October 2016 | Edition No. 14 ENVIRONMENT INTEREST POLICY PRODUCTIVITY RURAL INVESTMENT RURAL ENVIRONMENT INTEREST GROWTH POLICY PUBLIC PRODUCTIVITY INVESTMENT RESULTS MARKET GROWTH LAND PUBLIC PERCENT RESULTS MARKET LAND OUTPUTS PERCENT POLICY FINANCIAL GROWTH OUTPUTS OUTLOOK POLICY FINANCIAL GDP PURCHASES OUTLOOK RATES LAND RATES GDP PURCHASES GROWTH PUBLIC LAND PUBLIC MARKET MARKET ROADS ROADS WEATHER FINANCIAL INDUSTRY FARMING ROADS FARMING PUBLIC PERCENT PERCENT INDUSTRY REFORMS GDP PUBLIC GDP REFORMS Beyond Resilience Increasing Productivity of Public Investments Beyond Resilience Increasing Productivity of Public Investments TABLE OF CONTENTS ABBREVIATIONS AND ACRONYMS........................................................................................................................... i FOREWORD ............................................................................................................................................................... ii Acknowledgments............................................................................................................................................ iii EXECUTIVE SUMMARY ............................................................................................................................................. v THE STATE OF KENYA’S ECONOMY 1. Kenyan Economy Resilient Despite Global Headwinds ...................................................................................... 2 1.1 In Contrast to Several Sub-Saharan African Economies, Kenya’s GDP Growth Strengthened in 2015 ........ 2 1.2 Agriculture, Construction and Services Were the Main Drivers of Growth in 2015 .................................... 2 1.3 Consumption and Government Spending Spurred Robust Domestic Demand............................................ 3 1.4 Yet Kenya’s Growth Performance Falls Short of its Target Level and Remains Below Some EAC Peers ....... 3 2. Kenya’s Robust Growth Momentum Has Been Sustained in 2016..................................................................... 4 2.1 With the Exception of the Manufacturing Sector, Growth in 2016 Has Been Broad-Based......................... 4 2.2 Buoyant Domestic Demand Has Mitigated Subdued Global Demand......................................................... 6 3. A Stable Macroeconomic Environment Has Underpinned Kenya’s Performance.......................................... 7 3.1 Inflation Has Fallen Within the Central Bank’s Target Range ........................................................................ 7 3.2 The Exchange Rate Has Stabilized in 2016 .................................................................................................... 8 3.3 The Current Account Position is Healthy....................................................................................................... 8 3.4 Nonetheless, Fiscal Consolidation is Delayed................................................................................................ 10 3.5 Though Sound, Financial Markets Have Been Affected by Structural Changes and Episodic Disturbances. 13 4. The Medium Term Growth Outlook Remains Bright ..................................................................................... 14 4.1 The Drivers of Growth Remain in Place......................................................................................................... 14 4.2 Downside Risks have External and Domestic Sources................................................................................... 16 SPECIAL FOCUS 5. Instituting Systems of Public Investment Management ................................................................................ 26 5.1 Kenya is Expanding its Infrastructure Spending............................................................................................. 28 5.2 Kenya Has Improved Its Infrastructure but More Work is Needed To Raise Its Competitiveness ............... 30 5.3 The scale-up of investment is yet to boost overall productivity ................................................................... 32 5.4 Productivity Trends Have Been Affected By the Way the Public Investments Are Managed....................... 33 5.5 Land Presents a Unique Challenge to Public Investment Management ...................................................... 42 5.6 From Spending To Growth ............................................................................................................................. 50 REFERENCES ............................................................................................................................................................. 57 STATISTICAL TABLES ................................................................................................................................................. 60 LIST OF FIGURES Figure 0.1: Growth will outperform the average for the region for the eighth consecutive year......................... v Figure 0.2: Investment as a share of GDP has increased but its contribution to growth contracted in the years . vi Figure 0.3: Index of Public investment management: Kenya versus South Africa................................................ vi Figure 0.4: Only one third of the cases filed in the Land and Environment Court are concluded in 12 months .. viii Figure 1.1: Kenya’s growth strengthened in 2015 despite global headwinds........................................................ 2 Figure 1.2: Growth was consumption driven.......................................................................................................... 3 Figure 1.3: However, Kenya’s growth remained below MTP II target..................................................................... 3 Figure 1.4: The economy sustained the growth momentum of 2015 ................................................................... 4 Figure 1.5: Leading economic indicators suggests ongoing robust growth in Q2 ................................................. 5 Figure 1.6: Overall Inflation has been contained within policy bounds since the beginning of 2016................... 8 Figure 1.7: Energy inflation has declined, while food inflation continues to be the main driver of overall inflation. 8 Figure 1.8: The Shilling remained stable against the U.S dollar in 2016................................................................. 8 Figure 1.9: Current Account Balance contracted.................................................................................................... 9 Figure 1.10: Current Account Financing.................................................................................................................... 9 Figure 1.11: Oil share in total imports declined........................................................................................................ 9 Figure 1.12: Remittances to Kenya remain strong, despite weakness in global economy....................................... 9 Figure 1.13: Kenya’s fiscal expansion is driven by infrastructural spending............................................................. 10 Figure 1.14: Budget execution has underperformed ............................................................................................... 12 Figure 1.15: There has been marginal increase in revenue...................................................................................... 12 Figure 1.16: The increase in debt levels have picked up pace ................................................................................. 13 Figure 5.1: Infrastructure takes half of development budget, financed through debt ......................................... 28 Figure 5.2: Public Investment in low income countries (LICs), middle income countries (MICs), and high income countries (HICs), percent of GDP and percent of Government Expenditure ...................................... 29 Figure 5.3: Quality of trade and transport related infrastructure, in Kenya, 2007-2016....................................... 31 Figure 5.4: Quality of trade and transport related infrastructure, Kenya, LMI and SSA......................................... 31 Figure 5.5: Country Score Card for Kenya, 2016, Logistics Performance Index ..................................................... 31 Figure 5.6: Global Competitiveness Index, Kenya, 2015-16................................................................................... 31 Figure 5.7: Gains in Total factor Productivity (TFP) have tapered........................................................................... 32 Figure 5.8: The ICOR is rising: more inputs are required to produce one unit of output....................................... 32 Figure 5.9: Net Investment contribution to growth contracted ............................................................................ 32 Figure 5.10: Eight Public Investment Management must-have functionalities ....................................................... 34 Figure 5.11: The infrastructure budget execution Gap has increased to about 3.7percent of GDP........................ 37 Figure 5.12: Private firms reporting who supplied them with information on the estimated price of goods to be procured by public institutions ............................................................................................................ 38 Figure 5.13: How suppliers determine the price to quote when placing tenders with public institutions.............. 38 Figure 5.14: Percent of MDA Development Expenditure allocated to Refurbishment of Buildings/Infrastructure and Civil Works...................................................................................................................................... 40 Figure 5.15: Land Acquisition Process (from the Land Act, 2012) ........................................................................... 45 Figure 5.16: The Land Acquisition Stumbling Blocks ................................................................................................ 46 Figure 5.17: The Key Assessments in the Environment and Social Impact Assessment ......................................... 48 Figure 5.18: Civil Backlog Cases by Type (High Court–June 2013)20........................................................................ 49 LIST OF BOXES Box 1.1: Status of Kenya’s devolution: Counties overcoming challenges .............................................................. 11 Annex 1, Box 1.1: What are the Implications of the UK’s vote to leave the European Union on Kenya?............... 20 Annex 1, Box 1.2: New Rules of The Game for Kenya’s Banking Sector................................................................... 22 Box 5.1: Data on Public Infrastructure spending in Kenya is likely overstated ...................................................... 29 Box 5.2: Drivers of African Economic Growth ........................................................................................................ 30 Box 5.3: Improving productivity of public investments.......................................................................................... 33 Box 5.4: Project preparation in the energy sector.................................................................................................. 35 Box 5.5: Steps taken to improve appraisal in Uganda............................................................................................ 36 Box 5.6: Cash short falls and delays in making payments...................................................................................... 39 Box 5.7: E-promis.................................................................................................................................................... 41 Box 5.8: Findings of the Ndung’u Commission....................................................................................................... 43 Annex 2, Box 2.1: Drawing from Legislation in other countries .............................................................................. 56 LIST OF TABLES Table 1.1: Medium term Growth Outlook (percent, unless stated) ....................................................................... 15 Table 5.1: Examples of Land Required for New Infrastructure across Various Sectors .......................................... 42 Table 5.2: The Escalating Cost of Land in Nairobi 2007-2014.................................................................................. 44 ABBREVIATIONS AND ACRONYMS CBK Central Bank of Kenya NCTIP Northern Corridor Transport CIP Charter Incentive Program Improvement Project COMESA Common Market for Eastern and NEER Nominal Effective Exchange Rate Southern Africa NEMA National Environment Management DANIDA Danish International Development Authority Agency NIPSH Non-Profit Institutions Supporting DRC Democratic Republic of Congo Households DSA Debt Sustainability Analysis NLC National Land Commission EAC East African Community NPLs Non-Preforming Loans EACC Ethics and Anti-Corruption Commission NSE Nairobi Security Exchange ELC Environment and Land Court OAG Office of the Auditor General e-PROMIS Electronic Projects Monitoring System OECD Organization for Economic Cooperation and Development ESIA Environment and Social Impact Assessment PAPP Project Analysis and Public-Private Partnerships EU European Union PAPs Project Affected Persons FDI Foreign Development Investment PBO Parliamentary Budget Office GDP Gross Domestic Product PFM Public Finance Management H1, H2 First Half, Second Half PIM Public Investment management HICs High Income Countries PMI Purchasing Manager’s Index ICORs Incremental Capital Output Ratios PPARB Public Procurement Administrative ICT Information Communication Review Board Technology PPP Purchasing Power Parity IFMIS Integrated Financial Management Information System Q1,2,3,4 Quarter One, Two, Three, Four IFRS International Financial Reporting RAP Resettlement Action Plan Standards REER Real Effective Exchange Rate IIWG Investment and Infrastructure Working ROWs Right of Ways Group SACCOs Savings and Credit Cooperative IMF International Monetary Fund Organizations KBRR Kenya Bank’s Reference Rate SCF Standby Credit facility KETRACO Kenya Electricity Transmission SDGs Sustainable Development Goals Company SGR Standard Gauge Railway KEU Kenya Economic Update SME Small and Medium Enterprises KNBS Kenya National Bureau of Statistics SOEs State Owned Enterprises KRA Kenya Revenue Authority SSA Sub-Saharan Africa KURA Kenya Urban Roads Authority T-bill Treasury Bills KWh Kilowatt-hour TFP Total Factor Productivity LICs Low Income Countries U.S United States LMI Lower Middle Income UK United Kingdom MCA Members of County Assembly UN United Nations MDA Ministries and Department Agencies USA United States of America MFIs Microfinance Institutions USD United States Dollar MICs Middle Income Countries WAEMU West African Economic and Monetary MTEF Medium Term Expenditure Framework Union MTP Medium Term Plan WDI World Development Indicators MW Mega Watts October 2016 | Edition No. 14 i FOREWORD It is my pleasure to present to you our fourteenth edition of the World Bank’s Kenya Economic Update. Kenya is one of the bright spots in the Sub-Saharan Africa due to robust domestic demand, a stable macroeconomic environment, and the economic dividend from prevailing low oil prices. This report has four main messages: First, for the eighth consecutive years, economic growth in Kenya will outperform the Sub-Saharan African average. The World Bank projects that Kenya’s growth rate will reach and be sustained at around 6 percent in the medium term. Ongoing infrastructure investments will ease supply side constraints, lower the cost of doing business and boost Kenya’s competitiveness. At the same time growth in private consumption is fueled by a surge in remittances, an emerging middle class and the demographic divided. These two levers of growth—infrastructure investment and private consumption—will benefit from a stable macroeconomic environment characterized by low inflation and currency stability. Second, Kenya’s economy remains vulnerable to risks that could derail the growth momentum. Domestically the recent capping of interest rates could lead to unintended consequences and election related spending could result in fiscal slippage. Adverse la nina climatic conditions could curtail agricultural growth prospects which remain largely weather dependent. In the external sector, subdued global demand could dampen the demand for Kenya’s exports, while volatility in global financial markets could trigger destabilizing capital outflows. Third, the report argues that reforms to address systemic weaknesses in the Public Investment Management (PIM) are warranted. The identified PIM system improvements can enhance the execution of infrastructure projects which in turn can accelerate the catalytic impact of public investment on economic growth. Fourth, the report argues that there is urgent need to address challenges related to land acquisition, compensation and Resettlement Action Plans (RAPs), which lead to significant delays and cost escalation in the execution of public infrastructure projects. As in the past, we are proud to have worked with many key Kenyan stakeholders during the preparation of this report. We hope that you too will join us in debating topical policy issues that can contribute to fostering growth, shared prosperity and poverty reduction in Kenya. Diariétou Gaye Country Director for Kenya World Bank ii October 2016 | Edition No. 14 ACKNOWLEDGEMENTS T his fourteenth edition of the Kenya Economic Update was prepared by a core team led by Jane Kiringai including Allen Dennis who provided overall guidance for Part 1, Jens Kromann Kristensen, Sheila Kamunyori, Christine Awiti, Angélique Umutesi, Mehnaz S. Safavian, Rajiv Daya, Christine Owour, Lillian Kahindo, and Rachel Sebudde. The team acknowledges contributions from Anne Khatimba, Keziah Muthembwa, Vera Rosauer, Georgia Dowdall, Laurencia Njagi, Narae Choi, Abdu Muwonge, Charles Muiru, and Robert Waiharo. The report benefitted from the insights of several peer reviewers including Mamadou Ndione, Jonathan Mills Lindsay, and Jay-Hyung Kim. The team also received overall guidance from Kevin Carey (Acting Practice Manager, Macroeconomic and Fiscal Management), Thomas O’Brien (Country Program Coordinator for Kenya, Uganda, Rwanda, Uganda and Eritrea, Johan Mistiaen (Program Leader for Kenya, Uganda, Rwanda and Eritrea), Meskerem Brhane (Program Leader for Kenya, Uganda, Rwanda and Eritrea), and Diariétou Gaye (Country Director for Kenya, Uganda, Rwanda, Uganda and Eritrea). Partnership with key Kenyan policy makers was instrumental in the production of this report. On October 18, 2016, a draft of the report was presented at the 20th Quarterly Economic Roundtable. The meeting was attended by senior officials from the National Treasury, the Kenya National Bureau of Statistics, the Office of the Controller of Budget, the Ministry of Devolution and Planning, the Central Bank of Kenya, the Kenya School of Monetary Studies, the Commission on Revenue Allocation, the National Economic and Social Council, the Executive Office of the Presidency, the National Land Commission, the International Monetary Fund, the KenInvest, Vision 2030 and the Ministry of Land and Physical Planning. October 2016 | Edition No. 14 iii MAIN MESSAGES AND KEY RECOMMENDATIONS Kenya is one of the bright spots in Sub-Saharan Africa. With economic growth rates sustained at above 5 percent, Kenya has outperformed the regional average, for 8 consecutive years. Robust domestic demand emanating from private consumption and government investment are the key drivers of