Kenya

2012

www.africaneconomicoutlook.org
 Kenya
The economy experienced moderate growth in 2011 but is expected to rise modestly in 2012 and 2013
respectively.

The year 2011 witnessed drastic currency depreciation and rapid inflation, both of which are expected to
stabilise in 2012 and 2013.

Youth unemployment constitutes 70% of total unemployment.

Overview
In 2011 Kenya’s economy recorded “checked” growth, primarily driven by financial intermediation, tourism,
construction and agriculture sectors. Gross domestic product (GDP) growth rate for the first nine months was
estimated at 4.2%, down from 4.9% in the same period in 2010. Overall, growth in 2011 was curtailed by an
unstable macroeconomic environment characterised by rising inflation, exchange rate depreciation and high
energy costs. The country also experienced limited rainfall in the first half of 2011, which affected aggregate
food production. The year 2011 is therefore expected to record moderate positive growth estimated at 4.5%.
Growth is expected to rise to 5.2% in 2012, and to 5.5% in later years.

Kenya witnessed moderate political activity in 2011 compared with 2010. The year 2010 saw heightened
tensions associated with referendum campaigns for the new constitution (promulgated on 27 August 2010) and
the naming of six Kenyans to appear at the International Criminal Court (ICC) in relation to the 2008 post-
election crisis. The year 2011 was characterised by the passing of legislation giving effect to the new
constitution, and the appearance of the six Kenyans at the ICC, while political parties began preparing for
elections expected in 2012.

Overall, the Country Policy and Institutional Assessment (CPIA) findings for 2011 somewhat mirrored those of
2010. Scores for macroeconomic policies, institutions for economic co-operation, regional integration and trade,
business regulatory environment, environmental policies, efficiency of revenue mobilisation, quality of public
administration, and transparency, accountability and corruption all remained the same for two consecutive
years. Little variation in other CPIA scores led to little change in the overall CPIA score.

Youth unemployment is a growing problem, as it constitutes 70% of total unemployment in Kenya. The Youth
Enterprise Development Fund, operational over the last five years as the main remedy, has disbursed KES 5.96
billion (Kenyan shillings) to some 157 538 youth enterprises, organised youth trade fairs, built sheds and stalls
for youth, and started pre-financing youth training, among other interventions. The fund will be expanded in
the coming years to ensure increased employment for the young.

Figure 1: Real GDP growth (Eastern)

10%

8%
Real GDP Growth (%)

6%

4%

2%

0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Real GDP growth (%) Eas tern Africa - Real GDP growth (%) Africa - Real GDP growth (%)

Figures for 2010 are estimates; for 2011 and later are projections.

African Economic Outlook 2012 2 | © AfDB, OECD, UNDP, UNECA

 Table 1: Macroeconomic Indicators

2010 2011 2012 2013

Real GDP growth 5.6 4.5 5.2 5.5

Real GDP per capita growth 3 1.8 2.5 2.8

CPI inflation 4.1 14 7.6 6.9

Budget balance % GDP -7 -6.9 -8 -7.5

Current account % GDP -6.8 -12.2 -11.5 -12.4

Figures for 2010 are estimates; for 2011 and later are projections.

African Economic Outlook 2012 3 | © AfDB, OECD, UNDP, UNECA

 Recent Developments & Prospects

Table 2: GDP by Sector (percentage of GDP)

2006 2010

Agriculture, forestry, fishing & hunting 26.8 25.2

Mining and quarrying 0.5 0.8

of which oil - -

Manufacturing 11.5 11.4

Electricity, gas and water 2 2.7

Construction 4.4 4.9

Wholesale and retail trade, hotels and restaurants 12.2 13.6

of which hotels and restaurants 1.7 1.9

Transport, storage and communication 11.9 11.2

Finance, real estate and business services 10.8 12.3

Financial intermediation, real estate services, business and other service activities - -

General government services - -

Public administration & defence; social security, education, health & social work - -

Public administration, education, health 6.1 5.3

Public administration, education, health & other social & personal services - -

Other community, social & personal service activities - -

Other services 13.8 12.5

Gross domestic product at basic prices / factor cost 100 100

Figures for 2010 are estimates; for 2011 and later are projections.

