Country Brief

Country Brief last updated September 2007

Economy

Kenya has seen economic recovery over the last three years, and the country’s macroeconomic environment has become more stable. GDP growth picked up recently after stagnating for many years.

The economy grew at 6.1 percent in 2006, up from 5.8 percent in 2005. It is expected to grow at around 6.5 percent in 2007, even though external development assistance to Kenya amounts to only about 5 percent of government spending and about 1 percent of GDP.

This recovery has been mainly due to improved macroeconomic management and progress in some structural reforms. As a result, public debt has gone down, prices are more stable, and real interest rates and Kenya’s country risk premium have fallen.

The recovery over the past years has been broad, cutting across key sectors (e.g., tourism, agriculture, manufacturing, transport, communication, and commercial sectors).

Also, more investors are reporting that, unlike the pre-2003 period, they can now do business without political interference.

Because of increasing food and energy prices, inflation during 2006 was around 14.5 percent—the average underlying inflation was 3.9 percent.

However, inflation is expected to decline in 2007 because recent favorable rains are expected to slow the rise in food prices. The targeted underlying inflation rate is below 5 percent.

On the external front, exports surged over the past two years on the strength of tea and horticultural exports; however, larger imports of machinery and transport equipment, as well as oil imports, have brought an increase in the current account deficit.

Buoyed by strong capital inflows, including remittances, the Kenyan Shilling has remained strong against all major currencies. Foreign exchange reserves at the end of 2006 covered 3.7 months of imports and are expected to remain stable at around 3.5 months of imports during 2006.

Fiscal management remains prudent. The fiscal year 2005/06 ended with a budget deficit of about 3.5 percent of GDP, which was in line with the Fund program target. Revenue performance was strong at about 21.5 percent of GDP, helped by much improved tax administration.

Revenues are expected to remain around 21 percent of GDP in 2006/07. Total government expenditures have been increasing because of growing spending on health and infrastructure sectors, and are expected to be around 26 percent of GDP in 2006/07.

Kenya ’s debt has been declining and remains sustainable. Debt dynamics are under control, though caution is advised because of volatile real interest and growth rates.

Social development

The prevailing macro-economic conditions between 2003 and 2006 have helped improve the welfare of Kenyans. Recent analysis of the KIHBS poverty data indicates that national absolute poverty declined from 52.3 percent in 1997 to 46.1 percent in 2005/06,*

While encouraging this also implies that 46.1 percent of Kenyans still have levels of consumption that do not meet basic food and non-food needs. In rural areas, overall poverty declined from 52.9 percent in 1997 to 49.1 percent, while in urban areas, poverty declined from 49.2 percent in 1997 to 38.8 percent in 2005/6.

The percentage of severe poverty has declined in Kenya from 29.6 percent in 1997 to 19.1 percent in 2005/6, implying that one in five Kenyans have consumption levels that would be inadequate to meet basic food needs alone, even if the individual were able to forego all non-food consumption. While the percentage of severe poverty has substantially declined in rural areas from 34.8 percent in 1997 to 21.9 percent in 2005/06, in urban areas it increased marginally from 7.6 percent in 1997 to 8.3 percent in 2005/06.

Despite the impressive recent gains in economic growth and poverty reduction, poverty and inequity are still major challenges for Kenya. In absolute numbers the 2005/6 population was projected to comprise 35.5 million, of which 16.7 million are poor.

The share of rural population to total population is 79 percent but 84 percent of all poor live in rural areas. The rural areas account disproportionately for 92.3 percent of the total hard-core poor.

The Kenyan poverty profile also reveals strong regional disparities in the distribution of poverty. The lowest incidence of rural poverty was in Central province (30.3%), followed by Nyanza (47.9%, Rift Valley (49.7%), Eastern (51.1%), Western (53.2%), Coast (69.7%), and North Easter province (74.0%).

Within these provinces, poverty levels vary greatly between relatively non-poor districts such as Kajiado (11.5%) and Kiambu (21.6%) and extremely deep pockets of poverty in districts such as Marsabit (91.9%) and Turkana (94.8%).

The incidence of urban poverty ranged from about 21 percent to about 44 percent.

In terms of other Sub Saharan African countries the decline in poverty in Kenya compares well with some other countries. However, the levels of national overall poverty in Kenya (46%) can still be considered high in comparison to neighboring countries such as Tanzania (38%) and Uganda (38%).