growth, underpinned by a stable macroeconomic environment, lower oil prices, diversification, improved security perceptions, and ongoing structural reforms. Medium term economic prospects for Kenya remain robust. Ongoing public infrastructure investments will continue to play a ‘crowding-in’ role, easing transport and energy costs, and supporting economic expansion in construction and industry. Private consumption will drive service sector growth, while agricultural sector will remain largely dependent on favorable weather conditions and timely availability of inputs. Though oil prices are expected to pick-up over the forecast horizon, Kenya’s external sector account will remain healthy on account of a steady increase in remittances, a rebound in tourism and a rise in foreign direct Investment (FDI). Nonetheless, there exist downside risks that can dent future growth prospects. Risks to Kenya’s future growth prospects that are not included in our baseline outlook emanate from both external and domestic sources. On the external front, these include weaker than expected growth in the global economy, volatility in global financial markets and a spike in oil prices. On the domestic front, these include delays to fiscal consolidation, adverse weather developments, and potential uncertainties associated with the run-up to 2017 elections that could lead to a wait-and-see attitude by investors, thereby dampening short-term growth prospects. Nevertheless, Kenya can achieve higher levels of growth by enhancing the productivity of public investments, which has declined in the recent years as reflected in the weak execution of infrastructure projects. In this regard, reforms are warranted in two broad areas; the first is to institute a system of Public Investment Management (PIM) which in turn can accelerate the catalytic impact of public investment on economic growth. The second reform is to streamline the process of land acquisition, particularly when determining compensation and preparing Resettlement Action Plans (RAPs), to prevent significant delays and cost escalation in the execution of public infrastructure projects. While comprehensive PIM reform and strengthening comprises a relatively complex agenda, quick-win high-priority actions include: • Establishing minimum criteria for project preparation, appraisal and inclusion of a project in the budget; • Gradually strengthening the role of National Treasury as an independent reviewer of project proposals before selection for funding; while enhancing the capacity to undertake this role. • Improving transparency and accountability for management of the portfolio of public investment projects. Mitigating the delays related to land acquisition requires legislative and administration reform which include protecting the public land currently available and strengthening the legislation that governs compulsory land acquisition and involuntary resettlement. Some quick wins in the regard include: • Providing payment assurance (such as via an escrow account at the National Treasury) for financing land acquisition and resettlement to ensure immediate availability of funds for compensation when needed. • Evaluating the current proposal to amend the legislation on compensation in land acquisition against international good practice to balance fairness, timeliness, and the public interest. • Developing a policy on involuntary resettlement, with supporting legislation, which reflects the principles of international good practice. Building a sustainable PIM system will take time and will have to align a medium-term strengthening of capacity with strengthening of institutions, regulations, guidance and manuals and stakeholder support. A reform action plan for PIM should center on clear performance indicators for results and progress to allow for flexibility in how results are achieved. Likewise, a more effective and institutionalized land acquisition will take time. A comprehensive public land inventory should be prepared and periodically updated. Many counties have begun to undertake this exercise. In the preparation of public land inventories the engagement of community groups, local officials, and other non-state actors should be positively encouraged, and ground checks will be essential. More broadly, a major aspect is strengthening administrative systems to safeguard public land by registering and titling all public land parcels in the name of the county or the appropriate national authority. This will be enabled by improvements in land administration. EXECUTIVE SUMMARY 0.1 Kenya is one of the bright spots in Sub- investment and transfers to county governments Saharan Africa has spawned growth in the devolved units. The World Bank projects economic growth Third, the prevailing, low oil prices and the at 5.9 percent in 2016, from 5.6 in 2015, and surge in remittances which counter the impact strengthening to 6.1 percent in 2018. This of the global down turn, leading to a contracting is a relatively robust performance against an current account deficit. Fourth, the diversified average growth of 1.7 percent forecast for Sub- structure of the economy is contributing to this Sahara Africa in 2016, and in the context of the growth. Though manufacturing performance prevailing global headwinds; the tightening in remains subdued, vibrant services sector― global financial markets, the reversal in capital formal and informal―remains a key pillar flows to emerging markets, and the subdued of Kenya’s growth. And finally, a stable global demand, which has curtailed trade macroeconomic environment characterized by expansion. Notably, this will be the eighth currency stability and low inflation is providing consecutive year of growth outperforming the a conducive environment for investment and regional average. consumption. Figure 0.1: Growth will outperform the average for the However, growth could moderate if three region for the eighth consecutive year potential downside materialize. Weaker than 12 GDP growth, 2007-2015 expected growth in the global economy could curtail the anticipated strengthening of Kenya’s 9 exports, remittance inflows and tourist receipts. Second, resurgence in volatility in global 6 financial markets could trigger destabilizing Percent 3 short-term portfolio outflows that undermine macroeconomic stability. Thirdly, security 0 risks emanating from terrorist activities could -3 undermine the recent uptick in tourism. 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Kenya Sub-Saharan Africa SSA oil exporters (EMDEs) Domestic policy environment could also curtail SSA oil importers (EMDES) growth prospects. The recent introduction of Source: World Development Indicators and Staff estimates. the interest rate caps could constrain credit Five favorable trends underpin the positive growth to the private sector and low-income growth outlook. First, growth in private households. Further, if fiscal consolidation is consumption has been supported by structural delayed, particularly due to elections related factors, including rising incomes and a growing spending, increased government spending middle-income class with higher disposable may crowd out private sector investments and incomes, and ongoing demographic transition. lead to overheating of the economy resulting in Second, fiscal expansion driven by public high inflation. October 2016 | Edition No. 14 v Executive Summary 0.2 Kenya can do even better by increasing Causes of declining efficiency of investment the productivity of public investment can be attributed to weakness in the system In an effort to close its infrastructure of public investment management, (PIM) and deficit, Kenya has quadrupled spending in the process of land acquisition, among other the infrastructure sector, and the quality factors. A public investment management index of infrastructure has improved. About half ranked Kenya 44 in a sample of 71 countries. th of Kenya’s capital budget is allocated for Out of a potential overall score of 4, Kenya scored infrastructure―transport, energy and ICT- and 1.45, which is a weak performance compared to this budget increased from about 5 percent of South Africa’s 3.53 score. Performance in each GDP to 7 percent of GDP in 2014/15. Available of the sub index, projects appraisal, selection, data shows there has been significant build up managing and evaluation indicates that while in capital stock as a result of recent investments. Kenya is an average performer in managing The index of quality of trade and transport projects, it is particularly weak in project related infrastructure has improved from 2 in appraisal and selection, see figure 0.3. 2007 to 3 in 2015. Improving Kenya’s PIM system can boost the However, the productivity of these investments productivity of ongoing investments. A good PIM has stagnated. This is reflected in declining system has eight basic functionalities: (i) strategic total factor productivity and increasing capital guidance linked to a development strategy output ratio. Total factor productivity (TFP) has which, in Kenya, is the Vision 2030 and the five stagnated at about 1.1 percent and projections year Medium Term Plans (MTPs); (ii) a project show a declining trend to about 0.5 percent appraisal process that provides a consistency in 2018. The incremental Capital Output ratio project selection; (iii) an independent review (ICOR) is rising, which suggests that more inputs process which confers credibility to the process; are required to produce one unit of output; and (iv) a rigorous selection process with authority the contribution of investment to GDP growth to reject low priority projects and develop a declined. For the period 2008-12, investment pipeline of fundable projects; (v) an established contributed 1.9 percentage points to GDP implementation process with effective budget growth compared to 0.9 percentage points in and procurement which is; (vi) flexible enough 2013-15, see figure 0.2. to adjust during implementation; (vii) ensures Figure 0.2: Investment as a share of GDP has increased Figure 0.3: Index of Public investment management: but its contribution to growth contracted in the years Kenya versus South Africa Index of public investment management Low High Appraisal investment investment 2.5 Investment contribution to growth high growth high growth 2.0 2008 -2012 1.2 1.5 2003-2007 Evaluation 1.3 1.2 Selection 1.0 2013-2015 1992-2002 0.5 High 2.3 Low investment investment low growth low growth 0.0 16 17 18 19 20 21 22 23 Managing Investment share of GDP (%)) Size = GDP annual growth Kenya South Africa Maximum Source: Computations from Kenya National Bureau of Statistics (Economic Source: IMF 2010. Survey, various issues). vi October 2016 | Edition No. 14 Executive Summary that completed assets are put into operation of land in Nairobi has increased by 535 percent and are maintained; and has (viii) a system for in seven years from 2007 to 2014 due to public evaluation to improve overall guidance. demand as investment in land has come to provide far higher returns than either the bond Setting up a Public Investment Management or stock market in the country. (PIM) system, will lay the foundation for increasing the returns on public investments. Compensation disputes related to compulsory A good starting point would be to promulgate land acquisition also adversely affect large a PIM reform action plan to steer the country infrastructure projects expected to have to what is a relatively complex reform agenda. high productivity gains. Infrastructure that Immediate and high priority steps include: is expected to translate into savings and • Establishing minimum criteria for project economic growth is hindered during the land preparation, appraisal and inclusion of a acquisition process, which is often fraught with project in the budget, compensation challenges. The challenges lead to disputes and delays in project implementation • Strengthening the role of National Treasury and significant cost overruns, and are felt across as an independent reviewer of project four factors: proposals before selection for funding, • Strengthening transparency and First, identification of legitimate rights’ holders accountability for management of the can delay acquisition of land. Confusing laws portfolio of public investment projects. and procedures have resulted in registries of poor integrity with outdated and inaccurate The land acquisition process poses a formal ownership information. Further, unique challenge in Kenya’s infrastructure occupants of the land in good faith must also development and public investment be compensated and often times it is difficult management. Infrastructure development to establish the legitimate rights holders due comes with significant demand for land, which for compensation especially if they do not hold is not readily available. Inventories of the public formal rights to the land. land available for infrastructure investments are limited, making compulsory land acquisition an Second, determining and agreeing on ‘just often necessary step in infrastructure projects. and prompt’ compensation can be a source of dispute and delay in project implementation. Acquisition of land increases the cost of public While there is agreement that ‘market value’ investments. For instance, current estimates constitutes the basis for just compensation, suggest that the cost of land accounted for 10 disputes arise when compensation is not percent of the cost of Phase I of the Standard made promptly and in full. Disputes in the Gauge Railway (SGR) project. While not high acquisition of the way leave for the power by global standards, it increases project costs transmission lines from Olkaria I and IV in ways not anticipated by the government as Geothermal Power Stations to Nairobi, and actual compensation costs tend to exceed the onwards to Mombasa, also indicate that budgetary allocations, sometimes as much as ‘market value’ is sometimes a contested value. twice the budgeted amount. Further, urban Yet the high cost of power and regular outages centers have the biggest need for network remains a binding constraint to doing business infrastructure but the cost of land in these areas in Kenya. Payment that is not done promptly is prohibitive. Estimates suggest that the cost has also resulted in delays in projects. October 2016 | Edition No. 14 vii Executive Summary Third, resettlement and restoration of Figure 0.4: Only one third of the cases filed in the Land livelihoods is not standardized. Compensation and Environment Court are concluded in 12 months packages can vary across implementing agencies Civil Backlog Cases: Land and Environment cases June 2013 (%) and across sub-national jurisdictions. For 40 instance, the SGR and the Kipevu New Container 33.6 Terminal Resettlement Action Plans (RAPs) 30 provided different compensation rates where 26.8 24.0 project area overlapped due to differences in 20 approaches and methodology. Notably the SGR 15.6 payments were higher. This difference indicates 10 that while some projects recognize the need for livelihood restoration, others do not. Protests 0 Below 12 months 12-13 months 24-59 months Over 60 months from the communities regarding poor livelihood restoration measures have resulted in stoppages Source: Judicial Case Audit and Institutional Capacity Survey, June 2013. in works. Mitigating the delays related to land acquisition Finally, the use of courts in resolving grievances requires legislative and administration reform. related to land acquisition also creates delays Measures to improve public land management and cost overruns. A 2013 survey revealed that need to be enhanced and can begin with a 66 percent of land cases in the Environmental comprehensive public land inventory which and Land Court had been going on for more should be prepared and periodically updated. In than one year and nearly half had been going parallel, reform of the legislative and regulatory on for over 60 months, see figure 0.4. framework to govern land acquisition and involuntary resettlement should be completed. Reforms should focus on crafting a single policy or legislative act on compulsory land acquisition, including livelihood restoration of the displaced persons. Good practices can be drawn from the legislation in other countries. viii October 2016 | Edition No. 14 Growth Outlook The State of Kenya’s Economy © A’Melody Lee, World Bank The State of Kenya’s Economy 1. Kenyan Economy Resilient Despite Global Headwinds 1.1 In Contrast to Several Sub-Saharan 1.2 Agriculture, Construction and Services African Economies, Kenya’s GDP Growth Were the Main Drivers of Growth in 2015 Strengthened in 2015 Agriculture accounts for about 30 percent Consistent with earlier World Bank forecast, of Kenya’s GDP and is largely dependent the Kenyan economy expanded at a rate of 5.6 on favorable weather conditions. In 2015, percent in 2015, 0.3 percentage points higher agricultural production increased by 5.6 percent than the growth recorded in 2014 (figure 1.1). (compared to 3.5 percent in 2014) due to Kenya’s growth performance was all the more favorable weather conditions. Manufacturing remarkable given strong headwinds from the output, although underperforming other global economy that included: volatility in sectors, picked up to a modest 3.5 percent global financial markets, heightened uncertainty (compared to 3.2 percent in 2014) on account regarding U.S Federal Reserve interest rate hikes, of a stable macroeconomic environment, decline in commodity prices, reversal of capital low oil prices, and increased access to, and flows to emerging markets, and subdued global lower, electricity costs. The fastest growing demand which has led to a structural slowdown sub-sector was construction (13.6 percent), in the pace of global trade expansion. These supported in part by major government flagship factors, among others, have been responsible infrastructural projects. Despite a subdued for the significant slowdown in growth amongst tourism sector in 2015, the service sector grew the developing countries, including in Sub- by 5.5 percent. This reflected the vibrancy of Saharan Africa, where GDP growth fell sharply non-tradable sectors of the Kenyan economy to 3.0 percent, about 1.6 percentage points such as information and communication (7.3 lower than in 2014. percent), financial services (8.7 percent), and transport and storage (7.1 percent) sub-sectors. Figure 1.1: Kenya’s growth strengthened in 2015 despite global headwinds Change in GDP growth 2015 - 2014, percentage points Guinea-Bissau Senegal Sudan Kenya Cameroon Uganda Seychelles Tanzania Burkina Faso Ghana Cote d'Ivoire Rwanda Madagascar Mauritius Mali South Africa Cabo Verde Guinea Liberia Gabon Togo Namibia Ethiopia Swaziland Mozambique Benin Zambia Angola Congo, Dem. Rep. Malawi Zimbabwe Niger Botswana Nigeria Congo, Rep. Chad Burundi South Sudan Equatorial Guinea -25 -20 -15 -10 -5 0 5 Source: World Development Indicators. 