their visit; just 33 percent cited beaches (Weaver, 1999). Thus, the opportunity to spend some time at a game park is the primary reason tourists come to Kenya in the first place. 5.29 Studies also suggest that tourism in Kenya has relatively weak poverty reducing linkages. While the tourist industry is a significant employer and provides a market for 79 agricultural products, many local people benefit little from neighboring tourist destinations. For example, expenditures made outside hotels amount to only 50 percent of hotel expenditures in coastal areas, and poverty maps of Mombasa indicate that many people living close to holiday resorts survive in dire poverty. Government policy for the tourism sector 5.30 The government is committed to the tourism sector as a major source of income and employment. The government's plan for tourism, as laid out in recent press announcements, in the draft Strategy for Economic Recovery, and in discussions with tourism and information ministry staff in January 2003 is based on: * Attracting tourists from a broader range of countries by marketing Kenya in new countries. * Encouraging tourists to visit a wider range of sites within Kenya, including in the west of the country. * Maximizing the net benefits of tourism by attracting high-spending tourists. * Encouraging pro-poor tourism, by providing grant support to enable villages to encourage tourists to visit and through outreach programs explaining to communities the benefits of tourism. * Protecting the environment. * Improving training and standards. * Refurbishing hotels with support from the Ministry of Finance through duty remission to hotels. 5.31 This ambitious agenda addresses key areas needed to increase the benefits of tourism for economic growth and poverty reduction.. However, some of the most important hindrances to tourism currently-security concerns and general economic conditions-fall outside the remit of the tourism ministry. Reversing the slump 5.32 Kenya has the natural attractions, the experience, and the institutions to quickly attract many more tourists. With rehabilitation of infrastructure and hotels and an improvement in the perceived and actual levels of security, Kenya could rapidly rebound as a tourist destination, enabling tourism to again contribute a substantial proportion of GDP. 5.33 Security is the first concern. The Kenya Tourism Foundation argues that the tourism police force (currently a small separate unit of the police force) should be expanded to cover known danger spots and to respond to every incident of crime reported by tourists.8' While this policy might have a short-term role, the presence of a large tourism police force has a number of 81 The Kenya Tourism Foundation also argues that security of tourists is better in national parks, which are serviced by the Kenya Wildlife Services in than it is in the national reserves, and it recommends extending the security mandate of the Kenya Wildlife Services to the reserves. 80 drawbacks. First, tourists do not like to perceive themselves as a group in need of special protection. Second, enclaves, as discussed above, reduce the potential poverty and local economic impact of tourism. The longer-term answer is clearly to address the broader crime situation in the country, an agenda that is likely to involve significant reform of the police services. 5.34 Within the sector, there may be a case for reducing sector-specific taxes. The tourism sector appears to be heavily taxed. The combination of visa fees, airport passenger fees, VAT on hotel stays, catering levy, VAT on visitor purchases, corporate and income taxes, is estimated to amount to 22 percent of tourist spending in Kenya (Thuo, 2003). Because the price elasticity of demand for tourist travel is high (a I percent increase in the total price of a package holiday leads to a 3.5 percent decline in travel to that destination), a reduction in taxation on tourism would significantly expand the number of tourist visits and increase sector revenues. However, studies have also suggested that tourists are quite willing to pay fees and taxes as long as those fees support preservation of tourism assets (Christie and Crompton, 2001). Moreover, reducing the price by lowering taxes will not be effective in attracting tourists who are staying away because of concerns about security. Improving security and infrastructure would have a far more immediate effect than lowering taxes in attracting tourists.82 Similarly, improving the overall macroeconomic climate will reduce interest rates and encourage investment in a manner that is far more sustainable than providing subsidized credit. Perhaps the most beneficial tax relief would be to abandon visa requirements, as this is not only an issue of money but also one of inconvenience. 5.35 Increasing sustainability and long-term growth will require improved marketing, both to improve Kenya's image as a safe destination, to attract visitors from new countries, and to encourage tourists to visit more destinations within Kenya. The Kenya Tourist Board is in charge of government-backed marketing efforts and already runs effective marketing campaigns. However, according to officials of the Kenya Tourist Board, Kenya's marketing budget for tourism is considerably smaller than that of direct competitors (South Africa's is 12 times larger; Thailand's is 32 times larger). This suggests that increasing funds available for marketing could be another high-return use of revenues generated through tourism. 5.36 Within the country, the strategy should be to foster community-based tourism, ecotourism, and visits to new areas. Successful efforts to redirect tourism to the northern and western areas will help spread the benefits of tourism spending. Backpackers and nationals are two groups that can help bring tourism into these new areas, which lack fully developed tourism infrastructure. Further, because backpacker and domestic tourists are likely to consume locally- produced goods and services, the benefits to local communities can be significant (Hampton, 1998). 5.37 Additional support and incentives may be justified to foster the development of new tourism areas. Communities who want to diversify into tourism may require technical assistance to help set up small and medium enterprises, access finance, train guides, and develop 82 In addition to improving roads, encouraging airlines that have abandoned operations to return and new airlines to start services is important. Airport services can be sustained through revenues from airport shops, rather than airport charges. Opening up domestic routes to international airlines may encourage tourists to spend more time in the interior. This would allow carriers other than Kenya Airways to omoad and pick up passengers in Nairobi prior to flying on to Mombasa. 81 information materials and technical know-how. The Tourism Development Corporation, which formerly built hotels for the government, is now largely moribund, but it could be redirected to help small enterprises in new areas. 5.38 Differential pricing would support a policy that encouraged tourism to new parks. At present, the minister sets tariff rates in parks, and it is difficult to change the tariffs to reflect supply and demand. Reducing entrance fees for less-visited parks would encourage tourists to visit the less well-known parks.83 5.39 Considerable scope exists for improved land management carried out in partnership with the private sector and communities. Improved coastal zone management is clearly important to ensure that beach and coastal resources are protected. An integrated coastal zone management structure to oversee development in Mombasa and Milindi could form an important element of the recovery process for the coastal hotel industry. Regarding wildlife tourism, the private sector should be encouraged to work with local communities within parks and reserves to increase the benefits of tourism to local people and to improve environmental management.84 Government-private-community partnerships could play an important role in extending reserve areas around national parks for the benefit of all. The Kenya Wildlife Services has found it necessary to erect fences around its parks because of encroachment by farmers and settlements onto the lands, much of which is ill-suited for crop cultivation in any case. To integrate wildlife tourism with national land use policy, the National Environment Management Act should be used to involve local communities in designing and implementing plans for sustainable land use management that can benefit all. This is especially important for the north of the country, where crop production on semiarid land will have a far lower economic rate of return than game viewing by tourists. 5.40 The 15,000 acre Selenkay Conservation Area bordering the Amboseli national park may be one model for encouraging sustainable land use through tourism development that has a real impact on the local economy. The local community set aside the area as a reserve and in return receives income from tourism activities to fund community projects. Tourism generates employment for rangers, trackers, camp staff, and road construction and maintenance crews. Over 100 conservancies have been created to date, but many require further investment to operate. 5.41 The private sector can also play a significant role in improving environmental management. The Ecotourism Society of Kenya, for example, has put in place a certification scheme for ecofriendly resorts based on a number of indicators such as percentage of local people employed and use of ecofriendly waste disposal methods. Hotels pay to be certified under the scheme. 83 A study to estimate the optimum pricing of (nontransferable) leases in parks was carried out in the early 1990s, and needs to be updated. Further, the Kenya Wildlife Services Strategic Plan dates back to 1989-90 and needs to be revisited. A new plan should focus on the sustainability of the Kenya Wildlife Services, and should cover issues including diversifying activities, and outsourcing of bandas, shops at park entrance, and even elements of park management. 84 It may also be that Maasai Mara should be placed under the regulatory and security control of Kenya Wildlife Services. 82 5.42 More broadly, there may be an increased role for the private sector in support of policy development in the sector. The two major acts that underpin the sector-the Tourism Industry Licensing Act and the Hotels and Restaurants Act-were both first drafted in the 1 960s. A stakeholder forum to update these acts should be held, and perhaps a move towards implementing a model of industry self-regulation.55 This process is underway. At the same time, the various government-funded authorities and services concerning the tourism industry (the Tourist Board, Wildlife Services, the Tourism Development Corporation, and the hotel and restaurant authority) should include representatives from the Kenya Tourism Foundation, its member groups, and other stakeholders. D. SUMMARY AND RECOMMENDATIONS 5.43 This chapter has discussed a number of issues related to information and communication services and tourism. A summary of the recommendations to improve ICT follows: * Remove barriers to competition as quickly as possible. The government plan to remove the remaining barriers to competition in the telecommunications sector should be pursued immediately, and the Communications Commission of Kenya should be given technical support to help promote competition. * Proceed with plans to privatize Telkom Kenya. Competition will further decrease the market value of Telkom Kenya in a difficult international telecommunications environment. Full (100 percent) privatization should move forward, but expectations about the proceeds from the sale need to be scaled back. * Involve the private sector in formulation of policy and strengthen capacity to evaluate policy options and regulate the industry. The government should consult with the private ICT sector regarding new laws covering Internet transactions. It should also strengthen its own capacity in information technology. The costs and benefits of ICT parks should be rigorously evaluated before they are rolled out. * Improving access to ICT in rural areas is a priority. Community broadcasting and mobile telephony are technologically appropriate and sustainable tools with which to do this. Offering a reverse-auction subsidy to private mobile operators to roll out mobile footprint coverage should be a priority. * Postal reform might include private sector participation. The private sector could be involved through management contracts, and through provision of support for investment in modern equipment, to retrench staff, and to retrain remaining staff. 5.44 The government is committed to encouraging tourism and to increasing the benefits of tourism expenditures for poor communities. A number of recommendations might support implementation of the strategy: * Take actions to improve security and infrastructure in the country. Sector- specific policies will have little impact unless security and infrastructure improve. 85 At the same time, the Kenya Wildlife Services mandate also needs to be clarified because currently one law covers both protected and unprotected areas, and the Kenya Wildlife Services combines regulatory and management functions. 83 * Improve security by reforming the police force, rather than by providing a tourist police force. The tourism police force may be a useful stopgap measure, but a broad reform of the police has a more important role to play. * Undertake comprehensive land use planning to improve management of natural resources. Land use planning, involving differential pricing of scarce resources, will increase sustainability of Kenya's natural resources. * Support community initiatives to diversify into tourism. Encouraging communities to diversify into tourism requires technical assistance. Support for private-sector initiatives to create community-managed private parks on the borders of national parks will increase sustainability of wildlife tourism and enable communities to benefit more from tourism, thereby helping to reduce poverty. * Include various stakeholders in the government-funded tourism organizations. Representatives of the Kenya Tourism Foundation, its member groups, and other stakeholders should be included in the decision-making bodies of the government- funded tourism organizations (Tourist Board, Wildlife Service, the Tourism Development Corporation and the Hotel And Restaurant Authority) to ensure that decisions of the government-funded groups reflect a consensus of the key stakeholders. 84 6. THE INVESTMENT CLIMATE 6.1. The quantity and quality of investment that takes place in a country, as well as its effectiveness in generating growth, is influenced by the overall policy and institutional enVironment, both present.and expected. This environment, often referred to as the investment climate, includes several interrelated dimensions. First, political and macroeconomic stability as well as an open investment and trade regime are critical. Kenya, as already discussed in previous chapters, has done relatively well in these areas. Second, an effective and transparent regulatory envir6nment-easy entry and exit of firms, adequate competition policies, and functioning factor markets-is required. Third, the issue of corruption and, more generally, of governance is important. Finally; the quality and quantity of physical infrastructure, such as power, transport, telecom, water, and financial services are important elements of the investment climate. This chapter focuses oni most aspects of the investment climate in Kenya. The regulatory framework is *discussed in section A. Sections B and C. review governance and infrastructure issues respectively (with the exception of telecommunications, discussed in chapter 5). There are two justifications for-this focus. First, virtually all observers name the deterioration in the investment climate as being the main cause for the stagnation in investment and the decline in productivity .growth-during the past decade. Second, most of the variables that make up the investment cliinate are amenable to public choices. This chapter suggests a number of policy actions that will help spur investment and increase productivity. A. THE REGULATORY FRAMEWORK '62 The regulatory framework for investments includes competition policy, taxes and incentives, the labor market, and technology, infrastructure, and institutions.86 An efficient regulatory framework is one where regulations do not encourage adverse selection and moral hazoard, and are implemented without harassment or corruption. Smooth entry and exit processes are key. to. fostering competition and for creating pressure for firms to innovate-less efficient producers being forced to improve their productivity or exit the market. - Competition policy 6.3 The entry of new businesses in Kenya has been streamlined in recent years and .startup of an enterprise is not seriously constrained by legal requirements. The Investment Promotion Center provides a one-stop shop for local and foreign investors that choose to use its services. The center issues the certificate of authority within 30 days of application and often in just a few days. Since last year, local authorities are required to issue a single business permit automatically, allowing enterprises to start operating without waiting for all permits (except where public health and enviromnental issues are involved). This has improved entry in many areas but inw.many small cities local authorities are slow and obstructive. The cost of the single business permit, around US$1,000, is considered high by small and micro enterprises. 86 Also important for the well functioning of the regulatory framework is the adequacy of the commercial legislation (company law, bankruptcy law, protection of shareholders, and creditors rights). These issues should be assessed in further work. 85 6.4 The framework for competition is adequate but specialized skills for safeguarding competition are lacking. Competition policy in Kenya originated with the price control ordinance of 1956. A comprehensive act covering restrictive trade practices, monopolies and price control was passed in 1988 and revised in 1990, and is currently under review (Institute of Economic Affairs, 2002). The control of prices is less relevant today since prices have been liberalized. The Monopolies and Prices Commission (MPC) is in charge of safeguarding competition, and the commissioner is empowered to conduct enquiries and make recommendations to the Minister of Finance. 6.5 On restrictive trade practices, the act covers such restraints as discriminatory pricing, tied purchasing, resale price controls, predatory pricing, and collusive tendering. Tied purchases are widespread, and shops can insist that customers buy additional items along with goods in short supply. Experts have argued that several restrictive trade practices cannot be banned by legal proceedings (Vyas, 2001). For instance, collusive pricing by manufacturers are deemed void but are not illegal. This ambiguity has caused confusion in the enforcement agencies. Moreover, the MPC lacks the necessary legal and economic skills to mount the investigations that are necessary to prove the actual impact of restrictive trade practices on competition. Finally, fines are very low. The maximum for undertaking restrictive business practices, for example, is around US$1,250 (Institute of Economic Affairs, 2002). 6.6 On control of monopolies, the act covers market dominance and mergers and acquisitions. It defines monopolies and concentration of economic power fairly broadly and the MPC is empowered to investigate any instance of unwarranted concentration.87 In this, the Kenyan law follows the practice of the United Kingdom of case-by-case analysis in the public interest, rather than viewing activities against predetermined criteria on market dominance. However, controlling monopoly power on a case-by-case basis requires significant skills, information, and time. The MPC has few resources for training staff in the specialized skills required and therefore has weak capacity to fulfill its antimonopoly functions. The last industrial census in Kenya was undertaken in 1982 and was never published. No reliable data on market concentrations in industry exist, making the task of the MPC more challenging. In addition, the MPC is required to assess the impact of all proposed mergers and acquisitions on productivity, export competitiveness, and employment creation. As with controlling monopoly power, this is an activity requiring specialized skills and information, and the capacity of the MPC to effectively perform this task is limited. The number of mergers and acquisitions in Kenya has been rising in response to liberalization (from around 9 per year during the seven years 1989-96 to 23 in 1998 and to 24 in 1999). Mergers and acquisitions comprised 70 percent of the MPC caseload during 1996-2000, up from 56 percent during 1989-96. Taxes and incentives 6.7 Kenya's tax regime is comparable to other countries in the region, but the extent and effectiveness of investment and export incentives should be reviewed and possibly 87 The definition is where one or a few firms control an economic activity to the extent that they are in a position to dictate terms and conditions on which goods/services provided by them are bought or sold. The factors that require particular attention in identifying concentration of economic power include control of distribution with sales exceeding 33 percent of the relevant market, control of over 66 percent of the supply of a manufactured product in the domestic market, shareholding exceeding 20 percent in a manufacturing enterprise, and a beneficial interest in the distribution of the relevant product. 86 rationalized.88 The tax base is narrow and many firms and individuals have escaped paying taxes because mechanisms of enforcement are weak. Historically, Kenya has offered significant incentives to investors and exporters but they have not spurred high rates of investment.89, 90 Kenya enacted EPZ legislation in 1990, well ahead of most African countries. It now has 23 zones operating, some of which are run by the govemment, but most or which are privately operated. The labor market 6.8 Kenya has a fairly well developed system of industrial relations. Labor laws are being revised to make them consistent with the conventions and recommendations of,,the International Labor Organization. Firms experiencing competitive pressures and economic difficulties, can lay off workers fairly easily if they pay due compensation.9' The main problem appears to be the industrial court. Employers claim that the court is biased in favor of employees, and that its decisions are not open to appeal by employers. In recent years, wage increases approved by the court have tended to exceed productivity rises by a significant margin. The proposed investment code 6.9 A draft investment code has been in discussion since 1998, and has yet to be finalized. Under the proposed code (the Kenya investment bill, 2002), the Investment Promotion Center will be transformed into the Kenya Investment Center, which will become responsible for licensing new businesses, promoting Kenya as a place to invest, and advising on the investment climate. The incentives offered under the code will be available to all businesses with paid up capital of Ksh 10 million or more that obtain a license from Kenya Investment Center. Besides the existing incentives, investors will have the right to deduct expenditures on basic infrastructure 88 The corporate tax rate is 32.5 percent for locally incorporated companies and 40 percent for branches of foreign companies operating in Kenya. The withholding tax is 15 percent on interest, 10 percent on dividends, and 20 percent on management fees and royalties. The rates of VAT are 18 percent on most goods, 16 percent on restaurants, 0 percent on inputs for healthcare and education, and 0 percent on exports of goods and services. Excise duties are levied on beer, tobacco, matches, spirits, wines, mineral water and confectionaries. The personal tax on income is 0- 32.5 percent (IMF, 2003). 89 Investment incentives include investment allowances at 100 percent on plant, machinery, equipment and buildings. Liberal depreciation allowances are: 2.5 percent on industrial buildings; 4 percent on hotels; 12.5 percent on plant and machinery; 25-37.5 percent on motor vehicles, trucks and tractors; and 30 percent on computers and office equipment. Businesses that suffer losses can carry forward such losses to be offset against future taxable profits. Imported materials used for exports are eligible for duty remission under the Export Promotion Programs Office. The 'Manufacturing under bond' (MUV) scheme grants 100 percent investment allowance. 9.0 Incentives to industries operating within EPZs include ten-year tax holidays and a flat 25 percent tax for ten years afterwards, exemptions from all withholding taxes on dividends and other payments during the first ten years and exemption from import duties on machinery, raw materials and intermediate inputs. Other export incentive schemes include: the dutyNAT remission, available to all industries importing raw materials for use in export production; the MUV, which allows participating industries duty and VAT exemption on imported plant, machinery equipment, raw materials and intermediate inputs; and all enterprises producing for export or for duty free sale in domestic markets are exempt from duty and or VAT on imports for production of such goods. 91 The procedures for processing redundancy is contained in section 16 A (1) of the Employment Act and section 4, subsections 4, 5, and 6 of the Trade Disputes Act. Employers are entitled to effect the redundancies without any prior approval of the Minister of Labor. The compensation for layoffs as severance pay is no less than 15 days pay for each completed year of service. 87 from corporate taxes. Spending on research and development will be entitled to exemptions and privileges. Export activity, under bond or in EPZs, will receive the usual privileges according to the EPZ Act. Investments in priority areas are entitled to rebates on corporate taxes. The code provides for a board for the Kenya Investment Center and proposes that a national investment council be established, chaired by the president of Kenya, with 12 public officials and 12 private sector members. The council is to identify and consult on impediments to investment, and monitor and promote industrial development and public-private cooperation. The act envisages that an investment appeals tribunal will hear appeals from enterprises or license holders on the decisions of the center or of the minister. The act provides for guarantees against expropriation except for security and related reasons. 