Kenya: Basic Data

Area: 582,600 square kilometers

Population, 1999 estimate: 29.4 million

Population, 1993–99 average annual growth: 2.3 percent

GNI per capita, World Bank Alias method, 1999 estimate: U.S. $ 360

Sources: Kenyan authorities; and IMF and World Bank staff estimates.

^1/Actual data for prices and exchange rates.

^2/Fiscal year starting July 1 of the calendar year indicated.

^3/Actual data for money and credit.

^4/In percent of beginning-of-period broad money stock.

^5/Public medium- and long-term debt, including to the Fund.

^6/After Paris Club rescheduling in November 2000, and assuming comparable treatment by non-Paris Club and commercial creditors.

^7/Three-year backward-looking average.

				1996	1997	1998	1999	2000	2001 Estimate 1/
National accounts				(In billions of Kenya shillings, unless otherwise specified)
	GDP at current market prices			528.7	623.2	690.8	740.3	788.9	824.9
	GDP at constant (1982) prices			112.1	114.4	116.2	117.7	117.5	118.8
	GDP at factor cost at constant (1982) prices			98.2	100.5	102.3	103.7	103.4	104.5
		(annual percentage change)		4.6	2.4	1.8	1.4	−0.3	1.1
				(In percent of GDP at current market prices)
	Gross domestic expenditure			104.3	107.4	107.7	105.9	109.9	108.8
		Consumption		84.0	88.9	90.3	89.7	94.4	93.4
		Gross capital formation		20.3	18.5	17.4	16.2	15.6	15.5
	Net exports			−4.3	−7.4	−7.7	−5.9	−9.9	−8.8
	Gross savings			18.2	14.3	12.5	14.0	13.4	13.0
Prices				(Annual percentage change)
	Consumer price index (annual average)			8.9	11.4	6.6	3.5	6.2	0.8
	Consumer price index (end of period)			3.3	3.0	2.5	8.0	7.5	−3.1
	Terms of trade, goods (- deterioration)			2.6	2.0	−5.0	−1.3	0.1	1.2
Exchange rates
	Kenya shilling per U.S. dollar (period average)			57.1	58.0	61.8	70.4	76.3	78.6
	Nominal effective exchange rate (-depreciation; end of period)			3.9	−3.8	−1.2	−10.3	2.9	2.2
	Real effective exchange rate (- depreciation; end of period)			12.0	1.8	−0.1	−5.1	7.8	−2.4
Central government finance 2/				(In billions of Kenya shillings, unless otherwise specified)
	Total revenue			147.9	179.0	192.3	178.0	191.2	206.6
	Grants			5.8	5.3	4.9	4.2	24.1	10.0
	Total expenditure and net lending			167.8	194.0	197.5	176.7	231.8	238.7
		Recurrent		141.4	161.2	161.5	157.9	198.9	201.7
		Development and net lending		26.4	32.9	36.0	18.9	32.8	37.0
	Overall balance on a commitment basis
		(excluding grants)		−19.9	−15.1	−5.2	1.3	−40.6	−32.1
		(including grants)		−14.1	−9.8	−0.3	5.5	−16.5	−22.1
	Overall cash balance
		(including grants)		−7.2	−5.3	−1.9	1.7	−15.0	−22.9
	Overall balance on a commitment basis (in percent of GDP)
		(excluding grants)		−3.5	−2.3	−0.7	0.2	−5.0	−3.8
		(including grants)		−2.5	−1.5	0.0	0.7	−2.0	−2.6