2 October 2016 | Edition No. 14 The State of Kenya’s Economy 1.3 Consumption and Government Spending 1.4 Yet Kenya’s Growth Performance Falls Spurred Robust Domestic Demand Short of its Target Level and Remains Below Some EAC Peers Private consumption, which accounts for over 75 percent of GDP, picked-up in 2015 on Notwithstanding Kenya’s relatively robust account of rising employment, a boost to real performance, GDP growth falls well short of incomes as oil prices declined, and a rise in the 8.7 percent target outlined in the Second remittances. Further, expansionary fiscal policy Medium Term Plan and which is needed to propel boosted government consumption and public Kenya to an upper-middle income economy with investment―all of which also supported public- significantly lower levels of poverty (figure 1.3).1 sector wage employment and consumption. Further, though larger and more diversified Despite weakness in exports, the contribution of than other East African economies, Kenya’s net exports to growth turned modestly positive growth has lagged behind that of Ethiopia, in 2015, thanks to a 37.9 percent decline in Tanzania and Rwanda, all of whom grew at the oil import bill as well as the decline in the least one-percentage points higher than Kenya importation of one-off big-ticket machinery and in 2015. This suggests that while safeguarding equipment items related to the Standard Gauge current progress (including the relatively stable Railway (figure 1.2). The latter also contributed macroeconomic environment), there exists to the slowdown in the expansion of gross fixed further scope for accelerating growth in Kenya, investment to 5.2 percent in 2015 (compared to particularly, by addressing some of the structural 14.8 percent in 2014). constraints that have capped productivity growth in the Kenyan economy.2 Figure 1.2: Growth was consumption driven Figure 1.3: However, Kenya’s growth remained below MTP II target Contribution to growth (percentage points) GDP growth in 2015 (%) 10 MTP II growth target 10 of 8.7 percent 8 8 7.0 6.9 6 6 5.6 Percentage points 5.0 Percent 4 4 3.0 2 2 0 0 2011 2012 2013 2014 2015 -2 -2 -2.5 -4 -4 Consumption Net investment Net exports Tanzania Rwanda Kenya Uganda Sub-Saharan Burundi Africa Statistical discrepancy GDP Source: 2015 & 2016 Issues of the Kenya National Bureau of Statistics’ Source: World Development Indicators and MTPII. Economic Survey. 1 As of 2015, the poverty rate (at the $1.90/ day 2011 PPP terms) in Kenya was estimated at 25.3 percent. 2 Several editions of KEU’s have addressed some of these structural constraints, including trade logistics, regional integration, job creation, high interest rate in banking sector, productivity in manufacturing sector, and informality. The special topic for this edition focuses on another such constraint – the efficiency of public investment. October 2016 | Edition No. 14 3 The State of Kenya’s Economy 2. Kenya’s Robust Growth Momentum Has Been Sustained in 2016 2.1 With the Exception of the Manufacturing the manufacturing sub-sector in Kenya continues Sector, Growth in 2016 Has Been Broad- to be stifled by high cost of credit, infrastructural Based constraints and a challenging business regulatory 2.1.1 Economic activity kicked-off at a brisk environment. Excluding the manufacturing pace in 2016. The Kenyan economy grew by 6.1 sub-sector, industrial sectors performed well, percent in the first half of 2016 (H1 2016). This particularly electricity and water supply (9.7 was 0.7 percentage points higher than the pace percent), construction (9.0 percent) and mining of expansion in the same period in 2015 and (9.0 percent). 0.2 percentage points higher than in H2 2016 (figure 1.4). While all sectors contributed to 2.1.3 Rebound in tourism propelled the rapid this performance, the agriculture and services expansion in the services sector. The services sectors have been the primary drivers of growth, sector grew by 6.9 percent in the first half of thus far in 2016. 2016, the highest half year pace of expansion since 2011. The accommodation and restaurants 2.1.2 Agriculture growth was relatively strong, sub-sector (the main tourism sector) grew at but a weak manufacturing sector weighed on 13.4 percent. The number of tourism arrivals industrial sector growth. Agriculture grew by 5.3 and hotel bed occupancy increased in the percent in the first half of 2016, higher than 3.5 period under review thanks to the lifting of percent experienced in the same half in 2015. travel advisories against Kenya’s coastal towns The growth was underpinned by adequate rains by the governments of major tourist-originating that led to increased production of key crops such countries. Further, apart from its well- as tea and horticulture. Industry’s growth was established domain as an eco-tourism spot, somewhat subdued; it grew by 5.8 percent in the Kenya is increasingly also becoming a center for first half of 2016 compared to 7.0 percent during conference tourism. In H1 of 2016 alone, Kenya the same period in 2015 (figure 1.4). However, hosted several major international conferences, this was due to a slowdown in manufacturing, including the recently concluded TICAD and the largest industrial sub-sector, to 3.2 percent in UNCTAD conferences. The sector also benefitting 2016 compared to 4.6 percent in 2015. Growth in from government incentive schemes such as the Figure 1.4: The economy sustained the growth momentum of 2015 Half year GDP growth (%) Half year GDP growth (%) 8 10 6.7 6.1 5.9 8 8.5 6 5.3 5.3 5.4 4.7 6 7.0 6.9 6.2 Percent Percent 4 5.8 5.8 5.3 4 3.5 2 2 2.2 0 0 H1 H2 H1 H2 H1 H2 H1 H1 2014 H1 2015 H1 2016 2013 2014 2015 2016 Agriculture Industry Services Source: Kenya National Bureau of Statistics (Quarterly Gross Domestic Product and Balance of Payments Report, First Quarter 2016 and Second Quarter, June and September 2016). 4 October 2016 | Edition No. 14 The State of Kenya’s Economy charter incentive program.3 Besides tourism, tea and horticulture), on a year-to-date basis the another service sub-sector that registered expansion has been robust (figure 1.5). In the strong growth was the transport and storage industrial sector, domestic electricity generation (8.6 percent in 2016 compared to 6.8 percent of continued its upward trajectory growing by 3.9 2015), which reflects vibrant economic activity percent in Q3, however manufacturing sector as well as lower fuel prices. Wholesale and retail growth was most likely modest given weak trade grew by 6.6 percent, information and growth in key sectors such as cement (decline by communication by 9.2 percent, while financial 3.9 percent), and sugar (19 percent) production. and insurance sub-sectors expanded by 7.7 Third quarter Purchasing Manager’s Index for percent. Innovations in the usage of mobile Kenya, although confirming an expansion at a phones to access services (both retail trade and healthy index level of 53.4, reflects a deceleration financial services) contributed to the vibrancy of in the pace of expansion compared to that of H1 these non-tradable services sectors. 2016 (figure 1.5). The strength of the tourism rebound in Q1 and Q2 likely continued into 2.1.4 Although quarterly GDP data for Q3 Q3 with the number of tourists’ arrival in Q3 is unavailable, leading economic indicators keeping apace (on a seasonally adjusted basis) suggest ongoing robust growth. Though output with the strong H1 performance (figure 1.5). of key agriculture products weakened in Q3 (e.g. Figure 1.5: Leading economic indicators suggests ongoing robust growth in Q2 Horticulture   exports  quantity,   2015-­‐2016 Tea production, 2015-2016 55 60 Metric tonnes, thousands 50 45 Metric  tonnes,   million 40 35 30 25 20 15 10 5 0 0 January June December January June December 2015 2016 2015 2016 Total domestic electricity generation Cement production, 2015 - 2016 900 600 850 560 Metric tonnes, thousands 800 Million KWh 520 750 480 700 440 650 600 400 0 0 January June December January June December 2015 2016 2015 2016 3 The government has set aside KSh 1.2billion Charter Incentive Program (CIP) aimed at recovering lost business from tourist charters. Landing fees for all charter aircraft terminating at the Kenyan coast have been waived for a period of 30 months beginning from 1st January 2016 to 30th June 2018. Source: http://ktb.go.ke/charter-airlines-to-kenya-coast-get-incentives/ Accessed on September 12, 2016. October 2016 | Edition No. 14 5 The State of Kenya’s Economy Tourism arrivals, 2015 - 2016 PMI Index 100 60 90 58 Number in thousands 80 56 70 54 60 52 50 50 40 0 48 January June December 0 2015 2016 Jan 14 Sep 14 May 15 Jan 16 Sep 16 Source: Kenya National Bureau of Statistics (Leading Economic Indicators, various issues) and Stanbic. 2.2. Buoyant Domestic Demand Has Mitigated to an average index value of 55.3 (from 54.4 Subdued Global Demand in 2016). This increase in business activity is 2.2.1 Robust domestic demand is driven by also reflected in robust investor confidence as consumption and public investment. Private reflected in the Standard Chartered MNI business consumption, which accounts for over 70 percent sentiment indicator, which has averaged 60 thus of GDP, has been supported by structural factors far in 2016 (well above the 50-mark signaling including rising incomes and a growing middle- favorable sentiments). Factors underpinning income class with higher disposable incomes these favorable developments include lower and increasing access to credit (if even at high input costs, improvements in electricity supply interest rates). Further, for the first half of 2016, (thanks to earlier public investments), expanding a 14 percent increase in remittances, a boost in export orders, more stable macroeconomic agricultural output thanks to improved weather environment and decline in interest rates. conditions, lower oil prices and lower interest rates (Central Bank of Kenya cut interest rates in 2.2.3 Nonetheless, private domestic May), have supported household consumption. investment, in particular by small and medium As a signal of the ongoing robust consumption sized enterprises (SME), remain constrained. in 2016, both the number and value of mobile These constraints include: high cost of credit transactions in H1 2016 has expanded by 36.7 (notwithstanding the decline in interest percent and 20.5 percent respectively. Fiscal rates), delays in payments by the exchequer policy has remained expansionary, with public and a challenging business regulatory investment on flagship infrastructure projects environment. Indeed, notwithstanding the and allocations to the counties driving the robust performance of the private sector, credit expansion (see section 3). growth to the private sector has weakened in 2016, averaging 11.7 percent compared to 2.2.2 Business spending is up though 20.7 in 2015, with the private households and constrained by challenging environment. As consumer durables sectors suffering the largest a gauge of corporate business spending, we declines in credit growth. The robust increase use Markit’s CfC Stanbic Bank Kenya PMI sub- in business purchases, against the backdrop of indicator for quantity of purchases. On that weaker private sector credit growth suggests basis, the pace of corporate spending, which strong corporate cash flows enabled purchases, was already robust in 2015, accelerated in 2016 notwithstanding ongoing developments in 6 October 2016 | Edition No. 14 The State of Kenya’s Economy the banking sector that have led to slower credit Insolvency Act, the Business Registration Act, growth (see section 3.5). The recent capping of and the Special Economic Zones Act. interest rate spread is also likely to constrain lending to SME sector (Annex 1, Box 1.2). 2.2.3 Despite weak exports, the decline in oil prices is supporting net exports contribution to 2.2.4 Supported by ongoing business regulatory growth. Reflecting sluggish growth in the global reforms, investor confidence is rising. While economy and weakness in commodity prices, domestic sources of financing private sector the value of exports of goods and services may be constrained, foreign direct investment contracted by 3.3 percent in the first half of 2016 to Kenya has surged in recent years (in 2015 (H1 2016). Notwithstanding the contraction in FDI increased by 52 percent), albeit from a low exports, the net exports contribution to GDP base suggesting increasing investor confidence has been positive in H1 2016, thanks to a 16.2 of prospects in the Kenyan economy. Indeed, percent decline in the import bill. This decline reforms to improve the business environment was mostly on account of a drop in oil prices. As have picked-up in recent years as reflected in the a share of total imports, the share of oil imports improvement of Kenya in the World Bank’s Ease fell by 3.3 percentage points in H1 2016 to 15.6 of Doing Business rankings by 21 places over percent from an average of 18.9 percent in 2015. the past year (from 113th to 92nd in most recent These developments, and the rise in remittances report). Further, a series of critical legislation to (14.4 percent in H1 2016) have supported the improve the business environment have been narrowing of the current account deficit to 4.9 enacted, including: the Companies Act, the percent of GDP in June 2016. 3. A Stable Macroeconomic Environment Has Underpinned Kenya’s Performance 3.1 Inflation Has Fallen Within the Central between 6 and 6.5 percent, which is well Bank’s Target Range within the 7.5 percent Central Bank of Kenya’s Headline inflation for the first eight months upper bound. The uptick in inflation in recent of 2016 averaged 6.3 percent, a decline from months has been largely driven by an increase the 6.4 percent observed over the same period in food prices. Indeed, heavy rains in April and in 2015. This decline in headline inflation was May had an adverse effect on the harvest of mainly due to lower oil and food prices, the vegetables thereby pushing up prices. Similarly, waning pass through effects from the sharp maize prices adjusted upwards on account of depreciation of the shilling in Q4 2015 and delayed release of maize stocks. Nonetheless, the lagged transmission of earlier interest rate underlying demand pressures are contained as hikes in Q3 2015. Indeed in May 2016, headline core inflation is only at 3.6 percent as of July inflation bottomed out at 5.0 percent. However, 2016 compared to 4.4 percent for the same it has increased in Q3 and been range-bound period in 2015. October 2016 | Edition No. 14 7 The State of Kenya’s Economy Figure 1.6: Overall Inflation has been contained within Figure 1.7: Energy inflation has declined, while food policy bounds since the beginning of 2016 inflation continues to be the main driver of overall inflation 10 16 14 8 Upper limit 12 10 Percent Percent 6 8 4 6 Lower limit 4 2 2 0 0 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Aug-14 Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Overall Target Rate Food Energy Core Overall Source: Kenya National Bureau of Statistics. 3.2 The Exchange Rate Has Stabilized in 2016 Standby Credit Facility (SCF) of US$ 1.5 billion The shilling has remained remarkably stable has also helped to shore-up further confidence against the currencies of its major trading in the Kenyan shilling. Consequently, foreign partners. Both the real and nominal effective exchange reserves have remained fairly healthy exchange rates have appreciated marginally reaching 5.6 months import cover in August by some 2.2 and 0.2 percent respectively 2016, up from an average of 4.6 in 2015. between December 2015 and August 2016. The 3.3 The Current Account Position is Healthy recent appreciation of the shilling can in part be attributed to the tightening of monetary 3.3.1 The current account deficit has improved. policy in July 2015, less pressure coming from a Driven mostly by oil prices the current account reduction in the current account deficit (thanks deficit improved to -4.9 percent of GDP in June to the decline in oil prices) and a surge in 2016, compared to -6.8 and -9.8 percent of GDP remittance inflows. Further, the IMF 24 month in 2015 and 2014 respectively. The improvement in Kenya’s current account deficit is all the Figure 1.8: The Shilling remained stable against the U.S more remarkable against the backdrop of a dollar in 2016 weakening export position as well as a widened 140 fiscal deficit. As earlier noted, subdued global demand (in particular from the EU) and weak 120 prices of Kenya’s main exports, contributed to the decline in the value of merchandise and Index 2003 = 100 100 services exports in the first half of 2016 (3 80 percent). However, while this served as a drag on the trade balance, the effects of a lower 60 import bill and improved remittance inflows 40 0 counteracted this. The oil import bill fell by 34.1 Ap-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 percent in H1 2016 compared to the same period NEER REER in 2015. As a share of GDP, oil imports declined Source: Central Bank of Kenya. by 0.5 percentage points between December 8 October 2016 | Edition No. 14 The State of Kenya’s Economy Figure 1.9: Current Account Balance contracted Figure 1.10: Current Account Financing 20 16 10 12 Percent of GDP Percent of GDP 0 8 -4.6 -5.9 -4.9 -8.8 -6.8 -9.1 -8.3 -9.8 4 -10 0 -20 -4 2009 2010 2011 2012 2013 2014 2015 Jun-16 -30 Direct Investments 2009 2010 2011 2012 2013 2014 2015 Jun-16 Portfolio Investments General government (classified under other investments) Balance of Trade Services Income Nonfinancial corporations, households, and NPISHs (classified under other investments) Net Errors and Omissions Current Account Balance Other Investments Net Errors and Omissions Source: Central Bank of Kenya. Source: Central Bank of Kenya. 2015 and June 2016 from 3.9 to 3.4 percent confidence in the Kenyan economy, capital as a share of GDP (figure 1.11). The improved flows to the financial accounts increased from current account balance has also been 8.0 percent to 9.0 percent of GDP between supported by a surge in remittance inflows. end December 2015 and June 2016. This For H1 2016, remittances have increased by increase was mainly on account of an increase 14 percent to US$ 1.7 billion, mainly driven by in investment flows to general government Kenyan Diaspora in the United States, whose (foreign participation in T-Bills and bonds) as well economy is on a relatively stronger footing as to nonfinancial corporations, households and than in Europe, the other abode of a strong Non-Profit Institutions supporting Households Kenyan diaspora. (NPISHs), at 3.5 and 4.1 percent of GDP respectively. Direct investment flows increased 3.3.2 Inflows to the financial accounts have marginally by 0.1 percentage points of GDP also improved. Reflecting increased investor between December 2015 and June 2016. Figure 1.11: Oil share in total imports declined Figure 1.12: Remittances to Kenya remain strong, despite weakness in global economy 30 1,800 1,600 25 Oil as a share of GDP (Percent) 1,400 US dollar million 20 1,200 1,000 15 800 600 10 400 5 200 0 0 Jun-06 Jun-08 Jun-10 Jun-12 Jun-14 Jun-16 2009 2010 2011 2012 2013 2014 2015 May-16 12- Month Cumulative in US dollar million Source: Central Bank of Kenya. Source: Central Bank of Kenya. October 2016 | Edition No. 14 9 The State of Kenya’s Economy 3.4 Nonetheless, Fiscal Consolidation 3.4.1 Public investment is the main driver of is Delayed Kenya’s fiscal expansion. While the rising deficit The fiscal deficit is projected to be higher in is narrowing fiscal space, the quality of spending 2016/17. Contrary to the expected decline has improved as reflected in an increasing share in the fiscal balance as proposed in the 2016 of development spending relative to recurrent Budget Policy Statement the 2016/17 budget expenditures. Development expenditure suggests an increase in the fiscal balance to increased from 6.9 percent of GDP in 2015/16 to -9.4 percent of GDP compared to -7.2 percent 11 percent of GDP in 2016/17, while recurrent of GDP in the previous fiscal year (figure 1.13). expenditure marginally went up from 15.4 It is however important to recognize that the percent of GDP to 15.8 percent of GDP during latest deficit estimate assumes full execution of the same period. The increase in development development spending, this is however unlikely spending stems largely from infrastructure projects, with the SGR project accounting for to occur based on weaknesses in execution of 1.2 percent of GDP in 2015. Given that weak public investments (see special focus), thus infrastructure is a binding constraint, these implying the deficit is likely to come in lower projects, when completed, should relieve these than projected. Nonetheless, since 2012/13 supply-side constraints, spur economic activity when Kenya started its fiscal expansionary and improve productivity. policy, devolution related allocations, spending on key infrastructural projects in energy, roads 3.4.2 National level expenditures have risen and railway, interest payments and public wage faster than county transfers. While the first two bill have all contributed to the widening fiscal years of the implementation of the devolution deficit from an average of 3.3 percent of GDP (2013/14 and 2014/15) led to a spike in before devolution (2007-2012) to 7.2 percent of county–level expenses, they have remained GDP in 2015. stable in 2016. On the other hand, expenses at the National level increased in 2016, reflecting Figure 1.13: Kenya’s fiscal expansion is driven by a rise in expenditure towards national level infrastructural spending Fiscal deficit (% of GDP) projects, especially infrastructure but also in Av.2008/09 -2012/13 2013/14 2014/15 2015/16 2016/17 education, by 1.1 percentage points of GDP in 0 the last two years. -2 3.4.3 Budget execution difficulties contain -4 the realized deficit but at the expense of -4.7 implementation (see special focus section). -6 -5.9 Despite higher allocations to capital budget, weak budget execution undermines government’s -7.2 -8 -8.1 commitment to upgrade infrastructure. Low development budget’s execution4 has been a -10 -9.4 challenge in recent years, particularly at the Source: The National Treasury (Quarterly Budget and Economic Review, August 2016 and the Budget Summary for the FY 2016/17, April 2016). National Level as execution rates at the county level are higher than National rates (box 1.1). 