Kenya’s main agricultural produce includes horticulture, sugar cane, pyrethrum, coffee, tea and livestock
products. In the second quarter of 2011 the sector expanded by a slightly lower 5.2% compared with 5.8%
during the same quarter in 2010. Tea production in the first half of 2011 amounted to 178 462 tonnes compared
with 213 012 tonnes in the same period of 2010. However, value of the produce was boosted by the average
auction price, which rose from KES 218 per kilogram to KES 250 per kilogram over the same period. During the
same period, exports of cut flowers rose to 49 387 tonnes from 35 239 tonnes and vegetable exports increased
by 37.2% to 38 584 tonnes, while the quantity of exported fruit grew by 32.3% to 6 499 tonnes. The good
performance recorded in the horticultural sub-sector was due to improved external demand. Coffee production
for the first half of 2011 declined to 14 694 tonnes from 23 062 tonnes in the same period of 2010 because of
inadequate rainfall in the coffee growing areas. However, average auction price for the first half of 2011
increased to KES 496 per kilogram compared with KES 318 per kilogram in the same period in 2010. Over the
same period sugar cane deliveries rose to 2.97 million tonnes from 2.82 million tonnes, while total milk
delivered to the processing plants dropped to 260 million litres from 267 million litres. This reduction was
attributed to unfavourable weather leading to low fodder production.

In 2011 tourism experienced significant gains with earnings rising by 32.8% to KES 97.9 billion, helped by the
weakening of the shilling and increased arrivals that grew by 15.4% to 1.26 million. The United Kingdom
continued to be the country’s main departure point for tourists with 203 290 arrivals. Other arrivals were from:
United States (119 000), Italy (96 000), Germany (68 000) and India (58 986). However, the number of tourists

African Economic Outlook 2012 4 | © AfDB, OECD, UNDP, UNECA

 coming from Europe was lower than expected. This was mainly attributed to the crisis in the euro area.
Increased arrivals from the emerging markets including the United Arab Emirates (46.8%), Poland (62.9%),
Russia (46.6%), Czech Republic (51.6%) and Hungary (42.1%) were the key drivers of the total growth.
Regional tourism also contributed significantly to the growth with 36 030, 31 355 and 28 435 visitor arrivals
from Uganda, South Africa and Tanzania respectively. Despite the best performance recorded to date in 2011,
adverse travel advisories due to ongoing security operations in Somalia and the euro area crisis are likely to
curb growth in the tourism sector in 2012.

The manufacturing sector in Kenya is dominated by processing of food and fast-moving consumer goods,
refining of crude petroleum and small-scale manufacturing of household goods, motor-vehicle parts, and farm
implements. In 2011 sub-sectors within manufacturing registered mixed performances in the first half of the
year. Production of galvanised sheets amounted to 136 655 tonnes in the first half of 2011 compared with
101 826 tonnes produced in a similar period in 2010. Output of processed sugar increased by 17.7% to 297 252
tonnes in the first half of 2011 from 252 550 tonnes processed in a similar period in 2010. Production of cement,
however, declined by 8.5% during the same period to 1 601 590 tonnes, while the number of vehicles
assembled locally declined from 2 839 in the January-June period in 2010 to 2 550 in the January-June period in
2011. In 2011 manufacturing growth was inhibited by high production costs, high taxes, poor infrastructure and
cheap imports.

Kenya imports crude oil and refines it for domestic use and for export. In the last five years the quantity of
imported petroleum products has grown only marginally from 3 172 900 tonnes in 2006 to 3 844 600 tonnes in
2010. Exports fell to 99 800 tonnes in 2008 and further declined to 95 100 in 2010. In the first half of 2011 total
electricity generation increased by 20.4% from 2 942 million kilowatt hours (kWh) to 3 542 million kWh in the
same period in 2010. Of this, 44.3% was hydropower, 35.6% was thermal power and the remaining 20.1% was
geo-thermal power. Production of hydroelectricity increased by 17.3% to 1 570 million kWh in the period
January-June 2011, while production of thermal power increased by 39.4% to 1 259 million kWh in the same
period

The building and construction sector has persistently been a key driver of economic growth in Kenya for the last
five years. In the first half of 2011 the sector recorded improved growth of 8.1% compared with growth of
2.0% during the first half of 2010. The sector’s growth was attributed to increased bank credit to the private
sector for real estate development and the intense investment in road infrastructure projects being undertaken
in various parts of the country by the government. The sector has a propensity for growth in the coming fiscal
year buoyed by excess demand for housing units in the country and the government’s commitment to enhanced
infrastructure.

African Economic Outlook 2012 5 | © AfDB, OECD, UNDP, UNECA

 Macroeconomic Policy
Fiscal Policy
The central government cumulative revenue collection for the fiscal year (FY) 2010/11 was KES 667.5 billion
(equivalent to 24.2% of GDP) against a target of KES 686.4 billion (equivalent to 24.9% of GDP). In the first
quarter of FY 2011/12 cumulative revenue collection was KES 149.1 billion (equivalent to 4.5% of GDP) against
a target of KES 179.4 billion (equivalent to 5.5% of GDP). Total revenue collection is expected to expand to
26.1% and 25.8% of GDP in 2012 and 2013 respectively.

