Appendix I. Kenya’s Political Economy
Developments since the December 2007 elections have drawn attention to Kenya’s complex political economy and ethnic make-up. Five groups each make up at least 10 percent of the population, with Kikuyus constituting the largest share at just over 20 percent. Asian and Muslim communities are prominent in Kenya’s cities and along the coast. Reflecting the ethnic composition and regional dispersion, the constitution requires that a presidential candidate secure at least twenty-five percent of the votes cast in at least five of eight provinces.
Regional and ethnic issues have long colored Kenya’s political landscape. For nearly four decades, the country was governed by the KANU, and a one-party system was enshrined in the constitution in 1982. Maintaining peaceful tribal relations was often cited as the rationale for the single-party approach. The system also provided for considerable patronage and corruption opportunities, with some observers suggesting that specific ministries and parastatals were “reserved” for different ethnic groups. At the same time, the principal actors in major corruption scandals were not from a single ethnic group.
Donors regarded Kenya’s single-party politics as increasingly authoritarian through the 1980s, following a coup attempt against President Daniel arap Moi in 1982. Raila Odinga, the opposition candidate in the disputed 2007 elections, was implicated in the coup and held without trial for six years. A “queuing system” that was used in the 1988 general elections, in which voters were forced to line up publicly for candidates, rather than voting by secret ballot, also colored donor perceptions. The murder of foreign minister Robert Ouko in 1990 added to concerns. Some observers have suggested that the end of the Cold War also changed donors’ views of Kenya, and new commitments of aid to the government were suspended from late 1991.
Kenya’s single-party system was rescinded in 1991. Since then, the political landscape has been characterized by frequent splintering and regrouping of parties and election-related violence in 1992 and 1997, although not on the scale of the recent turmoil. Elections have also brought fiscal and financial pressures and have coincided with major corruption scandals (Goldenberg in 1992 and Anglo-Leasing in 2002) and the build-up of fraudulent domestic arrears. President Moi, from the smaller Kalenjin tribe, displayed considerable skill in manipulating ethnic politics and keeping his opponents off balance with surprise political moves and ministerial shifts. For example, Raila Odinga’s party was brought into the government in 1997 and again in 2001 and even merged with KANU. President Moi’s designation of a successor in the run-up to the 2002 elections was similarly surprising, as he passed over several well-known politicians for Uhuru Kenyatta, the son of the first Kenyan president, Jomo Kenyatta, and a relative newcomer to the political scene at that time. These maneuvers have also wrong-footed the donor and foreign investor communities.
A key theme of the 2002 elections was to move beyond the complex, quarter-century tenure of President Moi to introduce economic and political reforms, including creation of a prime ministerial post and presidential age limits. Other reforms would have addressed land issues and regional and ethnic concerns through decentralization (e.g., greater authority for Muslim courts). However, a constitutional referendum was rejected by voters in November 2005, leading to the dissolution of the cabinet of President Kibaki and a split in the Kibaki-Odinga coalition that won the 2002 elections. This, in turn, set the stage for the 2007 election contest. The events of the past five years underscore a key legacy of the Moi era, KANU’s long rule, the patronage system, and the constant maneuvering of political figures and parties: political fragility.
In spite of this complex context, Kenya has long been seen as a haven of stability in a difficult region, particularly given conflict in neighboring Somalia, Sudan, and Ethiopia. In addition to a multi-party political system, Kenya has an active news media and civil society. This perception of stability has persisted, even though Kenya suffered from high-profile terrorist attacks in recent years, including on the U.S. Embassy in Nairobi in 1998 and on coastal resorts in 2002. Although a political stand-off and violence followed the disputed 2007 elections, a political resolution reached in February on a power-sharing arrangement between Mr. Kibaki and Mr. Odinga may set an important example for furthering democracy in the region.
Appendix II. Kenya’s Relations with the World Bank
Kenya’s collaboration with the Bank paralleled its fitful relations with the Fund:
During the 1990s, Bank budget support was constrained by the authorities’ poor track record, particularly on public sector management and agriculture liberalization. Only the first tranche of a 1996 structural adjustment credit was disbursed, just after approval of the ESAF. The second tranche and augmented financing were not released, and the loan was closed in June 1998.
