Abstract
This Selected Issues paper and Statistical Appendix addresses the question of how to interpret recent developments in the Kenyan consumer price index (CPI) properly to assess the current inflation pressure and extract signals about possible future CPI inflation trends. The paper 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 shows that Kenya faces both price and nonprice constraints on export performance.
III. Export Performance in Kenya Since 199531
A. Introduction
56. Kenya’s exports have performed poorly since 1995, in spite of a more liberalized trade and exchange rate regime. As the economy has stagnated and investor confidence fallen, exports have also suffered. The analysis in this section 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 that of 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.
57. This section is organized as follows: Subsection B discusses recent trends in export performance; Subsection C examines constraints on exports; Subsections D and E examine the performance of traditional and nontraditional exports of goods, respectively; Subsection F briefly discusses the tourism exports; and Subsection G concludes.
B. Trends in Goods Export Performance
58. Kenya’s export of goods in current U.S. dollars since 1995 has been marked by an early increase between 1995 and 1996, followed by sluggish performance toward the end of the decade (Figure 4). Kenya has also seen significant shifts in the composition of its exports of goods, particularly away from one of its traditional exports, coffee, and toward other (nontraditional) products such as horticulture.
Kenya: Contribution of Commodities to Exports of Goods, 1995–2000
(In millions of U.S. dollars)
Citation: IMF Staff Country Reports 2002, 084; 10.5089/9781451821062.002.A003
Sources: Kenyan authorities; and Fund staff estimates.Composition of exports of goods
59. Broadly speaking, Kenya’s exports of goods can be divided into seven groups: coffee, tea, horticulture, oil products, processed foods and vegetables, manufactured products, and other products. In 1995 and 1996, the largest share of exports of goods was held by manufactured products, followed closely by other products, which include pyrethrum and soda ash. Coffee exports, as a share of total exports of goods, fell significantly from 15 percent in 1995 to less than 10 percent in 2000. Tea’s share in total exports of goods has gradually risen, replacing manufactured products as the largest contributor, and made up over one-fourth of total exports of goods in 2000. Horticulture rose steadily over the period 1995–2000, while oil maintained a modest share. Over this period, manufactured products and other products gradually fell as a share of total exports of goods (Table 4).
Kenya: Share of Selected Products in Exports of Goods, 1995–2000 1/
(In percent)
Excluding reexports.
Kenya: Share of Selected Products in Exports of Goods, 1995–2000 1/
(In percent)
| 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | |
|---|---|---|---|---|---|---|
| Coffee | 15.3 | 14.3 | 15.1 | 11.1 | 10.4 | 9.8 |
| Tea | 18.0 | 19.7 | 20.8 | 28.7 | 28.6 | 29.5 |
| Horticulture | 6.5 | 6.8 | 7.5 | 8.5 | 10.5 | 13.3 |
| Oil products | 5.1 | 4.8 | 8.7 | 7.8 | 8.3 | 8.1 |
| Processed food and vegetables | 5.1 | 4.3 | 3.3 | 3.3 | 3.6 | 2.9 |
| Manufactured products | 26.3 | 25.9 | 25.2 | 22.1 | 21.6 | 20.7 |
| Other | 23.7 | 24.2 | 19.4 | 18.5 | 17.0 | 15.8 |
Excluding reexports.
Kenya: Share of Selected Products in Exports of Goods, 1995–2000 1/
(In percent)
| 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | |
|---|---|---|---|---|---|---|
| Coffee | 15.3 | 14.3 | 15.1 | 11.1 | 10.4 | 9.8 |
| Tea | 18.0 | 19.7 | 20.8 | 28.7 | 28.6 | 29.5 |
| Horticulture | 6.5 | 6.8 | 7.5 | 8.5 | 10.5 | 13.3 |
| Oil products | 5.1 | 4.8 | 8.7 | 7.8 | 8.3 | 8.1 |
| Processed food and vegetables | 5.1 | 4.3 | 3.3 | 3.3 | 3.6 | 2.9 |
| Manufactured products | 26.3 | 25.9 | 25.2 | 22.1 | 21.6 | 20.7 |
| Other | 23.7 | 24.2 | 19.4 | 18.5 | 17.0 | 15.8 |
Excluding reexports.
60. The shift in the composition of exports of goods likely reflects the pace of structural reforms in particular sectors. A clear example of this is the erosion of coffee’s share in exports, as well as its decline in current U.S. dollar terms. The reasons for coffee’s dismal performance, as discussed below (Subsection D), are closely linked to bottlenecks and inefficiencies in the coffee sector, as well as drought conditions and declining world coffee prices in recent years. The rise in the share of tea exports over the period 1996–2000 may reflect the anticipation and actual restructuring of the tea sector (Subsection D). Overall, exports of goods as a share of GDP rose slightly from 1995 to 1996, only to fall rather dramatically over the 1997–2000 period (Figure 5).