Total government expenditure for FY 2010/11 amounted to KES 811.8 billion (73% being recurrent), below the
target of KES 918.1 billion. The lower-than-targeted recurrent expenditures were attributed to operations and
maintenance of public infrastructure, wages and salaries, and payments to pensioners, which accounted for KES
14.4 billion, KES 3.8 billion and KES 3.1 billion. The central government budgetary operations in the first
quarter of FY 2011/12 amounted to KES 192.7 billion below the target of KES 239.9 billion. This low absorption
in expenditure was mainly due to slow utilisation of domestically and foreign financed development
expenditure. Total expenditure is expected to rise moderately from 33.2% of GDP in 2011 to 33.3% in 2013.

During 2010/11 the government continued to pursue prudent fiscal policy and realised a reduced budget deficit
of KES 137.6 billion (5.0% of GDP) on commitment basis. The deficit was within the target of 6.8% of GDP. The
cumulative overall fiscal balance, on a commitment basis (excluding grants), registered a deficit of
KES 43.6 billion (equivalent to 1.3% of GDP) by the end of the first quarter of FY 2011/12 compared with a
deficit of KES 22.3 billion (equivalent to 0.8% of GDP) for the similar period in FY 2010/11. Primary balance is
expected to stand at 5.2% in 2012 and 4.6% in 2013.

Table 3: Public Finances (percentage of GDP)

2003 2006 2007 2008 2009 2010 2011 2012 2013

Total revenue and grants 20.9 21.8 22.5 23.2 23.3 24.9 26.4 26.1 25.8

Tax revenue 18.2 18.7 19.6 20.4 20.7 21.3 23.2 22.4 21.9

Oil revenue - - - - - - - - -

Grants 1.4 1.3 0.9 1.1 0.9 1.3 1.5 1.6 1.8

Total expenditure and net lending (a) 24.4 25.2 23.4 27.4 27.8 32 33.2 34.1 33.3

Current expenditure 21 20.7 18.7 20.7 20.1 21.7 21.5 22.3 21.7

Excluding interest 17.7 18.0 16.2 18.2 17.8 19.1 18.8 19.5 18.8

Wages and salaries 7.9 7.4 7.4 7.5 7.1 7 6.9 6.5 6.1

Interest 3.3 2.7 2.5 2.5 2.4 2.6 2.7 2.8 2.9

Primary balance -0.2 -0.7 1.6 -1.7 -2.1 -4.4 -4.2 -5.2 -4.6

Overall balance -3.6 -3.4 -0.8 -4.2 -4.5 -7 -6.9 -8 -7.5

Figures for 2010 are estimates; for 2011 and later are projections.

Monetary Policy
The year 2011 was tumultuous for the monetary authorities in Kenya with high inflation rates and a heavily
depreciated currency. The month–on-month inflation rate averaged 12.9% from January to October and peaked
at 19.7% in November 2011 against a target of 5%. The high rate of inflation was mainly driven by a rise in
food and non-alcoholic beverage prices and transport charges. The food and non-alcoholic beverages index rose
by 26.2% compared with October 2010 while the transport index rose by 26.22%. The rise in transport index
reflected the sharp rise in fuel prices. According to the Central Bank of Kenya (CBK), the euro-area currency
crisis also had a destabilising effect on the price level. Inflation is expected to drop to single digits in the next

African Economic Outlook 2012 6 | © AfDB, OECD, UNDP, UNECA

 two years thanks to improved production of food and stability of fuel prices.

In 2011 the Kenyan shilling depreciated by a margin of 25.2% against the US dollar (USD), dropping from an
average of KES 81.11 per USD 1 in January 2011 to KES 101.51 in October 2011. The shilling also depreciated
against the pound sterling (GBP) from an average of KES 127.86 for GBP 1 in January 2011 to KES 160 in
October 2011. It depreciated against the euro (EUR) from an average of KES 108.29 per EUR 1 in January to
KES 139.07 in October 2011. To arrest the fall of the Kenyan shilling, the monetary policy committee (MPC)
progressively increased the central bank rate (CBR) from a low of 6% in January 2011 to a high of 18% by
December 2011. The MPC also increased the cash reserve ratio (CRR) to complement the CBR increases. In
May 2011, the CRR was increased by 25 basis points to 4.75% and again to 5.25% in December 2011. The
exchange rate is expected to stabilise at between KES 85 and KES 95 to the US dollar in the next two years.