Budget support was renewed with a loan in August 2000—coinciding with approval of the PRGF. A second tranche was disbursed in December 2003; however, the loan was closed in 2004, with a final, third tranche cancelled. The Bank later rated the outcome of the loan as unsatisfactory, although it noted that the Kibaki government had made a promising, albeit cautious start in reforms to improve Kenya’s investment climate.37
The results of key project loans were also mixed. A 1996 urban transport infrastructure project was clouded by kickbacks, contract rigging, and theft of funds, including by Bank staff. A 2000 HIV/AIDS project became bogged down by political infighting and “grave fraud and mismanagement.” However, a 1997 energy sector project contributed to an expansion of electricity generation capacity, greater transparency in pricing, and elimination of subsidies. The project also led to unbundling of the power sector and establishment of an independent regulatory board—prerequisites for subsequent investment and privatization. A 2000 public sector management TA project aimed to support civil service rationalization, legal and judiciary reforms, improved PFM practices, and coordination of reforms across the government. Following the 2002 elections, activities were extended to strengthening judiciary and court capacity. While the project helped set the basis for later gains in many areas, the project review concluded that it was critical to keep reforms simple and focused, with realistic expectations for implementation and an effective communications strategy.
Bank project lending improved over the past five years, despite the temporary suspension of new lending in late 2005. The share of projects “at risk” declined significantly, and audit compliance improved. The Bank’s CAS was extended by one year in early 2007 to support project lending operations and implementation of the GAP. The extension also aimed to address emerging concerns with uneven development and inequity through better geographic and demographic targeting of Bank projects. Budget support was not renewed.
Appendix III. Public Enterprise Reforms in Kenya
Successive Fund arrangements appropriately targeted public enterprise reforms, with gradual, but considerable success. In the early 1990s, governance problems and financial mismanagement were acute at several major public enterprises (PEs), the inefficient operations of which seriously constrained Kenya’s economy (ports, transportation, telecommunications, agriculture storage and marketing, and energy). PEs had easy access to overdrafts with state-owned banks, so that mismanagement also had financial sector implications. A 1991 policy paper of the Kenyan government divided PEs into strategic and nonstrategic firms. The authorities did not favor sale of strategic PEs, but rather strengthening of oversight and operations. Throughout the period, the authorities were concerned to retain Kenyan ownership of PEs. This position began to shift in 1999, when they agreed to foreign participation in privatization.
A first phase of PEs reforms (1993-99) aimed at limiting fiscal pressures from “strategic” firms and at sale of nonstrategic firms. This phase was broadly successful, although progress was slower than anticipated. Half of the 210 nonstrategic enterprises were sold during the 1994 ESAF, and divestiture continued thereafter. Explicit program measures also targeted cost-cutting and improved performance in four strategic PEs—KPTC, the NCPB, KPLC, and KR—with assistance from the World Bank. In parallel, a 20 percent stake in the NBK was floated in October 1994. Progress with improving financial performance of KPTC and NCPB proved difficult, however, reflecting continued mismanagement. The 1996 ESAF brought a new impetus, and by end-1997, management of a key container terminal operated by the Kenya Ports Authority had been contracted out, a restructuring plan for KR had been adopted, NCPB began operating on a commercial basis, Kenya Airways was privatized, a strategic restructuring and privatization plan for KPTC was approved, direct government ownership in NBK was reduced to 26 percent, and KPLC was separated into distribution and generation firms. By end-1999, KPTC had been separated into three entities, and a decision was made to privatize Kenya Telkom (later reversed—see below). Despite slower-than-expected progress, reform was moving in the right direction.
A second phase from 2000 focused on restructuring or privatization of “strategic” PEs. Major success was registered, especially in 2006-07. Under the 2000 PRGF, reforms suffered setbacks, as a transaction for Telkom was cancelled after bids had gone out, and privatization of KCB stalled. The 2003 PRGF aimed to complete the agenda, while improving transparency. A Privatization Act was passed in 2005, and a privatization commission was established in 2007. Progress with transactions was achieved through initial public offerings (IPOs) in the energy, sugar, and insurance sectors—helping to ensure shareholding by the Kenyan public—and through sale to strategic investors (Telkom). The NBK was restructured in May 2007, and a privatization strategy was approved in November. A management contract and a concession agreement were put in place for KPLC and KR, respectively. Operations of the PEs sector improved through performance contracts piloted in 2004/05 and rolled out in 2005/06 and through recruitment of professional managers.
Goals under successive Fund arrangements were ambitious, and the experience showed that reforming large, complex parastatals can go forward, albeit gradually and with sufficient ownership. Weak economic conditions (and layoffs) may have undermined the environment for earlier reforms. The recent focus on strengthened operations and management—rather than on transactions—was well aligned with the authorities’ own policy priorities. A key factor in success was close involvement of the World Bank in the reforms.