Kenya: Exports of Goods as Share of GDP at Current Prices, 1995–2000
(In percent)
Citation: IMF Staff Country Reports 2002, 084; 10.5089/9781451821062.002.A003
Sources: Kenyan authorities; and Fund staff estimates.Goods export growth
61. Goods export growth in current U.S. dollar terms broadly followed the path of growth in volumes (Figure 6). After 1996, goods export volumes declined dramatically, largely owing to adverse weather conditions in 199732 and a severe drought in 2000. Goods export prices, however, fluctuated quite a bit, rising at first and then falling before ticking up again. A goods export price boom in 1997, mainly reflecting surging coffee prices, allowed goods export value growth to remain roughly unchanged between 1996 and 1997, notwithstanding the sharp decline in volumes.
Kenya: Export Performance, 1995–2000
Citation: IMF Staff Country Reports 2002, 084; 10.5089/9781451821062.002.A003
Sources: Kenyan authorities; and Fund staff estimates.62. Although the sharp reduction in goods export volumes can be partly explained by the drought conditions, which severely affected production of agricultural commodities, other factors, such as poor infrastructure and other high costs of doing business, also likely contributed to this outcome (see Subsection C below).
Destination of Kenya’s exports of goods
63. Nearly half of Kenya’s exports of goods find their destination in Africa, with Uganda and Tanzania absorbing the majority of these exports, owing to their geographic proximity and close trade relations. Exports of goods to western Europe (mainly the United Kingdom, Germany, and the Netherlands) constitute nearly one-third of total exports of goods, while Asia receives about 10 percent of Kenya’s exports of goods. This pattern has remained roughly unchanged since 1995, with exports to Asia picking up and export to Europe falling slightly.
64. Kenya’s relationship with its regional trading partners is described in more detail in Section IV, which describes the various regional and multilateral trade areas of which Kenya is a member. Currently, Kenya’s policymakers are contemplating ways to deal with Kenya’s membership in both the East African Community (EAC) and the Common Market for Eastern and Southern Africa (COMESA).
C. Constraints on Export Performance
Traditional measures of competitiveness
65. After liberalizing its foreign exchange regime in the early part of the 1990s, Kenya experienced wild fluctuations in its real effective exchange rate (Figure 7). These fluctuations continued into the later part of the decade and may have contributed to Kenya’s deteriorating export performance. Over the same period, the nominal effective exchange rate fluctuated much less. It is difficult to gauge any trend or pattern in the real effective exchange rate because of its sharp fluctuations. Since its low in mid-1993, Kenya’s exchange rate has appreciated by nearly 45 percent in real effective terms, while the nominal effective exchange rate has remained relatively constant. However, the entire appreciation in real effective terms took place between 1993 and 1995. The real effective exchange rate continued to show considerable volatility after 1995, before finally settling down in 2001.
Kenya: Real and Nominal Effective Exchange Rates, January 1990 - December 2001
(Indices, January 1990=100)
Citation: IMF Staff Country Reports 2002, 084; 10.5089/9781451821062.002.A003
Sources: Kenyan authorities; and Fund staff estimates.66. Kenya’s terms of trade have remained roughly steady since 1995, with fluctuations typically of less than 5 percent (Figure 8). The terms of trade have been stable in spite of the coffee boom in 1997 and a generally upward trend in tea prices since 1995. Offsetting this movement has been a rising trend in oil prices, particularly in 1999 and 2000. Excluding the wild fluctuations in coffee prices, the terms of trade improved by 15 percent in the first part of the 1990s, but worsened by over 10 percent between 1996 and 1998. In 1999 and 2000, however, the terms of trade excluding coffee improved slightly. Overall, changes in the terms of trade do not explain the fluctuations of the real effective exchange rate.
Kenya: Terms of Trade, 1990–2000 (Indices, 1990=100)
Citation: IMF Staff Country Reports 2002, 084; 10.5089/9781451821062.002.A003
Sources: Kenyan authorities; and Fund staff estimates.67. Another indicator of competitiveness is the ratio of tradable prices to nontradable prices. This ratio reflects the prices faced by producers of exports and import-substituting goods, relative to those faced by producers of goods that are not traded. In Kenya, over the period 1990–2000, the relative price of tradables to nontradables fell dramatically, by over 30 percent between 1993 and 2000 (Figure 9). Similarly, when looking at the relative price of exports to nontradables, relative export prices have fallen substantially since the coffee boom in 1997. This decline has decreased the attractiveness of production for export or import substitution, and has squeezed profit margins in the tradable sector relative to the nontradable sector.
Kenya: Ratio of Tradable to Nontradable Prices, 1990–2000
(Indices, 1990=100)
Citation: IMF Staff Country Reports 2002, 084; 10.5089/9781451821062.002.A003
Sources: Kenyan authorities; and Fund staff estimates.68. Finally, in order to assess the effects that cost dynamics have had on export industries, unit labor costs—defined as wage costs per unit of output—are analyzed (Figure 10). The data on unit labor costs cover a variety of sectors for both exporting and non-exporting production (export-intensive sectors such as manufacturing are highlighted below). It is clear from Figure 10 that unit labor costs in many industries in Kenya have increased substantially during the 1990s. Overall (total) unit labor costs increased by about 30 percent from 1990 to 1999. Unit labor costs declined in only the finance, insurance, and business sector and the wholesale and retail trade sector. All other sectors saw a rapid increase in costs. The effects of such an increase, coupled with developments in the relative price of tradables to nontradables surely decreased profitability in the export sector in Kenya.