The inflationary pressure experienced in 2011 and the depreciation of the Kenyan shilling can directly be traced
back to the CBK policy adopted in 2010, when it cut the CBR from 7% in January to 6% in December. This was
meant to revive lending and stimulate the economy through increased consumption. The policy was highly
successful as evidenced by the 5.6% growth attained in 2010. However increased consumption pushed up
consumer prices and put pressure on the Kenyan shilling as it heightened demand for imports, which rose from
USD 11 283 million in FY 2009/10 to USD 13 659 million in FY 2010/11. Furthermore, in FY 2010/11, domestic
credit increased by KES 254.4 billion (23.4%) against a target of KES 205.9 billion (18.9%). The excess credit
growth reflected a stronger domestic demand than previously estimated.

Economic Cooperation, Regional Integration & Trade

The East African Community (EAC) countries – Kenya, Tanzania, Uganda, Rwanda and Burundi – transformed
into a fully fledged and enforceable customs union on 1 January 2010. They adopted a common external tariff
(CET) with three bands: 0% (raw materials and capital goods), 10% (intermediate goods) and 25% (finished
goods). Tariffs of up to 100% are applicable to products that are deemed to be sensitive to member states.
These include maize, rice, cement, sugar and dairy products. Members will continue to collect customs receipts
separately until a revenue sharing mechanism can be agreed.

Furthermore, the EAC Common Market Protocol came into force on 1 July 2010, potentially allowing for the
free movement of goods, services, people and capital in a zone with a combined population of some 135 million
people. Given the large amount of legislation that needs to be amended in all countries to comply with the
protocol, the transition is expected to proceed slowly.

Kenya has already taken significant steps to domesticate and embrace the provisions of the protocol. A task
force charged with reviewing national laws and aligning them with the Common Market Protocol has completed
its report. Areas that need harmonisation include investment, tax, labour, education, standards, competition,
transport, communications and financial services. The report was forwarded to the attorney general who was
expected to prepare a miscellaneous amendment bill to be tabled in parliament. Non-tariff barriers (e.g. road
blocks, varying quality standards, the inefficient functioning of the port of Mombasa and other red tape)
continue to impede the free trade in goods and add to the costs of doing business.

The replacement of paper-based customs administration practices with an electronic interface system, Simba, is
a strong step towards enhancing competitiveness and trade facilitation. With the bringing into operation of
Simba customs checks are subjected to computerised scanning and fewer physical checks are undertaken. The
programme has enabled importers and exporters to lodge their documentation on line. In 2012, the Simba
upgrade is expected to increase automation of goods clearance across all Kenyan border crossings.

Export earnings increased from USD 4 932 million in FY 2009/10 to USD 5 541 million in FY 2010/11. The main
exports in the year to June 2011 were tea (24.4%), horticulture (16.1%), manufactured goods (14.7%), raw
materials (6.9%), coffee (4.7%) and oil products (2.6%). The improved export performance was due to
improved earnings in coffee, manufactured goods and horticulture, which increased by 9.6%, 17.5% and 2.4%
respectively. Exports of manufactured goods continued to benefit from the regional market. Exports are
expected to stabilise at about 16% of GDP in the next two years.

The value of imports increased by 21.1% from USD 11 283 million in FY 2009/10 to USD 13 659 million in FY
2010/11. The major import products for the year to June 2011 were oil, manufactured goods, chemicals,
machinery and transport equipment. The increase in the value of imports was mainly due to imports of oil,
machinery and transport equipment, and manufactured goods. Oil imports accounted for 24.2% of the total
import bill in FY 2010/11 compared with 23.3% in FY 2009/10. International oil prices increased from USD 74.8
per barrel in June 2010 to USD 112.15 per barrel in June 2011. Imports of machinery and transport equipment
accounted for 28.9% of total imports, and increased from USD 3 212 million to USD 3 942 million. This was due
to the ongoing infrastructure development. Imports of manufactured items, mainly intermediate goods,
accounted for 14.8% of the import bill and increased from USD 1 625 million to USD 2 021 million while

African Economic Outlook 2012 7 | © AfDB, OECD, UNDP, UNECA

 chemicals accounted for 13.5%.

In FY 2010/11, 47% of all the exports went to African countries while 53% went to the rest of the world. The
main destinations for Kenya’s exports were Uganda (14.6%), United Kingdom (9.2%), Tanzania (8.0%),
Netherlands (6.5%), United States of America (5.6%), Sudan (4.6%), Pakistan (4.2%), Egypt (4.1%) and United
Arab Emirates (4.1%). Exports to the EAC accounted for 26.4% in FY 2010/11 while exports to the Common
Market for Eastern and southern Africa (COMESA) region accounted for 34.6% of total exports in the same
period.