6.10 The proposed investment code introduces the investment license, which is unnecessary. The current draft reflects many of the comments given by the Foreign Investment Advisory Services (FIAS) of the World Bank in 2000 on an earlier draft of the code. An important exception, however, relates to the licensing of new investments, which is not best practice. Applicants for a license will have to provide information on the qualifications, number and nationality of management staff, as well as on technology transfers and management agreements. The Kenya Investment Center will be required to appraise applications with respect to nine criteria and provide a one-stop licensing service for all permits and clearances.92 6.11 A major institution-building effort will be required if the full benefits of FDI are to be realized. The Investment Promotion Center needs to be significantly restructured and improved if it is to match the dynamic promotion agencies in many parts of the developing world. The center has 71 employees-including 20 professionals-but few have the skills needed to promote private sector investment in the current environment. Its information base on activities and potential investors is weak. Both the center and the EPZ authority have responsibilities for promotion, which means that resources for promotion are spread thinly and important synergies are lost. The current budget of the center (about US$1 million) is inadequate to fund its promotion functions, and some 85 percent of it is spent on salaries and overheads rather than on promotion.93 6.12 Centralizing information would help improve access to FDI data in Kenya. At the moment, the Investment Promotion Center collects data on approved FDI, and not on actual investments and only from investors that choose to use its services. The EPZ authority, not the center, collects data on export-oriented FDI. The central bank data do not include FDI unless the investor declares it as such. Reinvestments by multinational firms do not appear in the FDI data. Moreover a sectoral breakdown of FDI is not available. Centralizing data collection is clearly important. 92 Including employment creation, utilization of local raw materials, export earnings and import substitution, introduction of new or advanced technology, transfer of technical skills, enhancement of linkages and the contribution to rural, domestic and regional development. 93 For example, the budget of Singapore's Economic Development Board (reputedly the best investment promotion agency in the developing world) is US$34 million; the budgets of Malaysia's Industrial Development Authority and of Thailand's Board of Investment are both around US$10 million. Even Mauritius spends US$3.1 million per year on FDI promotion. 88 Technology infrastructure and institutions 6.13 Technological activity in Kenya is conspicuously weak.94 Companies import technology yet make little effort to absorb or improve upon it. Firms finance very little research and development. The lack of a technology culture in Kenyan industry will be a handicap to its competitiveness, particularly as it attempts to use and develop more complex technologies. In the public sector, the main institution responsible for conducting research and development for the manufacturing sector is the Kenya Industrial Research and Development Institute (KIRDI).95 KIRDI's has focused mainly on developing technologies for the processing and storage of traditional local food products like sorghum, millet, and seed potatoes. Its technologies and training have been oriented to farmers and small rural enterprises, and its research has had little impact on the formal sector. Large industrial companies have relied on foreign sources of technology while small and medium size enterprises have had little to do with KIRDI (Bwisa and Gacuhi, 1997). KIRDI has significantly reorganized since the mid-1990s and has reduced its staff from 700 to around 250 today (this includes about 50 professionals). Industrial demand for services of KIRDI increased significantly after the reorganization, but the institution is still heavily dependent on the government for its operational budget. But these resources are inadequate to enable it to recruit and retain qualified staff and to procure modern equipment. With upgraded capabilities KIRDI could assist both small and large enterprises upgrade their technology to reach world class standards. 6.14 Awareness of quality and metrological needs in Kenya is poor, particularly in small and micro enterprises. The two technology infrastructure institutions in the country are the, Kenya Bureau of Standards and the Kenya Industrial Property Institute. The Kenya Bureau of Standards, with a total staff of 650, provides support to the industry for metrology, standards, testing, and quality.96 Established in 1974, it has developed around 3,000 standards, and has another 2,000 under development. It is by far the most developed and competent institution handling these issues in East Africa. The bureau has 10 lead assessors able to provide ISO 9000 and 14000 certification. It has so far certified 20 companies as ISO 9000 compliant, and 2 firms 94 However, industrial research and development goes back many years in Kenya. The 1940s saw the creation of specialized institutions to conduct research and development. Research for industry was conducted in public works by the materials branch of the Ministry of Works. The national development plan of 1970-74 advocated a national research and scientific council to launch scientific research in support of economic and social development, and to set national priorities for scientific research. The bill for the creation of the national council for science and technology was introduced in parliament and became law in March 1977. The Science and Technology Act was amended in 1979 to provide for the establishment of semiautonomous national research institutes and advisory research committees. 95 KIRDI is one of eight research and development institutes established in 1979 after the break up of the EAC (although it descends from the Kenya industrial management board set up in 1942). Its mission was to enhance the national industrial innovation process through the development of a sufficient national capacity in disembodied and embodied industrial technologies for the attainment of a self-sustaining industrialization process (Lall and Pietrobelli, 2001) 96 Standards are the basic technical language that allows firms to communicate specifications to each other and achieve economies of scale. Metrology services (calibration of measuring and control instruments in industry) are essential for maintaining quality; their international traceability allows complex products to be accepted in international markets. Testing services are essential for quality control and certification in local and foreign markets. Quality management standards like the Intemational Standards Organization (ISO) 9000 and 14000 series are becoming vital to maintain international competitiveness. In the absence of strong local standards institutions, industry has to use imported services at high cost and can lag in quality control. 89 as ISO 14000 compliant.97 Its quality control laboratories provide testing facilities and have capabilities in a range of areas relevant to the needs of Kenya (but rather limited in terms of new technologies). The bureau lacks the ability to certify independent assessors and laboratories for testing and metrology, an ability that it must develop to promote the growth of a private testing and metrology industry able to satisfy international standards. The bureau is funded by a standards levy on all manufacturers (0.2 per cent of ex-factory sales up to a ceiling of US$4,000 per year), and by fees collected for inspection of imports for quality, by annual grants from government, and by fees for services provided to industry (mainly testing, but also training courses). Its main needs are for more and better equipment, staff training in all areas, better ICT facilities, and help in obtaining international accreditation for all its laboratories. 6.15 While most of the industrial property system in Kenya conforms to current international norms, implementation is weak. The industrial property regime in Kenya is embodied in the Industrial Property Act of 1989 (revised in 1991). It promotes indigenous technology, protects foreign patents, and encourages the acquisition and diffusion of technology.98 The Kenyan law on patents conforms to the U.K. law, and includes some features of the European and U.S. systems. Patent protection has been raised from 17 to 20 years in conformity with the trade related intellectual property rights agreement of the WTO. The Kenya Industrial Property Institute, established in 1990, is an autonomous institute under the Ministry of Trade and Industry charged with registering and protecting intellectual property rights in the areas of patents, trademarks, industrial design, and utility models.99 Its primary source of revenue comes from fees for examinations and registrations of trademarks. While the institute is trying to raise the awareness of intellectual property issues in Kenya and to encourage local people and firms to innovate, most of its resources are focused on issues of trademarks rather than on patents. The low technological capacity of Kenyan industry means that local demand for patents is limited. The institute has limited capacity to deal with intellectual property issues, and it needs to upgrade its staff through recruitment and training. Moreover, the legal framework in Kenya does not cover new issues such as piracy of software and music. According to the institute, this is an area that needs to be strengthened and brought into line with international norms. Counterfeiting is rife but inspection and prosecutions are ineffective. Patent infringement has been made into a criminal offense but counterfeiting has not. The industrial property tribunal is the court of first resort in this area but lawyers and magistrates trained in modern intellectual property law are few. 97 The Kenya Bureau of Standards has six divisions: standards development; quality assurance; testing; import inspection; metrology and special projects. Its main source of income from industry is for testing. Of its 10 testing laboratories, five are accredited internationally; the others will be accredited when resources become available (international accreditation is essential for laboratory services to be acceptable in export markets). Its Metrology Division has 14 laboratories, two of which have been accredited by the German calibration service. The division maintains national measurement standards, and serves industry in Kenya as well as other countries with calibration services. 9S Other legislation includes the 1957 trademarks act, revised in 1982 and 1994; the 1972 seeds and plants varieties act; and the 1966 copyright act, revised in 1995, which protects literary, musical, artistic and audiovisual works. 99 Earlier the Kenya Industrial Property Institute (whenit was called the Kenya Industrial Property Office) used to register technology transfer agreements to ensure that royalties and fees did not exceed the stipulated 3-5 percent of the turnover of local firm. The registration was necessary to get central bank permission to remit the royalties and fees. After 1992 this registration became redundant since fees could be remitted freely. Since 1990 patents have been registered through Kenya Intellectual Property Institute, the African Regional Industrial Property Office (located in Zimbabwe) and the patent cooperation treaties. Copyrights are handled by the department of the attorney general, and plant breeder rights are handled by the Kenya plant health inspectorate service in the Ministry of Agriculture. 90 The weaknesses of the legal system more generally mean that innovations and intellectual property are not adequately protected in Kenya. Recommendations 6.16 Suggested actions to improve the regulatory framework include: * Make entry, operation, and exit easier for private investors, particularly by improving the process of obtaining business permits at the local level. In this context, a new investor road map study would help understanding how Kenya compares to competitors regarding procedures for entry and conditions in factor markets. * Strengthen the capabilities and information base of the Monopolies and Prices Commission by providing more staff and specialized training for existing staff. Increase the capacities of the legal profession and judiciary to deal with cases of intellectual property rights. * Restructure the legal framework for labor issues. In particular, an appeal facility for employers needs to be introduced. * Strengthen protection intellectual property by launching a campaign to raise public awareness of intellectual property rights issues. Intensify control of counterfeiting and introduce more rapid legal action and severe penalties, bringing counterfeiting penalties in line with those for patent infringement. Raise the capabilities of the legal system to handle modem intellectual property rights cases, and increase the number of lawyers and magistrates trained in modem intellectual property rights law. Broaden the scope of intellectual property rights legislation to cover software and music. * Finalize and approve the new investment code, removing the requirement for an investment license. Also, strengthen FDI promotion, concentrating efforts in one agency that has the information and human and financial resources to efficiently and effectively promote Kenya to potential investors. * Strengthen the capabilities and linkages of KIRDI by providing resources to improve salaries and equipment. Encourage KIRDI to move into modem technological activities that are more relevant to formal sector small and medium- scale enterprises, and to develop stronger linkages with these enterprises. Strengthen the capabilities of KIRDI to assess the technological capabilities of enterprises and to assist enterprises upgrade their technology. * Upgrade the equipment and capabilities of Kenya Bureau of Standards and the Kenya Industrial Property Institute. The Kenya Bureau of Standards needs more and better equipment, staff training, ICT facilities, and help in obtaining international accreditation for all its laboratories. The Kenya Industrial Property Institute needs to recruit new staff and provide training to existing deal with intellectual property rights issues. 91 B. GOVERNANCE Background 6.17 Poor economic governance, including weak rule of law, high levels of corruption and poor management of public resources, is recognized as one of the key impediments to economic and social development.'00 It undermines development by distorting the rule of law and weakening the institutional foundation on which economic growth depends. The harmful effects of weak governance are especially severe on the poor, who are most reliant on the provision of public services, and are least capable of paying the extra costs associated with bribery, fraud, and the misappropriation of economic resources. Corruption-a major manifestation of poor governance-and poverty are linked through many indirect channels. At a macro level, corruption has implications for a country's ability to attract investment, for the effectiveness of its institutions and for income generation through taxation. Corruption also affects the way public money is allocated, diverting expenditures away from sectors such as health and education to sectors such as public works where contracts can be manipulated and bribes more easily secured. 6.18 The government that was elected in Kenya at the very end of 2002 has promised to eliminate corruption, restore the rule of law and bring about equitable development that favors all citizens. Securing lasting improvements in governance along these lines represents a major challenge and it will require focused and sustained effort to build stronger institutions that are able to effectively apply the law and to manage public resources with integrity. Corruption in particular is regarded as deep rooted in existing political and economic structures. This section reviews a number of aspects of governance, particularly those that are key to the business environment such as corruption and security, and discusses the government's program and initiatives in these areas. Indicators of governance 6.19 Poor governance has been strongly associated with the weak performance of Kenya's economy and the situation became worse during the 1990s. Table 6.1 reports the institutional quality scores compiled for Kenya by the International Country Risk Guide, averaged for selected periods. This provides an assessment against five criteria: government stability, investment profile, bureaucratic quality, corruption and law and order. The overall average of these criteria (termed institutional quality) remained remarkably stable over the past couple of decades in Kenya, being the same (4.6) for the five year period prior to 2002 as it was during 1985-89. But the components of this index moved quite differently-government stability significantly improved, the investment profile advanced marginally, but the other dimensions (bureaucratic quality, corruption and law and order) declined sharply.'0' '°° In a broad sense, governance is defined as the traditions and institutions by which authority is exercised. Governance encompasses three main components: (1) the process of selecting and replacing governments; (2) the capacity to formulate and implement policies and deliver services; and (3) the respect of citizens and State for the institutions that govem economic and social interactions. Corruption has a much stricter meaning-it is the abuse of public office for private gain. See Kaufman (2002). 101 The International Country Risk Guide Index reflects the opinion of banks, multinational companies and other institutional investors. 92 Table 6-1: Institutional Quality Scores for Kenya, 1985-2001 government Investment Bureaucracy Law and Institutional Stability e/ Profile v Quality hI Corruption £' Order s' quality IV 1985-1989 6.4 6.7 3.0 3.0 4.0 4.6 1990-1996 5.0 5.5 3.0 3.0 3.4 4.0 1997-2001 9.3 6.9 2.1 2.1 2.4 4.6 a/ Scale 0-12: a higher number means less risk; b/ Scale 0-4 c/ Scale 0-6 d/ Unweighted mean of all five components. Source: Intemational Country Risk Guide 6.20 These findings are similar to those of a survey on governance carried out by the World Bank in 175 countries (Kaufinann and Kraay, 2002). In this survey Kenya ranks below 80 percent of countries worldwide on all indicators of governance, and below 90 percent of countries on the rule of law and control of corruption. It also ranks below the Sub-Saharan Africa average on all indicators of governance (figure 6.1).102 Figure 6.1: Kenya's Governance Indicators Compared with the Sub-Saharan Africa Average, 2000/01 40 3 5 30 15 -~_ 10 - .1 Voice and Polhical stubility Government Regulatory quality Rule of law Control of corruption accountability effectiveness | SKenya Regional averag | Source: Kaufinann, Kraay, 2002. The problem of corruption 6.21 Corruption has been identified as a major obstacle to doing business in Kenya. The results of the World Business Environment Survey in 2000 suggest that about 90 percent of firms in Kenya identify corruption as a serious obstacle to doing business (table 6.2). Although it is 102 Kaufmann, Kraay and Zoido-Lobaton construct a number of indicators based on the perceptions of the quality of govemance of a large number of enterprise, citizens, expert survey respondents, nongovemmental organizations, commercial risk rating agencies, and think-tanks in both industrial and developing countries. The figure depicts the percentage of countries worldwide that rate below Kenya with respect to each indicator (subject to a margin of error). They show that countries scoring higher on these indexes of rule of law, graft, voice and accountability, etc. tend to have lower infant mortality and higher literacy rates, as well as higher per capita incomes. See Kauftnann, Kraay and o Zoido-Lobaton (1999a) and (1999b). 93 very difficult to quantify corruption precisely and inter country comparisons are sometimes regarded as unreliable, according to the most recent Transparency International survey of perceptions of corruption, in 2002 Kenya ranked 96 out of a total of 102 countries worldwide (Transparency International, 200 1).103 Some of the richest countries in the world have very low levels of perceived corruption in government and public institutions, while some of the poorest have very high levels. The only countries scoring below Kenya in the 2002 corruption perceptions index were Angola, Madagascar, Paraguay, Nigeria and Bangladesh. Since the Transparency International index was first published in 1996, Kenya's highest ranking was 73 out of 85 countries achieved in 1998. 6.22 Corruption has been regarded as systemic or routine in many parts of Kenya's public service. A typology of corruption in Kenya generally distinguishes grand from petty corruption. The most serious form of grand corruption has been the looting associated with major scams that have had significant financial and macroeconomic effects. Probably the most infamous example of looting in Kenya is the Goldenberg scam of 1992, in which extremely large export subsidy payments were made for fictitious exports of gold. But there have been several other cases of looting, including the raiding of public assets deposited on instruction in poorly supervised parts of the banking sector. Other forms of grand corruption have involved senior government officials taking advantage of their position to influence the award of contracts or the provision of services such as finance. The sums of money at risk are less substantial but still serious. Public procurement systems have been a major focus for this type of corruption as has the banking sector and the judiciary. Petty corruption involves relatively junior officials typically extorting small bribes either to provide a service which is a normal requirement, for example, the provision of a license or permit, or to overlook an offence. 6.23 Corruption has been fueled by the absence of concern about sanction and sustained by a number of institutional factors. For example: (a) public financial management and procurement systems are weak; (b) civil servants' loyalties have been divided by allowing their engagement in private business; (c) watchdog institutions that provide information in which detection and enforcement is based (for example, the office of the controller and auditor general) have been denied adequate resources and independence; (d) principles of ethics amongst public servants at all levels are underdeveloped; (e) accountability is not enforced, including importantly through the courts. Governance and the quality of public services 6.24 Poor governance has resulted in poor quality of public services. Waste and fraud reduce the resources available for public services and present a formidable obstacle to doing business. A large proportion of businesses participating in the World Business Environment Survey 2000 named the quality and efficiency of each of Kenya's public services as a major problem. In most cases a larger proportion of firms in Kenya rated public services as poor than was the case in other countries of Sub-Saharan Africa (table 6.2). 103 The Transparency International corruption perception index measures the degree to which business people, academics, and risk analysts perceive corruption to be a problem in a country. 94 Table 6-2: World Business Environment Survey Results Overall quality and efficiency of public services (percent firms rating agencies "bad," "very bad" or "slightly bad") Kenya Tanzania Uganda Ghana Senegal South Africa Customs 54.1 36.4 43.3 20.4 24.7 27.4 Courts 73.8 42.3 42.7 15.9 27.2 27.5 Roads 94.6 65.4 45.0 30.8 61.8 15.8 Postal 69.6 30.3 23.9 22.0 4.6 35.5 Telephone 80.0 26.6 31.8 22.9 4.2 14.9 Power 55.0 44.9 69.5 23.4 69.4 2.5 Water 87.4 81.0 32.6 27.8 63.6 5.8 Health 90.1 67.9 58.3 28.3 43.8 75.0 Military 31.0 8.7 24.1 20.0 4.9 34.5 Government 75.9 10.5 14.0 17.3 37.5 11.8 Parliament 66.7 24.7 13.2 15.5 58.5 21.7 Judicial system 43 15 32 39 45 Source: Batra and others, 2002. 6.25 The World Business Environment Survey highlights especially the poor quality of infrastructural services (section C) and the weaknesses of the judiciary and legal system, including the police. Severe weaknesses in Kenya's system of commercial justice in particular present difficulties for investors. Excessive delays arise from a court system that is overloaded and operating with inadequate resources, and from the abuse of court procedures by litigants and their lawyers through inappropriate use of injunctions and adjournments to delay judgment. Judgments are unreliable in particular as a result of widespread corruption both amongst judges, and amongst administrative staff. Legal disputes can be extremely expensive in terms of both legal fees and management time. Access to business finance is significantly hampered, as the difficulties in enforcing contracts make banks and suppliers extremely cautious in offering credit and raise interest rates to cover risk. The cost of corruption 6.26 The need to pay bribes imposes significant costs on ordinary Kenyans. Some evidence on the costs of corruption in Kenya comes from research carried out by Transparency Intemational Kenya on bribery and the misuse and misallocation of public resources. The most recent bribery survey published in January 2003 found that the average urban Kenyan paid 6.9 bribes a month in 2002.'°4 The burden of bribery amounted to Ksh 4,900 a month, or nearly 20 percent of average monthly income among urban survey respondents of about Ksh 26,000. Most bribes were small, with 60 percent of the bribes involving sums below Ksh 200. Police officers, the worst offenders, exacted bribes equal to Ksh 1,644 per person per month, one-third of the total burden of bribery. The next worst offender was the immigration department, which took bribes of Ksh 786 per respondent, 16 percent of the total.'05 104 The survey results must be interpreted with caution because the sample was not sufficiently representative to allow for firm conclusions about the urban population as a whole. ,os Private sector firms (Ksh 242), local authorities (Ksh 193), and the judiciary (Ksh 188) complete the top five bribery-prone institutions. The department of defense (Ksh 186) ranks sixth, related to widespread bribery during recruitment of servicemen in 2002. Others in the top ten include the provincial administrations (Ksh 165), the Nairobi 95 6.27 The burden of bribery falls most heavily on the poor. People with monthly incomes below Ksh 5,000 were asked for bribes in about 67 percent of their encounters, while those with incomes of Ksh 50,000-100,000 were asked in 60 percent of interactions. While it is impossible to know whether the experiences of the respondents accurately reflect that of all Kenyans, the data suggest that bribery is a heavy burden for average citizens. 6.28 Corruption also leads to the misallocation and misuse of resources. Poor, public procurement processes have been at the root of this problem in Kenya (box 6. 