Appendix IV. Rationalization of Civil Service Employment
During the 1980s, the civil service and number of ministries in Kenya grew substantially. The 1989 ESAF included benchmarks on wage bill growth, but performance was mixed. The authorities issued a draft civil service reform program in 1992 to cut positions by 25 percent over 5 years. Donors were asked to help finance separations, but with aid frozen in 1991 and upcoming elections, the program did not progress.
Reforms advanced with the 1993 SMP and one-year ESAF. The civil service reform program was approved in July 1993, aiming for a sharper reduction of positions—by nearly 40 percent by mid-1998. The cuts excluded teachers. Staff reductions progressed in line with targets under the SMP and the ESAF through end-1995. Progress was also achieved on an ambitious agenda for restructuring and rationalizing ministries, part of program conditionality.
While reforms also continued initially under the 1996 ESAF, they were derailed by wage hikes in the run-up to the 1997 elections. Reforms under the 1996 ESAF stressed the importance of improving the pay of high-level civil servants and introducing an automatic personnel database. Position reduction targets were revised and only slightly undershot in 1996; however, in the run-up to elections in 1997, an ambitious wage agreement with teachers (200 percent over five years and 35 percent in 1997/98) and civil servants (18 percent in 1997/98) was concluded. The big hike reflected, in part, the erosion of wages, which were reported to have declined by 25 percent since 1990, and by more than 50 percent since 1980. Only the first phase of the teachers’ agreement was implemented, however, although it was revived in 2003/04 by the new government.
Parts of the reform continued even though the 1996 ESAF arrangement went off-track. Ghost employees identified in censuses conducted before the establishment of the new payroll system were reduced, and ministerial rationalization continued. In September 1999, the number of ministries was reduced from 27 to 15.
During the 2000 PRGF, further staffing cuts were achieved, but structural reforms of the wage bill did not advance. A functional review of ministries and departments was completed, and a new retrenchment program was designed. The program aimed for a further reduction of 48,000 employees. By September 2000, cuts of more than 25,000 were completed, but after that, the program stalled.
Over the past five years, a relative reduction in the wage bill took place, although mainly due to high GDP growth. Progress in civil service reform was mixed. Actions included reforming the minimum wage setting mechanism, harmonizing wages across the general government, and continuing a general hiring freeze, with flexible application for poverty-reducing priority sectors. However, a review and consolidation of allowances was not finalized, different pay review bodies were not harmonized, and ad hoc salary increases continued.
Over the entire period, central government administrative staffing was cut, but this did not reduce the wage bill as a share of GDP. Increases in wages and noncivil service positions (e.g., teachers) limited savings. Problems with the pay structure and competitiveness were not fully addressed. Middle-level employees remained underpaid, relative to low-level staff.
Appendix V. The Ambitious Agenda of the Dream Team
Staff began working with the Dream Team in July 1999. During a mission that month—the first of two to undertake the 1999 Article IV consultations—staff developed a list of 13 “priority measures” in five broad areas: (i) enhancing accountability; (ii) strengthening oversight bodies; (iii) strengthening budget planning and execution; (iv) changing incentive mechanisms faced by potential participants in corruption; and (v) removing rent seeking opportunities. Specific actions included:
Measures to enhance transparency of procurement by tender boards and parastatals.
More adequate staffing and support for KACA.
Assignment of financial controllers from the Treasury to line ministries to countersign all expenditure commitments to ensure consistency with budgetary ceilings.
Establishment of widely publicized rules to limit government payments for expenditure committed outside the existing financial regulations.
Elimination of all external duty exemptions and waivers except those specified by international treaties.
During the second mission, in September, staff found that a number of the measures were underway or completed. However, during the Board discussion of the Article IV consultations in December, Directors stated that more would need to be done before a program could be put in place. A follow-up mission in January targeted 17 additional measures to be “implemented in the near future.” These included:
Adoption of international standards in tendering.
Strengthening of reporting of transactions of line ministries by having them audited by the Office of the Internal Auditor
Requiring that all public officials and members of government declare their assets upon appointment and every three years thereafter or upon leaving service, whichever comes first.
Incorporating all extrabudgetary transactions into the budget.
Issuing a statement to inform the public that Comptroller and Auditor General (C&AG) reports are available for purchase from the government printing office.
Providing adequate budget support to the C&AG, KACA, the Auditor General, and the KRA.
Strengthening further the capacity of the Auditor General’s office and merging it with the Office of the C&AG.
Authorizing the Treasury to refer cases of alleged misuse of public resources to the KACA within three months after deliberation of reports prepared by the parliament’s Public Accounts and Public Investment Committees.
Finally, the brief for a subsequent mission in May 2000 stated that the authorities had committed to implement a significant number of governance measures “in the weeks ahead” from a Cabinet-approved list of 56 actions.
