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 was largely due to inappropriate agricultural, land, and industrial policies compounded by poor international terms of trade. Increased government intrusion into the private sector and import substitution policies made manufacturing sector uncompetitive. The policy environment along with tight import controls, and foreign exchange controls made the domestic environment for investment unattractive for both foreign and domestic investors.
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
mid-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.
Economic growth 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, 2008 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 shaved 2008
economic growth from the 8% forecast to below 3%. 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 were 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. The IMF program concluded without full implementation and
the Government of Kenya currently has no IMF program.
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), Telkom Kenya, and Kenya Re-Insurance have been privatized. Kenya Railways is operating under a long-term management concession, 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 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. Currently there are 21 apparel factories and
one yarn factory operating in the Export Processing Zones. Ninety-eight percent
of AGOA exports are garments, and Kenya’s garment exports under AGOA fell from U.S. $265 million in 2006 to U.S. $245 million in 2008.
Kenya does not systematically collect foreign direct investment (FDI) statistics and its historical performance in attracting FDI has been relatively weak. The stock of FDI in 2005 was estimated to be about $1.04 billion, less than half of that in neighboring Tanzania. Net foreign direct investment (FDI) was negative from 2000-2003, but started trickling back in 2004 and showed a significant increase in 2007.
Remittances are Kenya’s single largest source of foreign exchange. 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, but there was a significant decrease in 2008.
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.
Kenya is pursuing regional economic integration, which will enhance long-term growth prospects. 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 October 2008, the heads of state of EAC, COMESA, and SADC agreed to work toward a free trade area among all three economic groups with the eventual goal of establishing a customs union.
GDP (2008 est.): $30 billion.
Annual growth rate (2008): 1.7%.
Gross national income per capita (2007): $680 (Atlas Method).
Natural resources: Wildlife, soda ash, land.
Agriculture: Products--tea, coffee, sugarcane, horticultural products, corn, wheat, rice, sisal, pineapples, pyrethrum, dairy products, meat and meat products, hides, skins. Arable land--5%.
Industry: Types--petroleum products, grain and sugar milling, cement, beer, soft drinks, textiles, vehicle assembly, paper and light manufacturing.
Structure of economy (% of GDP): Services--58.2%; industry and commerce--19%; agriculture--22.7%.
Work force: Formal sector wage earners--1.95 million (public sector 30%; private sector 70%). Informal sector workers--6.4 million.
Trade (2008): Exports--$4.4 billion: tea, coffee, horticultural products, petroleum products, cement, pyrethrum, soda ash, sisal, hides and skins, fluorspar. Major export markets--Uganda, United Kingdom, Tanzania, Netherlands, United States, Egypt, Pakistan. Imports--$9.9 billion: machinery, vehicles, crude petroleum, iron and steel, resins and plastic materials, refined petroleum products, pharmaceuticals, paper and paper products, fertilizers, wheat. Major suppliers--United Arab Emirates, India, China, South Africa, Japan.