Kenya: Unit Labor Costs by Sector, 1990–99
(Indices, 1990=100)
Citation: IMF Staff Country Reports 2002, 084; 10.5089/9781451821062.002.A003
Sources: Kenyan authorities; and Fund staff estimates.69. Although data on price determinants of competitiveness in Kenya are scarce, this section shows that, even with limited data, the results are clear. The incentive for producers to move into the export sector has diminished over the 1990s, particularly in the second half. Compounding this is the rapid increase in unit labor costs, which would have squeezed profit margins of exporters.
Nonprice and other measures of competitiveness
70. Nonprice constraints are prevalent in Kenya and perhaps more distortionary than the price constraints on the competitiveness of the country’s exports. These factors have contributed to the high costs of doing business in Kenya and do not appear to have abated in recent years. The costs of doing business in Kenya have increased over the years owing to pervasive governance problems,33 high real interest rates, and an inefficient utility sector. In addition, delays in reforming key sectors—such as coffee, telecommunications, and ports and railways—and the deteriorating security situation have increased the cost of doing business.
71. Governance has been a key factor in the deterioration of Kenya’s economy over the 1990s. As noted in Section VI of this paper, governance problems can reduce growth by limiting investment incentives and encouraging poor economic management. The effects of Kenya’s governance problems can be seen throughout the economy and have most likely contributed both directly and indirectly to the high costs of doing business. Direct effects of governance on costs come from, for example, the need to bribe. Indirect effects, caused by poor economic management, particularly of public enterprises, can be seen in the poor state of roads in Kenya and the inefficient telecommunications sector (see below).
72. Kenya’s telephone system is inefficient and in a state of disrepair. In an attempt to reduce government involvement in this sector, the World Bank’s IDA credit has focused on the privatization of Kenya’s Telkom—so far without success. The continued involvement of the government in the telecommunications sector has led to widespread government interference, weak management, and the poor financial state of Telkom. Compounding this has been a lack of investment and modernization of Kenya’s telecommunications system. In contrast to the poor state of the fixed-line system in Kenya, mobile phone licensing appears to have been successful at creating a competitive market environment in that industry (see below).
73. Over many years, the problems in the telecommunications sector have led to long waiting times for telephone mainline and a relatively low number of telephone mainlines per employee, indicating that the quality of telecommunications services in Kenya is low. The cost of a local call has remained below the average for other African countries (Table 5).
Africa: Telecommunications Development Indicators
Average cost of local call in 1998.
Waiting time for telephone mainlines in 1997.
Waiting time for telephone mainlines and telephone mainlines per employee in 1998.
Africa: Telecommunications Development Indicators
| Telephone Mainlines, Waiting Time (Years), 1999 |
Average Cost of Local Call (U.S. dollars), 1999 |
Telephone Mainlines per Employee, 1997 |
||
|---|---|---|---|---|
| Cameroon 1/ | 6.2 | 0.06 | 40.5 | |
| Cote d’lvoire | 1.1 | 0.07 | 39.8 | |
| Egypt, Arab Rep. of | 2.3 | 0.03 | 66.3 | |
| Ethiopia | 10.0 | 0.03 | 27.8 | |
| Ghana 2/ | 1.5 | 0.08 | 29.6 | |
| Kenya | 9.6 | 0.05 | 19.8 | |
| Malawi | 10.0 | 0.03 | 7.7 | |
| Mozambique | 7.1 | 0.09 | 29.1 | |
| Nigeria 3/ | 10.0 | 34.7 | ||
| Tanzania | 1.6 | 0.08 | 22.0 | |
| Uganda | 3.0 | 0.15 | 37.9 | |
| Zambia | 7.2 | 0.05 | 23.5 | |
| Memorandum items: | ||||
| Sub-Saharan Africa | 6.0 | 0.07 | 68.5 | |
| Norway | 0.0 | 0.08 | 132.6 | |
Average cost of local call in 1998.
Waiting time for telephone mainlines in 1997.
Waiting time for telephone mainlines and telephone mainlines per employee in 1998.
Africa: Telecommunications Development Indicators
| Telephone Mainlines, Waiting Time (Years), 1999 |
Average Cost of Local Call (U.S. dollars), 1999 |
Telephone Mainlines per Employee, 1997 |
||
|---|---|---|---|---|
| Cameroon 1/ | 6.2 | 0.06 | 40.5 | |
| Cote d’lvoire | 1.1 | 0.07 | 39.8 | |
| Egypt, Arab Rep. of | 2.3 | 0.03 | 66.3 | |
| Ethiopia | 10.0 | 0.03 | 27.8 | |
| Ghana 2/ | 1.5 | 0.08 | 29.6 | |
| Kenya | 9.6 | 0.05 | 19.8 | |
| Malawi | 10.0 | 0.03 | 7.7 | |
| Mozambique | 7.1 | 0.09 | 29.1 | |
| Nigeria 3/ | 10.0 | 34.7 | ||
| Tanzania | 1.6 | 0.08 | 22.0 | |
| Uganda | 3.0 | 0.15 | 37.9 | |
| Zambia | 7.2 | 0.05 | 23.5 | |
| Memorandum items: | ||||
| Sub-Saharan Africa | 6.0 | 0.07 | 68.5 | |
| Norway | 0.0 | 0.08 | 132.6 | |
Average cost of local call in 1998.
