DECLINE OF KENYA’S ECONOMY

After independence, Kenya promoted rapid economic growth through public investment, encouragement of smallholder agricultural production, and incentives for private (often foreign) industrial investment. Gross domestic product (GDP) grew at an annual average of 6.6% from 1963 to 1973. Agricultural production grew by 4.7% annually during the same period, stimulated by redistributing estates, diffusing new crop strains, and opening new areas to cultivation. After experiencing moderately high growth rates during the 1960s and 1970s, Kenya's economic performance during the 1980s and 1990s was far below its potential. The economy grew by an annual average of only 1.5% between 1997 and 2002, which was below the population growth estimated at 2.5% per annum, leading to a decline in per capita incomes. The decline in economic performance in the last two decades was largely due to inappropriate agricultural policies, inadequate credit, and poor international terms of trade contributing to the decline in agriculture. Kenya's inward-looking policy of import substitution and rising oil prices made Kenya's manufacturing sector uncompetitive. The government began a massive intrusion in the private sector. Lack of export incentives, tight import controls, and foreign exchange controls made the domestic environment for investment even less attractive.
From 1991 to 1993, Kenya had its worst economic performance since independence. Growth in GDP stagnated, and agricultural production shrank at an annual rate of 3.9%. Inflation reached a record 100% in August 1993, and the government's budget deficit was over 10% of GDP. As a result of these combined problems, bilateral and multilateral donors suspended program aid to Kenya in 1991. In the 1990s, the government implemented economic reform measures to stabilize the economy and restore sustainable growth. In 1994, nearly all administrative controls on producer and retail prices, imports, foreign exchange and grain marketing were removed. The Government of Kenya privatized a range of publicly owned companies, reduced the number of civil servants, and introduced conservative fiscal and monetary policies. By the mid-1990s, the government lifted price controls on petroleum products. In 1995, foreigners were allowed to invest in the Nairobi Stock Exchange (NSE). In July 1997, the Government of Kenya refused to meet commitments made earlier to the International Monetary Fund (IMF) on governance reforms. As a result, the IMF suspended lending for 3 years, and the World Bank also put a $90-million structural adjustment credit on hold.
The Government of Kenya took some positive steps on reform, including the establishment of the Kenyan Anti-Corruption Authority in 1999, and the adoption of measures to improve the transparency of government procurements and reduce the government payroll. In July 2000, the IMF signed a $150 million Poverty Reduction and Growth Facility (PRGF), and the World Bank followed suit shortly after with a $157 million Economic and Public Sector Reform credit. The Anti-Corruption Authority was declared unconstitutional in December 2000, and other parts of the reform effort faltered in 2001. The IMF and World Bank again suspended their programs.
Net foreign direct investment (FDI) was negative from 2000-2003, but started trickling back in 2004, as demonstrated by an increase in the number of enterprises operating in Export Processing Zones (EPZs) from 66 to 74 between 2003 and 2004. The value of total investments increased from Ksh18.7 billion (U.S. $247.3 million) in 2005 to Ksh20.1 billion (over U.S. $278.3 million) in 2006. Following the end of the Multifiber Arrangement (MFA) textile agreement in January 2005, several textile and apparel factories closed, leaving 68 EPZ enterprises. In 2006, this number increased to 70 EPZ enterprises. According to the World Bank's Migrations and Remittances Factbook 2008, remittances rose from U.S. $338.3 million in 2004 to U.S. $1.3 billion in 2007, equivalent to 5.3% of the GDP.
The economy began to recover after 2002, registering 2.8% growth in 2003, 4.3% in 2004, 5.8% in 2005, 6.1% in 2006, and 7.0% in 2007. However, the violence that broke out after the December 27, 2007 general election paralyzed the economy in January and early February 2008 and closed the Northern Corridor in Rift Valley province, cutting off vital shipments of fuel and other goods to Uganda, Rwanda, Burundi, eastern Democratic Republic of the Congo and South Sudan. Tourists fled, and agricultural production in the breadbasket Rift Valley region was crippled. The manufacturing sector had to cut back operations by 70%, as unsafe roads prevented movement of workers, inputs, or products, and congestion at the Port of Mombasa slowed imports and exports. The signing of a reconciliation agreement on February 28 put the economy back on track, but the damage in the first quarter to agriculture, tourism, consumption, investment, and the financial, transport, and construction sectors is expected to shave 2008 economic growth from the 8% forecast to the 4%-6% level. Governments in major source countries for tourists to Kenya have lifted their travel advisories, and the Kenyan Government and tourism industry will make strenuous efforts to bring tourists back, but revenues will be a small fraction of the approximately $1 billion earned in 2007.
During President Kibaki's first term in office (2003-2007), the Government of Kenya began an ambitious economic reform program and resumed its cooperation with the World Bank and the IMF. The National Rainbow Coalition (NARC) government enacted the Anti-Corruption and Economic Crimes Act and Public Officers Ethics Act in May 2003 aimed at fighting graft in public offices. There was some movement to reduce corruption in 2003, but the government did not sustain that momentum. Other reforms, especially in the judiciary, public procurement, etc., led to the unlocking of donor aid and a renewed hope of economic revival.
