Overview: Kenya has one of Africa’s worst performing economies. The economy is market-based, with some state-owned infrastructure enterprises, and maintains a liberalized external trade system. The agricultural sector employs more than 70 percent of the country’s 32 million people. Half of the sector’s output remains subsistence production. Kenya’s gross domestic product (GDP) growth rate has declined continuously from a peak of about 6.5 percent per year during the first decade after independence to less than 4 percent per year in the following decade, to only about 1.5 percent per year during the 1990s, with a slight uptick lately. Declining economic performance, combined with rapid population growth, has translated over time into declining income per head, increased poverty, and worsening unemployment. Between the 1970s and 2000, the number of Kenyans classified as poor has grown from 29 percent to about 57 percent.
Kenya’s economic performance has been hampered by numerous interacting factors: heavy dependence on a few agricultural exports that are vulnerable to world price fluctuations, population growth that has outstripped economic growth, prolonged drought that has necessitated power rationing, deteriorating infrastructure, and extreme disparities of wealth that have limited the opportunities of most to develop their skills and knowledge. Poor governance and corruption also have had a negative impact on growth, making it expensive to do business in Kenya. According to Transparency International, Kenya ranks among the world’s half-dozen most corrupt countries. Bribery and fraud cost Kenya as much as US$1 billion a year. Kenyans, most living on less than US$1 per day, pay some 16 bribes a month—two in every three encounters with public officials. Another large drag on Kenya’s economy is the burden of human immunodeficiency virus/acquired immune deficiency syndrome (HIV/AIDS).
Prospects have brightened under the new government, which has set out sound aims in the Economic Recovery Strategy for Wealth and Employment Creation (ERSWEC) for 2003 to 2007, as well as in other policy initiatives and statements on macroeconomic targets, such as the budget and debt. Increased confidence in the government’s will and ability to implement these policies and anticorruption measures would in turn help by increasing financial flows from donors.
Gross Domestic Product (GDP): In 2004 Kenya’s GDP was about US$14 billion. Per capita GDP averages less than US$400 annually. Adjusted in purchasing power parity (PPP) terms, per capita GDP in 2003 was about US$1,000. The country’s real GDP growth picked up to 2.3 percent in early 2004, compared with a sluggish 1.4 percent in 2003 and throughout Moi’s last term (1997–2002). Real GDP is expected to continue to improve, largely because of a recovery in agriculture and an anticipated disbursement of donor funds. The Kenya Central Bank forecast for 2005 is 3.3 percent GDP growth. GDP composition by sector, according to 2004 estimates, was as follows: agriculture, 25.7 percent; manufacturing, 14.0 percent; trade, restaurants, and hotels, 13.8 percent; transport and communications, 6.9 percent; government services, 15.6 percent; and other, 24.0 percent.
GOVERNMENT Budget/Deficit: The budgets of the Moi era carried increasingly worrisome deficits, and the Kibaki government’s first budget for fiscal year (FY) 2004 was similarly unbalanced. In 2003 Kenya’s revenues totaled US$2.761 billion, while its estimated expenditures totaled US$3.406 billion. Government budget balance as a percentage of GDP was –4.6 percent in 2003, –5.5 percent in 2004, and is expected to be somewhat improved in 2005, at –4.5 percent.
Inflation: In 2003 the inflation rate for consumer prices was estimated at 9.8 percent. This rate was a significant rise from the previous year, reflecting higher food prices, which carry a 50 percent weighting in the consumer price index.
Agriculture, Forestry, and Fishing: The agricultural sector continues to dominate Kenya’s economy, although only 15 percent of Kenya’s total land area has sufficient fertility and rainfall to be farmed, and only 7 or 8 percent can be classified as first-class land. In 2003 almost 75 percent of working Kenyans made their living on the land, compared with 80 percent in 1980. About one-half of total agricultural output is non-marketed subsistence production. Agriculture is also the largest contributor to Kenya’s gross domestic product (GDP). In 2003 agriculture, including forestry and fishing, accounted for about 24 percent of GDP, as well as for 18 percent of wage employment, and 50 percent of revenue from exports. The principal cash crops are tea, horticultural produce, and coffee, with horticultural produce and tea the main growth sectors and the two most valuable of all of Kenya’s exports. In 2003 horticulture accounted for 19.9 percent and tea for 18 percent of total export earnings. Coffee has declined in importance with depressed world prices, and accounted for just 3.4 percent of export receipts in 2003. The production of major food staples such as corn is subject to sharp weather-related fluctuations. Production downturns periodically necessitate food aid—for example, in 2004 aid for 1.8 million people in the worst drought since 2000.
