100229 June 2015 | Edition No. 12 Storm Clouds Gathering The economy facing strong headwinds with a special focus on Public Participation Storm Clouds Gathering The economy facing strong headwinds with a special focus on Public Participation TABLE OF CONTENTS ABBREVIATIONS AND ACRONYMS .................................................................................................................... i FOREWORD ......................................................................................................................................................... ii ACKNOWLEDGEMENTS ..................................................................................................................................... iii MAIN MESSAGES AND KEY RECOMMENDATIONS ............................................................................................ iv EXECUTIVE SUMMARY ...................................................................................................................................... v THE STATE OF KENYA’S ECONOMY ..................................................................................................................... 1 1. Economic Performance in 2014 ....................................................................................................................... 2 1.1 Growth remained solid .............................................................................................................................. 2 1.2 Fiscal expansion continued ........................................................................................................................ 6 1.3 The Central Bank of Kenya responded to pressure from the real and external sectors by raising its benchmark rate .......................................................................................................................................... 11 1.4 The external sector remains vulnerable ..................................................................................................... 14 2. Growth Outlook for 2015–17 .......................................................................................................................... 19 2.1 Kenya’s growth prospects continue to be favorable ................................................................................. 20 2.2 Lack of security is taking a toll on Kenya’s economy ................................................................................. 21 2.3 The transmission of lower global oil prices in 2014/15 to the domestic economy was poor ................... 22 2.4 Risks to growth remain significant in the near term ................................................................................. 23 2.5 Several policy issues need addressing in the medium term ...................................................................... 26 3. Special Focus: Enabling the Voices of Citizens ................................................................................................ 29 3.1 Devolution to the counties has the potential to improve service delivery ................................................ 30 3.2 Social accountability is critical to making devolution work ...................................................................... 31 3.3 What has been the experience of counties in implementing public participation? .................................. 38 3.4 How can public participation be enhanced? .............................................................................................. 47 REFERENCES ........................................................................................................................................................ 51 ANNEXES ............................................................................................................................................................. 53 List of Figures Figure 1: The number of tourists has declined, reducing travel credits in the balance of payments ........ vii Figure 2: A large percentage share of the budget goes to security ........................................................... viii Figure 3: Citizens believe that devolution provides more opportunities than risks ................................... ix Figure 1.1: Growth slowed in 2014 but remained solid ................................................................................ 2 Figure 1.2: Average growth in Kenya was above the average for Sub-Saharan Africa and lower-middle- income countries in 2011–14 ..................................................................................................... 3 Figure 1.3: All sectors contributed to growth in 2014 .................................................................................. 3 Figure 1.4: Production of tea—Kenya’s main export—grew, but earnings from exports declined................ 4 Figure 1.5: Electricity generation increased in 2014, despite a significant decline in hydropower generation 4 Figure 1.6: Services grew significantly, despite the deep decline in the accommodations and restaurant subsector .................................................................................................................................... 5 Figure 1.7: The volume and value of mobile payments continued to exceed expectations ......................... 5 Figure 1.8: Investment recovered in 2014 .................................................................................................... 5 Figure 1.9: Inflation remained below the central bank target ...................................................................... 6 Figure 1.10: Food price rises have been a major driver of overall inflation ....................................................... 6 Figure 1.11: Kenya’s fiscal position is expected to continue to weaken ............................................................. 7 Figure 1.12: The central government remains the main driver of public expenditure ...................................... 7 Figure 1.13: Kenya’s public borrowing has not compromised its debt stock targets ......................................... 8 Figure 1.14: Revenues declined in 2014/15 ....................................................................................................... 9 Figure 1.15: Infrastructure sector accounted for a larger share of the budget, but executed almost a half ..... 9 Figure 1.16: Overall implementation was pulled back by energy sector ........................................................... 9 Figure 1.17: More emphasis was put on priority sectors in 2014/15 ................................................................ 10 Figure 1.18: Despite significant improvement, execution of the development budget remained low .............. 11 Figure 1.19: The interbank market has been volatile, albeit less than in 2011 ................................................. 11 Figure 1.20: The central bank rate continues to coordinate short-term rates, despite volatility in the money market ............................................................................................................................................ 12 Figure 1.21: Long-term interest rates declined in response to the Central Bank’s monetary policy stance, albeit very slowly ........................................................................................................................... 12 Figure 1.22: Monetary operations slowed the growth of monetary aggregates ............................................... 13 Figure 1.23: Credit to the agriculture and manufacturing sectors increased, while credit to services declined 13 Figure 1.24: Loans are concentrated in three nonproductive sectors ............................................................... 13 Figure 1.25: The volume of nonperforming loans increased in most sectors .................................................... 14 Figure 1.26: The banking sector continued to experience strong growth .......................................................... 14 Figure 1.27: Lower growth prospects and depreciation risk reduced the attractiveness of the Nairobi Securities ......................................................................................................................... .............. 14 Figure 1.28: The current account deficit remained very high ............................................................................ 15 Figure 1.29: Exports continued to underperform, and imports remained high ................................................. 15 Figure 1.30: Exports continued to stagnate against imports .............................................................................. 15 Figure 1.31: Trade indicators have been weakening .......................................................................................... 16 Figure 1.32: The Eurobond proceeds enhanced official flows in 2014, but short-term flows still dominate ..... 16 Figure 1.33: Foreign exchange reserves have grown, cushioning Kenya from short-term shocks ..................... 16 Figure 1.34: Remittances are the single most important source of foreign exchange inflows in Kenya ............ 17 Figure 1.35: The foreign exchange market has been volatile, albeit not as volatile as in 2011 ......................... 17 Figure 1.36: Despite recent volatility, the real exchange rate continued to appreciate ..................................... 18 Figure 2.1: The outlook for economic growth in Kenya is robust .................................................................... 19 Figure 2.2: The number of tourists declined,reducing travel credits in the balance of payments .................. 20 Figure 2.3: National security is one of the largest sectors in the 2015/16 budget .......................................... 21 Figure 2.4: The volume of oil imports volume remained roughly constant between 2009 and 2013, but the value soared ............................................................................................................................ 22 Figure 2.5: Kenya has a high current account deficit and a high fiscal deficit ................................................. 25 Figure 2.6: Growth has been high during years of fiscal expansion linked to increases in public debt ........... 25 Figure 2.7: Economic stimulus, elections, and devolution increased Kenya’s fiscal deficit ............................. 26 Figure 2.8: Big fiscal programs have reduced fiscal space and increased debt ratios and vulnerability ......... 26 Figure 3.1: Accountability needs to be both upward and downward ............................................................. 30 Figure 3.2: Kenyans expect devolution to provide more opportunities than risks .......................................... 34 Figure 3.3: Before devolution, Kenyans’ satisfaction with service provision was low ..................................... 34 Figure 3.4: Most Kenyans now have a high or medium understanding of county responsibilities ................. 35 Figure 3.5: Kenyans care most about roads and health services ..................................................................... 35 Figure 3.6: Most Kenyans perceive that conditions under devolution have improved ................................... 37 Figure 3.7: Open budget index scores vary widely across counties ................................................................ 39 Figure 3.8: Citizen awareness and attendance at county government meetings has risen ............................. 42 List of TABLES Table 1.1: Budget summary for 2015/16 budget ........................................................................................ 8 Table 1.2: County governments’ budget framework, 2013/14–2014/15 ................................................... 10 Table 2.1: Actual spending by ministries, departments, and agencies in the security sector ..................... 20 Table 3.1: Governance indicators in selected countries in East Africa ........................................................ 32 Table 3.2: Kenyans’ expectations of devolution .......................................................................................... 34 Table 3.3: Frameworks to facilitate public communication and access to information .............................. 38 Table 3.4: Types of county documents available online .............................................................................. 38 Table 3.5: Number of countries surveyed providing adequate budget information ................................... 39 Table 3.6: Structures established to facilitate citizen participation ............................................................. 41 List of BOXES Box 1.1: Impact of China’s Slowdown in Kenya – A preliminary assessment ........................................... 24 Box 3.1: What is social accountability? .................................................................................................... 29 Box 3.2: Social accountability improved spending in several countries ................................................... 31 Box 3.3: Maji Voice has increased accountability and customer satisfaction .......................................... 40 Box 3.4: Nakuru County has launched various initiatives to improve civic education ............................. 43 Box 3.5: Citizens in Baringo County achieved a more equitable distribution of resources ...................... 44 ABBREVIATIONS AND ACRONYMS BOP Balance of Payments CBEF County Budget and Economic Forums CBK Central Bank of Kenya CBR Central Bank Rate CCTV Closed-Circuit Television CDF Constituency Development Fund CIC Commission for the Implementation of the Constitution CPI Corruption Perception Index CPIA Country Policy and Institutional Assessment CSO Civil Society Organization DANIDA Danish International Development Agency DRoPPs Drivers of Public Participation FDI Foreign Direct Investments FOB Free on Board FY Fiscal Year GDP Gross Domestic Product ICPAK Institute of Certified Public Accountants of Kenya ICT Information Communication Technology IFC International Finance Corporation IFMIS Integrated Financial Management Information System IMF International Monetary Fund KENGEN Kenya Electricity Generating Company KEU Kenya Economic Update KNBS Kenya National Bureau of Statistics LATF Local Authority Transfer Fund MDA Ministries and State Department Agencies MLAs Members of Local Assembly NGO Non-Governmental Organization NSE Nairobi Securities Exchange NSWSC Nairobi City Water and Sewerage Company PAYE Pay As You Earn PFM Public Financial Management SMS Short Message Service US Unites States USSD Unstructured Supplementary Service Data VAT Value Added Tax June 2015 | Edition No. 12 i FOREWORD I t is my pleasure to present the 12th Edition of the Kenya Economic Update. The economic environment in 2015 which begun on a favorable footing is turning out to be challenging. With the Fed at the cusp of changing its monetary stance, there is uncertainty in global financial markets. This has weakened global currencies and capital flows to emerging markets are being affected. These global developments are also being felt in Kenya. In the past, Kenya has managed economic shocks well. If Kenya succeeds in overcoming its ongoing economic challenges, including the crisis emanating from China, the government will be in a position to begin delivering the promise of a more prosperous future. Already, Kenya’s economy is expected to be among the best performers in Sub-Sahara Africa and low middle income countries. This Economic Update (KEU edition 12) has four main messages. First, Kenya’s economic performance remains solid, underpinned by strong infrastructure spending and consumer demand. Growth in 2015 is estimated at 5.4 percent, a 0.6 percent downward revision from its estimate in December 2014. The revision reflects the strong headwinds the economy is facing in the foreign exchange market and the monetary policy response to calm those fears. Second, the current expansionary fiscal path is not sustainable and presents a risk to growth. Although heavy infrastructural spending is a boon for Kenya’s production space and future growth, the short - to medium- term macro-fiscal framework is vulnerable to macroeconomic shock as fiscal space has been wiped out. The overall fiscal deficit of 8.3 percent in 2014/15 and a budgeted 8.7 percent in 2015/16 is high by any standard. Third, county governments, with support from central authorities have made considerable progress towards implementing constitutional and legal provisions for transparency, accountability and participation. In the early stages, they prioritized the setting up of structures and systems to facilitate public participation. Counties have built communication frameworks, and established participatory forums as per legislative requirements. Beyond meeting the legislative requirements counties have adopted innovative initiatives to engage citizens. Much still needs to be done to ensure that proper and adequate mechanisms are put in place. Lastly, the high cost of participation, the lack of administrative capacity and trained staff to implement participatory processes and tokenistic forms of participation continue to hinder effective citizen engagement. While most counties have taken steps to put in place communication systems, most county budgets are still not readily available to the public despite requirements of the PFM Act. As in the past, we are proud to have worked with many Kenyan stakeholders during the preparation of this Kenya Economic Update. We hope that it will contribute to their discussions of policy issues that will contribute to helping Kenya grow, permanently reduce poverty, and bring shared prosperity to all Kenyans. Diariétou Gaye Country Director for Kenya World Bank ii June 2015 | Edition No. 12 ACKNOWLEDGEMENTS T his Twelfth edition of the Kenya Economic Update was prepared by a team led by John Randa and Christopher Finch supervised by Apurva Sanghi. The core team consisted of Annette Omolo, Angélique Umutesi, Christine Owuor, Barbara Karni, Angelina Musera. The team acknowledges contributions from Linda Odhiambo and Robert Waiharo. The report benefitted from the insights of several peer reviewers including Thomas O’Brien, Apurva Sanghi, Kevin Carey, Simon Carl O’Meally, Paula Andrea Rossiasco, Leanne Michelle Bayer, Joseph Mansilla, Fulbert Tchana Tchana, and Prof. Terry Ryan. The team also received overall guidance from Albert Zeufack (Practice Manager, Macroeconomic and Fiscal Management), Kevin Carey (Lead Economist, Macroeconomic and Fiscal Management), Thomas O’ Brien (Country Program Coordinator for Kenya, Rwanda, Uganda and Eritrea) and Diarietou Gaye (Country Director for Kenya, Rwanda, Uganda and Eritrea). Partnership with key Kenyan policy makers was instrumental in the production of this report. On June 30, 2015, a draft of the report was presented at the 18th Quarterly Economic Roundtable. The meeting was attended by senior officials from the National Treasury, the Ministry of Devolution and Planning, the Central Bank of Kenya, the Kenya Revenue Authority, the Kenya Vision 2030, the Kenya Institute of Public Policy Research and Analysis, the International Monetary Fund, the Kenya National Bureau of Statistics, the National Economic and Social Council, the Office of the Controller of Budget, the Council of Governors, the Commission for the Implementation of the Constitution, the Kenya School of Government, and the Centre for Parliamentary Studies and Training. June 2015 | Edition No. 12 iii MAIN MESSAGES AND KEY RECOMMENDATIONS Main messages Kenya’s economic performance remains solid, underpinned by strong infrastructure spending and consumer demand, which are driving growth. Growth in 2015 is estimated at 5.4 percent, a 0.6 percent downward revision from its estimate in December 2014. The revision reflects the strong headwinds the economy is facing in the foreign exchange market and the monetary policy response to calm those fears. The current expansionary fiscal path is not sustainable and presents a risk to growth. Although heavy infrastructural spending is a boon for Kenya’s production space and future growth, the short- to medium-term macro-fiscal framework is vulnerable to macroeconomic shock as fiscal space has been wiped out. The overall fiscal deficit of 8.3 percent of GDP in 2014/15 and a budgeted 8.7 percent of GDP in 2015/16 is high by any standard. County governments, with support from central authorities have made considerable progress towards implementing constitutional and legal provisions for transparency, accountability and participation. In the early stages, they prioritized the setting up of structures and systems to facilitate public participation. Counties have built communication frameworks, and established participatory forums as per legislative requirements. Beyond meeting the legislative requirements counties have adopted innovative initiatives to engage citizens. Much still needs to be done to ensure that proper and adequate mechanisms are put in place. The high cost of participation, the lack of administrative capacity and trained staff to implement participatory processes and tokenistic forms of participation continue to hinder effective citizen engagement. While most counties have taken steps to put in place communication systems, most county budgets are still not readily available to the public despite requirements of the PFM Act. Key recommendations to maintain growth Undertake reforms to reduce the structural imbalance in the external account, which has not improved, despite a significant drop in the price of oil. Kenya’s current account remained high at 9.8 percent in June 2015. Kenya’s export sector has been lagging since the mid-1990s. Policy makers need to focus on improving Kenya’s competitiveness and increasing the production of traded goods and services to enhance the country’s capacity to earn foreign exchange and boost its external sector. The government is taking steps to improve the investment climate as demonstrated by improved operations at the port of Mombasa and infrastructure to support trade. Policy reforms for services trade can also have knock-on benefits for manufacturing, and liberalizing it would facilitate firms’ access to services inputs. Consolidating Kenya’s fiscal position is now urgent in the short to medium term. The fiscal balance has deteriorated from 1.8 percent in 2007 to 8.3 percent of GDP in 2015. Even though some of the fiscal expansion involved huge investments in infrastructural projects, these projects have reduced fiscal space and increased debt ratios and vulnerability should the country be hit by another macroeconomic shock. The poor fiscal situation has coincided with weak external position. Risks to external and fiscal sustainability are a concern if inflows in the future will not be sufficient to repay private debt or investments. Without a clear path to fiscal consolidation, there is a potential risk of sudden reversal, which could create severe macroeconomic instability. Key recommendations to strengthen participation at the local level Invest in building the capacity of county service providers to involve citizens in local service delivery. This can involve training civil servants on new responsibilities by incorporating key elements of participation in civil servant training programs on PFM, planning and monitoring and evaluation; as well as providing on the job technical assistance. Capacity building of county officials should also be accompanied by enhancing the capacity of citizens to engage through civic education. Develop county government systems to facilitate participatory processes. Structured participatory processes should complement and support existing internal accountability mechanisms. Facilitating public participation will involve; building internal government systems; capacity for planning and managing public finances and procurement; monitoring and evaluation; and audit and reporting, and; integrating participatory processes into these systems. Doing so entails several actions including supporting counties to make County Budget and Economic Forums operational and to design and structure effective participation forums at the sub-county and ward level. Establish strong incentives for counties to be transparent and foster inclusive citizen participation. This involves systematically measuring and comparing county performance and citizen satisfaction on metrics that citizens care about. Annually updating and making this information public can increase incentives to improve service delivery performance based on systematic assessments of progress. Non State Actors can expand partnerships to help counties build effective systems and processes for participation, transparency and mobilization. EXECUTIVE SUMMARY K enya’s economic performance remains solid, underpinned by strong infrastructure spending and consumer demand, which are driving growth. On the production side, growth from services, electricity generation and a rebound in agriculture will drive growth in 2015. The World Bank estimates that growth will be 5.4 percent in 2015, a 0.6 percent downward revision of its estimate in December 2014. The revision reflects the strong headwinds the economy is facing in the foreign exchange market, the monetary policy response to calm those fears, and the fact that the effect of lower global oil prices on the wider economy was muted because of the depreciation of the shilling in 2015 and weak transmission into the wider economy. The revised figure is still higher than the average for both lower-middle-income countries and Sub-Saharan Africa. The risks to growth remain the same as in previous Updates except for Chinese devaluation which has heightened global risks. The external sector remains vulnerable to further shocks from weak global export demand exacerbated by weak doing business environment, the continued strengthening of the U.S. dollar, and the authorities’ response to those external risks. Preliminary analysis shows that the direct transmission from events in China to Kenya are minimal as the renminbi closely tracks the US dollar. While the fiscal deficit of 8.7 percent of GDP has raised concerns at the national level, it is the quality and transparency of spending that is paramount in the devolved system of government. Functional and political devolution to counties also seems beneficial for efficiency, as it provides incentives for county governments to deliver locally preferred services more efficiently, as the burden and benefits of public service delivery accrue in communities. Even though the benefits of devolution have not all been achieved and counties still going through a steep learning curve, a majority of Kenyans still support the devolved system of government despite the challenges being experienced in its implementation. Increasing public participation in budget information can help county governments become more efficient and targeted in the spending and reflect the voices of the people in their spending decisions. K enya’s economic growth continues to be robust. Strong consumption and investment demand powered growth, as the economy grew 5.3 percent built up inventories and made new investment in capital equipment to take advantage of declining interest rates. in 2014. Strong macroeconomic management kept overall and core inflation within the targeted Economic growth was broad based. Despite level, while the foreign exchange market remained significant challenges at the start of the year, all relatively stable. Lower oil prices spurred domestic productive sectors (agriculture, manufacturing, consumption, which increased real incomes and other industry, and service) contributed to overall aggregate demand. Ongoing infrastructure projects growth in 2014. Agriculture, which is still critical to are having a catalytic impact on economic activities Kenya’s economic growth prospects, performed well. and increasing aggregate demand. Inadequate rainfall led to higher food and electricity prices, but agriculture grew, albeit at a slower rate Investment spending rebounded. After having by growing at 3.5 percent. Despite higher electricity taken a wait and see attitude in 2013, investors prices and continuing challenges in the business were back in business in 2014. Real investment climate for investors, the manufacturing sector spending rebounded, driven by higher development also grew by 3.4 percent. Other industry registered spending on major infrastructural activities, such as faster growth in 2014, driven by construction the standard gauge railway, roads, and geothermal and electricity generation and growing by 11.0 power generation. In the private sector, investors percent. The services sector registered higher than June 2015 | Edition No. 12 v Executive Summary expected growth at 5.7 percent, despite significant The economy faces headwinds in the near term, but declines in the accommodation and restaurant the fundamentals for growth in the medium term subsector in 2014, thanks to good performance in are strong T real estate, wholesale and retail, and information he World Bank projects that Kenya will grow 5.4 and communications technology (ICT). The mobile percent in 2015 and 5.7 percent in 2016. These revolution is still ongoing, with mobile payment estimates are 0.6 percent lower than projections continuing to spur economic activity in terms of made in the December 2014 Update. The revisions both employment and the volume of transactions. reflect the reassessment of risks associated with macroeconomic instability resulting from exchange Public debt remains sustainable. According to the rate volatility, inflationary threats associated with latest IMF/World Bank debt sustainability analysis concerns about currency depreciation and delayed done in 2015, Kenya is at low risk of debt distress, fiscal consolidation, balance of payment pressures, with overall debt remaining sustainable in the and the poor transmission of the effects of low oil medium term. Kenya’s external and total public prices. Growth is expected to pick up to 5.7 percent debt are below the IMF/World Bank threshold over in 2016, supported by positive externalities from a 20-year horizon. The reorientation of public debt infrastructural projects currently being undertaken toward external debt is consistent with Kenya’s in the railways, roads, and energy subsectors. 