				1996	1997	1998	1999	2000	2001 Estimate 3/
Money and credit				(Annual percentage change)
	Domestic credit 4/			9.9	27.2	9.1	−1.6	1.7	−1.7
		Government (net)		−1.6	5.4	−0.1	−1.6	−2.5	4.0
		Other public sector		0.1	0.8	−0.8	0.6	0.2	0.0
		Private sector		11.4	21.0	10.0	−0.7	3.9	−5.7
	Money and quasi money (M3)			15.9	9.8	3.1	2.8	0.8	2.4
Balance of payments				(In millions of U.S. dollars, unless otherwise specified)
	Current account balance			−196	−450	−549	−234	−220	−253
		Excluding official transfers (net)		−209	−469	−549	−233	−311	−340
		Exports, f.o.b.		2,083	2,060	2,012	1,755	1,774	1,761
		Imports, f.o.b.		−2,598	−2,944	−3,028	−2,679	−2,965	−2,850
Trade balance				−515	−884	−1,016	−924	−1,191	−1,089
		Services (net)		98	90	122	298	245	241
		Income (net)		−226	−172	−130	−173	−134	−154
		Current transfers (net)		446	516	475	564	860	748
	Capital and financial account (net)			643	413	616	214	211	278
		Capital account (net)		112	63	79	63	63	62
		Financial account (net)		531	350	537	151	148	217
Investment assets and liabilities (net)				−51	−199	−172	−305	−170	−256
Short term (net) and errors and omissions				582	549	709	456	318	473
	Overall balance			447	−37	66	−20	−8	25
	Current account balance (in percent of GDP)
		(including official transfers)		−2.1	−4.2	−4.9	−2.2	−2.1	−2.4
		(excluding official transfers)		−2.3	−4.4	−4.9	−2.2	−3.0	−3.2
Gross official international reserves (end of period)
		In millions of U.S. dollars		855	788	783	791	897	1,064
		In months of next years imports		2.7	2.5	2.8	2.6	3.0	3.6
External debt
	Stock of external debt (end of period) 5/6/			6,172	5,950	5,757	5,473	5,268	5,154
		(in percent of GDP)		66.9	55.6	50.9	52.0	50.9	49.1
	Net present value of external public debt
		(in percent of exports of goods and services) 6/7/		187	153	145	136	140	136
	Scheduled external debt service 5/7/
		(in percent of export of goods and services)		24.3	22.4	23.6	27.3	18.6	17.6
	External payments arrears (end of period)			67	104	25	113	60	103

Sources: Kenyan authorities; and IMF and World Bank staff estimates.

^1/Actual data for prices and exchange rates.

^2/Fiscal year starting July 1 of the calendar year indicated.

^3/Actual data for money and credit.

^4/In percent of beginning-of-period broad money stock.

^5/Public medium- and long-term debt, including to the Fund.

^6/After Paris Club rescheduling in November 2000, and assuming comparable treatment by non-Paris Club and commercial creditors.

^7/Three-year backward-looking average.

View Table

				1996	1997	1998	1999	2000	2001 Estimate 1/
National accounts				(In billions of Kenya shillings, unless otherwise specified)
	GDP at current market prices			528.7	623.2	690.8	740.3	788.9	824.9
	GDP at constant (1982) prices			112.1	114.4	116.2	117.7	117.5	118.8
	GDP at factor cost at constant (1982) prices			98.2	100.5	102.3	103.7	103.4	104.5
		(annual percentage change)		4.6	2.4	1.8	1.4	−0.3	1.1
				(In percent of GDP at current market prices)
	Gross domestic expenditure			104.3	107.4	107.7	105.9	109.9	108.8
		Consumption		84.0	88.9	90.3	89.7	94.4	93.4
		Gross capital formation		20.3	18.5	17.4	16.2	15.6	15.5
	Net exports			−4.3	−7.4	−7.7	−5.9	−9.9	−8.8
	Gross savings			18.2	14.3	12.5	14.0	13.4	13.0
Prices				(Annual percentage change)
	Consumer price index (annual average)			8.9	11.4	6.6	3.5	6.2	0.8
	Consumer price index (end of period)			3.3	3.0	2.5	8.0	7.5	−3.1
	Terms of trade, goods (- deterioration)			2.6	2.0	−5.0	−1.3	0.1	1.2
Exchange rates
	Kenya shilling per U.S. dollar (period average)			57.1	58.0	61.8	70.4	76.3	78.6
	Nominal effective exchange rate (-depreciation; end of period)			3.9	−3.8	−1.2	−10.3	2.9	2.2
	Real effective exchange rate (- depreciation; end of period)			12.0	1.8	−0.1	−5.1	7.8	−2.4
Central government finance 2/				(In billions of Kenya shillings, unless otherwise specified)
	Total revenue			147.9	179.0	192.3	178.0	191.2	206.6
	Grants			5.8	5.3	4.9	4.2	24.1	10.0
	Total expenditure and net lending			167.8	194.0	197.5	176.7	231.8	238.7
		Recurrent		141.4	161.2	161.5	157.9	198.9	201.7
		Development and net lending		26.4	32.9	36.0	18.9	32.8	37.0
	Overall balance on a commitment basis
		(excluding grants)		−19.9	−15.1	−5.2	1.3	−40.6	−32.1
		(including grants)		−14.1	−9.8	−0.3	5.5	−16.5	−22.1
	Overall cash balance
		(including grants)		−7.2	−5.3	−1.9	1.7	−15.0	−22.9
	Overall balance on a commitment basis (in percent of GDP)
		(excluding grants)		−3.5	−2.3	−0.7	0.2	−5.0	−3.8
		(including grants)		−2.5	−1.5	0.0	0.7	−2.0	−2.6