In FY 2010/11 the share of imports that Kenya sourced from African countries accounted for 11.6% while 88.4%
came from the rest of the world. Kenya is generally increasing its imports from Asia. In FY 2010/11, Kenya
sourced its imports mainly from the United Arab Emirates (13.0%), China (12.1%), India (11.6%), South Africa
(5.8%), Japan (5.1%), United Kingdom (4.6%) and Singapore (4.0%). Imports from the EAC region accounted
for 2.2% of total imports while imports from the COMESA region accounted for 3.9% of total imports in the year
to June 2011.

In FY ending June 2011 Kenya’s overall balance of payments recorded a surplus of USD 261 million compared
with a surplus of USD 592 million in FY 2009/10. The decline was explained by increased imports of oil and
intermediate and capital goods. The current account recorded a deficit of USD 3 380 million in FY 2010/11
compared with a deficit of USD 1 920 million in FY 2009/10. This emanated from a USD 1 767 million widening
of the merchandise account deficit, which more than offset the improvement in the services account, which
recorded a USD 307 million surplus gain in FY 2010/11. On the other hand, from the capital account records, the
capital and financial account surplus increased from USD 2 512 million in FY 2009/10 to USD 3 641 million in FY
2010/11. The accumulation of this surplus was largely from financial flows which increased to USD 3 412 million
in FY 2010/11 compared with USD 2 331 million in the year to June 2010. Performance on the financial account
reflected improved short-term private flows, which included trade credits. Net capital transfers increased by
USD 49 million from USD 180 million in FY 2009/10 to USD 229 million in FY 2010/11.

Table 4: Current Account (percentage of GDP)

2003 2006 2007 2008 2009 2010 2011 2012 2013

Trade balance -7.7 -14.5 -15.7 -18.8 -19.5 -19.5 -25.3 -24.5 -24.1

Exports of goods (f.o.b.) 16.3 15.6 15.2 16.8 15.2 15.3 16.6 16.1 15.9

Imports of goods (f.o.b.) 23.9 30.1 30.9 35.6 34.7 34.8 42 40.6 40.1

Services 3.4 4.7 4.6 4.6 6.6 5.2 5.6 5.4 5.1

Factor income -0.6 -0.3 -0.5 -0.2 -0.2 0 -0.1 -0.1 -0.1

Current transfers 5.8 7.9 7.8 7.8 7.8 7.6 7.6 7.7 6.8

Current account balance 1 -2.1 -3.8 -6.6 -5.3 -6.8 -12.2 -11.5 -12.4

Figures for 2010 are estimates; for 2011 and later are projections.

Debt Policy
The overall objective of the debt-management strategy is to meet the central government borrowing
requirement at minimal cost and with a prudent degree of risk. The strategy also aims at facilitating
government access to the financial market, and supporting the development of a well-functioning domestic
financial market. The country has a debt management department and this is currently being transformed into a
fully fledged debt management office, which is part of the wider reform agenda to strengthen financial
management.

Kenya’s public and publicly guaranteed debt stood at KES 1 491.4 billion at the end of June 2011. This
represented a 21.7% increase from KES 1 225.7 billion held at the end of June 2010. The increase in the overall
government debt stock comprised KES 103.9 billion in domestic debt and KES 161.8 billion in external debt. The
percentage of domestic debt in total debt declined from 53.9% to 51.2% during the period, while that of
external debt increased from 46.1% to 48.8%. As a percentage of GDP, overall public debt stock increased from

African Economic Outlook 2012 8 | © AfDB, OECD, UNDP, UNECA

 49.9% to 54.0% during the period. In particular, the proportion of external debt in GDP increased from 23.0%
to 26.3%, while domestic debt increased from 26.9% of GDP to 27.7%. The budget estimates for 2011/12 have
government domestic borrowing projected at KES 119.5 billion (3.9% of GDP) while external borrowing is
estimated at KES 116.7 billion (3.8% of GDP).

Figure 2: Stock of total external debt (percentage of GDP) and debt service (percentage of exports of
goods and services)

50%

40%

30%
Percentage

20%

10%

0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Debt/GDP Debt s ervice/Exports

Figures for 2010 are estimates; for 2011 and later are projections.

African Economic Outlook 2012 9 | © AfDB, OECD, UNDP, UNECA

 Economic & Political Governance
Private Sector
In 2012 the World Bank Doing Business report ranked Kenya at 109 out of 183 economies in the ease of doing
business. This was three places lower than the 2011 ranking. The Fitch Ratings for 2011 remained at B+ for
long-term foreign debt, B for short-term foreign debt and BB- for domestic long-term debt. These ratings have
not changed since 2009.