2015 medium-term debt strategy, which aims to slow domestic debt growth in order to stabilize Macroeconomic instability emanating from liquidity and reduce interest rates in domestic foreign exchange market volatility and fiscal policy financial markets. concerns threaten to destabilize domestic prices, building inflationary pressure and slowing growth. Despite weakness in merchandise exports, exports The monetary policy decisions made in June and of services and remittances are now more important July aimed primarily at containing to the economy. Services exports inflation expectations and calming represent 53 percent of total exports the markets. Yields on government of goods and services, with exports securities and lending rates are of nonfactor services playing a The mobile revolution expected to increase, raising key role. Remittances are now the is still ongoing, with returns on shilling-denominated single most important source of mobile payment assets. However, the policy rate foreign exchange inflows in Kenya, continuing to spur increase may reduce aggregate bringing in more than official economic activity consumption by households and development assistance. Kenya in terms of both firms and dampen aggregate received $1.5 billion in remittances, employment and the demand. Should interest rate rise equivalent to 2.4 percent of GDP, steeply, the impact on investment for the 12 months ending in June volume of transactions demand may be higher, slowing 2015. Remittances boost household consumption overall growth. When this done, investment and investment. The property boom in Kenya and spending will also dampen thus the revision. activity in the stock market has been attributed to remittances. The current expansionary fiscal path is not sustainable and presents a risk to growth. The Reserves are sufficient to absorb short term shocks. overall fiscal deficit rose from 4.5 percent of Kenya has accumulated sufficient international GDP in 2011/12 to 8.3 percent in 2014/15 and a reserves to cushion against short-term shocks. budgeted 8.7 percent in 2015/16. Devolution is Reserves stood at US$7.2 billion in June 2015, putting added pressure on the fiscal position, but equivalent to 4.6 months of import cover. it is the lack of rationalization of spending after vi June 2015 | Edition No. 12 Executive Summary devolution, the duplication of functions at the renminbi, Kenya shilling has depreciated 20 and 17 national and county level, and the strong appetite percent respectively. Trade transactions between for spending at both levels of government that China and Kenya (and wider EAC) is undertaken in have worsened Kenya’s fiscal position. Although US dollar, however, renminbi transactions are rare heavy infrastructural spending is a boon for Kenya’s but available. Since the yuan loosely tracks the dollar, production space and future growth, the short- to it has been dragged higher with the dollar. This medium-term macro-fiscal framework is vulnerable implies Chinese goods in the region have become to a macroeconomic shock. Fiscal space has been expensive as the regional currencies weakened wiped out, with public debt to GDP passing the 50 against the US dollar and Chinese yuan. In nominal percent threshold in FY2015/16. The lack of fiscal terms imports from China are 17-20 percent more consolidation is raising jitters in the market over expensive in local currency terms as the shilling whether Kenya has a twin deficit problem. has lost 17-20 percent of its value. Despite these developments Kenya’s imports from china are Volatility in the foreign exchange market has growing at about 40 percent. exposed Kenya’s vulnerability to the winding down of the U.S. monetary stimulus. Kenya’s economy has The ongoing economic turbulence triggered by benefited immensely from the U.S. Federal Reserve’s insecurity and market volatility in the foreign stimulus, in terms of both short- and long-term exchange market pose threats to Kenya’s prospects capital flows. The volatility Kenya is experiencing has in the near term. Recurrent security threats have already forced the Central Bank of Kenya (CBK) to adversely affected the tourism sector and country risk increase its benchmark rate to shore up the shilling. assessments. Security concerns following terrorist Yields on shilling-denominated assets have been attacks from al Shabaab have hit the tourism sector, high, outstripping the depreciation risks and large a major foreign exchange earner and significant interest rate differentials, making Kenya a more source of employment in Kenya. Multiple issuances attractive destination for world capital than many of travel advisories by major tourist destinations other emerging economies in Africa as a whole. significantly reduced the number of tourists in the With the ending of the Fed’s monetary stimulus, first half of 2015, which declined 38 percent from a the flow of cheap capital that has been funding peak of 1.3 million in 2011 to 0.8 million in the year the current account could dry up, as investors ending June 2015 (Figure 1). The travel advisories build up their dollar-denominated assets, creating have since been lifted, but the change came too volatility in the foreign exchange market. The CBK’s late for the peak season in the summer of 2015. action to raise interest rates could choke growth if Figure 1: The number of tourists has declined, reducing travel credits investment demand declines. The strong dollar in in the balance of payments 2015 has already partly offset the benefits of low 2.5 1,400 international oil prices. 1,200 2.0 Tourism arrivals (in thousands) The devaluation of the renminbi/yuan in August 1,000 created heighten uncertainty in the global financial 1.5 Percent of GDP 800 markets but the transmission to Kenya remains 600 weak. China's biggest currency intervention in 1.0 August, 2015 jolted the world financial and equity 400 0.5 markets. However, preliminary analysis of the 200 Chinese slowdown show that the impact on Kenya 0 0 is minimal as the Kenya Shilling has depreciated 2009 2010 2011 2012 2013 2014 2015 significantly against both the renminbi yuan and Travel credit, percent of GDP Tourism arrival the US dollar. Against the US dollar and the Chinese Source: Central Bank of Kenya and Kenya National Bureau of Statistics. June 2015 | Edition No. 12 vii Executive Summary The negative impact of insecurity is not limited to the infrastructure sector. Significant import demand the tourism sector; it also reduces confidence in the is for goods that could be produced domestically, economy and country risk assessment by foreign however. Against the belief that the external account investors, which may adversely affect foreign direct could decline with lower global oil prices, the investment (FDI) and portfolio flows into the country. structural imbalance problems still exists. Structural reform is urgently needed to improve Kenya’s The government has ramped up spending on external balance, as discussed in previous Updates. security to address insecurity threat. The allocation The export sector has been lagging since the mid- to the security sector is among the largest in the 1990s (the last tea and coffee boom). As a result, budget, after energy, infrastructure and ICT, and Kenya relies too heavily on short-term capital flows education (Figure 2). Nominal allocations to national to service its current account. In order to service security (including internal security) has doubled and reduce external indebtedness, policy makers since 2011/12 fiscal year. The increase aims to need to focus on increasing the production of traded enable the government to strengthen security at its goods to enhance the capacity to generate foreign borders and throughout the country by investing in exchange. The government is working tirelessly security infrastructure such as security installations to streamline operations at the port of Mombasa and equipment, developing standards and guidelines and improve infrastructure to support trade. Kenya for installation of integrated closed-circuit television would still benefit from an export master plan, which (CCTV) systems in all urban buildings, undertaking might help shift resources toward the export sector. a comprehensive training program on modern personnel management and policing, and investing Both the fiscal deficit and the current account in a modern and functional command and control. deficit are high. Kenya’s current account deficit increased from less than 1 percent of GDP in 2007 Urgent structural reforms are needed to 9.8 percent in 2015; the fiscal deficit increased T he external account balance has not improved, from 1.8 percent to 6.3 percent of GDP during the despite a significant drop in the value of oil same period. This fiscal expansion involved huge imports. Kenya’s current account stood at 10 percent investments in infrastructural projects. It coincided of GDP at the end of 2014 and remained high (9.8 with capital inflows (both short and long term) percent) in June 2015. The high current account into the economy in the form of both fixed-income deficit is driven mainly by imports of machinery securities and equities and official and private flows. and transport equipment to meet the demands of Portfolio and other capital inflows have allowed Figure 2: A large percentage share of the budget goes to security a. Actual expenditure, 2011/12 b. Budget allocation, 2015/16 Social protection Health Social protection 4% Economic and 2% commercial 4% Economic and Agriculture affairs Governance commercial 4% 2% 2% affairs Environment Environment protection 2% protection 4% 5% Education 26% Agriculture Energy and Governance 5% infrastructure 6% 27% Health 8% National security (plus Ministry of Interior) National security (plus 16% Public Ministry of Interior) administration 19% 11% Education 22% Energy and Public administration infrastructure 16% 15% Sources: Office of the Controller of Budget (National Government Budget Implementation Review Report, Fiscal Year 2011/12 and Third Quarter FY 2014/15) and National Treasury (Highlight of the 2015/16 Budget, June 2015). viii June 2015 | Edition No. 12 Executive Summary Kenya to consume more foreign goods than the As they simultaneously deliver services and build economy can pay for. This situation needs careful new institutions, counties are seeking to establish management, with structural adjustments made effective means to engage the public, with varied over time. Larger twin deficits are unavoidable given success. A key focus of the national and county the infrastructure investment drive, and they are not governments, as well as civil society actors, has worrisome in themselves if they translate into higher been to operationalize the strong policy and legal framework on transparency, accountability, and productivity. Risks to external and fiscal sustainability are a concern if inflows in the future will not be public participation into practical and effective sufficient to repay private debt or investments (in mechanisms that engage citizens. The devolution the form of dividends) and primary balance deficits process has generated hope and high expectations decline. Without a clear path to fiscal consolidation, among citizens on how quickly devolved government there is a potential risk of sudden reversal, which will change the lives of ordinary citizens, provide could create macroeconomic instability. more opportunities than risks, and improve service delivery (Figure 3). The challenge is for county Greater public participation could improve governments to convert raised citizen expectations efficiency at the county level for better service delivery into action while helping P ensure that citizens have a realistic understanding of ublic participation, transparency, and the constraints and challenges counties face. There accountability in decision-making processes are have been a number of noteworthy interventions key to public service delivery and efficiency. Kenya’s at both the national and subnational levels, but constitution and legal framework on devolution place strong emphasis on public participation, more needs to be done to realize the promise of transparency, and accountability as means of devolution for better development outcomes and improving the efficiency, equity, and inclusiveness improved service delivery. of government and service delivery. Multiple studies Figure 3: Citizens believe that devolution provides more opportunities than risks document how governance weaknesses limit Kenya’s economic and social development and impede its July progress toward national goals for economic growth, 2014 64 22 7 6 job creation, social inclusion, equity, and poverty reduction. Devolution creates a new opportunity, as well as new challenges, for addressing governance August 2013 67 18 7 8 challenges that limit the efficiency and equity of service delivery. Evidence is mounting that strengthening public participation is critical for January2013 65 14 9 11 effective service delivery. But devolution alone does not necessarily improve the accountability 0 20 40 60 80 100 and responsiveness of service delivery. Multiple Percentage of respondents More opportunities More risks than No effect Don't Know factors must be in place, including the capacity to than risks opportunities disseminate government information in user-friendly Source: National Democratic Institute 2014. formats, structure efficient and representative consultations with the public, and provide recourse In the first year of devolution, both national mechanisms when laws and policies are not and county governments focused on setting up followed. Similarly, public participation itself is not effective structures, systems, and an enabling a magic bullet. Effective public participation requires environment for implementing participation. coordinated action by government as well as citizens, National-level actors, including the National including user-friendly information and structured Treasury, the Ministry of Devolution and Planning, engagement with representative groups of citizens. and constitutional bodies, such as the Commission June 2015 | Edition No. 12 ix Executive Summary on Revenue Allocation, prioritized the development The national and county governments could take of guidelines and regulations to provide counties various priority actions to enhance participation: with basic standards for implementing participation • Build the capacity of county officials to involve in public financial management (PFM), planning, citizens in local service delivery. Doing so will and other county processes. There has also been a require making investments to ensure that focus on the capacity building of county government participation processes are adequately resourced officials, through the development of PFM training and staffed and county staff trained on new material and the rolling out of training courses that responsibilities. integrate principles of transparency, accountability, • Equip counties to disseminate reliable, updated and public participation. The central government county information and manage structured also improved national budget transparency, with consultation processes on county laws, plans, significant improvement in the narrative sections of budgets, and monitoring of service delivery. the program based budget. • Establish strong incentives for county and other Counties have made significant strides toward subnational service providers to be transparent improving citizen engagement. Many counties and foster inclusive citizen participation by have operationalized legal provisions, put in place systematically measuring and comparing local websites, established basic citizen government performance and citizen satisfaction forums and county communication on metrics that citizens care about. An frameworks, and piloted innovative index measuring citizen participation initiatives. Few counties have made could be developed as a subset of their updated plans and budgets Quantity of participation other county performance indicators. readily available, however, as does not equal quality required under the Public Financial of participation Civil society could build partnerships Management Act; adopted county with counties to establish legislation on participation; or operationalized participatory processes. They could use networks county budget and economic forums to facilitate the and coalitions to identify, advocate for, and monitor structured engagement of citizens. Key challenges minimum standards for social accountability and use include the cost of participation, the lack of capacity, common methodologies and platforms to monitor and tokenistic forms of participation that hinder county performance. meaningful engagement of citizens, as discussed in detail in this special focus. Quantity of participation Development partners could support government– does not equal quality of participation. Building the civil society partnerships focused on designing and capacity of government and establishing structured rolling out participatory county systems. Donors processes for consulting the public and focusing could consider prioritizing longer-term initiatives by on services they care about will be key drivers for civil society networks and coalitions that advocate achieving meaningful citizen engagement. Structured for minimum standards on social accountability engagement is likely to ensure representation of and enhance grant-making criteria that reinforce broad segments of society and the inclusion of accountability of civil society to constituents. marginalized groups. x June 2015 | Edition No. 12 The State of Kenya’s Economy June 2015 | Edition No. 12 1 The State of Kenya’s Economy 1. Economic performance in 2014 G rowth in 2014 was solid and broad based as the economy performed well while absorbing two major government programs: devolution and infrastructure scale-up. The economy grew 5.3 percent, driven by stronger than expected growth in services and other industry. Consumption demand remained the main source of growth. Investment demand rebounded, as investors dropped their wait and see stance. Net exports remained a drag on the economy, as the growth in imports outstripped growth in exports. The fiscal policy continued on the expansionary path to ease the cost of doing business and push out Kenya’s production frontier. The monetary policy stance kept inflation within CBK targets. The current account remained high as a share of GDP, despite falling oil prices, signaling Kenya’s vulnerability in the external sector. 1.1 Growth remained solid The oil-price plunge provided cyclical support to K enya’s economy grew 5.3 percent in 2014. The real incomes for Kenyans. Cheaper fuel helped drag from weak growth in the last quarter contain inflationary pressures and provided support of 2013 extended into the first quarter of 2014, to real incomes in the second half of 2014 and when the economy grew 4.8 percent (Figure 1.1). the first half of 2015. The beneficial effects of low However, government spending in the last quarter oil prices on consumer purchasing power came of the fiscal year propelled growth to 6.1 percent under threat in 2015, offset by higher fuel levies, a in the fourth quarter. Strong consumption and depreciating shilling, and rising interest rates, which investment demand from public sector and strong could constrain economic activity and export growth. private sector credit drove growth in the second half of the year. The macroeconomic environment Average growth in Kenya between 2011 and 2014 was stable, with inflation remaining within the (5.4 percent) exceeded the averages for both Sub- CBK target, but global demand was weak and Saharan Africa (4.6 percent) and lower-middle- agricultural production poor due to inadequate income countries (4.1 percent). Growth was higher rains, with knock-on seasonal effects on food than in Botswana (4.2 percent) and Ghana (4.2 prices. Weak demand for Kenya’s exports and low percent) but lower than in Nigeria (7.5 percent), tea prices also hurt economic performance. Rwanda (7.0 percent), Tanzania (6.9 percent), and Côte d’Ivoire (6.3 percent) (Figure 1.2). Figure 1.1: Growth slowed in 2014 but remained solid a. Annual GDP growth, 2010–14 b. Quarterly GDP growth, 2012–14 8 9 8.4 7.0 7 6.8 8 6.0 6.0 6 GDP growth (percent) GDP growth (percent) 7 5.5 6.1 5.2 6 5.7 5 4.7 4.7 4.7 5.3 4.3 4.5 5 4.6 4 4 2.9 3 3 2 2 1 1 0 0 1 2 3 4 1 2 3 4 1 2 3 4 2010 2011 2012 2013 2014 2012 2013 2014 Source: Kenya National Bureau of Statistics 2015a. 2 June 2015 | Edition No. 12 The State of Kenya’s Economy Figure 1.2: Average growth in Kenya was above the average for Sub-Saharan Africa and lower-middle-income countries in 2011–14 Annual growth rate in selected middle income economies, 2014 Average annual growth in selected East Africa, 2011-2014 8 7.5 8 7 7 7.0 6.9 6.3 Annual growth (percent) Annual growth (percent) 6 5.4 6 5.3 5.3 5.4 5 4.9 5 4.6 4.6 4.2 4.1 4.4 4 4 3 3 2 2 1 1 0 0 Côte Nigeria Zambia Kenya Namibia Botswana Ghana Lower Rwanda Tanzania Kenya Uganda Sub-Saharan Burundi d'Ivoire middle Africa income excluding countries South Africa Source: IMF 2015. Growth in 2014 was positive across sectors, but by KENGEN’s investment program, while private manufacturing and agriculture lagged. Growth sector credit and investments in roads drove growth was weak at the beginning of 2014, but all sectors in construction. Construction grew 13.1 percent, up of the economy recovered to post positive growth. from 5.8 percent the previous year. Strong performance was driven by other industry, which grew 11.0 percent, up from 4.2 percent in Lackluster performance in agriculture reflected 2013 (Figure 1.3). Real estate and trade (wholesale low prices of marketed crops and delayed and and retail) increased the rate of growth of services inadequate rainfall. Growth in the crop subsector, to 5.7 percent, up from 5.4 percent in 2013. which constitutes 69 percent of agriculture, declined Manufacturing’s contribution to growth declined from 6.6 percent in 2013 to 4.4 percent 2014, and from 5.6 percent to 3.4 percent, while growth in animal production increased just 0.2 percent, down agriculture declined from 5.2 percent in 2013 to from 1.0 percent in 2013. The performance of tea 3.5 percent in 2014. Other industry mainly reflects (Kenya’s largest export product) was weak, with electricity and construction; electricity was boosted output increasing just 2.9 percent (Figure 1.4). The volume of tea exports rose 2.3 percent, to 456,000 Figure 1.3: All sectors contributed to growth in 2014 metric tons, but the value of exports declined 10.2 14 percent, to KSh 94 billion. The volume of horticultural 12 11.7 11.0 exports increased 3.0 percent, to 220,000 metric 10 tons, while the value increased 0.8 percent to KSh 84. Annual growth (percent) Output of cut flowers rose 10.7 percent, and output 8 of fruits rose 13.0 percent. In contrast, vegetable 6 5.2 5.6 5.4 5.7 output declined 8.9 percent. Export values rose 7.0 4.7 4.2 4 3.5 3.4 percent for cut flowers rose and 20.7 percent for 2.9 2 fruit; export earnings of vegetables declined 18.1 (0.6) percent. Production of maize—Kenya’s staple crop— 0 Agriculture Manufacturing Other industries Services declined 4.2 percent, to 39.0 million bags. Bean -2 production also declined. 