				1996	1997	1998	1999	2000	2001 Estimate 3/
Money and credit				(Annual percentage change)
	Domestic credit 4/			9.9	27.2	9.1	−1.6	1.7	−1.7
		Government (net)		−1.6	5.4	−0.1	−1.6	−2.5	4.0
		Other public sector		0.1	0.8	−0.8	0.6	0.2	0.0
		Private sector		11.4	21.0	10.0	−0.7	3.9	−5.7
	Money and quasi money (M3)			15.9	9.8	3.1	2.8	0.8	2.4
Balance of payments				(In millions of U.S. dollars, unless otherwise specified)
	Current account balance			−196	−450	−549	−234	−220	−253
		Excluding official transfers (net)		−209	−469	−549	−233	−311	−340
		Exports, f.o.b.		2,083	2,060	2,012	1,755	1,774	1,761
		Imports, f.o.b.		−2,598	−2,944	−3,028	−2,679	−2,965	−2,850
Trade balance				−515	−884	−1,016	−924	−1,191	−1,089
		Services (net)		98	90	122	298	245	241
		Income (net)		−226	−172	−130	−173	−134	−154
		Current transfers (net)		446	516	475	564	860	748
	Capital and financial account (net)			643	413	616	214	211	278
		Capital account (net)		112	63	79	63	63	62
		Financial account (net)		531	350	537	151	148	217
Investment assets and liabilities (net)				−51	−199	−172	−305	−170	−256
Short term (net) and errors and omissions				582	549	709	456	318	473
	Overall balance			447	−37	66	−20	−8	25
	Current account balance (in percent of GDP)
		(including official transfers)		−2.1	−4.2	−4.9	−2.2	−2.1	−2.4
		(excluding official transfers)		−2.3	−4.4	−4.9	−2.2	−3.0	−3.2
Gross official international reserves (end of period)
		In millions of U.S. dollars		855	788	783	791	897	1,064
		In months of next years imports		2.7	2.5	2.8	2.6	3.0	3.6
External debt
	Stock of external debt (end of period) 5/6/			6,172	5,950	5,757	5,473	5,268	5,154
		(in percent of GDP)		66.9	55.6	50.9	52.0	50.9	49.1
	Net present value of external public debt
		(in percent of exports of goods and services) 6/7/		187	153	145	136	140	136
	Scheduled external debt service 5/7/
		(in percent of export of goods and services)		24.3	22.4	23.6	27.3	18.6	17.6
	External payments arrears (end of period)			67	104	25	113	60	103

Sources: Kenyan authorities; and IMF and World Bank staff estimates.

^1/Actual data for prices and exchange rates.

^2/Fiscal year starting July 1 of the calendar year indicated.

^3/Actual data for money and credit.

^4/In percent of beginning-of-period broad money stock.

^5/Public medium- and long-term debt, including to the Fund.