4 Budget execution in the document is computed as the ratio of the actual expenditure and the gross estimates. 10 October 2016 | Edition No. 14 The State of Kenya’s Economy Box 1.1: Status of Kenya’s devolution: Counties overcoming challenges County governments are overcoming some of the challenges experienced in the first year of devolution. At the end of 2014/15, almost all counties met the 30 percent PFM development expenditure threshold while at the same time improving budget execution, which stood higher (62.4 percent) than that at national level (45.8 percent). This is supported by improved staff capacity and setting realistic targets. In addition, public participation (media, citizens) and Members of County Assembly (MCA) have been playing a key role in ensuring accountability. Counties’ own sources of revenues have expanded. Own, diversified sources of revenue have helped county governments set realistic targets and enhance revenue collection. In the first year of devolution, county governments had set unrealistic targets of local revenue collections. But in 2014/15, actual local revenue improved and became closer to the target sets; the target was achieved at 67.2 percent, higher than 48.5 percent of 2013/14. Although revenue streams vary per counties, the number of sources of revenue per county ranges between 6 (lowest) and 20 (highest). They include agriculture produce cess, bus park fees, game park fees, hospital fees, land rates, market fees, property rates, sand cess, transport and infrastructure, royalties, and single business permits. They are tailored to county governments’ economic activities. However, county governments still rely on national transfers. In the 2016/17 budget, national transfers are estimated at KSh 304.2 billion billions (equivalent to 3.9 percent of GDP). Equitable share constitutes the main component of national transfers, accounting for 92.1 percent (KSh 280.3 billion, figure B.1.1.1). Whereas equitable share is set at 15 percent (minimum) of the last audited revenue, there has been a two-year lag in government revenue/expenditure audit. As a result, the Division of Revenue bill (2016) determined 2016/17 estimates by adding a 7.8 percent growth on the 2015/16 equitable share of KSh 259.8 billion. This is equivalent to 30 percent of 2013/14 audited revenue. Additional conditional grant allocations for 2016/17 amounted to KSh 23.9 billion. Figure B1.1.1: Equitable share constitute the main component of national transfers in the 2016/17 budget 5.3 World Bank and DANIDA Leasing of Medical Equipment 4.5 Road maintaince fuel levy fund Free Maternal Healthcare Equitable Share Conditional grants 4.3 Level-5 Hospitals Ksh 280.3 billion Ksh 23.9 billion County foregone user fee compensation 4.1 Construction of county Headquaters 5 counties Special Purpose (Lamu &Tana River) 4.0 0.9 0.6 0.2 Source: The National Treasury (Budget Highlights for 2016/17, June 2016) and the Division of revenue Bill, 2016. October 2016 | Edition No. 14 11 The State of Kenya’s Economy Development budget execution4 improved in play an important role, continuing with recent 2015/16 to 69.2 percent. Energy, infrastructure trends, the financing gap is increasingly being and ICT sector, which accounts for over 50 plugged from external sources. External percent of total development allocations, were financing is estimated at 6.3 percent of GDP among the sectors with the lowest execution (67 percent of the deficit) in the fiscal year rates (figure 1.14). This state of affairs has 2016/17, higher than its 2015/16 level of 4.1 been attributed to low donor disbursement percent of GDP. and revenue underperformance on one hand. However, challenges in procurement planning 3.4.5 Although public debt remains sustainable, have contributed to this. In addition, late margins for maneuver are rapidly narrowing. exchequer release affects budget execution and Kenya’s public debt remains sustainable, but with has spillover effects on non-performing loans as a declining margin. A recent Debt Sustainability payments to government suppliers’ delayed. Analysis (DSA) carried out jointly by the IMF and the World Bank show that the risk of distress for 3.4.4 Growth in expenditures have outstripped the current debt level is still low. Debt levels have, growth in revenues. There has been a marginal however, increased from 42.1 percent of GDP increase in revenue collections, unlike the in 2012/13 to 55.1 percent of GDP in 2015/16, significant increases in expenditure. Revenue is following the increase in development spending projected to increase by 2.3 percentage points (figure 1.16). These infrastructure expenditures in 2016/17 to 21.3 percent of GDP compared to are expected to alleviate binding constraints to 19.0 percent of GDP in 2015/16 (figure 1.15). the productive capacity of the Kenyan economy, Expenditure, on the other hand is projected to thereby ultimately leading to a decline in debt increase by 3.7 percentage points of GDP during ratios. Nonetheless, with an over 13 percentage the same period. Growth in revenue is expected point of GDP increase in the debt-to-GDP ratio to be supported by reforms plugging revenue within a three-year period, and with debt levels leakages (e.g. enhancing compliance for rental over 50 percent of GDP, and fiscal deficits well income tax) and other tax administration above the medium term 4.5 percent target, the measures (e.g. expanding withholding VAT fiscal policy space is fast eroding and margins for agents). While domestic debt instruments will further debt accumulation are narrowing. Figure 1.14: Budget execution Figure 1.15: There has been marginal has underperformed increase in revenue Development budget execution (2015/16, percent) 26 General economic and commercial affairs 94 2.7 2.9 3.0 2.7 16 Public administration and international relations 90 Social protection, culture, and recreation 85 16.8 16.5 16.3 18.6 6 Percent of GDP Agriculture 82 Governance, justice, law, and order 72 -4 Education 66 -15.5 -14.8 -15.4 -15.8 Infrastructure, energy and ICT 63 -14 Health -6.3 -8.8 -6.9 55 -10.9 -24 3.8 -4.0 Environment protection, water, and natural 50 -3.9 -3.9 National security 0 -34 2013/14 2014/15 2015/16 2016/17* 0 20 40 60 80 100 Other Tax revenue County transfers Development Recurrent Percent expenditure expenditure Source: The National Treasury (Quarterly Budget and Economic Review, Source: The National Treasury (Quarterly Budget and Economic Review, August 2016). August 2016, and Estimates of Revenue, Grants and Loans, April 2016). 12 October 2016 | Edition No. 14 The State of Kenya’s Economy Figure 1.16: The increase in debt levels have 3.5.2 Kenya’s banking sector remains picked up pace fundamentally sound, despite recent 3,500 60 receiverships. Capital adequacy ratios are at 3,000 55.1 50 16.0 percent, well above what is recommended 47.5 48.9 within the Basel III Tier 1. Further, at 7.8 percent Percent of GDP 2,500 40 in Q1 of 2016, non-performing loans as a share of KSh billion 43.1 40.1 40.7 40.6 42.1 2,000 37.7 39.7 30 GDP are low. Indeed, the banking sector remains 1,500 one of the most profitable sectors in Kenya with 20 1,000 returns of equity averaging 23.9 percent in 500 10 2015 and is the largest sub-sectoral contributor to the company income tax. Nonetheless, in 0 0 2006/2007 2009/2010 2012/2013 2015/16 April 2016, Chase Bank (the third bank in nine- External Domestic Debt gross month period) was placed under statutory Source: The National Treasury (Quarterly Budget and Economic Review, management. Initially, this appeared to rattle August 2016). confidence in the financial sector with depositors withdrawing funds from the smaller banks, 3.5 Though Sound, Financial Markets Have leading to liquidity pressures. Quick action Been Affected by Structural Changes and from the Central Bank of Kenya, which offered Episodic Disturbances a facility for struggling banks, ensured calm was 3.5.1 New law jolt Kenya’s Banks. On 24th restored. Nonetheless, with credit growth still August 2016, the President of Kenya signed into decelerating this could be indicative of some law the Banking (Amendment) Bill 2015. The residual effects from the wave of receiverships. law caps the maximum interest rate charged for It is, however, important to recognize that these a credit facility by Kenyan Banks at no more than recent developments were an outcome of audit four per cent of the base rate set by the Central process initiated by the Central Bank of Kenya. Bank of Kenya; and provides a floor for the Hence the actions taken were important market deposit rate held in interest earning accounts to disciplinary measures that should increase trust at least seventy per cent of the Central Bank of in the banking sector as unscrupulous practices Kenya Base Rate. Interest rate spreads in Kenya (fraud, money laundering, etc.) are wiped out of have on average been perceived to be high, the system. given relatively high levels of return on equity. 3.5.3 Recorded non-performing loans spiked in Interest rate caps are not unique to Kenya, with 2016. In Q4 2015 and Q1 2016, non-performing several countries including both developed and loans (NPLs) spiked by 15.8 percent, from 6.8 developing having experimented with interest percent of GDP to 7.8 percent of GDP (figure rate caps. It is too early to determine the long- 1.17). However, an important driver of the spike term impact the law will have. However, based in NPLs is most likely an accounting artifact on the international experiences, the impact resulting from the introduction of guidelines of the new law is likely to be mixed, with the by the Central Bank for banks to appropriately most likely beneficiaries being lower risk profile record their provisioning for loan losses, rather borrowers such as large corporates, wealthy than a real structural break in the ability of households and the government, whereas there corporates and households to pay back loans. could be unintended consequences (e.g. credit Nonetheless it draws attention to the need to rationing) to borrowers perceived to be riskier monitor much closely as there could be other such as low income households and small and economic factors at work including lagged medium sized enterprises (Annex1, Box 1.2). effects from the macro turbulence experienced October 2016 | Edition No. 14 13 The State of Kenya’s Economy in Q3 2015, when there was a sharp increase in down 13.9 percent, with some of the heaviest the exchange rate and policy rates were hiked. declines among banking sector stocks. A number Further there also exist concerns on how delays of reasons account for this. Foremost is the in payments from the exchequer could be playing skittishness in global financial markets triggered a contributory role. Thus far, delinquencies of by multiple factors over 2016, including earlier loans to the real estate, household and trade in 2016 worries about rebalancing in China’s sectors have risen the most. economy, as well Britain’s vote to exit from the European Union (Annex 1, Box 1.1). Further, 3.5.4 Bearish sentiments persist in equity on the domestic front the enactment of the markets. The Nairobi Stock Exchange has Banking Act amendment, seemed to have declined since mid-2015, the pace of decline taken market participants by surprise and continued to gather steam in 2016 (figure 1.18). further accentuated the decline in banking On a year-to-date basis (mid-October), stocks are stocks in the Nairobi Stock Exchange (NSE). Figure 1.17: Growth in Non-performing Loans by Sector Figure 1.18: The NSE Index has continued its bearish trend in 2016 Change in NPLs by Sector (March 2016-December 2015) 6,000 Real Estate 5,500 Personal/Household Trade 5,000 Manufacturing Building and Construction 4,500 Financial Services Tourism, Restaurantand Hotel 4,000 Energy and Water Mining and Quarrying 3,500 Agriculture Transport and Communication 3,000 0 -8 -6 -4 -2 0 2 4 6 8 Apr-11 Mar-12 Feb-13 Jan-14 Dec-14 Nov-15 Oct-16 Ksh billion NSE 20 Share Index Source: Central Bank of Kenya. Source: Central Bank of Kenya. 4. The Medium Term Growth Outlook Remains Bright 4.1 The Drivers of Growth Remain in Place inflation, and oil prices staying low even if there is a gradual pick-up and favorable weather 4.1.1 Kenya’s growth momentum is expected conditions, and increased remittance flows. to continue over the medium term. The World Bank projects GDP to increase by 5.9 percent 4.1.2 Robust consumption growth will continue. in 2016, strengthening to 6.1 percent by 2018. The ongoing favorable trends in the underlying These forecasts are consistent with our March drivers of Kenya’s robust consumption growth 2016 outlook. Domestic demand, in particular is expected to continue, including from stable strong consumption and investment growth, are macroeconomic environment, remittances, expected to be the main growth drivers (table favorable agricultural harvests, further cuts 1.1). This outlook is predicated on the sustenance to policy rates, and increased share of the of a stable macroeconomic environment, low population entering the labor force. However, 14 October 2016 | Edition No. 14 The State of Kenya’s Economy this robust consumption growth is likely to be finance institutions that are not subject to the dented by our baseline assumption of a gradual Banking Amendment Act to partially fill in some rise in oil prices as well as the recent caps to of the void left by the banks. interests charged by the banks (Annex 1, Box 1.2). We expect the latter to have a double- 4.1.3 Private and Public Investment will remain edged effect on private consumption. On the robust over the medium term. Given the critical one hand, existing borrowers, in particular importance the government attaches to relieving those with fixed-rate mortgages and other fixed- infrastructural constraints as articulated in interest consumer loans above the statutory cap the Medium Term Plan 2, we expect public will have higher disposable incomes to spend. investment to remain strong over the forecast This will be a further positive for consumption. horizon. Our baseline assumption is that this However, given that only a very small number will be carried out within the context of a post- of consumers have access to such bank credit 2017 election fiscal consolidation plan. This facilities, this is likely to be negligible. On the should help anchor macroeconomic stability other hand, for the vast majority of consumers, and sustain the progress made to date. Given our baseline scenario is that, access to credit the increased foreign investor interest in the facilities from banks, which was already out Kenyan economy, as evidenced in the surge in of reach for the vast majority of consumers, foreign direct investment in recent years, private is likely to become even more constrained investment is expected to increase supported by as banks ration credit to consumers on a risk- crowding-in effects of improved infrastructure, adjusted basis. While credit rationing should access to electricity, and improvements in have a dampening effect on consumption, we business regulations. Nonetheless, activity anticipate other non-bank financial institutions among small and medium sized enterprises will such as Savings and Credit Cooperative be challenged by bearing the brunt of credit Organizations (SACCOs), co-operatives, micro- rationing from the banks. Table 1.1: Medium term Growth Outlook (percent, unless stated) 2014 2015 2016 2017 2018 Real GDP growth, at market prices 5.3 5.6 5.9 6.0 6.1 Private consumption 4.6 5.3 5.9 6.4 6.6 Government consumption 6.0 15.4 6.3 7.3 5.6 Gross fixed capital investment 14.8 5.2 5.7 6.7 6.7 Exports, goods and services 5.3 -0.9 0.1 5.2 6.0 Imports, goods and services 10.6 -1.2 6.2 7.6 7.6 Agriculture 3.5 5.6 5.6 5.4 5.4 Industry 6.5 6.9 5.7 5.7 5.6 Services 5.8 5.5 5.6 6.2 6.6 Current account balance, % of GDP -9.8 -6.8 -5.6 -6.1 -7.0 Fiscal balance, % of GDP -7.0 -8.3 -8.8 -7.8 -7.4 Revenue 19.8 19.1 19.5 20.0 19.5 Expenditure 26.7 27.4 28.3 27.8 26.9 Source: World Bank/Macro Poverty Outlook, September 2016. Note: Data for fiscal indicators were converted to calendar year. October 2016 | Edition No. 14 15 The State of Kenya’s Economy 4.1.4 The contribution of net exports is 4.2.2 On the domestic front, risks can emanate expected to weaken. Exports are projected from fiscal slippages. Kenya’s hard-earned to moderately improve in the medium term macroeconomic stability could be tested if fiscal as trading partners’ growth improves and as consolidation is further delayed and increased commodity prices slowly pick up. In Kenya’s domestic borrowing puts upward pressure trading partners, particularly in Africa (EAC and on domestic interest rates, as this will crowd COMESA), growth is projected to recover as out private investments. This is all the more their domestic economies strengthen. However, pertinent as the recent caps on interest rates in line with our baseline assumption of a pick in increases the relative attractiveness of the risk- oil prices to about US$ 60 a barrel by 2018 from free high-yielding government paper. Further, its 2016 average of US$ 40 a barrel, we expect even if the funding gap was to be sourced from the import bill to also increase. As a result, net international capital markets, in an environment exports will return to being a drag on GDP with where fiscal deficits are perceived by market the current account balance projected to rise to participants to be high and a credible path to 7 