2012 2013 2014 Source: Kenya National Bureau of Statistics 2015a. June 2015 | Edition No. 12 3 The State of Kenya’s Economy Figure 1.4: Production of tea—Kenya’s main export—grew, but earnings from exports declined Tea production, 2013-2014 Tea auction prices, 2013-2014 Tea production in metric tonnes, thousands 50 300 45 270 Price in KSh per kilo 40 240 35 210 30 180 25 150 2013 2014 2013 2014 Source: Kenya National Bureau of Statistics 2015b. Weak manufacturing growth was attributed to percent in 2014. Output of beverage and tobacco declining demand for Kenyan goods in neighboring products declined for the second year in a row, but countries as a result of competition from China at a less rapid pace. and India. The manufacturing sector grew just 3.4 percent in real terms in 2014, down from 5.6 The scale-up of geothermal power continues to percent in 2013. Growth in food, beverages, and support growth. Electricity generation expanded tobacco, which together constitute 38 percent of 5.7 percent in real terms, down from 6.6 percent in total manufacturing, declined from 10.5 percent 2013. Total power generation increased 8.2 percent in 2013 to 4.0 percent in 2014. Growth of other (to 8,888 megawatts), despite a 22.2 percent manufacturing, repair, and installation, which decline in hydropower generation (caused by together constitute 62 percent of manufacturing, below-average rain) to 3,411 megawatts. The drop increased from 2.8 percent to 3.1 percent. The was compensated for by a 63 percent increase in volume of total manufactured goods increased 4.5 geothermal generation (to 2,917 megawatts) and a percent in 2014, a drop from 7.0 percent growth in 25.3 percent increase in thermal power generation 2013. However, growth in the volume of total food (to 2,556 megawatts) (Figure 1.5). products declined, from 9.3 percent in 2013 to 3.9 Figure 1.5: Electricity generation increased in 2014, despite a significant decline in hydropower generation Domestic electricity generation, 2013-2015 Local electricity generation, million of KWh 430 380 330 280 230 180 130 80 2013 2014 2015 Hydro Geo-thermal Thermal Source: Kenya National Bureau of Statistics 2015b. 4 June 2015 | Edition No. 12 The State of Kenya’s Economy The services sector grew more rapidly than Figure 1.7: The volume and value of mobile payments continued to exceed expectations expected. Despite significant declines in the 250 accommodation and restaurant subsector, services Number of transactions and number of agents grew 5.7 percent, driven by good performance in 200 real estate, wholesale and retail trade, transport and storage, education, finance, insurance, and 150 information and communications services (Figure 1.6). The information and communications subsector 100 maintained double digit growth (13.4 percent), with 50 this and other strong performers offsetting weakness in the accommodation and restaurant subsector 0 which declined 17.2 percent in 2014. The poor Jan Jan Jan Jan May May May May Nov Nov Nov Oct Oct Aug Oct Ap Aug Ap Ap Aug Ap Jul Jul Jul Dec Dec Dec Jun Mar Jun Mar Jun Mar Jun Mar Sep Feb Feb Sep Feb Sep Feb 2012 2013 2014 2015 performance reflected fear created by increased Number of customers (millions) Value of transactions (billions of KSh) terrorist activity in parts of the country. Transactions (millions) Agents (thousands) Source: Central Bank of Kenya. Figure 1.6: Services grew significantly, despite the deep decline in the accommodations and restaurant subsector Although consumption spending slowed, it FISIM continued to drive growth. Lower fuel prices Other services contributed to lower inflation, boosting consumers’ Health purchasing power. Real growth of weighted Education Real estate consumption spending dropped from 6.9 percent Professional, administration and support services in 2013 to 4.7 percent in 2014 (Figure 1.8) but Public administration accounted for most growth. Weighted real growth Financial and insurance Information and communication of government spending declined from 5.0 in 2013 Transport and storage to 2.7 percent, while private consumption declined Accomodation and restaurant from 8.2 percent to 5.5 percent. The drop in real Wholesale and retail trade consumption spending reflected lower recurrent -20 -15 -10 -5 0 5 10 15 Annual growth (percent) government spending, higher electricity prices, and 2014 2013 the poor performance of the agricultural sector. Source: Kenya National Bureau of Statistics 2015a. Figure 1.8: Investment recovered in 2014 10 Rapid growth in mobile payment transactions 8.4 shows the deepening of this innovation. The money 8 transfer business has revolutionized the way Kenya 6.1 6 5.7 does business, making it a world leader in mobile 5.3 Percentage points 4.6 payments. The number of agents employed to 4 transact mobile payments increased 9.3 percent, to 2 123,703 in 2014, rising to 131,761 in June 2015. The average monthly number of customers using mobile 0 payments increased 10.1 percent, to 25.9 million 2 in 2014. The annual number of mobile transactions 2010 2011 2012 2013 2014 increased 24.4 percent, to 911 million, while the 4 value of the transaction increased 24.7 percent, to Consumption Net investment Net exports GDP Source: Kenya National Bureau of Statistics 2015a. KSh 2.4 trillion (Figure 1.7). June 2015 | Edition No. 12 5 The State of Kenya’s Economy Investment spending rebounded. After having the first half of 2015 stood at 6.4 percent, below the taken a wait and see attitude in 2013, investors CBK’s upper target. Core inflation, which excludes were back in business in 2014. Investment spending food and fuel prices, remained below the CBK’s 5 grew at a weighted real rate of 1.5 percent, after percent target. After keeping the central bank rate declining 0.2 percent in 2013. Higher development at 8.5 percent for 25 consecutive months, in order spending on major infrastructural activities, such to give commercial banks time to pass through the as the standard gauge railway and public roads, lower policy rate, the CBK raised its rate by 300 basis drove the rebound. In the private sector, investors points in June and July 2015. The CBK’s monetary built up inventories and made new investment in policy stance has kept both overall and core inflation capital equipment to take advantage of declining to within targets. interest rates. Investment in various types of fixed assets grew 11.2 percent in 2014, after growing just 1.2 Fiscal expansion continued D 1.6 percent in 2013, primarily thanks to a Kenya espite the implementation of fiscal reforms, tax Airlines purchase and a 21.1 increase in investment revenue fell below the growth of the overall in structures. economy. Fiscal reforms have started to pay off. Expanded revenue allowed the government to Net exports continued to be a drag on economic reorient spending toward much-needed development growth. Exports of goods and services, which projects in priority areas of infrastructure, energy, declined 0.6 percent in 2013, grew 2.3 percent in and ICT. Total revenue mobilized remained below 2014. Spending on imports of goods and services expenditure needs, however, causing Kenya’s fiscal recovered in 2014, increasing 9.7 percent in real position to weaken. Government expenditure terms, after growing just 0.3 percent in 2013. Net increased mainly driven by development projects exports reduced real GDP expenditure-side growth in priority areas of infrastructure, energy and ICT. by 2.6 percentage points. Given the building fiscal pressure, there is need to start fiscal consolidation. Overall Inflation remained below the upper target of 7.5 percent set by the CBK, but concerns about Fiscal policy remained expansionary. With more depreciation triggered a strong policy response development spending in 2014/15, growth in total to contain inflation expectations. Average overall expenditure (of 9.9 percent) and a deceleration in inflation increased from 5.7 percent in 2013 to 6.9 tax revenue (of 2.1 percent), Kenya’s fiscal position percent in 2014, as a result of higher food prices weakened. The fiscal deficit widened from 6.1 (Figures 1.9 and 1.10). Average overall inflation in percent of GDP in 2013/14 to 8.3 percent in 2014/15. Figure 1.10: Food price rises have been a major driver of Figure 1.9: Inflation remained below the central bank target overall inflation 15 Contribution of food, energy and core inflation to overall inflation rate, August 2010-June 2015 13 100 11 In ation rate (percent) 80 Inflation rate (percent) 9 7 60 5 40 3 1 20 -1 0 Food inflation Energy inflation Upper bound target Core inflation Overall inflation Food Energy Core Source: Kenya National Bureau of Statistics and Central Bank of Kenya. Source: Kenya National Bureau of Statistics and Central Bank of Kenya. 6 June 2015 | Edition No. 12 The State of Kenya’s Economy For 2015/16, the fiscal deficit has been budgeted development spending rose to 11.3 percent of GDP, to increase to 8.7 percent of GDP, leaving the 4.3 percentage points higher than the previous budget vulnerable to a shock. The primary balance year. National recurrent expenditure, which had (which excludes interest payments on public debt) stagnated after devolution at 17.5 percent of GDP increased to 5.2 percent of GDP, up from 3.5 percent in both 2012/13 and 2013/14, rose 0.3 percentage the previous year (Figure 1.11). points to stand at 18.4 percent of GDP. The allocation Figure 1.11: Kenya’s fiscal position is expected to continue to weaken of expenditure toward productive spending is a welcome achievement, but its sustainability requires 30 continued growth in revenue. 25 Figure 1.12: The central government remains the main driver of public 20 expenditure Percent of GDP 15 35 4.1 10 30 4.0 5 3.8 25 0.2 2011/12 2012/13 2013/14 2014/15 2015/16 Percent of GDP 0 (4.5) 20 26.6 (5.7) (6.1) 24.0 23.5 23.7 24.6 21.9 24.3 -5 (8.3) (8.7) 20.9 23.1 22.3 15 -10 Government revenue Government expenditure 10 Fiscal balance, after grants, cash basis Primary deficit, after grants, cash basis Source: National Treasury (Quarterly Economic and Budgetary Review, August 5 2015) and Kenya National Bureau of Statistics. 0 Proceeds from the Eurobond issue helped finance National Transfer to county governments the fiscal deficit. Both domestic and external Sources: National Treasury (Quarterly Economic and Budgetary Review, August financing were used to finance the deficit in 2014/15. 2015); Office of the Controller of Budget; and Kenya National Bureau of Statistics. External financing was buoyed by proceeds from the sovereign bond issue, and financed 46.2 percent Total government expenditures in FY2015/6 of the deficit (equivalent to 3.8 percent of GDP). passed KSh 2 trillion (just over US$20 billion). Total Domestic sources financed 53.8 percent (equivalent expenditure in FY 2015/16 budget was equivalent to to 4.4 percent of GDP). However, domestic borrowing30.7 percent of GDP, with 23.1 percent of GDP (KSh remained the main source of fiscal deficit financing, 1.5 trillion) allocated to national government and 4.1 it rose to 4.4 percent of GDP, down from 4.0 percent percent (KSh 264.2 billion) going to the 47 counties in 2013/14. (Table 1.1). The national government allocated KSh 721 billion (11.1 percent of GDP) to capital spending Infrastructural development is driving fiscal and 782.2 billion (12.0 percent of GDP) to recurrent expansion spending, in an effort to continued reorienting the T he government’s emphasis on infrastructure budget toward capital expenditure, specifically development is increasingly driving the fiscal infrastructure spending. A new urgent priority is expansion (Figure 1.12). The 2014/15 budget the security sector. To address the problem, the outturn showed a larger proportion of development government allocated an additional KSh 27.1 billion spending by the central government. Total to the security sector in 2015/16, bringing the spending by the central government grew despite total to KSh 223.9 billion. Other priorities include the fact that some of its functions were devolved. the standard gauge railway (KSh 118.2 billion), Allocations for subnational governments increased geothermal power development (KSh 13.2 billion), 0.2 percentage points, while central government generation and transmission of new electricity, and expenditure rose 2.4 percentage points. National continued expansion of roads. June 2015 | Edition No. 12 7 The State of Kenya’s Economy Table 1.1: Budget summary for 2015/16 budget Item KSh billion Percent of GDP Revenue, including grants 1,431.5 22.0 Revenue 1,358.1 20.8 Ordinary 1,254.9 19.2 Appropriation-in-aid 103.2 1.6 Grants 73.4 1.1 Expenditure 2,001.6 30.7 Ministries, departments, and agencies (MDA) 1,503.5 23.1 Recurrent 782.2 12.0 Development 721.3 11.1 County transfer (including level-5 hospital grants and DANIDA) 264.2 4.1 Interest payments 185.3 2.8 Pensions 43.4 0.7 Other consolidated fund services 3.2 0.0 Fiscal deficit, including grants (570.2) (8.7) Fiscal deficit (including grants, excluding grants for the standard gauge railway) (426.3) (6.5) Financing 570.2 8.7 Domestic 229.7 3.5 Foreign 340.5 5.2 Source: Budget Statement for FY 2015/16. Public debt remained sustainable Figure 1.13: Kenya’s public borrowing has not compromised its debt K enya’s public debt as percentage of GDP rose stock targets 60 marginally. (Net) total public debt increased 0.5 percentage points, to 44.5 percent of GDP in 50 2014/15 (Figure 1.13). Domestic debt stood at Percent of GDP 40 25.5 24.8 24.8 percent of GDP, lower than the 25.5 percent 22.2 23.4 21.9 21.5 in 2013/14. External debt rose, to 24.9 percent of 30 20.2 18.6 19.5 GDP. The increase was consistent with the 2015 20 medium-term debt strategy, which aims to slow 19.1 20.2 18.9 21.0 19.4 18.8 22.6 24.9 domestic debt growth in order to stabilize liquidity 10 and reduce interest rates in domestic financial 0 markets. Debt remained sustainable in the medium term, as confirmed by the IMF/World Bank debt sustainability indicators undertaken in 2015, which External Domestic Public debt net Sources: National Treasury (Quarterly Economic and Budgetary Review, August show that Kenya’s external and total public debt are 2015; Medium-Term Budget Policy Statement, February 2015) and Kenya National below their threshold over a 20-year horizon. Bureau of Statistics. 8 June 2015 | Edition No. 12 The State of Kenya’s Economy Budget execution improved Despite more allocation for infrastructure, R evenue underperformance in 2014/15 made development spending execution remained low. fiscal consolidation a challenge. Total revenue Budget execution reached 76.1 percent in June 2015, declined 0.4 percentage points, to 18.9 percent of down significantly from the 85.6 percent executed GDP in 2014/15 (Figure 1.14). Income tax (including during the same period in 2014 (Figure 1.16). This pay as you earn [PAYE]) and value added tax (VAT) was due to low spending by energy, infrastructure were the main sources of revenue, accounting and ICT sector at 49.3 percent, yet this sector for 49.8 percent and 24.6 percent, respectively. accounted for the larger share (30.2 percent)of Income tax remained stagnant at 8.9 percent of the total ministerial budget (Figure 1.15). Lower GDP; VAT fell marginally, from 4.6 percent of GDP execution rates undermines governments goal to in 2013/14 to 4.5 percent in 2014/15. Import turn ambitious plans into tangible deliverables. duties and excise duties as a share of GDP stood at 1.3 percent and 2.1 percent. County governments embarked on fiscal expansion 20 Figure 1.14: Revenues declined in 2014/15 ounty governments are overcoming some of C the challenges encountered in their first fiscal year. The 2014/15 budget showed an expansion of 18 1.3 1.2 16 1.6 1.6 1.7 2.0 both spending and revenue by county governments. 2.0 14 2.6 2.0 1.9 1.3 1.3 Counties’ overall fiscal balance remained positive, Percent of GDP 1.3 12 1.4 1.3 helping improve Kenya’s overall fiscal position. Low 4.6 4.5 10 4.8 4.4 4.1 budget execution of development expenditure at 8 the county level undermines ambitious efforts to 6 deliver promises. 7.8 8.3 8.9 8.9 4 6.9 2 County governments’ budgets rose significantly in 0 2006/07- 2011/12 2012/13 2013/14 2014/15 2014/15. County budgets was estimated at KSh 320.7 2010/11 billion (5.6 percent of GDP) in 2014/15 from the Income tax VAT Import Duty Excise Duty Other Revenues executed spending of KSh 169.4 billion (3.6 percent Sources: National Treasury (Quarterly Economic and Budgetary Review, August 2015) and Kenya National Bureau of Statistics. of GDP) in 2013/14 (Table 1.2). The driving forces Figure 1.15: Infrastructure sector accounted for a larger share of the budget, but executed almost a half Figure 1.16: Overall implementation was pulled back by energy sector Ministerial expenditure for FY 2014/15 Overall ministerial budget implementation for FY 2014/15 Energy infrastructure and ICT National security 99.9 Education Public administration and General economic and commercial affairs 95.7 international relations Education 93.4 Governance, justice, law and order Environment protection, water and natural resources 91.1 National security Social protection, culture and recreation 87.9 Agriculture, rural and urban development Environment protection, water Agriculture, rural and urban development 86.7 and natural resources Public administration and international relations 84.7 Health Health 79.6 Social protection, culture and recreation Governance, justice, law and order 76.2 General economic and commercial affairs Energy infrastructure and ICT 58.1 0 100 200 300 400 Billion, KSh 0 20 40 60 80 100 Target Actual Percent Sources: National Treasury (Quarterly Economic and Budgetary Review, Sources: National Treasury (Quarterly Economic and Budgetary Review, August 2015). August 2015). June 2015 | Edition No. 12 9 The State of Kenya’s Economy Table 1.2: County governments’ budget framework, 2013/14–2014/15 2013/14 2014/15 Budget Actual Budget Actual, third quarter Item (KSh billion) KSh billion) KSh billion) (KSh billion) Expenditure 288.6 169.4 321.6 170.0 Development 123.4 36.6 140.3 117.0 Recurrent 165.2 132.8 181.3 53.0 Revenue 280.8 224.0 338.1 203.7 National transfer 213.4 193.4 242.4 138.1 Equitable share 190.0 226.7 Conditional grants (level 5 hospital) 1.9 Conditional grants of on-going projects 13.9 Local revenue 67.4 26.3 57.2 25.2 Balance brought forward 38.1 40.5 DANIDA 0.7 Balance –7.8 54.7 17.9 33.7 Sources: National Treasury (Quarterly Economic and Budgetary Review, May 2015; Medium-Term Budget Policy Statement, February 2015) and Office of the Controller of Budget. Note: Quarterly Economic and Budgetary Review for IV quarter does not separate recurrent and development expenditure. behind the increase was the surge in allocations of the budget to 13.3 percent, education rose from for development spending to KSh 139.2 billion 0.8 percent to 8.3 percent, and agriculture rose from (equivalent to 2.4 percent), just KSh 36.6 billion (0.7 1.8 percent to 7.7 percent. percent of GDP) was spent on development projects Figure 1.17: More emphasis was put on priority sectors in 2014/15 in 2013/14. County government revenue rose from KSh 224.0 billion (4.4 percent of GDP) to KSh 338.1 General public services billion (5.9 percent of GDP), KSh 226.7 billion of it in Health the form of the equitable share. Based on the local Transport Education revenue outturn for the previous fiscal year, county Agriculture governments revised local revenue collection Housing and community amneties potential downward. County revenue stood at Other economic affairs KSh 62.5 billion (1.1 percent of GDP) for 2014/15, Environmental protection lower than the KSh 67.4 billion (1.3 percent of GDP) Recreation, culture and religion Social protection budgeted for 2013/14. General economic affairs -15 5 25 45 65 85 Budget operations at the county level shifted to Percent of total expenditure priority sectors of service delivery. The budget 2013/14 2014/15 allocated to general public services fell from Source: Kenya National Bureau of Statistics (Economic Survey, May 2015). KSh135.2 billion (2.7 percent of GDP) in 2013/4 to KSh 108.7 billion (1.9 percent of GDP) in 2014/15, The budget outturn for the first three quarters equivalent to 35.9 percent of the total 2014/15 of 2014/15 showed significant improvement in budget (down from 83.8 percent in 2013/14). The execution, but there is still a long way to go (Figure decline created room for priority sectors (Figure 1.18). The average execution rate stood at 52.9 1.17). The health sector budget share increased percent in March 2015—much higher than the 32.2 from 5.3 percent of the budget in 2013/14 to 19.4 percent realized in March 2014. Recurrent budget percent in 2014/15, transport rose from 3.7 percent utilization was 64.5 percent, while the development 10 June 2015 | Edition No. 12 The State of Kenya’s Economy Figure 1.18: Despite significant improvement, execution of the development budget remained low 80 Actual expenditure as percent of gross estimate 70 60 Average county budget execution rate (Quarter three, 2014/15) 50 40 30 20 10 0 Source: Office of the Controller of Budget 2015 execution rate was 37.8 percent. The modest prices up and dislodge inflationary expectations that improvement was attributable to the increased the government had managed to keep within target. number of staff and staff capacity building. The money market has experienced significant Citizens, the media, and the County Assembly volatility, although it has not been as volatile as played a growing role in budget preparation it was in 2011/12. Both the interbank and the and monitoring (see Part 3). Their involvement Treasury bill rate experienced volatility as the increased pressure on county governments to money market experienced liquidity shortages deliver and may improve accountability. However, caused by the CBK’s sale of foreign exchange in challenges continue to hinder full implementation domestic market to stop the shilling from sliding of the budget at the county level. They include sharply against the U.S. dollar. In addition, the reliance on manual entry of financial transactions build-up of government deposits at the CBK at the instead of fully adoption of the Integrated Financial start of the fiscal year mopped up liquidity in the Management Information & System (IFIMIS), the banking system and created shortages in the wider lack of an internal audit function, and use of local market. These shortages caused volatility in the revenue at source before depositing it into county interbank market (Figure 1.19). revenue funds. Figure 1.19: The interbank market has been volatile, albeit less than in 2011 1.3 The Central Bank of Kenya responded to 60 pressure from the real and external sectors by Interbank volatility (percent) 50 raising its benchmark rate T he central bank rate rose 300 basis points to 11.5 40 percent in July 2015. The previous rate of 8.5 30 percent had been left unchanged for 25 consecutive months (since May 2013). The CBK faced pressure 20 to stem volatility in the foreign exchange market 10 and to halt inflationary pressure, which had been building. Rising inflationary pressure from both food 0 prices and local prices of imports (emanating from the depreciation of the shilling) threatened to push Source: Central Bank of Kenya. June 2015 | Edition No. 12 11 The State of Kenya’s Economy The central bank rate continues to coordinate in the central bank rate and the Kenya Bankers money markets rates. Despite volatility, both the Reference Rate, they are set to increase in the second interbank rate and the 91-day Treasury bill rates are half of 2015. Deposit rates remained stagnant as in moving around the central bank rate (Figure 1.20). the 2014, at 6.6 percent. As a result, interest rate The interbank rate averaged 11.8 percent in June spreads (lending rates minus deposit rates) declined 2015, 490 basis points above the December average 100 basis points to stand at 8.8 percent in June 2015. and 520 basis points above the average for June 2014. The 91-day Treasury bill also experienced volatility, Monetary operations are tightening liquidity. The but it stood at 8.3 percent, a marginal decline from volatility of the shilling vis-à-vis the dollar and other the December value. major currencies forced the CBK to draw down its foreign exchange reserves by injecting dollars into Long-term rates declined marginally, despite the banking system. When the CBK sells dollars to accommodative monetary policy. Long-term commercial banks, it receives shillings in return, lending rates fell 90 basis points in the 12 months which is equivalent to mopping up liquidity. As a ending June 2015 and 50 basis points in the first half result, the growth of reserve money and monetary of 2015 (Figure 1.21). However, with the increase aggregates slowed. Reserve money growth moderated from 18.5 percent in December 2014 Figure 1.20: The central bank rate continues to coordinate short-term rates, despite volatility in the money market to 15.0 percent in May 2015. M1 and M2 growth 30 also slowed, from 13.2 percent and 18.6 percent in December 2014 to 9.6 percent and 16.4 percent in 25 June 2015 (Figure 1.22). On the contrary, M3, which Interest rate (percent) 20 include foreign currency deposits grew by 18.6 percent in June 2015 higher than 16.7 percent in 15 December 2014. 10 Tight liquidity has slowed the growth of private 5 sector credit. The global liquidity situation in the 0 banking system is affecting the amount of money commercial banks allocate for credit. Banks keep excess balances in order to avoid being caught short Interbank 91-day Treasury bill rate Central bank rate Source: Central Bank of Kenya. in meeting their prudential guidelines and liquidity ratios. In the first quarter of 2015, the average Figure 1.21: Long-term interest rates declined in response to the liquid ratio was 39.9 percent, up from 37.7 percent Central Bank’s monetary policy stance, albeit very slowly in December 2014 (the minimum statutory limit is 30 20 percent). As a result, the growth of total private credit fell from 25.8 percent in March 2014 to 20.5 Long-term interest rate (percent) 25 percent in June 2015. 20 15 Private credit increased significantly in agriculture and manufacturing. Growth increased in only 10 three sectors: agriculture (from 7.7 percent to 22.3 5 percent), manufacturing (from 17.3 percent to 21.1 percent), and building and construction (from 2.0 0 percent to 12.7 percent). Credit to business services dropped from 45.5 percent to 27.8 percent, real Deposit Lending Interest rate spread Source: Central Bank of Kenya. estate declined from 28.4 percent to 19.6 percent, 12 June 2015 | Edition No. 12 The State of Kenya’s Economy Figure 1.22: Monetary operations slowed the growth of monetary aggregates Monetary aggregates, February 2011-June 2015 40 40 35 35 30 Annual growth (percent) Annual growth (percent) 30 25 25 20 20 15 15 10 10 5 5 0 0 Reserve money M0 M1 M2 M3 M0 M1 Private sector credit growth Source: Central Bank of Kenya. Figure 1.23: Credit to the agriculture and manufacturing sectors increased, while credit to services declined Unweighted percentage change in private credit, by sector, Weighted percentage change in private credit, March 2014-March 2015 March 2014-March 2015 Business services Real estate Agriculture Business services Manufacturing Transport & communication Real estate Finance and insurance Trade Agriculture Building & construction Consumer durables Consumer durables Building & construction Other activities Mining & quarrying Mining & quarrying Other activities -40 -20 0 20 40 60 -2 -1 0 1 2 3 4 Change in volume of credit to private sector (percent) Contribution to credit growth (percentage points) 2014 2015 2014 2015 Source: Central Bank of Kenya. trade fell from 25.2 percent to 18.8 percent, and Figure 1.24: Loans are concentrated in three nonproductive sectors consumer durables decreased from 22.5 percent Mining and quarrying to 12.4 percent (Figure 1.23). Private households Tourism, restaurants and hotels (26 percent), trade (19 percent), and real estate Building and construction (15 percent) accounted for 60 percent of the total Agriculture volume of loans. The share of loans to productive Financial secrvices sectors was low, except for manufacturing (12 Energy and water percent) (Figure 1.24). There was a 3.6 percent Transport and communication nominal increase in the volume of loans to all sectors Manufacturing Real estate of the economy. Trade Personal/household The quality of bank assets deteriorated marginally 0 100 200 300 400 500 600 in the first half of 2015. The share of nonperforming KSh billion loans to total loans increased from 4.3 percent Source: Central Bank of Kenya. in December 2014 to 5.6 percent in June 2015 June 2015 | Edition No. 12 13 The State of Kenya’s Economy (Figure 1.25). Ten of 11 economic sectors registered The equities market rose in 2014 but is increases in nonperforming loans, as the economy underperforming in 2015. The Nairobi Securities missed its high-growth target. The share of Exchange underperformed in 2014 (Figure 1.27). nonperforming loans increased 27.6 percent in Its index rose 0.4 percent in the 12 months ending building and construction and 20.5 percent in real in June 2015, to stand at 4,906. Performance was estate in the first quarter of 2015. weaker than some global benchmarks. Over the same period, for example, the Dow Jones Industrial Figure 1.25: The volume of nonperforming loans increased in most average rose 4.7 percent. Security concerns; better sectors performance on other African exchanges (such as Energy and water Nigeria’s); and depreciation risk, which reduced the Mining and quarrying real return to foreign investors, made Kenya’s stock Financial secrvices market less attractive than it had been. Tourism, restauranta and hotels Agriculture Figure 1.27: Lower growth prospects and depreciation risk reduced the attractiveness of the Nairobi Securities Exchange Manufacturing 6,000 19,000 Transport and communication Building and construction Dow Jones Industrial average 18,000 Real estate 5,500 NSE index (1966 = 100) Personal/household 17,000 Trade 5,000 0 5 10 15 20 25 30 35 16,000 KSh billion Source: Central Bank of Kenya. 4,500 15,000 The balance sheet of Kenya’s banking sector 4,000 14,000 continues to grow. Net assets increased 19.5 percent to KSh 3.6 trillion in June 2015, liabilities and -share index NSE 20 Dow Jones Industrial average advances increased 20.7 percent to KSh 2.17 trillion, Source: Nairobi Securities Exchange. deposits increased 18.1 percent to KSh 2.57 trillion, and capital and reserves increased 24.3 percent to 1.4 The external sector remains vulnerable KSh 530.1 million (Figure 1.26). Figure 1.26: The banking sector continued to experience strong growth T he vulnerability of the external sector is highlighted by the depreciating shilling and the current account deficit, which has remained high 4,000 despite a significant drop in oil prices. The Kenya shilling lost more than 8 percent of its value in the 3,000 first 6 months of 2015 as volatility in the foreign exchange market continued, forcing the monetary KSh billion 2,000 authorities to raise the central bank rate to calm the market. Volatility reflects a strong dollar and fears about Kenya’s current account. The oil import 1,000 bill has fallen following the significant fall in oil prices. However, imports of capital and equipment 0 increased by more than 25 percent driving the Assets Liabilities Deposits Capital and reserves overall balance of payment to negative territory. Source: Central Bank of Kenya. 