1). Box 6.1: Reform of Public Procurement Successive reports of the controller and auditor general have highlighted the corruption associated with public procurement systems in Kenya The waste of public resources has directly affected the capacity of the govemment to provide public services. Problems include: * Awarding contracts, in many cases associated with major projects, without any competitive bidding, significantly inflating costs. * -Significantly overvaluing or overpricing land, buildings, and other materials sold to the government and parastatals. * Paying for items that are never delivered or constructed. New public procurement regulations were gazetted in- March 2001. These will be reinforced by legislation that was approved by cabinet in May 2003 and will be 'presented to parliament at the first opportunity. The new framework addresses problems with procurement by establishing clear procurement rules, enforcing greater accountability, and. creating new institutions for regulation and supervision. The framework includes: * Uniform regulations for all public entities * Standard tender documents * Collective or corporate decision making in awarding or extending contracts, as opposed to. decisions by individuals * Creation of tender committees placing full responsibility for procurement on public officials responsible for using public funds * Creation of a high level independent public procurement oversight authority responsible for formulating procurement policy, building capacity, and overseeing the enforcement of regulations., The new framework can greatly improve the effectiveness and accountability of public procurement. - Simultaneous reforms to directly address corruption and public officer ethics will increase its impact: Iniportantly, however, change will require a willingness to enforce the rules, especially by punishing those that transgress. In the area of public works and roads, in particular, supporting initiatives are needed to control collusion between engineers, surveyors and architects, and to control the abuse of the contracting process. Source: World Bank staff, Mullei, 2000. Security and crime 6.29 Insecurity and crime are problems for investors. Respondents to the World Bank Business Environment Survey 2000 identified crime and insecurity as important obstacles to doing business (figure 6.2). These problems reflect poor governance, including-weaknesses in the police and in the judicial system. - Concerns of businessmen about security almost certainly increased in the 1990s because of the tribal clashes associated with.the elections in 1992 and 1997 and by the bombing in 1998 of the United States embassy. Recent tribally-based violence in the City Council (Ksh 157), the ministry of education (Ksh 152), and the Kenya Revenue Authority (Ksh 151). Altogether- the top ten organizations collected about 80 percent of the total each respondent paid in bribes. 96 slums of Nairobi and a second terrorist attack in 2002 in Mombasa have increased worries about insecurity. Concerns about crime have significantly increased the costs of doing business as a result of the requirement for increased expenditure to protect income and assets. Even more important are the impact of crime and insecurity on the image of Kenya in the international investment community, which places a premium on locating mobile activities (particularly export-oriented activities in global value chains) in countries with good living conditions for expatriates. 6.30 Official statistics vastly underestimate the problem of crime. Lack of confidence in the agencies responsible for law enforcement results in underreporting of crime (table 6.4). Statistics from the United Nations Habitat survey on crime in Nairobi suggest that reported crime is only about one percent of the total (United Nations Habitat, 2002). Table 6-3: Crime in Nairobi People in Nairobi reporting Cases of Crime in Nairobi Reported to the being victims of: Police in 2000 Robbery 793,000 Robbery 3,404 Theft 471,500 Theft and stealing 3,512 Assault 385,800 Assault 1,656 Sources: people reporting being victims based on a UN Habitat survey taken in Nairobi in 2000, Nairobi population and crime reported from police from Kenya Economic Survey, 2002. 6.31 A category of crime particularly important to business is economic crime. A study of the costs of economic crime (fraud, embezzlement, extortion, money laundering, breach of trust, and corruption) was conducted in 2001 for 189 companies in a broad range of industries in Kenya, Tanzania, and Zambia (Price Waterhouse Coopers, 2003). About 58 percent of the respondents to the survey had been the victim of an economic crime during the previous two years, costing an estimated total of US$206 million. The most prevalent crime reported by respondents was embezzlement by employees, with 50 percent of firms saying that they had been the victim of this type of crime. About 30 percent of firms reported cases of corruption in dealings with the public sector. A policy agenda for improving governance 6.32 Although attempts were made in the past to establish strategies and institutional arrangements to effectively deal with corruption, these floundered under the KANU administration because of a lack of strong political backing. Judicial and wider legal sector reform were similarly pursued without conviction, notwithstanding the availability of officially commissioned diagnostic reports that clearly pointed the way forward. 6.33 The government of President Kibaki has announced a clear intention to break from the past and quickly put into place a comprehensive reform agenda. Elements of the new agenda include: * Strong political commitment to both effective anticorruption measures and judicial reform. This has been demonstrated by the establishment of a new 97 department of public service conduct and ethics under the direction of the president himself, and the creation of a new ministry of justice and constitutional affairs.'06 * Passage into law on May 2, 2003 of two key pieces of legislation on anticorruption and public ethics. The Anti-Corruption and Economic Crimes Act defines corruption and economic crimes and associated sanctions, and creates an independent Kenya Anti-Corruption Commission to pursue their investigation. The Public Officer Ethics Act makes all public officers, including members of parliament, the executive, and the judiciary as well as ordinary public servants subject to codes of conduct that include declaration of assets. During May 2003 three additional pieces of governance legislation covering government financial management, public audit, and public procurement and disposal were sent by the cabinet to the parliament for approval. * A constitutional review that will establish an improved framework for accountable government in Kenya, including stronger parliamentary institutions and a stronger and more independent judiciary. This review is expected to include the establishment of the Kenya Anti-Corruption Commission as a constitutional body with powers to prosecute as well as investigate cases of corruption. * Comprehensive legal and judicial reform to significantly improve access at all levels to justice and security. A new chiefjustice and a number of high court judges have already been appointed. On May 16, 2003, the Judicial Service Commission approved and published the Judicial Code of Conduct and Ethics. An inquiry into corruption in the judiciary is underway. * Human rights initiatives focused on empowering people to demand justice, including through the appointment of an ombudsman. 7 6.34 These policies have almost certainly had an important effect on investor's perceptions of the investment climate in Kenya by signaling a strong intention to reform. In the February 2003 International Country Risk Guide the majority of the indicators of institutional quality improved, including corruption and law and order. Investors' perceptions will improve further once it is clear that reforms are having an impact in reducing uncertainty and the costs of doing business. Experience elsewhere suggests that it may take up to two years to fully demonstrate that the governance component of the investment climate has changed. It is essential to quickly establish credibility through effective implementation. Key reform processes 6.35 The policy agenda the government has set for itself is compelling and ambitious. Suggestions for implementing this agenda effectively include: 106 The new ministry will be responsible for integrity and ethics, constitutional matters, legal policy and state law office, the judiciary, law reform, legal education, the electoral commission of Kenya, political parties, the Kenya Anti- Corruption Commission, and the Human Rights Commission. 107 The omdudsman or public complaints officer provides an avenue for redress where administrative practices deny individuals their legal or human rights (for example, access to a passport). 98 * Demonstrating strong political leadership from the president and his cabinet on governance issues, is essential in building trust in government and in the reform process. Within this context, a prompt declaration of their assets by the president and the cabinet, as provided for under the public officer ethics legislation, would be an important step. * Ensuring that the Kenya Anti-Corruption Commission has adequate staff and resources to be able to quickly fulfill its obligations under the anticorruption and economic crimes bill (and the revised constitution). * Establishing a track record of investigating corruption cases, leading quickly to successful prosecution. No corruption case in Kenya's recent history has been successfully prosecuted, a factor undermining anticorruption efforts.108 Successful prosecution is required both to establish credibility in the government's commitment to end corruption and to demonstrate that effective sanctions are now in place. * Building capacity to enforce public officer codes of conduct. Effective enforcement of the codes of conduct is also essential to build credibility in the reform process. A system of maintaining and updating records of the declared assets of public officers, in a way that makes them readily accessible, should be established quickly. Systematically enforcing other provisions of the codes of conduct, such as immediately suspending officials who are charged with offences, is also important. * Strengthening the quality and independence of the judiciary. The quality and independence of the judiciary will be an important focus for the constitutional review.'09 The review is likely to propose that judges meet minimum selection criteria and that permanent appointments are vetted by the parliament. The review is also likely to strengthen the role of the judicial services commission, for example in monitoring judicial performance. Ahead of the conclusion of the constitutional review it will be essential to act on the findings of the inquiry on judicial corruption that is now underway, building on the appointments of the new chief justice and high court judges. * Enhancing access to and speed and quality of the judicial process. Initiatives to improve court recording, record management, and case management are needed immediately. Strengthening alternative mechanisms of dispute resolution can make an important contribution to accelerating commercial justice. Introducing small claims courts has significantly increased access to justice and the speed with which cases are resolved. Although the government aims to pursue comprehensive judicial and legal sector reforms, the private sector will benefit immediately if the government focuses quickly on key commercial areas such as debt recovery and land administration. * Removing both powers of discretion and bureaucratic procedures in the work of public officials. Discretionary power and bureaucratic procedures increase the opportunities for public servants to extract bribes. A review of the legislation and 1s However, the new govemment has suspended all public officers under serious investigation for corruption. 109 The constitutional review is reviewing the constitution in full. This includes those clauses which determine the role and independence of the judiciary and the way in which it is appointed. Reforming the judiciary requires that these clauses are overhauled. 99 administrative rules to minimize such opportunities would help fighting corruption. This is particularly important in areas such as customs administration where the problem is known to be acute. * Effectively managing public procurement in the context of the public procurement and disposal of assets bill. Public procurement in Kenya has been a major source of corruption (box 6.1). This new legislation, once passed, set alongside the procurement regulations gazetted in 2001, provides a framework for addressing the problem. Building capacity to manage the new system and to enforce its provisions for accountability should be a particular focus. * Improving accountability in the management of public finance. The public procurement and disposal bill addresses a particular set of problems that have contributed to corruption in the management of public finances. More generally, accountability in the management of public finances will be significantly strengthened by the rapid installation of a government integrated financial management information- system that can provide timely information on government expenditure and commitments. This project is underway but it has been subject to major delays. * Improving the autonomy and resources available for public sector audits. Creating a national audit office through the proposed public audit bill will improve the quality and timeliness of audit reports and make it easier for parliament to more effectively oversee the management of public finances. To be able to address longstanding problems of staff shortages, the national audit office, needs to be autonomous (from the public service commission) with respect to the terms and conditions of employment and on recruitment. The constitutional review should address this issue. * Establishing systems for monitoring the impact of governance reforms through surveys of enterprises, households and users of public services. Monitoring and evaluating the reform process and its impact is essential to establish that objectives are being met and to inform the reform agenda going forward. Dissemination of results should help in improving perceptions of Kenya as a place to do business. C. INFRASTRUCTURE AND FINANCIAL SERVICES FOR INVESTMENT AND GROWTH 6.36 Industrial development cannot take place without adequate infrastructure in the form of power supply, water and sanitation systems, and transport and financial services. Kenya has long been perceived as being ahead of most other African countries in all of these areas. It has, for instance, a very extensive road network, and the most developed financial sector in East Africa. However, over the past decade, the quality of infrastructure and financial services has steadily deteriorated (see annex HII, table III.8). This process has had a very significant impact on investor confidence and has led to higher production costs and loss of competitiveness for manufactured goods. Respondents to both the World Business Environment Survey and the Africa Competitiveness Survey 2000/01 concur in identifying the poor delivery of infrastructure services as the key constraint to competitiveness (figure 6.2). 6.37 The following sections review the performance and status of infrastructure services-air transport, roads, railways, ports, power and water-as well as of financial services. They discuss recent proposals for reform and suggest a number of policy actions to improve their effectiveness for investors and exporters. 100 Air transport 6.38 Air transport is operating well in a liberalized environment. Kenya has three international airports, Nairobi's Jomo Kenyatta Figure 6.2: General Constraints to Enterprises International Airport, (percent of enterprises rating constraint "major' or "moderate" as opposed to Mombasa's Moi, and the "no obstacle" or "minor" Eldoret Airport, as well as a number of domestic airports - ! ; l . i 3 and over 300 airstrips Co.I i ; _2 ; I throughout the country. ...n...d.. . i...l.j...j._ N airobi's international Nlit -bi Iiy . ....................... airport serves more than 30 T d,.Su.d- . . . airlines providing scheduled . ! =. . . ! . ! services to cities in Asia, ; Europe, and Africa. In . ....... addition to passenger E. M| services, it has air cargo handling facilities, including 0 K.7yo chilling facilities to store cut u t __1 flowers and fresh fruits and Source: World Business Environment Survey, World Bank Institute. vegetables bound for Europe. Kenya Airways was privatized in 1996 by means of a strategic partnership with KLM. It is now profitable, and is becoming one of the market leaders in Africa. Air transport sustains the tourist industry-and it has been instrumental to the development of a first class horticulture industry. However, the civil aviation infrastructure has not kept pace with the quality of the air transport services. 6.39 Recent institutional changes are positive. In October 2002, the government set up the Civil Aviation Authority, an autonomous body that is responsible for regulating aviation activities (including air traffic control). The Kenya Airports Authority, a public enterprise, is in charge of managing of airports, including their safety and security. The new government has removed airport authority from the Office of the President, and put it in the Ministry of Transport and Telecommunications. This may be the first step towards privatization-the airports authority was once included on the list of enterprises to be privatized. Current legislation (Kenya Airport Authority Act and the Kenya Civil Aviation Authority Act) allows for commercial activities at the airports (for example, aircraft landing services, and cargo handling). New legislation will be needed to introduce private sector management of the airports or concessions. 6.40 Costs for airport users are higher than elsewhere. The fees charged for, landing at Nairobi's airport by the Kenya Airports Authority are much higher than at comparable airports, such as Johannesburg. The authority charges every vehicle entering the airport zone, including the cargo support areas-which is highly unusual. On the cargo side, operations are less constrained. The larger horticultural exporters now use full load dedicated charter flights, which transport around 80 percent of all flower exports. They also control their own ground-handling operations. 6.41 The immediate challenge is for the Kenya Airports Authority to improve safety and security in the airports. Nairobi's status as the major airline hub in East Africa brings a great deal of business to the country. Donor organizations, multinational firms, and others site their 101 regional offices in Nairobi. If Addis Ababa or Dar es Salaam were to overtake Nairobi as the dominant hub in the region, this would be bound to affect decisions of these groups. However, because of security concerns, the airport has only Federal Aviation Authority security class two status, meaning that there are no flights to the U.S. Reaching class I status is of major competitive significance to Kenya Airways, since Ethiopian Airlines has recently started direct flights to the U.S. In addition, Air Tanzania now has a strategic alliance with South African Airlines, which is likely to increase competition from the Dar es Salaam hub. Recommendations: * Review the fees charged at Nairobi's airport, as these are higher than at comparable airports. Take steps in the short term to ease congestion in the passenger terminal building, and in the long term to increase capacity to handle passenger traffic and benefit from commercial opportunities. * Introduce legislation to allow the private sector to participate in managing the airports (or concession). * Improve airport safety and security. Aim at obtaining the Federal Aviation Authority class 1 allowing direct flights to the U.S. Roads 6.42 Kenya has developed a dense road network in the highly-populated areas, and some level of access throughout the country. Kenya has a road network of about 100,000 kilometers, of which 8,800 kilometers are paved (up from 1,800 kilometers upon independence). Very few Kenyans live more than half a day's walk from the nearest road. On the northern corridor, served by both road and rail, road transport carries around 75 percent of the freight traffic, and almost all the passenger traffic. The road transport industry is competitive, with rates set by the market. 6.43 While network coverage is good, the quality of roads has deteriorated dramatically. The costs, delays, and uncertainties created by a failing road infrastructure affect businesses badly, particularly those that handle highly perishable products and face tight export deadlines, such as the horticulture industry. Operators report that truck maintenance may absorb up to 8-10 percent of total overhead costs. Road quality deteriorated steadily during the 1980s, and then collapsed during the 1990s. Contributing factors include the El Nifno floods of 1997, which washed away entire sections of crumbling roads, and the decline in donor funding, which was not fully offset by increased allocations for road maintenance and rehabilitation from domestic resources. In addition, allocation of available funds has been poor. Much went to maintain secondary unpaved roads, instead of to the roads with the heaviest traffic, both urban and interurban roads. Corruption has resulted in award of contracts to incompetent contractors and poor quality road works. In a 2001 survey on bribery, Transparency International reported that the Ministry of Public Works topped the list of public services in average size of bribe paid, at Ksh 37,506 (Transparency International, 2001). Requests for bribes were encountered in 83.3 percent of the dealings with that ministry, according to respondents. 6.44 However, the recent road levy fund initiative has succeeded in slowing the deterioration of the road network. The road levy fund was established in 1994, funded by a levy on fuel and by transit tolls levied on trucks passing through Kenya. The levy fund financed a major program of patching potholes, which has removed some of the worst dangers to vehicles 102 on the main road network. In addition, constituency funds provided by the levy fund have reportedly been used to improve rural roads. In many districts, the rural roads are now receiving their first funding for many years. Access to transportation services for rural communities is already improving. The levy fund currently raises around US$120 million per year, which is sufficient to fund the regular maintenance (requiring around US$110 million per year), but inadequate to undertake major repairs and improvements."° In the year ending June 2002, 55 percent of the levy fund went for highways and main roads, 17 percent was allocated for district roads, 11 percent was given to local government for care of district roads, 14 percent was allocated to constituencies, and the rest funded the operations of the road board. 6.45 Around 50 percent of the fuel levy is generated in urban areas, and yet no funding is specifically allocated for maintenance of urban roads. This is both inefficient and inequitable and has a particularly adverse impact on private businesses. Also, only 33 percent of the total revenue derives from heavy commercial vehicles, and yet they are reckoned to be the primary cause of severe road damage. Local heavy commercial vehicles are charged only 50 percent of the rate per kilometer charged for transit vehicles. As long as the revenue actually went into road maintenance, the private sector would probably be willing to pay reasonable charges. Currently, the revenue from vehicle license fees does not go to the levy fund. Actual collections are around US$10 million, only 40 percent of expected collections. This revenue should be added to the levy fund. Improving collections would add significantly to total funds. 6.46 Significant institutional reforms have begun. The government in 2000 established the Kenya Roads Board to be responsible for overseeing the management of the national road network. The roads board became fully operational in 2002 and has taken over the management of the levy fund. Private sector representatives have majority representation on the board. Similarly, the district road committees have the responsibility for minor roads. To deal with the rural roads crisis, a new strategy, Roads 2000, has been launched. It focuses on partially rehabilitating and selectively improving a large number of rural roads, with the aim of bringing them up to a standard which can be maintained and of improving access during the rainy season. It also emphasizes the use of labor-based techniques, which have the added benefit of generating income earning opportunities for local people. Recommendations 6.47 In spite of these recent positive developments, much is needed to continue the reform agenda: * Complete the ongoing survey of the actual condition of the road network. A thorough road condition survey started in June 2001 and is expected to be completed by the end of 2003. * Reduce the audit backlog for the road levy fund and improve public information on the use of the levy. Charges for heavy vehicles could possibly be increased, the 110 Experts have estimated that it would require additional funding of around US$1 billion to bring Kenya's main road network up to a standard where it could be kept in good condition by regular maintenance. BKS Consulting, in its roads concessioning study, estimates the backlog for the classified road network to be higher, at US$1.2 billion, of which US$336 million would be needed for the northem corridor alone. 103 vehicle license collections improved, and the levy fund coverage of urban roads reviewed. * Establish a new road safety authority. With 2,800 people killed (40 percent of whom are vehicle passengers) and 9,500 seriously injured on the roads each year, road safety is a major problem in Kenya. Enforcement of traffic regulations is poor. The new road safety authority is expected to put forward a coherent and coordinated road safety program. * Formulate and implement a longer-term road sector strategy. The last strategic plan for the sector covered 1997-2001. The European Union is currently funding a strategy to guide operations in the sector for a period of ten years. A final report is expected before the end of 2003. Kenya also lacks an overall transport policy, of which the road sector strategy should form a part, and with which it must be compatible. Consultations on the recommendations of the new road sector strategy should be undertaken and a timetable for the government to announce its firm 10- year policy set. * Decide on institutional responsibilities below the Kenya Roads Board. While the roads board oversees the whole network, the actual awarding and supervision of contracts is undertaken by various implementation agencies. The central government, through its roads department, is responsible for the main network, while the district road committees are supposed to look after district roads. The Kenya Wildlife Service takes care of the roads within the national parks, but receives no funding for this out of the levy fund. However, problems with this structure are already apparent-in particular the district approach is not appropriate for the major towns. A proposal under discussion is the agency model, where the central government would cease to have any involvement in implementation. A Kenya highways agency would be responsible for the main road network and a separate rural roads agency would implement Roads 2000."' Nairobi itself probably requires its own separate agency dealing with roads. Many countries have faced similar institutional problems that Kenya faces and most have moved to this agency model. Once the roads strategy is adopted, detailed work on implementation arrangements below the Kenya Roads Board should be conducted, possibly on the basis of the agency model and on longer-term performance-based maintenance contracts. * Accelerate preparations for the concessioning of major roads. There is a broad consensus that improving the northern corridor road is the top priority, since it is the single most important road link for business activity in Kenya. The first phase of the preparations, the Kenya road concessioning assessment, was completed in 2002. The assessment proposed that the northern corridor road from Mombasa to Malaba (922 kilometers) be concessioned on the basis of conventional tolls. It also proposed that a further 3,792 kilometers of main roads with sufficient traffic (more than 500 vehicles per day) be concessioned on the basis of shadow tolls. The draft final report on road concessioning was completed in May 2003 and discussed at a stakeholders workshop in July, leading to a firm decision to move ahead. The government now needs to move forward quickly with the invitations to bid. This agency approach was included in the interim PRSP. It is hoped that the road strategy study will assist in identifying an appropriate institutional structure below the Kenya Roads Board. 