The 2000 PRGF was approved in August.
Appendix VI. The On-and-Off Nature of Donor Support in Kenya
1989–92 ESAF. Bilateral balance of payments assistance was suspended in late 1991, due to slow progress on economic reforms and in moving to a multiparty political system. Project assistance continued, broadly as before.
1993 SMP and one-year ESAF. With successful stabilization under the 1993 SMP and a positive track record under the one-year ESAF, donors made new commitments of $800 million at CG meetings in November 1993 and December 1994.
1995. Donors became concerned with temporary reversals of earlier liberalization steps, as well as ethnic tensions and the authorities’ refusal to register a prominent opposition group, Safina, headed by Dr. Richard Leakey. Pledges made during the 1994 CG meeting were not disbursed.
1996–99 ESAF. During a CG meeting in March 1996, bilateral donors expressed continued concerns with “democratization of the political process, the rule of law, and the administration of justice in Kenya.” While willing to consider release of committed funds, many donors were reluctant to make new pledges. Reflecting this skepticism, the ESAF assumed program financing to be phased out to zero after 1998. After the Goldenberg trial was suspended by the High Court and the ESAF arrangement went off-track in mid-1997, virtually no program support was disbursed for the next three years. Project support also fell slightly.
2000–03 PRGF. The PRGF arrangement assumed a slow but nevertheless ambitious return of budgetary assistance, including from the World Bank. However, no CG meeting had taken place, and financing needs would mostly be met through domestic financing and enhanced revenues, as well as a Paris Club rescheduling, which was approved in November 2000. The PRGF arrangement quickly went off-track, and donor budgetary support returned to virtually zero. Project support fell further.
2003–07 PRGF. A CG meeting, the first since 1996, was held in November 2003 eliciting new pledges of $4.1 billion over three years. A political impasse over constitutional reform and the Anglo-Leasing scandal negatively affected disbursements, although donors initially remained supportive and endorsed the authorities’ Anti-corruption Action Plan for April 2005-June 2006 at a CG meeting in April 2005. This changed when the World Bank froze funding to the Kenyan government in November 2005, and after John Githongo’s memorandum, accusing close allies of Mr. Kibaki of corruption, was leaked in January 2006. While a forward-looking governance strategy allowed the PRGF arrangement to resume, donor budgetary assistance remained very low.
Annex I. The Views of the Kenyan Authorities and Other Stakeholders
A draft of the EPA report was presented and discussed in Nairobi during June 23-25 with the Head of the Public Service, the Minister of Finance, the Governor of the CBK, and the Director of the KACC. Other discussants included the permanent secretaries of the ministries of finance, justice, medical services, water and irrigation, higher education, science and technology, planning, public health, and agriculture, and of the Office of the Prime Minister. Discussions were also held with representatives of civil society organizations (CSOs), labor unions, and donor agencies and embassies.
Kenya did not qualify for the HIPC initiative or the MDRI, as it was not found to face an unsustainable external debt burden beyond a level that could be addressed by traditionally available debt relief mechanisms. Kenya’s per capita GDP was above the $380 threshold at the end of 2004.
Kenya also had a three-year ESAF arrangement during 1989–92. Only one Fund member country has had more arrangements under the Enhanced Structural Adjustment Facility (ESAF) or the PRGF—six—and just one other member has had five such arrangements.
The 1998 U.S. Embassy bombing and terrorist attacks on coastal resorts in 2002 negatively impacted tourism.
Total net inflows to the budget—including project and program grants—amounted to $1 billion; foreign interest payments were $1.5 billion. On a broader basis, all inflows to Kenya from donors (OECD ODA data) amounted to $8.3 billion ($224 per capita, based on current population estimates), compared with $16.9 billion for Tanzania ($429 per capita) and $12.1 billion to Uganda ($400 per capita).
The pick-up of growth helped reduce poverty. According to the World Bank, a recent analysis of Kenya Income and Household Budget Survey data showed that the rate of absolute poverty declined from 52.3 percent in 1997 to 46.1 percent in 2005/06, with sharper declines in urban areas (from 49.2 percent to 38.8 percent) than in rural areas (52.9 percent to 49.1 percent). Inequality remained high, however, and increased in urban areas.
World Bank statistics show, for example, considerably higher education spending levels and higher school enrollment at the primary, secondary, and tertiary levels in Kenya than in Tanzania or Uganda during 1985-2006, with some catch-up at the primary level (and the tertiary level for Uganda) in recent years.
PFM improvements also included a more streamlined budget process and introduction of a medium-term expenditure framework. The number of benchmarks met under the Public Expenditure Management Assessment and Action Plan framework increased from 3 in 2003 to 10 in 2007.