14 June 2015 | Edition No. 12 The State of Kenya’s Economy Figure 1.29: Exports continued to underperform, and imports Figure 1.28: The current account deficit remained very high remained high 15 30 10 20 10 Percent of GDP 5 Percent of GDP 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 0 0 (June) -10 -5 -20 -10 -30 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 -15 -40 (June) Overall balance Other flows Current account Short-term flows (including net Exports (fob) Nonfactor services Balance of trade errors and ommissions) Imports (non-oil) Oil imports Balance of trade (non-oil) Source: Central Bank of Kenya. Source: Central Bank of Kenya. The current account improved in 2015, but the main merchandise exports. In the first quarter 2015, deficit as a percentage of GDP remains high and tea exports declined 1.1 percent, after falling 12.0 still poses risks. The current account’s share of percent decline in 2014; manufactured exports GDP fell marginally from 10.0 percent in December, declined 20.3 percent; horticulture declined 5.5; and 2014 to 9.8 percent in June 2015 (Figure 1.28). chemical exports fell 7.9 percent. Only the exports Both exports and imports declined as a percentage of coffee, which rose 12.7 percent, and oil products, of GDP, with exports falling from 10.1 percent to which grew 71.5 percent, but these increases were 9.2 percent and nonfactor services falling from 5.8 low by historical standards. percent to 5.4 percent from their December 2014 levels. Imports of goods declined from 31.0 percent The growth of merchandise imports was robust, to 28.8 percent of GDP. driven by demand for machinery and equipment. Kenya’s main imports registered robust growth in Exports of goods and services continue to lag imports. 2015 (Figure 1.31). The exception was oil imports, After a 6.0 percent growth in 2014, merchandise which fell 18.8 percent. Imports of machinery and exports decelerated by 5.4 percent in the first half of equipment, which constitute 34 percent of Kenya’s 2015 (Figures 1.29 and 1.30). Sluggish export growth total imports, grew 27.4 percent in the first half of was attributable to poor performances of Kenya’s 2015, from 33.2 percent in 2014. Import demand from Figure 1.30: Exports continued to stagnate against imports Exports of goods and nonfactor services, 2006-15 25 80 70 20 Percent of GDP 60 15 Percent 50 10 40 5 30 0 20 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2006 2008 2010 2012 2014 (June) Exports of goods Exports of goods and non-factor services Ratio of exports plus non-factor services to imports Exports of non-factor services Source: Central Bank of Kenya. June 2015 | Edition No. 12 15 The State of Kenya’s Economy Figure 1.31: Trade indicators have been weakening The financial account continues to finance the 60 current account deficit. It declined in June 2015, 50 falling to 7.0 percent of GDP (US$4.4 billion), down from 12.2 percent (US$7.5 billion) in December 40 2014. Significant movements in both long-term and Annual growth (percent) 30 short-term flows accounted for the change. Official 20 long-term flows declined from US$2.9 billion (3.8 percent of GDP) in December 2014 to US$1.6 billion 10 (2.5 percent of GDP) in June 2015. However the 0 level of the financial account fell short of the current -10 account size driving the overall deficit into overall -20 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 (June) BOP deficit. Exports of goods and nonfactor services Imports (cif) Services Source: Central Bank of Kenya. Short-term flows are still significant in the financial the standard gauge railway and other infrastructural account, despite the decline in 2015. Short-term projects drove growth in machinery and transport flows (including net errors and omissions) fell from equipment imports. Imports of chemicals rose 8.6 KSh 3.5 billion (5.8 percent of GDP) in 2014 to KSh percent and imports of manufactured goods rose 1.7 billion in 2015. The decline reflected significant 1.6 percent in the first half of 2015. revision by the CBK of net errors and omission, which fell from KSh 0.8 billion (1.2 percent of GDP) to KSh The importance of long-term flows in financing -1.12 billion (-1.9 percent of GDP). Short-term flows the current account deficit increased in 2014 and (excluding net errors and omissions) increased from remained significant in the first half of 2015, as $2.8 billion (4.5 percent of GDP) in December 2014 short-term flows declined. Both short-term flows, to $2.9 billion (4.6 percent of GDP) in June 2015. which declined from 5.8 percent to 2.7 percent of GDP, and long-term flows, which fell to 5.0 percent International reserves are sufficient to cushion from 6.5 percent of GDP, financed the current against short-term shocks. Kenya’s official reserves account. The increase in long-term flows in 2014 stood at $7.2 billion, equivalent to 4.6 months was attributed to receipts from the US$2 billion of import cover as of June 2015 (Figure 1.33). Eurobond issue (Figure 1.32). Commercial banks’ foreign exchange reserves Figure 1.32: The Eurobond proceeds enhanced official flows in 2014, Figure 1.33: Foreign exchange reserves have grown, cushioning Kenya but short-term flows still dominate from short-term shocks 8 9 6 7 7.9 8 6 7.2 5 Reserves (billions of dollars) 7 6.6 5 Billions of dollars Months of cover 6 5.7 4 4 5 3 4.2 3 3.8 4.0 2 4 1 3 2.9 2 0 2 1 -1 1 -2 2010 2011 2012 2013 2014 2015 (June) 0 0 Capital account Financial account 2008 2009 2010 2011 2012 2013 2014 2015 Official, medium and long-term Private, medium and long-term (June) Short term (including portfolio flows) Net errors and omissions (NEO) Official reserves Months of import cover Source: Central Bank of Kenya. Source: Central Bank of Kenya. 16 June 2015 | Edition No. 12 The State of Kenya’s Economy Figure 1.34: Remittances are the single most important source of foreign exchange inflows in Kenya 160 140 1,600 2.5 140 1,400 120 2.0 120 1,200 100 Monthly (US$ Million) Millions of dollars Millions of dollars 100 1,000 1.5 Percent of GDP 80 80 800 60 600 1.0 60 40 400 40 0.5 20 200 20 - 0 0 0 Monthly 12 -month average 12-month cumulative, million Percent of GDP Source: Central Bank of Kenya. The shilling is experiencing significant volatility, increased by $0.4 billion to stand at $2.3 billion. The proceeds from the Eurobond issue accounted for for a variety of reasons (Figure 1.35). The dollar is the significant increase in reserves.1 strengthening against most of the world’s currency, as a result of the Federal Reserve’s tapering of its Remittances continue to grow. Twelve-month monetary stimulus; short-term flows are slowing, as average remittances increased 10 percent between other markets in Africa become attractive; Kenya June 2014 and June 2015, to US$124 million. Kenya has been experiencing a structural current account received US$1.5 billion worth of remittances, deficit since 2003; and, the government has been equivalent to 2.4 percent of GDP, in the 12 months undertaking an expansionary fiscal path. ending in June 2015. Remittances are now the single most important source of foreign exchange The Kenyan shilling has performed well against inflows in Kenya, bringing in more than official regional currencies. Between the end of December development assistance (Figure 1.34). Remittances 2014 and the end of June 2015, it depreciated boost household consumption and investment. They 8.7 percent against the dollar, moving from KSh have been credited with spurring the property boom 90.71 to KSh 98.64. Against the pound, the shilling in Kenya and activity in the stock market. depreciated 10.2 percent, moving from KSh 140.81 Figure 1.35: The foreign exchange market has been volatile, albeit not as volatile as in 2011 4.0 Volatility of the shilling against the dollar (percent) Period of excess 3.5 macroeconomic volatility 3.0 2.5 2.0 1.5 Exchange rate market stable without excess volatility 1.0 0.5 0 Source: Central Bank of Kenya. 1 Proceeds from the Eurobond were sold to the CBK and the counterpart funds deposited with government accounts at the CBK. June 2015 | Edition No. 12 17 The State of Kenya’s Economy to KSh 155.10. The shilling depreciated 0.2 percent the shilling against hard currencies. The tide is now against the euro, moving from KSh 110.13 to KSh turning, and the shilling is finding its true value. 110.40. Regionally, the shilling appreciated 5.3 percent against the Tanzanian shilling and 8.7 The trade-weighted nominal and real exchange percent against the Ugandan shilling. It depreciated rates show that the shilling continued to appreciate 4.1 percent against the South African rand. against the currencies of its trading partners. In the 12 months ending in May 2015, the shilling Volatility driven by the end of the Fed stimulus has depreciated 3.2 percent in nominal terms while hurt countries like Kenya, which have been net it appreciated 3.1 percent in real terms (Figure beneficiaries of short-term inflows. The interest 1.36). Although Kenya is not benefiting from the rate differential that existed between shilling- current depreciation of the shilling, the currencies denominated assets and assets denominated in of its trading partners are feeling the same heat dollars or euros since 2008 triggered an inflow of against the dollar. short-term flows into Kenya, artificially strengthening Figure 1.36: Despite recent volatility, the real exchange rate continued to appreciate Index of exchange rate, November 2000-September 2014 Volatility of exchange rate, November 2010-September 2014 150 30 140 25 Percentage change in exchange rate 130 20 Index (January 2003 = 100) 120 15 10 Depreciation 110 5 100 0 90 -5 80 -10 70 Appreciation -15 60 -20 50 -25 Nominal effective exchange rate Real effective exchange rate Nominal effective exchange rate Real effective exchange rate Source: Central Bank of Kenya. 18 June 2015 | Edition No. 12 2. Growth Outlook for 2015–17 T he World Bank projects 5.4 percent growth in 2015 and 5.7 percent growth in 2016. Ongoing government infrastructural spending and higher consumption will support this growth. Adequate rains in 2015 will improve agricultural performance. Foreign exchange market volatility and expansionary fiscal policy could raise inflationary pressures, leading to higher lending rates and a slowdown in growth. 2.1 Kenya’s growth prospects continue to be The continuing infrastructural spending on the favorable standard gauge railway is having a catalytic effect on T he World Bank projects that Kenya will grow related sectors of the economy, including building at 5.4 percent a year in 2015 and 5.7 percent and construction, heavy manufacturing, engineering in 2016. These estimates, which are lower than the services, and many more. Thanks to adequate rains projections made in the December 2014 Update, in 2015, the agriculture sector expects a bumper take into account more recent data on exchange harvest, which should increase consumption. rate, inflation fiscal consolidation, and balance of Government recurrent spending will also power payments pressures. The projected growth of 5.4 public consumption, leading to higher growth. A weaker shilling in real terms will stimulate exports, percent is still robust by African standards, and which also boosts growth. it is higher than the average for lower-middle- income countries. Growth is projected to pick up Macroeconomic risks emanating from the foreign to 5.7 percent in 2016, supported by the positive exchange market volatility and fiscal policy externalities from infrastructural projects currently concerns could feed into inflation (and inflationary being undertaken in the railway, roads, and energy expectations). If inflation rises, the CBK could sectors. Growth will continue to exceed the average decide to raise the central bank rate again to calm for both Africa and lower-middle-income countries, the market. Yields on government securities and making Kenya one of the fastest-growing countries. lending rates would like rise in tandem, increasing Figure 2.1: The outlook for economic growth in Kenya is robust returns on shilling-denominated assets, making them attractive. A steep rise in interest rates would 7.2 6.9 dampen aggregate demand, as both consumption 6.7 6.7 and investment spending will slow down and reducing growth. GDP growth (percent) 6.2 6.1 5.7 5.8 In the high-growth scenario, GDP will grow 5.8 5.7 5.7 5.7 percent in 2015 and 6.7 percent in 2016. Under 5.3 5.4 5.5 5.2 this scenario, volatility in the foreign exchange 5.1 market is contained, capping inflationary pressures; 4.7 4.6 consumption demand is stronger than in the 4.2 baseline, driven by higher private sector credit 2012 2013 2014 2015 forecast 2016 2017 forecast forecast from the middle class in 2015 to 2016; and ongoing Baseline High-case scenario Low-case scenario investments in public infrastructure starts to pay off Source: World Bank estimates. in terms of lower electricity prices and crowding in private investment. Real incomes increase, spurring In the baseline scenario, GDP is projected to grow economic activities. Low oil prices finally translate at 5.4 percent in 2015 and 5.7 percent in 2016, into higher real incomes, raising aggregate demand. thanks to sustained aggregate demand powered Growth is higher, but net exports remain a drag as by both infrastructural and consumption spending. imports continue to increase. June 2015 | Edition No. 12 19 Growth Outlook In the low-case scenario, growth is 5.1 percent Figure 2.2: The number of tourists declined,reducing travel credits in the balance of payments in 2015 and 5.5 percent in 2016. In this scenario, 2.5 1,400 consumption demand recovers moderately, as higher lending rates slow private sector credit growth and 1,200 Tourism arrivals (in thousands) 2.0 investment demand tampers off. Aggressive action 1,000 Percent of GDP by the CBK to increase the benchmark rate to calm 1.5 800 volatility in the foreign exchange market could reduce demand for private credit, which would dampen 1.0 600 growth. A deterioration of the security situation, 400 which would require that more budget resources be 0.5 200 reoriented to the security sector, would crowed out resources for productive sectors. 0 0 2009 2010 2011 2012 2013 2014 2015 Travel credit, percent of GDP Tourism arrival 2.2 Lack of security took a toll on Kenya’s economy Source: Central Bank of Kenya and Kenya National Bureau of Statistics. in 2015 T he lack of security adversely affected the The decline in the number of tourists is hurting tourism sector and country risk assessments. the balance of payments. One of the ways tourism Recurrent security threats had a significant impact contributes to Kenya’s economy is by bringing in on Kenya’s tourism sector in the first half of 2015. foreign exchange. Travel credits in the balance of Security concerns following terrorist attacks by al payments declined from a peak of 2.2 percent in Shabaab hit the tourism sector, one of Kenya’s major 2011 to 1.2 percent in 2015. foreign exchange earners and a significant source of employment. Multiple issuances of travel advisories Security spending has increased in response to against visiting Kenya significantly reduced the terrorist activity. The government is strengthening number of tourists in the first half of 2015: The the security sector. Several budget lines within number of tourists visiting Kenya declined 39 the security sector have been increased, with percent from a peak of 1,264,926 in 2011 to 769,819 an aim of strengthening Kenya’s security at its in the year ending April 2015. In addition to reducing borders, including by (a) increasing investments in tourism revenues, terrorist activity shakes investors’ security infrastructure such as housing, offices, and confidence in the economy, adversely affecting FDI security installations and equipment; (b) developing and portfolio flows. standards and guidelines for installation of integrated closed-circuit television (CCTV) systems Table 2.1: Actual spending by ministries, departments, and agencies in the security sector (Percent of total budget) Ministry 2011/12 2012/13 2013/14 2014/15 2015/16 Ministry of Interior and Coordination of National Government 7.9 8.2 11.3 8.4 8.0 Ministry of Defense 9.3 9.5 9.4 6.2 6.1 National Intelligence Services 2.0 1.7 1.9 1.5 1.3 National security (total) 19.2 19.5 22.6 16.1 15.5 Source: Office of the Controller of Budget (National Government Budget Implementation Review Report, FY 2011/12 and Third Quarter FY 2014/15) and National Treasury (Highlightof the 2015/16 Budget, June 2015) 20 June 2015 | Edition No. 12 Growth Outlook Figure 2.3: National security is one of the largest sectors in the 2015/16 budget a. Actual expenditure, 2011/12 b. Budget allocation, 2015/16 Social protection Health Social protection 4% Economic and 2% commercial 4% Economic and Agriculture affairs Governance commercial 4% 2% 2% affairs Environment Environment protection 2% protection 4% 5% Education 26% Agriculture Energy and Governance 5% infrastructure 6% 27% Health 8% National security (plus Ministry of Interior) National security (plus 16% Public Ministry of Interior) administration 19% 11% Education 22% Energy and Public administration infrastructure 16% 15% Source: Office of the Controller of Budget (National Government Budget Implementation Review Report, Fiscal Year 2011/12 and Third Quarter FY 2014/15) and National Treasury (Highlighted of the 2015/16 Budget, June 2015). Note: Figures show share of total ministerial budget estimate for 2015/16. in all urban buildings; (c) strengthening institutional goods that use oil as inputs (for example, shipping and legal framework for border security; (d) and fertilizer). These benefits were not enjoyed undertaking a comprehensive training program on fully by Kenyans consumers because of the shilling’s modern personnel management and policing; and depreciation and bureaucratic pricing hurdles. (e) investing in a modern and functional command and control. The budget for Ministry of Interior (and Lower inflationary pressure as a result of the decline coordination of national government) has more in oil prices should have increased the real incomes than doubled, from KSh 55.1 billion in 2011/12 to of the general populations, providing a boost to KSh 120.4 billion in 2015/16 in current Kenya shilling the economy. The decline was also supposed to terms. Over the same period, the Ministry of Defense have improved the current account position and budget rose 43 percent, from KSh 64.7 billion to 92.4 eased pressure on the shilling. In the event, neither billion, and the National Intelligence Service budget effect materialized. The depreciation of the shilling increased 44 percent, from KSh 14 billion to KSh 20.1 mitigated the lower oil price pass-through, while billion. As a share of total budget, national security increased use of machinery and capital equipment sector is one of the top four sectors, after energy, kept the current account high, forcing the CBK to infrastructure and ICT, and education (Figure 2.3). increase the benchmark rate. 2.3 The transmission of lower global oil prices in Households were supposed to benefit from lower 2014/15 to the domestic economy was poor oil prices, which were supposed to trickle down K enya is oil dependent, with about a quarter of to consumers and raise real income and increase its imports bill attributed to oil. Most factors aggregate demand. In Kenya, there is an automatic of production use oil as an input in the production fuel price adjustment mechanism built into tariff- process; the pass-through effect of changes in oil setting process usually passed to consumers and prices to domestic inflation is therefore significant. the government already dropped fuel charges Declining oil prices were supposed to boost to consumers late last year and earlier this year. domestic economy through first- and second round- However, these prices have already started inching effects. First-round effects affect goods and activities up to compensate for depreciation. They will that use oil directly (for example, transport and increase further as a result of new government fuel electricity). Second-round effects occur through levy increase. June 2015 | Edition No. 12 21 Growth Outlook The December Update predicted that the drop in investment elsewhere but continue operations in global oil prices would lead to a decrease in the Kenya as the breakeven point is S40–$50 a barrel. current account from 8.3 percent of GDP in 2013 to 4.7 percent in 2017 as a result of falling oil 2.4 Risks to growth remain significant in the near prices. Although the oil import bill has not grown as term T expected, the current account has not fallen as much he risks to Kenya’s outlook are similar to those as expected, as a result of imports of machinery and highlighted in the December 2014 Update. On capital equipment. the domestic front are the security environment Figure 2.4: The volume of oil imports volume remained roughly and the fiscal position. On the external front are constant between 2009 and 2013, but the value soared the winding down of monetary easing by the Fed. Imports of petroleum products Sluggish growth in the Euro area will dampen the 4,000 300 growth pick-up the economy expects to see in the 250 near to long term. The risks from China as much as Tonnes (in thousands) 3,000 they affect the global markets are minimal on Kenya 200 and are through the US dollar. Kenya’s export to Ksh billion 2,000 150 China are less than one percent of the total exports while its imports from China are at 15 percent of 100 1,000 the total. The direct transmission mechanism from 50 events in China are very weak and through the US 0 dollar as the renminbi tracks it. - 2009 2010 2011 2012 2013 Volume The security situation is dampening growth Value Source: Kenya National Bureau of Statistics. prospects. Al Shabaab terrorists continue to threaten Kenya’s national security. Terrorist activities have Oil imports comprise predominantly petroleum scared away tourists and potential investors. Tourist products rather than crude oil, as Kenya’s only oil arrivals in 2015 have declined by over 30 percent refinery is winding down production. The prices of since 2011 peak. Hotel occupancy rates have also light diesel oil and jet/turbo fuels are less volatile than plummeted with several coastal hotels closed and the headline crude oil price. If the price of imported majority of those remaining operating below 50 petroleum falls 25 percent, the overall cost of oil percent capacity while international conferences imports would decline by at least 1 percent of GDP. declined 19.4 percent in 2014 according to the The decline in the dollar price of petroleum products economic survey. Tourism’s contribution to GDP has been partially offset by the appreciation of the declined by one third in 2014. However, the travel dollar, whose value rose almost 8 percent between advisories have since been lifted but this might have December 2014 and June 2015. come late for 2015 bookings. [AU: I recommend moving this material to the earlier discussion of Kenya is bound to collect more tax revenues from security and tourism to avoid repetition. the levy fund, which is based on volume. In June 2015 the government increased the petroleum levy Fiscal consolidation is essential to ensure macro by 15.4 percent, from KSh 19.5 per liter to KSh 21.5. stability. The overall fiscal deficit has doubled from The increase absorbs part of the benefits of lower oil 4.5 percent as share of GDP to an estimated 6.3 prices to consumers. percent in 2014/15 to a budgeted 8.7 percent in 2015/16. Devolution added pressure to the fiscal The drop in oil prices has mooted exploration across position, but it is the lack of rationalization of spending Africa. Tullow Oil—the company that discovered after devolution, the duplication of functions at the oil in Kenya, recently stated that it would slash national and county level, and the strong appetite 22 June 2015 | Edition No. 12 Growth Outlook for spending at both levels of government that or Africa as a whole. With the ending of the Fed’s have worsened Kenya’s fiscal position. Although monetary stimulus, the flow of cheap capital that heavy infrastructural spending is a boon for Kenya’s has been funding the current account could dry up, production space and future growth, the short- to creating volatility in the foreign exchange market. medium-term macro-fiscal framework is shaky Even though the CBK’s action to raise interest should there be a macroeconomic shock. The lack of rates is deemed to be appropriate in attracting fiscal consolidation is raising jitters in the market on capital inflows, higher interest rate could dampen whether Kenya has a twin deficit problem. aggregate demand and growth prospects. In addition, the strong dollar in the fourth quarter of The volatility in the foreign exchange market has 2014 through 2015 has already offset part of the exposed Kenya’s vulnerability to the winding down benefits of low international oil prices. of the U.S. monetary stimulus. Kenya’s economy has benefited immensely from the Fed stimulus, in Deflation in the Euro area poses a risk to exports. terms of both short- and long-term capital inflows. Weak demand for Kenya’s exports will continue to The volatility that Kenya is experiencing has already drag down overall growth. Europe is one of the forced the CBK to increase its benchmark rate to main destinations of Kenya’s merchandise exports. shore up the shilling. Yields on shilling-denominated It is also a main source of tourists to Kenya, as well assets have been high, outstripping the depreciation as the source of most equity funds. A continued risks and large interest rate differentials, making or deeper slowdown in Europe would hurt Kenya’s Kenya a more attractive destination for world growth prospects. capital than many other emerging economies Box 1.1: Impact of China’s Slowdown in Kenya – A preliminary assessment The devaluation of the Renminbi/yuan in August created heighten uncertainty in the global financial markets. China's biggest currency intervention in August, 2015 jolted the world financial and equity markets. Against the dollar, the renminbi was devalued by 3 percent on August 11-12, the largest single move since 1994.2 This mild devaluation was seen to bolster Chinese exports and to re-invigorate economic growth in the world's second largest economy after its industrial production, investment and retail sales data for July were weaker than expected and exports dropping by 8.3 percent in July 2015. The Chinese economy faltered as it continued to experience a string of weakening output growth figures going back to last year and the authorities came under intense pressure internally to address the slowdown. Figure Box 1: The shilling as depreciated against the US dollar and The Kenya Shilling has depreciated significantly against Renminbi Yaun the renminbi yuan. Against the US dollar and the Chinese 125 renminbi, Kenya shilling has depreciated 20 and 17 Normalized index (July 2014 = 100) percent respectively (Figure Box 1). Trade transactions 120 between China and Kenya (and wider EAC) is undertaken 115 in US dollar, however, Renminbi transactions are rare but available. Since the yuan loosely tracks the dollar, it has 110 been dragged higher – keeping its differential with the US 105 dollar roughly the same. This implies Chinese goods in the region have become expensive as the regional currencies 100 weakened against the US dollar and Chinese yuan. In 95 nominal terms Figure 1.37 depicts that Renminbi tracks the US dollar and that in nominal terms, imports from 90 China are 17-20 percent more expensive in local currency Jul-14 Aug-14 Sep-14 Oct-14 May-15 Jun-15 Aug-15 Sep-15 Apr-15 Feb-15 Mar-15 Nov-14 Dec-14 Jan-15 Jul-15 terms as the shilling has lost 17-20 percent of its value. USD/KSh Chinese Yuan/KSh Source: Central Bank of Kenya database 2 The Renminbi/Yuan was pegged to the US Dollar before 2015. However the Chinese’s currency reform unpegged it from a strict tie with the dollar in favor of a looser tracking policy that in theory allows the currency to move 2 percentage points in either direction. June 2015 | Edition No. 12 23 Growth Outlook Box 1.1: Impact of China’s Slowdown in Kenya – A preliminary assessment (Continued) Kenya has a strong trade relationship with China. The trade relationship between Kenya and China is in the later favor. Kenya’s exports to China only constitutes 0.8 % of total exports on average (2010 – 2013) while China is the second source of Kenya’s imports after India. The share of imports from China about 15 percent in 2014 as indicated in Figure Box 2. Figure Box 2: Kenya’s international trade favors China Kenya Exports Kenya Imports China China 1% 15% Rest of the world Rest of the world 99% 85% Source: Economic Survey (2014) Despite the strengthening of the renminbi, Chinese Figure Box 3: The growth of Chinese import to Kenya has very strong imports to Kenya has grown at tremendous rate. The 70 value of imports from China have grown at a nominal rate of 41 percent in the year to July compared to 10 60 percent in 2014. In US dollar terms, the value of imports 50 have grown at 36 percent in the same period compared to 9 percent in 2014 (see Figure Box 3). Chinese Growth of Imports 40 businesses supply the world with everything, and a 30 cheaper yuan will make Chinese exports less expensive 20 in the EAC regional market. 