104 Railways 6.48 Kenya railways services have greatly deteriorated. Kenya Railway Corporation, a parastatal, operates Kenya's three single track main lines."2 Kenya Railways is financially troubled and is constrained by inadequate assets and a heavy wage bill due to overstaffing. In the early 1970s, Kenya Railways carried the dominant share of freight traffic between Mombasa and Nairobi, and almost all freight traffic into Uganda. It now carries around 20 percent of the Mombasa-Nairobi freight traffic, and about 22 percent of the containers moving in and out of Mombasa port. The main line is operating at around 50 percent of its capacity. Kenya Railways has been dogged by political interference, increased competition from an aggressive road transport sector, insufficient funding to replace assets, and its own inability to provide the level of service demanded.'"3 Its prices for moving containers can be up to double those charged by road transport. Nevertheless, Kenya Railways remains a potentially useful asset. If it could move containers in and out of Mombasa port quickly, reliably, and cheaply, then it would assist the port greatly in improving the efficiency of its container handling. Similarly, if it could offer a guaranteed overnight service for container movements between Nairobi and Mombasa, then some of the pressure on the main road could be removed. In 1997 the government announced the decision to privatize Kenya Railways. A study to discuss options recommended involving the private sector through a concession arrangement. 6.49 The current management has been able to partially, reverse the decline. For example, during 1997-2001 the freight ton-kilometer improved from 1.07 billion to 1.6 billion, operating costs were reduced, and the U.S. dollar cost per traffic unit declined from 0.049 cents to 0.038 cents. Employment was reduced from over 11,000 in 1997 to the current 10,000, and a further 4,000 employees are to be retrenched by the end of 2003. Kenya Railways has contracted General Electric to maintain 35 mainline locomotives, but has not been able to adequately fund maintenance of its other locomotives and its wagon fleet. Therefore, it is still unable to provide a fully effective service overall. Box 6.2: How One Large Ril User Created its Own Solution-.' Magadi Soda, a private company, exports 300,000 tons of soda ash per year from'itsplant at Lake Magadi," by rail to its dedicated terminal at Mombasa. The viability of, this business 'dlepeiids totally:on 'regularj reliable, low-cost rail transport to the port. In the mid-1990s, Magadi Soda found that its own profitability was at risk, because Kenya Railway's tariffs were high, its services-were poor, and its capacity was' inadequate Magadi Soda then suggested and implemented-a conrcessioning of the Kouza-Magadi line: to Magadi Railway Company (a subsidiary of Magadi Soda). It now runs its own dedicated service, both on its own 146 kilometer branch line, and theri-'onward using the Kenya Railways main line to Mombasa. It leases Kenya Railways'locomotives and wagons-and it'pays a track fee for the use of the main line. Magadi Soda claims that this arrangement has reduced-its,transport costs by 20 percent, and .allowed it to increase exports from around 220,000 tons ;to 300,000 tons,;while at the same time reducing the manpower required for the service from 212 to 92. This is perhaps a small illustration of what could be achieved thr6ugh broader participation of the private sector in providing railway services in-Kenya. 112 These are the main northern corridor lines from Mombasa to Malaba on the Ugandan border (1083 kilometers); the link from Nakuru to Kisumu on Lake Victoria (217 kilometers); and a small branch line from Nairobi to Thika (approximately 60 kilometers). Apart from four trains per week between Nairobi and Mombasa, plus a rudimentary commuter service, Kenya Railways providcs freight services only. South African Railways provides on a lease-hire basis ten 1,200-ton haulage capacity locomotives for moving cargo between Nairobi and Mombasa. 113 Safety is also poor, with the most recent published Kenya Railways annual report reporting 18 collisions, 218 derailments, and 82 deaths in railway accidents. 105 6.50 In principle, the way forward has been decided-the previous government had approved the privatization of Kenya Railways by means of a long-term concession covering passenger and cargo operations. The concession fee plus the sale of surplus assets would service the existing debts of Kenya Railways. However, before privatization, a new legal and regulatory framework needs to be put in place to allow the introduction of private sector participation in the railways. The International Finance Corporation (IFC) has been acting as the Government's transaction advisor. The first phase of its work is complete. The second 12-month phase would involve detailed design of the concession and support for the transaction. Recommendations * Complete the concessioning of the Kenya Railways. Ports 6.51 Ports are perhaps Kenya's single most important infrastructure constraint. The Mombasa port serves the whole of Kenya and it is also the port for the northern corridor, and the rail and road link to the land-locked countries of Uganda, Rwanda, and Burundi.' 14 It also serves southern Sudan, eastern Tanzania, and eastern Democratic Republic of Congo. Uganda accounts for around 80 percent of this transit traffic. Mombasa's main competitor, particularly for the transit business, is Dar es Salaam, which is the port for the central corridor. This competition has increased significantly in recent years, with Tanzania Railways having already won much of the Burundi market and a substantial part of the Rwanda market. It is now actively pursuing the Uganda market. The port is run by Kenya Ports Authority, a parastatal established under the Kenya Ports Authority Act, which also owns and manages inland container depots at Nairobi, Kisumu, and Eldoret.' 15 Current legislation allows for the private sector to be engaged. A private international firm manages and operates the container terminal in Mombasa. For many years, the port of Mombasa has suffered from aging equipment, a lack of personnel with appropriate skills, poor management, overstaffmg, corruption, and political interference. Port users complain of high port charges and poor levels of service.'16 The Kenya Ports Authority employs 6,100 people, which is 2,000-3,000 more than it needs. Respondents to a Transparency International survey conducted in 2001 stated that they were asked for bribes in 75 percent of their dealings with the port authority, and paid an average of Ksh 9,700 in bribes (Transparency International, 2001). 6.52 Mombasa's container productivity is reckoned to be between a third and a half of accepted international norms. Because of the limitations of the aging container handling equipment, 20 percent of containers have to be unloaded by ship's gear, which is inefficient and costly. While all major container ports operate computer-based systems to track and manage 114 Mombasa is Kenya's main seaport with an annual capacity of 22 million tons, 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 of about 8.1 million tones, of which 72 percent are imports. 1'5 Note that the port of Kisumu on Lake Victoria, is operated by Kenya Railways, and is dealt with in the section on rail transport. The inland container depot at Nairobi is currently operating at around 20 percent of capacity. The depot at Kisumu is even less utilized, and the depot at Eldoret has never opened to traffic. 116 For a recent single shipment from Felixstowe to Mombasa, the charge for unloading at Mombasa was around six times the charge for loading at Felixstowe. 106 container movements, Mombasa still operates a manual card system. Mombasa has a regular service from several shipping lines direct from Europe and from Asia. Most operate second generation vessels, with capacities of 1,500 containers, since the port can only accommodate ships carrying around 600 containers. Global hub ports can now accommodate ships carrying over 6,500 containers. While global container traffic doubled between 1990 and 1998, the container capacity of the port of Mombasa failed to keep up. 6.53 But improvements have been made. Under new management that took charge in 1999, performance and service quality have improved. The average container dwell time is now down to around 10 days, a considerable improvement over the 22-day average of the mid-1990s. Port services are available now seven days per week, and officers can be found after 5:00 p.m. The ports authority is in the process of introducing an electronic data interchange system, accessible by customers, to further improve service levels (table 6.6 shows performance indicators). Table 6-4: The Port of Mombasa: Performance Indicators 1998 1999 2000 2001 Total traffic handled, thousands of deadweight tons 8,561 8,188 9,126 10,600 Total containers handled, thousands of twenty-foot equivalent units 248.5 232.4 236.9 290.5 Total transit traffic, thousands of deadweight tons 1,126 1,310 1,454 2,117 Ship arrivals 960 979 991 1,111 Average waiting days per ship 3.74 3.38 3.64 2.99 Average deadweight ton per ship per working day 1,614 1,815 2,429 2,967 Source: Kenya Ports Authority 6.54 The ports authority has licensed four stevedoring companies to operate in competition with each other and it has licensed Bulk Grain Handlers to run their own dedicated berth terminal, linked to storage facilities located just outside the port itself. The ports authority intends to grant 33-year leases to Magadi Soda and Bamburi Cement at their dedicated terminal facilities at the port. 6.55 In early 2000, the government endorsed the conversion of Kenya Ports Authority into a landlord port authority, as advised in the strategic plan and way forward of the board of the Kenya Ports Authority. Restructuring the ports authority into a landlord port authority- which will require new legislation-will bring Kenya into line with the most widely-used model for introducing private provision of services into port operations. This is the model now used by 25 of the world's top 30 container ports. Under this model, the port infrastructure (channels, locks, berths, and the like) plus the port superstructure (such as surfacing, sheds, and fences) will remain under public ownership through the authority. Also, regulatory functions remain with the authority (such as, licensing, vessel traffic management, and establishment of safety standards). But private operators provide user services in a competitive environment (pilotage, towage, berthing, supplies, cargo handling, storage, repair, security, and the like). The govemment also decided that the container terminal will be transferred to private operators by means of a long- term concession. The container terminals that are currently operated by the authority would be privatized, probably in conjunction with the privatization of Kenya Railways. Their operation would seem to be a closer fit with the railways than with the Mombasa port. 6.56 Problems with custom clearances severely reduce the efficiency of handling cargo. The management of the authority estimates that of the ten-day average container dwell time at the port, around six days can be accounted for by delays in clearances and paperwork. If the ports authority is to achieve its objective of reducing the dwell time down to two days, it must speed the clearance process. Depending on the type of cargo, as many as seven different specialist 107 control agencies can be involved in issuing clearances. All processes are paper-based. The system opens avenues for bribery by giving considerable discretion to the individual officer. The complexity and discretion involved in the clearances process adds significantly to the costs, delays, and uncertainties of doing business in Kenya, particularly for those businesses dependent on imported inputs and those working to tight supply deadlines. While the reduction in the number of tariff bands has simplified valuations, the processing of import declarations for customs clearance is not computerized. Kenya Ports Authority now plans a one-stop center to house all clearance functions, which should reduce delays. It also plans to make Mombasa a paperless port. But without radical reform of all the control processes, backed by political will, it is unlikely that improvements can be achieved. Recommendations: * Introduce the appropriate regulatory framework to allow the conversion of Kenya Ports Authority into a landlord port authority. Introduce private provision and competition into all services. The strategic options study for container terminal operations should be accelerated to include full coverage of the options concerning a possible second terminal at the port. * Undertake a major reform project on all clearances affecting the passage of goods through the ports. This should be aimed at minimizing discretion, reducing time, and improving efficiency. * Improve and streamline customs procedures. Assessing the time and costs involved in import and export procedures and implementing recommendations to streamline the system would help. Reducing the scope for discretion and rent seeking is important. Energy 6.57 Kenya has substantial energy resources. These include hydropower, geothermal, solar, wind and biomass. Biomass (mainly wood fuels) accounts for about 70 percent of the total energy consumption, electricity for 9 percent, and petroleum products for the remaining 21 percent.117 The power sector has undergone some restructuring. Kenya Electricity Generating Company (KenGen), a public corporation launched in 1997, provides 75 percent of power generated in the country. The Kenya Power and Lighting Company (KPLC), a company with private-public ownership structure, maintains a monopoly over the distribution and transmission of energy. Power outages and brownouts have become increasingly common due to drought and constant breakdowns of aging and poorly maintained equipment. Renewable energy sources remain largely untapped. The percentage of the population with access to electricity remains around 8 percent. Users with that require uninterrupted power supplies are forced to invest in expensive 100 percent back-up generators. System losses have been increasing, from 16.4 percent in 1997 to 21.3 percent in 2001. Bill collection is a continuing problem, with receivables up from 79 days of sales in 1999 to 148 in 2001. Theft of electricity is said to be widespread. 117 It also relies on imports of both crude and refined petroleum products-accounting for about 25-30 percent of the country's total import bill-through the Kenya Petroleum Refineries Limited. 108 6.58 Industrial and commercial customers face high tariffs and poor quality services. The average industrial price of electrical power in Kenya, expressed in U.S. cents per kilowatt, is presently around 6.8 cents (down from 13 cents in 2000). This is about the same as in Uganda, but high compared to 3 cents in Zambia, 2.5 cents in Egypt, and 2.3 cents in South Africa. There are three main reasons for the high prices. First, the stop-gap purchasing of power from the four private sector independent power producers, which began during the drought, is still continuing at high prices. Second, a 1999 power purchase agreement, between the KPLC and KenGen, which set a flat rate irrespective of the plant where energy was generated, has resulted in extremely high costs of energy bought by the KPLC from KenGen.118 Third, operational weaknesses at KPLC, including high costs and overstafftng contribute to high costs. 6.59 Recent reforms have separated key functions in the power sector. The sector is regulated by the Electric Power Act of 1997. During the past decade, generation has been separated from distribution and supply. Operations, policy, and regulation also have been separated. While the Ministry of Energy deals with policy, the electricity regulatory board handles regulation (setting and reviewing tariffs and approving power purchase contracts and service contracts). The previous government planned for a sale of assets of the KPLC and KenGen through flotation of the KPLC's remaining shares and an initial public offering of KenGen's shares (this to be pursued only after the remaining generation plant is completed at the end of 2003).19 However, the licenses under which the KPLC operates (and which grant the monopoly) are outmoded, and must be reviewed before privatization. With financial assistance from the Public-Private Infrastructure Advisory Facility supported by the World Bank the government has commissioned a study to discuss various options for moving towards wholesale competition, where distribution companies buy from competing suppliers. After a suitable period of consultation about the options, the government should carry out any required restructuring prior to the final move towards private service provision and competition. The government should also consider revising the existing design and structure of energy tariffs, taking into account the recommendations of a recently completed study.'20 Recommendations * Review the existing tariff regime and the methodology for setting tariffs. * Base renewals of current supply contracts with independent power producers on independent expert confirmation that these are still required to meet system needs. If renewed, base contracts on a new tariff design that is more favorable to consumers. * Decide on and move towards implementation of the chosen option for private sector participation in the power sector. 118 KenGen has been selling energy to the KPLC under an interim power purchase agreement originally signed in 1999 and renewed in 2002. Tariffs are established to cover operating costs, loan servicing, and other loan covenants for investments in new projects. 119 The KPLC and KenGen are constituted under the companies act, and sale of their shares would not require an act of legislation. The Electricity Act of 1997 does not prevent restructuring. 120 This is the policy of a national user tariff, meaning that any customer with similar consumption characteristics faces the same tariffs, regardless of geographical location. 109 Water Resources and Services 6.60 The problems affecting water supply are becoming a serious constraint to economic growth. Water is a fundamental input for agriculture, energy, livestock, manufacturing, tourism and health sectors. Kenya is classified by the United Nations as a chronically water-scarce country. Per capita availability currently stands at 647 cubic meters, compared with 2,940 cubic meters in Tanzania and 2,696 cubic meters in Uganda. Water is scarce because of the limited natural endowment, the increase in population, a decline in public expenditure on developing water resources, and neglect of the management of the resource base which has led to serious degradation. Yet, water is neither treated, developed, or managed as a scarce resource. Loss of forest cover, estimated at 6,000-9,000 hectares per year, is a severe problem. A number of cities still discharge raw or partially-treated sewage. Controls on industrial effluents are inadequately enforced.'2' Overall, a very conservative and limited estimate suggests that poor water resource management costs Kenya around US$48 million per year, or 0.6 percent of GDP. These weaknesses affect almost every sector of the economy. For example, about 72 percent of the nation's electrical power comes from hydro resources. Vital horticultural products for export depend crucially on water. These weaknesses are also contributing to rural poverty. By 2010, total demand is projected to be almost three times the demand in 1990. In parallel, expenditures on water resource management have been declining (they fell by 46 percent between 1996 and 2000), with recurrent costs consuming about 92 percent of expenditures. Although only 15 percent of the yield of renewable fresh water resources has been developed, new sources have not been developed to keep pace with growing demand. Water storage has also not kept pace; storage per capita declined from 11.3 cubic meters in 1969 to 4.5 cubic meters in 1999. 6.61 The framework for water resources management is adequate for today's needs. Water is allocated through permits, and the system has become ineffective. Theft is common, groundwater permits are routinely granted through bribes, and reported conflicts over water access is growing and becoming widespread. In Kenya, conflicts over water are common (for example, water use conflicts resulted in the deaths of over 100 people in the Tana District in November 2002). Hydrological information underpinning the permit system is inadequate. 6.62 Although past investments have resulted in good coverage of water supply, the services are often poor. About 65 percent of the population has access to a water service. The service is, however, of poor quality and not responsive to consumer demand. While all 103 gazetted towns have some services, most low-income households live in informal settlements within urban areas and do not receive services from water and sewerage utilities. Only 46 percent of rural dwellers have access to clean water, and only 40 percent have access to sanitation facilities, mainly pit latrines. Self-help groups are widespread, operating 355 piped water supply systems and around 10,000 point sources. 6.63 Underinvestment in maintenance has resulted in the collapse of the water and sewerage infrastructure. Even though little is being spent on improvements, tariffs in Kenya 121 The resulting hydrological, ecological and economic consequences are significant. First, discharges of untreated effluents are polluting supplies needed for drinking, energy generation, livestock, industry, and irrigation. Second, they are causing irreversible damage to an already stressed resource. Third, they are undermining investments in urban water supply, irrigation, and hydropower. Finally; they are affecting downstream freshwater, coastal, and marine resources and communities-often the poor-who depend on these resources. 110 are not particularly low. The typical tariff of 40 U.S. cents per cubic meter compares with 27 cents in Ghana, 56 cents in Senegal and 73 cents in Uganda. Low-income users who have to complement the poor public service with altemative sources such as kiosks, tanker trucks, and other small independent providers pay well above this average. Large industrial users complain of high tariffs and poor service. The industrial charge for water in Mombasa is said to be higher than in some desert Middle Eastern cities. In addition, neglect of water resource management issues in urban water and sewerage services has contributed to destruction (and in some cases, complete abandonment) of major investments. 6.64 The 2002 Water Act will create major institutional changes. First, it will separate water resources management from the supply of water and sewerage services. Second, it provides for the private provision of water and sewerage services under a new regulator. Third, it transfers water services operations and assets from the ministry to the water services boards. A new water resources management authority will have responsibility for managing all water resources. Under the authority, separate boards covering catchments and subcatchments will be established to support decentralized water resources planning and management and integration of the water users in decision making. For water services, a regulatory board for water and sewerage services will oversee all activities. The responsibility for ensuring service delivery will pass to area boards charged with this responsibility, licensed by the regulatory board. Apart from exceptional situations, these boards will contract out the actual supply of services within their areas to service providers, selected on a competitive basis. The transition to this new system will be managed by an interministerial water reform steering committee. Implementing the act will be a major undertaking, and the process has just begun. Recommendations * Treat water resources as a national priority concern. Give priority to water resources management and to provision of water and sanitation services in the government's "Strategy for Economic Recovery." * Finalize the economic sector work on water resource management and allocate resources to priority water resources management activities. * Approve an action plan and timetable for the full implementation of the detailed provisions of the Water Act 2002. The Ministry of Water Resources and the responsible steering committee should approve an action plan to implement the provision of the Water Act 2002 as soon as possible. Support for technical assistance may be sought to help implement the provisions of the act. * Discuss and implement the recommendations of the study regarding the private provision of water and sanitation services for greater Nairobi.'23 123 A draft report on private sector provision options for water and sanitation services in Nairobi was presented in January 2002 by Halcrow Consulting. Halcrow had examined the feasibility of providing a concession to a private operator (while ownership of assets would remain in the public domain), on the basis of ambitious improvements between 2001 and 2029 (for example, access to formal water supplies would increase from 42 percent of the population to 79 percent). The operation would be profitable but only on the basis of roughly doubling current tariffs. The report also identified an investment program of US$75 million over a 5 year period (or US$15 million per year), and proposes that all capital expenditures be financed by the public sector, with the support of donors, for the first five years of the lease. For the second five years, the utility itself should be able to service debts and also finance capital expenditure internally. A new independent asset holding company would own the assets, and supervise the lease contract. 111 Financial services 6.65 According to the World Business Environment Survey of 2001 and again by the investment climate survey carried out in 2003 by RPED and the Kenya Institute for Public Policy Research, sources of finance for firms in Kenya do not differ much from those of other countries in Africa. Retained earnings are the most important source, followed by commercial banks, and equity. Respondents to the survey rate give the highest rating to banks as a source of finance. However, when asked what is the major obstacle in firm financing, 90 percent of firms say that it is the high cost of credit. Table 6-5: Sources of Finance for Firms (percent firms rating source as most important) Kenya Tanzania Uganda Ghana Senegal South Africa Retained earnings 45.5 47.0 35.1 38.7 27.9 58.3 Equity 8.9 13.3 9.9 7.6 12.4 9.1 Commercial banks 18.0 9.6 10.5 2.5 6.5 15.7 Investment funds - 5.4 13.3 10.5 5.9 0.8 2.5 Foreign banks - 4.5 4.8 6.8 1.7 2.4 1.7 Family, friends 0.9 9.6 11.0 2.5 12.1 0.8 Money lenders 0.9 6.0 3.0 0.0 3.2 0.8 Supplier credit 4.4 6.0 7.4 3.4 4.8 3.3 Leasing 0.9 1.2 0.7 0.8 1.6 0.0 Judicial syste'm 43 15 32 39 45 Source: Batra and others, 2002. 