Tea, coffee, sisal, pyrethrum, corn, and wheat are grown in the fertile highlands, one of the most successful agricultural production regions in Africa. Production is mainly on small African-owned farms formed from the division of formerly European-owned estates. Livestock predominates in the semi-arid savanna to the north and east. Coconuts, pineapples, cashew nuts, cotton, sugarcane, sisal, and corn are grown in the lower-lying areas.
Forestry and Fishing: Resource degradation has reduced output from forestry. In 2002 roundwood removals came to 21,979,000 cubic meters. Fisheries are of local importance around Lake Victoria and have potential at Lake Turkana. Kenya’s total catch reported in 2004 was 165,000 tons. However, output from fishing has been declining because of ecological disruption. Pollution, overfishing, and the use of unauthorized fishing equipment have led to falling catches and have endangered local fish species.
Mining and Minerals: Kenya has no significant mineral endowment. The mining and quarrying sector makes a negligible contribution to the economy, accounting for less than 1 percent of gross domestic product (GDP), the majority contributed by the soda ash operation at Lake Magadi in south-central Kenya. Thanks largely to rising soda ash output, Kenya’s mineral production in 2003 reached 1 million tons. One of Kenya’s largest foreign-investment projects in recent years is the planned expansion of Magadi Soda. Apart from soda ash, the chief minerals produced are limestone, gold, salt, and fluorospar.
All un-extracted minerals are government property, according to the Mining Act. The Department of Mines and Geology, under the Ministry of Environment and Natural Resources, controls exploration and exploitation of such minerals.
Industry and Manufacturing: Although Kenya is the most industrially developed country in East Africa, manufacturing still accounts for only 14 percent of gross domestic product (GDP). This level of manufacturing GDP represents only a slight increase since independence. Expansion of the sector after independence, initially rapid, has stagnated since the 1980s, hampered by shortages in hydroelectric power, high energy costs, dilapidated transport infrastructure, endemic corruption, and the dumping of cheap imports. Industrial activity, concentrated around the three largest urban centers, Nairobi, Mombasa, and Kisumu, is dominated by food-processing industries such as grain milling, beer production, and sugarcane crushing, and the fabrication of consumer goods, e.g., vehicles from kits. Kenya also has an oil refinery that processes imported crude petroleum into petroleum products, mainly for the domestic market. In addition, a substantial and expanding informal sector engages in small-scale manufacturing of household goods, motor-vehicle parts, and farm implements. About half of the investment in the industrial sector is foreign, with the United Kingdom providing half. The United States is the second largest investor.
Kenya’s inclusion among the beneficiaries of the U.S. Government’s African Growth and Opportunity Act (AGOA) has given a boost to manufacturing in recent years. Under AGOA, Kenya’s clothing sales to the United States almost tripled between 2001 and 2003 to US$187 million. Other initiatives to strengthen manufacturing have been the new Kenya government’s favorable tax measures, including the removal of duty on capital equipment and other raw materials.
Energy: The largest share of Kenya’s electricity supply comes from hydroelectric stations at dams along the upper Tana River, as well as the Turkwel Gorge Dam in the west. A petroleum-fired plant on the coast, geothermal facilities at Olkaria (near Nairobi), and electricity imported from Uganda make up the rest of the supply. Kenya’s installed capacity stood at 1,142 megawatts a year between 2001 and 2003. The state-owned Kenya Electricity Generating Company (KenGen), established in 1997 under the name of Kenya Power Company, handles the generation of electricity, while the Kenya Power and Lighting Company (KPLC), which is slated for privatization, handles transmission and distribution. Shortfalls of electricity occur periodically, when drought reduces water flow. In 1997 and 2000, for example, drought prompted severe power rationing, with economically damaging 12-hour blackouts. Frequent outages, as well as high cost, remain serious obstacles to economic activity. Tax and other concessions are planned to encourage investment in hydroelectricity and in the geothermal energy, in which Kenya is a pioneer.
Kenya has yet to find hydrocarbon reserves on its territory, despite several decades of intermittent exploration. Although Australia continues the search off Kenya’s shore, Kenya currently imports all crude petroleum requirements. Petroleum accounts for 20 to 25 percent of the national import bill. Kenya Petroleum Refineries—a 50:50 joint venture between the government and several oil majors—operates the country’s sole oil refinery in Mombasa, which currently meets 60 percent of local demand for petroleum products. In 2001 oil consumption was estimated at 57,000 barrels a day. Most of the Mombasa refinery’s production is transported via Kenya’s Mombasa-Nairobi pipeline.
Services: Kenya’s services sector, which contributes about 63 percent of GDP, is dominated by tourism. The tourism sector has exhibited steady growth in most years since independence and by the late 1980s had become the country’s principal source of foreign exchange. In the late 1990s, tourism relinquished this position to tea exports, because of a terrorism-related downturn. The downturn followed the 1998 bombing of the U.S Embassy in Nairobi and later negative travel advisories from Western governments. Tourists, the largest number from Germany and the United Kingdom, are attracted mainly to the coastal beaches and the game parks, notably, the expansive Tsavo National Park (20,808 square kilometers) in the southeast. The government and tourist industry organizations have taken steps to address the security problem and reverse negative publicity. Such steps include establishing a tourist police and launching marketing campaigns in key tourist origin markets.