10 Kenya has strong financial flows with China. Kenya has 0 been a strong recipient of financial flows from China. Major infrastructural investments in roads and railway -10 Aug-10 Aug-11 Aug-12 Aug-13 Aug-14 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 (including the standard gauge railway) are being financed Jun-15 and implemented by Chinese companies. The controls Import Value (Kshs) Import growth (US$) on the currency have given Chinese businesses a high Source: Economic Survey degree of predictability when they plan investment abroad. A weaker renminbi would cripple Chinese companies who have loaded up on dollar-denominated debt. While the impact on Kenya’s balance of payment is not clear since there is transparency of Chinese flows, there is no indications that major projects the Chinese companies are involved in are under any significant threat. *- A deeper analysis of the full impact of China slowdown will be undertaken in the next edition of the Update 24 June 2015 | Edition No. 12 Growth Outlook 2.5 Several policy issues need addressing in the portfolio and other capital inflows have allowed medium term Kenya to consume more foreign goods than the K enya needs to undertake reforms to reduce the economy can pay for. Larger twin deficits are now structural imbalance in the external account, unavoidable, given the infrastructure investment which has not improved, despite a significant drop drive. They are not worrisome if they translate in the price of oil and the import bill. Kenya’s current into higher productivity. However, risks to external account stood at 9.2 percent of GDP at the end of and fiscal sustainability might arise if inflows in 2014 and remained high at 9.8 percent in June 2015. the future are not sufficient to repay private debt Kenya’s export sector has been lagging since the or fund dividends and declining primary balance mid-1990s (the last tea and coffee boom). As a result, deficits make public debt unsustainable. Unless the Kenya relies too heavily on short-term capital flows government starts fiscal consolidation soon, there is to service its current account. In order to service a potential risk of sudden reversal that could create and reduce external indebtedness, policy makers macroeconomic instability. need to focus on increasing the production of traded goods to enhance the capacity to generate foreign Kenya’s low level of national savings and domestic exchange. The government is working tirelessly to investment are muting growth, putting pressure on improve operations at the port of Mombasa and the external account. Low levels of investment imply infrastructure to support trade. An export master slower future growth, because they limit productive plan that would help shift resources toward the capacity and increase intertemporal insolvency. export sector is now critical. Kenya needs to increase its savings and investment ratios to enhance its creditworthiness in the eyes of Kenya is running a high fiscal deficit and a high international investors. High investment and savings current account deficit. Kenya’s current account provide a form of commitment to higher future increased from 2.0 percent of GDP in 2007 to 8.6 output, bolstering the perception that the economy percent in 2015, while the fiscal deficit increased will be able to service and reduce its external debt. from 1.8 percent of GDP to 6.3 percent (Figure 2.5). The fiscal expansion, which has involved Kenya’s fiscal position is not sustainable in the huge investments in infrastructure, has coincided medium term. Fiscal spending have driven the with capital inflows (both short and long term) pattern and level of growth since 2008. Various into the economy both in fixed-income securities fiscal expansion measures have led to growth and equities and official and private flows. These spurts (Figure 2.6) as well as increases in both the Figure 2.5: Kenya has a high current account deficit and Figure 2.6: Growth has been high during years of fiscal expansion a high fiscal deficit linked to increases in public debt 2 10 50 8 45 0 6 40 -2 4 35 Percent Percent 2 30 Percent of GDP -4 0 25 -6 -2 20 -4 15 -8 -6 10 -8 5 -10 -10 0 June June June June June June June June -12 2008 2009 2010 2011 2012 2013 2014 2015 Fiscal deficit (fiscal year ending June) Current account deficit (12 months cumulative up to June) Fiscal balance, percent of GDP GDP growth, percent Source: National Treasury (Quarterly Economic and Budgetary Review, May 2015); Source: Kenya National Bureau of Statistics and National Treasury (Quarterly Central Bank of Kenya; and Kenya National Bureau of Statistics. Economic and Budgetary Review, May 2015). June 2015 | Edition No. 12 25 Growth Outlook fiscal deficit (Figure 2.7) and public debt (Figure 2012/13 and 2013/14. These episodes raise the 2.8). The economic stimulus program of 2009– question of whether growth in Kenya is organic 10 enhanced growth, as did the devolution and (and therefore sustainable) or fiscally propelled increase in spending on public infrastructure in (and therefore unsustainable). Figure 2.7: Economic stimulus, elections, and devolution increased Figure 2.8: Big fiscal programs have reduced fiscal space and Kenya’s fiscal deficit increased debt ratios and vulnerability 60 30 2014/15 2013/14 50 2009/10 2011/12 25 2008/09 Fiscal balance, percent change 40 2010/11 Public debt, net (percent change) 30 20 2009/10 2013/14 2014/15 2012/13 2012/13 20 15 10 2011/12 0 10 -9.0 -8.0 -7.0 -6.0 -5.0 -4.0 -3.0 2007/08 -10 Fiscal balance, percent of GDP 5 2006/07 -20 - -30 0 (2010/11) 32 34 36 38 40 42 44 46 48 -40 Public debt, net (percent of GDP) Source: Kenya National Bureau of Statistics and National Treasury (Quarterly Source: Kenya National Bureau of Statistics and National Treasury (Quarterly Economic and Budgetary Review, May 2015). Economic and Budgetary Review, May 2015). 26 June 2015 | Edition No. 12 Special Focus: Enabling the Voices of Citizens June 2015 | Edition No. 12 27 Growth Outlook 3. Special Focus: Enabling the Voices of Citizens K enya’s Constitution and legal framework on devolution place strong emphasis on public participation, transparency, and accountability as a means of improving efficiency, equity, and inclusiveness of government and service delivery. Multiple studies have documented how governance weaknesses limit Kenya’s socioeconomic development and impede its progress toward national goals for economic growth, job creation, social inclusion, equity, and poverty reduction. Devolution creates a new opportunity, as well as new challenges, for addressing governance weaknesses. Enabling citizen voice is critical to making devolution a success. There is increasing evidence that citizen engagement can improve the rational use of public resources and curb spending leakages. Involving citizens in decision-making processes has the potential not only to improve planning and prioritization by county governments but also to increase local revenues. Devolution alone, however, does not necessarily improve the accountability and responsiveness of service delivery. Multiple factors—the capacity to disseminate government information in user-friendly formats, the efficiency of the structure, representative consultations with the public, and provision of recourse mechanisms when laws and policies are not followed—must be in place. Public participation itself is not a magic bullet. Effective participation requires coordinated action by the government as well as citizens. 3.1 Devolution to the counties has the potential to promoting objective principles, including economic improve service delivery criteria, merit, and need. The assumption is that A mong the multiple institutional changes counties are in a better position than the national ushered in by the 2010 Constitution, government to deliver social services because they devolution is arguably the most far-reaching, with understand the local contexts and, with the support major implications for improved development and of citizens, are able to articulate and identify citizens’ enhanced service delivery. Kenya’s highly ambitious needs. The creation of 47 subnational entities also devolution to 47 new county governments seeks provides an additional accountability mechanism, to narrow long-term, deeply entrenched regional as it empowers citizens to demand better provision disparities; increase the responsiveness and of services by bringing them physically closer to officials with whom they can now engage. accountability of government to citizens; and grant greater autonomy to regions and groups. The March 2013 elections were the culmination of a constitutional change that created 47 new Kenya experienced a decade of relatively steady county governments, which are responsible for a socioeconomic growth, but regional disparities significant portion of public finances and service in poverty levels, human development indicators, delivery. Each county has an elected governor and and access to services are large. Devolution seeks assembly—a brand-new level of government that to remedy the unequal distribution of investments consolidates former levels of the central government, and services that has historically benefitted some reducing the number of central ministries from more regions at the expense of others, including by than 40 before the elections to 18, including a new shifting significant resources and responsibilities to Ministry of Devolution and Planning. Although, the semi-autonomous and locally accountable county Constitution envisaged a three-year transition and governments. By rebalancing power away from transfer of functions, most functions and funds were a historically strong and centralized presidency, transferred to the new counties during the first year. devolution is intended to eliminate the allocation The formula for allocating funds across counties of resources based on subjective criteria such as shifts resources toward historically marginalized regionalism, ethnicity, and political loyalty while counties and regions. 28 June 2015 | Edition No. 12 Growth Outlook The new county governments quickly assumed Box 3.1: What is social accountability? major responsibilities, and major funding, for Social accountability typically involves a process of delivering health, agriculture, urban services, and engagement, dialogue, and negotiation between local infrastructure. Devolved functions include citizens and the state, with the goal of influencing the the delivery of primary health care, urban services, broader development agenda. It refers to processes that enable citizens to hold state institutions accountable trade licensing, agriculture, county roads, county and make them responsive to their needs. Through planning and development, management of village three key dimensions—transparency, participation, polytechnics, and county public works and services. and accountability—social accountability empowers The functions assigned to the national government citizens by giving them a greater voice in governance are limited to policy, standard setting, and the and policy-making processes. Social accountability is an evolving umbrella category that cuts across provision of public goods, such as national security citizen monitoring and oversight of public or private and macroeconomic policy. sector performance, user-centered public information access or dissemination systems, public complaint and Under the new financing arrangement, historically grievance redress mechanisms, and citizen participation in decision making regarding resource allocation (Fox marginalized areas receive larger shares of 2014; World Bank 2014). resources. Financing is provided primarily through an unconditional “equitable share.” The Constitution 3.2 Social accountability is critical to making provides that counties receive a minimum of 15 devolution work percent of national revenues of the last audited financial year. Counties were allocated KSh 190 billion (US$2.2 billion) in 2013/14 and KSh 226 billion (US$2.5 billion) in 2014/15, amounting to E xperience from other countries indicates that devolution does not automatically bring greater government responsiveness and accountability to 3.9 percent of GDP. The equitable share is allocated the public, especially if accountability mechanisms across the 47 counties based on a highly progressive are not quickly put in place. Governance risks formula based on population (45 percent), poverty that can undermine expected performance and (20 percent), equal shares (25 percent), land area accountability gains from decentralization include (8 percent), and a “fiscal discipline” component (2 elite capture, clientelism, capacity constraints, percent). As a result of the formula, which applies competition over the balance of power between for three years, historically privileged counties levels of government, and weak interregional (which include most larger urban centers and the information flows (Yilmaz and others 2009). most productive agriculture areas) receive smaller per capita resource transfers, while historically Rapid devolution carries major risks for disruptions marginalized areas (arid and semi-arid areas) receive in service delivery, mismatches between larger per capita shares. responsibilities of counties and their capacity, leakages of public resources, and continued regional The Constitution and the new legal framework for inequality. Navigating the rapid transition to a devolution place strong emphasis on transparency, devolved system; establishing effective county-level accountability, and citizen participation as a means systems and capacities (including clear functional of accelerating development and enhancing local assignments, strong public financial management, service delivery. They contain multiple provisions management of human resource transitions, requiring both central and county governments to establishment of effective monitoring and evaluation make information publicly available and consult systems); and ensuring responsiveness to citizens with citizens in planning, budgeting, and monitoring are major challenges, especially given the speed and service delivery. These processes are referred to as magnitude of Kenya's transition. social accountability, public participation, or citizen engagement (the terms are used interchangeably in this report) (Box 3.1). June 2015 | Edition No. 12 29 Growth Outlook Global experience highlights the need to balance Citizen engagement provides opportunities for direct the increased political, administrative, and fiscal interaction between government officials and service discretion of the new county governments with users in budgetary design and implementation, greater accountability. A critical determinant of with significant impact on how resources are spent, the success of devolution is how well counties leakages are reduced, and service delivery and living develop systems that ensure they are responsive standards are improved. It has also led to significant and accountable to the needs of the public. Upward increases in local tax revenues (Box 3.2). accountability, in which the central government supervises county governments, can be more difficult Social accountability is not a magic bullet; certain to implement, because of county government conditions must prevail for success to occur. autonomy and distance from the center (Figure Many interventions that produced meager results 3.1). Downward accountability mechanisms, which were based on assumptions that turned out to be enable citizens to hold subnational institutions weak, such as “information is power,’’ “community accountable and make them responsive to their participation is democratic,” and “community needs, therefore become increasingly important participation can (by itself) influence service in devolved settings (Gaventa and Gregory 2010; providers.” Stand-alone civil society initiatives are Yilmaz and others 2009). often unsustainable because they are ignored or squelched. Citizen action that has the backing of Figure 3.1: Accountability needs to be both upward and downward government offices that are both willing and able to get involved or have forged links with other citizen Central Government counterparts to build countervailing power are more Upward Accountability: - Internal and upward likely to have impact (Fox 2014). government accountability Literature reviews and evaluations of public County participation initiatives suggest that multipronged Government Social Accountability: approaches are necessary to achieve significant - Local citizens hold results. Research (Fox 2014; Muriu 2014; O’Meally their county governments accountable 2015; Yilmaz and others 2009) suggests the following: Citizens • Effective implementation of decentralization reforms requires a strategy to give discretionary Source: World Bank, 2012 power to local governments and strengthen their accountability to the public. • Effective accountability measures work Building subnational government responsiveness simultaneously on different issues and at and performance requires a focused effort to different levels. Public participation principles link county governments with the public. Several therefore need to be embedded in all stages of countries—including Brazil, India, and South the policy cycle, and enforcement and action Africa—have placed strong emphasis on building as well as information sharing and transparency accountability of local governments to citizens as need to be ensured. Information alone is rarely part of decentralization, with significant success. sufficient to improve accountability outcomes; it must match the capacity and incentives of actors Citizen engagement can improve development to bring about change. An enabling environment results needs to reduce fear of reprisals. Longer time A growing body of evidence documents how citizen engagement, or social accountability mechanisms, can improve development results. horizons and a learning-by-doing approach need to be adopted. 30 June 2015 | Edition No. 12 Growth Outlook Box 3.2: Social accountability has improved spending in several countries In the Brazilian city of Porto Alegre, structured budget participation resulted in more pro-poor expenditures, increased access to public services, and greater local government accountability. Municipalities that favored an allocation of public expenditures that closely matched popular preferences channeled a larger fraction of their budgets to investments in sanitation and health. As a result, infant mortality rates fell. The adoption of participatory budgeting also led to a substantive increase in tax revenues, as immediate visibility of the work and services that resulted from their engagement motivated citizens to improve their taxpaying habits (Cabannes 2014; Fox 2014). In Uganda systemic implementation of public expenditure tracking surveys established that only 13 percent of capitation grants from the central government were reaching local schools. The government responded by publicizing the funds transferred to schools in local newspapers and radio on a monthly basis. Schools were also required to maintain public notice boards displaying funds received. By 2001, 44 percent of grants reached schools (Fox 2014). In South Africa new opportunities for participation on hospital boards led to a switch from a curative approach to one that is primary and holistic, addressing the impacts of socioeconomic issues such as unemployment and poverty on the well-being of the community (Gaventa and Gregory 2010). Implementation of citizen report cards in Pakistan resulted in increased enrollment and learning, better-quality education as parents demanded better performance from schools, and increases in school-level investments, such as textbooks (Fiszbein and Ringold 2011). In Gujarat, India, the training of elected representatives by a local nongovernmental organization (NGO) on budget information improved the ability of members of the local assembly to understand local budgets and track unspent amounts. It increased the time allocated to budget debates and the debate participation in the local assembles, which raised more budget-related queries (O’Meally 2015). • Building effective public participation depends on capacity building of government as well as citizens. Local government capacity and T he constitutional emphasis on citizen engagement aims in part at strengthening governance. Kenya’s track record on governance incentives are often key constraints to effective and corruption has been mixed. Although Kenya decentralization. Strengthening public has made steady gains in strengthening its policy participation requires building government and institutional framework, corruption remains a systems and capacity, as well as the capacity significant challenge. Kenya scores well on improving of citizens and CSOs. An enabling environment the quality of its policies and institutions, receiving must be created that actively encourages the the highest score in Sub-Saharan Africa (3.8) after voice and representation of people who would Rwanda. Kenya outperforms its peers on voice normally be excluded because of gender, age, and accountability and performs fairly better in ethnic or class bias. Such an environment may government effectiveness. It however scores below be achieved by reaching out to marginalized the average for lower middle-income countries groups to seek their representation on boards, and for Sub-Saharan Africa on rule of law and committees, and forums. corruption (Table 3.1). Global corruption perception • Citizens should be engaged by focusing on surveys also reflect weak performance, with a low popular services and issues they care about. Corruption Perception Index (CPI) score (25) and low global ranking. Kenya has a fairly vibrant and open Citizen engagement can address governance and media and civil society, as reflected in the strong institutional weaknesses that hold back Kenya’s performance in the press freedom index and voice economic and social development and accountability. June 2015 | Edition No. 12 31 Growth Outlook Table 3.1: Governance indicators in selected countries in East Africa Measure Burundi Kenya Rwanda Tanzania Uganda Country Policy and Institutional Assessment (CPIA) Africa 2014a 3.3 3.8 4.0 3.8 3.7 Corruption Perception Index (CPI) 20 25 49 31 26 CPI 2014b (rank out of 176 countries) 159 145 55 119 142 World Governance Indicators (2013)c Voice and accountability 21.3 41.2 14.7 41.7 30.8 Regulatory quality 21.5 38.8 53.1 40.7 44.5 Control of corruption 2.4 12.9 72.3 22.5 13.8 Rule of law 14.7 27.9 50.7 38.9 44.1 Political stability, absence of violence/ 9.4 13.7 43.6 41.2 19.9 terrorism Government effectiveness 15.3 36.8 55.5 29.1 33 Open Budget Index 2012d — 49 8 47 65 Open Data Barometer 2013 — 49 46 68 64 Ease of Doing Business 2013e (rank out of 159 121 52 134 120 185 countries) Press Freedom index 2013f 38 27.8 55.5 27.3 31.7 Press Freedom (rank out of 179 countries) 132 71 161 70 104 Sources: a. The CPIA describes how a country is improving the quality of policies and institutions that are important for development. It looks at four areas: economic management, structural policies, policies for social inclusion and equality, and public sector management and institutions. Scores range from 1 to 4, with 4 representing the best quality (World Bank 2013a). b. As of 2012, the CPI ranked 176 countries on a scale of 0 (highly corrupt) to 100 (very clean). In previous years, the CPI ranked countries on a scale ranging from 0 to 10 (Transparency International 2014). c. Higher values indicate better governance outcomes (World Bank 2013b). d. The Open Budget Index measures the budget transparency of countries. Scores are as follows: 81–100: Budget provides extensive information; 61–80: Budget provides significant information; 41–60: Budget provides some information; 21–40: Budget provides minimal information; 0–20: budget provides scant or no information (International Budget Partnership 2012). e. Doing Business measures business regulations for domestic firms, primarily in the largest business city. It presents quantitative indicators on regulations that apply to firms at different stages of their life cycle. Data highlight the main obstacles to business activities as reported by entrepreneurs in the more than 100 economies ranked. f. A lower score indicates greater press freedom (Freedom House 2013). Access to information has been a challenge in Kenya, Weak governance negatively affects Kenya’s goals although there has been some improvement in for sharing prosperity and reducing inequality and recent years. Kenya slightly improved its Open absolute poverty. Numerous studies document Budget index (OBI) score, from 48 in 2006 to 49 in how governance weaknesses negatively affect 2012 with a global ranking of 46th out of 98 countries. public service delivery and investment, the business It dropped one point back to 48 in the recent 2015 environment, and job creation. Analytical work OBI survey, scoring slightly higher than the global documents how Kenyans pay more frequent bribes average of 45. The Constitution establishes citizens’ for business and informal fees for basic services such right to access information, but Kenya has not yet as education and health than people from other adopted a freedom of information bill or data countries. These costs disproportionately affect the protection and management bill. Kenya fell 27 places poor. Enterprise surveys indicate that the percentage in the most recent Open Data Barometer rankings of Kenyan firms identifying corruption as a problem (from 22nd place in 2012 to 49th in 2013), as a result is significantly higher than the Sub-Saharan average of challenges in the sustainability of the portal linked (World Bank and IFC 2013). The Kenya Economic to limited the capacity of government, civil society, Update Edition 7, which included a special focus on and the private sector. jobs, highlights nepotism, tribalism, and demands 32 June 2015 | Edition No. 12 Growth Outlook for bribes as major barriers to breaking into the Social accountability mechanisms that enlist job market. Young people indicate that demands the public in setting development priorities and for bribes to get jobs are common and that the monitoring the flow and use of financial resources more competitive the vacancy, the larger the bribe can reduce social and economic tensions. County demanded. Inactive youth are at higher risk of being governors are likely to face significant pressures recruited into criminal activity. Estimates suggest from vested interests to reward constituencies that that if firms used all the money they paid in bribes supported their candidacies; the long tradition of to hire employees, they would be able to create patronage in Kenya may not be easy to reverse. The 250,000 positions (World Bank 2012). 