Inequality in Kenya remains high. The distribution of income, measured by the Gini coefficient per adult equivalent, was estimated at 39 in rural areas and 49 for urban areas. Income disparities in the rural areas have gone down since 1997, while the disparities in the urban areas have increased slightly.

* The poverty information is derived from on the “Basic Poverty Report in Kenya”, an analysis based on the 2005/6 Kenya Integrated Household Budget Survey, Government of Kenya, Ministry of Planning and National Development, Kenya National Bureau of Statistics (April 26, 2007).

World Bank assistance

A Country Assistance Strategy (CAS) Progress Report for Kenya was endorsed in March 2007 to guide the Bank's relationship with Kenya through June 2008. Under the updated strategy, the Bank Group will continue to emphasize the same priority themes agreed upon in 2004 when the strategy was first prepared. These include strengthening public sector management and accountability, reducing the cost of doing business, and improving the investment climate. Other themes include reducing vulnerability of communities and investing in people through support of projects that provide social services, such as health and education.

The updated strategy’s program more directly targets the poorest people (with continuing attention to the drivers of overall growth). Analytic work, such as joint poverty assessments, will help the government improve the targeting and use of public resources. Lending will target some poverty hotspots, such as Western Kenya, Nyanza Province, and urban and periurban slums, where about 70 percent of poor Kenyans live. New programs will provide financial and technical resources for poor communities and entrepreneurs to provide economic services and create employment.

The updated strategy also reflects greater attention to governance and will be supporting the Government’s Governance Strategy for Building a Prosperous Kenya (GSPK) and Governance Action Plan (GAP) . The Bank will focus on t transparency initiatives (including transparency in the judiciary, and capacity building in the prosecutorial and judicial services); b broadening stakeholder involvement, including additional private participation in infrastructure services, such as the ports; accelerating public financial management reforms; and improving governance in high-priority sectors—education, HIV/AIDS, health, and roads.

Analytic work in such areas as media development, parliamentary and judicial capacity, and police oversight mechanisms will help lay the foundation for the development and governance agenda beyond this GSPK/GAP and for the next CAS.

At the same time several measures have been introduced to protect Bank-financed projects against corruption, while strengthening country systems. For example, lending by the World Bank in Kenya involves undertaking safeguards and due diligence analysis in areas where corruption risks are high, before proceeding with lending. This approach was developed after earlier forensic reviews of some World Bank financed projects confirmed corruption risks.

The Bank’s strategy in Kenya continues to emphasize strong partnerships with other development agencies in the spirit of the Paris Declaration on Aid Effectiveness, and has reached an understanding with the government on deepening partnerships beyond the executive branch, including the judiciary, professional bodies, and civil society organizations.

For information on the World Bank’s portfolio in Kenya, including a full listing of the current active projects, refer to Projects and Programs.

The International Finance Corporation (IFC). The Grassroots Business Initiative (GBI), a trust fund managed from IFC, is working with several social enterprises in Kenya that target disadvantaged youth and rural and urban poor. IDA and IFC are exploring opportunities for scaling up successful programs under GBI.

In addition, the IFC is offering support through several technical assistance programs including the following: the Small and Medium-Size Enterprise (SME) Solutions Center; SME Development Initiatives; a program to facilitate women entrepreneurs’ access to finance through local banks; a program to develop credit bureaus; and a program to facilitate better access to finance for private schools in Kenya.

IFC is also supporting curriculum development in business schools, including on issues of governance and ethics, through its Global Business School Network program. IFC will partner with IDA to prepare the Corporate Governance ROSC (Report on the Observance of Standards and Codes), a review of the corporate governance of state-owned enterprises, and additional work on governance in the financial sector.

As part of joint World Bank/IFC outreach and dialogue with the private sector, IFC will explore additional opportunities for company-level programs, especially among MSMEs, to provide training and build awareness, address problems in particular companies, and help create governance reform champions.

Multilateral Investment Guarantee Agency (MIGA). MIGA is providing support for a 45 MW private geothermal power plant in Kenya. It is also receiving increasing interest from other investors and sectors in the country.

Contacts

Mr. Colin Bruce
Country Director
Hill Park Building, Upper Hill, Nairobi, Kenya
Tel (254-20) 3226-441
Fax (254-20) 3226 382

Mr. Peter Warutere
Communications Officer
Hill Park Building, Upper Hill, Nairobi, Kenya
Tel (254-20) 3226-444
Fax (254-20) 3226 382

Mr. Harold Bedoya
Senior Country Officer
1818 H Street NW, Washington DC 20433
Tel. (202) 473-8733
Fax (202) 473-5453