Other elements of Kenya’s services sector face challenges of downsizing, in particular, the financial system. The Kenya banking system is supervised by the Central Bank of Kenya (CBK). As of late July 2004, the system consisted of 43 commercial banks (down from 48 in 2001), several non-bank financial institutions, including mortgage companies, four building societies, and several score foreign-exchange bureaus. Two of the four largest banks, the Kenya Commercial Bank (KCB) and the National Bank of Kenya (NBK), are partially government-owned, and the other two are majority foreign-owned (Barclays Bank and Standard Chartered). Most of the many smaller banks are family-owned and -operated.
Labor: In the early 2000s, agriculture remains the population’s main occupation and source of income. In 2003 Kenya’s labor force was estimated to include about 11.5 million workers, almost 75 percent in agriculture. The number employed outside small-scale agriculture and pastoralism was about 6 million. In 2004 about 15 percent of the labor force was officially classified as unemployed. Other estimates place Kenya’s unemployment much higher, even up to 40 percent.
Foreign Economic Relations: Since independence, Kenya, a nonaligned but pro-Western country, has seen both substantial foreign investment and significant amounts of development aid, some from the communist bloc, most from the West. Between 60 and 70 percent of industry is still owned from abroad. Development assistance has come from increasingly diverse sources in recent years. The share provided by the United Kingdom has fallen, while that of multilateral agencies, particularly the World Bank and the European Development Fund, has increased. When President Moi left office in December 2002, one of the major concerns of international donors was removed, and they prepared to step up aid. The International Monetary Fund resumed aid after a three-year gap, and others followed suit with pledges of US$4.1 billion from 2004 to 2006 for development and budgetary support. By February 2005, however, relations were again deteriorating, and some promised aid was suspended, because of disappointing progress in tackling corruption and in instituting economic reforms, including privatization.
Aside from ties with advanced economies and donors, Kenya is active within regional trade blocs such as the Common Market for Eastern and Southern Africa (COMESA) and the East African Community (EAC), a partnership of Kenya, Uganda, and Tanzania. The East African Community, dissolved in 1977 because of political tensions, was revived in 1997. The ultimate aim of the EAC is a common market of the three states modeled on the European Union. Among the early steps toward integration is the customs union of 2004, which eventually will eliminate duties on goods and non-tariff trade barriers among the members. The question of how the EAC will relate to other regional trade blocs, including COMESA and the Southern African Development Community (SADC), is in flux.
Imports and Exports: Kenya’s chief exports are tea and horticultural products. In 2003 the combined value of these commodities was almost US$800 million, 10 times the value of Kenya’s third most valuable export, coffee. Kenya’s other significant exports are petroleum products, sold to near neighbors, fish, cement, pyrethrum, and sisal. The leading imports are crude petroleum, chemicals, manufactured goods, machinery, and transportation equipment. The major destinations for exports are the United Kingdom, Tanzania, Uganda, and the Netherlands, and major suppliers are the United Kingdom, the United Arab Emirates, Japan, and India.
Trade Balance: Kenya typically has a substantial trade deficit. The trade balance fluctuates widely because Kenya’s main exports are primary commodities subject to the effects of both world prices and weather. In 2003 Kenya’s income from exports was about US$2.5 billion. The payment for imports was about US$3.7 billion, yielding a trade deficit of about US$1.2 billion. The trade deficit with the United States was about US$27 million.
Balance of Payments: In 2004 Kenya had a current account deficit of US$47.5 million. This figure was a significant improvement over 2003, when the current account had a deficit of US$306 million.
External Debt: In 2003 Kenya’s external debt totaled US$6.5 billion.
Foreign Investment: Kenyan policies on foreign investment generally have been favorable since independence, with occasional tightening of restrictions to promote the “Africanization” of enterprises. Foreign investors have been guaranteed ownership and the right to remit dividends, royalties, and capital. In the 1970s, the government disallowed foreign investment unless there was also some government participation in the ownership of an enterprise. Notwithstanding some restrictions, between 60 and 70 percent of industry is still owned from abroad. The most active investors have been the British.
Currency and Exchange Rate: The value of the Kenya shilling (KSh), Kenya’s unit of currency, declined during Moi’s last term (1997–2002) from about KSh60 per US$1 in 1998 to KSh78.75 per US$1 in 2002. The exchange rate of the Kenya shilling between 2003 and 2005 has averaged about KSh76 to US$1.
Fiscal Year: Kenya’s fiscal year runs from July 1 though June 30.