47 counties largely follow geographic boundaries that were drawn shortly after independence, Citizen engagement is critical for promoting social partly based on where different ethnic groups cohesion, reducing resource-based and ethnic resided. Citizens in Kenya have tended to align conflict, and building stronger citizen-state relations themselves with political parties and coalitions T he constitutional emphasis on participation largely along ethnic lines. At least initially, the and inclusion of marginalized communities and formation of counties with elected governors and vulnerable groups is in part a response to Kenya’s assemblies has contributed to multiple governors historical experience with political instability, operating as a bloc on some issues rather than which has hurt economic performance and social along national party lines. cohesion. Kenya witnessed a political crisis in 2008, when violence erupted following the disputed The accountability relationships established among national elections held in December 2007. Among the central government, county governments, the most salient explanatory factors for continued and citizens will be a key determinant of how cycles of violence around election time in Kenya well services are delivered under devolved are income inequality, feelings of exclusion, and government. Inclusion of the marginalized and the regional inequities (Kenya’s Gini index of 42.5 in poor in decision making at the local level is likely 2008 was higher than in neighboring countries to lead to pro-poor policies. Incentives to improve such as Uganda [37] and Tanzania [38]). A judicial development outcomes will be determined by the commission of inquiry established that many of the strength of the accountability mechanisms put in youths involved in the 2007 post-election violence place to override traditional historical incentives. were unemployed. Another dimension of inequality The extent to which some governors outperform that can help explain violence in Kenya is horizontal others and performance systems are put in place inequality (inequality among culturally defined for citizens to distinguish and provide feedback on or constructed groups). This form of inequality is relative performance between elections will also be multidimensional and includes political, social, and a key determining factor. economic dimensions. Since independence, Kenya has had significant levels of horizontal inequality, Citizen engagement can help manage and meet with the ethnic group in power benefitting politically, high public expectations that devolution will economically, and socially. Over the years, horizontal improve service delivery inequality has contributed to ethnic cleavages and conflict. Other related dynamics are the distribution K enyans remain optimistic that devolution will create more opportunities than risks (Figure of land and the political manipulation of ethnic 3.2). A significant percentage of citizens expect identities and enmity over the imbalances of that devolution will improve service delivery and resources and services (World Bank 2008). enhance their participation. A challenge will be June 2015 | Edition No. 12 33 Growth Outlook Figure 3.2 Kenyans expect devolution to provide more opportunities Figure 3.3: Before devolution, Kenyans’ satisfaction with service than risks provision was low 70 63 60 July 60 57 55 64 22 7 6 54 2014 50 41 41 35 36 40 33 August 67 18 7 8 2013 30 20 January 65 14 9 11 10 2013 0 Maintenance of Maintenance of Maintenance of Cleanliness and Use of land 0 20 40 60 80 100 local roads local market public health garbage Percentage of respondents places standards collection More opportunities Don't Know Percentage of respondents More risks than No effect than risks opportunities Fairly/very badly Fairly/very well Source: National Democratic Institute 2014. Source: Afrobarometer study (Institute for Development Studies, University of Nairobi, and Michigan State University 2011). to convert citizen expectations for better service could not articulate the correct position or the roles delivery (Table 3.2) into action while helping ensure of different office bearers (Society for International that citizens have a realistic understanding of the Development 2012). Public awareness appears to be constraints and challenges county governments face. improving, with more citizens now having a medium (45 percent) or high (27 percent) understanding of These expectations reflect low levels of satisfaction county roles and responsibilities (Figure 3.4). with local service delivery before devolution. Large percentages of Kenyans rated local government Given high public expectations, elected governors as performing badly in local road maintenance have incentives to enhance service delivery in their (63 percent), cleanliness and garbage collection counties and to ensure that county investments (60 percent), and maintenance of public health and activities respond to citizen priorities. In 2013 standards (55 percent) (Figure 3.3). most Kenyans cited roads (45 percent), health (39 percent), and agricultural development (38 percent) Surveys suggest that public understanding of new as priority areas for counties to address (Figure 3.5). roles and responsibilities under devolved structures In 2014 even more people cited roads and health is improving. Before devolution, less than a third as priorities; general county level planning and of Kenyans (29 percent) had a clear understanding development replaced agriculture as the third most of devolved structures; the majority (71 percent) important priority. Table 3.2: Kenyans’ expectations of devolution (Percent of respondents) Neither agree nor Don’t Statement Agree disagree Disagree know Devolution will lead to better transparency and accountability 39 24 10 27 Citizens will be able to get better public services 43 21 9 26 Devolution provides citizens with better opportunities to participate 40 22 11 27 Devolution will minimize vices such as corruption and impunity 30 26 16 28 Devolution will lead to a more cohesive and peaceful nation 34 27 12 27 Women will have better opportunities in devolved government 40 24 10 26 Minority communities will have better opportunities 37 24 11 29 Source: Society for International Development 2012. 34 June 2015 | Edition No. 12 Growth Outlook Figure 3.4: Most Kenyans now have a high or medium understanding Figure 3.6: Most Kenyans perceive that conditions of county responsibilities under devolution have improved Things are worse than before 14% High (Identified correct number of counties and responsibilities for at 27 least 7 out of 8 service sectors) 45 Medium (Identified correct Things are same number of counties and as before 18% responsibilities for 4 out of 8 service sectors) Things are 28 Low (Was unable to identify better than before correct number of counties or 68% their responsibilities) Percent of respondents Percent of respondents Source: Ipsos Synovate 2014. Source: Infotrak 2015. Kenyans’ perceptions of devolution depend on Social accountability provides county governments tangible development activities. A survey conducted with tools with which to inform citizens about what between December 2014 and February 2015 to they are trying to achieve and how much resources ascertain citizens’ perceptions of the performance of they have. It enables them to engage citizens in their county governments established that 68 percent decision making that can improve the targeting and feel conditions are better than before (Figure 3.6). responsiveness of government investments and Sentiments about devolution were positive where activities to citizen preferences. Understanding the infrastructural development increased, especially in amount of resources available to counties may also the area of road networks, rehabilitation of existing help citizens appreciate the limitations facing county health facilities and construction of new ones, and governments as they seek to deliver services. improved investments in childhood education and agricultural production. Where infrastructure, health, The Constitution and devolution create the education, and agriculture performed comparatively opportunity to develop government systems and poorly, county residents indicated that conditions capacities that are more effective, responsive, and were worse than before. accountable to citizens. The Constitution calls for a Figure 3.5: Kenyans care most about roads and health services reshaping of the relationship between the citizen and state. The challenge is to help national and county County transport 24 governments, as well as civil society, operationalize 19 these provisions. Realizing this goal will take time Pre-primary education 12 22 and will depend on multiple factors, including the Agricultural development 38 nuts and bolts of central and county government 25 planning, financial management, monitoring County planning and development 27 26 systems, staff capacities, and systems and staff to County health services 39 49 make information available, hold structured public consultations to understand preferences, and gather 45 County roads 55 feedback from citizens. 0 10 20 30 40 50 60 Percentage of respondents August 2013 July 2014 Source: National Democratic Institute 2014. June 2015 | Edition No. 12 35 Growth Outlook 3.3 What has been the experience of counties in including formulating legislation, determining implementing public participation? planning and budget priorities, reviewing public sector performance and expenditures, and “The legislative landscape in Kenya is strong, submitting grievances. County governments are providing an array of clear, pragmatic provisions required to create structures, mechanisms, and and principles….The challenge now is on guidelines for public participation; promote access implementation, especially in developing the for minorities and marginalized groups; establish necessary capacities, systems, and regulations mechanisms for public communication and access at the county level, including an enabling to information using a wide variety of media; and environment from the national level.” submit annual reports on citizen participation to the - Ms. Mwanamaka Mabruki, Principal Secretary, county assembly (Nizam and Muriu 2015a). Ministry of Devolution and Planning N The Public Financial Management Act provides ew county governments face immense for citizen participation in the formulation of the challenges as they seek to put in place effective budget policy statement, the preparation of the systems and build institutional capacity while revenue bill, county allocations, and county-level delivering services and making visible investments. planning and budgeting processes (Sections 117, The early months of Kenya’s devolution were 125, 128, 131, and 137). It also requires that various characterized by intense bargaining between budget documents, including estimates, approvals, county and national governments, which led to the fiscal strategy paper, audited accounts, and an accelerated devolution timetable. The central quarterly and annual reports, be published and government transferred functions much more publicized within certain times and in user-friendly quickly than originally planned, doing so in six formats (Sections 48 and 139). months rather than three years. In addition, more than 30 percent of national revenue, rather than the At the national level, there have been multiple 15 percent minimum set by the Constitution, was interventions to provide support to counties decentralized to the counties. County governors are and improve engagement with citizens. The therefore under pressure to deliver results. Commission on Revenue Allocation has developed guidelines on the formation of County Budget and County and central authorities have made Economic Forums (CBEFs). The guidelines clarify considerable progress toward implementing the establishment and administration of the CBEFs constitutional and legal provisions for transparency, per the Public Financial Management Act and guide accountability, and participation. In the first year both counties and citizens on how to operationalize of devolution, both state and nonstate actors them. The Ministry of Devolution and Planning is prioritized the setting up of structures and systems spearheading the development of best-practice to facilitate public participation. Much still needs county guidelines on public participation. These to be done to ensure that proper and adequate guidelines aim to provide counties with a logical mechanisms are put in place to facilitate structured path to plan and implement participation, as engagement with the public. enshrined in the Constitution and attendant laws and regulations. The Ministry of Devolution and Public participation is now required at all Planning is developing a civic education framework, stages of the planning and budget cycle. The curricula, and content and rolling out a nationwide County Government Act 2012, the Public Finance civic education program aimed at empowering Management Act 2012, and the Urban Areas citizens to hold national and county governments and Cities Act (2011) require public participation accountable. The National Treasury, with support in national and county government processes, from development partners, has developed 36 June 2015 | Edition No. 12 Growth Outlook public financial management modules on budget community liaison offices or information desks to preparation, execution, and financial accounting and engage the public and civil society in exercises such reporting that integrate key principles of participation as joint conduct of social audits. Counties have used and accountability. Training of county officials using drama, art, road shows, and sporting activities the modules is underway. The Commission for the to convey key messages and live talk shows to Implementation of the Constitution (CIC) has put in break down the budget on FM radio stations place mechanisms to monitor progress by counties and community radio. They have used opinion in implementing constitutional provisions, including leaders—known as drivers of public participation provisions relating to public participation. (DRoPPs)—as strategic points for passing important information to community members and appointed Budget transparency at the national level has opinion leaders from wards to represent different improved. The shift to a program-based budget segments of society, including the marginalized, in led to significant improvements in the 2014/15 budget forums. budget, including substantive narratives, improved presentation of indicators and targets, and more The high cost of participation, the lack of careful review of changes over time in priorities and administrative capacity and trained staff to availability of the budget proposal (International implement participatory processes, and tokenistic Budget Partnership 2015). Although devolution to forms of participation hinder effective citizen counties is the primary focus of this analysis, national engagement. In the first fiscal year, most counties level initiatives set a good precedent for enhancing sought public views on their initial budgets and subnational participation. integrated development plans. They faced challenges related to compressed devolution timetables, lack Counties have made strides to improve public of dedicated county staff and resources, and lack participation. They have built county communication of frameworks or guidelines to operationalize frameworks and facilitated access to information, participation. Although teething challenges are to created participatory structures, and improved be expected, there are risks that these initial, often the quality of citizen engagement through civic ad hoc, efforts to engage citizens become the norm if education. By the end of the first year of devolution, processes are not structured, staffed, and resourced. 40 of 47 counties had created websites, a critical avenue for disseminating information to the public; Transparency and access to information need by 2015 only three counties lacked websites. improvement M Twenty-two counties had put in place a county ost counties have taken steps to put in place a communication framework, and 26 had established communication framework, but information citizen forums, per the legislative requirements is not as accessible as it is supposed to be as per (Nizam and Muriu 2015b). Beyond meeting legal the new law. Communication plays a key role in requirements, counties have adopted innovative enabling county governments to share information initiatives to engage citizens. Some have formed critical for participation in county processes, such collaborative engagements with CSOs to develop as budgeting and planning. By the end of the first citizen-friendly budgets and county integrated year of devolution, 22 counties had in place a development plans. Others have mobilized the county communication framework, 4 had enacted public to participate in forums and used social media, county legislation on access to information, and 16 including Facebook and Twitter, to inform citizens had a strategy for including minority groups (Table and solicit their feedback on projects and legislative 3.3). What remains to be done, according to the bills under development (online conversations and Honorable Geoffrey Kaituko, speaker of the Turkana feedback are usually consolidated and addressed at County Assembly, is to translate public information formal meetings). Some counties have established into local languages to expand outreach. June 2015 | Edition No. 12 37 Growth Outlook Table 3.3: Frameworks to facilitate public communication the first time at the meetings in a highly summarized and access to information or massive form that is not citizen friendly. Number of Mechanism counties Percent Counties, particularly ones with large rural County communication populations, cite low uptake of information posted 22 47 framework on their websites as one reason for not putting County government legislation on access to information 4 9 documents online. Social media sites such as the governor’s Facebook page appear more popular. Strategy for inclusion and integration of minorities and A survey conducted in 10 counties between June 16 34 marginalized groups in county and August 2014 found that they provide scant development and governance budget information to the public. All of the counties Source: Commission for the Implementation of the Constitution 2014. published insufficient information; only one Despite the requirements of the Public Financial provided minimal information (putting its 2014/15 Management Act, most county budgets are not county fiscal strategy paper and budget estimates readily available to the public. CSOs continue to online) (Table 3.5 and Figure 3.7). The counties report challenges in accessing key documents, final surveyed make information on procurement and budgets, and county integrated development plans service delivery available, but they limit the kind of that would enable them to monitor the use of county information they provide. All counties surveyed make resources. Very few counties have put their budget information on the launch of procurement tenders documents on their websites (Table 3.4). Limited available to the public through various sources. They notice of meetings and failure to make budget do not provide information on the award of public documents available before consultative forums tenders and procurement complaints. For citizens continue to compromise the quality of participation. to exercise oversight on service delivery, they need Notices are sometimes provided through media information on the range of services offered and (such as newspapers) that do not reach most citizens, the basis on which services are provided (for a fee especially in rural areas. In many cases, members of or free, to all citizens or just some citizens). Only 2 of the public access agenda documents and budgets for the 10 counties provided information on the range Table 3.4: Types of county documents available online Number of Percent of Document type counties total Counties Baringo, Busia, Elgeyo, Isiolo, Kericho, Kiambu, Kilifi, County integrated development plan 21 42.5 Kisumu, Kitui, Marakwet Meru, Migori, Mombasa, Muranga, Nakuru, Nandi, Nyandarua, Samburu,Trans Nzoia, Uasin Gishu, West Pokot Annual development plan 4 8.5 Baringo, Kitui, Mombasa, Nakuru County budget review and outlook 6 10.6 Baringo, Machakos,Nyamira, Siaya, Uasin Gishu, West paper Pokot Baringo, Bomet, Busia, Embu, Kajiado, Kiambu, Kilifi, County fiscal strategy paper 19 40.4 Kisii, Kisumu, Kitui, Laikipia, Machakos, Mombasa, Nakuru, Nandi, Nyamira, Uasin Gishu, Vihiga, West Pokot Baringo, Busia, Kericho, Kiambu, Kilifi, Kisii, Kitui, Budget estimates (proposed budget) 13 28.0 Lamu, Machakos, Nairobi, Nandi, Taita Taveta, West Pokot Approved estimates (enacted budget) 5 10.6 Baringo, Bomet, Kilifi,Nakuru, Nandi Quarterly implementation report 1 2.1 Muranga Source: International Budget Partnership 2015a. Note: Databased on information available on official county websites. 38 June 2015 | Edition No. 12 Growth Outlook of services offered consolidated at a single source Some counties have adopted innovative means of through services charters. In the other eight counties, communicating with the public. Eldoret, Kitui, Nyeri each responsible department or agency provides this and Nakuru use brochures, newsletters, and flyers. information, making it difficult for citizens to access in Embu and Nyeri rely on key opinion leaders (DRoPPS) one place (Institute of Economic Affairs 2015a). to pass information to their communities. Bungoma shares talking points on pertinent issues with local Many citizens are poorly informed about their leaders, who pass them on to the community. Homa counties’ budgets. A study conducted in 16 counties Bay and Kakamega use roadshows, music, art,and in April 2015 revealed that 92 percent of respondents sports. Bungoma, Embu, Nakuru, and Nyeri simplify were unaware of the amount of funds allocated the contents of the budget on live talk shows on to their county (Transparency International community radio stations. 2015). Their ignorance partly reflects the fact that Accountability systems include mechanisms for citizens cannot access budget documents. Failure citizen feedback and complaints to make information public is likely to impede debates and discussions of the budget; limit public understanding of budget policies, county revenues, and spending plans; and retard the ability to hold the government to account on expenditure related to service delivery. Table 3.5: Number of countries surveyed providing adequate budget information County Open Budget Index/level of information provided Number of counties 81–100: Extensive 0 61–80: Significant 0 41–60: Some 0 Source: URAIA, 2015. 21–40: Minimal 1 (Nakuru) 0–20: Scant 9 (Bungoma, Garissa, Counties have established varied mechanisms to Kajiado, Kisumu, Machakos, receive feedback and complaints from citizens. Mombasa, Nandi, Nyeri and Most counties use interactive social media platforms, Taita Taveta) including Facebook and Twitter, to get feedback Source: Institute of Economic Affairs 2015a. from citizens on laws, policies, implementation of projects, and service delivery. Bomet and Bungoma Figure 3.7 Open budget index scores vary widely across counties counties have established citizen blogs on their County open budget index websites. They ranked among the top-performing Nakuru 30.5 counties by citizens, with Bungoma placed second Kisumu 17.6 (with 60 percent approval) and Bomet fourth (with Taita Taveta 16.7 59 percent) (Infotrak 2015). Counties are also Machakos 15.7 using citizen score cards and customer satisfaction Bungoma 15.7 surveys to solicit feedback on their performance, Nandi 14.3 with notable success. In Visoi Ward in Nakuru, the Nyeri 14.3 county government responded immediately to the Garissa 12.9 results of a community score card implemented Mombasa 12.4 at the Lengenet Health Centre, where citizens Kajiado 11.4 had indicated the absence of equipment. The 0 5 10 15 20 25 30 35 missing equipment was delivered shortly after Index Source: Institute of Economic Affairs 2015a. the scoring process. A different approach is the Maji Voice accountability mechanism, being June 2015 | Edition No. 12 39 Growth Outlook implemented in the water sector. In its first year of implementation by the Nairobi City Water and Sewerage Company, the number of complaints C ounties have established various structures to facilitate citizen participation, in line with the County Government Act (Section 91). They recorded rose almost tenfold, resolution rates include ICT platforms, town hall meetings, budget climbed from 46 percent to 94 percent, and time preparation and validation forums, and stakeholder to resolution fell by half (Box 3.3). forums (Table 3.6). Public hearings are the most popular mechanism counties use to reach out to Feedback to citizens on the outcomes of their citizens (Commission for the Implementation of contributions remains inadequate. Although the the Constitution 2014; ICPAK 2014). Few counties public has been mobilized to provide input on have adopted county-specific legislation on public various policy proposals, rarely has it been provided participation. Bomet, Kajiado, Kiambu, Laikipia, Lamu, with feedback on how its contributions influenced Migori, Nyeri, Tana River, and Turkana are some of the decisions made and the rationale supporting the the counties that have enacted public participation final decisions. This lack of feedback often results in bills. Civil society has worked with some counties in public participation being viewed as a mere public relations exercise with little genuine intent, which the development of public participation legislation. could discourage future participation. Citizens have participated in developing most of Counties have established a variety of public the key documents required by law, albeit through participation platforms unstructured arrangements. Most counties have But what constitutes public participation? If we call seen public participation in the development of two elders who are my friends and sit somewhere county integrated development plans, county fiscal in my office, can we call that “public participation”? strategy papers, budget estimates, finance bills, and Right now we are all doing this in our own ways. other key laws. However, initial participatory forums How can we direct this to do it properly? have been ad hoc and held predominantly at the —Ms. Dorothy Nditi, county and subcounty level rather than at the ward Deputy Governor of Embu, December, 2014 or village level. As a result, participants have had Box 3.3: MajiVoice has increased accountability and customer satisfaction MajiVoice is a web-based software that enables utility staff to receive, process, and report on complaints by customers. After a pilot in Nairobi in 2013, the Nairobi City Water and Sewerage Company (NSWSC) launched the system in 2014. It has since been extended to service providers in Mathira, Nakuru, and Nanyuki. Customers can submit complaints using a dedicated SMS shortcode, an Unstructured Supplementary Service Data (USSD) shortcode, the Internet, or traditional channels such as a hotline number or walk-in service centers. Free hotlines and low-cost Internet and SMS submissions (which cost KSh 1) give customers multiple ways to avoid time and cost-intensive personal service center visits. For each complaint, a unique reference number is sent to the customer free of charge. It can be used to query the complaint status. Majivoice tracks each complaint and every staff action on it, triggering alerts if set resolution ceiling are exceeded. A recent anonymous staff survey shows positive staff response, with large majorities reporting that the MajiVoice system “made it easier to deal with and follow up on specific complaints” (93 percent) and “improved the way NCWSC deals with complaints” (98percent). About a third of surveyed staff reported that MajiVoice increased their personal workload (34 percent) and increased pressure to deal with customer complaints (37 percent).In another recent survey of close to 500 customers who had used MajiVoice, more than 74 percent had a positive opinion of the reference number system and more than 50 percent had actively used it to follow up on their complaints. Customers who received MajiVoice reference numbers were significantly more likely to feel that NCWSC took their complaint seriously and reported significantly higher satisfaction with NCWSC services in general. 