Waiting time for telephone mainlines in 1997.
Waiting time for telephone mainlines and telephone mainlines per employee in 1998.
74. Related to the poor quality of the telecommunications system in Kenya, are the use of mobile telephones and access to the Internet. Both of these forms of communication are becoming increasingly necessary for day-to-day business transactions. For exporters, in particular, the ability to quickly communicate with local suppliers and overseas contacts is crucial to maintaining a competitive advantage. The data indicate that Kenya’s progress (particularly in Internet services) is about average—Kenya is behind some African countries and ahead of others (Table 6). In order to attract investors and new business into Kenya, the telecommunications system will need to be upgraded, both to enable quick internet access and to encourage more individuals to use the Internet. Although the numbers for mobile phone usage are low in 1999, recent anecdotal information suggests that this usage is on the rise in Kenya, as the sale of mobile phone licenses appears to have successfully at created a competitive market; as a result, user fees have recently come down.
Africa: Access to the Internet and Mobile Telephones, 1999
Africa: Access to the Internet and Mobile Telephones, 1999
| Per 10,000 People | ||||
|---|---|---|---|---|
| Internet | Internet | Mobile | ||
| users | hosts | phones | ||
| Cote d’lvoire | 12.9 | 0.24 | 177.2 | |
| Egypt, Arab Rep. of | 31.9 | 0.28 | 80.0 | |
| Ghana | 10.7 | 0.06 | 35.5 | |
| Kenya | 11.9 | 0.19 | 8.1 | |
| Mozambique | 8.7 | 0.09 | 6.3 | |
| Tanzania | 7.6 | 0.05 | 15.6 | |
| Zambia | 25.3 | 0.06 | 26.1 | |
| Zimbabwe | 12.6 | 0.48 | 31.4 | |
| Memorandum item: | ||||
| Norway | 4,484.3 | 753.10 | 6,130.0 | |
Africa: Access to the Internet and Mobile Telephones, 1999
| Per 10,000 People | ||||
|---|---|---|---|---|
| Internet | Internet | Mobile | ||
| users | hosts | phones | ||
| Cote d’lvoire | 12.9 | 0.24 | 177.2 | |
| Egypt, Arab Rep. of | 31.9 | 0.28 | 80.0 | |
| Ghana | 10.7 | 0.06 | 35.5 | |
| Kenya | 11.9 | 0.19 | 8.1 | |
| Mozambique | 8.7 | 0.09 | 6.3 | |
| Tanzania | 7.6 | 0.05 | 15.6 | |
| Zambia | 25.3 | 0.06 | 26.1 | |
| Zimbabwe | 12.6 | 0.48 | 31.4 | |
| Memorandum item: | ||||
| Norway | 4,484.3 | 753.10 | 6,130.0 | |
75. Other constraints attributable to poor physical infrastructure arise from inadequate electricity and the dismal condition of the road network. The electricity system in Kenya is controlled by two parastatals—Kengen, which generates electricity through hydroelectric and geothermal power plants, and the Kenya Power and Lighting Company (KPLC), which distributes electricity. In addition, there are a small number of independent power producers but they currently capture only a very small fraction of the market. The lack of progress in reforming the power sector in Kenya has led to an inefficient system for power distribution, in particular. Electric power distribution losses in Kenya are among the highest in Africa, while its power-generating capacity is among the lowest (Table 7). Similarly, Kenya’s road system is a serious impediment to export performance, especially since many products need to be transported from the agricultural areas to the main shipping areas (Nairobi and Mombasa).
Africa: Comparative Infrastructure Development Indicators
Road indicators are for 1995.
Africa: Comparative Infrastructure Development Indicators
| Electricity Distribution Losses (Percent of output), 1998 |
Electricity Capacity (kwh. per capita), 1998 |
Paved Roads (Percent of total roads), 1996 |
Paved Roads (km per thousand capita), 1996 |
||
|---|---|---|---|---|---|
| Cameroon 1/ | 19.5 | 229.7 | 12.5 | 2.6 | |
| Egypt, Arab Rep. of | 12.2 | 1,023.4 | 78.1 | 1.1 | |
| Ghana | 0.7 | 394.9 | 24.1 | 2.2 | |
| Kenya | 25.0 | 166.9 | 13.9 | 2.3 | |
| Mozambique | 10.4 | 404.6 | 18.7 | 1.9 | |
| Nigeria | 31.8 | 130.1 | 18.8 | 1.7 | |
| Tanzania | 22.3 | 67.1 | 4.2 | 2.9 | |
| Zambia | 11.3 | 814.8 | 7.2 | ||
| Zimbabwe | 17.0 | 565.3 | 47.4 | 1.6 | |
| Memorandum item: | |||||
| Norway | 7.6 | 26,192.0 | 75.5 | 20.4 | |
Road indicators are for 1995.