Small and medium enterprises (SMEs) play a significant role in Kenya’s economy. In 2011 the SME sector
employed close to 80% of Kenya’s total workforce and contributed 20% to GDP. The sale of goods and services
in neighbouring Uganda and Tanzania was the main driver of revenue growth in 76% of all the SMEs. However
while Kenyan firms have rushed to exploit opportunities in the region, experts have advised that partnerships
with locals in foreign countries will be critical to building trust that is needed for successful entry into new
markets in future. The impediments to growth in the SME sector still remain the high cost of finance and lack of
targeted government policy to boost small and emerging businesses in Kenya.

The stock market in Kenya experienced some restructuring in 2011 with the Nairobi Stock Exchange
transformed into Nairobi Securities Exchange (NSE). This was done with the aim of introducing new financial
instruments such as forwards and futures to the market. Trading performance at the stock market over the year
2011 was not impressive. The NSE 20 share index dropped from an average of 4 464.92 in January 2011 to a
low of 3 109.79 in December 2011. Market capitalisation declined from KES 1 166.99 billion in January 2011 to
KES 845.55 billion in December 2011. The bearish trend at the NSE was attributed to reduced interest on the
part of foreign investors, the high inflation rate and currency devaluation. 2012 seems bleak as investors will
most likely stay out of the market as they contend with the persisting inflation and uncertainty associated with
the 2012 general elections.

Financial Sector
In 2011, the number of banking institutions remained at 43 while mortgage finance institutions remained at 1.
Rafiki DTM (Deposit Taking Microfinance) was issued with a licence to operate as a deposit-taking microfinance
institution nationwide. This brought the number of nationwide DTMs operating in Kenya to six.

Total assets of the banking sector rose by 21% from KES 1 548.4 billion in June 2010 to KES 1 873.8 billion as at
the end of June 2011. Growth in asset base was due to growth in deposits, retained profits and capital injections.
For the year to 30 June 2011 the banking sector’s pre-tax profits increased by 16.9% from KES 34.9 billion in
June 2010 to KES 40.8 billion in June 2011. Deposits expanded by 15.9% from KES 1 219.5 billion in June 2010
to KES 1 412.8 billion in June 2011. This increase was attributed to branch expansion, remittance inflows and
receipts from exports. Non-performing loans (NPLs) declined by 5.2% from KES 61.5 billion in June 2010 to
KES 58.3 billion at the end of June 2011. The improved performance in NPLs was largely due to continued
deployment of enhanced appraisal standards by the financial institutions. The banking sector is expected to
remain stable in the next two years.

Public Sector Management, Institutions & Reform

Kenya has a proper and functional organisation of government with ministerial and departmental functions
clearly specified. The government is in the process of revamping the five-year public financial management
reform programme. New institutions have been created by the new constitution (promulgated in August 2010)
to help improve public administration and governance. These include the Independent Electoral and Boundaries
Commission; the Commission on Revenue Allocation; the Remuneration Commission; and a revamped judiciary
complete with new supreme court. In the next three years devolved governments will be created in 47 newly
established counties.

The entire government continued to embrace performance contracting, which is part of a broader public sector
reform aimed at improving efficiency and effectiveness in the management of the public service. Hiring of
employees in the civil service has improved tremendously with a legal requirement to recruit across various
ethnic groups and a guaranteed 30% gender representation provided for in the new constitution. The Public
Service Commission of Kenya (PSCK) ensures that it carries out its mandate with impartiality in hiring,
promoting and disciplining public servants. The list of short-listed persons is published and the names of final
recruits are also published in local wide-circulation newspapers. The job vacancies are often posted on the PSCK
website (http://www.publicservice.go.ke) together with application procedures.

Natural Resource Management & Environment

Environment law requires the National Environmental Management Authority (NEMA) to conduct annual

African Economic Outlook 2012 10 | © AfDB, OECD, UNDP, UNECA

 environmental audits and to prepare and submit a State of Environment (SoE) report every year to parliament.
The report documents environmental issues and potential interventions to be undertaken by various sectors
towards enhancing the status and quality of the environment. The SoE Report also forms the basis for the
preparation of operational sector policies, enhancement of the integration of environmental concerns into
development processes, and preparation of environmental action plans. Kenya developed its first National
Climate Change Response Strategy (NCCRS) in April 2010. The strategy is destined to enhance Kenya’s
participation in global climate change discussions. Kenya also made specific provisions for environmental
protection in the new constitution adopted in August 2010.