In November 2003, following the signing into law of key anti-corruption legislation and other reforms by the Kibaki government, donors reengaged as the IMF approved a three-year $250 million Poverty Reduction and Growth Facility (PRGF) and donors committed $4.2 billion in support over 4 years. In December 2004, the IMF approved Kenya's Poverty Reduction and Growth Facility arrangement equivalent to U.S. $252.8 million to support the government's economic and governance reforms. However, the government's ability to stimulate economic demand through fiscal and monetary policy remains fairly limited, while the pace at which the government is pursuing reforms in other key areas remains slow. The Privatization Law was enacted in 2005, but only became operational as of January 1, 2008. Parastatals Kenya Electricity Generating Company (KenGen), Kenya Railways, Telkom Kenya, and Kenya Re-Insurance have been privatized, and the government sold 25% of Safaricom (10 billion shares) in 2008, reducing its share to 35%. Accelerating growth to achieve Kenya's potential and reduce the poverty that afflicts about 46% of its population will require continued de-regulation of business, improved delivery of government services, addressing structural reforms, massive investment in new infrastructure (especially roads), reduction of chronic insecurity caused by crime, and improved economic governance generally. The government's Vision 2030 plan calls for these reforms, but implementation will be delayed by the reconstruction effort, coalition politics, and line ministries' limited capacity. In June 2008, the government introduced a revised but still ambitious Vision 2030 plan that seeks to address the economic challenges stemming from the political crisis while still striving to meet growth benchmarks.
Economic expansion is fairly broad-based and is built on a stable macro-environment fostered by government, and the resilience, resourcefulness, and improved confidence of the private sector. Despite the post-election crisis, Nairobi continues to be the primary communication and financial hub of East Africa. It enjoys the region's best transportation linkages, communications infrastructure, and trained personnel, although these advantages are less prominent than in past years. On January 31, 2007, the government signed a $2.7 million contract with Tyco Telecommunications to perform an undersea survey for the construction of a fiber-optic cable to Fujairah in the United Arab Emirates (U.A.E.) called the East African Marine Systems (TEAMS). Two other fiber-optic cables projects are being pursued to link Kenya to the rest of East Africa and India. Once TEAMS and the domestic fiber-optic cables planned by the government are completed, the economy is expected to benefit significantly from reduced internet access prices and improved capacity. A wide range of foreign firms maintain regional branches or representative offices in the city. In March 1996, the Presidents of Kenya, Tanzania, and Uganda re-established the East African Community (EAC). The EAC's objectives include harmonizing tariffs and customs regimes, free movement of people, and improving regional infrastructures. In March 2004, the three East African countries signed a Customs Union Agreement paving the way for a common market. The Customs Union and a Common External Tariff were established on January 1, 2005, but the EAC countries are still working out exceptions to the tariff. Rwanda and Burundi joined the community in July 2007. In May 2007, during a Common Market for Eastern and Southern Africa (COMESA) Summit, 13 heads of state endorsed a move to adopt a COMESA customs union and set December 8, 2008 as the target date for its adoption.
In 2007, horticulture exports rose 65% to U.S. $1.12 billion, surpassing tourism as the largest foreign exchange earner. Tourism earned Kenya U.S. $972 million in 2007, up from U.S. $803 million in 2006, followed by tea exports of U.S. $638.9 million. Africa is Kenya's largest export market, followed by the European Union (EU). Kenya benefits significantly from the African Growth and Opportunity Act (AGOA), but the apparel industry is struggling to hold its ground against Asian competition. Ninety-eight percent of AGOA exports are garments, and Kenya's AGOA exports fell from U.S. $265 million in 2006 to U.S. $250 million in 2007.
Kenya faces profound environmental challenges brought on by high population growth, deforestation, shifting climate patterns, and the overgrazing of cattle in marginal areas in the north and west of the country. Significant portions of the population will continue to require emergency food assistance in the coming years.
Nairobi, Kenya - For the first time since independence in 1963, Kenya recorded a contracted economy, with a negative three percent growth during the 12 months to 30 November last year.
The unprecedented economic performance confirms the country's downward slide owing to gross mismanagement and factors beyond the government's control, such as drought.
According to the Central Bank's monthly review for February, estimates of key economic activities, including agriculture, indicate that the gross domestic product (GDP) declined by 0.3 percent during the 12 months, compared to 1.4 percent during the same period in 1999.
The bank attributes this poor performance in all the aspects of the economy to mainly drought, which brought about long and severe power and water rationing, and insecurity, which adversely affected foreign investment and tourism.
The major culprit, however, is high-level corruption and inept management.
This sordid state of affairs means that the current misery, including poverty, high rate of unemployment and poor provision of social services, including education and health care, will go on for most of the year.
Agricultural production in general declined by 0.3 percent, compared to 1.2 percent in 1999. For instance, the production of tea, the chief foreign exchange earner, slumped by 5.8 percent to 233,775 tonnes, down from 248,248 tonnes.
But the good news is that, owing to improved world prices, the earnings from the exports of the crop increased from 446 million US dollars to 473 million dollars.
The output of horticulture and other export crops also declined considerably, according to the review.
The manufacturing sector, whose GDP share is 13.2 percent, declined by 1.2 percent, compared to the one-percent fall the previous year.
The poor performance is ascribed to the reduced competitiveness in domestic production arising from the high cost of raw materials and other inputs, such as energy and transportation.
Finance, insurance, real estate and business services, which account for 10.5 percent of GDP, grew by 1.5 percent, compared to two percent in 1999.
According to the central bank, various measures have been taken to reverse the trend. These include the on-going repair of the road network, the restructuring of the central tender board, and the telecommunications sub-sector and the reforms in the agriculture sector.

NICKY BITA