6.66 In Kenya,, lending rates have fallen significantly but are still relatively high (in January 2003 nonpriority customers were-charged around 14 percent, or 10 percent in real terms). Interest rate spreads are also very high (around 8-12 percent). Credit is directed at low risk borrowers, with risky borroWers like manufacturing enterprises and farmers finding it almost impossible to raise long-term credit through commercial channels. 6.67 As discussed in chapter 1, the large -spreads are traceable to several factors. First, the banking sector is oligopolistic. Second, they reflect the heavy burden of nonperforming loans. Third, the weak information base on -borrowers and the low capacity to assess risk affects the efficiency of banking operations. Fourth, the cumbersome legal process hampers the recovery of collateral, making banks even more risk averse.124 Fifth, land is the main collateral and a massive decline in real estate values in Nairobi (30-50 percent) since the mid-1990s has affected portfolio values and recovery rates.'25 Finally, in rural areas, ill-defined property rights and communal landholding, in some areas, hold back commercial lending. 124 Banks talk about the default culture that has developed in Kenya, institutionalized by bureaucratic and corrupt judicial procedures. While the Banking Act and the central bank of Kenya do not require commercial banks to insist on collateral as a condition for making loans, all banks do insist on almost all credit being secured. Unsecured credit is given to a few select customers on a confidential basis. The security policies reflect the central bank's prudential guidelines that treat all unsecured loans as bad debt regardless of the payment history. Thus, the earning potential of the borrower is not recognized under the guidelines as a basis for extending credit. See Kenya Institute for Public Policy Research and Analysis, (2001). 125 - The Land Office is partly to blame for the difficulties in enforcing property-based collateral. Apparently its titles have turned out in some cases to be legally questionable and titles have been obtained through corrupt means. 112 6.68 Access to bank credit is limited for enterprises except for multinational firms and large local companies. NGOs are almost entirely dependent on donor financing for their resources. Virtually no long-term credit is available for industry from the banking sector despite the large amount of liquidity placed in it by the govemment. However, a few large companies have been allowed to issue bonds (which have been well received), but lenders tend to hold on to the bonds so that an active market in such bonds has not developed. The equity market is tiny, and although the Capital Markets Authority is reputedly well managed and competent there is little appetite for new issues because of the poor economic climate and high risk (see box 6.3). Box 6.3: The Financial Sector in Kenya -The financial sector in Kenya has 46 co,"mrnercial banks, 5 noribank financial institutions, 4 building societies, and 47 foreigp exchange burea,us.- Qfthe banks, 9 have international affiliation,,6 hav'e public sector interest and 31 are small private banks. The top 9-banks dominate the industry'and account for over two-thirds of commercial bank .deposits; banks with public in,terest account-for 28 petcerit of system assets. Despite its depth, the Kefiyan banking niddutry has been badly affected by nonperforring loans, of which a large part is traceable to politically motivated lending arid another large'part to recession. The current;level of-provisioning'(about 35 percent of nonperforrhing loans) is low'by':interrational standards. The banks-with-'public sector interest, have chronic weaknesses, particularly the National- Bank of Kenya, which is a failed institution and should be restructured:and privatized. For: the Kenya,Commercial B a strategic pla,n needs to' be developed on the basis.of a c6mprehensive diag,nostic audit after which the bank-should be privatiied. , The,Nairobi stock exchange, established in' 1954, is the oldest and-largest capital market in East Africa, In recent 'years'its performance has beei disappointing and market capitalization has fallen from a-high of 43-percent of 'GDP in 1994 to 12 percent- of GDP in 200l.'2 The market is'also relatively illiquid, with a turnover .ratio of 3 percent, andL relatively -concentrated,' with the topsI 0 companies accounting for 67: percent- of total':market caitalization. ,The Nairobi stiock eixchangeIaccou,nis for o'er 90 percent of secondary market activity'; Transaction .costs 'are- relatively high and 'are a cause .of the low liq-uidity with' total' costs ranging betwe,en 2-4 p,ernt of * transaction,value. 'Kenya has allowednegotiabi6 commissions fro,Apr,il 2002. - ' :Kediya's niarket.with"government.debt.,represents 27 percent of GDP.; lt:has become niore 'active, -with the -.restructuring in 2001 of short-teringovernment debt into long-term treasury bonds. The:market is dominated by "I '3 year'bonds., The proportion of long'tireasury bonds (1'6 yeais) has increased from only l percent oftotal,debt in 1999.to 43 percent inV2002 (this-proportion is expectedto iricrease,to 70 percent by June 2003). Kenya has oly' 4 corporate bonds--prtly because of the underdevelopment .of the credit rating industry. h Kenya9hs made provisionsfor rating agencies'to'register'with the'Capital'Market Authority under-its guidelines -on 'theapproyal 'and r'gistration of credit rating agencies but onlyone- has so far registered. The Kenya Capital Markets Authority was created-in I991Uas,the overall regulatory and supervisory agency for the capital naiiket: The Capital Markets Authority (arniendheht),:Act of2000-0invested the authoriiy with 'extensive ;rule-malng- au,thority- and powers-including powers to .regulate the listing requirements 6fthe-Nairobi stock exchange and to, impose, fines.on brokers for noncompl-iance with -information reporting requirements. The -authority's oversight of the:ma,rket is backed by an'.aray of laws, regulations and guidelines.'2'50 percent share) 54.0 52.8 50.0 48.9 50.3 50.3 53.9 52.5 49.9 48.5 48.0 47.5 Local governmnent 51.7 52.1 50.8 49.6 57.9 67.8 71.8 74.9 77.1 78.8 80.7 82.3 Source: Central fleaum of Statistics Economic Survey. Statistical Abstract, various issues. 141 111.2. National Income Accounts Table 111.2.1: Gross Domestic Product by Sector at Current Prices, 1990-2001 (In Millions of Kenyan shillings) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Provisional Non-Monetary Economy 8,434 9,169 9,838 10,449 11,217 12,043 12,95 13,880 14,248 15,254 16,334 17,340 Forestry and fishing 1,317 1,426 1,507 1,626 1,735 1,730 1,799 1,861 1,941 2,020 2,314 2,530 Building and construction 1,816 1,853 2,028 2,063 2,098 2,356 2,431 2,492 2,528 2,600 2,667 3,136 Watercollection 923 981 1,062 1,127 1,200 1,274 1,354 1,438 1,518 1,612 1,830 1,955 Ownershipofdwellings 4,379 4,908 5,241 5,633 6,184 6,683 7,410 8,089 8,261 9,022 9,523 9,719 Monetary Economy 160,020 184,620 218,213 273,259 326,847 381,724 436,626 522,384 579,208 623,802 669,826 755,553 Agriculture 45,607 49,736 60,320 83,369 105,842 115,553 124,660 137,999 148,018 139,936 124,253 134,403 Forestry and fishing 2,800 3,371 3,712 4,439 5,069 5,309 5,844 6,783 7,062 7,550 8,702 9,706 Miningandquarrying 459 561 606 704 714 724 741 815 823 994 1,143 1,260 Manufacturing 19,748 23,348 24,615 28,394 36,155 38,911 47,758 54,607 66,006 79,121 88,715 96,969 Building and construction 7,536 9,542 11,592 13,104 14,856 15,984 17,583 18,771 21,405 24,470 26,466 30,025 Electricity and water 1,588 1,842 2,007 2,538 3.281 3,823 4,400 4,840 5,444 5,822 6,332 6,982 Trade, restaurants & hotels 18,953 22,667 30,342 38,413 48,016 64,760 82,895 109,805 123,453 138,031 162,391 194,611 Transport, storage & comm. 11,963 13,638 18,174 19,838 25,259 30,313 35,472 41,816 43,255 45,617 50,339 53,107 Finance & business services 13,734 17,309 21,627 27,963 40,313 46,768 55,719 68,747 75,010 76,078 69,750 75,731 Ownership ofdwellings 9,610 10,919 13,168 14,334 15,297 16,280 18,722 20,969 22,353 24,369 27,264 29,596 Domestic services 2,271 2,648 3,091 3,612 4,223 4,944 5,683 6,174 6,710 7,294 8,099 8,932 govermnent services 25,970 29,756 34,447 41,501 44,462 53,964 56,884 70,382 83,075 88,909 95,144 106,486 Other services 5,030 5,844 7,373 9,557 11,562 13,875 16,372 19,974 23,721 27,790 31,986 36,178 Less imputed bank service charges -5,250 -6,562 -12,861 -14,507 -28,202 -29,483 -36,108 -39,296 -47,127 -42,178 -30,758 -28,433 Total GDP at Factor Cost 168,454 193,789 228,051 283,708 338,065 393,767 449,621 536,264 593,456 639,056 686,159 772,893 Source: Central Bureau of Statistics, Economic Survey, Statistical Abstract, various issues. Table 111.2.2: Gross Domestic Product by Sector at 1982 Constant Prices, 1990-2001 (In Millions of Kenyan shillings) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Provisional Non-Monetary Economy 4,593 4,691 4,749 4,947 5,087 5,261 5,415 5,564 5,676 5,757 5,826 5,923 Forestryandfishing 657 672 686 702 715 738 751 772 781 792 800 821 Building and construction 1,459 1,488 1,509 1,527 1,558 1,578 1,598 1,618 1,619 1,620 1,629 1,643 Water collection 483 497 507 510 531 553 574 594 619 634 650 669 Ownershipofdwellings 1,994 2,034 2,047 2,207 2,284 2,392 2,492 2,580 2,657 2,710 2,747 2,791 Monetary Economy 79,880 81,539 81,896 81,909 84,404 88,542 92,736 94,914 96,577 97,945 97,630 98,774 Agriculture 23,841 23,579 22,697 21,770 22,386 23,466 24,507 24,752 25,122 25,426 24,896 25,196 Forestry and fishing 1,121 1,187 1,208 1,314 1,418 1,489 1,584 1,644 1,690 1,728 1,693 1,708 Mining and quanying 225 239 220 225 228 234 240 244 247 252 254 257 Manufacturing 11,207 11,633 11,772 11,984 12,212 12,688 13,153 13,408 13,597 13,732 13,540 13,649 Building and construction 2,686 2,586 2,444 2,232 2,261 2,347 2,429 2,476 2,508 2,530 2,492 2,479 Electricityandwater 874 919 902 910 930 945 974 1,014 1,039 1,054 1,011 1,026 Trade, restaurants & hotels 9,319 9,441 9,579 9,591 10,176 11,049 11,934 12,408 12,693 12,948 13,077 13,247 Transport, storage & comm. 4,995 5,182 5,272 5,314 5,474 5,703 5,932 6,048 6,118 6,202 6,329 6,522 Finance & business services 6,663 7,069 7,559 8,103 8,597 9,191 9,843 10,360 10,690 10,904 10,945 11,055 Ownership of dwellings 4,587 4,706 4,780 4,789 4,862 5,115 5,406 5,594 5,706 5,796 5,878 5,983 Domestic services 1,410 1,566 1,705 1,892 2,049 2,278 2,496 2,642 2,793 2,920 2,990 3,068 government services 12,914 13,382 13,709 13,996 14,206 14,462 14,696 14,858 14,975 15,078 15,182 15,287 Other services 2,719 2,822 2,890 2,914 2,988 3,176 3,367 3,438 3,500 3,570 3,588 3,624 Less: imputed bank services & charges -2,681 -2,772 -2,841 -3,126 -3,383 -3,604 -3,827 -3,972 -4,099 -4,195 -4,246 -4,326 Total GDP at Factor Cost 84,473 86,230 86,644 86,856 89,491 93,803 98,151 100,478 102,253 103,701 103,456 104,697 Source: Central Bureau of Statistics. 142 Table 111.2.3: Gross National Product by Expenditure at Current Prices, 1990-2001 (In millions of Kenyan shillings) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Provisional GDP at Factor Cost 168,454 193,789 228,051 283,708 338,065 393,767 449,621 536,264 593,456 639,056 686,159 772,893 Non-Monetawy 8,434 9,169 9,838 10,449 11,217 12,043 12,995 13,880 14,248 15,254 16,334 17,340 Monetary 160,020 184,620 218,213 273,259 326,847 381,724 436,626 522,384 579,208 623,802 669,826 755,553 Net Indirect Taxes 27,983 30,443 36,422 49,905 62,614 71,505 79,118 86,971 97,489 103,080 109,813 122,386 Indirect Taxes 27,985 30,444 36,423 49,906 62,636 71,526 79,119 87,002 97,539 103,199 110,013 122,486 Subsidies 2 1 1 1 21 21 1 31 50 119 200 100 GDP at Market Prices 196,436 224,232 264,473 333,613 400,679 465,272 528,740 623,235 690,945 742,135 795,972 895,279 Resource Gap 10,204 2,815 -246 -15,960 -12,584 27,542 22,695 45,922 52,877 42,968 75,635 80,164 Imports ofGNFS 61,390 63,327 69,042 118,958 135,641 180,139 195,155 220,769 224,772 232,233 287,067 314,377 Exports ofGNFS 51,186 60,512 69,288 134,918 148,225 152,596 172,459 174,846 171,895 189,265 211,433 234,213 Total Resources 206,640 227,046 264,227 317,653 388,095 492,814 551,435 669,158 743,823 785,103 871,607 975,443 Consumption 159,174 180,025 219,552 258,902 310,796 391,297 443,966 553,884 623,734 665,000 749,097 845,902 Public 36,620 37,606 41,475 48,307 60,719 69,057 84,523 100,712 113,568 125,943 139,159 150,430 Private 122,554 142,418 178,077 210,596 250,077 322,240 359,442 453,173 510,165 539,057 609,938 695,472 Statistical Discrepancy Gross Investment 47,467 47,022 44,675 58,750 77,299 101,517 107,469 115,273 120,089 120,103 122,510 129,540 Gross fixed capital formation 40,560 42,671 43,777 56,506 75,616 99,497 104,469 109,873 113,879 112,961 116,369 124,259 Public 19,125 19,149 19,353 24,387 36,103 36,659 39,636 41,862 41,707 41,139 44,113 45,126 Central government Private 21,436 23,521 24,424 32,118 39,513 62,838 64,834 68,011 72,172 71,822 72,255 79,133 Changes in stocks 6,906 4,351 898 2,245 1,683 2,020 3,000 5,400 6,210 7,142 6,142 5,282 Gross Domestic Savings 37,263 44,207 44,921 74,710 89,883 73,975 84,774 69,351 67,212 77,135 46,876 49,376 Net factor Income -10,179 -12,572 -12,493 -24,186 -21,902 -18,513 -12,610 -13,623 .10,468 -11,196 -10,140 -11,586 Net Private Transfers 3,848 3,971 2,200 8,533 8,250 20,994 33,124 31,321 31,556 45,644 61,788 54,901 Gross National Savings 30,932 35,606 34,627 59,058 76,231 76,457 105,288 87,049 88,300 111,583 98,524 92,691 GNP at Market Prices 186,257 211,660 251,980 309,427 378,777 446,759 516,130 609,612 680,477 730,939 785,833 883,693 Source: Central Bureau of Statistics. Table 111.2.4: Gross Fixed Capital Formation at Current Prices, 1990-2001 (In millions of Kenyan shillings) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Provisional Total Capital Formation 40,560 42,671 43,777 56,506 75,616 99,497 104,469 109,873 113,879 112,961 116,369 124,259 Agriculture and forestry 2,887 2,872 2,855 3,164 5,179 7,152 6,896 6,995 8,139 7,752 8,339 8,664 Mining and quarrying 313 283 412 294 279 715 741 877 972 1,082 1,087 1,094 Manufacturing 7,266 6,833 6,146 8,299 11,976 19,233 23,458 24,203 25,118 23,869 23,978 25,493 Construction 2,233 1,813 2,870 2,859 3,541 5,139 6,030 8,049 8,130 8,448 10,635 10,863 Electricity and water 3,466 5,081 4,186 4,663 2,994 6,160 7,837 6,983 8,527 8,358 9,031 8,640 Trade, restaurants & hotels 804 2,732 1,887 3,722 2,453 3,684 3,391 3,846 3,657 3,756 3,505 4,302 Transport and 6,430 8,413 9,029 15,942 25,834 24,253 23,814 25,097 25,265 25,620 24,383 26,579 communication Finance & business services 1,381 1,390 807 1,838 2,964 4,057 4,485 4,831 4,890 5,114 5,212 6,198 Ownership of dwellings 5,374 4,956 4,690 5,524 5,878 5,334 5,604 5,896 5,542 5,552 5,554 5,031 govemment services 8,948 7,409 9,352 7,630 11,474 19,951 18,813 19,474 19,113 18,640 19,359 21,411 Other services 1,457 888 1,541 2,570 3,044 3,818 3,400 3,622 4,527 4,770 5,284 5,985 Private Sector 21,436 23,521 24,424 32,118 39,513 62,838 64,834 68,011 72,172 71,822 72,255 79,133 Agriculture and forestry 2,380 2,704 2,526 2,884 4,771 6,744 6,423 6,441 7,712 7,326 7,930 8,172 Mining and quarrying 313 283 412 294 279 715 640 877 972 1,082 1,087 1,094 Manufacturing 6,965 6,573 5,997 8,024 11,227 18,089 20,847 22,197 24,244 23,470 23,601 24,123 Electricity and water 84 1,687 -289 309 2,507 2,957 1,798 2,704 3,244 4,902 6,659 6,202 Construction 1,910 1,263 3,417 3,854 2,143 5,526 7,152 6,364 7,168 5,828 7,825 3,516 Trade, restaurants and hotels 676 2,450 1,310 3,338 1,908 3,210 2,926 3,114 3,057 3,587 3,420 3,755 Transport and 3,538 3,719 5,974 6,473 8,982 16,205 16,099 15,701 15,086 14,056 10,734 17,689 communication Finance and business 669 526 -130 667 919 2,037 2,031 2,782 2,024 2,763 1,397 4,206 services Ownership ofdwellings 3,476 3,446 3,670 3,708 3,738 3,536 3,734 4,226 4,139 4,042 4,363 4,452 Other services 1,423 870 1,537 2,565 3,039 3,818 3,184 3,606 4,525 4,767 5,241 5,926 Public Sector 19,125 19,149 19,353 24,387 36,103 36,659 39,636 41,862 41,707 41,139 44,113 45,126 Source: Central Bureau of Statistics. 143 Ill3.1 Balance of Payments and International Integration Table 11L3.1: Balance of Payments, 1990-2001 (US$ millions) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Provisional Trade (net) -1,314 -901 -853 -503 -558 -742 -515 -884 -1,016 -924 -1,260 -1,295 Exports, fo.b. 997 1,055 1,013 1,103 1,484 1,924 2,083 2,060 2,012 1,755 1,773 - 1,881 Imports, fo.b. 2,311 1,956 1,866 1,606 2,042 2,666 2,598 2,944 3,028 2,679 3,033 3,176 Services (net) 830 778 820 788 759 149 98 90 122 298 245 261 Balanceongoodsandservices -484 -123 -34 285 201 -594 -417 -794 -894 -626 -1,015 -1,033 Income (net) -367 -372 -355 -360 -362 -320 -226 -172 -130 -173 -130 -148 Current transfers (net) 372 348 282 241 146 404 446 516 475 564 860 783 Private 167 144 68 147 147 409 433 497 476 566 769 694 Official 205 204 214 94 -1 4 13 19 0 -2 91 89 Current account balance -479 -147 -106 165 -15 -509 -196 -450 -549 -234 -284 -398 Excludingofficialtransfers -684 -351 -321 71 -14 -505 -209 -469 -549 -233 -375 486 Capital account (net) 106 97 114 65 82 111 112 63 79 63 63 69 Financial account 363 -166 -131 116 64 264 531 350 537 152 212 350 Investment assets and liabilities (net) 178 113 -146 24 -268 -5 43 -127 42 -285 -314 -206 Official, medium and long term 155 89 -131 45 -207 -61 -51 -199 -172 -305 -170 -284 Inflows 551 508 276 425 252 378 400 241 287 205 304 168 Program loans 111 117 9 9 0 49 3 Project loans 192 241 194 230 148 224 132 Defense loans 16 8 8 8 0 0 0 government guaranteed/parastatal 59 35 30 40 57 31 32 Outflows -396 419 407 -380 460 -439 -452 -440 460 -510 474 452 Commercial banks (net) 0 0 0 0 -17 23 88 3 80 21 -235 96 Private (net) 23 24 -16 -21 43 33 6 69 51 -1 91 -19 Short-term (net) and net errors and omissions 1/ 186 -280 15 92 332 268 489 477 578 437 527 556 Overall balance -10 -217 -123 346 131 -135 447 -37 66 -20 -8 21 Financing items 96 311 232 -274 -131 135 -447 37 -66 20 8 -21 Reserve assets (gross) 63 80 2 -292 -151 168 -397 67 5 -8 -106 -167 Use of Fund credit and loans to the Fund (net) 33 8 -83 -30 18 -39 -25 -67 -62 -60 2 -24 Change in arrears 0 223 313 49 499 6 -25 37 -79 87 -53 48 Rescheduling 0 0 0 0 501 0 0 0 70 0 166 122 1/ Includes underrecorded tourism eamings. Source: Kenyan Authorities and the IMF. 144 Tabic III 3.2: Exports and Imports of Nonfactor Services (USS millions) 1995 1996 1997 1998 1999 2000 2001 2002 Provisional Exports of nonfactor services 1,024 952 916 831 932 969 1,087 1,110 Transport 283 289 285 306 376 411 428 459 Travel 486 452 388 290 301 259 308 293 Other services: govemment 174 160 198 200 214 266 296 302 Other services: private 82 52 45 35 41 33 55 56 Imports of nonfactor services 876 854 826 709 634 724 825 859 Transport 431 416 339 309 236 342 373 381 Travel 145 167 198 190 165 131 143 148 Other services: government 143 142 118 62 65 59 62 63 Other services: private 157 129 171 148 167 192 248 268 (percentage change) Exports of nonfactor services -7.0 -3.8 -9.3 12.2 4.0 12.1 2.1 Transport 2.2 -1.4 7.2 23.0 9.3 4.1 7.2 Travel -7.0 -14.2 -25.2 3.7 -13.8 18.9 -5.0 Other services: govemment -8.0 24.0 0.9 7.1 24.3 11.4 2.0 Other services: private -37.3 -13.0 -21.9 17.1 -19.5 65.2 3.0 Imports ofnonfactor services -2.5 -3.3 -14.1 -10.6 14.3 14.0 4.1 Transport -3.5 -18.5 -8.9 -23.6 44.9 9.0 2.1 Travel 15.3 18.3 4.0 -13.0 .20.7 9.2 3.2 Other services: govemment -0.4 -17.4 -46.9 4.6 -9.6 4.7 2.0 Other services: private -17.9 32.9 -13.7 13.1 15.1 28.9 8.1 Source: IMF, Central Bank of Kenya and Ministry of Finance and Planning. Table IIL3.3: Trade in Goods 1979-84 1985-90 1991-96 1997-01 (as a percent of GDP) Kenya 57.3 52.0 66.0 60.4 Tanzania n.a. 41.7 55.9 39.2 Uganda 42.8 19.8 31.0 40.9 Mozambique 31.0 36.1 64.7 54.6 Cote d'lvoire 75.3 67.5 70.0 75.0 Ghana 42.2 38.7 53.9 90.3 Vietnam n.a. n.a. 72.4 98.4 Honduras 66.1 57.8 82.1 99.2 Sub-Saharan Africa 58.3 51.1 55.4 64.4 Low income 30.5 28.8 40.1 49.3 World 39.3 36.6 40.6 47.4 (annual change, percent points) Kenya -4.1 5.1 14.7 -1.6 Tanzania n.a. 12.0 13.4 -2.8 Uganda -38.1 -3.9 12.3 6.4 Mozambique -13.3 35.7 -2.5 31.4 Cote d'lvoire 2.9 -12.1 12.9 -5.9 Ghana -25.8 8.8 17.7 47.2 Vietnam n.a. n.a. 48.8 15.7 Honduras -20.9 16.0 32.1 2.2 Sub-Saharan Africa -3.1 4.9 9.5 9.9 Low income -3.5 1.7 10.9 6.5 World -1.1 2.4 5.7 2.8 Note: Trade in goods includes exports and imports of goods and nonfactor services. Source: World Bank. 145 Table 111.3.4: Merehandise Exports, 1990-2001 (Value and in percent of total exports) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Provisional (USS millions) Food and live animals 194 124 141 145 173 277 199 996 1,044 903 879 754 Maize. unmilled 18 4 0 0 0 16 35 1 2 5 0 0 Pineapples, canned 38 42 35 33 30 48 67 45 46 38 33 38 Beverages and tobacco 476 459 441 548 585 678 661 42 38 26 31 39 Coffee, unroasted 191 163 127 190 233 281 218 287 213 170 154 95 Tea 272 284 292 322 301 350 398 411 546 470 461 439 Crude materials, inedible 47 48 41 46 13.5 39 190 184 169 165 178 218 Sisalfiberandtow 16 13 11 12 12 11 14 12 11 9 8 9 Mineral fuels 169 241 198 173 105 108 140 181 165 137 127 161 Animal and vegetable oils and fats 2 2 4 6 25 38 35 37 40 31 16 17 Chemicals 34 68 57 77 89 143 129 128 122 105 88 81 Manufactured goods 140 171 144 230 224 298 290 283 220 172 162 176 Cement 11 13 15 22 29 31 45 39 24 18 18 13 Machineryandtransportequipment 5 6 6 9 15 28 15 7 17 15 S 10 Other exports -10 67 35 -3 96 120 263 -11 -31 -14 -111 -244 TotalDomesticExports 1,057 1,186 1,067 1,232 1,448 1,729 1,920 1,847 1,784 1,540 1,378 1,213 Nonoil Exports 888 945 868 1,059 1,343 1,621 1,780 1,666 1,620 1,403 1,251 1,051 Horticulture 139 134 129 135 148 207 239 234 247 251 278 270 Reexports 10 14 21 18 40 82 75 102 112 102 194 333 Food (excluding manufctured) 0 0 0 0 4 19 2 3 3 4 3 9 Machineryand uansportequipment 4 5 14 11 19 31 27 41 49 28 31 57 Total 1,068 1,200 1,088 1,250 1,488 1,811 1,995 1,949 1,896 1,642 1,572 1,546 (in percent Of total exports) Food and live animals 18.1 10.4 13.0 11.6 11.6 15.3 10.0 51.1 55.1 55.0 55.9 48.8 Maize, unmilled 1.7 0.3 0.0 0.0 0.0 0.9 1.8 0.0 0.1 0.3 0.0 0.0 Pineapples, canned 3.5 3.5 3.2 2.7 2.0 2.7 3.4 2.3 2.4 2.3 2.1 2.5 Beverages and tobacco 44.6 38.3 40.5 43.8 39.3 37.5 33.1 2.1 2.0 1.6 1.9 2.5 Coffee,unroasted 17.9 13.6 11.7 15.2 15.7 15.5 10.9 14.7 11.2 10.4 9.8 6.1 Tea 25.5 23.7 26.9 25.8 20.2 19.3 19.9 21.1 28.8 28.7 29.3 28.4 Crudematerials, inedible 4.4 4.0 3.8 3.7 9.1 2.2 9.5 9.4 8.9 10.0 11.3 14.1 Sisal fiber and tow 1.5 1.1 1.0 1.0 0.8 0.6 0.7 0.6 0.6 0.6 0.5 0.6 Mineral fuels 15.8 20.1 18.2 13.9 7.1 6.0 7.0 9.3 8.7 8.3 8.1 10.4 Animalandvegetableoilsandfats 0.2 0.2 0.4 0.5 1.7 2.1 1.7 1.9 2.1 1.9 1.0 1.1 Chemicals 3.2 5.6 5.3 6.2 6.0 7.9 6.4 6.6 6.4 6.4 5.6 5.2 Manufactued goods 13.1 14.2 13.2 18.4 15.1 16.5 14.5 14.5 11.6 10.5 10.3 11.4 Cement 1.0 1.1 1.4 1.8 2.0 1.7 2.2 2.0 1.3 1.1 1.1 0.8 Machinery and tansport equipment 0.5 0.5 0.5 0.7 1.0 1.5 0.7 0.4 0.9 0.9 0.5 0.7 Other exports -0.9 5.6 3.2 -0.3 6.5 6.6 13.2 -0.6 -1.6 40.9 -7.1 -15.8 Total Domestic Exports 99.1 98.9 98.1 98.5 97.3 95.5 96.2 94.8 94.1 93.8 87.7 78.5 Nonoil Exports 83.2 78.8 79.8 84.7 90.2 89.5 89.3 85.5 85.4 85.5 79.6 68.0 Horticulture 13.0 11.2 11.8 10.8 9.9 11.4 12.0 12.0 13.1 15.3 17.7 17.5 Reexports 0.9 1.1 1.9 1.5 2.7 4.5 3.8 5.2 5.9 6.2 12.3 21.5 Food (excluding manufactured) 0.0 0.0 0.0 0.0 0.3 1.1 0.1 0.2 0.2 0.2 0.2 0.6 Machinery and trnsport equipment 0.4 0.4 1.3 0.8 1.3 1.7 1.3 2.1 2.6 1.7 2.0 3.7 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Central Bureau of Statistics. 146 Table 111.3.5: Top Merchandise Exports 1090 1991-96 1997-2001 I 1980.90 I199-9 1997-2001 (USS millions) (as a share of IOta) exports) Tea (074 1) 233.4 339.3 388.9 26.7 28.4 29.5 Cut flowers (2927) 23.6 81.2 140.1 2.7 6.8 10.6 Vegetables, fr-esh or chilled (05459) 24.9 58.0 102.9 2.8 4.9 7.8 Coffee, whether or not roasted or freed of caffeine (071 1) 289.3 244.2 197.1 33.1 20.4 14.9 Outer- garnnents. women's, of textile fabrics (8439)1I/ 0.3 0.9 20.7 0.0 0.1 1.6 Fruits, fresh or dried (avocados, mangoes, gusavas) (0579) 7.9 14.5 20.3 0.9 1.2 1.5 Bovine &equine hides (othser than calf),rmw (21111) 4.8 4.0 13.1 0.6 0.3 1.0 Fish fillets, frozen (0344) ,7.4 40.7 41.4 0.8 3.4 3.1 Fruit and nuts, prepared or preserved (05899) 34.0 49.1 46.6 3.9 4.1 3.5 Outer garments, men's, of textile faLbrics (trousers, breeches, etc) (8423) 0.6 11.1 15.9 0.1 0.9 1.2 Fish, prepared or preserved, including caviar (037 1) n.a. 0.4 14.0 n.a. 0.0 1.1 Bulbs, tubers & rhizomes of flowering or of foliage (2926) 2/ 1.7 4.9 12.4 0.2 0.4 0.9 Inorganic chemic-als (neutral sodium carbonate) (52323) 12.6 19.0 18.8 1.4 1.6 1.4 Vegetables prepared/preserved otherwise than by vinegar (05659) 2.3 10.8 16.4 0.3 0.9 1.2 Tobacco, unosanufactured; wholly or partly stripped (1212) 0.9 3.8 10.5 0.1 0.3 0.8 Vegetable saps and extracts; pectic aubstances (29291) 16.6 24.5 14.4 1.9 2.1 1.1 Fish fillets, fresh or chilled (0343) .0.2 5.9 6.9 0.0 0.5 0.5 Pineapple juice (05854) 7.5 15.1 13.0 0.9 1.3 1.0 Sisal & other fibers of agaves family, raw or processed (2654) 15.9 14.0 8.9 1.8 1.2 0.7 Portland cement, cement fondue, slag cement etc. (6612) 8.1 13.3 11.5 0.9 1.1 0.9 Total Exports 874.5 1,195.6 1,319.9 100.0 100.0 100.0 Taiwan (China), Thailand, Trinidad & Tobago, Turkey. Tunisia, Uruguay and Venezuela. outer garments of wool or animal hair, cotton, man made fibers and other fibers. Excluding coats and jackets, suits & costumes, dresses, skirts, blouses, of textile fabrics. 2/ Live plants including trees, shrubs, bushes, etc. Source: UN COMTRADE Statistics, SITC-2 based on partners imports. Table 111.3.6: Exports of Manufactures 1980-90 1991-9 199'7-2001 1980.90 1991-96 1997-2001 1980.90 1991-96 1997.2001 (UJSS millions) (as a shore of total manufactured (as a share of total merchandise exports eports) Chemicals and related products (5) 19.7 33.9 27.6 19.7 19.2 15.7 2.3 2.8 2.1 Neutral sodium carbonate (52323) Il 12.6 19.0 18.8 12.6 10.7 10.7 1.4 1.6 1.4 Dyeing, tannsing and coloring materials (53) 3.7 3.9 3.1 3.7 2.2 1.8 0.4 0.3 0.2 Manufactured goods classified chiefly by material (6) 2/ 52.9 70.8 46.6 52.9 40.0 26.6 6.1 5.9 3.5 Portland cement, cement fondue and slag cement (6612) 8.1 13.3 1 1.5 8.1 7.5 6.6 0.9 1.1 0.9 Leather, leather manufactured and dressed fursmkin (61) 27.4 32.2 12.7 27.4 18.2 7.2 3.1 2.7 1.0 Leather of bovine cattle and equine leather (6114) 10.8 13.2 4.1 10.8 7.4 2.3 1.2 1.1 0.3 Goat and kid skin leather (61161) 10.0 10.7 6.4 10.0 6.0 3.6 1.1 0.9 0.5 Sheep and lamb skin leather (6115) 3.7 3.5 1.4 3.7 2.0 0.8 0.4 0.3 0.1 Cork and wood manufactures (excluding fismiture) (63) 1.8 4.3 6.2 L.8 2.4 3.5 0.2 0.4 0.5 Manufactures of metal (69) 0.6 0.9 3.2 0.6 0.5 1.8 0.1 0.1 0.2 Machinery and transport equipment (7) 13.2 21.2 32.0 13.1 12.0 18.2 1.5 1.8 2.4 Power generating machinery and equipment (71) 2.6 2.5 6.1 2.6 1.4 3.5 0.3 0.2 0.5 Motors &generators, direct current (7161) 0.0 0.1 1.4 0.0 0.1 0.8 0.0 0.0 0.1 Reaction engines (7144) 2.0 n.a. 0.9 2.0 n.a. 0.5 0.2 n.a. 0.1 Gas turbines, including turbo-propellers(7148) 0.2 0.5 1.8 0.2 0.3 1.0 0.0 0.0 0.1 Telecommunications & sound recording apparatus (76) 3/ 2.2 3.9 5.4 2.2 2.2 3.1 0.3 0.3 0.4 Electrical machinery, apparatus and appliances (77) 1.5 4.4 5.1 1.5 2.5 2.9 0.2 0.4 0.4 Parts of calculating machines, cash registers and automatic data 0.4 0.9 3.1 0.4 0.5 1.8 0.0 0.1 0.2 procesing machines (7599) Miscellaneous manufactured articles (8) 14.4 50.9 69.2 14.3 28.8 39.5 1.6 4.3 5.2 Articles of apparel and clothing accessories (84) 3.0 33.3 48.4 3.0 18.9 27.6 0.3 2.8 3.7 Outer garmnents, women's, of texile fabrics (8439)4/ 0.3 0.9 20.7 0.3 0.5 11.8 0.0 0.1 1.6 Outer garments, men's, of textile fabrics (trousers, breeches, 0.6 11.1 15.9 0.6 6.3 9.1 0.1 0.9 1.2 etc) (8423) Shirts, men's, of cotton (8441 1) 0.0 12.3 8.4 0.0 7.0 4.8 0.0 1.0 0.6 Unused postage, revenue and similar stamps (89283) n.a. 2.2 5.7 n.a. 1.3 3.3 n.a. 0.2 0.4 All Manufactures 5/ 100.1 176.7 175.3 100.0 100.0 100.0 11.4 14.8 13.3 Total Merchandise Exports 874.5 1,195.6 1,319.9 ______________ 100.0 100.0 100.0 I/ Excludes nonferrous metals. 