^6/After Paris Club rescheduling in November 2000, and assuming comparable treatment by non-Paris Club and commercial creditors.

^7/Three-year backward-looking average.

I. Introduction

1. This selected issues paper provides background on seven topics of particular relevance for this Article IV consultation, namely, the interpretation of inflation data, export performance, trade policy and regional integration, the health of the banking sector, corruption, fiscal sustainability, and external vulnerability.

2. Section II addresses the question of how to interpret recent developments in the Kenyan consumer price index (CPI) properly, to assess the current inflationary pressure and extract signals about possible future CPI inflation trends. Failure of the key inflation rates monitored and published properly to reflect the current situation can cause market distortions, as well as complications for monetary and fiscal policy formulation. In 2001, the key inflation rates monitored and published in Kenya—the annual average and 12-month rates of change in the overall and “underlying” CPI—did not adequately indicate that consumer prices, in fact, had been falling since November 2000. During most of 2001, those rates continued to show strong positive inflation. Developments in the Kenyan CPI during 2000-Oldemonstrate that 12-month and annual average growth rates reflect current inflationary pressures with a significant delay.

3. Section III discusses why Kenya’s exports have performed poorly over the past five years in spite of a more liberalized trade and exchange rate regime. The analysis provided shows that Kenya faces both price and nonprice constraints on export performance. Price constraints include a decline in the terms of trade (excluding coffee) over 1996–98, a decrease in the ratio of the price of tradable to nontradable goods, and rising unit labor costs. Beyond these traditional measures of competitiveness, Kenyan exporters also face a variety of nonprice constraints, particularly related to physical infrastructure. These constraints increase the costs and risks of doing business in Kenya.

4. Section IV describes the strides Kenya has made over the last two years in establishing a more open and transparent trade regime. The recently launched tariff reform aims at streamlining Kenya’s tariff structure while paving the way toward greater integration with Kenya’s regional trading partners. This section describes Kenya’s current trade regime, including recent developments, discusses its involvement in regional free trade areas, and illustrates some of the potential obstacles to further regional integration. If Kenya is to fully realize the benefits from a more open and regionally integrated trade regime, it will be important to continue pursuing the tariff reform, while also dismantling the nontariff barriers that still exist.

5. Section V addresses the health of Kenya’s banking system, which has been in a fragile and deteriorating state for some years. This situation largely reflects the belated recognition of nonperforming loans (NPLs) in government-owned and other small banks, mainly resulting from political interference with licensing and lending decisions. This section also describes the potential implications of implementing the Central Bank of Kenya (Amendment) Act (the so-called Donde Act), which would set restrictions on the bank lending and deposit rates. Implementation of this law would likely have a number of adverse implications, especially for smaller domestic banks, and would affect the long-term growth of the economy, increasing unemployment and poverty.

6. Section VI discusses corruption in Kenya and its impact on Kenya’s economic performance. Corruption in Kenya is widely thought to have reached endemic proportions. In recent years, the IMF has increasingly recognized the adverse impact of corruption and poor governance on macroeconomic performance and the success of economic reforms. This section surveys some of the recent research on the economic impact of corruption to illustrate the potential benefits of reducing corruption for growth and poverty alleviation in Kenya.

7. Section VII analyzes fiscal sustainability and fiscal risk in Kenya. The current fiscal position of the central government is very fragile. The level of indebtedness is high, and the overall magnitude of fiscal risks the central government assumes is also large. The results of the analysis show that Kenya needs an extended period of rapid growth, combined with an up-front fiscal consolidation and concessional financing, in order to restore fiscal sustainability.

8. Finally, Section VIII analyzes Kenya’s external vulnerabilities. As Kenya recovers from a period of high debt-service payments, which occurred throughout the 1990’s and into 2001 its debt-service burden and stock of debt have fallen. The results of the analysis show that Kenya’s external vulnerability would be reduced over the medium- and longer-term under conditions of robust economic growth and macroeconomic stability. Kenya’s ability to withstand terms of trade shocks, however, would be worsened under conditions of low growth and economic stagnation.