percent of GDP over the same period. fiscal consolidation is not yet observed, external finances will only be accessed at a higher cost, 4.2 Downside Risks have External and thereby further complicating the debt dynamics Domestic Sources (e.g. as in the case of Ghana and Zambia in recent 4.2.1 On the external side, a slowdown in the years). Further, limited fiscal space handicaps the global economy, particularly from the European ability to carry out countercyclical fiscal policy Union, could dent Kenya’s growth prospects. were that to be required. Against this backdrop, The EU remains an important destination for the commencement of the government’s medium Kenya’s exports (in particular, horticulture term fiscal consolidation plans will help rebuild products), source of remittance flows, and the fiscal buffers and safeguard macroeconomic tourist arrivals (Annex 1, Box 1.1). Further, stability―one of the foundational pillars uncertainties related to future U.S interest rate identified in the Vision 2030 plan. hikes could lead to volatilities in global financial markets and destabilizing short-term capital 4.2.3 Other potential domestic risks include, outflows in emerging and frontier markets. With poor rains, security and terrorism related Kenya’s increased integration with global capital threats. The onset of La Nina might negatively markets, as evidenced in increased participation affect agriculture’s performance. Although of foreign investors in government securities normal rains are expected in Kenya’s main and Kenya’s forays into the Eurobond market, it crop growing areas, depressed rainfall in has become increasingly susceptible to shocks Eastern, Coastal and semi-arid regions might from global financial markets. If that were to affect livestock. Given the importance of the occur, Kenya’s hard earned macroeconomic agriculture sector, on average we observe stability could be tested with a sharp currency 0.6-percentage point decline in GDP growth depreciation (or fall in reserves) and potential in Kenya in years of poor rains. Uncertainties rise in interest rates, which could hurt growth. associated with the run-up to 2017 elections This scenario, while feasible, remains a tail risk could unduly lead to a wait-and-see attitude as Kenya’s new precautionary facility with the by investors that could dampen short-term IMF provides a good buffer against such shocks. growth prospects. Based on the current strong 16 October 2016 | Edition No. 14 The State of Kenya’s Economy institutional frameworks, our baseline scenario prevailing will persist over the forecast horizon. is that the elections will occur without any However, in the unlikely event that there was significant disruption to economic activity. Last a major security incident this will adversely but not least, given increased investment in impact investor confidence and dent the the security apparatus, our baseline assumes ongoing rebound in the tourism sector. that the improved security situation currently October 2016 | Edition No. 14 17 © Kenya Ports Authority ANNEX 1 Annex 1 Annex 1, Box 1.1: What are the Implications of the UK’s vote to leave the European Union on Kenya? After over four-and-half decades since joining the European Economic Community, voters in the United Kingdom (UK) voted in a referendum on June 23rd 2016 to leave the European Union (EU). This momentous decision has implications not only for the United Kingdom but for several developing countries with strong economic ties to the UK, including Kenya. This note identifies the main channels through which Kenya is likely to be impacted. Trade in goods and services: Though the share of Kenya’s merchandise trade to the UK has been declining in recent years (figure B.1.1.1 and figure B.1.1.2), as the fifth largest trading partner the UK still accounts for a significant share of Kenya’s exports (7 percent in 2015). On services trade, the UK is even more important as it remains the leading source of tourist arrivals (98,000 UK tourists visited Kenya in 2015, figure B.1.1.3 and figure B.1.1.4). With the depreciation of the pound and a lower UK GDP trajectory expected demand for Kenya’s exports from the UK are expected to be weaker over the long run. We estimate that the volume of Kenya’s total merchandise trade will be lower by between 0.6 and 1.7 percent over a 15-year period compared to the status quo (i.e. if the UK voted to remain in the European Union).5 The decline in Kenya’s exports of flowers are likely to be higher than that of its tea and vegetable exports, since the demand for the latter food exports are more price and income inelastic. The impacts on services trade will be larger with an estimated shortfall in Kenya’s services exports ranging between 1.2 and 3.1 percent over a 15-year period compared to the status quo. Remittances: With the UK being home to the largest Kenyan diaspora, it is a significant source of remittances for Kenya, accounting for about a third of total remittances (figure B.1.1.5 and B.1.1.6). Indeed, the flow of remittances from the UK to Kenya has nearly doubled from US$ 275 million in 2010 to US$ 520 million in 2015, and is the single largest source of foreign exchange (about 2.6 percent of GDP in 2015). With both wage growth in the UK and the pound expected to be weaker in the light of UK’s vote to leave the EU, this is likely to dampen remittance inflows to Kenya. We estimate that the growth in total remittances to Kenya could be lower by between 0.9 and 1.3 percent over a two-year period compared to the status quo. This will in turn dampen household consumption and add to the current account deficit. Capital Flows: Capital flows to Kenya are likely to be hit from both direct and indirect channels as a result of the UK’s vote to leave the EU. Directly, the UK is major contributor to capital flows to Kenya. UK investors are the largest contributors to the stock of foreign direct investment in Kenya. From agriculture, manufacturing to services sectors (including major banks) there are major UK subsidiaries that operate in Kenya, hence a hit to parent companies in the UK could be deleterious to their Kenyan operations. Secondly, UK investors are among the leading investors into Kenya’s Eurobonds Kenya’s domestic bond and equity markets. Hence, yields could rise if UK investors decided to pull out their portfolio in emerging markets, including Kenya. The indirect effects through financial markets are likely to have the largest impact of all channels. With heightened uncertainty in the global economy, financial markets have become increasingly sensitive. Negotiations leading to the formal exit of the UK from the EU will undoubtedly be watched closely 5 Estimates of the impact of UK’s vote to leave the EU are inherently uncertain given the unknown final outcome of negotiations. To guide our estimates, we use as inputs the outcomes of the different scenarios laid out by HM Treasury (2016). We translate these outcomes for the UK economy to the Kenyan economy based on the relative share of the UK’s contribution to specific modes of transmission (trade and remittances). 20 October 2016 | Edition No. 14 Annex 1 by financial markets thereby increasing the likelihood of further episodic risk-on sentiments with the attendant flight to safety and potentially destabilizing capital outflows. This is all the more important for Kenya given its increasing integration with international capital markets. Indeed, as a harbinger of what could further occur, in the immediate aftermath of the decision, the Nairobi Stock Exchange Composite Index fell by 260 basis points to its lowest level in four-days. Figure B.1.1.1: Export growth and destruction share Figure B.1.1.2: Kenya’s export value by destination Average 2010 -2015 Kenya's exports value in the leading destinations, 2010-2014 30 900 Other markets 25 750 EAC 20 Asia and 600 USD, million Australia Share (%) 15 450 EU excl. UK Americas 10 300 UK 5 150 Other Europe 0 0 0 2 4 6 8 10 12 14 16 18 20 2010 2011 2012 2013 2014 Growth (%) Uganda Tanzania Netherlands USA UK Figure B.1.1.3: Top five origin of tourists Figure B.1.1.4: Source of tourist arrival (thousands), 2015 Top five origin of tourists, 2015 Number of tourism arrival, 2015 140 Middle East 7% Oceania 120 2% Tourists in "000" 100 Asia 14% UK 80 13% 60 Americas Europe 14% 37% Europe excluding 40 UK Africa&Indian 24% 20 Ocean 26% 0 United Kindom USA India Italy Germany Figure B.1.1.5: Kenya’s remittances inflow Figure B.1.1.6: Kenya’s sources of remittance, 2015 (thousands, US dollar) Kenya's   remittances  inflow  (US  $  million) Kenya's  migrants  remittances  inflows,  2015  (US$  million) 1,800   1,600   1,400   UK 1,200   33% 1,000   Rest  of  the  World 30% 800   600   400   Canada 7% 200   -­‐ 2010 2011 2012 2013 2014 2015 USA 30% Total   remittances Remittances   from  UK Data Source (for all the charts): Kenya National Bureau of Statistics, Central Bank of Kenya, Kenya Tourism Board, and World Bank. October 2016 | Edition No. 14 21 Annex 1 Annex 1, Box 1.2: New Rules of The Game for Kenya’s Banking Sector A New Banking Law Comes into Effect. On 24th August 2016, the President of Kenya signed into law the Banking (Amendment) Bill 2016. The law caps the maximum interest rate charged for a credit facility in Kenya by the banks at no more than four per cent of the base rate set by the Central Bank of Kenya; and provides a floor for the deposit rate held in interest earning accounts to at least seventy per cent of the Central Bank of Kenya base rate. Interest Rate Spreads are Perceived to Have Persisted at High Levels for a Long Time. Interest rate spreads in Kenya have averaged 10.1 percent between 2001 and 2015 with profits (48 percent) and overheads (40 percent) accounting for a large portion of the interest rate spread (figure B.1.2.1 and figure B.1.2.2).6 Further, the high return on equity in the Kenyan banking sector compared to the sub-region is often cited as proof for interest rate spreads to be brought down. However, two previous attempts at legislating curbs to interest rates (2001 and 2013) failed. On both occasions the banks promised to self-regulate their spreads, however the general perception is that they have failed to live up to those expectations. Further the attempt by the CBK to persuade banks to follow a reference rate—the Kenya Bank’s Reference Rate (KBRR) introduced in 2014—is also perceived to have failed. Kenya is not Unique in Introducing Interest Rate Caps. A recent World Bank study finds that globally some 76 countries have experimented with interest rate caps, invariably to protect consumers (figure B.1.2.3). Indeed over 44 percent of countries in Sub-Saharan Africa (24), Latin America (14) and East Asia and the Pacific (7) had some form of interest rate controls.7 However, these measures were by no means limited to developing economies, as they also persisted in some advanced economies, including in Western Europe, Japan, and certain States in the US. Findings from the empirical literature suggest that, interest rate cap is a blunt tool to address the problem of high spreads and often leads to unintended consequences. These include: reduced financial inclusion for the most poor and vulnerable, decreased lending for productive investments by firms, the introduction of compensatory fees and costs, and declining quality of loan portfolios. Globally, Interest Rate Caps Have had Unintended Consequences. In South Africa, some financial institutions evaded the interest rate caps by charging credit life insurance and other services, which reduced the transparency of the total cost of credit. In Armenia, the lack of clarity on how to calculate the interest rate spread led to the imposition of various fees and commissions, which reduced transparency and circumvented the interest cap ceilings. Among West African Economic and Monetary Union (WAEMU) countries, the imposition of interest rate caps on micro-finance loans caused micro-finance institutions to withdraw loaning to the poor and more remote areas. In Japan, the supply of credit appeared to contract, acceptance of loan applications fell and illegal lending rose. In France and Germany, interest rate ceilings decreased the diversity of products for low-income households. In Nicaragua, the application of an interest ceiling caused micro-finance institutions to reduce lending and prompted a number of such institutions to leave urban areas due to high operational costs and risks. They also responded by adding fees so as to circumvent the interest rate cap hence passing on a constraint to depositors. In India, the enacting of interest rate margin cap in 2011 led to slower borrowing and lower formal financial access. In the United States, caps on loans in certain states led to the migration of clients to states with less restrictive practices. 5 The Kenya Economic Update Edition 9 carried out an analysis on the Banking Sector and looked specifically at the composition of the interest rate spread. 7 Maimbo and Gallegas (2014). 22 October 2016 | Edition No. 14 Annex 1 What Are The likely Impacts of the New Law In Kenya? The eventual effect of the law on specific economic agents is likely to be mixed. The likely short-run beneficiaries of this new law will be large corporates and relatively wealthier households with low risk profiles, the government, and existing borrowers with high interest rates. On the other hand, bank profitability is likely to decline, and credit flows to smaller businesses and lower income households could decline or be accessed at higher cost through non-bank channels. 1. Effects on the non-bank corporates and consumers – In principle, banks charge borrowers interest rates commensurate with their perceived risk profile. Further, because loan processing costs are fixed and interest incomes are proportional to the size of a loan, a cap on rates means that only loans above a certain threshold are economically viable to extend. Both of these effects are likely to constrain lending to small and medium size enterprises as well as low and middle-income consumers since they have a higher risk profile and borrow smaller amounts. On the other hand, larger borrowers with good credit ratings will benefit further as there should be increased competition for their business from the banks. Though still early days, there is some evidence of credit rationing as some Kenyan banks have announced plans to curtail new unsecured consumer loans and loans for motor vehicle purchases. Further, as in other economies where interest rate caps have been introduced, some Kenyan banks have increased existing charges or introduced additional ones (e.g. appraisal fee, processing fee, insurance premiums etc.) to procure a loan have been introduced by some banks in Kenya. It is, however, noteworthy that one major bank has announced plans to compete in this new regime by increasing the volume of loans. Besides credit rationing, theoretically the law should benefit all savers, as the minimum rate at which banks are required to pay interest-bearing accounts is higher than what most savers currently receive. However, banks have already announced plans to do away with savings accounts or have imposed a stricter interpretation of what qualifies as an interest bearing savings account (with some savings account being treated as a current accounts based on limited number of withdrawals). Hence, to the extent these practices become prevalent, it would limit any potential benefit to savers. While the above discussion considers the effect for new transactions, it is important to recognize that given most banks are applying the law retroactively, in the short-run this represents a boon to borrowers who had loans above the new statutory ceiling (most likely SMEs and low to middle- income consumers), in particular those with fixed-rate products. Indeed, in the few weeks after the law came into effect a number of banks have reported an increase in loan applications, most of them due to re-financing or extension of existing loans at lower interest rates. 2. Effect on Banks - Average net interest margins are likely to decline by up to 430 basis points from the 11.4 percent they averaged in June 2016. This will impact all categories of Kenyan banks, however, given lower profit margins among Tier 3 banks relative to Tier 1 banks they are likely to be hit the hardest. Reflecting the impact of the new law on bank profitability, some 15 percent of value of bank stocks (5.4 percent of the all share index) was wiped-off within a month of the passing of the Banking Amendment Bill. Further, the law is likely to reduce the ability of banks to differentiate creditworthiness and price accordingly, leading to a more homogenous product, reduced competition and shutting out of certain categories of borrowers. A consolidation of the banking sector may occur, as most of the smaller banks will face even higher challenges given their relatively high cost of funds. October 2016 | Edition No. 14 23 Annex 1 When combined with more stringent capital requirements, the likelihood of consolidation is very high. This will potentially increase the market share of SACCOs and Micro-Finance Institutions (MFIs), who are not subject to the same interest rate restrictions. Indeed, there are also concerns that Banks could create special purpose vehicles outside the purview of the Banking Act, freeing them to charge interest rates without the limitations of statutory cap. Banks are expected to also divert more of their assets to government securities. Further, banks with a regional presence will likely reduce Kenyan exposure in favor of other countries. 3. Effects on Government - It could lead to a decline in borrowing costs for the government. As the provider of a “risk-free” security, the attractiveness of government treasury bills will likely become relatively higher, as the risk premia that banks charge to non-government borrowers is curtailed by law. This increased demand for government securities from the banks is already driving down government borrowing costs, with the 91-day security declining by 50 basis points within two weeks of the signing of the law (figure B.1.2.4 and figure B.1.2.5). However, to the extent that the banking sector is a large revenue contributor of corporate income taxes, a drop in the profitability of the sector will reduce their contribution to government revenues. 4. Monetary Policy Setting – In a regime where commercial bank interest rates are directly linked to Central Bank’s policy rate decisions, the transmission mechanism will be effective immediately, unlike under the previous regime where there was a lagged or weaker transmission to commercial bank rates from CBK’s interest rate decisions. In this regard, the stakes for the appropriate calibration of the Central Bank’s policy rate in accordance with the economic fundamentals of the Kenyan economy are much higher. Miscalculated decisions on policy rates (e.g. lowering interest rates when there is a growing positive output gap) are likely to become more costly than under the previous regime when the transmission mechanism was much weaker. Communication from the monetary policy committee on their assessment of the Kenyan economy and reasons for their interest rate decisions could provide the appropriate signals for economic agents to respond accordingly. Reforms To Address Other Underlying Causes Of High Credit Cost Are Needed. The statutory capping of lending rates and putting a floor on savings rate may succeed in reducing spreads on interest rates, nonetheless it remains a blunt policy instrument that is likely to leave in its trail unintended consequences and may not achieve the goal of making credit less costly and more widely accessible. Indeed, given what is already occurring in these early days, lawmakers are threatening further efforts to tighten any loopholes that the banks may be seeking to exploit. While individual banks have an important part to play, making credit more accessible and less costly goes beyond the reach of regulating the interest rate charges of the banking sector. This section considers other Kenya-specific factors that account for the high cost of credit. First, although Kenya’s banking sector remains one of the most vibrant in the sub-region, it could benefit from greater competition. Indeed, while Kenya has some 42 banks (compared to 19 and 22 in South Africa and Nigeria, both of which have much larger economies and populations), the industry’s market structure is oligopolistic as the top seven banks alone account for 57.6 percent/58.7 percent of the total assets/deposits as at December 2015. Not surprising, bank size has been found to be positively related to interest rate spreads.8 Further industry consolidation, particularly among the smaller banks should help erode the exercise of market power by some of the larger banks. 