2/ Classified under mIetailliC Salts and peroxysalts of inorganic acids" 3/ Includes "parts of apparatus of electric line telephonic and telegraphic apparatus (7649 1)' and "radiotelegraphic & radiotelephonic transsmitters (7643)." 4/ Covering outer garments of the fabrics: textile fabrics coated with preparation of cellulose derivatives; rubberized textile fabrics; textile fabrics otherwise impregnated or coated; outer gartnents of wool or animal hair, cotton, man made fibers and other fibers.. 5/ All Manufactures = Chemicals and related products (5) + Manufactured goods classified chiefly by material (6) + Machinery and transport equipment (7) + Miscellaneous manufactured articles (8) - Non-ferrous metals (68).. Source: UN COMTRADE Statistics. SITC-2 based on parters imports. 147 Table 111.3.7: Manufactures Exports As A Share Of Total Merchandise Exports, Selected Countries 1980 1985 1990 1995 1996 1997 1998 1999 2000 2001 Kenya 10.2 9.8 14.6 13.1 13.2 12.5 11.9 13.1 12.8 16.3 Ghana 4.2 5.5 12.7 19.4 26.0 19.6 24.5 27.6 17.0 12.6 South Africa 33.9 30.3 27.4 36.0 37.2 35.8 38.8 39.0 46.0 48.2 Tanzania 10.3 8.1 14.2 13.4 10.8 13.7 13.0 13:0 17.3 16.9 Uganda 3.9 1.0 1.1 0.8 1.2 1.7 3.3 2.5 2.9 2.5 Mauritius 24.9 47.4 63.0 68.4 67.2 69.2 68.8 72.6 75.0 72.8 Madagascar 6.2 10.2 14.9 25.5 31.8 37.2 39.9 44.4 45.3 48.7 Egypt 6.9 8.7 24.2 33.6 29.8 36.9 41.1 37.0 41.1 46.3 Bangladesh 67.5 68.3 78.2 87.7 87.6 89.0 91.1 90.9 91.3 93.4 India 60.6 53.7 70.5 75.5 71.1 73.8 75.6 77.2 77.0 76.7 Russian Federation n.a n.a n.a. 31.0 30.4 30.1 32.6 29.7 24.5 25.5 China 47.6 49.0 78.9 88.1 88.6 89.1 90.4 90.9 91.1 91.6 Philippines 33.5 50.0 62.6 75.7 81.0 85.0 85.8 88.2 89.4 89.5 Thailand 27.1 36.2 61.8 71.2 71.7 73.9 75.0 76.6 77.5 77.1 Vietnam 21.1 16.4 23.3 46.7 46.5 52.7 53.9 53.0 50.6 53.4 Source: UN COMTRADE Statistics SITC-2, based on partners imports. Note: Manufactures exports = Chemicals and related products + Manufactured goods classified chiefly by material + Machinery and transport equipment + Miscellaneous manufactured articles-nonferrous metals. Table 1II.3.8: Real Export Growth, Selected Countries (exports of goods and services in constant 1995 US$) (annual percentage change) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 World 5.0 2.3 4.1 3.5 8.9 8.9 5.4 10.2 4.4 4.9 n.a. n.a. Low&middle income 4.2 -1.5 1.0 7.0 11.3 10.6 3.6 9.1 4.3 4.1 14.0 1.9 Sub-Saharan Africa 3.6 0.2 -0.2 3.3 5.1 8.4 9.3 4.6 3.4 1.1 3.8 3.9 Kenya 22.5 -1.2 -0.8 31.5 -1.2 -7.7 4.6 -14.4 -5.2 12.7 8.6 4.5 Ethiopia -2.1 -23.8 -46.8 83.8 17.0 11.0 14.5 36.1 -9.7 -2.6 23.6 -1.6 Tanzania n.a. -10.5 22.9 29.9 11.6 32.6 0.4 -24.9 9.8 18.6 18.4 7.0 Ghana 6.2 9.3 2.7 17.1 3.7 2.6 42.5 4.0 10.7 12.1 -2.3 0.3 Uganda 5.0 -5.5 15.5 -4.4 31.5 28.6 27.2 29.5 -14.9 31.3 -0.7 6.2 Mauritius 5.7 6.3 3.9 5.0 4.8 4.9 8.6 7.0 5.9 4.8 -2.0 5.5 EastAsia& Pacific 15.4 15.8 13.6 9.4 20.1 12.2 -7.9 12.9 3.7 5.6 22.4 -0.1 Philippines 1.3 5.8 3.9 6.2 19.8 12.0 15.4 17.2 -21.0 3.6 6.6 -12.3 Vietnam 12.9 29.9 24.7 9.1 51.9 25.4 37.4 13.3 4.3 22.6 14.8 n.a. Thailand 13.4 15.1 13.8 12.7 14.2 15.6 -5.5 8.3 6.5 9.9 15.4 -0.1 Indonesia 3.4 18.8 13.7 6.1 9.9 7.7 7.6 7.8 11.2 -31.8 26.5 1.9 Malaysia 17.8 15.8 12.6 11.5 21.9 19.0 9.2 5.5 0.5 13.4 16.1 -7.6 South Asia 8.6 14.0 9.7 11.4 7.6 22.0 5.9 5.7 8.5 4.5 6.8 5.1 India 9.1 10.8 6.9 14.4 8.0 32.9 7.1 6.2 12.5 6.0 5.0 3.3 Pakistan 1.1 33.5 13.8 1.3 3.1 -3.1 2.0 -6.5 -5.7 -2.9 16.0 5.1 Bangladesh 37.3 -3.1 21.8 16.4 3.7 30.7 8.1 16.5 12.3 2.3 8.6 17.3 Source: World Development Indicators. 148 Table IIL.3.9: Real Exports Per Capita, Selected Countries I/ (Constant 1995 US$) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 World 927 934 958 977 1,049 1,125 1,170 1.271 1,309 1,355 n.a. n.a. Low & miiddle income 487 469 464 487 532 577 585 626 641 654 732 732 Sub-Saharan Africa 145 141 137 139 142 150 160 163 164 162 164 167 Kenya 107 103 100 127 123 110 113 94 87 96 102 104 Ethiopia 16 12 6 1 1 13 14 IS 20 18 17 21 20 Tanzania 20 18 21 26 29 37 36 26 28 33 38 39 Ghana 75 79 79 90 91 92 128 130 141 154 147 145 Uganda 24 22 24 22 28 35 44 55 45 58 56 58 Mauritius 1,648 1,736 1,779 1,841 1,902 1,978 2,126 2,248 2,356 2,439 2,367 2,471 East Asia &Pacific 135 154 172 186 221 244 222 248 254 265 322 318 Philippines 282 291 296 307 360 394 445 511 395 402 420 362 Vietnam 33 42 5 1 55 81 100 136 151 155 188 213 n.a. Thailand 647 734 825 920 1,043 1,198 1,125 1,210 1,280 1,397 1,599 1,584 Indonesia 176 205 229 239 259 274 290 308 337 226 281 282 Malaysia 2,178 2,460 2,701 2,939 3,495 4,055 4,321 4,445 4,363 4,832 5,476 4,951 South Asia 29 33 35 38 40 48 50 52 56 57 60 62 India 24 26 27 3 1 33 43 45 47 52 54 56 56 Pakistan 59 76 85 84 84 80 79 72 67 63 72 73 Bangladesh 20 19 -23 26 27 34 37 42 46 47 50 57 Source: World Development Indicators. I/ Exports of goods and services (constant 1995 USS) Table_III.3.10:_Competitve-Dnamic Export Products ___ ______________________ Keaya's Trade Share (%) Average Annual Growth Rat %) COMESA Exports I/ World Exports 2/ COMESA Exports World Exports Kenya Exports 1995 2001 1990 1995 2001 1996-2001 1I91-95 1996-2001 1991-95 1996-2001 Tea (074 1) 85.4 88.3 19.1 21.4 24.1 1.1 0.4 -0.7 3.1 1.7 Cut flowers (2927) 59.2 60.0 1.3 2.4 4.2 6.7 6.3 -2.6 18.9 7.0 Vegetables, firsh or chiUled (05459) .57.3 67.1 0.8 0.9 1.6 7.4 7.8 -0.5 8.7 10.4 Coffee, whether or notrmasted or fredof caffeine (071 1) 23.7 35.3 2.8 2.2 1.3 -24.3 17.2 -12.6 10.7 -18.9 Outer garments, women's, of textile fabrics (9439) 3/ 1.6 11.5 0.0 0.0 0.2 18.0 6.2 5.8 9.4 23.6 Fruits, fresh or dried (avocados, mangoes, guavas) (0579) 23.8 39.3 0.2 0.2 0.3 -2.1 6.0 0.0 14.9 12.9 Bovine &equine hides (other than cal), raw (21 11) 3312 51.1 0.2 0.1 0.7 30.0 2.3 -1.7 7.8 17.3 Inorganic chemicals (neutral sodium carbonate) (52323) 99.5 99.8 2.2 1.9 1.4 -3.1 7.6 -0.2 6.0 -3.8 Pineapple juice (05854) 99.8 91.5 4.6 5.9 2.6 -10.0 6.7 -0. 1 15.2 -10.9 Sisal &othserfibeTs of apves family, raw or processed (2654) 69.3 70.0 26.2 29.2 24.4 -13.9 -0.5 -11.0 0.8 -13.9 AU above products 55.3 61.4 1 5.7. 6.4 6.1 1.0 1 6.0 -2.4 9.6 2.5 Trade in all goods 7.9 6.4 0.0 0.0 0.0 3.5 8.6 1.9 6.6 -1.6 AU goods less petroleum 12.6 11.2 0.0 0.0 0.0 0.7 9.5 1.3 6.8 -1.7 All manufactures 4.8 3.8 0.0 0.0 0.0 7.1 9.8 2.1 5.1I 2.7 Source: UN COMTRADE Statistics, SITC-2 based on partners imports. I/ Includes the world reported total imports from the following countries: Angola, Burundi, Comoros, D.R. Congo, Djibouti, Egypt, Eriftae, Ethiopia, Kenya, Madagascar. Malawi, Mauritius, Namibia, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe. 2/ Includes the following countries' reported total imports from Kenya: All original OECD members, Algeria, Argentina, Bangladesh, Barbados, Belize, Bolivia, Brazil, Chile, China, Colombia, Costa Rica, Cyprus, Ecuador, Egypt, El Salvador, Greenland, Guatenmala, Honduras, Hong Kong (Chins). Hungary, Indonesia, Ismael, Jamaica, Rep. of Korea. Macao, Malaysia, Malta, Mauritius, Mexico, Nepal, Nicaragua, Pakistan, Panama, Paraguay, Peru. Philippines. Poland, Romania, Singapore, SACU (South Africa, Botswana, Lesotho, Namibia, Swaziland). Taiwan (Chins). Thailand, Trinidad & Tobago, Tturkey, Tunisia, Uruguay and Venezuela. 3/ Including outer gannents of the fabrics: Textile fabrics coated with preparation ofrcellulose derivatives; rubberized textile fabrics; textile fabrics otherwise imprepased or coated; outer garmnents of wool or animal hair, cotton, man made fibers and other fibers. Excluding coats and jackets, suits & costumes, dresses, skirts, blottses, of textile fabrics. 149 Table IIL3.11:Top Tea Exporters Value of exports (USS millions) and share of world market 1980 1985 1990 1995 2001 (value) (%) (value) (%) (value) (%) (value) (%) (value) (%) Kenya 153.5 12.9 288.6 19.2 319.3 19.1 362.1 21.4 385.6 24.1 (ranks 3) (ranks 1) (ranks 1) (ranks 1) (ranks 1) China 145.4 12.2 214.3 14.2 268.8 16.1 251.7 14.9 243.9 15.3 United Kingdom 66.0 5.5 75.4 5.0 115.2 6.9 130.7 7.7 155.4 9.7 Sri Lanka 203.2 17.1 216.8 14.4 241.9 14.5 219.4 13.0 152.9 9.6 India 241.5 20.3 149.9 10.0 187.2 11.2 197.5 11.7 123.0 7.7 Indonesia 72.4 6.1 124.1 8.2 109.4 6.5 96.9 5.7 69.3 4.3 South Africa 5.2 0.4 11.6 0.8 19.7 1.2 10.0 0.6 62.2 3.9 Germany 6.3 0.5 25.0 1.7 40.4 2.4 58.8 3.5 56.2 3.5 Argentina 20.4 1.7 50.2 3.3 41.9 2.5 36.6 2.2 49.5 3.1 Belgium 1/ 4.1 0.3 2.3 0.2 12.1 0.7 30.2 1.8 40.4. 2.5 Malawi 44.6 3.7 65.4 4.3 38.5 2.3 26.7 1.6 35.6 2.2 United States 5.6 0.5 10.7 0.7 11.0 0.7 24.3 1.4 25.0 1.6 France 1.0 0.1 3.1 0.2 9.3 0.6 17.2 1.0 24.3 1.5 Taiwan 21.8 1.8 24.1 1.6 26.1 1.6 18.4 1.1 14.8 0.9 Vietnam 2.6 0.2 4.0 0.3 3.4 0.2 13.1 0.8 13.7 0.9 Netherlands 19.9 1.7 18.2 1.2 18.4 1.1 26.8 1.6 12.1 0.8 Singapore 9.5 0.8 13.5 0.9 13.9 0.8 13.0 0.8 11.6 0.7 Japan 2.9 0.2 3.6 0.2 3.2 0.2 8.8 0.5 10.9 0.7 Tanzania 26.2 2.2 22.5 1.5 23.8 1.4 14.1 0.8 10.3 0.6 Bangladesh 13.8 1.2 31.9 2.1 16.7 1.0 18.6 1.1 6.4 0.4 World 1,191.7 100.0 1,503.9 100.0 1,671.8 100.0 1,693.3 100.0 1,596.8 100.0 1/ After 1998, excluding Luxembourg. Source: UN COMTRADE Statistics, SITC-2 based on partners imports. Table 111.3.12: Top Cut Flowers Exporters Value of Exports (USS millions) and Share of World Market 1980 1985 1990 1995 2001 (value) (%) (value) (%) (value) (%) (value) (%) (value) (%) Netherlands 731.7 51.7 741.4 52.2 1,881.5 55.8 2,272.3 51.0 1,553.4 41.8 Colombia 144.7 10.2 198.1 14.0 343.0 10.2 534.8 12.0 502.0 13.5 Ecuador 0.2 0.0 1.1 0.1 15.4 0.5 103.9 2.3 228.4 6.2 Kenya 16.6 1.2 16.9 1.2 44.4 1.3 104.9 2.4 156.8 4.2 (ranks 11) (ranks 10) (ranks 10) (ranks 6) (ranks 4) Israel 134.7 9.5 91.9 6.5 146.7 4.3 172.8 3.9 138.1 3.7 United States 42.8 3.0 44.9 3.2 105.0 3.1 152.6 3.4 118.2 3.2 Italy 132.9 9.4 75.5 5.3 178.3 5.3 172.1 3.9 88.6 2.4 Canada 12.2 0.9 21.7 1.5 38.7 1.1 52.5 1.2 80.6 2.2 CostaRica 1.3 0.1 10.0 0.7 51.5 1.5 94.8 2.1 80.1 2.2 Spain 20.5 1.5 31.1 2.2 83.3 2.5 66.3 1.5 79.8 2.1 Zirnbabwe n.a. n.a. 0.4 0.0 12.9 0.4 52.6 1.2 65.9 1.8 Thailand 31.7 2.2 28.4 2.0 70.2 2.1 84.2 1.9 51.0 1.4 Mexico 4.1 0.3 7.4 0.5 22.7 0.7 40.4 0.9 49.0 1.3 Germany 6.5 0.5 8.2 0.6 27.3 0.8 51.9 1.2 41.2 1.1 Belgium 1/ 4.7 0.3 4.5 0.3 11.7 0.3 27.2 0.6 38.7 1.0 Denmark 21.1 1.5 21.2 1.5 73.9 2.2 38.4 0.9 23.9 0.6 France 20.3 1.4 14.4 1.0 32.2 1.0 45.0 1.0 30.9 0.8 World 1,415.1 100.0 1,419.9 100.0 3,374.4 100.0 4,459.1 100.0 3,713.4 100.0 1/ After 1998, excluding Luxembourg. Source: UN COMTRADE Statistics, SITC-2 based on partners imports. 150 Table 111.3.13: Top Vegetables Exporters (Vegetables, fresh or chilled; SITC no: 05459) 1/ Value of exports (US$ millions) and share of world market 1980 1985 1990 1995 2001 (value) (N) (value) (%) (value) (el) (value) (0/6) (value) (%/6) Spain 207.8 9.7 328.9 14.2 883.1 17.3 1,537.9 20.9 1,273.5 18.0 Mexico 161.3 7.5 255.7 11.0 459.4 9.0 671.6 9.1 1,142.9 16.2 United States 223.5 10.4 267.4 11.5 482.6 9.5 765.5 10.4 820.2 11.6 Netherlands 502.3 23.4 457.0 19.7 1,068.9 21.0 1,427.2 19.4 803.0 11.4 China 56.8 2.7 41.0 1.8 53.2 1.0 272.2 3.7 459.6 6.5 France 206.3 9.6 177.3 7.6 432.6 8.5 402.2 5.5 303.1 4.3 Italy 280.5 13.1 234.6 10.1 512.5 10.1 503.1 6.8 255.2 3.6 Canada 27.3 1.3 31.6 1.4 38.2 0.8 83.4 1.1 220.6 3.1 Belgium 2/ 116.2 5.4 121.0 5.2 228.8 4.5 235.4 3.2 167.4 2.4 Ireland 7.1 0.3 11.5 0.5 59.9 1.2 96.0 1.3 131.2 1.9 Australia 11.6 0.5 26.2 1.1 56.4 1.1 136.5 1.9 116.2 1.6 Kenya 19.7 0.9 18.0 0.8 42.9 0.8 64.7 0.9 112.2 1.6 (ranks 14) (ranks 16) (ranks 16) (ranks 15) (ranks 12) Israel 38.1 1.8 26.6 1.1 32.5 0.6 33.2 0.5 111.0 1.6 Peru 0.1 0.0 02 0.0 8.5 0.2 39.6 0.5 110.3 1.6 Germany 7.4 0.3 11.2 0.5 30.0 0.6 54.4 0.7 103.1 1.5 NewZealand 3.5 0.2 16.2 0.7 48.2 0.9 76.2 1.0 81.7 1.2 Greece 32.5 1.5 33.6 1.4 98.4 1.9 90.7 1.2 13.9 0.2 World 2,142.8 100.0 2,323.3 100.0 5,0933 100.0 7,362.7 100.0 7,0613 100.0 I/ Excludes potatoes, fresh or chilled; beans, peas, lentils and otler leguminous vegetables; tomatoes, fresh or chilled; onions, shallots, garlic, leeks and alliaceous vegetables. 2/ After 1998, excluding Luxembourg. Source: UN COMTRADE Statistics, SITC-2 based on parners imports. Table 111.3.14: Top Coffee Exporters (Coffee, whether or not roasted or freed of caffeine; SITC no: 0711) Value of exports (US$ millions) and share of world market 1980 1985 1990 1995 2001 (value) (%/6) (value) (%) (value) (%) (value) (%/0) (value) (%) Brazil 2,517.3 20.2 2,632.1 24.7 1,392.9 18.2 2,284.4 15.4 997.4 17.6 Colombia 2,492.6 20.0 1,707.3 16.0 1,487.5 19.4 2,393.3 16.2 750.6 13.2 Guatemala 495.4 4.0 350.7 3.3 373.1 4.9 778.0 5.3 388.3 6.8 Vietnam 4.8 0.0 3.5 0.0 36.1 0.5 713.2 4.8 355.3 6.3 Germany 136.6 1.1 223.2 2.1 207.4 2.7 496.4 3.4 330.7 5.8 Mexico 477.1 3.8 433.6 4.1 428.6 5.6 718.2 4.8 243.6 4.3 Indonesia 636.3 5.1 477.1 4.5 386.4 5.0 646.0 4.4 222.5 3.9 Costa Rica 269.6 2.2 257.9 2.4 259.3 3.4 429.7 2.9 206.1 3.6 Kenya 339.8 2.7 297A 2.8 211.1 2.8 321.2 2.2 74.6 13 (ranks 9) (ranks 9) (ranks 8) (ranks 15) (ranks 20) World 12,443.2 100.0 10,647.8 100.0 7,6643 100.0 14,813.1 100.0 5,674.7 100.0 Source: UN COMTRADE Statistics, SrrC-2 based on partners impors. 151 Table 111.3.15: Top Garments Exporters (Outer garments, women's, of textile fabrics; SITC no: 8439) l/ Value of exports (US$ millions) and share of world market 1980 1985 1990 1995 2001 (value) (%) (value) (%) (value) (%) (value) (%) (value) (%) China 99.7 3.8 389.5 8.1 2,216.4 16.7 4,409.5 24.7 6,366.4 25.9 Mexico 39.8 1.5 53.1 1.1 250.3 1.9 660.3 3.7 1,973.3 8.0 Hong Kong, China 642.3 24.7 1,008.0 21.1 1,428.2 10.8 1,499.2 8.4 1,551.4 6.3 Turkey 18.6 0.7 91.5 1.9 490.8 3.7 618.7 3.5 799.8 3.2 Italy 270.9 10.4 404.0 8.4 1,025.7 7.7 1,070.6 6.0 789.2 3.2 Indonesia 8.3 0.3. 45.0 0.9 276.7 2.1 496.1 2.8 765.7 3.1 Germany 107.9 4.1 213.2 4.5 700.5 5.3 646.8 3.6 696.0 2.8 Bangladesh 0.0 0.0 23.0 0.5 134.7 1.0 312.1 1.8 656.0 2.7 India 66.5 2.6 114.4 2.4 370.7 2.8 502.6 2.8 574.1 2.3 Tunisia 30.1 1.2 38.2 0.8 148.5 1.1 . 380.8 2.1 566.1 2.3 United States 33.8 1.3 18.1 0.4 112.6 0.9 481.0 2.7 561.2 2.3 France 210.5 8.1 223.4 4.7 613.3 4.6 425.0 2.4 437.0 1.8 Kenya 0.0 0.0 0.5 0.0 0.9 0.0 2.2 0.0 40.6 0.2 (ranks 89) (rinks 72) (ranks 93) (ranks 100) (ranks 20) World 2,603.9 100.0 4,785.2 100.0 13,245.6 100.0 17,826.8 100.0 24,617.1 100.0 I/ Including outer garments of the fabrics: Textile fabrics coated with preparation of cellulose derivatives; rubberized textile fabrics; textile fabrics otherwise impregnated or coated; outer garments of wool or animal hair, cotton, man made fibers and other fibers. Excluding coats and jackets, suits and costumes, dresses, skirts, blouses, of textile fabrics. Source: UN COMTRADE Statistics, SITC-2 based on partners imports. Table 111.3.16: Merchandise Imports: Value and Share, 1990-2001 (in percent of total imports) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Provisional Foods and live animals 6.1 4.2 9.8 6.0 14.5 4.0 6.8 12.2 9.6 6.4 8.6 9.4 Beverages and tobacco 0.3 0.4 0.4 0.6 0.4 0.4 0.3 0.4 0.5 0.5 0.6 0.7 Crude materials 2.5 3.0 3.4 2.9 2.5 2.4 2.2 2.3 3.2 2.8 2.6 2.8 Mineral fuels 19.7 19.3 21.8 25.2 16.4 13.4 16.4 16.0 16.3 14.9 26.2 20.2 Animal and vegetable oils and fats 2.7 3.7 5.1 3.8 4.6 4.9 5.0 4.0 4.4 4.4 3.2 3.5 Chemicals 13.3 16.3 16.8 19.7 15.6 17.6 16.9 15.1 15.2 15.5 13.2 13.6 Manufactured goods 14.6 15.2 13.0 14.6 13.2 17.5 15.7 14.3 12.8 13.6 11.1 12.5 Machinery and transport 37.2 33.7 25.8 23.1 27.7 35.4 31.4 30.1 32.0 28.8 29.1 32.1 Misc. manufactured articles 3.4 4.0 3.9 4.3 5.0 4.4 5.2 5.1 6.1 7.4 5.4 5.2 Other miscellaneous imports 0.1 0.0 0.1 0.0 0.1 0.0 0.1 0.4 0.0 5.8 0.0 0.0 Total Imports 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Nonoil imports 80.3 80.7 78.2 74.8 83.6 86.6 83.6 84.0 83.7 85.1 73.8 79.8 Source: Central Bureau of Statistics. 152 Table 111.3.17: Trade Value And Volume, Price, Exchange Rate And Terms Of Trade Indices Export Value of Terms of REER Years Value of exports volume Export price imports Import volume Import price trade (average) (1990 constant $) 1989 91.6 92.7 98.9 85.3 95.5 89.3 110.6 106.9 1990 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1991 105.9 106.5 99.4 84.6 92.0 92.0 108.0 98.4 1992 101.6 101.2 100.4 80.7 91.3 88.4 113.5 101.3 1993 110.6 113.0 97.9 69.5 80.1 86.7 112.9 88.3 1994 148.8 134.6 110.6 88.3 100.7 87.8 126.0 111.1 1995 193.0 157.0 122.9 134.0 133.0 100.8 122.0 111.0 1996 208.9 174.0 120.1 130.4 135.8 96.0 125.1 108.7 1997 206.6 156.6 131.9 142.0 137.4 103.4 127.6 124.8 1998 201.8 153.4 131.6 144.4 133.0 108.6 121.2 130.8 1999 176.0 145.4 121.1 124.9 123.4 101.2 119.6 120.2 2000 177.9 138.2 128.7 143.0 132.1 108.3 118.8 128.3 2001 188.7 154.3 122.3 146.8 138.9 105.7 115.8 135.0 2002 187.1 154.5 121.2 144.7 131.0 110.4 109.7 131.9 (percentage change) Export Value of Terms of REER Years Value of exports volume Export price imports Import volume Import price trade (average) 1990 9.2 7.9 1.2 17.2 4.7 11.9 -9.6 -6.5 1991 5.9 6.5 -0.6 -15.4 -8.0 -8.0 8.0 -1.6 1992 -4.1 -5.0 1.0 -4.6 -0.7 -3,9 5.1 3.0 1993 8.9 11.7 -2.5 -13.9 -12.3 -1.9 -0.6 -12.9 1994 34.6 19.1 13.0 27.1 25.7 1.2 11.7 25.9 1995 29.6 16.6 11.2 51.7 32.1 14.9 -3.2 -0.1 1996 8.3 10.9 -2.3 -2.7 2.2 -4.8 2.6 -2.1 1997 -1.1 -10.0 9.9 8.9 1.1 7.7 2.0 14.8 1998 -2.3 -2.0 -0.3 1.6 -3.2 5.0 -5.0 4.8 1999 -12.8 -5.2 -8.0 -13.5 -7.2 -6.8 -1.3 -8.1 2000 1.1 -4.9 6.3 14.5 7.0 7.0 -0.7 6.7 2001 6.1 11.6 -5.0 2.6 5.2 -2.4 -2.6 5.2 2002 -0.8 0.1 -0.9 -1.5 -5.7 4.5 -5.2 -2.3 Source: IMF, World Bank database. 153 Table 1113.18: Exports by Destination: Value and Share, 1990-2001 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Provisional (In millions of Kenyan shillings) European Union 12,070 15,372 14,404 28,320 28,998 31,346 33,290 39,268 36,271 38,089 39,942 39,821 UK 4,364 5,336 6,384 11,801 9,917 9,719 12,327 13,878 16,217 16,991 18,610 16,382 Other Westem Europe 610 2,310 1,610 736 572 1,239 1,344 1,487 925 1,060 1,308 1,598 EastemnEurope 396 58 9 111 114 125 259 454 357 612 604 912 USA 852 1,156 1,266 2,730 2,935 2,632 3,174 3,375 3,053 2,751 2,801 3,381 Canada 217 206 230 596 578 620 648 592 613 432 472 346 African Countries 5,220 7,403 9,113 24,764 36,320 43,628 51,284 49,716 51,501 50,379 47,514 50,076 Uganda 1,226 2,077 2,375 6,520 10,200 14,017 17,501 16,341 17,358 18,558 17,162 19,183 Tanzania 594 1,017 1,496 5,084 8,514 11,009 13,654 13,936 13,745 11,397 8,724 9,328 Burundi 157 286 212 430 622 412 357 264 258 720 400 580 Sudan 390 567 403 1,630 1,367 1,205 1,341 1,866 2,631 2,359 1,936 2,054 Rwanda 358 575 443 1,322 4,805 3,015 2,024 3,454 2,621 2,706 1,774 1,530 Other 2,495 2,881 4,185 9,778 10,812 13,971 16,408 13,855 14,887 14,638 17,518 17,401 MiddleEast 964 934 1,011 2,142 1,496 2,325 3,963 3,943 4,785 5,405 6,521 6,891 South Asia, East Asia, Australia 3,138 3,524 4,748 9,384 9,750 10,639 12,256 12,614 15,806 15,932 18,468 16,741 Japan 303 317 475 666 666 657 947 887 939 1,059 1,442 1,320 Total 24,647 32,224 35,362 72,504 83,414 93,124 113,926 114,459 114,445 115,406 119,764 121,434 Domestic 24,414 31,858 34,678 71,443 81,186 88,908 109,652 108,474 107,710 108,253 105,001 95,278 Reexports 233 366 684 1,061 2,228 4,215 4,274 5,986 6,735 7,153 14,763 26,156 (in percent of total exports) European Union 49.0 47.7 40.7 39.1 34.8 33.7 29.2 34.3 31.7 33.0 33.4 32.8 UK 17.7 16.6 18.1 16.3 11.9 10.4 10.8 12.1 14.2 14.7 15.5 13.5 Other Westem Europe 2.5 7.2 4.6 1.0 0.7 1.3 1.2 1.3 0.8 0.9 1.1 1.3 Eastem Europe 1.6 0.2 0.0 0.2 0.1 0.1 0.2 0.4 0.3 0.5 0.5 0.8 USA 3.5 3.6 3.6 3.8 3.5 2.8 2.8 2.9 2.7 2.4 2.3 2.8 Canada 0.9 0.6 0.6 0.8 0.7 0.7 0.6 0.5 0.5 0.4 0.4 0.3 African Countries 21.2 23.0 25.8 34.2 43.5 46.8 45.0 43.4 45.0 43.7 39.7 41.2 Uganda 5.0 6.4 6.7 9.0 12.2 15.1 15.4 14.3 15.2 16.1 14.3 15.8 Tanzania 2.4 3.2 4.2 7.0 10.2 11.8 12.0 12.2 12.0 9.9 7.3 7.7 Burundi 0.6 0.9 0.6 0.6 0.7 0.4 0.3 0.2 0.2 0.6 0.3 0.5 Sudan 1.6 1.8 1.1 2.2 1.6 1.3 1.2 1.6 2.3 2.0 1.6 1.7 Rwanda 1.5 1.8 1.3 1.8 5.8 3.2 1.8 3.0 2.3 2.3 1.5 1.3 Other 10.1 8.9 11.8 13.5 13.0 15.0 14.4 12.1 13.0 12.7 14.6 14.3 Middle East 3.9 2.9 2.9 3.0 1.8 2.5 3.5 3.4 4.2 4.7 5.4 5.7 SouthAsia,EastAsia,Australia 12.7 10.9 13.4 12.9 11.7 11.4 10.8 11.0 13.8 13.8 15.4 13.8 Japan 1.2 1.0 1.3 0.9 0.8 0.7 0.8 0.8 0.8 0.9 1.2 1.1 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Domestic 99.1 98.9 98.1 98.5 97.3 95.5 96.2 94.8 94.1 93.8 87.7 78.5 Reexports 0.9 1.1 1.9 1.5 2.7 4.5 3.8 5.2 5.9 6.2 12.3 21.5 Source: Central Bureau of Statistics. 154 Table 111.3.19: A Decomposition of Merchandise Export Growth, Selected Countries (Growth rates in percent) Nominal export growth From world demand From market share From export diversification Compound annual average 1980-1990 1991-1996 1997-2001 1980-1990 1991-1996 1997-2001 1980-1990 1991-1996 1997-2001 1980-1990 1991-1996 1997-2001 Kenya 0.2 6.7 -3.0 -1.4 5.0 0.6 0.6 1.4 4.0 1.0 0.2 0.4 Tanzania -2.1 11.3 -5.6 4.1 5.7 -0.3 -7.0 6.6 -9.5 1.1 -1.2 4.6 Uganda -6.4 26.0 -15.2 3.7 7.9 -1.6 -11.4 16.7 -15.2 1.8 0.1 1.7 Ethiopia -2.6 15.4 -13.3 3.3 7.7 1.8 -7.3 6.5 -17.6 1.7 0.6 3.3 Ghana -1.0 9.9 -2.8 -0.7 5.5 -1.1 -0.5 1.1 -3.5 0.3 3.0 1.9 Mauritius 9.4 6.6 -1.8 9.7 7.8 1.6 -1.0 -1.6 -3.4 0.8 0.6 0.1 South Africa 0.0 9.6 3.7 3.5 6.8 2.1 -4.1 -0.8 3.1 0.8 3.4 -1.6 China 17.2 18.2 9.2 2.7 9.6 3.6 10.2 8.6 6.0 3.5 -0.6 -0.6 Philippines 3.9 18.4 8.5 7.9 11.5 4.7 -6.2 7.2 5.4 2.6 -0.9 -1.7 Vietnam 23.9 33.1 11.7 5.0 5.9 3.5 8.2 18.4 7.2 9.0 6.2 0.7 Malaysia 8.3 17.6 3.1 1.3 10.8 4.0 2.8 6.3 0.3 4.0 -0.1 -1.1 Thailand 13.9 15.7 3.1 7.6 10.8 3.4 0.7 4.2 -1.0 5.2 0.1 0.8 Honduras 0.7 19.2 26.3 6.7 6.2 3.5 -5.5 11.8 22.2 -0.1 0.4 -0.1 India 9.1 14.6 1.9 7.5 7.3 2.5 0.6 3.9 -0.9 0.9 2.7 0.3 Bangladesh 9.3 17.8 8.1 4.7 6.1 0.6 -1.0 10.6 7.5 5.5 0.5 -0.1 Sub-Saharan Africa -1.0 6.5 2.9 -1.3 5.8 2.3 -0.8 -0.4 -1.1 1.2 1.1 1.7 Low and middle income countries 2.2 12.1 6.0 3.2 9.1 3.3 -3.6 2.1 3.7 2.7 0.6 -1.0 Source: UN COMTRADE Statistics; World Bank staff estimates. Note: Data are from the United Nations COMTRADE database. Partner countiy reports of imports are used at the three-digit Standard Intemational Trade Classification (SITC) level. Nominal export growth is defined as the product of three factors: fl * f2* B; fl indicates the growth due to expansion of the world market for the country's traditional exports. f2 indicates the growth due to the expansion of its market share for its traditional exports. f3 captures the growth in exports due to diversification into nontraditional exports. Definitions: fl = Xmt/Xmo; where Xmt is the value of total world trade in the country's traditional exports at the end of the period and Xmo is the corresponding value at the beginning of the period. f2 = (xmtlxmo)/(Xmt/Xmo); where xrnt and xmo are the country's exports of traditional goods at the end and the beginning of the period. Thus factor f2 is the ratio of the country's share of world trade in traditional exports at the end of the period to its share at the beginning of the period. *3 = (xmo/xo)/(xmt/xt); where xt and xo represent the country's total exports (traditional and nontraditional) at the end and the beginning of the period. Thus the trade diversification factor represents the reciprocal of the change in shares of traditional exports from the beginning to the end of the period. In other words, it shows the room made available in the county's export bundle for nontraditional exports. 155 Table 1IL3.20: Imports by Origin: Value and Share, 1990-2001 1990 1991 1992 13 1994 1995 1996 1997 1998 1999 2000 2001 Provisional (in millions of Kenyan shillings) European Union 22,887 22,227 19,909 34,930 40,765 64,382 63,488 61,408 64,385 62,971 75,653 72,029 Other Westem Europe 2,767 2,221 2,496 3,542 2,247 2,650 3,871 3,310 3,504 4,604 3,553 5,424 Eastem Europe 359 482 364 773 1,344 1,518 2,090 2,217 2,287 3,296 5,082 2,140 USA 2,287 2,641 4,869 5,868 7,632 6,461 8,802 14,110 16,509 13,190 10,084 38,967 Canada 314 488 426 803 531 640 1,792 1,593 1,393 1,735 986 1,599 African Countries 1,513 1,580 1,881 2,433 15,818 14,029 16,181 28,917 17,339 22,298 22,746 31,749 Middle East 10,483 10,567 12,892 23,041 17,683 20,017 27,204 32,686 35,903 43,072 73,505 68,878 Saudi Arabia 2,467 2,661 1,430 4,677 2,729 5,645 8,470 10,216 12,384 10,873 15,004 15,773 United Arab Emirates 6,785 6,577 9,642 15,181 12,873 10,407 13,862 19,012 17,610 25,529 48,212 41,465 Other 1,231 1,329 1,820 3,182 2,081 3,966 4,872 3,458 5,908 6,670 10,289 11,640 South Asia, East Asia and Australia 9,283 11,954 13,519 18,979 27,869 42,097 43,132 43,601 48,080 50,800 51,844 64,319 All other countries - 1,020 758 2,742 10,760 1,190 3,374 1,926 2,832 8,388 4,436 4,354 5,003 Total 50,913 52,918 59,097 101,128 115,080 155,168 168,486 190,675 197,789 206,402 247,805 290,108 (inpercent of total exports) European Union 45.0 42.0 33.7 34.5 35.4 41.5 37.7 32.2 32.6 30.5 30.5 24.8 Other westem Europe 5.4 4.2 4.2 3.5 2.0 1.7 2.3 1.7 1.8 2.2 1.4 1.9 Eastem Europe 0.7 0.9 0.6 0.8 1.2 1.0 1.2 1.2 1.2 1.6 2.1 0.7 USA 4.5 5.0 8.2 5.8 6.6 4.2 5.2 7.4 8.3 6.4 4.1 13.4 Canada 0.6 0.9 0.7 0.8 0.5 0.4 1.1 0.8 0.7 0.8 0.4 0.6 African countries 3.0 3.0 3.2 2.4 13.7 9.0 9.6 15.2 8.8 10.8 9.2 10.9 Middle East 20.6 20.0 21.8 22.8 15.4 12.9 16.1 17.1 18.2 20.9 29.7 23.7 Saudi Arabia 4.8 5.0 2.4 4.6 2.4 3.6 5.0 5.4 6.3 5.3 6.1 5.4 UnitedArabEmirates 13.3 12.4 16.3 15.0 11.2 6.7 8.2 10.0 8.9 12.4 19.5 14.3 Other 2.4 2.5 3.1 3.1 1.8 2.6 2.9 1.8 3.0 3.2 4.2 4.0 South Asia, East Asia and Australia 18.2 22.6 22.9 18.8 24.2 27.1 25.6 22.9 24.3 24.6 20.9 22.2 Allothercountries 2.0 1.4 4.6 10.6 1.0 2.2 1.1 1.5 4.2 2.1 1.8 1.7 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Central Bureau of Statistics. Table IIL3.21: External Reserves, 1990-2001 (in millions of Kenyan shillings) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Provisional Assets Central bank 6,016 4,673 5,571 33,035 27,207 24,652 46,250 48,217 46,980 56,041 60,371 77,233 Central govenmment 185 228 227 450 319 39 61 19 31 28 45 27 Reserve Tranchc-IMF 416 490 609 1,151 802 1,024 972 1,046 1,070 1,241 1,265 1,232 Commercial banks 1,653 1,975 5,762 23,783 19,073 24,593 40,654 31,220 29,349 27,790 25,075 25,885 Gross reserves 8,270 7,366 12,169 58,418 47,401 50,308 87,936 80,502 77,430 85,100 86,756 104,377 Change in reserves 429 904 4,803 46,249 11,017 -2,907 -37,628 7,434 3,072 -7,670 -1,656 -17,621 Liabilities Use of IMF credit 10,782 13,192 14,025 25,887 18,048 20,901 18,519. 15,797 14,448 11,213 12,055 9,982 SDR allocation 1,259 1,484 1,844 3,482 2,402 3,075 2,921 3,128 3,190 3,694 3,770 3,727 Other extemal banks 493 129 126 145 241 28 39 19 89 79 96 28 Commercial banks 1,698 1,388 1,922 3,392 4,029 5,802 5,682 10,351 11,993 ... ... ... Net position -5,962 -8,828 -5,747 25,512 22,681 20,502 60,777 51,207 47,711 70,114 70,835 90,640 Change in Net Foreign Assets 3,401 2,866 -3,081 -31,259 2,831 2,179 40,275 9,570 3,496 -22,403 -721 -19,805 Source: Cental Bureau of Statistics. 