40 June 2015 | Edition No. 12 Growth Outlook Table 3.6 Structures established to facilitate citizen participation Number of Structure Counties Percent ICT-based platforms 34 72 Town Hall meetings (structured meetings) 32 68 Budget preparation and validation forums 37 79 Notice boards that announce jobs, appointments, procurement, awards, and other important 40 85 announcements of public interest Development projects sites 33 70 Avenues for participation of peoples’ representatives, including but not limited to members of the 35 76 National Assembly and Senate Establishment of citizen forums at county and decentralized units (also in section 22(1) of the Urban 26 55 Areas and Cities Act 2011) Source: Commission for the Implementation of the Constitution 2014. to travel long distances and demanded transport by organizations representing professionals; allowances in order to attend. This approach business; labor; and women, people with disabilities, has locked out citizens at the ward level (Nizam the elderly, and faith-based groups at the county and Muriu 2015b). Counties have only recently level. The CBEF can work well if well-organized groups established ward administration offices manned by of women, businesspeople, laborers, professionals, ward administrators who are responsible for matters and vulnerable groups nominate members and hold relating to participation and civic education at the them accountable for representing their interests ward level. More counties have begun holding public in the budget process. The representatives should meetings at ward levels, sometimes on a quarterly be balanced across different groups. They should basis, as is the case in Turkana and Kisumu (Institute properly source inputs from the wider society and of Economic Affairs 2015b). channel feedback to citizens on decisions made, in order to avoid elite capture. The CBEFs offer a Two years after their creation, few counties have set structured solution as counties grapple with how up or operationalized their CBEFs. The purpose of to build support for rates and fees and consensus these forums is to provide a means by which county about priority development projects. For them to governments can consult with other stakeholders succeed, interests must organize at the county level on preparation of county plans, the county fiscal in an effective way. strategy paper, the budget review and outlook paper, and other PFM–related issues. But the tide Another challenge for the CBEF is that some counties appears to be turning. The Commission on Revenue still have not mastered the budget process. Many Allocation, in partnership with CSOs, has begun are late and have not followed the budget cycle, as training counties on running CBEFs using recently laid out in the Public Financial Management Act. developed guidelines. Most counties are finally County cabinets are struggling to understand how establishing the forums. Some counties realized that to coordinate to ensure that funding is directed to the first set of actors nominated to sit in the forum priority areas. Weak internal coordination processes did not comply with the legal requirements and took make it difficult for the public or nonstate CBEF steps to reconstitute them in order to make the members to know how and when to intervene to CBEFs more diverse and representative. influence the budgets in their counties. There is also a growing danger of participation fatigue if the One of the biggest challenges for CBEFs—and for consultation process is not well coordinated. The participation at the county level more broadly—is budget cycle runs from August 31 to June 30. On weak organization on the part of citizen and interest a number of documents, the public is supposed groups. The CBEFs should include people nominated to be consulted—by the Executive in formulation June 2015 | Edition No. 12 41 Growth Outlook and by the Assembly for oversight. Over and above Figure 3.8 Citizen awareness and attendance at county government meetings has risen the budget documents, the law requires public 50 consultation on all laws and policies that counties 46 45 develop. In some cases, the County Executive and 41 40 38 Assembly prefer to use separate frameworks; even Percent of respondents 35 within the Executive, each department prefers 30 to carry its own participation processes, which 25 may result in too many requests for participation. 20 Ongoing training of county officials on PFM- 15 15 related processes is targeted at addressing these 10 challenges. It may be useful to consider providing 5 nonstate representatives in the CBEF with similar 0 PFM training to enhance their knowledge of PFM- Awareness of meetings Attendance of meetings related processes. 2014 2015 Source: Transparency International 2015. Citizen participation is increasing. Recent surveys and analytical assessments indicate that many Efforts are being undertaken at the county level to citizens find it difficult to participate in county plan for and put in place frameworks, structures, budgeting and planning or influence county decision and programs to facilitate sustainable civic making. This finding is not surprising, given that education, in order to improve both the level counties are still relatively new and participation and quality of citizen participation. Counties have is a process that will take time to institutionalize established or are in the process of establishing itself in county systems and processes. Effective civic education units. By the end of the first year of participation depends on the establishment and devolution, only six counties (Kirinyaga, Makueni, functioning of PFM and planning systems, human Meru, Trans Nzoia, West Pokot, and Vihiga) had resource capacity, and performance management. established such units. Some counties have It tends to occur more often through representative introduced commendable practices to improve the processes than individual participation. There quality of citizen engagement. Box 3.4 highlights of has, however, been a remarkable increase in the some of the initiatives undertaken by Nakuru County. share of citizens attending public forums, from 15 percent in 2014 to 46 percent in 2015 (Transparency Kenyans are already using the Constitution and the International 2015) (Figure 3.8). Nearly half of the new legal framework to expand public participation. respondents sampled in a survey of 16 counties In April 2014, a group of businesspeople (the Matatu indicated they had participated in public meetings Owners Association, quarry owners, and Kiambu to discuss development projects and budgets. This residents) filed a court petition against the Kiambu finding indicates that as counties establish their County government on the grounds that the Finance participatory systems, more citizens are engaging. Act of 2013 violated provisions of the Constitution. People who do not attend meetings cite lack of The complainants argued that no proper public time, illiteracy, limited knowledge of the perceived participation was factored into enactment of the act, technical nature of budget and planning processes, which contained levies and taxes that the county and inadequate awareness of the procedures of was not empowered to impose. opportunities and spaces for participation. In 2014 the High Court nullified the Finance The quality of participation is more important Act, ruling that its preparation had not met the than the quantity. Quality participation is achieved thresholds for public participation. The decision set through an informed citizenry, representative a precedent for public participation in county policy spaces, and enhanced government systems for making. In rendering the verdict, the judge indicated sharing information, consulting citizens, and that crucial information disseminated to the public receiving feedback. should be clear and unambiguous; that members of 42 June 2015 | Edition No. 12 Growth Outlook Box 3.4: Nakuru County has launched various initiatives to improve civic education Nakuru County has taken various steps to improve the quality of citizen engagement in devolved processes: • It held a public service week to commemorate the first year of devolution. The goal was to heighten the community’s awareness of what the county does in terms of delivering infrastructure and services. • Preparation of the 2014/15 finance bill entailed a structured awareness exercise in which a local radio station was contracted to deliver messages on the content of the bill and indicate was expected from the public with regard to submission of memoranda. • The County Executive Finance Minister held a live radio interview in which listeners were given the opportunity to ask questions about the finance bill and related issues. • The Budget and Economic Planning Office, in partnership with an NGO, prepared popular versions of the 2014/2015 budget and the county integrated development plan. the public cannot participate meaningfully if they county, and the establishment of the Office of the are not given enough time to study bills, consider Judiciary Ombudsperson to receive complaints from their stance, and formulate representations; and the public (Government of Kenya 2013). that the mode of advertisement must lend itself to a proper avenue for communication in a largely Compliance with the legal framework on illiterate and poor community. He ruled that the participation takes place incrementally. Counties County Assembly should exhort its constituents may not immediately adhere to all the provisions to participate in the process of enacting such envisaged under the legal framework, as doing legislation by making use of churches, mosques, so requires not only the setting up of systems and temples, barazas (local public meetings), national structures but patience and a change of attitude and vernacular (local community radio stations, toward public participation. The often minimalist and other avenues. The objective in involving the approach to engaging the public—focusing on public in the law-making process is to ensure that merely complying with the law—needs to be legislators are aware of the public’s concerns. slowly replaced with deliberate efforts to seek and This awareness promotes the legitimacy and thus genuinely incorporate public views in key policy the acceptance of the legislation (Nizam and processes. Focus group discussions reveal that Muriu 2015b). county officials are beginning to appreciate the importance of public participation as a building The Constitution provides that judicial authority is block for instilling ownership and sustainability derived from the people and exercised by courts as of projects and programs, promoting trust and a public trust. This notion has radically transformed better relations with citizens, ensuring inclusive the attitude and operations of the judiciary. and equitable distribution of resources, improving Public engagement is a key tenet of the judicial livelihoods, reducing conflict, and achieving transformation framework. The judiciary itself has political mileage for reelection to office opened itself up to scrutiny and engagement with the public through public vetting of judges and Making this change to conduct participation for magistrates, judicial march weeks (during which instrumental reasons requires capacity building judicial officers hold public meetings explaining how and the allocation of sufficient resources to the judiciary works), service weeks (during which participatory processes. Most counties argue judicial officers meet the public and educate them that participation is a costly exercise, because the about their services and procedures), the creation of public have expectations of receiving per diems a Directorate of Public Affairs and Communications, or handouts for attending public forums. In fact, station-based open days, community outreach participation need not be expensive if organized in visits, promotion of alternative dispute-resolution more structured formats at the village or ward levels, mechanisms (including traditional community with community representatives selected to channel mechanisms), decentralization of the court of views upward through the CBEFs. appeals, efforts to establish a High Court in every June 2015 | Edition No. 12 43 Growth Outlook Citizens need to appreciate the long-term value often involved significant upfront planning, facilitation, of their participation. They can do so only when and financing to mobilize community leaders, train counties respond to their priorities and needs citizens and local government officials, and develop with visible investments. In Nakuru County the user-friendly information. Incentives have also been community participated in the health facility scoring a primary factor influencing participation for instance, process in Visoi Ward. It has begun to appreciate the the LATF requirement that local authorities report linkages between its involvement in the budgeting how they achieved participation in order to access process and the allocation of funds to services. future funds appears to have increased participation Community contributions to budget hearings have (Rose and Omolo 2013). increased, potentially influencing budget priorities. These changes among county governments and Engaging citizens is not without challenges. citizens can be accelerated by demonstrating the Fragmentation of local development fund procedures benefits of effective public participation from the and guidelines have made it difficult for citizens experiences of others, such as the citizens of Baringoto participate and demand accountability. Each County (Box 3.5). of the funds has different implementing agencies, procedures, and entry points for citizen engagement. Kenya’s experience with participation provides There are significant differences between official counties with a good foundation to strengthen procedures for participation and actual practice, and scale up citizen engagement. Kenyan CSOs, largely as a result of limitations in government local governments that have been absorbed by capacity. Citizens and CSOs often report difficulties counties, and citizens have used a wide range of obtaining basic information on local development social accountability approaches and tools, with programs, procedures, and finances. The lack of CSOs working hand in hand with local governments public comparative data on the performance of and elected officials. The approaches focus primarily local funds also limits the ability of citizens to assess on local service delivery around two development performance and hold service deliverers to account funds, the Constituency Development Fund (CDF) (Finch 2015). and the Local Authority Trust Fund (LATF). The LATF requires that local authorities conduct ward-level CSO-led monitoring efforts face challenges of consultative meetings in which local communities scale and sustainability. CSOs have piloted multiple identify capital investment projects to meet their methodologies for social accountability and citizen local needs and priorities. participation over the past decade, but they often proved unsustainable when funding expires. They These participatory approaches have were external to government and applied different demonstrated results at the local level, improving methodologies and metrics, with results typically the responsiveness of funds to community disseminated through small print runs or posted on priorities, documenting the misuse of resources, CSO websites. As a result, it was difficult for citizens and demonstrating structured approaches to to see aggregated results of citizen participation participation. The more successful initiatives have that compared performance across different Box 3.5: Citizens in Baringo County achieved a more equitable distribution of resources After receiving training on reading and interpreting the budget, the Endorois community of Lower Mochongoi (a subcounty in Baringo) noted that the 2013/14 and 2014/15 county budget ward development project distribution had consistently been unequitable. Out of KSh 56 million spent in the ward in previous financial years, only KSh 4 million had been allocated to the lower Mochongoi area, with the rest going to Upper Mochongoi. During the budget formulation process in February, the community turned out in large numbers. Their concern led the County Executive Committee member for finance and planning to call for a halt of the meeting and the convening of a smaller forum to discuss the disparities. A community committee deliberated on the matter with the county. The outcomes of the deliberation led to a redistribution of four projects from Upper Mochongoi to Lower Mochongoi. The county planning unit also committed to upscale community consultations to ensure that community priorities and concerns are included in the budgeting process. 44 June 2015 | Edition No. 12 Growth Outlook Constituency Development Funds (CDF) or local guidelines will help ensure that while counties authorities. Funding modalities can exacerbate such prepare their own frameworks, minimum challenges, because funding tends to be directed to standards are observed that give all citizens equal single organizations to enhance citizen participation opportunity of engaging (Finch and Omolo 2015). rather than to coalitions applying common methodologies across a larger group of local funds. Actions by county governments, with support from Funding is also not regularly tied to how well a CSO the national government itself is linked with citizen or to how well it builds 2. Invest in building the capacity of county service mechanisms through which citizen engagement providers to involve citizens in local service can be continued after initial funding ends. These delivery. Key entry points include the following: lessons as well as county experiences provide useful • Train civil servants on new responsibilities by insights for enhancing future public participation. incorporating material in civil servant training programs on PFM (budgeting, accounting, 3.4 How can public participation be enhanced? reporting, procurement, and auditing); E nhancing participation requires sustained efforts by government and civil society to establish structured processes that are efficient planning; and monitoring and evaluation that helps civil servants apply legal provisions for transparency, participation, and accountability. and inclusive. These structured participatory Training should be accompanied by on-the-job processes should complement and support existing technical assistance or mentoring. internal accountability mechanisms. Counties need • Ensure that participation processes are to strengthen their own internal mechanisms of adequately resourced and staffed. Counties accountability, including PFM systems, audit, and need to plan, budget, and staff public monitoring; participation should be an additional participation processes as part of the mechanism for reinforcing accountability. Building overall budget formulation process. They the capacities of county officials to engage citizens need to designate staff with responsibility is critical, but basic capacities for service delivery for supporting participatory processes and and resource management should simultaneously monitor and reward good performance. be strengthened. If counties lack adequate funds and functionaries to deliver services, the public may • Conduct civic education so that citizens question whether participation matters. understand the basic roles, functions, and responsibilities of county assemblies and Policy makers can take several steps to help make executives through civic education programs public participation more effective. They can be and handbooks that explain entry points for achieved through an incremental and strategic citizens in county budget making, planning, approach that focuses on two or three programs and performance monitoring (Finch and or mechanisms. Efforts require specific actions Omolo 2015). from national and county governments and nonstate actors. 3. Develop county government systems to facilitate participatory processes. Facilitating public Actions by the national government participation will depend partly on building internal government capacity and systems for 1. Develop and disseminate clear guidelines for planning and managing public finances and citizen participation at the national and county procurement, monitoring, and aligning civil levels, based on wide consultations with counties servant roles. It will also require focused efforts and civil society. The Ministry of Devolution to integrate participatory processes into these and Planning has held meetings with both systems, in order to create and disseminate counties and civil society on draft county public user-friendly information (on budgets, plans, participation guidelines and is consolidating and legislation) and link it with communication the feedback into a final document. National June 2015 | Edition No. 12 45 Growth Outlook plans; mobilize citizens; conduct participatory 4. Establish strong incentives for county and other planning and budgeting processes; and put in subnational service providers to be transparent place effective recourse mechanisms (Finch and foster inclusive citizen participation. Several and Omolo 2015). Doing so will require the actions would strengthen these incentives: following actions: • Systematically measure and compare local • Structure county planning, budgeting, and government performance and citizen monitoring processes so that they include satisfaction on metrics that citizens care about. opportunities for citizen engagement. Citizens will demand greater accountability Counties need to be supported to make when they have comparative data on how CBEFs operational and to design and structure their counties are performing. Annually effective participation forums at the subcounty updating and making this information public and ward level that link to the CBEF. The can increase incentives to improve service structures developed should provide clear delivery performance based on systematic mechanisms for communicating the agenda assessments of progress. for consultations, including a timeline of when • Develop and publish an index measuring and where consultations should take place; participation across counties, possibly as disseminating key documents; providing clarity a subset of other county performance on what citizens are being asked to comment indicators. Doing so would provide a on, with public notices and invitations clearly mechanism for identifying good practices providing a summary of the resource persons, and showing where additional support is proposed summary expenditures, and needed. Government and/or civil society targeted revenues; and producing simplified will need to develop systems that regularly feedback tools that make public submissions review and compare the quality of citizen easy to incorporate (Omolo 2015). Citizens participation processes across counties. could help monitor service delivery through County performance on participation could the use of citizen score cards, with a platform be linked to financing and other incentives provided for dialogue between service delivery (awards, recognition of good practice). providers and users. • Ensure that the CBEF incorporates Actions by civil society and donors mechanisms for engaging with marginalized 5. CSOs can expand partnerships to help counties and vulnerable groups and allowing them to build effective systems and processes for select representatives who will act as links to participation, transparency, and mobilization. the CBEF. Representatives should be able to CSOs bring rich experience on how counties can provide guidance to the CBEF on the specific operationalize transparency, participation, and needs of their communities, including ideal recourse mechanisms. Individual counties are communication and grievance mechanisms. enlisting them to help them structure and carry • Develop and monitor robust complaint- out participation processes. Government and handling and recourse systems that track citizen CSOs can reinforce and expand this collaboration. comments and county government responses, There is a need to strengthen and incentivize aggregate this information, and regularly report emerging and existing partnerships, such as the to counties on major types of complaints Devolution Forum, as well as county-level CSO and whether they were resolved. Almost all networks (Finch and Omolo 2015). counties have some sort of system for handling complaints, but these systems fall short of the standards prescribed to handle complex complaints (such as fraud and corruption). 46 June 2015 | Edition No. 12 Growth Outlook Donors can support Kenyan CSOs in their efforts • Increase long-term support for coalitions and to help build responsive and accountable county networks that bring together CSOs working on institutions in a variety of ways: devolution to exchange knowledge on their • Support partnerships between experienced interventions, use common criteria for monitoring civil society actors and county governments counties, put civic education materials and data to design, test, and roll out participatory on devolution on shared platforms, and build planning, budgeting, and monitoring systems clearinghouses. and participatory approaches to enhance county service delivery. 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Review of status of Public Participation and County Information Dissemination Frameworks: A Case Study of Isiolo, Kisumu, Makueni and Turkana Counties. Nairobi. • IpsosSynovate. 2014. "Current Affairs Poll Report." http://www.ipsos.co.ke/home/index.php/downloads. • Kenya National Bureau of Statistics. 2015a. "Economic Survey 2015." Nairobi. ———. 2015b. Leading Economic Indicators, Nairobi. • Muriu, A. R. 2014. "How Does Citizen Participation Impact Decentralized Service Delivery? Lessons from the Kenya Local Authority Service Delivery Action Plan." LASDAP 2002-2010, International Budget Partnership. www.Internationalbudget.org/wp-content/uploads/How-does-Public-Particicipation- Influence-Decentralized-Service-Delivery-Muriu-April-2014.pdf. • National Democratic Institute. 2014. "All County Survey, July 2014." Nairobi. • National Treasury. 2014. "Quarterly Economic and Budgetary Review. Third Quarter." Nairobi June 2015 | Edition No. 12 49 References ———. 2015a. Medium Term Budget Policy Statement. February, Nairobi. ———. 2015b. Quarterly Economic and Budgetary Review. Fourth Quarter. Nairobi. • Nizam, R., and A. Muriu. 2015a. “Basic Requirements for Public Participation in Kenya’s Legal Framework.” World Bank and Kenya School of Government Working Paper Series 2, Washington, DC. ———. 2015b. “One Year On: Review of Country Initiatives in Public Participation in the Roll Out of Devolution.” World Bank and Kenya School of Government Working Paper Series 5, Washington, DC. • Office of the Controller of Budget. 2015. "County Budget Implementation Review Report." Half Year 2014/15, February. Nairobi. • O’Meally, S. 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A national opinion poll on devolution and governance in Kenya. Nairobi • Worldwide Governance Indicators. Database. http://info.worldbank.org/governance/wgi/. • World Bank. 2011. "Violence in the City. Understanding and Supporting Community Responses to Urban Violence." World Bank, Washington DC. ———. 2012. "Kenya at work: Energizing the economy and creating jobs." Kenya Economic Update Edition No. 7. Nairobi. ———. 2013a. "Country Policy and Institutional Assessment Indicators." Washington, DC. http:// datatopics.worldbank.org/cpia/. ———. 2013b. World Wide Governance Indicators. Washington, DC. ———. 2014. Republic of Burundi, Decentralization and Local Service Provision under Fiscal Constraints: Managing Trade-Offs to Promote Sustainable Reforms. Washington, DC. ———. 2015. “Supporting Poor-Inclusive Water and Sanitation Sector Reform. Maji Voice: A New Accountability Tool to Improve Public Service.” Policy Note, Water and Sanitation Program, Washington, DC. • World Bank, and IFC (International Finance Corporation). 2013. "Enterprise Surveys: Kenya Country Profile." http://www.enterprisesurveys.org/data/exploreeconomies/2013/kenya. • Yilmaz, S., G. Alam, S. Gurkan, S. Mahieu, M. Felicio, and V. Venugopal. 