Africa: Comparative Infrastructure Development Indicators
| Electricity Distribution Losses (Percent of output), 1998 |
Electricity Capacity (kwh. per capita), 1998 |
Paved Roads (Percent of total roads), 1996 |
Paved Roads (km per thousand capita), 1996 |
||
|---|---|---|---|---|---|
| Cameroon 1/ | 19.5 | 229.7 | 12.5 | 2.6 | |
| Egypt, Arab Rep. of | 12.2 | 1,023.4 | 78.1 | 1.1 | |
| Ghana | 0.7 | 394.9 | 24.1 | 2.2 | |
| Kenya | 25.0 | 166.9 | 13.9 | 2.3 | |
| Mozambique | 10.4 | 404.6 | 18.7 | 1.9 | |
| Nigeria | 31.8 | 130.1 | 18.8 | 1.7 | |
| Tanzania | 22.3 | 67.1 | 4.2 | 2.9 | |
| Zambia | 11.3 | 814.8 | 7.2 | ||
| Zimbabwe | 17.0 | 565.3 | 47.4 | 1.6 | |
| Memorandum item: | |||||
| Norway | 7.6 | 26,192.0 | 75.5 | 20.4 | |
Road indicators are for 1995.
76. Finally, the lack of access to credit and the high level of real interest rates in Kenya are additional constraints on exporters. The high level of real interest rates has in particular been a constraint for exporters who typically have access to credit, as the real lending rate in Kenya has been quite high since 1995 (Table 8). Although this rate has come down recently, evidence suggests that real rates may have risen again in Kenya in 2001. Furthermore, many producers do not have access to credit at all. This is viewed as a serious constraint on small-scale producers of agricultural commodities, in particular. Serious deficiencies in Kenya’s legal and financial systems,34 particularly among the state-owned banks, have been a major factor contributing to the high real lending rates as well as to the inadequate access to credit.
Africa: Real Lending Rates for Selected Countries, 1995–2000
(In percent)
Africa: Real Lending Rates for Selected Countries, 1995–2000
(In percent)
| 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | Average | |
|---|---|---|---|---|---|---|---|
| Cameroon | 6.3 | 17.4 | 16.4 | 18.2 | 19.8 | 20.5 | 16.5 |
| Chad | 6.4 | 8.6 | 15.5 | 8.8 | 30.9 | 17.5 | 14.6 |
| Egypt, Arab Rep. of | 0.6 | 7.8 | 8.8 | 8.5 | 9.6 | 10.3 | 7.6 |
| Ethiopia | 4.6 | 20.0 | 7.9 | 7.7 | 4.5 | 10.9 | 9.3 |
| Kenya | 27.8 | 22.9 | 16.3 | 22.4 | 19.2 | 15.6 | 20.7 |
| Tanzania | 11.3 | 10.7 | 8.8 | 8.9 | 13.0 | 14.8 | 11.2 |
| Uganda | 10.7 | 12.2 | 13.5 | 20.9 | 14.3 | 19.5 | 15.2 |
Africa: Real Lending Rates for Selected Countries, 1995–2000
(In percent)
| 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | Average | |
|---|---|---|---|---|---|---|---|
| Cameroon | 6.3 | 17.4 | 16.4 | 18.2 | 19.8 | 20.5 | 16.5 |
| Chad | 6.4 | 8.6 | 15.5 | 8.8 | 30.9 | 17.5 | 14.6 |
| Egypt, Arab Rep. of | 0.6 | 7.8 | 8.8 | 8.5 | 9.6 | 10.3 | 7.6 |
| Ethiopia | 4.6 | 20.0 | 7.9 | 7.7 | 4.5 | 10.9 | 9.3 |
| Kenya | 27.8 | 22.9 | 16.3 | 22.4 | 19.2 | 15.6 | 20.7 |
| Tanzania | 11.3 | 10.7 | 8.8 | 8.9 | 13.0 | 14.8 | 11.2 |
| Uganda | 10.7 | 12.2 | 13.5 | 20.9 | 14.3 | 19.5 | 15.2 |
D. Traditional Exports of Goods
Coffee
77. Coffee is one of Kenya’s most popular and traditional exports. Kenyan coffee is renowned for its high quality and typically fetches a price higher than the world average. Nearly all (about 95 percent) of the coffee grown in Kenya is exported. Over recent years, however, the coffee sector has suffered from drought and low world prices, as well as from delays in reforming the sector.
78. The coffee sector is regulated by the Coffee Board of Kenya (CBK), which was, until late 2001, the monopoly marketer of Kenyan coffee. Recent revisions to the Coffee Act, whose legislation was passed by Parliament and signed by the President in late 2001, should come into effect by April 1,2002. These revisions create room for competition in marketing, while retaining the central auction system. However, barriers to entry and other problems with the legislation may dilute the impact of the reform.
79. Most Kenyan coffee is produced by small-scale farmers, although there are a significant number of coffee-growing estates. Coffee is processed in several stages, including picking, pulping, drying, and milling, and the level and type of regulation at each stage varies. The small-scale farms are organized into cooperative societies, which vary in size and efficiency, and are responsible for providing credit to farmers during the planting season. As stipulated by the Coffee Act,35 farmers must deliver their (coffee) cherry to the cooperatives’ pulping stations, giving each cooperative a monopoly over the pulping of its farmers’ cherry. The final stage of coffee processing, milling, has been liberalized and works quite efficiently. After milling, coffee is brought to the Nairobi Coffee Exchange where a weekly auction is held.