156 Table 111.3.22: Foreign Direct Investment, Selected Countries (in percent of GDP) 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 . 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Kenya 0.1 0.1 0.2 0.1 0.2 0.4 0.4 0.1 0.6 0.3 0.2 0.1 0.0 0.1 0.4 0.1 0.4 0.4 0.4 1.2 0.5 Tanzania .. .. .. .. .. .. .. 0.1 0.1 0.0 0.0 0.3 0.5 1.1 2.3 2.3 2.1 2.1 2.1 2.1 2.4 Uganda 0.0 0.1 0.0 0.0 -0.1 0.0 0.0 0.1 0.0 0.0 0.0 0.1 1.7 2.2 2.1 2.0 2.8 3.2 2.4 2.7 2.5 Mozambique 0.0 0.0 0.0 0.0 0.0 0.0 0.3 0.2 0.1 0.4 0.9 1.4 1.6 1.6 1.9 2.6 1.9 5.5 9.6 3.7 13.3 Cote d'lvoire 0.4 0.6 0.5 0.3 0.4 0.8 0.9 0.5 0.2 0.4 0.2 -2.1 0.8 1.0 2.1 2.2 3.5 3.0 2.6 2.2 2.4 Ghana 0.4 0.4 0.1 0.0 0.1 0.1 0.1 0.1 0.3 0.3 0.3 0.4 2.1 4.3 1.6 1.7 1.2 0.7 0.8 2.2 1.7 Vietnam .. .. .. .. 0.0 0.0 0.0 0.0 0.1 0.2 2.4 3.9 7.6 11.9 11.3 9.7 8.3 6.2 4.9 4.2 4.0 Honduras -0.1 0.5 0.7 0.6 0.8 0.8 0.9 1.2 1.4 1.4 1.7 1.4 0.8 1.0 1.3 2.2 2.6 1.9 4.4 4.8 3.1 Sub-SaharanAfrica 0.7 0.7 .. .. 1.1 0.5 .. .. .. .. .. .. .. 1.2 1.4 1.3 2.4 2.0 2.5 1.9 4.1 Low income 0.3 0.3 0.2 0.2 0.4 0.2 0.3 0.3 0.6 0.4 0.6 0.7 0.9 1.1 1.5 1.8 1.8 1.4 1.0 0.5 0.8 World 0.6 0.5 0.5 0.5 0.5 0.6 0.8 0.9 1.0 1.0 0.7 0.7 0.9 0.9 1.1 1.2 1.6 2.3 3.1 3.9 2.2 Source: World Bank 157 III.4. External Debt Table 111.4.1: Summary of External Debt, 1990-2002 (US$ millions) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Provisional TOTAL DEBT STOCKS (EDT) 7,058 7,453 6,898 7,111 7,202 7,412 6,931 6,603 6,881 6,513 6,320 5,644 6,207 Long-term debt (LDOD) 5,642 6,252 5,728 5,846 6,119 6,405 6,060 5,549 5,841 5,569 5,380 4,863 5,256 Public and publicly 4,762 5,265 5,149 5,246 5,589 5,960 5,685 5,224 5,561 5,349 5,205 4,754 5,207 guaranteed Private nonguaranteed 880 987 579 600 530 445 375 325 280 220 175 109 49 Use of IMF credit 482 493 393 363 405 374 337 250 196 131 127 99 88 Short-term debt 934 708 777 903 679 634 534 803 844 812 S13 682 863 of whichinterestarrearson 95 141 189 242 83 32 16 34 68 102 62 113 164 LDOD Official creditors 49 59 62 59 20 23 9 21 30 48 18 62 95 Private creditors 46 82 127 183 63 9 7 13 38 54 43 51 69 Memo: principal arrears on LDOD 72 155 263 410 9 6 29 76 136 239 216 368 526 Official creditors 22 41 72 97 9 2 17 46 69 137 44 209 317 Private creditors 50 114 191 313 0 4 12 30 66 102 172 159 209 TOTAL DEBT FLOWS Disbursements 778 952 502 448 294 698 467 219 231 282 409 247 185 Long-term debt 642 904 502 416 262 698 431 219 231 282 364 247 185 IMF purchases 136 48 0 32 32 0 36 0 0 0 44 0 0 Principal repayments 457 399 410 366 552 600 567 449 467 529 350 311 220 Long-term debt 352 359 327 304 538 561 506 381 404 470 307 287 202 IMF repurchases 105 40 83 62 14 39 61 67 63 60 42 24 18 Net flows on debt 290 545 175 112 (277) 137 (185) 21 (229) (313) 99 (247) 95 of which short-term debt 294 73 (65) 6 (84) 251 7 (66) 41 (182) 130 Interest payments (TNT) 334 321 260 265 330 301 277 221 205 175 131 106 79 Long-term debt 230 248 201 208 290 263 245 190 165 134 89 79 59 IMF charges 26 18 10 4 2 2 2 1 1 1 1 1 0 Short-tern debt 78 55 49 53 38 36 30 29 39 40 41 26 19 Net transfers on debt 281 .. ... (111) (651) (197) (462) (199) (434) (487) (32) (353) 16 Total debt service paid (TDS) 791 720 670 631 882 901 845 669 672 704 481 417 299 Long-terrn debt 582 607 528 512 828 824 752 571 569 603 396 367 261 IMF repurchases and charges 131 58 93 66 16 41 63 69 64 61 43 24 19 Short-term debt (interest only) 78 55 49 53 38 36 30 29 39 40 41 26 19 Source: World Bank Data Reporting System. 158 Table I1.4.2: Debt Outstanding and Disbursements, 1990-2002 (US$ millions) 1990 1991 19 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Provisional DEBT OUTSTANDING 5,642 6,252 5,728 5,846 5,776 6,405 6,060 5,549 5,841 5,569 5,380 4,863 5,256 (LDOD) Public and publicly guaranteed 4,762 5,265 5,149 5,246 5,246 5,960 5,685 5,224 5,561 5,349 5,205 4,754 5,207 Official creditors 3,715 3,979 3,960 4,150 4,853 5,252 5,106 4,745 5,007 4,827 4,684 4,387 4,774 Multilateral 2,492 2,616 2,514 2,615 2,762 2,919 2,943 2,855 2,999 2,884 2,831 2,764 2,986 Concessional 1,395 1,598 1,638 1,853 2,040 2,248 2,402 2,390 2,584 2,575 2,607 2,599 2,830 Bilateral 1,222 1,363 1,446 1,535 2,091 2,333 2,164 1,890 2,008 1,943 1,853 1,623 1,788 Concessional 985 1,115 1,149 1,237 1,354 1,630 1,536 1,372 1,539 1,582 1,507 1,339 1,481 Private creditors 1,047 1,285 1,190 .1,097 736 708 578 480 554 522 521 367 433 Commercial banks 924 1,137 1,028 956 653 607 500 445 472 424 432 287 311 Other private 124 148 162 141 83 101 79 35 82 98 89 80 122 Private nonguaranteed 880 987 579 600 530 445 375 325 280 220 175 109 49 Commercial banks and other 880 987 579 600 530 445 375 325 280 220 175 109 49 Memo: IBRD 871 783 656 566 501 435 312 213 154 91 47 23 13 IDA 1,185 1,370 1,411 1,631 1,789 1,977 2,062 2,032 2,210 2,220 2,262 2,263 2,447 DISBURSEMENTS 642 904 502 416 261 698 431 219 231 282 364 247 185 Public and publicly guaranteed 587 844 442 351 261 698 431 219 231 282 364 247 185 Official creditors 405 466 329 329 256 566 359 171 194 144 308 234 102 Multilateral 297 230 132 239 160 220 197 142 142 87 188 125 87 Concessional 264 199 106 234 124 181 181 128 132 84 184 125 87 Bilateral 108 236 197 90 96 346 161 29 53 56 120 108 14 Concessional 106 192 123 76 74 346 108 29 35 40 102 108 9 Private creditors 182 378 113 22 5 132 72 48 36 139 56 13 83 Commercial banks 119 333 66 17 5 72 72 48 14 77 52 13 49 Other private 63 45 47 5 0 60 0 0 22 61 4 0 35 Private nonguaranteed 55 60 60 65 0 0 0 0 0 0 0 0 0 Commercial banks and other 55 60 60 65 0 0 0 0 0 0 0 0 0 Memo: IBRD 4 0 0 0 0 0 0 0 0 0 0 0 0 IDA 235 178 91 226 97 159 156 84 123 78 170 116 66 Source: World Bank Data Reporting System. 159 Table 111.4.3: External Public Debt Service Payments by Creditor Type, 1990-2002 (US$ millions) 1990 1991 1992 1993 1994 1995 . 1996 1997 1998 1999 2000 2001 2002 Provisional Amortization 352 359 327 304 538 561 506 381 404 470 307 287 202 Suppliers' credits 20 20 16 20 48 45 23 15 27 43. 6 4 2 Financial institutions 115 110 78 56 169 160 150 88 82 103 67 46 39 Multilateral loans 126 127 133 140 151 150 135 127 124 124 106 88 71 IBRD 95 96 98 100 106 100 88 74 66 58 40 22 12 IDA 4 5 6 7 8 9 10 I1 15 23 29 35 42 Other 27 26 29 32 36 41 36 42 43 42 37 30 17 Bilateral loans 53 62 40 38 100 120 128 102 127 138 83 84 30 Export credits 37 40 60 50 70 85 70 50 45 61 45 66 60 Interest 230 248 201 209 289 262 245 190 165 134 89 79 59 Suppliers' credits 6 6 6 6 14 7 5 2 2 1 2 0 0 Financial institutions 53 .42 28 22 69 48 45 40 27 24 17 11 6 Multilateral loans 100 94 85 85 80 77 73 58 50 43 35 28 27 IBRD 78 68 61 55 49 43 34 23 17 12 7 3 1 IDA 7 9 10 11 13 14 15 15 15 16 16 16 17 Other 15 16 14 18 19 19 25 20 18 15 12 9 8 Bilateral loans 34 61 26 42 80 89 90 59 60 44 17 26 19 Export credits 38 45 56 54 46 41 32 31 26 21 19 13 8 Total Public Debt Service 582 607 528 513 827 823 752 571 569 603 396 367 261 Source: World Bank Data Reporting System. Note: Excluding obligations to the IMF. 160 I11.5. Public Finance Table I11.5.1: Summary of Central government Operations (in millions of Kenya shillings) 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 Actual Revenue 123,994 144,409 147,902 178,995 192,266 178,024 191,160 Expenditure and net lending 136,387 149,304 167,802 194,047 197,456 176,732 231,769 Recurrent expenditure I/ 107,569 121,291 141,422 161,152 161,468 157,851 198,941 of which: Interest payments 31,823 37,245 34,786 37,971 40,055 30,703 26,824 Domestic interest 22,588 25,928 26,569 30,358 31,743 22,068 19,021 Foreign interest due 9,235 11,317 8,217 7,613 8,312 8,635 7,803 Wages and benefits (civil service) 42,830 45,886 48,171 62,148 63,253 65,861 68,119 Balance (commitment basis, excluding grants) -12,393 4,895 -19,900 -15,052 -5,190 1,292 40,609 Grants 5,508 5,814 5,783 5,272 4,920 4,247 24,080 Food relief grants 0 12,444 Project grants 5,246 5,252 4,511 4,956 4,525 4,247 5,681 Program grants 262 563 1,272 316 395 0 5,955 Balance (commitment basis, including grants) -6,885 920 -14,117 -9,780 -270 5,539 -16,529 Balance (cash basis, including grants) 4,193 -1,445 -7,206 -5,336 -1,857 1,750 -15,017 Financing 4,194 1,897 9,853 6,630 2,284 -534 14,817 Net foreign financing 4,420 138 -6,634 -7,201 -8,732 -18,974 12,601 Privatization proceeds 0 3,846 1,135 1,789 0 5,660 0 Bank restructuring costs 0 0 Net domestic financing 8,614 -2,087 15,352 12,042 11,016 12,780 2,216 Financing gap (stat. discrepancy for outtums) -1 452 -2,647 -1,294 427 -1,216 200 I/ Includes drought relief expenditures. Source: Kenyan authorities and the IMF. 161 Table 11L5.2: Central Government Revenue (In percent of total revenues) 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2000/02 Provisional Tax Revenue 89.0 86.3 88.8 88.3 93.1 88.1 85.6 86.4 88.5 86.2 85.6 86.3 87.3 Direct Taxes 29.1 29.3 30.5 28.7 36.4 35.4 33.5 32.9 33.3 30.6 29.5 27.8 29.2 On income and profits 29.1 29.3 30.5 28.7 36.4 35.4 33.5 32.9 33.3 30.6 29.5 27.8 29.2 Indirect Taxes 59.9 57.0 58.3 59.6 56.7 52.6 52.1 53.5 55.2 55.6 56.0 58.5 58.1 On goods and services 42.9 43.3 49.1 46.4 42.1 37.5 37.3 38.1 39.0 39.8 40.2 43.5 43.4 Sales tax/VAT 31.1 31.4 33.3 31.9 28.7 20.0 19.8 20.3 20.6 21.7 22.7 26.1 26.0 On local manufactures 15.7 17.3 12.0 11.7 12.9 11.0 10.3 9.9 10.6 11.7 12.4 13.6 13.7 On imports - 15.4 14.1 21.2 20.2 15.8 9.0 9.5 10.4 10.0 10.0 10.3 12.5 12.3 Excise duties 7.3 7.6 12.2 12.0 11.0 15.8 15.8 16.1 17.0 15.9 15.8 14.7 14.5 Other taxes and licenses 4.5 4.3 3.6 2.5 2.4 1.7 1.7 1.7 1.4 2.2 1.7 2.7 3.0 On intemational trade 17.0 13.7 9.2 13.2 14.6 15.2 14.8 15.4 16.3 15.8 15.8 15.0 14.6 Import duties 1/ 16.9 13.7 9.2 13.2 14.6 15.2 14.8 15.4 16.3 15.8 15.8 15.0 14.6 Export duties 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Nontax Revenue 11.0 13.7 11.2 11.7 6.9 11.9 14.4 13.6 11.5 13.8 14.4 13.7 12.7 Income from property 5.1 6.1 6.7 7.0 1.2 2.5 5.4 3.3 2.7 3.6 3.3 2.5 2.0 Currenttransfers 0.6 0.7 0.4 0.3 0.2 0.5 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Sales of goods and services 2.8 3.4 2.7 2.3 2.0 5.9 6.7 7.1 6.5 5.5 4.8 5.4 5.3 Other 2.5 3.4 1.4 2.2 3.5 3.0 2.2 3.0 2.2 4.6 6.1 5.7 5.4 Statistical Discrepancy 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1/ Before export compensation payments. Source: Central Bureau of Statistics. 162 Table IIL53: Local Government Budget Operations (In millions of Kenyan shillings) 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Provisional Total revenue 3,492 5,134 5,698 11,299 7,379 8,819 6,459 6,294 6,967 7,408 8,824 10,650 11,700 Municipal councils 2,760 4,384 4,754 10,546 6,273 7,467 4,800 5,073 5,395 5,951 6,550 7,602 8,216 Current Revenue 2,119 2,010 2,726 3,303 4,232 4,798 4,027 5,002 4,568 5,521 6,140 7,209 7,961 Direct taxes 1/ 680 657 871 1,031 1,099 1,205 725 1,742 1,742 1,599 1,724 1,837 1,923 Indirect taxes 0 43 196 215 169 216 437 563 360 325 623 692 722 Nontax revenue 1,439 1,310 1,659 2,056 2,964 3,377 2,865 2,674 2,456 3,596 3,493 3,681 3,890 Transfers 0 4 0 0 3 5 46 22 10 1 300 999 1,426 Capital revenue 641 2,374 2,028 7,243 2,041 2,669 773 71 826 430 410 393 255 Loans raised 638 2,374 2,028 7,232 2,036 2,659 758 62 818 422 404 388 250 Loan repayment 2 0 0 11 6 10 16 9 8 7 6 5 5 Town, urban and county councils 732 750 944 753 1,106 1,352 1,659 1,221 1,572 1,458 2,274 3,048 3,484 Current Revenue 684 699 717 747 1,098 1,343 1,658 1,219 1,571 1,457 2,273 3,036 3,482 Direct taxes I/ 28 36 34 34 61 63 491 264 79 124 176 204 259 Indirect taxes 162 123 124 155 320 344 402 325 267 254 316 441 563 Nontax revenue 494 541 559 558 717 937 765 630 1,225 1,078 1,780 2,391 2,660 Total expenditure 6,230 6,749 7,285 12,001 7,724 9,811 9,250 7,899 8,582 9,571 9,592 10,855 11,996 Municipal councils 5,562 5,608 5,962 11,105 6,730 8,303 7,495 6,374 6,814 7,371 7,182 8,156 8,907 Current expenditure 1,555 2,125 2,260 2,365 3,153 4,089 4,725 4,968 4,759 5,714 6,035 6,249 6,858 Transfers 78 12 57 18 64 74 41 126 152 114 86 113 125 Capital expenditure 4,007 3,483 3,702 8,740 3,577 4,214 2,770 1,406 2,055 1,656 1,147 1,907 2,049 Gross fixed capital formation 3,648 3,350 3,541 8,518 3,427 4,011 2,637 1,304 1,992 1,566 1,052 1,490 1,537 Debt service 334 130 157 220 115 171 101 68 54 76 94 417 512 Transfers 24 3 3 2 35 32 32 34 9 14 0 ... 0 Town, urban and county councils 667 1,141 1,323 895 994 1,509 1,755 1,525 1,768 2,201 2,410 2,700 3,088 Currentexpenditure 570 663 814 804 918 1,255 1,615 1,395 1,552 1,969 2,118 2,369 2,747 Transfers 12 5 66 7 49 54 0 199 182 173 3,651 205 238 Capital expenditure 97 478 509 91 76 254 140 130 216 232 292 330 341 Gross fixed capital formation 90 468 498 73 52 245 131 124 203 215 263 297 304 Debtservice 7 10 10 5 8 9 5. 0 13 17 29 34 37 Transfers 0 0 0 14 16 1 5 6 0 0 0 0 0 Overall Deficit -2,738 -1,615 -1,587 -702 -345 -992 -2,792 -1,605 -1,615 -2,163 -767 -205 -296 Municipal Councils -2,803 -1,224 -1,208 -559 -457 -835 -2,695 -1,301 -1,419 -1,420 -632 -554 -691 Town, urban and county councils 65 -391 -379 -142 112 -157 -97 -304 -196 -743 -136 348 395 1/ Paid by households and enterprises. Source: Central Bureau of Statistics. 163 Table Il1.5.4: Composition of Expenditure (in percent of GDP) I 1993 1994 I1s 1996 197 Im 199 2000 2001 2002 2003 KENYA Total expenditure and net lending 28.8 34.3 35.7 31.5 30.0 29.1 29.5 27.6 23.0 27.4 25.0 27.7 of which: Wages 8.8 9.0 8.6 9.9 9.2 8.4 9.5 8.8 8.6 8.1 8.5 9.2 Capital expenditure 5.5 6.1 6.7 6.7 5.6 4.6 5.0 5.0 2.5 3.9 2.7 3.4 TANZANIA Total expenditure and net lending 14.2 17.7 15.6 16.2 15.8 13.6 13.7 14.1 16.1 15.5 17.2 21.2 ofwhich: Wages 2.7 3.4 3.4 3.7 4.1 4.2 3.9 3.4 3.9 3.8 3.8 4.1 Capital expenditure 2.4 3.7 3.2 2.8 3.2 2.3 3.5 3.9 5.0 3.5 3.2 5.9 UGANDA Total expenditure and net lending 21.2 18.6 18.6 16.7 16.2 16.8 16.4 18.0 26.8 20.7 25.9 25.4 of which: Wages 1.7 1.6 1.9 2.5 2.7 3.4. 3.4 4.2 4.2 4.6 5.5 5.7 Capital expenditure 9.4 10.2 9.7 7.5 7.1 6.8 6.7 7.3 14.2 7.5 10.4 10.1 ETHIOPIA Total expenditure and net lending 20.2 19.6 25.0 24.7 26.9 24.2 25.3 30.8 33.1 29.6 34.9 34.1 of which: Wages 5.7 5.5 6.2 5.6 5.5 5.2 5.9 6.1 6.8 6.9 8.1 7.8 Capital expenditure 4.6 6.7 9.5 9.3 12.2 10.4 9.5 . 9.9 6.6 9.6 13.1 12.8 SENEGAL Totalexpenditureandnetlending 21.5 20.8 21.0 19.6 21.0 19.0 20.1 20.9 20.0 21.7 20.2 22.8 of which: Wages 8.7 8.6 7.4 7.1 6.8 6.1 5.8 5.7 5.6 5.2 5.6 5.3 Capital expenditure 5.2 4.2 5.0 5.0 7.5 6.2 8.5 8.5 6.4 6.3 7.8 8.4 GHANA Total expenditure and net leading 24.6 29.0 31.2 30.4 29.7 29.0 28.6 26.2 27.7 32.8 27.2 35.0 of which: Wages 6.1 5.9 5.7 5.6 5.4 5.3 5.5 5.6 5.2 6.1 8.8 10.0 Capital expenditure 10.3 11.1 13.3 14.0 13.3 12.4 11.3 .9.8 9.2 12.8 6.4 11.2 SOUTH AFRICA Total expenditure and net lending 31.1 35.5 34.0 33.0 33.3 32.6 26.8 26.3 25.8 26.2 26.2 25.9 of which: Wages 11.3 11.8 11.5 11.2 11.0 10.9 11.0 10.6 10.2 10.0 9.7 10.0 Capital expenditure 3.0 4.4 3.3 3.0 2.8 2.5 1.9 1.6 1.4 . 1.8 2.1 2.1 MADAGASCAR Totalexpenditureandnetlending 21.3 21.9 20.4 16.9 21.7 17.4 19.9 17.8 18.1 18.1 14.6 17.8 of which: Wages 3.9 3.7 3.4 3.2 3.1 3.7 4.1 4.3 4.0 4.4 5.0 5.1 Capital expenditure 7.5 7.9 6.6 6.1 7.1 6.5' 9.4 8.5 9.0 7.9 5.0 7.6 THAILAND Totalexpenditureandnetlending 15.1 15.8 16.5 15.4 17.8 19.7 18.7 19.0 18.4 18.0 19.5 17.7 of which: Wages 5.1 5.4 5.1 5.6 5.3 5.6. 6.2 6.4 6.3 6.2 6.4 6.3 Capital expenditure 4.1 4.5 5.7 5.0 6.9 8.9 6.8 5.3 4.5 4.1 5.3 4.3 PHILIPPINES Total expenditure and net lending 19.1 19.1 18.9 18.4 18.6 19.4 19.2 19.9 19.7 19.5 19.2 19.1 of which: Wages 5.5 5.3 5.5 5.7 6.2 6.2 6.5 5.6 5.5 5.5 5.5 5.4 Capital expenditure 3.7 3.0 3.1 3.8 3.9 4.1 3.3 4.0 3.4 3.2 3.3 3.3 Note: Capital expenditure includes development and net lending. Source: World Bank database, IMF-International Financial Statistics. 164 111.6. Monetary Survey Table 111.6.1: Consolidated Accounts of the Banking System at Years' End (In millions of Kenyan shillings) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Provisional Money(MI) 29,491 34,339 49,403 60,578 67,286 73,177 79,241 91,061 94,718 110,081 119,393 130,026 I.Demand Deposits 18,662 21,579 32,198 39,223 42,469 44,290 48,851 54,883 56,005 67,117 75,927 84,681 2. Currency outside the banks 10,829 12,760 17,205 21,355 24,817 28,887 30,390 36,178 38,713 42,964 43,466 45,345 Quasi-money (MS) 30,468 39,987 49,889 64,250 95,440 119,407 159,125 186,749 189,792 185,433 178,479 178,709 1. Time Deposits 8,537 15,213 16,673 18,693 41,424 56,887 91,713 110,479 105,474 96,508 91,710 92,929 2. Others 21,931 24,773 33,216 45,557 54,015 62,520 67,412 76,270 84,318 88,925 86,769 85,780 Total (M2) 59,959 74,326 99,292 124,828 162,726 192,584 238,366 277,811 284,510 295,514 297,872 308,735 Money andquasi money (M3) ... ... 132,100 161,580 205,820 231,080 267,820 294,052 303,750 312,116 314,686 322,326 M3 and foreign currency deposits (M3X) ... ... ... ... ... 244,760 283,540 317,314 328,321 345,037 359,647 368,132 Other Liabilities 7,103 4,215 -6,017 46,973 54,277 79,151 80,460 96,098 108,627 129,007 166,931 163,236 Total Liabilities 67,062 78,541 93,275 171,801 217,003 271,735 318,826 373,909 393,137 424,521 464,803 471,971 Net foreign assets -5,303 -8,061 -6,583 19,504 13,291 23,002 39,591 46,497 42,508 53,155 83,478 91,775 Domestic Credit 72,365 86,603 99,857 152,297 203,712 248,732 279,234 327,413 350,630 371,367 381,325 380,196 TotalCredittogovernment 32,651 36,619 36,309 53,285 81,394 82,451 79,116 90,538 96,328 93,960 91,847 108,410 Central govemment (net) 29,422 32,547 32,311 48,887 75,642 77,422 73,761 82,665 90,067 86,656 83,789 100,383 Other public bodies 3,229 4,072 3,998 4,398 5,752 5,029 5,355 7,872 6,261 7,304 8,058 8,027 Private sector 39,714 49,983 63,549 99,012 122,318 166,281 200,118 236,875 254,302 277,407 289,478 271,786 Source: Central Bureau of Statistics. Table 111.6.1a: Change in Money Supply and Sources of Change (In millions of Kenyan shillings) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 * Provisional Money 3,175 4,848 15,064 11,175 6,708 5,890 6,065 11,820 3,657 15,363 9,312 10,633 Quasi-money 8,431 9,519 9,902 14,361 31,190 23,967 39,718 27,625 3,043 4,359 -6,954 230 Total (M2) 11,606 14,368 24,966 25,537 37,897 29,858 45,782 39,445 6,699 11,004 2,358 10,863 Money and quasi money (M3) ... ... ... 29,480 44,240 25,260 36,740 26,232 9,698 8,366 2,570 7,640 M3 and foreign currency deposits (M3X) ... ... ... ... ... ... 38,780 33,774 11,007 16,716 14,610 8,485 Net foreign assets -3,545 -2,758 1,479 26,087 -6,213 9,711 16,589 6,906 -3,989 10,647 30,323 8,297 Domestic Credit 16,950 14,238 13,255 52,440 51,415 45,020 30,502 48,179 23,217 20,737 9,958 -1,129 Central govemment (net) 12,275 3,126 -237 16,577 26,755 1,780 -3,661 8,904 7,402 -3,411 -2,867 16,594 Otherpublicbodies 472 843 -74 400 1,354 -723 326 2,518 -1,611 1,043 754 -31 Private sector 4,202 10,269 13,565 35,464 23,306 43,963 33,837 36,757 17,427 23,105 12,071 -17,692 Source: Central Bureau of Statistics. 165 Table 111.6.2: Balance Sheet of Bank of Kenya (In millions of Kenyan shillings) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Provisional Total Liabilities 31,854 37,931 49,865 117,873 87,967 111,662 116,608 130,150 124,978 126,228 141,055 134,856 Total currency 12,755 14,981 20,058 24,777 29,757 34,854 36,338 43,172 44,486 50,157 51,914 53,080 Capital and general resources fund 1,259 1,600 2,058 500 593 859 1,672 2,264 3,837 4,877 5,341 5,748 Deposits 16,145 18,769 25,402 87,235 48,680 65,035 66,870 68,753 69,843 69,404 75,525 73,103 Kenyagovemment 0 0 0 38,289 0 0 0 11,698 17,172 18,922 26,526 28,537 Kenya Banks 2,982 3,024 5,675 17,355 26,152 37,206 36,732 31,220 29,349 27,790 25,075 25,629 Others 13,163 15,745 19,727 31,591 22,528 27,829 30,138 25,835 23,322 22,692 23,924 18,937 OtherLiabilities 1,696 2,582 2,347 5,361 8,937 11,773 11,728 15,961 6,812 1,790 8,275 2,925 Total Assets 31,854 37,931 49,865 117,873 87,374 111,662 116,608 130,150 124,978 126,228 141,055 113,559 Foreign Exchange 6,016 4,673 5,571 33,034 27,207 24,669 46,269 43,437 45,989 56,550 69,934 82,238 Balances with extemal banks 5,377 3,714 4,700 30,006 26,255 23,660 45,024 41,650 45,702 55,971 69,162 81,899 Others 639 959 870 3,028 952 1,009 1,245 1,787 287 579 772 339 Direct advances and overdraft to Kenya govemment 16,287 18,909 10,074 22,658 20,755 45,642 29,993 5,367 6,609 6,664 8,595 5,936 Advances and discounts to banks 3,440 4,096 15,774 11,484 10,072 9,766 9,056 9,124 1,140 904 4,884 1,362 Other assets 6,112 10,253 18,446 50,697 29,340 31,585 31,290 72,222 71,240 62,110 57,642 24,023 Source: Central Bureau of Statistics. 166 Table 11I.6.3: Balance Sheet of Commercial Banks (In millions of Kenyan shillings) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Provisiona ASSETS Domestic 1,925 2,220 2,853 3,422 4,347 5,104 5,944 6,990 5,769 7,190 8,444 7,728 Foreign 128 173 374 1,754 885 972 1,001 810 1,329 1,478 1,133 1,076 Total 2,053 2,393 3,227 5,176 5,232 6,076 6,945 7,800 7,098 8,668 9,577 8,804 Deposits Central Bank of Kenya 3,428 4,351 6,103 17,448 27,443 30,212 36,516 32,746 29,201 28,891 23,319 29,450 Commercial Banks 2,190 2,886 2,818 1,353 3,7.16 2,856 2,984 6,577 4,666 5,057 10,222 7,664 Total 5,618 7,237 8,921 18,801 31,158 33,068 39,500 39,323 33,867 33,948 33,541 37,114 BalancesduebyBanksAbroad 679 842 2,186 9,398 11,228' 13,188 11,178 15,830 15,844 19,331 34,870 24,968 Treasury Bills 6,537 4,289 6,587 15,589 36,736 24,990 40,973 41,296 71,358 58,987 57,904 53,039 Investments: Domestic 4,493 7,028 14,499 7,824 3,709 7,876 13,747 15,593 12,189 17,684 14,398 39,835 Foreign 14 15 2,301 10,046 2,361 3,157 185 1,075 709 513 1,404 2,635 Total 4,506 7,042 16,800 17,870 6,070 11,033 13,932 16,668 12,898 18,197 15,802 42,470 Bills Discounted Domestic 2,710 2,773 1,938 2,111 1,275 1,792 3,512 2,861 2,271 3,172 1,763 2,061 Foreign 830 905 853 2,085 1,221 1,743 1,500 1,795 1,414 1,498 1,636 2,371 Total 3,541 3,678 2,791 4,197 2,496 3,535 5,012 4,656 3,685 4,670 3,399 4,432 Loans and Advances Kenya government 1,242 2,809 1,572 1,009 1,378 1,792 1,813 2,749 2,779 3,795 3,575 3,090 Public Bodies 2,859 3,662 3,514 3,631 5,120 4,927 5,237 7,572 7,502 6,455 6,959 6,601 Other 34,652 43,714 57,496 61,074 84,324 128,376 162,461 207,873 221,140 246,391 258,787 248,463 Total 38,752 50,185 62,582 65,713 90,822 135,095 169,511 218,194 231,421 256,641 269,321 258,154 Bank premises and other fixed assets 3,508 4,600 6,645 7,287 10,100 12,924 16,444 20,969 22,384 23,240 28,148 29,422 Other assets 14,666 23,157 36,781 44,577 68,474 70,308 83,876 90,817 106,878 93,429 154,821 150,798 Total Assets 79,860 103,424 146,519 188,609 262,317 310,215 387,371 455,553 505,433 517,111 607,383 609,201 LIABILITIES Central government 3,098 5,323 3,078 4,790 4,133 4,766 3,254 3,621 9,108 7,882 7,466 4,199 Local government 230 180 174 272 277 391 498 484 1,364 361 591 588 Otherpublicbodies 4,562 6,985 12,359 12,323 16,654 16,218 17,132 18,075 17,243 21,913 20,035 21,997 Total 7,889 12,488 15,611 17,385 21,065 21,375 20,884 22,180 27,715 30,156 28,092 26,784 Other Deposits Demand 11,508 16,457 24,628 37,243 35,863 35,871 39,204 27,977 63,212 75,115 75,927 94,119 Time savings and others 27,301 33,246 41,192 55,269 82,471' 109,390 153,079 196,092 189,619 186,805 196,724 188,178 Total 38,809 49,703 65,820 92,512 118,334 145,260 192,283 224,069 252,831 261,920 272,651 282,297 Total Deposits 46,698 62,190 81,431 109,897 139,399 166,635 213,167 246,249 280,546 292,076 300,743 309,081 Balances due to Banks in Kenya Central Bank of Kenya 25 1,342 4,921 252 0 0 0 448 4,335 1,614 3,635 2,974 Commercial Banks of Kenya 2,295 2,881 3,211 2,513 2,927 3,773 4,712 5,436 4,911 3,270 6,098 7,929 Total 2,320 4,223 8,132 2,765 2,927 3,773 4,712 5,884 9,246 4,884 9,733 10,903 Balances due to banks abroad 588 2,622 704 1,483 1,317 2,456 2,305 2,411 3,718 3,590 4,806 3,148 Billspayable 1,858 2,269 2,635 3,370 5,644 4,913 3,911 6,857 6,958 4,958 5,766 5,534 Otherloans 882 1,261 2,201 1,689 2,077 2,756 4,776 7,473 9,317 12,199 5,500 11,331 Otherliabilities 16,779 23,832 39,331 54,018 87,686 97,733 118,065 132,434 141,622 114,354 228,208 214,888 Total 20,108 29,984 44,870 60,560 96,724 107,858 129,057 149,175 161,615 135,101 244,280 234,901 Capital and Reserve Paid up capital 3,133 3,585 5,435 7,166 9,501 12,471 17,063 19,573 22,417 24,321 38,871 28,598 Reserve Funds and other funds 3,962 5,812 6,649 8,221 13,765 19,279 23,372 34,674 31,606 60,729 13,755 25,720 Total 7,095 9,397 12,084 15,388 23,266 31,750 40,435 54,247 54,023 85,050 52,626 54,318 Grand total 76,221 105,794 146,518 188,609 262,317 310,016 387,371 455,555 505,430 517,111 607,382 609,203 Source: Central Bureau of Statistics. 167 Table III.6.4: Commercial Banks Domestic Lending by Economic Sector (In millions of Kenyan shillings) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Provisional Government 4,392 6,719 5,086 4,658 6,498 6,502 7,048 10,322 10,281 10,249 10,534 9,692 Private Sector 37,329 44,841 57,525 60,221 80,841 113,236 147,233 157,230 185,499 205,015 214,312 207,348 Agriculture 6,015 6,725 8,244 9,576 11,890 14,478 14,730 17,919 21,933 23,426 24,399 23,795 Mining and Quarrying 196 472 363 244 1,010 1,530 1,584 2,419 2,617 2,975 2,838 2,169 Manufacturing 9,019 11,136 11,621 15,510 19,218 32,164 38,380 42,935 49,635 54,936 59,426 49,597 Building and Construction 2,434 2,855 4,248 3,558 4,217 6,092 8,469 11,508 14,962 18,363 16,850 17,288 Trade 7,114 8,639 9,823 9,235 13,081 21,798 25,918 32,865 36,752 39,413 41,500 38,128 Electricity and Water 68 87 137 186 186 283 478 603 1,523 1,063 1,626 1,843 Transport, Storage and Communications 1,680 1,655 2,307 2,725 4,113 6,594 7,320 10,972 10,309 9,723 9,608 9,901 Financial Institutions 995 2,171 1,274 1,897 1,538 3,242 3,157 5,165 6,472 6,876 5,324 5,391 Other Services 9,808 11,100 19,508 17,292 25,588 27,056 47,197 32,844 41,296 48,240 52,741 59,236 Private Households 1/ ... ... ... ... ... 4,896 5,212 25,451 27,908 34,246 35,671 43,177 Grand Total 41,721 51,559 62,611 64,879 87,339 124,634 159,493 193,003 223,688 249,510 260,517 260,217 I/ Includes private nonprofit making organizations and private households. Source: Central Bureau of Statistics. Table 111.6.5: Assets and Liabilities of Nonbank Financial Institutions at Years' End (In millions of Kenyan shillings) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Provisional Liabilities Deposits 33,224 36,736 41,645 46,593 57,070 46,197 38,309 21,668 23,370 20,528 19,829 14,947 Central and local govemment 1,247 919 727 731 587 679 562 767 710 801 785 438 Other public sector 5,939 6,601 7,418 7,374 6,852 4,686 5,135 4,475 4,635 3,821 3,049 2,468 Other depositors 26,038 29,217 33,500 38,488 49,632 40,831 32,611 16,426 18,025 15,906 15,995 12,041 Other liabilities 9,308 12,116 15,138 21,561 20,598 20,603 19,379 18,257 19,170 15,635 17,648 9,033 Assets Cash and banks 4,033 4,196 5,502 5,782 8,741 12,988 11,938 5,089 6,899 4,920 4,453 2,415 Other financial institutions 2,902 3,171 3,438 2,998 2,385 659 1,127 52 157 286 50 866 Associated companies 1,164 1,187 1,007 882 460 398 236 192 1,904 1,426 1,597 2,844 Investments, bills, loans and advances 32,264 37,144 43,346 55,058 66,114 58,644 48,407 32,321 31,096 26,865 28,997 16,382 Central and local government 3,236 4,626 7,658 18,650 20,583 7,095 3,097 ... ... ... ... ... Other public sector 554 628 370 334 5,221 9,922 8,219 ... ... ... ... ... Total public sector 3,790 5,254 8,028 18,984 25,805 17,017 11,316 4,568 2,270 2,387 3,032 ... Private sector 28,474 31,890 35,318 36,074 40,309 41,626 37,091 27,753 28,826 24,478 25,965 16,382 Other assets 2,170 3,154 3,490 3,436 4,334 3,823 3,964 2,211 2,483 2,665 2,381 1,472 Source: Central Bureau of Statistics. 