8 Were and Wambua (2013). 24 October 2016 | Edition No. 14 Annex 1 Second, macroeconomic conditions affect the cost of credit, and of particular importance is the extent of domestic borrowing by the government, as banks charge a risk premia above the government T-bill rates. A recent study confirms the expected statistically positive relationship between budget deficits and lending rates.9 Efforts to reduce the government Treasury bill rates, say via external borrowing and more recently through providing a platform for retail investors to purchase Treasury bills should help in this regard. Other macroeconomic factors of importance include maintaining a benign inflationary and stable exchange rate environment. Thirdly, several microeconomic factors increase the operational cost of banks in underwriting loans or reclaiming collateral. a) There is the need to reduce the information asymmetry which leads risk adverse banks to shun potentially good borrowers or charge them much higher interest rates than their true risk profile demands. One way to tackle this is by expanding the credit information-sharing framework in Kenya to facilitate banks to use positive credit information to offer lower rates to customers with good history and also to widen the participation in the framework to include SACCOs, utilities and other issuers of credit. In other jurisdictions this reform has led to a 5 percentage points decline in the interest rate charged on loans and a 7 month extension in loan maturity. b) The cost of perfecting a security interest by banks could be significantly reduced if there existed an electronic central registry of collateral. Presently charges related to perfecting security interest (search costs, legal fees, stamp duty etc.) are expensive and add significantly to banks operational costs. They also remain prohibitive to borrowers who may want to refinance loans at cheaper rates with other banks, thereby reducing competition. c) There is the need to develop a framework to promote property (both moveable and immovable) as collateral. This is a reform that has been associated with a 3-percentage point reduction in interest rates and a 6-month extension of the maturity of a loan in other jurisdictions. While many Kenyans own land, it remains “dead capital”10 due to the lack of associated property rights and missing information. The computerization of land registries will enable the capture, management and analysis of geographically referenced land related data. This will help to create a reliable and accessible land ownership infrastructure that can facilitate the collateralization of land thereby opening up access to credit facilities to a broad cross section of Kenyans. d) The implementation of the National Payments System Act and regulations which will operationalize infrastructure sharing by banks in order to reduce operational costs as well as encouraging banking innovations such as agency banking, currency centers and mobile banking. e) Finally the implementation of the New Companies Act and Insolvency Act should help improve the legal framework when companies are distressed. Since banks price loans based on their rights in case of default it is no surprise that creditor-unfriendly bankruptcy regimes tend to have higher costs, as banks increase costs to mitigate potential higher losses. Kenya ranks as one of the most difficult places to resolve insolvencies according to the World Bank Doing Business indicators. It takes about four and half years to resolve an insolvency compared to 3 years for the average Sub-Saharan African country and 1.7 years for OECD countries. Further the recovery rate in bankruptcy cases is a mere 27 cents on the dollar compared to 72 cents for OECD countries and 64 cents for Botswana. 9 Sambiri, J. Mudaki; Otieno, D. Ojala; Maurice, Mwangi; Ongiyo, O. Charle, and Rombo, Kevin. 2014. “Lending Rates and it’s Impact on Economic Growth in Kenya.” Journal of Economics and Sustainable Development. 10 Hernando De Soto (2000). The term dead capital is taken from Hernando De Soto’s hugely influential book on the mystery of capital. In that book he explains why due to the lack of property rights, missing information etc, many people remain poor even though they own important assets. October 2016 | Edition No. 14 25 Annex 1 Figure B.1.2.1: Spreads are mainly driven by Figure B.1.2.2: Interest rate spread has been profits and overheads on the increase 12 20 13 18 10 16 12 5.6 8 5.7 14 4.2 5.0 12 11 Percentage Percent Percent 6 0.5 10 0.8 0.4 0.9 8 10 4 6 4.7 4.5 4.0 4.3 9 2 4 2 0 0.6 0.6 0.7 0.9 0 8 2009 2010 2011 2012 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Profits Provisions Overheads Reserves Interest rate spread Deposit Lending Figure B.1.2.3: Other countries have experimented Figure B.1.2.4: Government borrowing interest rate caps costs has declined Number and percentage of countries with interest rate ceilings, by region 14 Interest rate cap bill signed on 24th August 2016 Sub-Saharan Africa (50%) 12 364-days Tbill Latin America and the Caribbean (48%) East Asia and the Pacific (44%) 182-days Tbill 10 Europe and Central Asia (23%) Middle East and North Africa (29%) 8 91-days Tbill South Asia (38%) 0 5 10 15 20 25 30 6 Percent 06-Jun-2016 27-Jun-2016 18-Jul-2016 08-Aug-2016 29-Aug-2016 26-Sep-2016 Figure B.1.2.5: Businesses were charged the highest interest rates Lending rates 20 19 18 17 Percent 16 15 14 13 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Corporate Business Personal Data Source (for all the charts): Central Bank of Kenya, Maimbo and Gallegas (2014), and Kenya Economic Update Edition 9, 2013. Special Focus: Instituting Systems of Public Investment Management © Sarah Farhat, World Bank Special Focus 5. Instituting Systems of Public Investment Management 5.1 Kenya is Expanding its Infrastructure 8 billion) in 2016/17 (see Figure 5.1a). Second, Spending the investments are debt financed, which has There is political consensus in Kenya on the resulted in a widening of the budget deficit and importance of infrastructure development for corresponding increase in debt. The budget economic growth. As a result, the country has deficit increased from -5.4 percent in 2012/13 significantly expanded infrastructure spending to -9.4 percent in the 2016/17 budgets while in recent years. Investment on infrastructure the stock of debt increased from 42 to 53 has increased and now averages 21 percent of percent of GDP. Third, the investment drive has GDP, largely driven by public investment. This delayed fiscal consolidation and the country is a testimony to the country’s ability to act is running the highest deficit in the East Africa on and implement its policy intentions. Three region. A mapping of GDP growth and budget observations can be made: first, the recent deficits for EAC countries (figure 5.1b) shows spike in investment is driven by government that Kenya is in the “high deficit -moderate investment in economic infrastructure growth” quadrant. The situation for a period projects, which account for about half of the of time can be a sensible strategy if there is development budget. The budget for economic a credible expectation of future payoffs in infrastructure sectors (energy and petroleum, terms of increased productivity and derived roads, railway, ports and other transport and additional economic growth. However, as will ICT) has quadrupled in nominal terms, from be discussed below, models of medium term KSh100 billion to 400 billion in a span of six future developments in productivity does not years, and is estimated at KSh 800 billion (US $ support expectations of productivity increases. Figure 5.1: Infrastructure takes half of development budget, financed through debt Medium term development budget GDP growth (percent) KSh billion 0.0 1,000 3.0 4.0 5.0 6.0 7.0 8.0 -2.0 Tanzania, 2013/14 800 Rwanda, 2013/14 Fiscal deficit (% of GDP) -4.0 600 42.9% 50.9% Uganda, 2013/14 49.6% 52.7% -6.0 400 Kenya, 2013/14 Tanzania, 2016/17 57.1% Uganda, 2016/17 50.4% 47.3% 49.1% -8.0 200 -10.0 0 Kenya, 2016/17 2015/16 2016/17 2017/18 2018/19 -12.0 Energy, infrastructure, and ICT Others Source: Staff computation from National Treasury and World Development Indicators. 28 October 2016 | Edition No. 14 Special Focus Box 5.1: Data on Public Infrastructure spending in Kenya is likely overstated Not all of the growing amount of budgeted development spending is used for public investment― i.e. spending that contributes directly to general government gross fixed capital formation. Many development budget expenditures are recurrent in nature but are included in the development budget because they are associated with specific projects. For example, all donor projects are categorized under the development budget, irrespective of whether they are financing recurrent or capital expenditures. Total public investment (government gross fixed capital formation) is therefore likely to be lower than total development spending in a given year. After reclassifying development expenditures to isolate investment spending, the IMF estimated total investment spending in Kenya to be around 7 percent of GDP in 2013. This was broken down as follows: 2.7 percent Central Government, 1.6 percent Local Government, and 2.8 percent public corporations and other entities. The combined total for Central Government and public corporations and other entities of 5.5 percent of GDP for 2013 is somewhat below the level of ‘development spending’ suggested by budget execution data for FY2013/14 of 6.3 percent. The difference may be indicative of the amount of recurrent expenditure included in the development budget. Source: IMF (2014) Kenya Article IV Report. Kenya’s expansion of public infrastructure for middle-income countries is around 25 investments is aligned with global trends and percent. For both lower middle-income and priorities. Low-income countries as a whole middle-income countries, the trend has been spent approximately 35 percent of their public towards increased public investments as a share expenditure on infrastructure while the share of GDP (figure 5.2). Figure 5.2: Public Investment in low income countries (LICs), middle income countries (MICs), and high income countries (HICs), percent of GDP and percent of Government Expenditure   Source: World Economic Outlook, May 2015. October 2016 | Edition No. 14 29 Special Focus Box 5.2: Drivers of African Economic Growth There is a positive relationship between Figure B.5.2.1: Kenya’s level of investment has increased infrastructure investment and economic growth. and trends low income countries A decade of analytical work has demonstrated 10 that inadequate infrastructure has been a binding 8 GDP growth (annual, %) constraint to growth for low-income countries. For 6 2015 instance, Calderon and Serven (2008) estimated 4 that if low-income countries in SSA increased 2 infrastructure investments to the same level as 1991 0 Mauritius, the regional leader, growth could increase -2 by 2.3 percent. In response, a significant number 15 17 19 21 23 25 27 29 of these countries have increased budgetary Investment (% of GDP) allocations for investment, Kenya included. Figure Kenya Lower middle income B.5.2.1 plots investment as a share of GDP against Log. (Kenya) Log. (Lower middle income) GDP growth for Kenya and low-income countries Source: World Development Indicators and indeed the relationship is positive. Underlying this increased spending on public has been realized not by cutting recurrent infrastructures is recognition of the importance spending but by increasing the available of infrastructure in boosting growth. Globally, envelope through loan financing. This strategy the G20 emphasizes infrastructure investment rests on the assumption that infrastructure as a growth driver and the Financing for will boost growth and thus finance itself over Development agenda acknowledge the key the medium term as public revenues increases contributions of robust physical infrastructure in a bigger and better and more productive for achieving the Sustainable Development Kenyan economy. Goals (SDGs).11 5.2 Kenya Has Improved Its Infrastructure In summary, Kenya is in tandem with the but More Work is Needed To Raise Its Competitiveness global consensus on the need to provide quality infrastructure for economic growth. Increased spending has resulted in improved Politically, there is near consensus on the need infrastructure quality in Kenya. According to to increase public spending on infrastructure, the World Bank’s Logistics Performance Index,12 and as a strong testimony to Kenya’s ability to Kenya has improved its ranking on the index from act on its intentions, spending is increasing very being number 76 out of 150 countries in 2007 significantly. Given the inherent challenges in to being number 42 out of 160 countries in changing the composition of a national budget, 2016.13 Significant improvements have been this is an impressive starting point. At the same made on the “Quality of trade and transport time, the changed composition of the budget related infrastructure.” With a score of about 11 The G20, under the G20 Investment and Infrastructure Working Group (IIWG), has established the Global Infrastructure Hub, which is mandated to “grow the global pipeline of quality, bankable infrastructure projects” (www.globalinfrastructurehub.org). The Financing for Development Agenda is a UN anchored multi-stakeholder process aimed at increasing multi-source funds for achieving development goals, including through addressing infrastructure gaps (www.un.org/esa/ffd). 12 The World Bank has complied the Logistics Performance Index since 2007. The Index compares the performance of countries on trade logistics along six dimensions, including dimensions such as the efficiency of customs and border. 13 World Bank Logistics Performance Index, 2016, http://lpi.worldbank.org 30 October 2016 | Edition No. 14 Special Focus 3 out of 5, Kenya scored above the average of Forum, in its 2015-2016 World Competitiveness the group of lower middle income countries Report, ranks Kenya 99 out of 140 economies and above other countries in Sub-Saharan reflecting assessments along 12 pillars relevant Africa. Notably, the score has improved to competitiveness. With a score of 3.2 out of 5 significantly between 2012 and 2016 (see on the infrastructure pillar, Kenya ranks 99 out figure 5.3 and 5.4 below). of 140 economies on this pillar―the same as for the overall ranking on this index. Looking at the Looking more broadly at Kenya’s different dimensions of competitiveness, Kenya competitiveness, further improvements in gets its lowest score on infrastructure illustrating infrastructure are needed. The World Economic the continued need to improve (figure 5.6). Figure 5.3: Quality of trade and transport related Figure 5.4: Quality of trade and transport related infrastructure, in Kenya, 2007-2016 infrastructure, Kenya, LMI and SSA 3.5 3.5 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0 0 2007 2008 2011 2013 2015 Kenya LMI SSA Figure 5.5: Country Score Card for Kenya, 2016, Logistics Figure 5.6: Global Competitiveness Index, Performance Index Kenya, 2015-16 Customs 5 1st  pillar:  Institutions 5 4 12th  pillar:  Innovation 2nd  pillar:  Infrastructure 4 3 Timeliness Infrastructure 11th  pillar:  Business   3 3rd  pillar:  Macroeconomic   2 sophistication environment 2 1 1 0 10th  pillar:  Market  size 4th  pillar:  Health  and   0 primary  education Tracking   and  tracing International   shipment 9th  pillar:  Technological   5th  pillar:  Higher   readiness education   and  training 8th  pillar:  Financial  market   6th  pillar:  Goods   market   development efficiency Logistic  competence 7th  pillar:  Labour   market   efficiency Source: World Bank Logistics Performance Index, 2016, http://lpi.worldbank.org. Source: World Economic Forum, http://reports.weforum.org/global- competitiveness-report-2015-2016/. October 2016 | Edition No. 14 31 Special Focus 5.3 The scale-up of investment is yet to boost suggests a more inefficient system of production. overall productivity Figure 5.8 shows that Kenya’s ICOR increased Kenya has decided to use debt-financed from 3.3 in 2003-07 to 5.3 in 2008-12, which infrastructure expansion to boost growth and is above the average for Sub Sahara Africa. A in turn help to meet future debt repayments third indicator is the contribution of investment through improved revenues. Much of the to growth. Decomposition of Kenya’s growth argument for public investment relies on shows the contribution of net investment to the assumption that resources allocated to GDP growth declined in the recent years. For investment translate into an equivalent value the period 2008-12, investment contributed 1.9 of public capital stock, which, by lowering the percentage points to GDP growth compared to cost of production or distribution, benefits the 0.9 percentage points in 2013-15, which was private sector and boosts the overall growth even lower than 1.1 percent for the period process. This can be measured by the rate of 2003-07 (figure 5.9). return of such investments to the economy. Figure 5.9: Net Investment contribution to growth contracted Efficiency and effectiveness of public 8 investments in Kenya seems to have declined 0.5 0.9 in recent years. Total Factor Productivity 6 1.1 1.9 (TFP), which measures how efficiently inputs 4 4.3 are utilized in production, has stagnated at 6.0 Percentage points about 1.1, and is projected to be declining in 2 the medium term to about 0.5 in 2018, (see 4.3 0 -0.9 -0.6 Figure 5.7). Another proxy for productivity, the -0.1 -2.2 -0.8 incremental Capital Output Ratio (ICOR), which -2 measures the additional amount of investment -4 2003-2007 2008-2012 2013-2015 necessary to generate an additional unit of Consumption Net investment Net exports Statistical discrepancy production, has been rising. A rising ICOR Source: World Bank Staff computation based on Kenya National Bureau of Statistics and World Development Indicators. Figure 5.7: Gains in Total factor Productivity (TFP) Figure 5.8: The ICOR is rising: more inputs are required have tapered to produce one unit of output 6 Incremental Capital Output Ratio (ICOR) 8 5 1.1 1.1 1.1 1.1 1.0 0.9 0.8 0.7 0.5 7 0.7 0.9 1.0 7 0.8 4 0.5 6 0.3 2.5 2.3 2.5 2.2 2.4 2.4 2.4 2.5 2.5 5.3 3 1.1 0.0 2.0 2.1 2.2 1.5 1.8 1.4 1.0 0.7 0.8 5 2 4 3.3 2.4 2.3 2.3 2.2 1 2.2 2.2 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.1 2.1 2.1 2.1 3 0 2 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 1 -­‐1 0 -­‐2 1995-02 2003-07 2008-12 Labor Capital   TFP Kenya Average for SSA 2000 -2011 Source: World Bank Staff computation based on Kenya National Bureau of Statistics and World Development Indicators. 