80. The cooperative system, while allowing small-scale farmers to benefit from economies of scale, has begun to be seen as a serious obstacle to reform in the sector and possibly as a reason for its recent weak performance. For example, it is estimated that some cooperatives retain nearly 90 percent of the proceeds (after transactions costs) from the coffee auction, leaving farmers with only 10 percent. However, the most efficient cooperatives retain only slightly more than 10 percent, leaving farmers with nearly 90 percent of the proceeds. This high degree of variability in the efficiency of cooperative management and local governance issues have led some analysts to the conclusion that the geographical monopoly that the cooperative societies enjoy should be reconsidered.
81. Coffee volumes and prices fluctuated greatly over the period 1995–2000, leading to large changes in coffee exports in U.S. dollar terms (Figure 11). In particular, coffee prices proved to be particularly volatile during that period, with a large upward spike in 1997 (72 percent) and sharp reductions more recently. Coffee volumes were adversely affected by drought in 1997 and 2000, although due to the long growing season for coffee, the effects of the drought in 2000 on coffee production will take place with a lag.
Kenya: Contribution of Price and Volume to Coffee Export Growth, 1995–2000
(In percent)
Citation: IMF Staff Country Reports 2002, 084; 10.5089/9781451821062.002.A003
Sources: Kenyan authorities; and Fund staff estimates.82. The overall trend in coffee has been disappointing, with coffee exports falling from US$282 million in 1995 to US$154 million in 2000—a nearly 50 percent decline. After strong growth in coffee exports in 1995, growth has been stagnant or negative (Figure 11). In 1999 and 2000, although (value) growth rates stemmed their decline, they were still sharply negative owing to depressed world coffee prices. The low prices seen in recent years, along with bottlenecks in the coffee sector, have led many coffee farmers to uproot their coffee trees and begin planting tea.
83. Ensuring reform of the coffee sector should be a top priority of Kenyan policymakers. The monopoly powers of the CBK and the cooperatives, poor management, drought, and weak infrastructure have all contributed to the decline of this sector. In response to many of the problems in the cooperatives, farmers have begun to develop small estates (5 acres) that have their own factories.36 This step has allowed small-scale farmers to exercise some independence from the cooperatives. Successful implementation of the reforms which have been passed in the recent months will lessen the monopoly power of the CBK and the cooperatives, and provide incentives to farmers to improve decision making and increase profitability. The World Bank is working with the Kenyan authorities to increase the profitability of the sector by encouraging speedy implementation of reforms, both at the central and producer level.
Tea
84. Since 1995, the tea sector has become the largest single contributor to Kenya’s exports. As with coffee, most Kenyan tea is exported. However, unlike coffee, delivering tea to market involves fewer steps (tea, for instance, does not need to be pulped), allowing for more independence on the part of tea farmers. In 2000, the tea sector was liberalized through an IDA-supported reform program. The salient features of the reform of the tea sector were the liberalization of tea marketing and the privatization of the Kenya Tea Development Authority (KTDA).
85. As with coffee, the growth of tea exports (in U.S. dollar terms) has fluctuated, although not nearly as much (Figure 12). Tea volumes were adversely affected by drought in 1997 and 2000, although the effects were mitigated by high world tea prices in those years. Furthermore, over the period 1995–2000, tea exports increased from US$330 million to US$463 million, notwithstanding the decline in 1999 and 2000.
Kenya: Contribution of Price and Volume to Tea Export Growth, 1995–2000
(In percent)
Citation: IMF Staff Country Reports 2002, 084; 10.5089/9781451821062.002.A003
Sources: Kenyan authorities; and Fund staff estimates.86. The liberalization of the tea sector, however, has not been without problems. Perhaps the biggest problem facing the tea sector since liberalization has been the “growing pains” associated with the transition to a decentralized system following the privatization of the KTDA. Other problems include the lack of institutional and managerial capacity and poor infrastructure, particularly the road system. Notwithstanding these impediments, tea exports are expected to remain robust over the medium term, as the liberalization of the tea sector takes hold and the effects of the recent drought subside.
E. Nontraditional Exports of Goods
87. Nontraditional exports contain a variety of products, including manufactured products, horticultural products, oil products, and others, such as processed food and vegetables. Of these, manufactured products and horticulture are the largest contributors to exports, followed by oil products.
Manufacturing
88. Manufactured exports have suffered since 1995. After peaking in 1996, manufactured exports declined by an average of nearly 10 percent per year through 2000. The decline can be seen profoundly in a few products, particularly leather products, cement, iron and steel, and essential oils and perfumes. The decline in exports of these products has not been offset by increases in exports of other manufacturing products, which implies that the poor performance of some manufacturing exports may not be due to shifts away from certain products and toward others. Rather, the overall decline in manufacturing exports may represent a loss in competitiveness for Kenyan products.
89. As with most other sectors in Kenya, high costs of doing business are likely having a negative impact on the manufacturing sector. High real interest rates and falling confidence have depressed investment, which, in turn, has led to the continued use of inefficient production technologies and low productivity. Costs associated with pervasive governance problems and deteriorating security have exacerbated the situation, and an inefficient utility sector and poor infrastructure have increased the costs of production and shipping. In addition, power disruptions associated with the drought in 2000 also adversely affected the manufacturing sector.