168 Table 111.6.6: Interest Rate Structure (In percentages) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Central Bank of Kenya Discount rate-treasury bills 15.9 16.8 17.0 39.9 17.9 20.9 21.5 26.4 11.1 20.5 13.5 10.9 Advances on treasury bills 18.4 19.3 19.5 44.5 20.5 23.5 26.9 31.4 17.1 26.5 19.5 16.8 Crop finance scheme Discounts 19.4 20.3 20.5 45.5 21.5 24.5 26.9 31.3 17.1 26.5 19.5 16.8 Advances 19.4 20.3 20.5 45.5 21.5 24.5 26.9 31.3 17.1 26.5 19.5 16.8 Other bills and notes Discounts 19.4 20.3 20.5 45.5 21.5 24.5 26.9 31.3 17.1 26.5 19.5 16.8 Advances 19.4 20.3 20.5 45.5 21.5 24.5 26.9 31.3 17.1 26.5 19.5 16.8 Kenya Commercial Banks Time Deposits 3-6months 13.8 12.1 13.7 18.7 11.2 11.3 13.3 18.5 14.9 10.3 6.3 6.1 6-9 months 14.0 11.2 12.4 18.2 11.4 10.7 12.9 16.8 13.4 8.6 6.7 5.6 9-12months 14.5 11.6 13.6 18.7 11.8 10.1 12.4 15.9 14.0 9.3 5.9 5.7 Savings deposits 13.5 13.5 13.5 11.3 8.6 6.9 8.0 9.7 8.0 6.2 4.5 4.4 Loans & advances (maximum) 1/ 19.0 29.0 30.0 38.5 30.9 33.1 34.6 30.4 26.2 25.2 19.6 19.5 Other Financial Institutions Post Office Savings Deposits 11.0 11.0 11.0 10.0 10.0 6.0 6.0 6.0 6.0 5.0 5.0 5.0 Agricultural Finance Corp. loans Land purchase 12.0 12.0 12.0 12.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 Seasonal crop loan 14.0 14.0 14.0 14.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 Other 13.0 13.0 13.0 13.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 Hire purchase companies and Merchant Deposits 13.0 13.0 13.0 15.0 11.5 4.0 4.0 6.2 5.9 5.9 5.6 5.6 Loans 19.0 19.0 21.0 29.0 29.0 26.0 31.0 25.0 24.9 21.5 19.9 19.9 1/ Loans and advances for less than 3 years. Source: Central Bureau of Statistics. 169 Table 111.6.7: Exchange Rate Movements (In percentages) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Annual average Shilling per dollar 22.9 27.5 32.2 58.0 56.1 51.4 57.1 58.0 61.8 70.4 76.3 78.6 Percent change -16.9 -14.5 -44.5 3.5 9.0 -10.0 -1.5 -6.1 -12.2 -7.7 -2.9 End of period Shilling per dollar 24.1 29.0 36.0 68.2 44.8 55.9 55.0 62.7 61.8 72.7 79.0 78.6 Percent change -17.0 -19.4 -47.2 52.0 -19.8 1.7 -12.2 1.4 -15.0 -8.0 0.5 Source: IMF m.7. Agriculture Sector Table Ill.7.1: Agricultural Output, Inputs and Value Added (In millions of Kenyan shillings, unless otherwise indicated) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Provisional Gross Output At current prices 50,386 55,911 66,656 92,055 117,402 127,343 135,572 151,614 163,086 155,574 140,189 152,338 Marketed production 21,982 24,402 26,438 43,222 53,800 60,850 65,046 71,134 84,802 73,313 78,775 80,536 At constant 1982 prices 26,944 26,436 25,391 24,416 25,090 26,322 27,073 27,019 27,576 27,999 27,407 27,509 Marketedproduction 11,360 11,308 10,327 10,811 10,933 12,285 12,188 9,694 10,743 10,889 11,557 11,556 Value index 240.2 266.5 317.8 438.8 559.7 607.1 646.3 722.8 777.5 741.7 668.3 726.2 Quantum index 128.4 126.0 121.0 116.4 119.6 125.5 129.1 128.8 131.5 133.5 130.7 131.1 Price index 187.0 211.5 262.5 377.0 467.9 483.8 500.8 561.1 591.4 555.6 511.5 553.8 Inputs Atcurrentprices 5,793 5,727 6,336 8,689 11,560 11,790 10,912 13,615 15,068 15,638 15,936 17,935 At constant 1982 prices 3,103 2,858 2,695 2,646 2,704 2,855 2,566 2,268 2,455 2,574 2,511 2,313 Value index 341.9 338.0 373.9 512.8 682.3 695.8 644.0 803.6 889.3 922.9 940.5 1,058.5 Quantum index 183.1 168.6 159.0 156.1 159.6 168.5 151.5 133.8 144.9 151.9 148.2 136.5 Price index 186.7 200.4 235.1 328.4 427.5 413.0 425.2 600.4 613.8 607.5 634.6 775.4 Value Added 1/ Atcurrentprices 44,593 50,184 60,320 83,366 105,842 115,553 124,660 137,999 148,018 139,936 124,253 134,403 At constant 1982 prices 23,841 23,579 22,697 21,770 22,386 23,467 24,507 24,751 25,122 25,425 24,896 25,196 Value index 231.3 260.3 312.8 432.4 548.9 599.3 646.5 715.7 767.6 725.7 644.4 697.0 Quantum index 123.6 122.3 117.7 112.9 116.1 121.7 127.1 128.4 130.3 131.9 129.1 130.7 Price index 187.0 212.8 265.8 382.9 472.8 492.4 508.7 557.5 589.2 550.4 499.1 533.4 Note: Base year for indices, 1982. 1/ Monetary sector only, and excludes forestry and fishing. Source: Central Bureau of Statistics. 170 Table 11L7.2: Gross Marketed Production at Current Prices (In millions of Kenyan shillings) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Provisional Cereals 1,818 2,628 3,059 3,205 5,462 6,036 6,596 6,296 6,780 5,414 5,617 8,752 Wheat 639 999 705 412 1,262 1,632 2,114 2,198 2,986 1,006 1,133 2,375 Maize 1,137 927 1,539 1,959 2,684 3,208 3,118 2,810 2,800 3,098 2,915 5,188 Rice Others 41 702 816 833 1,516 1,196 1,364 1,288 994 1,310 1,569 1,189 Temporary crops 2,908 3,057 3,260 4,123 6,478 8,076 8,684 8,712 10,458 10,494 10,775 10,217 Pyrethrurn 252 331 381 397 558 442 334 322 350 406 729 769 Sugar Cane 1,828 2,147 2,304 3,171 5,136 6,824 7,126 6,644 7,968 7,639 7,942 7,155 Others 828 579 576 555 784 810 1,224 1,746 2,140 2,449 2,103 2,293 Permanent crops 11,427 12,297 13,715 28,091 30,640 32,580 35,530 41,346 53,454 42,361 48,435 46,415 Coffee 4,067 4,054 4,365 7,696 11,758 15,290 14,358 16,546 13,198 10,050 11,282 6,424 Sisal 361 377 335 338 376 534 546 786 796 874 810 957 Tea 6,937 7,800 8,933 19,867 18,300 16,596 20,336 23,636 39,138 31,088 35,970 38,565 Others 62 66 82 190 206 160 290 378 322 349 373 470 Crops (subtotal) 16,153 17,982 20,035 35,419 42,580 46,692 50,810 56,354 70,692 58,270 64,826 65,384 Livestock and products 5,829 6,420 6,403 7,803 11,220 14,158 14,236 14,780 14,110 15,043 13,949 15,151 Cattle and calves 3,281 3,876 4,142 4,704 5,054 6,052 7,262 8,714 8,878 8,886 8,040 9,079 Dairy produce 1,687 1,578 1,275 1,943 3,230 5,076 3,864 2,862 1,946 2,694 2,051 1,920 Others 862 966 986 1,156 2,936 3,030 3,110 3,204 3,286 3,463 3,858 4,153 Total gross marketed products 21,982 24,402 26,438 43,222 53,800 60,850 65,046 71,134 84,802 73,313 78,775 80,536 Memo Item: Temporary industrial crops 2,533 2,792 3,101 3,963 6,276 7,874 8,364 8,258 9,980 9,972 10,529 9,949 Source: Central Bureau of Statistics. 171 Table 111.7.3: Principal Crops: Volume of Sales, Average Prices and Producers' Revenue (In millions of Kenyan shillings, unless otherwise indicated) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Provisional Wheat VolumeofSales('OOOmt) 79 199 126 73 105 126 130 124 177 53 71 132 Average Price (KSh/mt) 4,500 5,000 5,603 5,650 12,000 13,000 15,630 17,700 16,901 18,150 16,517 18,009 Producers' Revenue 353 995 705 413 1,262 1,632 2,032 2,198 2,986 960 1,164 2,374 Maize VolumeofSalesCOOOmt) 528 304 324 242 316 401 296 205 218 224 201 377 Average Price (KSh/mt) 2,617 3,056 4,747 8,104 9,500 8,000 10,550 13,732 12,844 13,859 14,494 13,598 Producers' Revenue 1,381 927 1,539 1,960 3,002 3,208 3,118 2,810 2,800 3,097 2,916 5,120 Sugar-cane Volume of Sales (000 mt) 4,200 4,000 3,700 3,800 3,600 3,800 3,900 4,300 4,600 4,400 3,900 3,600 Average Price (KSh/mt) 448 521 630 826 1,553 1,553 1,553 1,553 1,730 1,730 2,015 2,015 Producers' Revenue 1,880 2,084 2,331 3,139 5,591 5,901 6,057 6,678 7,958 7,612 7,859 7,254 Coffee VolumeofSales('OOOmt) 112 87 88 78 82 96 103 68 51 64 98 55 AveragePrice('OOOKSh/mt) 36 47 49 99 144 160 * 139 252 257 156 115 118 Producers' Revenue 4,069 4,054 4,364 7,691 11,759 15,295 14,359 17,102 13,193 10,052 11,279 6,430 Tea Volume of Sales ('000 mt) 197 204 188 211 209 245 257 221 294 249 236 295 Average Price ('000 KSh/mt) 35 38 48 92 87 68 79 107 133 125 152 131 Producers' Revenue 6,936 7,835 8,935 19,509 18,298 16,594 20,339 23,571 39,129 31,100 35,972 38,560 Source: Central Bureau of Statistics. Table 111.7.4: Selected Agricultural Price Indices (Index 1982=100) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Provisional Indices of Prices Received Sales to marketing boards 193.5 215.8 256.0 399.8 495.3 527.5 533.7 733.8 789.4 673.3 681.6 696.9 General index of agricultural outputprices 187.0 211.5 262.5 377.0 467.9 483.8 500.8 561.1 591.4 555.6 511.5 553.8 Indices of Prices Paid Purchased inputs 186.7 216.1 235.1 328.4 427.5 413.0 465.2 549.4 613.8 607.5 634.6 775.3 Index of purchased consumer goods-rural areas 205.9 228.6 284.8 430.3 565.5 572.2 632.3 650.4 683.6 727.3 793.5 820.5 Weighted average 196.5 214.4 263.9 372.2 438.6 505.3 523.7 565.4 630.0 610.0 666.6 790.0 Agricultural Terms of Trade 95.2 98.6 99.5 101.3 106.7 95.7 95.6 99.2 93.9 91.1 76.7 70.1 Source: Central Bureau of Statistics. 172 Table 111.7.5: Tea: Selected Indicators by Size of Landholding 199 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Provisional Area ('000 ha) Smallholders 67.0 68.8 72.2 73.1 73.S 79.0 81.2 86.1 87.9 90.3 88.4 88.4 Estates 30.0 31.0 31.3 31.8 32.1 32.4 32.5 32.7 33.1 33.9 34.4 40.8 Total 97.0 99.8 103.5 104.9 105.9 111.3 113.7 118.8 121.0 124.2 122.8 129.2 Production ('000 mt) Smallholders 110.0 112.7 99.8 112.5 119.1 139.0 144.1 129.7 175.6 153.9 145.6 181.7 Estates 87.0 90.9 88.3 98.6 90.3 105.6 113.1 91.0 118.5 94.9 90.7 112.9 Total 197.0 203.6 188.1 211.2 209.4 244.5 257.2 220.7 294.2 248.8 236.3 294.6 Average Yield (mtlha) Smallholders 1,640.7 1,638.1 1,383.2 1,539.2 1,612.7 1,759.8 1,775.1 1,506.5 1,998.1 1,704.3 1,647.8 2,056.6 Estates 2,902.4 2,932.3 2,816.2 3,106.5 2,817.0 3,262.7 3,479.7 2,783.2 3,581.3 2,799.4 2,636.6 2,766.5 Total 2,030.6 2,040.1 1,817.1 2,013.7 1,977.3 2,196.6 2,262.5 1,857.9 2,431.2 2,003.2 1,924.9 2,2s8.9 Note: Data in calendar years and may differ from those based on crop year. Source: Tea Board of Kenya; Central Bureau of Statistics. Table 111.7,6: Coffee: Selected Indicators by Size of L,andholding 1989190 1990191 1991/92 1992/93 1993M94 1994/95 1995/96 1996i97 1997/98 1998/99 1999,/O 200/0,l Provisional Area ('000 ha) Cooperatives 116.4 117.4 116.7 120.2 120.5 120.5 122.7 122.7 122.6 128.0 128.0 128.0 Estates 36.7 38.0 37.1 38.0 38.2 40.0 38.4 38.4 39.7 42.0 42.0 42.0 Total 153.1 155.4 153.8 158.2 158.7 160.5 161.1 161.1 162.3 170.0 170.0 170.0 Production (C000 mt) Cooperatives 69.5 51.3 51.0 42.4 41.3 62.6 56.9 38.3 32.1 39.4 62.2 24.8 Estates 34.4 35.1 34.3 32.7 38.6 32.8 40.1 29.7 21.3 28.7 38.5 38.5 Total 103.9 86.4 85.3 75.1 79.9 95.4 97.0 68.0 53.4 68.1 100.7 51.7 Average Yield (mt/ba) Cooperatives 597.1 437.0 437.0 352.7 342.7 519.5 463.7 312.1 261.8 308.0 485.9 193.8 Estates 937.3 923.7 924.5 860.5 1,010.5 820.0 1,044.3 773.4 536.5 683.0 916.7 640.5 Total 678.6 556.0 554.6 474.7 503.5 594.4 602.1 422.1 329.0 400.6 592.4 304.1 Source: Coffee Board of Kenya; Central Burelau of Statistics. 173 111.8. Industrial and Other Sectors Table 111.8.1: Employment and Labor Earnings in Manufacturing Enterprises 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Provisional Employment in Manufacturing Enterprises (Number) Slaughtcring, preparing and preserving of meat 3,545 3,620 3,697 3,790 3,898 4,469 4,114 4,147 4,107 4,124 4,070 4,031 Manufacture of dairy products 4,101 4,112 4,065 4,099 4,185 4,269 4,348 4,384 4,328 4,434 4,437 4,458 Canning and preserving of fruits and vegetables 3,945 4,096 4,100 4,126 4,157 4,216 4,260 4,428 4,405 4,865 5,150 5,442 Grain mill products 4,320 4,389 4,415 4,466 4,852 5,256 5,577 5,993 6,017 6,169 6,198 6,205 Sugar factories and refineries 12,585 12,618 12,644 12,869 12,961 13,000 13,008 15,811 16,402 16,578 16,569 15,899 Manufacture of food products n.e.c 17,893 19,281 19,375 20,391 21,600 23,010 24,524 27,306 28,602 29,459 29,766 29,839 Spirits beer and tobacco 5,380 5,628 5,718 5,917 6,181 6,448 6,631 6,725 6,797 6,660 6,382 6,139 Spinning, weaving and finishing textiles 12,418 11,608 11,700 12,278 11,795 11,653 11,791 12,430 13,116 13,359 13,356 13,285 Knitting mills 7,130 7,220 7,229 7,249 7,447 7,720 7,903 7,925 7,942 7,877 7,671 7,497 Manufacture of weaving apparel except footwear 6,868 6,931 6,733 6,820 6,976 7,114 7,211 7,304 7,403 7,402 7,284 7,194 Sawmills, planing and other woodmills 8,494 8,477 8,403 8,528 8,695 9,012 9,328 9,497 9,516 9,667 9,626 9,614 Printing, publishing and allied industries 5,992 5,870 5,965 6,063 6,284 6,575 6,870 7,160 7,162 7,469 7,594 7,700 Manufacture of plastic products 3,420 3,587 3,897 4,051 4,217 4,465 4,713 4,899 4,935 5,342 5,562 5,816 Manufacture of cement, lime and plaster 3,391 3,427 3,463 3,507 3,466 3,861 4,098 4,602 4,578 4,482 4,345 4,119 Manufacture of fabricated metal products except machinery and equipment n.e.c 6,919 6,971 7,028 7,188 7,404 8,010 8,300 8,489 8,506 8,629 8,577 8,558 Other manufacturing enterprises 81,299 81,065 81,868 82,258 83,382 85,722 87,824 83,100 83,684 83,384 82,113 80,804 Total Manufacturing 187,700 188,900 190,300 193,600 197,500 204,800 210,500 214,200 217,500 219,900 218,700 216,600 Earnings in Manufacturing in Enterprises (in millions of Kenyan shillings) Slaughtering, preparing and preservingof meat 137 150 169 194 222 310 341 412 466 538 584 623 Manufacture of dairy products 186 208 227 287 332 433 532 626 692 802 866 917 Canning and preserving of fruits and vegetables 112 130 142 159 178 230 308 387 471 635 791 973 Grain mill products 129 145 158 196 267 368 510 615 689 795 866 917 Sugar factories and refineries 280 308 378 450 537 706 1,026 1,198 1,366 1,525 1,762 1,933 Manufacture of food products n.e.c 288 344 427 543 710 943 1,341 1,731 2,139 2,597 2,998 3,360 Spirits beer and tobacco 414 473 534 615 731 1,008 1,344 1,684 2,042 2,411 2,659 2,881 Spinning, weaving and finishing textiles 334 319 340 406 468 578 747 901 1,101 1,303 1,472 1,617 Knitting mills 198 225 248 308 381 489 612 781 964 1,175 1,346 1,517 Manufacture of weaving apparel except footwear 152 166 184 206 275 342 441 576 716 877 1,017 1,160 Sawmills, planing and other woodmills 172 189 203 246 301 387 489 590 680 800 880 949 Printing, publishing and allied industries 310 339 369 408 470 587 728 876 1,021 1,246 1,426 1,592 Manufacture of plastic products 112 130 167 199 239 337 442 564 625 754 852 945 Manufacture of cement, lime and plaster 249 264 283 310 331 441 565 691 720 792 887 938 Manufacture of fabricated metal products except machinery and equipment n.e.c 308 334 363 405 493 609 933 894 1,038 1,227 1,354 1,465 Other manufacturing enterprises 3,522 3,806 4,235 4,787 5,733 7,544 8,806 10,668 14,417 16,675 17,816 19,034 Total Manufacturing 6,902 7,532 8,424 9,720 11,666 15,312 19,162 23,193 29,143 34,151 37,575 40,820 Source: Central Bureau of Statistics. 174 Table][11.8.2 Comparativelindictors of Energy, P cwr, Communications and Infrastructure Provision _______ Electric power Electric power Improved water Air transport, Telephone Telephone consumption losses source Roads,paved freight mainflnes mainlines Internet users Internet hosts Mobile phones (% of population (kwh per capita) (% of output with acc-ess) (% of total roads) 'million tons per ki) waiting timae (years) (per employee) (000) ___________ 199 1999 1990 1999 1990 2000 1990 1999 1990 2000 1997 2000 1990 2000 1995 2000 1995 2000 1995 2000 Sub--Saharan Africa 445.6 434.8 9 11 48.7 55.4 17 13 . .. 4 4 39 97 464 3,695 . Kenya 115.7 126.3 16 20 40.0 49.0 13 12 52 77 6 a 13 16 0 200 17 949 2 127 Ghana 294.8 203.6 1 1 56.0 64.0 20 30 16 40 2 to 1 63 0 30 6 119 6 130 Senegal 98.5 114.5 13 16 72.0 78.0 27 29 18 14 1 I 23 146 0 40 14 485 .. 250 Mauritius . .. . .. 100.0 100.0 93 96 64 183 I I 41 153 .. 87 0 3,286 12 ISO South Africa 3,676.0 3,775.5 6 8 .. 86.0 30 20 179 688 0 1 49 113 460 2,400 48,277 184,547 535 8,308 Tanzania 51.2 54.6 20 22 50.0 54.0 3 4 1 3 7 1 .15 47 .. 115 0 536 4 ISO Uganda . . . .. 44.0 50.0 .. 7 22 23 1 4 12 25 1 40 58 159 2 189 East Asia and Pacific 383.7 697.6 8 8 70.2 74.4 17 21 . .. I .. 28 .. 225 32,903 . Philippines 342.3 453.6 13 15 87.0 87.0 .. 20 316 241 3 .. 35 230 20 2,000 1,771 16,694 494 6,454 Thailand 689.7 1,352.0 11 8 71.0 80.0 55 98 661 1,713 1 2 70 169 55 2,300 4,055 53,683 1,298 3,056 Vietnam 94.0 252.2 24 15 48.0 56.0 24 25 1 116 .. . . . . 200 0 56 24 789 South Asia 228.7 337.0 19 22 79.5 87.2 38 37 . .. 6 214 .. 251 5,413 . India 253.6 379.2 18 21 78.0 88.0 . 4.6 663 545 1 1 13 .. 250 5,000 788 32,991 77 3.577 Bangladesh 42.8 89.0 34 16 91.0 97.0 .. 10 70 194 ~ 7 3 12 3401 . 0 205 Europe and Central Asia .. 2,679.0 .. 13 .. 90.2 74 86 . .. 3 2 5 3 8 468. Latin America and Caiibbean 1,141.2 1,470.1 14 16 81.1 84.9 22 27 . .. I I 8 8 0 906. Mfiddle East and NortbhAfrica 928.6 1,76.0 11 12 84.5 89.5 67 66 . . 5 I 4 3 2 185. World 1,744.9 2,107.3 8 9 75.5 80.5 39 4.. . I 1 14 21 .________ Source: World Development Indicators. Table 111.8.3: Production, Trade and Consumption of Energy by Primary Source (In thousands of metric tons of oil equivalent) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Provisional Domestic Energy Production 690 739 736 784 799 819 326 309 322 283 167 194 Hydro power 609 667 671 718 736 750 292 277 289 251 135 155 Geothermal power 81 72 65 65 63 70 34 .32 33 33 32 39 Total Net Imports 2,002 1,973 2,115 2,195 2,235 2,301 2,885 3,028 3,019 3,114 3,071 3,012 Imports of crude oil 2,178 2,059 2,235 2,274 2,173 1,680 1,413 1,834 2,158 2,139 2,452 1,966 Petroleum fuels -402 -600 -550 -289 -133 353 964 896 1,388 1,251 875 1,208 Imports of hydro power 42 32 58 66 53 45 12 13 12 13 19 10 Coal & coke consuniption of oil 106 94 99 88 76 97 89 92 73 72 66 66 Stock changes (includes balancing item) )78 388 273 57 65 126 407 195 -612 -361 -341 -238 Total Energy Consumption 2,692 2,712 2,851 2,978 3,034 3,120 3,211 3,337 3,341 3,397 3,238 3,206 Liquid fuels 1,854 1,847 1,959 2,041 2,105 2,159 2,784 2,924 2,934 3,029 2,986 2,936 Stock changes (includes balancing item) 78 388 273 57 65 126 407 195 -612 -361 -341 -238 Hydro and geothermal 731 771 794 849 852 864 338 322 334 296 186 204 Coal and coke 106 94 99 88 76 97 89 92 73 72 66 66 Memo Items: Local production as % of total consumption 26 27 26 26 26 26 10 9 10 8 5 6 Per capita ConSumption in terms of kilograms of oil equivalent 115 113 114 115 113 113 113 119 116 115 107 104 Note: Fuelwood and charcoal are excluded. Source: Central Bureau of Statistics. 175 Table 111.8.4: Installed Capacity and Electricity Generation 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Provisional Installed Capacity (megawatt) 723 829 805 805 808 809 788 860 857 930 1,159 1,143 Hydro 498 604 604 604 604 604 595 599 595 595 675 677 Thertmal oil 180 180 156 156 159 160 148 217 217 291 428 409 Goethermal 45 45 45 45 45 45 45 45 45 45 57 57 Generation of Electricity (gigawatt) 3,044 3,237 3,215 3,396 3,538 3,747 4,276 4,389 4,558 4,582 4,179 4,338 Hydro 2,537 2,780 2,796 2,993 3,068 3,123 3,535 3,373 3,498 3,063 1,794 1,917 Thermal oil 171 159 147 131 209 334 349 647 672 1,136 2,018 1,965 Geothermal 336 298 272 272 261 290 392 369 389 383 367 456 Note: Data includes estimates for industrial establishments with generation capacity. Source: Central Bureau of Statistics. Table 111.8.5: Tourism Sector Selected Indicators 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Provisional Receipts (in millions of Kenyan shillings) 10,660 11,880 14,254 24,440 28,100 24,993 25,593 22,640 17,509 21,367 21,554 24,239 Arrivals ('000) 814 805 782 826 989 966 1,003 1,001 894 969 1,037 994 Purpose: Holiday 696 673 607 680 808 786 821 805 687 747 778 729 Business 74 78 109 98 102 99 104 102 87 94 98 92 Transit 36 38 51 47 57 60 56 72 102 107 139 153 Other 10 15 15 2 22 21 22 22 19 21 22 20 Averagelengthofstay(days) 1/ 14 14 13 14 16 13 14 12 10 9 9 8 Hotel occupancy (OOO/night) 6,046 6,519 5,526 6,189 5,110 5,055 5,061 4,910 2,813 2,951 3,688 3,355 Hotel occupancy rate (%) 58 59 48 52 43 44 45 52 35 34 39 40 Visitors to national parks('000) 2/ 1,532 1,519 1,367 1,428 1,528 1,493 1,489 1,365 1,079 1,533 1,645 1,650 I/ Excludes days stayed by arrivals categorized as "other'. 2/ Includes visitors to game reserves. Source: Central Bureau of Statistics. Table 111.8.6: Transport Selected Indicators 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Provisional Kenya Pipeline Throughput (OOOs cubic meters) 1,831 1,860 1,973 1,943 2,249 2,377 2,475 2,575 2,783 2,783 3,463 Kenya Railways Passenger handled (OOOs) 2,635 2,507 2,426 1,911 1,624 2,379 1,981 2,843 4,700 4,200 6,500 Freight handled(OOOs tons) 3,286 2,821 2,310 1,901 2,090 1,827 1,621 1,688 2,200 2,400 2,300 Kenya Ports Authority Cargo handled (OOOs tons) 7,102 7,893 7,917 8,269 9,112 8,694 9,785 9,688 9,498 10,580 12,717 Commercial Airlines Passenger handled (OOOs) 2,617 2,582 2,721 2,773 2,712 2,691 3,416 3,163 3,558 3,846 3,819 Freight handled (OOOs metric tons) 56 63 78 95 86 83 84 126 133 146 147 Registration of new vehicles (number) 15,516 14,784 12,420 17,928 22,224 28,664 29,893 31,718 27,892 20,236 26,024 Source: Central Bureau of Statistics. 176 HI.9. Prices Table II[.9.1: National Consumer Price Index (Index 1990=100) 1990 9I91 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 CPI period average Index (1990= 100) 100.0 120.1 152.9 223.2 287.5 292.0 317.9 355.8 379.7 401.5 441.5 466.9 476.1 Pcrcentdiange 17.8 20.1 27.3 46.0 28.8 1.6 8.9 11.9 6.7 5.8 10.0 5.8 2.0 CPI end of period (December) Index (1990= 100) 100.0 114.5 153.0 236.7 252.4 269.8 298.5 334.3 336.5 371.9 415.7 422.4 440.3 Percent change 23.1 14.5 33.7 54.7 6.6 6.9 10.7 12.0 0.7 10.5 11.8 1.6 4.3 CPI mid-year (June) Index (1990 = 100) 100.0 120.8 163.6 227.6 .293.1 .293.5 321.7 363.3 386.6 406.0 451.5 472.3 485.7 Percentdiamge 17.5 20.8 35.5 39.1 28.7 0.2 9.6 12.9 6.4 5.0 11.2 4.6 2.8 Source: IMF 177 Table 111.9.2: Wage Payments by Industry and Sector (In Millions of Kenyan shillings per year) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Provisional Public and Private Sector by Industry 47,204 52,980 60,978 69,952 88,692 106,080 133,434 171,743 214,865 282,481 285,872 324,579 Agriculture and forestry 3,514 4,000 4,698 5,512 7,006 9,072 11,598 13,032 17,225 20,343 23,028 26,053 Miningandquarrying 116 134 148 174 202 240 286 320 396 459 518 593 Manufacturing 6,902 7,532 8,424 9,720 11,666 15,312 19,160 23,193 29,143 34,151 37,575 40,820 Electricity and water 1,208 1,316 1,400 1,574 1,854 2,252 2,656 2,413 4,050 4,540 5,127 5,525 Construction 1,938 2,278 2,622 2,978 3,692 4,782 6,090 6,749 8,848 10,250 11,401 12,396 Trade, restaurants and hotels 5,640 6,242 7,092 8,368 14,746 13,832 18,022 22,313 27,503 32,834 38,746 46,479 Transportandcommunications 3,822 4,310 4,786 5,684 6,566 8,190 10,512 10,428 16,288 19,323 23,956 29,472 Finance and business services 5,288 5,882 6,932 7,922 9,192 11,774 14,772 17,023 22,268 25,213 29,238 33,452 Other services 1/ 18,776 21,286 24,876 28,020 33,768 40,626 50,338 76,272 89,144 135,369 116,284 129,789 Private Sector 22,964 25,918 31,470 37,924 46,298 61,086 79,186 98,191 120,890 144,699 168,870 196,961 Agriculture and forestry 2,308 2,602 3,200 3,948 5,116 6,572 8,428 10,262 12,490 14,798 16,596 18,670 Mining and quarrying 78 94 108 130 154 186 226 269 310 361 407 467 Manufacturing 5,526 6,166 6,914 8,070 9,710 12,732 16,236 20,182 24,549 29,053 31,904 34,744 Electricity and water 20 22 42 56 76 102 132 177 291 359 396 445 Construction 1,042 1,286 1,516 1,828 2,280 3,080 4,008 4,997 6,037 7,106 7,932 8,695 Trade, restaurants and hotels 5,200 5,838 6,660 7,934 9,902 13,226 17,306 21,733 26,542 31,721 37,476 45,053 Transport and communications 1,474 1,684 2,054 2,864 3,492 4,376 5,792 6,525 8,489 9,930 11,963 14,421 Finance and business services 3,488 3,880 4,790 5,746 6,786 8,604 10,858 13,460 16,142 18,921 22,060 25,734 Other services 1/ 3,828 4,346 6,186 7,348 8,782 12,208 16,200 20,587 26,041 32,450 40,136 48,735 Public Sector 24,240 27,062 29,508 32,028 42,394 44,994 54,248 73,552 93,975 102,919 117,002 127,618 By industry Agriculture and forestry 1,206 1,398 1,498 1,564 1,890 2,500 3,170 2,770 4,736 5,545 6,432 7,383 Mining and quarrying 38 40 40 44 48 54 60 52 87 98 110 126 Manufacturing 1,376 1,366 1,510 1,650 1,956 2,580 2,924 3,011 4,595 5,098 5,671 6,076 Electricity and water 1,188 1,294 1,358 1,518 1,778 2,150 2,524 2,235 3,759 4,181 4,731 5,080 Construction 896 992 1,106 1,150 1,412 1,702 2,082 1,752 2,811 3,144 3,469 3,701 Trade, restaurants and hotels 440 404 432 434 4,844 606 716 579 961 1,113 1,269 1,427 Transport and communications 2,348 2,626 2,732 2,820 3,074 3,814 4,720 3,904 7,799 9,394 11,993 15,052 Finance and business services 1,800 2,002 2,142 2,176 2,406 3,170 3,914 3,564 6,126 6,292 7,178 7,718 Other services 1/ 14,948 16,940 18,690 20,672 24,986 28,418 34,138 55,686 63,103 68,056 76,148 81,055 By govemmental entity Central govemment 10,242 11,124 12,396 13,200 14,824 16,782 18,312 24,172 25,962 26,664 26,982 26,589 Teachers service commission 5,430 6,682 7,126 7,948 10,030 11,056 14,576 24,000 36,184 36,589 36,921 37,855 Parastatal bodies (wholly govemment-owned) 4,922 5,200 5,634 6,126 7,378 8,468 10,174 11,418 13,933 17,886 23,676 27,919 Majority control by the govemment (>50 percent share) 2,184 2,384 2,570 2,854 3,464 4,278 5,274 6,740 8,232 9,642 14,389 17,174 Local govemment 1,462 1,672 1,782 1,882 2,304 4,428 6,238 7,223 9,664 12,138 15,035 18,082 1/ Community, social and personal services. Source: Central Bureau of Statistics. 178 Table 111.93: Nominal and Real Wages (In Kenyan shillings per year) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Provisional Average Nominal Wage 33,495 36,748 41,706 47,409 58,912 68,131 82,428 104,467 127,957 167,238 168,616 193,536 Private sector 32,362 35,670 40,955 48,035 56,654 70,457 86,269 103,708 124,990 146,175 168,398 193,345 Public sector 34,638 37,844 42,537 46,688 61,592 65,209 77,398 105,497 132,136 147,279 168,956 193,830 Average Real Wage 1/ 335 306 273 212 205 233 259 294 337 417 382 415 Private sector 324 297 268 215 197 241 271 291 329 364 381 414 Public sector 346 315 278 209 214 223 243 297 348 367 383 415 1/ Deflator is index with 1990 base derived from the changes in national CPI. Source: Central Bureau of Statistics. 179 I[l.10.1: Human Development Infant Mortality and Child Mortality in Kenya (per 1,000 live births) 1970 1975 1980 1985 1990 1995 2001 Mortality rate, infant 96 84 73 68 63 73 78 Mortalityrate,under-5 156 135 115 106 97 111 122 Source: World Bank World Development Indicators. 111.10.2: Literacy Rates (persons aged 15 years and above) 1970 1975 1980 1985 1990 1995 2001 Youth female (% of females ages 15-24) 47.8 57.7 68.5 79.4 86.7 91.2 94.7 Youth male (% of males ages 15-24) 80.5 83.9 87.5 90.6 92.9 94.7 96.2 Youth total (% of people ages 15-24) 64.2 70.8 78.0 85.0 89.8 92.9 95.5 Adult female (% of females ages 15 and above) 25.7 33.6 42.6 52.0 60.8 68.9 77.3 Adult male (% of males ages 15 and above) 55.7 63.0 69.9 75.8 80.9 85.2 89.5 Adult total (% of people ages 15 and above) 40.6 48.2 56.2 63.8 70.8 77.0 83.3 Source: World Bank World Development Indicators. 111.10.3: Gross Primary Enrollment by Region and Gender ('000) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 By gender Boys 2,797 2,807 2,761 2,815 2,802 2,843 2,880 2,995 3,082 3,118 3,201 Girls 2,659 2,723 2,668 2,742 2,734 2,754 2,797 2,925 2,982 3,038 3,114 Total 5,456 5,530 5,429 5,557 5,536 5,598 5,677 5,920 6,064 6,156 6,315 By region Central 883,256 901,989 905,698 898,262 951,010 903,944 911,009 894,583 864,889 896,898 818,057 Coast 360,204 365,057 352,900 339,864 352,579 368,104 369,851 362,593 379,729 389,070 423,622 Eastem 1,043,760 1,050,217 1,023,780 1,030,429 1,020,805 1,042,091 1,060,872 1,110,163 1,134,707 1,132,145 1,139,823 Nairobi 149,565 152,384 122,626 153,668 157,080 154,946 153,640 155,834 159,897 164,289 171,231 North eastem 34,221 33,793 26,343 35,272 25,106 35,892 35,272 44,693 48,134 47,835 48,193 Nyanza 979,098 1,020,864 1,045,759 1,075,373 991,687 966,508 1,064,126 1,008,587 1,075,780 1,024,909 1,141,060 Rift Valley 1,254,890 1,267,692 1,192,267 1,245,464 1,263,127 1,303,057 1,354,439 1,400,759 1,433,626 1,527,131- 1,610,447 Westem 751,002 771,992 759,023 778,676 783,604 793,048 811,673 850,951 797,422 780,848 814,128 Total 5,455,996 5,563,988 5,428,396 5,557,008 5,544,998 5,567,590 5,760,882 5,828,163 5,894,184 5,963,125 6,166,561 Source: Central Bureau of Statistics. 180 BIBLIOGRAPHY Alesina, Alberto, and Dani Rodrik. 1994. 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