The government continues to pursue environmental protection with emphasis currently fixed on the Mau Forest
and cleaning of the Nairobi River Basin. The rehabilitation of the Mau Forest Complex is being undertaken in
five phases, which is in line with the recommendation of the Mau Task Force report. The first two phases have
already been completed. During phase one, 4 530 hectares of unoccupied forest land were repossessed. As part
of phase two, an additional 19 000 hectares were repossessed from illegal squatters by December 2009. Over 1
400 hectares of forest have been replanted and plans are underway to rehabilitate an additional 5 000 hectares
during the rainy season of April-May 2012. It is expected that once the Mau is complete, protection efforts will
focus on the remaining four principal water towers.

Political Context
Although the Grand Coalition government, put in place after the post-election crisis of early 2008, brought two
different political parties to form a government, their performance has been commendable. Co-ordination
between the office of the president and that of the prime minister has functioned well and restored stability in
government functions. While the cabinet meets every week under the chairmanship of the president to
deliberate on national policy, the prime minister chairs various thematic groups including land, food security and
private sector development. All cabinet decisions are posted through briefs on a website
(http://www.statehousekenya.go.ke/). The proper co-ordination has seen several successful reforms mounted
by the government between 2009 and October 2011. The most critical was the adoption of a new constitution
in August 2010 and passage of 16 laws required by the target date of 27 August 2011.

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 Social Context & Human Development
Building Human Resources
Kenya ranks near the top in sub-Saharan Africa on international comparisons of primary student performance.
Gaps in policies remain, however, especially in post-primary education and with regard to resource use.
Specifically, teacher deployment remains very unequal across regions.

Kenya is yet to achieve global and regional health performance targets. Kenya, being a signatory of the Abuja
declaration, committed itself to ensuring that expenditure on health was 15% of the entire budget in any given
budget year. This is yet to be achieved as the average expenditure on health care since FY 2007/08 to FY
2010/11 was 4.7% of the entire government budget.

In 2010 malaria was still the major cause of registered death, accounting for 27% of all deaths registered. This
was followed by pneumonia and AIDS, which accounted for 18% and 11% respectively. Cancer and tuberculosis
accounted for 10% each. These statistics further expose the sorry state of the Kenyan health system since
malaria, the main killer disease, is both preventable and curable.

Poverty Reduction, Social Protection & Labour

The government has drafted the National Social Protection Policy, to inform development of a social protection
system and harmonise existing interventions. To improve social protection and reduce poverty, the
government: i) more than tripled the budget allocated to the orphans and vulnerable children cash transfer
programme between financial years 2009 and 2010, ii) allocated KES 1 billion to the food subsidy programme in
2010/11, iii) increased allocations for a cash transfer for the elderly, and iv) launched the Kazi Kwa Vijana
programme targeting unemployed youth. A draft national policy on orphans and vulnerable children (OVC) is
also in place. A recent independent impact evaluation of the cash transfer for OVCs has shown that it is effective
at reducing poverty and increasing household welfare. Various feeding programmes are operational, including
the school feeding programme, emergency food aid for arid and semi-arid lands (ASAL), hunger safety net
programme, food and nutrition programme targeting people living with HIV/AIDS, and the national drought
contingency fund.

Kenya has ratified seven of the eight fundamental conventions of the International Labour Organization (ILO)
related to core labour standards. The only one not ratified is the Freedom of Association and Protection of the
Right to Organise Convention of 1948. Kenya ratified ILO Convention No. 182 "Concerning the Prohibition and
Immediate Action for the Elimination of the Worst Forms of Child Labour" on 7 May 2001. In addition Kenya has
ratified 49 ILO conventions. The non-ratification of international review mechanisms and the lack of available
national mechanisms to enforce international standards, as provided in international instruments to which Kenya
has ratified, remains a key obstacle in the protection and promotion of labour rights. However, the new
constitution gives broad guarantees to workers including the right to strike.

The government has developed the National Employment Policy and Strategies, National Productivity Policy,
National Policy on Occupational Safety and Health, Policy on HIV/AIDS, National Industrial Training Policy and
the Child Labour Policy. The passing of the National Youth Policy in 2007 and enactment of the National Youth
Council (NYC) Act, 2009, are facilitating the mainstreaming of youth employment and ensuring that youth have
a 30% representation in the public sector. The NYC Act outlines the structures that will empower young people
to participate in all decision making.