2009. "Local Government Discretion and Accountability: Application of a Local Governance Framework." World Bank, Washington, DC. 50 June 2015 | Edition No. 12 ANNEXES Annexes Annex 1: Macroeconomic environment 2009 2010 2011 2012 2013 2014 GDP growth Rates (percent) 3.3 8.4 6.1 4.5 5.7 5.3 Agriculture -2.3 10.0 2.4 2.9 5.2 3.5 Industry 3.7 8.7 7.2 4.2 5.0 6.5 Manufacturing -1.1 4.5 7.2 -0.6 5.6 3.4 Services 6.2 7.3 6.1 4.7 5.4 5.7 Fiscal Framework (percent of GDP)* Total revenue 19.4 19.4 18.8 18.8 19.3 20.7 Total expenditure 24.0 23.5 23.7 24.8 25.7 28.0 Grants 1.0 0.5 0.4 0.5 0.5 1.0 Budget deficit (including grants) -5.8 -3.4 -4.5 -5.1 -6.1 -6.3 Total debt (net) 36.6 39.1 37.0 38.5 43.1 43.9 External Account (percent of GDP) Exports (fob) 12.2 13.1 13.8 12.3 10.6 9.9 Imports (cif) 27.8 31.0 35.3 33.2 31.0 30.2 Balance of trade -10.5 -11.6 -15.3 -13.7 -13.8 -13.3 Current account balance -4.5 -6.3 -7.9 -8.4 -8.7 -9.2 Financial and capital account 6.6 6.7 7.8 10.9 10.0 11.4 Overall balance 2.1 0.4 -0.1 2.5 1.2 2.3 Prices Inflation (average) 10.5 4.1 14.0 9.6 5.7 6.9 Exchange rate (average KSh/$) 77.4 79.2 88.8 84.5 86.1 87.9 Source: World Economic Outlook(IMF) and Kenya National Bureau of Statistics. * End of FY in June (e.g 2009 = 2009/2010) Annex 2: GDP growth rates for Kenya SSA and EAC (2008-2014) 2010 2011 2012 2013 2014 2010-2014 Kenya 8.4 6.1 4.5 5.7 5.3 5.4 SSA (excluding South Africa) 5.7 5.0 4.2 4.6 4.4 4.6 Uganda 7.7 6.8 2.6 3.9 4.9 4.6 Tanzania 6.4 7.9 5.1 7.3 7.2 6.9 Rwanda 6.3 7.5 8.8 4.7 7.0 7.0 Source: World Economic Outlook(IMF) and Kenya National Bureau of Statistics. 52 June 2015 | Edition No. 12 Annexes Annex 3: Kenya annual GDP Years GDP, GDP, 2001 GDP/ GDP current constant capita, growth prices prices current prices KSh KSh US$ Percent Billions Billions Billions 2007 2151 2766 847 6.9 2008 2483 2772 926 0.2 2009 2864 2864 930 3.3 2010 3169 3104 978 8.4 2011 3726 3294 998 6.1 2012 4261 3444 1167 4.5 2013 4731 3640 1238 5.7 2014 5358 3834 1338 5.3 Source: Kenya National Bureau of Statistics and World Bank Development Indicators. Annex 4.a: Broad sectors growth (half year, percent) Year Half Agriculture Industry Services GDP H1 10.1 5.5 6.5 7.1 2010 H2 10.1 11.7 8.1 9.8 H1 3.0 9.4 6.7 7.1 2011 H2 1.5 5.3 5.5 5.1 H1 2.9 3.9 4.8 4.4 2012 H2 3.1 4.5 4.6 4.6 H1 6.4 7.3 5.3 6.6 2013 H2 3.7 2.8 5.5 4.8 H1 2.1 8.7 5.6 5.4 2014 H2 5.3 4.4 5.7 5.2 Source: Kenya National Bureau of Statistics. Note: 'Agriculture = Agriculture, forestry and Fishing Industry = Mining and quarrying + Manufacturing + Electricity and gas + Water supply and sewerage + Construction Services = Wholesale and retail trade + Accomodation and restaurant + Transport and storage + Information and communication + Financial and insurance + Public administration + Professional, administrative and support services + Real estate + Education + Health + Other services + FISIM June 2015 | Edition No. 12 53 54 Annex 4.b: Quartely growth rates (percent) AGRICULTURE INDUSTRY SERVICES GDP (Q:Q-3)/ (Q:Q-3)/ (Q:Q-3)/ (Q:Q-3)/ Years Quarters Q/Q-1 Q/Q-4 (Q-4:Q-7) Q/Q-1 Q/Q-4 (Q-4:Q-7) Q/Q-1 Q/Q-4 (Q-4:Q-7) Q/Q-1 Q/Q-4 (Q-4:Q-7) June 2015 | Edition No. 12 2011 1 42.7 2.9 7.9 -4.2 8.0 9.0 -0.4 7.9 7.8 7.2 7.6 8.6 2 -9.4 3.2 5.9 2.4 10.8 10.5 -2.1 5.6 7.4 -3.2 6.7 8.4 3 -22.7 3.8 5.0 1.2 4.3 8.9 6.0 5.9 7.1 -1.6 5.8 7.9 4 -0.7 -0.8 2.4 7.0 6.3 7.2 1.7 5.1 6.1 2.3 4.4 6.1 2012 1 48.9 3.5 2.6 -4.6 5.8 6.7 -1.0 4.4 5.2 7.5 4.7 5.4 2 -10.6 2.1 2.3 -1.2 2.0 4.6 -1.3 5.3 5.2 -3.6 4.3 4.8 3 -22.7 2.0 1.9 3.8 4.6 4.7 5.2 4.5 4.8 -1.4 4.5 4.4 4 1.3 4.1 2.9 6.7 4.4 4.2 1.9 4.8 4.7 2.5 4.7 4.5 2013 1 51.9 6.3 3.8 -0.5 8.9 5.0 -1.6 4.1 4.7 8.8 6.0 4.9 2 -10.4 6.6 5.0 -4.1 5.7 5.9 1.0 6.5 5.0 -2.6 7.0 5.6 3 -22.9 6.4 5.9 4.6 6.5 6.4 4.0 5.4 5.2 -1.7 6.8 6.2 4 -3.9 0.9 5.2 -0.4 -0.6 5.0 2.2 5.6 5.4 -1.2 2.9 5.7 2014 1 53.8 2.2 4.0 7.0 6.9 4.6 -2.5 4.6 5.5 10.8 4.8 5.4 2 -10.4 2.1 2.8 -0.9 10.5 5.8 2.8 6.5 5.5 -1.4 6.1 5.1 3 -19.3 6.8 2.9 -1.6 4.0 5.1 3.1 5.5 5.6 -2.4 5.4 4.8 4 -6.6 3.8 3.5 0.4 4.8 6.5 2.6 6.0 5.7 -1.5 5.1 5.3 2015 1 54.8 4.4 4.2 7.7 5.9 6.3 -3.1 5.1 5.8 10.1 4.9 5.4 Source: World Bank, based on data from Kenya National Bureau of Statistics. Annexes Annexes Annex 5: Inflation Year Month Overall Food Energy Core inflation inflation inflation inflation January 3.7 2.4 3.9 5.2 February 4.5 4.0 4.6 4.9 March 4.1 2.9 5.3 4.8 April 4.1 3.6 4.3 4.6 May 4.1 4.3 3.5 4.1 June 4.9 6.5 3.5 4.1 2013 July 6.0 8.4 4.6 4.4 August 6.7 9.7 5.3 4.3 September 8.3 12.6 5.7 5.4 October 7.8 12.0 4.8 5.4 November 7.4 10.7 5.1 5.5 December 7.1 10.4 5.1 5.1 January 7.2 10.1 5.5 5.4 February 6.9 9.1 5.6 5.5 March 6.3 8.3 4.7 5.4 April 6.4 8.1 5.9 5.3 May 7.3 8.9 8.1 5.6 June 7.4 8.4 9.0 5.6 2014 July 7.7 9.1 9.1 5.5 August 8.4 10.9 8.6 5.6 September 6.6 8.4 7.2 4.4 October 6.4 8.2 7.0 4.4 November 6.1 7.5 6.4 4.6 December 6.0 7.7 6.0 4.5 January 5.5 7.7 4.5 4.1 February 5.6 8.7 3.3 4.1 March 6.3 11.0 2.9 3.9 2015 April 7.1 13.4 1.5 4.0 May 6.9 13.2 0.3 4.2 June 7.0 13.4 0.2 4.4 Source: World Bank, based on data from Kenya National Bureau of Statistics. June 2015 | Edition No. 12 55 Annexes Annex 6: Tea production and exports Production Price Exports Exports value Year Month MT KSh/Kg MT KSh million January 45,390 284 40,190 11,383 February 38,503 271 34,585 10,071 March 33,368 241 32,534 8,619 April 38,230 210 33,662 8,012 May 39,600 215 40,936 9,463 June 30,530 209 37,783 8,515 2013 July 26,229 212 43,761 9,911 August 26,338 208 36,175 8,236 September 32,800 191 34,082 7,635 October 44,283 174 33,532 6,977 November 35,463 187 40,054 7,834 December 41,719 212 38,741 7,991 January 44,970 236 38,652 8,784 February 33,774 203 33,514 7,317 March 33,336 187 37,642 7,938 April 39,975 188 37,439 7,782 May 41,186 179 36,216 7,380 June 31,945 178 39,011 7,692 2014 July 30,790 200 42,393 8,468 August 26,756 191 38,121 7,974 September 33,321 178 35,961 7,244 October 45,368 180 37,637 7,444 November 38,614 182 38,275 7,595 December 45,071 182 41,631 8,379 January 41,653 212 40,970 8,485 February 24,276 221 41,086 9,313 March 15,688 250 35,700 8,796 2015 April 23,837 258 28,262 7,189 May 37,523 297 27,016 7,506 June 32,286 319 35,915 11,263 Source: Kenya National Bureau of Statistics. 56 June 2015 | Edition No. 12 Annexes Annex 7: Coffee production and exports Production Price Exports Exports value Year Month MT KSh/Kg MT KSh million January 3,938 344 2,790 1,062 February 4,825 320 3,955 1,429 March 4,074 327 3,179 1,188 April 6,038 279 3,986 1,362 May 4,482 230 5,164 1,790 June 2,307 207 5,238 1,778 2013 July 830 251 4,652 1,556 August 3,411 297 4,741 1,409 September 2,442 286 4,802 1,436 October 1,580 239 3,899 1,303 November 1,882 256 3,808 1,153 December 2,133 274 2,675 862 January 2,850 293 3,169 1,055 February 5,382 399 3,078 1,118 March 6,212 459 4,584 1,533 April 6,611 393 4,858 2,013 May 3,747 349 4,594 2,024 June 2,860 358 4,587 2,007 2014 July 1,292 315 5,425 2,383 August 3,214 381 3,313 1,474 September 3,424 404 3,944 1,722 October 2,801 423 3,618 1,645 November 1,703 410 3,718 1,747 December 2,354 414 2,551 1,192 January 2,795 412 2,844 1,307 February 4,837 489 2,884 1,339 March 5,571 378 4,290 2,025 2015 April 3,714 310 3,948 1,901 May 2,969 289 4,383 2,236 June 0 0 4,220 2,068 Source: Kenya National Bureau of Statistics. June 2015 | Edition No. 12 57 Annexes Annex 8: Horticulture exports Exports Exports value Year Month MT KSh million January 18,398 9,071 February 21,576 9,198 March 19,814 7,061 April 19,790 5,228 May 17,135 5,924 June 15,181 6,996 2013 July 15,193 4,971 August 15,005 6,304 September 17,589 5,036 October 20,292 9,118 November 17,689 7,290 December 16,165 7,182 January 18,494 8,376 February 19,640 7,729 March 18,834 9,741 April 20,569 6,636 May 19,858 7,533 June 18,237 6,536 2014 July 17,114 6,138 August 16,459 5,203 September 18,488 5,479 October 19,638 7,380 November 17,089 7,815 December 15,825 5,517 January 18,170 6,413 February 20,599 7,892 2015 March 21,279 10,510 April 21,410 6,223 May 19,147 7,241 Source: Kenya National Bureau of Statistics. 58 June 2015 | Edition No. 12 Annexes Annex 9: Local electricity generation by source Hydro Geo-thermal Thermal Total Year Month KWh million KWh million KWh million KWh million January 377 129 169 675 February 333 113 160 606 March 348 135 163 645 April 345 152 140 637 May 377 159 133 668 June 378 162 131 671 2013 July 386 158 157 701 August 377 158 182 717 September 377 153 175 705 October 385 151 211 746 November 358 151 222 731 December 347 161 198 705 January 339 179 226 747 February 270 145 257 674 March 287 171 279 737 April 308 170 240 717 May 250 191 296 737 June 263 221 246 730 2014 July 254 258 252 763 August 294 247 224 765 September 278 293 164 735 October 279 339 157 775 November 307 322 122 751 December 282 382 94 758 January 278 388 109 776 February 230 352 121 703 March 246 377 134 757 2015 April 264 359 121 744 May 301 380 103 784 June 297 362 109 769 Source: Kenya National Bureau of Statistics. June 2015 | Edition No. 12 59 Annexes Annex 10: Soft drinks, sugar, galvanized sheets and cement production Galvanized Soft drinks Sugar sheets Cement Year Month litres (thousands) MT MT MT January 32,756 49,046 25,528 393,921 February 36,014 50,036 22,874 380,032 March 42,499 43,647 26,297 367,673 April 27,450 39,151 26,010 365,579 May 27,851 36,529 23,866 414,161 June 31,362 49,512 26,147 422,519 2013 July 28,909 61,802 25,007 454,288 August 28,143 58,687 27,398 432,938 September 36,474 50,303 25,051 453,542 October 35,258 52,751 27,588 487,594 November 36,777 54,752 26,421 464,834 December 43,534 53,994 22,965 422,048 January 39,007 64,298 22,090 454,960 February 39,146 60,044 18,573 442,636 March 40,320 63,365 21,267 478,416 April 37,885 47,279 25,989 468,022 May 40,430 44,094 27,433 464,695 June 28,706 42,866 24,465 464,929 2014 July 33,790 55,912 21,779 503,428 August 33,404 50,140 25,733 492,801 September 35,899 47,915 26,126 499,479 October 41,601 42,197 26,732 553,186 November 40,134 34,455 25,763 545,041 December 49,142 64,298 18,539 492,944 January 45,282 63,127 33,543 511,298 February 40,021 57,917 17,261 465,471 March 50,388 63,389 19,299 533,294 2015 April 39,120 46,280 20,074 519,821 May 40,112 44,081 19,829 504,819 June 503,271 Source: Kenya National Bureau of Statistics. 60 June 2015 | Edition No. 12 Annexes Annex 11: Tourism arrivals Year Month JKIA MIA TOTAL January 85,538 26,446 111,984 February 48,970 24,031 73,001 March 52,103 17,850 69,953 April 61,685 6,739 68,424 May 69,751 4,772 74,523 June 91,083 6,692 97,775 2013 July 112,332 11,460 123,792 August 33,749 23,334 57,083 September 83,986 11,721 95,707 October 89,045 12,352 101,397 November 81,242 19,068 100,310 December 103,514 25,159 128,673 January 75,906 19,853 95,759 February 50,270 18,334 68,604 March 76,561 15,041 91,602 April 59,357 7,293 66,650 May 54,334 3,967 58,301 June 42,549 4,758 47,307 2014 July 78,902 7,764 86,666 August 82,465 10,962 93,427 September 53,743 6,778 60,521 October 52,606 6,323 58,929 November 51,480 7,153 58,633 December 65,427 9,570 74,997 January 40,846 10,107 50,952 February 45,141 7,882 53,053 March 66,121 6,958 73,079 2015 April 49,933 4,020 53,953 May 50,764 2,511 53,275 June 59,867 3,218 63,146 Source: Kenya National Bureau of Statistics. June 2015 | Edition No. 12 61 Annexes Annex 12: New vehicles registration All body types Year Month (number) January 20,997 February 16,928 March 17,061 April 20,203 May 25,070 June 23,527 2013 July 23,223 August 15,224 September 15,749 October 15,803 November 15,995 December 12,398 January 15,411 February 17,779 March 15,629 April 12,789 May 14,109 June 14,011 2014 July 16,490 August 32,401 September 24,390 October 17,214 November 17,226 December 20,608 January 15,366 February 17,409 March 25,067 2015 April 20,730 May 22,837 June 25,070 Source: Kenya National Bureau of Statistics. 62 June 2015 | Edition No. 12 Annexes Annex 13: Exchange rate Year Month USD UK pound Euro January 86.9 138.8 115.5 February 87.4 135.5 116.9 March 85.8 129.4 111.3 April 84.2 128.8 109.6 May 84.1 128.7 109.2 June 85.5 132.4 112.8 2013 July 86.9 131.9 113.7 August 87.5 135.5 116.5 September 87.4 138.5 116.7 October 85.3 137.3 116.3 November 86.1 138.6 116.2 December 86.3 141.4 118.2 January 86.2 142.0 117.5 February 86.3 142.8 117.8 March 86.5 143.8 119.6 April 86.7 145.1 119.8 May 87.4 147.3 120.1 June 87.6 148.1 119.2 2014 July 87.8 150.0 118.9 August 88.1 147.2 117.4 September 88.8 145.0 114.7 October 89.2 143.7 113.2 November 90.0 142.0 112.3 December 90.4 141.5 111.5 January 91.4 138.5 106.3 February 91.5 140.2 103.9 March 91.7 137.5 99.4 2015 April 93.4 139.6 100.7 May 96.4 149.1 107.5 June 98.6 155.1 110.4 Source: Central Bank of Kenya. June 2015 | Edition No. 12 63 Annexes Annex 14: Interest rates Short-term Long -term Overall Average weighted Interest 91-Treasury Central deposit lending rate Interbank bill bank rate rate Savings rate spread January 5.9 8.1 9.5 6.5 1.7 18.1 11.6 February 9.0 8.4 9.5 6.3 1.6 17.8 11.6 March 8.8 9.9 9.5 6.5 1.4 17.7 11.2 April 7.9 10.4 8.5 6.4 1.5 17.9 11.5 May 7.2 9.5 8.5 6.5 1.5 17.5 10.9 June 7.2 6.2 8.5 6.7 1.7 17.0 10.3 2013 July 8.0 5.9 8.5 6.6 1.6 17.0 10.4 August 9.0 10.0 8.5 6.4 1.7 17.0 10.6 September 7.8 9.6 8.5 6.5 1.6 16.9 10.3 October 10.7 9.7 8.5 6.4 1.6 17.0 10.6 November 10.8 9.9 8.5 6.6 1.6 16.9 10.3 December 9.1 9.5 8.5 6.6 1.6 17.0 10.3 January 10.4 9.3 8.5 6.6 1.6 17.0 10.5 February 8.8 9.2 8.5 6.6 1.5 17.1 10.5 March 6.5 9.0 8.5 6.6 1.6 16.9 10.3 April 7.4 8.8 8.5 6.5 1.5 16.7 10.2 May 7.8 8.8 8.5 6.4 1.5 17.0 10.6 June 6.6 9.8 8.5 6.6 1.5 16.4 9.8 2014 July 8.1 9.8 8.5 6.6 1.3 16.9 10.3 August 11.8 8.3 8.5 6.5 1.5 16.3 9.8 September 7.4 8.4 8.5 6.6 1.5 16.0 9.4 October 6.8 8.7 8.5 6.6 1.6 16.0 9.4 November 6.9 8.6 8.5 6.7 1.5 15.9 9.2 December 6.9 8.6 8.5 6.8 1.8 16.0 9.2 January 7.2 8.6 8.5 6.6 1.6 15.9 9.3 February 6.9 8.6 8.5 6.7 1.5 15.5 8.8 March 6.8 8.5 8.5 6.6 1.5 15.5 8.8 2015 April 8.9 8.4 8.5 6.6 1.9 15.4 8.8 May 11.1 8.3 8.5 6.6 1.5 15.3 8.7 June 11.8 8.3 10.0 6.6 1.9 15.5 8.8 Source: Central Bank of Kenya. 64 June 2015 | Edition No. 12 Annex 15: Credit to private sector Annexes services Other activities growth rates Real estate Private Consumer Business Total private Agriculture Trade households durables sector annual Manufacturing construction communication insurance Building and Transport and Finance and quarrying Mining and January 12.0 13.3 16.9 9.0 33.6 -11.3 29.9 16.9 5.2 7.3 9.8 23.1 10.0 February 11.6 8.0 15.1 10.1 22.4 -12.9 -2.6 17.3 8.6 14.0 8.3 24.5 11.0 March 11.2 11.0 12.6 10.2 23.9 -15.3 -9.5 15.8 4.3 11.0 6.7 24.0 19.6 April 10.5 4.2 11.6 7.6 17.5 -12.1 -2.4 13.9 -17.7 16.5 8.2 27.1 16.9 May 9.5 2.0 4.9 7.3 13.2 -13.2 4.2 14.0 -9.8 24.8 7.7 37.4 -0.4 June 12.7 1.9 5.5 10.3 11.1 -7.2 11.0 -1.2 -16.0 27.1 13.5 45.5 34.8 2013 July 13.5 6.5 6.4 11.0 9.6 6.3 -0.8 17.5 -13.4 27.3 13.6 36.0 7.3 August 16.2 3.6 9.6 15.4 11.4 9.8 -3.5 16.9 17.4 26.6 13.3 42.1 10.9 September 17.4 -0.5 6.8 20.3 13.5 13.1 -12.4 14.7 18.8 32.9 18.3 35.5 15.0 October 18.0 -3.1 8.8 24.4 11.8 11.1 -25.2 16.6 19.5 26.5 25.0 41.3 16.7 November 20.0 2.9 13.6 23.2 10.2 14.7 -16.8 18.4 18.5 27.7 24.7 41.3 21.6 December 20.1 2.0 7.3 19.9 2.3 18.1 -8.5 22.5 11.0 29.8 18.1 52.6 27.0 January 20.5 -1.1 12.8 18.6 0.1 23.1 -13.6 23.3 -16.3 35.6 20.2 50.1 24.6 February 21.5 3.4 16.8 20.2 5.4 31.2 12.1 24.0 -14.0 30.9 20.4 48.1 15.1 March 22.7 7.7 17.3 25.2 2.0 44.8 39.0 28.4 -8.6 44.0 22.5 45.5 -14.6 April 23.9 16.1 22.8 24.5 4.4 45.4 31.2 33.2 5.9 35.2 21.8 51.0 -15.5 May 25.0 16.7 28.5 25.4 10.7 50.1 26.5 31.6 9.2 24.7 22.0 44.0 -3.4 June 25.8 17.9 31.7 24.4 15.1 44.3 31.2 27.5 30.7 28.3 20.6 38.2 3.0 2014 July 25.5 18.8 27.5 25.9 9.4 42.3 37.8 30.8 24.3 30.2 20.3 36.5 1.8 August 24.5 20.9 27.0 25.1 10.8 46.1 42.6 29.4 19.6 27.8 18.4 31.7 -0.2 September 24.5 30.8 35.2 20.7 11.8 43.8 40.4 36.5 -0.5 23.8 16.4 44.1 -12.3 October 23.6 36.8 32.7 18.7 10.3 45.4 75.1 35.7 3.5 38.0 11.4 27.5 -24.8 November 22.2 32.1 29.8 19.7 11.3 45.2 66.9 31.6 1.9 38.9 12.4 28.9 -29.9 December 22.2 27.9 30.7 21.2 13.6 45.6 68.4 32.4 -15.8 39.1 18.7 25.0 -32.3 June 2015 | Edition No. 12 January 21.8 25.2 30.1 19.8 17.6 43.0 76.1 33.4 -3.8 35.2 14.2 24.8 -31.3 February 20.7 24.7 27.5 21.5 11.6 38.6 79.6 29.1 -16.2 38.7 15.3 19.3 -31.4 2015 65 March 19.6 22.3 21.1 18.8 12.7 31.3 47.5 19.6 -20.1 28.0 12.4 27.8 -8.9 Source: Central Bank of Kenya. Annexes Annex 16: Money aggregate Broad Growth money Reserve rates (yoy) supply (M2) Money (M1) money January 18.2 16.1 11.5 12.2 February 17.0 15.5 17.6 23.9 March 15.8 17.8 16.0 11.5 April 18.5 20.0 13.6 9.5 May 17.8 21.9 14.9 18.9 June 15.6 20.7 16.6 11.7 2013 July 13.9 18.5 15.5 10.3 August 13.8 17.5 15.7 23.8 September 14.7 20.2 12.1 12.1 October 12.8 16.0 13.8 22.7 November 13.3 19.8 13.3 13.3 December 13.8 16.3 10.5 9.2 January 16.7 19.9 10.6 10.3 February 17.8 20.3 5.0 9.9 March 19.0 20.4 4.5 7.7 April 16.1 16.9 8.4 17.7 May 18.4 19.9 9.2 11.9 June 18.8 21.3 6.9 12.6 2014 July 18.8 18.9 8.6 7.3 August 20.0 21.0 7.9 15.2 September 17.1 12.6 7.9 11.2 October 18.4 12.9 6.3 13.5 November 17.8 13.5 4.2 9.3 December 18.6 13.2 6.2 18.5 January 17.0 11.4 8.2 15.8 February 17.2 10.0 9.9 22.9 March 16.4 11.9 9.4 11.8 2015 April 17.2 13.4 11.1 May 14.8 10.0 9.7 June 16.4 9.6 10.8 Source: Central Bank of Kenya. 66 June 2015 | Edition No. 12 Annexes Annex 17: Mobile payments Number of Number of Value of Number of customers transactions transactions Month agents (Millions) (Millions) (Millions) January 85548 21.4 53.4 142.7 February 88393 21.8 53.5 141.1 March 93211 22.3 52.4 134.4 April 96319 23.0 56.0 142.6 May 100584 23.5 60.3 158.8 June 103165 23.8 60.0 152.5 2013 July 105669 24.3 62.7 162.8 August 108559 23.9 64.7 168.1 September 110432 24.0 63.4 165.6 October 111697 24.4 68.3 175.3 November 112947 24.9 68.7 175.2 December 113130 25.3 69.1 182.5 January 114107 25.8 67.1 178.5 February 115015 26.1 65.6 172.8 March 116196 26.2 74.0 192.7 April 116581 26.1 72.1 186.7 May 117807 25.8 74.5 198.1 June 120781 25.9 74.0 189.9 2014 July 122462 26.2 77.5 201.0 August 124708 26.3 78.9 206.7 September 124179 26.3 78.2 206.3 October 128706 26.0 82.9 210.3 November 121419 24.9 81.0 203.2 December 123703 25.2 85.6 225.5 January 125826 25.4 81.7 210.5 February 127187 25.5 80.7 208.1 March 128591 25.7 90.3 231.8 2015 April 129218 26.1 84.9 213.7 May 129735 26.5 89.9 230.2 June 131761 26.5 90.7 227.9 Source: Central Bank of Kenya. June 2015 | Edition No. 12 67 Annexes Annex 18: Nairobi stock exchange (20 share index) and the Dow Jones (New York) Month NSE (1966 = 100) Dow Jones January 4417 13,861 February 4519 14,054 March 4861 14,579 April 4765 14,840 May 5007 15,116 June 4598 14,910 2013 July 4788 15,500 August 4698 14,810 September 4793 15,130 October 4993 15,546 November 5101 16,086 December 4927 16,577 January 4856 15,699 February 4933 16,322 March 4946 16,458 April 4949 16,581 May 4882 16,717 June 4885 16,827 2014 July 4906 16,563 August 5139 17,098 September 5256 17,043 October 5195 17,391 November 5156 17,828 December 5113 17,823 January 5212 17,165 February 5491 18,133 March 5248 17,776 2015 April 5091 17,841 May 4787 18,011 June 4906 17,620 Source: Nairobi Securities Exchange and New York Stock Exchange. 68 June 2015 | Edition No. 12 Annexes Annex 19: Nominal and real exchange rate NEER REER Month 2003=100 2003=100 January 119 66 February 119 67 March 116 64 April 114 63 May 113 63 June 115 63 2013 July 116 64 August 117 65 September 117 64 October 115 63 November 116 63 December 116 63 January 116 62 February 116 62 March 117 62 April 117 62 May 118 62 June 118 62 2014 July 118 62 August 118 61 September 118 61 October 118 61 November 118 61 December 117 60 January 117 59 2015 February 117 59 March 116 58 Source: Central Bank of Kenya. June 2015 | Edition No. 12 69 70 Annex 20: Fiscal position Actual (percent of GDP) 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15* Revenue and grants 19.4 19.8 18.9 20.5 19.9 19.2 19.2 19.9 19.3 Total revenue 18.6 18.7 18.2 19.4 19.4 18.8 18.8 19.3 18.9 Tax revenue 16.9 17.1 17.0 17.9 17.7 17.1 17.3 18.2 18.0 Income tax 6.2 6.8 6.9 7.2 7.5 7.8 8.3 8.9 8.9 June 2015 | Edition No. 12 VAT 4.8 4.8 4.7 4.9 5.0 4.4 4.1 4.6 4.5 Import duty 1.4 1.4 1.4 1.4 1.3 1.3 1.3 1.3 1.3 Excise duty 2.8 2.7 2.6 2.5 2.3 2.0 1.9 2.0 2.0 Other revenues 1.7 1.4 1.4 2.0 1.5 1.6 1.7 1.3 1.2 Railway levy 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Appropriation-in-aid 1.6 1.5 1.2 1.6 1.7 1.7 1.5 1.1 0.9 Grants 0.8 1.1 0.7 1.0 0.5 0.4 0.5 0.5 0.4 Expenditure and net lending 20.9 23.1 22.3 24.0 23.5 23.7 24.8 25.7 28.3 Recurrent 15.3 17.4 16.3 16.9 17.2 16.3 17.5 17.5 18.4 Wages and salaries 6.3 6.3 5.8 5.7 5.8 5.5 6.1 5.6 5.1 Interest payments 2.1 2.1 1.9 2.1 2.2 2.1 2.7 2.6 3.0 Development and net lending 4.0 5.7 6.0 7.1 6.4 7.4 6.6 7.1 11.3 Transfer to counties 0.0 0.0 0.0 0.0 0.0 0.0 0.2 3.8 4.0 Parliamentary service 0.0 0.0 0.0 0.0 0.0 0.0 0.3 0.4 0.4 Judicial service 0.0 0.0 0.0 0.0 0.0 0.0 0.3 0.3 0.2 Fiscal balance Deficit excluding grants (commitment basis) -2.3 -4.4 -4.0 -4.6 -4.2 -4.9 -6.0 -6.4 -9.4 Deficit including grants (commitment basis) -1.5 -3.3 -3.4 -3.6 -3.6 -4.5 -5.6 -5.9 -8.9 Deficit including grants (cash basis) -1.8 0.3 -4.4 -5.8 -3.4 -4.5 -5.1 -6.1 -8.3 Annexes Annexes Actual (percent of GDP) 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15* Financing Foreign -0.1 0.3 1.5 0.8 0.8 2.8 1.4 2.1 3.8 Domestic borrowing 1.9 -0.6 2.8 5.0 2.6 1.6 3.8 4.0 4.4 Public debt to GDP (net) 36.6 33.4 35.4 36.6 39.1 37.0 38.5 44.0 45.5 External debt 20.0 19.1 20.2 18.9 21.0 19.4 18.7 22.6 24.9 Domestic debt 20.2 18.6 19.5 21.9 22.2 21.5 23.3 25.5 24.8 Memo: GDP (Calendar year current market prices, 2151.3 2483.1 2863.7 3169.3 3725.9 4261.2 4730.8 5357.7 6075.6 KSh billions) GDP (Fiscal year current market prices, KSh 2006.7 2317.2 2673.4 3016.5 3447.6 3993.5 4496.0 5044.2 5716.6 billions) Source: National Treasury (Quarterly Economic and Budgetary Review, August 2015) and Kenya National Bureau of Statistics. June 2015 | Edition No. 12 71 72 Annex 21: 12-months cumulative balance of payments 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015* 1. CURRENT ACCOUNT 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015* Balance of trade 2. MERCHANDISE ACCOUNT -511 -1034 -1973 -1671 -2512 -3330 -4253 -4786 -6097 -6132 -2226 -2996 -4260 -3892 -4642 -6440 -6893 -7584 -8049 June 2015 | Edition No. 12 2.1 Exports (fob) -3817 -4936 -6444 -5768 -7169 -9007 -10539 -11229 -12719 -12340 Coffee Tea 3516 4132 5048 4528 5225 5807 6183 5822 6174 5759 Horticulture 138 166 155 201 209 222 269 192 232 232 Manufactured goods 656 693 924 892 1159 1153 1199 1215 1069 1090 Other 509 607 763 692 725 678 695 741 808 743 422 513 625 526 608 729 700 705 592 529 2.2 Imports (cif) 1792 2153 2580 2216 2525 3026 3320 2969 3473 3166 Oil Chemicals 7333 9069 11492 10296 12395 14814 16722 17051 18893 18099 Manufactured goods 1745 1919 3051 2192 2673 4081 4081 3838 4026 3208 Machinery and transport equipment 1004 1156 1446 1324 1603 1947 2076 2279 2388 2513 Other 1065 1435 1589 1411 1774 2250 2302 2624 2677 2732 2252 2800 3063 3065 3808 3686 4748 4600 6128 6210 3. SERVICES 1267 1759 2343 2304 2537 2848 3251 3593 3673 3435 3.1 Non-factor services 3.2 Income account 3306 3902 4470 4097 4657 5676 6286 6443 6622 6208 3.3 Current transfers account 1591 1940 2184 1876 2527 2566 3645 3646 3373 3366 of which remittances -70 -143 -45 -38 -158 7 -164 -339 -528 -643 1785 2106 2331 2259 2288 3103 2804 3137 3777 3485 4. CAPITAL & FINANCIAL ACCOUNT 408 574 611 609 642 891 1171 1291 1428 1492 4.1 Capital account 1186 1888 1505 2451 2675 3288 5514 5471 7475 4850 4.2 Financial account 211 267 294 290 154 235 235 98 24 443 Annexes 4.2.1.1 Official, medium and long-term Annexes Annex 21: 12-months cumulative balance of payments 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015* 4.2.1.2 Private, medium and long-term 975 1621 1210 2161 2522 3053 5278 5373 7451 4407 4.2.1.2.3 Direct investment (FDI) -202 -16 106 466 308 340 1147 592 2289 1595 4.2.1.3 Commercial banks (net) 38 592 72 44 176 35 -87 -258 981 789 -11 438 153 127 106 107 107 218 1023 755 4.2.2 Short term and net errorsand omissions (NEO) -156 -5 15 494 61 -213 854 49 666 315 Short term (including portfolio flows) Net errors and omissions (NEO) 1296 1050 1017 1158 1977 2891 3364 714 1032 995 577 1130 1678 2429 2579 2763 2881 5. OVERALL BALANCE 582 18 22 581 847 1213 935 2410 752 -1173 Memo: 675 854 -469 781 163 -43 1261 685 1378 -1282 Gross reserves Official Commercial banks 3331 4557 4641 5064 5123 6045 7160 8483 9738 9473 Imports cover (calender year) 2415 3355 2875 3847 4002 4248 5702 6560 7895 7212 Import cover (36 mths imports) 916 1202 1765 1217 1121 1797 1458 1923 1843 2262 3.5 4.0 2.7 4.1 3.5 3.1 3.8 4.3 4.6 4 GDP market price (Kshs billion) 3.9 4.8 3.4 4.1 3.9 3.7 4.3 4.5 5.0 5 GDP market price (US$ billiom) 1862 2151 2483 2864 3169 3726 4261 4731 5358 6102 25.8 32.0 35.9 37.0 40.0 42.0 50.4 54.9 60.9 62.8 Source: Central Bank of Kenya June 2015 | Edition No. 12 73 Annexes Annex 22: Growth Outlook 2014 2015e 2016f 2017f BASELINE GDP Revised projections 5.3 5.4 5.7 6.1 Previous projections 6.0 6.6 6.5 HIGH CASE SCENARIO GDP Revised projections 5.3 5.8 6.7 6.9 Previous projections 6.5 7.0 7.0 LOW CASE SCENARIO GDP Revised projections 5.3 5.1 5.5 5.7 Previous projections 5.6 5.6 5.7 Source: World Bank. Note: e(estimate); f(forecast) 74 June 2015 | Edition No. 12 Storm Clouds Gathering The economy facing strong headwinds with a special focus on Public Participation Growth in 2014 was solid and broad based as the economy performed well while absorbing two major government programs: devolution and infrastructure scale-up. The economy grew 5.3 percent, driven by stronger than expected growth in services and other industry. Consumption demand remained the main source of growth. Investment demand rebounded, as investors dropped their wait and see stance. The special focus of this update highlights the importance of public participation, transparency, and accountability as a means of improving efficiency, equity, and inclusiveness of government and service delivery. It examines the progress counties have made in implementing a strong legal framework on participation under the devolved system of government, identifies the successes and challenges, and proposes the priority actions that National and County governments can take to enhance public participation. This report has four messages: First,Kenya’s economic performance remains solid, underpinned by strong infrastructure spending and consumer demand. Growth in 2015 is estimated at 5.4 percent, a 0.6 percent downward revision from its estimate in December 2014. The revision reflects the strong headwinds the economy is facing in the foreign exchange market and the monetary policy response to calm those fears. Second, the current expansionary fiscal path is not sustainable and presents a risk to growth. Although heavy infrastructural spending is a boon for Kenya’s production space and future growth, the short - to medium-term macro-fiscal framework is vulnerable to macroeconomic shock as fiscal space has been wiped out. Third, county governments, with support from central authorities have made considerable progress towards implementing constitutional and legal provisions for transparency, accountability and participation. In the early stages, they prioritized the setting up of structures and systems to facilitate public participation. Counties have built communication frameworks, and established participatory forums as per legislative requirements. Beyond meeting the legislative requirements counties have adopted innovative initiatives to engage citizens. Much still needs to be done to ensure that proper and adequate mechanisms are put in place. Lastly, the high cost of participation, the lack of administrative capacity and trained staff to implement participatory processes and tokenistic forms of participation continue to hinder effective citizen engagement. While most counties have taken steps to put in place communication systems, most county budgets are still not readily available to the public despite requirements of the PFM Act. World Bank Group Delta Center Join the conversation: Menengai Road, Upper Hill Facebook and Twitter P. O. Box 30577 – 00100 @WorldBankKenya Nairobi, Kenya Telephone: +254 20 2936000 Send questions and comments: Fax: +254 20 2936382 #KenyaEconomicUpdate Website: www.worldbank.org/kenya Produced by Macroeconomics & Fiscal Management, Trade & Competitiveness and Governance Global Practices Africa Region