32 October 2016 | Edition No. 14 Special Focus Box 5.3: Improving productivity of public investments Rapidly increasing capital spending is raising concerns about the efficiency of these investments globally and Kenya is not an exception. Globally, there are large differences between countries in terms of what they get out of their public investments. Figure B.5.3.1 below shows a measure of infrastructure quality (vertical axis) compared to the capital stock in those countries (horizontal axis). Countries with Figure B.5.3.1 Efficiency of Public Capital the best infrastructure quality at a given level of capital stock define the frontier (the green line). Countries below the frontier have potentials for improvement of efficiency (or productivity) of their capital stock, and thus public investment. Emerging markets countries could―on average― improve the efficiency of public investments by 27 percent, while low income countries have an improvement potential of 40 percent. Looking to the worst performers―the bottom quarter― around half of the capital stock funded through the capital budget does not contribute to quality infrastructure according to this rough measure. To S ource: IMF, 2015, Making Public Investment More Efficient Note: put it differently: Public investment have twice as 1) Capital stock on the X-Axis summarizes the value of public investments over time adjusted for depreciation. 2) The “hybrid indicator” on the Y-Axis combines indicators for the volume of much impact in countries with the highest efficiency selected economic and social infrastructure in a country and survey data on perceptions of infrastructure quality as collected by the World Economic of public investments (top quartile) compared to 3) The Forum. frontier (green line) is determined by the country with the highest infrastructure index for a given capital stock. countries with low efficiency (bottom quartile). Overall, productivity in Kenya is low and each of the steps of the public investment cycle, falling, which raises the question of whether pointing out the loopholes or problem areas that Kenya is getting high enough returns on its can and affect the quality of public investments. very significant public investments. IncreasingThere are eight specific functions that a public investment cycle should establish and/or productivity is the sine qua non of growth. While strengthen to ensure quality public investment there are many factors affecting productivity, the outcome. These functions are considered to quality of infrastructure and public investments are major factors.14 be “must-have” functions that are needed to provide a logical and internally consistent 5.4 Productivity Trends Have Been Affected system that countries ought to follow to ensure By the Way the Public Investments Are basic discipline for public project selection Managed and implementation. The framework does not Eight “must have functions” should be in place seek to identify “best practice” but rather to to improve public investment productivity. identify the bare-bones functional features Rajaram et al. (2014)15 have developed a that would minimize major risks, be achievable framework to guide the way public investments in a lower-capacity context, and yet provide are managed by providing a systemic view of an effective systemic process for managing IMF, 2015, Making Public Investment More Efficient. 14 Rajaram, Anand, Tuan Minh Le, Kai Kaiser, Jay-Hyung Kim, and Jonas Frank (2014). The Power of Public Investment Management: Transforming 15 Resources into Assets for Growth. Washington: World Bank. October 2016 | Edition No. 14 33 Special Focus public investments. The emphasis should be is an important way to anchor government on the basic processes and controls (linked decisions and to guide sector-level decision at appropriate stages to broader planning, makers towards national priorities. The Vision budgeting and implementation processes) that 2030 provides a long-term vision of policies are likely to yield the greatest assurance of and priority projects that form the country’s efficiency in public investment decisions. development program and these are cascaded down through a coherent planning and Figure 5.10: Eight Public Investment Management must- budgeting hierarchy. The hierarchy includes have functionalities Medium Term Plans, Annual Budgets, Annual Performance Contracts (for Heads of Ministries and Agencies) and Departmental Work Plans. However, competing pressures and political interests create ad hoc priorities that are not captured in the Vision 2030, medium term expenditure framework (MTEF) and MTP processes. This happens when non-government actors, such as private sector individuals, enterprises or development partners, sponsor   new projects. It also happens when needs Source: Rajaram et al. (2014), The Power of Public Investment Management: Transforming Resources into Assets for Growth. are identified by high-level authorities well after the national plans have been drafted. In Kenya, land has cultural, political and Finally, so-called “complement projects” economic significance and is seen as a major come up. Currently, little guidance exists on crosscutting challenge to public investment how to deal with new proposals outside the management because access to and acquisition normal planning process. While there is a well- of land for infrastructure projects affect cost publicized high strategic guidance for public and timeliness of project preparation and investment decisions at the central, ministerial, implementation. Land issues are therefore and county levels, there is no process or practice reviewed separately in a section below. for screening project proposals for basic consistency with government policy as regards The review in this Kenya Economic Update is new proposals not included in the plans. on Public Investment Management at National Level. However, as the devolved system of 5.4.2 Project appraisal and independent review governance settles in, it would be important lacks basic requirements and capacity. Project to pay equal attention to public investment Appraisal serves to determine whether to go management at county level and across levels ahead with an investment project proposal of government. or not. Functionalities that should be in place include pre-feasibility and feasibility studies 5.4.1 There is limited screening of project determining technical, social, environmental proposals for alignment with Vision 2030 and economic viability of the project. Broad strategic guidance for public investment 34 October 2016 | Edition No. 14 Special Focus Box 5.4: Project preparation in the energy sector As the energy sector struggles to achieve the ambitious targets within the plan to increase generation, transmission and distribution of electricity in Kenya, each institution seems to be facing unique challenges that could have been managed if there were standard procedures and coordination across the sector. And while regional interconnectivity is expected to be a significant component of the investments to connect regional neighbors (such as Tanzania, Zambia and eventually South Africa, Ethiopia, and Democratic Republic of Congo-DRC) to tap into the surplus electricity that Kenya hopes to enjoy, there has not been clear feasibility studies and cost benefit analysis to support these ambitious investments before they were embarked on. This example demonstrates the complexity of PIM for projects with a regional dimension. Without a systematic approach (centralized or decentralized) for appraisal, costing for some of the projects is done carefully but the result is descriptive. Technical personnel in the sector indicate that while they have been well-equipped with relevant skills through numerous training programs in project appraisal and cost benefit analysis. However, there is no mechanism to integrate these skills into value for the sector and hence no incentive for stopping bad projects or rationalization of the portfolio. It is also not clear who has gatekeeping authority to bring discipline in project selection and enable project prioritization. Sometimes projects that enter the budget are not ready for implementation. In many cases, it is after the project has been identified for funding that feasibility studies are carried out. In other cases, new projects have been misrepresented as ongoing projects to avoid rules that limit new projects. Appraisal of proposed investment projects It will take time to significantly improve the is embryonic. The quality of technical project quality of investment project appraisal but design and costing varies considerably between small steps can go a long way. Project appraisal projects. Economic analysis, including Cost- guidelines with minimum standards for technical Benefit and Cost-Effectiveness Analyses, is not design, costing and economic analysis should systematically done and there is limited capacity be drafted. Doing appraisal requires technical for doing them. The legal provisions for project skills, which are only emerging in Kenya, so appraisal are very general in nature, and more implementation of the guidelines should be detailed guidance is very recent and is still too done gradually and aligned with capacity general to improve the quality of appraisal. building. It is important that an administrative There is no manual of procedures to guide the check is put in place to ensure that guidelines project appraisal and selection process. Beside are being adhered to. This could for example environmental assessments anchored by NEMA, be done by making appraisal a requirement there is no independent review to challenge for including a project in the budget. Similarly, project design, assumptions, justifications and transparency and disclosure of appraisals will costing, etc. provide a public check on compliance. October 2016 | Edition No. 14 35 Special Focus Box 5.5: Steps taken to improve appraisal in Uganda Recently, the Government has implemented a number of measures intended to start a reform process that may improve Uganda’s PIM system. As part of this process, the Ministry of Finance, Planning and Economic Development embarked on measures to strengthen its gate-keeping function by creating a department in charge of Project Analysis and Public-Private-Partnerships (PAPP) in 2015. This created a systematic structure with clearly defined mandates to manage the project cycle, and project quality assurance. Among other matters, the PAPP Department is expected to ensure that technical and economic analysis of public investment initiatives at the national and/or regional level is conducted, thus acting as an independent reviewer of the projects. Accordingly, it is responsible for: - Analyzing, appraising and recommending or rejecting public investment projects for financing and execution; - Defining and updating general and sector rules, guidelines, circulars and norms that inform the formulation and appraisal of investment projects; - Providing technical support to MDAs and local government evaluation teams or planning units; - Coordinating the provision of nation-wide training on issues of project preparation and project appraisal; - Providing the secretariat to the Development Committee, with the latter mandated to approve or reject submitted projects for project execution by granting a seal of approval; and - Undertaking selected monitoring and post evaluation for selected key projects. With technical assistance, the unit has developed public investment guidelines and manuals and started building capacity in the area of project appraisal within the Ministry and in other MDAs. Amongst other measures, it has developed a simplified manual for public investment appraisal. As part of its role to appraise and select projects for financing, this unit may in some cases serve as the independent reviewer. However, lack of clarity on mandate, thresholds, and other aspects, on which projects should be subjected to independent reviews, leaves different projects being subjected to different standards. This department is in fact the champion for the strengthening of the overall PIM system in Uganda, but has to remain cautious not to overburden itself with roles that should be undertaken by other agencies along the PIM cycle. 5.4.3 Institutions for project selection and a setting in which sectoral priorities and budgeting are weak. The Kenyan budget process technical knowledge is well represented in the has many strengths but the National Treasury selection process. All expenditures, including could strengthen its role as “gatekeeper” in all development expenditures whether the project selection and budgeting process. implemented by Ministries, Departments and The budget process is well-regulated in the Agencies or State Owned Enterprises (SOEs) Public Finance Management Act 2012 and (irrespective of funding source) are on budget. there is good discipline around the budget However, problems of optimism bias or conflict calendar. The decentralized approach to of interest in project selection and budgeting prioritization and vetting of projects provides are not addressed. 36 October 2016 | Edition No. 14 Special Focus The pressures to include a given project in Figure 5.11: The infrastructure budget execution Gap has the budget―independent of the results of increased to about 3.7percent of GDP any appraisal―can be significant even in the Infrastructure sector budget and expenditure (2008/09-15) best of settings. This makes the existence of a 10 supervisory or oversight function important to 8 ensuring that only viable projects are included 7.7 in the budget and that the overall envelope Percent 6 5.7 3.7% is fiscally responsible. However, the National 4.9 of GDP Treasury’s role as challenger of budget proposals 4 4.0 3.9 3.8 and gatekeeper is limited in a number of ways, including by the absence of a formal process to 2 respond to ad hoc or emergency projects, limited 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 data on project information and limitations in Sector budget (% of GDP) Sector expenditure (% of GDP) existing financial management systems. There is Source: Staff computation from National Treasury (Quarterly Budget and Economic Review, various issues). limited staffing within the Budget Department in National Treasury to perform a robust challenge function to Ministries, Departments Procurement, corruption, cash management and Agencies. This is notably the case in the and acquisition of land are key impediments infrastructure, transport and energy sectors that to implementation. A key step to improving account for 50 percent of the development budget. project and budget execution is to improve the quality of project preparation as discussed 5.4.4 Implementation: procurement, cash above. Badly prepared projects are harder and management and pending land reforms are key slower to implement. However, deficiencies in impediments. One of the obvious symptoms of procurement processes/practices, challenges to the weakness in Kenya’s PIM system is the low the management of cash and delayed payments levels of execution of the infrastructure budget. to contractors as well as land acquisition also For instance, in the year 2014/15, only 31 delay implementation. percent of infrastructure budget was executed, compared to 89 percent for general economic Public Procurement and Contracting and commercial affairs sector. Figure 5.11 shows Procurement is a special area of focus in PIM, as budget estimates for infrastructure and the the mechanisms for selection and contracting actual spending for the period 2008-09 to 20014- influence price and quality as well as facilitate 15. The difference between the two lines, which or mitigates fraud and corruption risks. we refer to as execution gap, increases as the Public investment procurement is particularly budget for the sector increases. The highest gap prone to significant efficiency losses because can be observed in 2014-15 when the budget it involves large contracts that can provide for the sector was 7.7 percent of GDP and only possibility for irregular payoffs by means of poor 3.8 percent was executed, leaving a gap of 3.7 procurement practices and collusion. Between percent of GDP. As will be discussed below, 2012 and 2013 it was estimated that 59 percent badly prepared and selected projects and issues of suppliers/private firms had accessed prior around design and procurement practices, knowledge of a public institution’s estimated contract management, cash and payment as price of goods and services from procurement well as land acquisition are key factors behind officials, management or other staff in the the execution gap. procuring institution. During the same period, October 2016 | Edition No. 14 37 Special Focus about 34 percent of suppliers reported adding (PPARB) handled 56 cases with a turnaround on extra mark-ups for profits, factoring in bribes completion of the review at 21 days. While on and “benchmarking” with other suppliers for average, 3 weeks does not constitute inordinate the same tender, as the basis for determining delay, 50 percent of the decision made by the how to quote when placing tenders with PPARB went on to judicial review process, which public institutions. does then cause delays.16 As discussed elsewhere in the report, more than 60 percent of cases Figure 5.12: Private firms reporting who supplied them filed in the Environment and Lands Court take with information on the estimated price of goods to be procured by public institutions between 12 - 60 months to be concluded.17 Cannot reveal my source, 4.5% Other suppliers Public institution's bidding for the same other members of sta , 11.4% contract, 27.7% Kenya has recently passed new procurement legislation. Ongoing efforts to implement the new legislation should help address procurement related delays to investment project implementation. This includes stronger M&E provisions for better contract management, Public institution's management, 10.9% Other suppliers not bidding for the same special approvals from the Attorney General contract, 6.4% Public institution's and notification of Cabinet for any procurement procurement o cial, 36.8% above KSh 5 billion and enforcement of the procurement planning (including multi-year Source: EACC, Evaluation of corruption in public procurement, 2015. procurement plans). However, even as the law makes improvements, issues relating to Figure 5.13: How suppliers determine the price to quote public participation particularly around land when placing tenders with public institutions and displacement are inevitable, and still cause significant delays and cost escalations as Quote  prevailing  market  price 60.4%  (342   discussed later in this report. suppliers) Consider   prevailing  market  price  but  add  big   18.2%  (103   profit suppliers) Use  prevailing  market  price   but  factor  in   8.5%  (48  s uppliers) Cash Management bribes Benchmark  our   price  with  other   suppliers   bidding   the  same  tender Weak cash management leads to recurrent 6.9  %  (39  s uplliers) Benchmark  our   price  with  the  estimated   3.5%  (20  s uppliers) cash shortfalls which adversely affect the price   of  a  procuring   entity 1.4%  (8  s uppliers) pace and extent of project implementation. We  simply  guess  the  price Ultimately, this leads to short term building up of arrears to contractors and increased costs for Any  other  method 1.1%  (6  s uppliers) 0 10 20 30 40 50 60 70 contractors. Contractors reflect this in pricing and cost variation orders and stall project Source: EACC, Evaluation of corruption in public procurement, 2015. completion. These elements make the system further vulnerable to fraud and corruption Some procurement-related delays are a as favored providers can be given priority in consequence of losing bidders lodging appeals payment and as the discretionary payments can against decisions. In FY 2013/2014, the Public be made contingent on kickbacks. Procurement Administrative Review Board Public Procurement and Oversight Authority 2013/2014 Annual report. 