Government policies recognise and encourage community-driven initiatives; these are implemented fairly
widely and increasingly (constituency funds, free primary education, the ASAL programme, HIV/AIDS
programme, Women’s Enterprise Fund and local authority transfer funds to local councils). For example, the
Youth and Women’s Enterprise Development Fund has been established to lend to young people and youth
groups, to create jobs for the young and increase the number of youth-led enterprises in the country. The
ministry is also establishing and rehabilitating youth empowerment centres in all 210 constituencies. These will
be a one-stop shop information centre for young people. A constituency education-bursary fund and tuition-
subsidy grants for youth polytechnics have been established. Finally, part of the economic stimulus packages
included construction of schools, health facilities and agriculture interventions.

Pensions and old-age savings systems afford some level of income security to about one half of those employed
in the formal sector. Well-developed private systems supplement public programmes for higher income groups,
with significant recent improvements in their regulation and oversight. The national social security fund (NSSF)
and national health insurance (NHIF) schemes are now open to non-salaried individuals and their memberships
continue to grow. The national health insurance scheme is piloting an outpatient cover and this is expected to
minimise catastrophic spending on health care among poorer households.

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 Gender Equality
Girls’ access to education has been greatly improved by the free primary education policy especially since 2006
and more recently by the implementation of the free secondary education policy. Although more boys are still
enrolled in secondary schools, the number of girls has been rising in tandem, given the introduction of free
tuition in secondary schools. Access to medical services is non-discriminatory.

Since 2010, when the new constitution was adopted, the policy of 30% recruitment in all public offices has seen
more women joining senior positions in the government; with the number of women ministers rising from two
in 2006 to seven in 2009/10, the number of permanent secretaries rising from five to seven and women
members of parliament from 18 to 22 over the same period. The government has also enacted legislation and
put in place programmes to enhance women’s access to resources and employment opportunities. For example,
the Women’s Enterprise Fund established in August 2007 has given more women access to finance for setting up
business enterprises. The funds are channelled to the grassroots through multiple sources, including
constituency development committees. As of 2010 some 166 610 women had so far benefited from the funds
with investments in wholesale and retail trade, poultry, dairy farming, hair salons, basket weaving, transport
and communications.

Kenya ratified the Convention on the Elimination of all forms of Discrimination Against Women (CEDAW) in 1984
and has been submitting periodic reports on schedule. As alluded to above, men and women are guaranteed
equal status and protection under the law, which is made more explicit in the new constitution. Kenya also
enacted the Sexual Offences Act in 2006, which provides women greater protection while outlawing violence
against women. Several offenders were jailed under the law in 2010 and 2011.

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 Thematic analysis: Promoting Youth Employment

Youth unemployment is a growing problem in Kenya. According to the 2009 population and housing census,
34% of the Kenyan population are aged between 15 and 34. This is a substantial workforce that could contribute
significantly to economic growth. However, much of this labour force is unutilised. According to the Kenya
Household Integrated Budget Survey (KIHBS) of 2005/06, unemployment stood at 25% for the age group 15-19,
24.2% for 20–24-year-olds, 15.7% for those aged 25-29 and 7.5% for the age group 30-34. It is devastating to
note that youth unemployment constitutes 70% of total unemployment in Kenya.

The high unemployment among the young has an implication for income distribution. This is because returns to
growth accrue to only those who supply the factors of production. With the favourable economic achievements
realised in the last ten years, unemployed young people are missing out on the gains. This calls for urgent
intervention by the Kenyan government to address the issue of youth unemployment.

Youth unemployment in Kenya is mainly attributed to the fact that Kenya’s economy is currently dependent on
agriculture. However, Kenyan youths are moving from rural to urban areas in large numbers. The urban areas
are not able to generate jobs as fast as the growth in population there. This factor has led to high levels of
youth unemployment.

The informal sector remains the major employer accounting for over 75% of total employment in Kenya. This
puts smallholder enterprises at the centre of job creation in Kenya. The “free primary education for all” policy
adopted by the government is aimed at equipping the Kenyan population with basic life skills and is a strong
foundation for a well-trained labour force. This is a progressive strategy for reducing youth unemployment. The
drawback to these strategies is that they are long-term in nature. This means that in the short to medium term
Kenya will continue to experience rampant youth unemployment.

The main medium-term solution is the Youth Enterprise Development Fund operational over the last five years.
To date, the fund has disbursed KES 5.96 billion to some 157 538 youth enterprises. The fund has organised
youth trade fares, built sheds and stalls for youth, partnered with Kenyatta University at the Chandaria Business
and Incubation Centre, started a mandatory pre-financing training for youth, helped them form savings and
credit societies, trained 2 500 young people in 24 constituencies, and helped 6 000 young people to secure
employment abroad, especially in the Middle East. The fund will be expanded in the coming years to ensure
increased employment for the young.

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