90. Rising unit labor costs and dollar wages have also squeezed profit margins in manufacturing and have made producing in Kenya less attractive (Table 9).37 From 1990 to 1999, monthly dollar wages rose from US$134 to US$185, an increase of nearly 40 percent. This effect of this increase was compounded by the fact that dollar wages fell from 1990 to 1994 before returning to their 1990 level in 1996. Thus, between 1996 and 1999, monthly dollar wages increased by over 40 percent. Similarly, manufacturing unit labor costs increased by 25 percent during 1990–99 and by 11 percent during 1995–99. The trend in unit labor costs is slightly different than that in dollar wages, however, since unit labor costs increased dramatically between 1994 and 1997 before leveling off (and even falling slightly).
Kenya: Manufacturing Unit Labor Costs and Dollar Wages, 1990–99
Kenya: Manufacturing Unit Labor Costs and Dollar Wages, 1990–99
| 1990 | 1991 | 1992 | 1993 | 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | ||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Monthly dollar wages | |||||||||||
| (per employee) | 134.0 | 120.9 | 114.7 | 72.3 | 87.7 | 121.1 | 130.9 | 163.6 | 182.4 | 185.4 | |
| Unit labor costs | |||||||||||
| (index, 1990=100) | 100.0 | 92.3 | 97.9 | 98.1 | 92.3 | 112.6 | 113.1 | 127.9 | 127.3 | 125.3 | |
Kenya: Manufacturing Unit Labor Costs and Dollar Wages, 1990–99
| 1990 | 1991 | 1992 | 1993 | 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | ||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Monthly dollar wages | |||||||||||
| (per employee) | 134.0 | 120.9 | 114.7 | 72.3 | 87.7 | 121.1 | 130.9 | 163.6 | 182.4 | 185.4 | |
| Unit labor costs | |||||||||||
| (index, 1990=100) | 100.0 | 92.3 | 97.9 | 98.1 | 92.3 | 112.6 | 113.1 | 127.9 | 127.3 | 125.3 | |
91. The decline in manufacturing exports in Kenya represents the larger problems of the Kenyan economy. Kenya is endowed with human capital and benefits from a good geographic location—both essential inputs to a successful manufacturing sector. In addition, Kenya has traditionally been the hub of economic activity in east Africa and has a reasonably well developed financial system. These factors should enable Kenya to develop a favorable business and investment climate; however the stop-go policies of the past decade have prevented this from materializing.
Horticulture
92. Kenya’s climate and fertile land provide an excellent base for growing horticultural crops. Horticulture exports contain a mixture of many products, including a variety of fruits and cut flowers, with cut flowers accounting for the largest component. Kenya’s diverse agro-ecological areas allow for a wide range of horticultural crops to be grown, including tropical crops (e.g., mangoes, bananas, and French beans), temperate crops (e.g., apples, carrots, and snow peas), and crops better suited to drier regions. These products in Kenya are both irrigated and rain fed.
93. Unlike other agricultural subsectors in Kenya, the horticulture industry has developed through strong involvement of the private sector and limited government intervention. The horticulture business is dominated by large-scale growers, although the majority of horticulture farmers are small-scale operators who produce for home use and local domestic consumption. Currently, most horticulture production is used for local domestic consumption, although high-value crops are exported, mainly to Europe and the Middle East.
94. Horticulture nearly doubled its share of exports from 1995 to 2000, and it showed steady growth in U.S. dollar terms from US$119 million in 1995 to US$209 million in 2000. Production of horticultural crops was adversely affected by drought in 2000, although favorable world prices mitigated the effects on the value of horticultural products in U.S. dollar terms. In particular, the rationing of electricity in 2000 on account of the drought had severe adverse effects on the flower industry. Horticulture production and exports face some of the same problems as the tea and coffee sectors, particularly poor infrastructure, although other problems exist as well (see below). It is estimated that up to 40 percent of horticultural products are lost because of poor road conditions.
95. According to the Ministry of Agriculture,38 yields of horticultural crops are consistently below their potential. This is mostly due to lack of proper irrigation, poor crop maintenance, and nonuse of appropriate fertilizers. There is scope for improving the yields of these crops by expanding irrigation, improving husbandry techniques, and increasing the use of inputs (including fertilizers). Other constraints include crop disease and pest incidence, poor road infrastructure, inadequate technical information at the small-scale farm level, and unpredictable weather conditions. In addition, poor marketing is cited as a major constraint on the horticulture industry. Most farmers have limited market outlets, inadequate market information, and lack of access to precooling and storage facilities. Discussions with industry leaders indicate that access to adequate air freight does not appear to be an impediment to development of the horticulture sector, although the lack of direct flight to the United States has limited Kenya’s ability to access that market.
96. Several steps are being taken to address some of the problems in this industry. Perhaps the largest projects involves the construction of cold storage facilities to be administered by the Horticultural and Crops Development Authority (HCDA). The HCDA will transport the produce from satellite depots to Nairobi, where produce will be auctioned. The goal of this project is to provide small-scale farmers with cold storage, transportation, and market outlets. This project is only one of several in which the government is increasing its involvement in the sector. Although there may be some role for government, especially in cases where markets are inefficient (as may be the case in the horticulture industry), it will be important for the government to avoid becoming too intrusive as it has done in the coffee sector and previously in the tea sector. With these steps, and the continued leadership of the private sector, the horticulture industry should continue to thrive and establish itself as one of the leading industries in Kenya.