These included a presidential airplane and construction of a new airport in President Moi’s home town.
At a Consultative Group (CG) meeting in March 1996, bilateral donors expressed concern about noneconomic governance issues, including democratization of the political process and the rule of law. Many were reluctant to make new commitments of support.
These included tax evasion at customs and procurement irregularities in energy and health.
Other measures considered included improvements in the transparency of political party financing and actions to address issues raised by a special commission on controversial land transfers.
There are indications that the measurement of consumer price inflation in Kenya may be overstated due to methodological shortcomings; Statistics Department (STA) has been working with the authorities to assess these.
The NBK was placed under strict supervisory control of the CBK, and the CBK’s autonomy and control will be important to ensure that the new capital is not lost through doubtful new lending.
In addition, in late-2007, just after the conclusion of the PRGF arrangement, the MOF granted an exemption from ownership disclosures for a local bank that had attracted foreign investors. This may constrain the CBK’s application of connected and insider lending and fit-and-proper rules and set a precedent.
The stock of arrears tracked electoral cycles, with spikes in 1992, 1997, and 2002. An audit of arrears under the 2003 PRGF found 95 percent of the claims fraudulent.
In 1996, the heads of the KRA and customs were fired in a corruption scandal. In 1998, when the KRA took on a longstanding problem of tax evasion on sugar imports, the customs head was removed, but reinstated.
For example, review of semi-autonomous agencies, tracking of donor flows, and strengthening legislation.
Some have suggested that with greater press freedom and a more active political opposition and donor community, corruption simply was more visible in Kenya. It is noteworthy that whistle blowers and Kenyan audit and oversight institutions helped bring both Goldenberg and Anglo-Leasing to light.
The Fund’s Legal Department (LEG) confirmed in 1994 that a financing gap arising from donors’ withholding of assistance was relevant for the Fund’s assessment of Kenya’s financial programs.
The association of anti-corruption measures to growth was consistently noted by staff, particularly during the slowdown in the 1990s. Staff did not, however, link the slowdown in Kenya to a similar growth pattern observed throughout sub-Saharan Africa, but took flagging performance as a clear indication of the effects of poor governance. A more formal link was made with the 2002 and 2004 Article IV consultations, when papers on the association of governance and growth were issued.
Specifically, LEG noted that since the officials involved in the past abuses had ceased to hold office, there was no longer a risk of a continuation of those abuses. In this context, LEG found that such specific program conditionality on the prosecution and imposition of criminal sanctions on these officials would not have been relevant either for the implementation of the program or for the safeguarding of Fund resources.
Directors called on staff to “provide quarterly reports to the Executive Board either in a written statement or in an oral presentation.”
Directors called for “determined efforts in fighting corruption more broadly and beyond the areas of agreed actions.” At an informal session in May 1999, Directors viewed implementation of prior actions on governance as “formalistic,” and recommended postponement of negotiations on a new program.
The leaked Kroll report alleged that cost overruns on a large hydroelectric project in the 1980s—and corresponding elevated external borrowing—were due to high-level kickbacks from contractors.
The nonconcessional reschedulings seem at odds with a zero ceiling on nonconcessional debt through much of the period.
The Kenya case raises an important issue of access and PRGF program design, as the authorities could have insisted on requesting full access remaining under the 2003 arrangement when reviews were completed under the extension. This points to a broader issue of whether PRGF architecture should allow for a more explicit reconsideration of access to take account of extensive program slippages and changes in the balance of payments position.
The Kenyan authorities have not agreed to publication of recent reports and letters of intent, and only the 2001 and 2003 Article IV reports and the 2003 PRGF request are available on the Fund’s website. The PINs for the 2004 and 2006 Article IV consultations were not published.
Despite relatively strong capacity and TA from the Fund, data weaknesses remain, including in balance of payment and price statistics.
This counts the 1989 ESAF and subsequent ESAF and PRGF arrangements in 1993, 1996, 2000, and 2003.
The Bank project completion report (#30969) suggested that the Bank had overestimated the willingness and ability of the Moi government to implement reforms and wrongly assumed that the small Dream Team could overcome internal opposition. Lessons learned included focusing on a limited set of reforms through annual, single-tranche credits, strengthening consultations with parliament, civil society, and other stakeholders, and developing an effective communications strategy.
Discussions with other stakeholders were carried out on the basis of a summary presentation.
Donor representatives also cited the need for institutional improvements in areas other than economic management, including public access to information and the Internet, the media, education, and the judiciary, although they recognized that these were outside the mandate and core competency of the Fund.