Oil products and reexports
97. Oil products have captured an increasingly larger share of total exports, although in U.S. dollar terms they have fallen since 1998. Kenya typically imported crude oil, refined it, and exported it to neighboring countries. In recent years, however, demand for oil refined in Kenya has fallen. In its place, particularly in 2000, reexports of refined oil products have emerged. Oil products enter Kenya and the port of Mombasa and are reexported to neighboring countries.
98. The precise reasons for the decline in Kenyan oil exports are unclear at this stage. However, one can surmise that the high cost of electricity in Kenya, the poor infrastructure, and volatile oil prices are likely causes.
F. Tourism
99. Tourism has long been one of Kenya’s largest export earners. Kenya has two main tourist destinations—the coastal region and the game parks. The tourism industry has suffered in recent years, however, largely because of Kenya’s security problems. The coastal region, in particular, has suffered as a result of deteriorating security. The game parks, however, have continued to do a robust business. From 1995 to 2000, tourism earnings have been on a downward trend (Table 10).
Kenya: Exports of Tourism, 1995–2000
(In millions of U.S. dollars)
Kenya: Exports of Tourism, 1995–2000
(In millions of U.S. dollars)
| 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | |
|---|---|---|---|---|---|---|
| Tourism | 486.0 | 452.0 | 387.8 | 290.0 | 300.8 | 259.3 |
Kenya: Exports of Tourism, 1995–2000
(In millions of U.S. dollars)
| 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | |
|---|---|---|---|---|---|---|
| Tourism | 486.0 | 452.0 | 387.8 | 290.0 | 300.8 | 259.3 |
100. Insecurity in Kenya, or the perception thereof, has become a major impediment to the further development of the tourism industry. The Kenya Tourist Federation (KTF) has taken steps to address the security problem, such as establishing a 24-hour security center for tour operators and a tourist police force. The security problems in Nairobi, including those related to the 1998 embassy bombing, have also contributed to the decline in tourism, even though Nairobi itself is not a major tourist destination.
101. To try to revitalize the tourism industry, the Kenya Tourist Board (KTB) has launched an aggressive marketing campaign and recruited new staff with marketing backgrounds. Their strategy involves placing marketing representatives in four key markets that will act as hubs (the United States, Germany, the United Kingdom, and Japan). Currently, Germany is the primary source market for tourism to Kenya, although Japan and the United Kingdom are also large markets. Efforts by the KTB and others should allow the tourism industry to recover and regain some of the losses made in the past several years. Prospects for the future remain positive, albeit uncertain, as there is much scope for growth in this industry.
102. The lack of appropriate data hampers analysis of Kenya’s tourism exports. It is highly likely that tourism exports are severely underestimated, which impedes a proper evaluation of trends in these exports.39 The Central Bureau of Statistics (CBS) has started conducting visitor exit surveys in an attempt to capture tourism receipts more fully. The survey will be ongoing and will be conducted semiannually. The KTB and the CBS are looking for ways to modify data collection on tourism.
G. Conclusion
103. Kenya’s export performance has deteriorated since 1995. Although this performance can be explained, in part, by volatility in export prices, the decline in export volumes is the primary explanatory factor. A major cause of the decline in export volumes has been the poor climatic conditions (prolonged drought) for production of agricultural commodities, namely, coffee, tea, and horticultural products.
104. Beyond the effects of the drought, separate price and nonprice effects on export volumes can be distilled. Price constraints, such as a decrease in the price of tradable to nontradable goods and rising unit labor costs have weakened the competitive position of exporters. Kenyan exporters also face a variety of nonprice constraints which have increased the costs and risks of doing business in Kenya.
105. The costs of doing business in Kenya are high owing to pervasive governance problems, poor infrastructure—particularly the road system—high interest rates, an inefficient utility sector, and deteriorating security. These factors, coupled with slow and erratic macroeconomic reform efforts, have contributed significantly to Kenya’s declining export performance.
Prepared by Julie Kozack.
The adverse weather conditions affecting Kenya in 1997 caused goods export volumes to continue to decline into 1998.
See Section VI of this selected issues paper for details of the impact of governance problems on growth and economic performance.
Inefficiencies and political interference in the commercial court system undermine the efforts of creditors and liquidators (such as the Deposit Protection Fund) to enforce loan contracts. This has led to a poor credit culture and, as a result, inadequate access to credit for small and medium enterprises. For a detailed discussion of the Kenyan banking system, see Section V.
The Coffee Act mandates that all small-scale farmers be members of a cooperative society.
According to the Coffee Act, a license is required for coffee planting, and only planters are allowed to own coffee. Planters are defined as cooperatives or estates of a least 5 acres, and are not permitted to plant outside their approved areas.
This phenomenon has been confirmed through discussions with industry representatives in Kenya, who have indicated that firms are considering moving their operations out of the country.
See the Annual Report, 2000 of the Horticulture Division of the Ministry of Agriculture and Rural Development of Kenya.
Underrecorded tourism earnings are thought to be the primary contributor to the large, positive net errors and omissions in Kenya’s balance of payments.