16 Judicial Case Audit and Institutional Capacity Survey June 2013. 17 38 October 2016 | Edition No. 14 Special Focus Box 5.6: Cash short falls and delays in making payments “Delay in government making payment for goods and services [….] plays a big part in creating incentives for bribery and rent seeking. “I am announcing that every Accounting Officer shall be held responsible for ensuring that all payments for goods and services are paid for in a timely manner…” H.E. Kenyatta in a police speech on corruption titled: “National Call to Action against Corruption” delivered from State House on November 23, 2015. The extent of the delay of payment to suppliers is significant, with longer delays extent of the delay warranting higher “facilitation” fees. While the Public Procurement Code of Ethics prohibits delays to payments due to contractors, suppliers, provides of services or consultants, the practice is still rampant in procurement in Kenya. Between 2012 and 2013, almost 50percent of suppliers interviewed by the Ethics and Anti-Corruption Commission (EACC) had experienced their payments delayed more than 10 times as shown in Figure B.5.6.1. In October/November 2015, Kenya faced the realities of a significant cash shortfall. The Parliamentary Budget Office attributed the shortfall to: (i) the failure of Kenya Revenue Authority (KRA) to meet their revenue targets from July-September 2015; (ii) high interest rates (spiked increase in domestic borrowing); (iii) sharp weakening of the value of the shilling to the US dollar; and (iv) the failure of Treasury to adequately plan mitigating measures to address challenges.18 Consequences of this included 15-30 days arrears in payments of salaries to teachers and county government staff, implementation of third term free primary education being disrupted, the procurement of laptops for schools postponed and disbursements to the Tourism Marketing Fund (to mitigate against travel advisories) and Rural Electrification Program, delayed.19 Figure B.5.6.1: Number of times in 2012 and 2013 that processing of payment was delayed Do not know 10 51 More than 10 times 44 49 6-10 times 37 15 1-5 times 269 116 None 207 141 0% 20% 40% 60% 80% 100% Suppliers Procurement officials Source: EACC Evaluation of corruption in public procurement report, 2015. http://www.businessdailyafrica.com/Low-revenues--high-interest-rates-behind-State-cash-crunch/539546-2905322-rkvkfk/index.html 18 Source: Requested from the PBO. http://www.businessdailyafrica.com/Low-revenues--high-interest-rates-behind-State-cash-crunch/539546- 19 2905322-rkvkfk/index.html October 2016 | Edition No. 14 39 Special Focus Project adjustment acquired by a SOE is valued periodically every Contract variations and cost overruns are not 2-5 and these values are updated in the balance systematically being monitored and the nature sheet accordingly. and extent of problems cannot be properly quantified. Coding of projects in IFMIS has until The national government of Kenya spent a recently only been done for projects funded by total of 18 percent of the annual development development partners. IFMIS is only used for budget expenditure on refurbishment of aggregated expenditure reporting that cannot buildings/infrastructure and civil works be generated at project level. It is therefore in fiscal year 2014-2015. However, except not possible to assess the completion rate of for the Presidency and Judiciary, key public the public investment projects including how investment MDAs such as Health, Infrastructure, these completion rates differ across key sectors. Industrialization and Transport spent less than Project tracking and monitoring would provide a 5 percent of their development budgets on the basis for improved project adjustment. same. See Figure 5.14. 5.4.5 Wanted urgently: Updating of Asset Anecdotal evidence suggests that the Registries and provision adequate funding transition from construction to operation and for maintenance. The national government maintenance is not always handled well. Newly operates on a cash basis of accounting and completed assets are sometimes not put into does not maintain a balance sheet of assets and use because of lack of funding for operations. attendant liabilities. The value of assets created Some assets are not probably maintained, by the national government are recorded which reduces their useful lifetime. Devolution and reported on in terms of only how much is likely to have temporarily increased this money was spent on that asset in the year of its problem, as many assets are not clearly acquisition/creation. SOE’s, however, maintain assigned to a level or government, as national asset registers, as they operate on the accrual government funds construction of assets basis of accounting. Assets owned by SOEs intended to be operated by counties and as are valued according to International Financial budgeting and other aspect of public financial Reporting Standards (IFRS) and any asset management is nascent in the counties. Figure 5.14: Percent of MDA Development Expenditure allocated to Refurbishment of Buildings/Infrastructure and Civil Works Expenditure on refurbishment, % of MDA's development expenditure 7,000 60 18%,6291 6,000 50 5,000 Ksh million 40 Percent 4,000 5%, 3160 30 3,000 20 2,000 1,000 56%, 564 10 3%,48 0.3%, 53 4%, 201 15%, 217 0 0 Ministry of National Ministry of The Judiciary The Presidency State Department of State Department of Health Treasury industrialization Infrastructure Transport Expenditure on refurbishment of buildings/infrastructure and civil works, Ksh million Expenditure on refurbishment of buildings/infrastructure and civil works, % of development Source: Staff compilation from the Controller of Budget (Annual National Government Budget Implementation Review Report 2014/15). 40 October 2016 | Edition No. 14 Special Focus 5.4.6 Evaluation: Improve recording, tracking Because of the lack of project level information, and transparency. Many aspects of Kenya’s it is difficult to undertake analysis to assess public investment program are not clearly and more exactly the scale of problems with transparently reported. The composition of the project delivery. Similarly, it is hard to assess the development budget between infrastructure impact of reforms and changes to the system and other expenditures is unknown because and to identify “islands” of good practice and some recurrent expenditure is included under performance in Kenya that serve as role models the development budget. Effective use of the and inspiration for others. National Treasury’s GFS classification of public expenditure does not recent efforts to improve the capture of appear to be present. Thus an important metric investment projects in the budget, is effectively of the quality of public spending, the share of operating without much information, and expenditure allocated to public capital, cannot cannot therefore fully perform its “watchdog” be clearly estimated. or oversight role over the PIM portfolio. Basic information on the number, sectoral Overall, the legal and institutional set-up allocation, value, and stage of completion of for public investment management in Kenya public investment projects is not available does not facilitate good returns on public either to policy makers or to the general public. investments. Kenya has taken initial steps to Beyond the Vision 2030 and Medium Term improve public management with the elaborate Plans, there is no portfolio of planned or assessed planning system as a good point of departure. investment projects, making project selection The ePromis platform is also in place as an unsystematic and without clear criteria. There important first step towards setting up criteria is no up-to-date or accurate tracking, disclosure for project appraisal and selection. However, and evaluation of project implementation across the eight “must have features” of a public status, timeliness and expenditures. investment management system, Kenya still has a potential to improve its approach and realize greater returns on its very significant public investment volume. Box 5.7: E-promis To facilitate project monitoring, an electronic Project Monitoring Information System (e-ProMIS) was developed in 2007/08. The uptake and use of e-ProMIS across line ministries in GoK has been slow. A review of the e-ProMIS data indicates data quality challenges. The largest project in e-ProMIS at the time of writing (February 2016) was listed as the Northern Corridor Transport Improvement Project (NCTIP)―a World Bank financed project―with a total project cost of US$ 5.6 billion. However, World Bank records indicate that the total project cost is closer to US$ 473 million (i.e. 12 times smaller). Furthermore, the SGR project is recorded in e-ProMIS as having a total lifetime project cost of KSh 6.65 billion (71st largest project by total cost), which is only 6 percent of the total budget allocation recorded for only one year of project implementation in the 2015/16 development estimates (KSh 118 billion). In addition, of the 1,818 projects that are listed as ‘ongoing’, only about 400 (22 percent) have ‘planned’ or ‘actual’ end dates that were in the future at time of writing, suggesting that the majority of the data is stale and needs to be updated. These data quality issues raise questions about the usefulness of undertaking detailed analysis of the e-ProMIS data and about the quality assurance systems in place to detect and correct errors. October 2016 | Edition No. 14 41 Special Focus 5.5 Land Presents a Unique Challenge to for example, road reserves and land for health Public Investment Management clinics and public schools. The reserved land 5.5.1 Meeting the growing demand for land should remain in the public domain until such for infrastructure projects is a ballooning a time that it is needed to meet increased challenge. With the growing scope and scale demand for services. In this way, there should of current infrastructure investments in Kenya, be a ready supply of public land on which to demand for land is growing. The amount of expand services. land required varies in size, depending on the project. For example, the US$450 million (KSh Over the last several decades, however, public 4.5 billion) Ruiru Sewerage Treatment Plant land management practices have been sub- required approximately 82 acres to be available optimal. Such practices have resulted in a in one plot. In other cases, the infrastructure situation in which much of the stock of public requires a narrow corridor of land along many land has been lost to individual uses (see Box kilometers. Infrastructure such as railways, 5.8). The allocation of this public land has roads, pipelines and power lines require this often been done irregularly with little oversight type of land corridor. For example, Phase I of reducing the stock of land that was set aside for the US$ 3.27 billion (KSh 327 billion) Standard planned interventions. In Nairobi in 2005, only Gauge Railway (SGR) required a narrow corridor 2.3 percent of the total land area was classified of land for 472km from Mombasa to Nairobi. as un-alienated government land20 and it was estimated in 2010 that only 13 percent of land This demand for land by the public sector can in urban areas is government owned. 21 be met through the public land inventory. The principle behind public land is that it is held in There is no clear inventory of what public land trust for the people by the government. Public is remaining. From 1963-2010, no systematic land is, therefore, to be used for the benefit of or comprehensive inventories of various types the citizens of the country to serve the public of public lands were completed for either rural interest. Infrastructure investments such as or urban areas. The common perception is that roads, railways, schools, sewage and water no public land exists that is unencumbered and treatment plants, etc., serve a public purpose. available for allocation for public uses or to During the planning process, land is set aside encourage investment, especially in locations for anticipated future demand of basic services, where it is most needed. Table 5.1: Examples of Land Required for New Infrastructure across Various Sectors Sector: Project Land Required Transport: Standard Gauge Railway (Phase I Mombasa-Nairobi) 60-130m corridor for 472km Energy: Suswa-Isinya Geothermal energy transmission line 60m corridor for 100km Sanitation: Ruiru Sewerage Treatment Plant/Juja Sewerage Treatment Plant 82 acres/120 acres Solid Waste Management: Mitubiri Landfill Site 50 acres 20 JICA, Integrated Urban Development Master Plan for the City of Nairobi, Final Report, May 2014, 2-26. (Nippon Koei Co., Ltd. IDCJ Inc. EJEC Inc.), Table 2.2.1. 21 UN-Habitat, 2010. 42 October 2016 | Edition No. 14 Special Focus Box 5.8: Findings of the Ndung’u Commission The Ndung’u Report, released nearly 15 year ago, documented the extent of corruption in the land sector. Known officially as the Report of the Commission of Inquiry into the Illegal/ Irregular Allocation of Land in Kenya (2004), the Ndung’u report confirmed that corruption involving public land was systematic and widespread. The commission found that at least 200,000 illegal titles had been issued to alienate public land22 between 1962 and 2002. The Ndung’u report also showed how presidents, public officials, and members of the judiciary, well-connected politicians and private businesses had consistently perverted the constitutional requirement for public land to be administered “in the public interest”. Wholesale alienation of public land occurred in both urban and rural areas. The result of the trends exposed by the Ndung’u Report and others was that by 2010 most public land that had not been (1) assigned to government authorities (e.g. railways, forest service, parks service, etc.); (2) demarcated for road, power, and rail Right of Ways (ROWs); (3) assigned for public services; or (4) alienated for urban uses within municipal, town, and market areas was simply lost. The main methods of land grabbing described in the Ndung’u report have been: letters of allotment treated as saleable interests in land; illegal/irregular allocations/ appropriations of public land; parastatals and ministries paying exorbitant prices to acquire land from private individuals; and illegal and/or irregular excisions of protected forestland to private interests and for unauthorized uses. The demand for land for infrastructure can In Nairobi, the city with the most active also be met through purchase in the open property market and the biggest need for market. Particularly for infrastructure that is network infrastructure, land values are site-dependent, such as sanitation treatment increasing dramatically (table 5.2). Investment plants and landfills, or where a need has been in land is providing far higher returns than determined where no public land has been set either the bond or stock market in the country. aside, the government may need to acquire land The city’s property market has “been one of the in the open market. Land purchase can be time- best performing globally over the last 8 years, consuming and expensive. There is no guarantee matched only by Hong Kong”.23 The average that the optimal parcel of land that is required price per acre was a little over KSh 30 million in will become available for purchase; and if such 2007, but is more than KSh 170 million today, land does become available, its scarcity value an increase of 535 percent in 7 years.24 In such will result in a high, perhaps prohibitively high, a market, the option of purchasing private land land price. to convert to public land may be very limited. Further, the announcement of a proposed infrastructure project tends to result in an immediate increase in land prices in the vicinity of the proposed project. 22 Alienation is the act of transferring public land into private ownership, at the discretion of the relevant government agency/agent, and under the aegis of delegating the utilization of the land ‘commons’ for the public good. 23 Hass Consult 2013. 24 Hass Property Land Index Q4 2014. October 2016 | Edition No. 14 43 Special Focus Table 5.2: The Escalating Cost of Land in Nairobi 2007-2014 Cost of 1 acre by neighborhood Percent change Current cost (as of 2007 2014 in KSh (millions) 2007-2014 Q2 of 2016) Average across Nairobi 30 170 535% - Upper Hill 60* 470 789% 600 Kilimani 66* 370 557% 430.3 Lang’ata 9* 40 427% 50.9 Westlands 73* 361.7 494% 398.4 Source: Hass Property Index Quarter 2 2016, Quarter 4 2014. * Author calculation based on HassConsult data 5.5.2 Compulsory land acquisition facilitates is expected to translate into savings that are availability of land where needed but can delay passed on to the consumer, leading to reduced the expected productivity gains of infrastructure electricity bills. Project delays mean that the projects. Kenyan law allows the government to country as a whole does not receive these exercise powers of compulsory land acquisition, savings until years later than projected. or eminent domain, which is the mandatory acquisition of private land in the public interest. Similarly, the production of cheaper During compulsory land acquisition, land is geothermal energy has not been maximized. bought at market price; however, it is not based The transmission of 280MW of geothermal on the market’s “willing buyer, willing seller” energy from the Olkaria I and IV Geothermal principle, as the landowner cannot refuse the Power Stations has been hindered due to acquisition. While compulsory land acquisition difficulties in acquiring land for the wayleaves for is also expensive and time-consuming, it is the the transmission line. The 100km 220 KV Suswa- common practice to avail land required for Isinya power transmission line, which is critical to infrastructure investments especially where evacuating this power, has not been completed public land is not available and/or land is not due to disputes related to compensation of the available in the open market. land for the way leave. Construction of the 400KV Nairobi-Mombasa line, also aimed at evacuating Challenges encountered in the land acquisition cheaper geothermal power to Mombasa, was process adversely affect infrastructure begun in 2012 and has not been completed for projects with consequent impacts on the similar reasons. The disputes have reduced the expected productivity. For example, the Kenya potential of geothermal energy as a cheaper Electricity Transmission Company (KETRACO) alternative to the more expensive hydropower continually face land acquisition challenges for electricity. which delay expected energy savings. KETRACO is a government agency set up 2008 to build Further, infrastructure that increases regional the new high voltage electricity transmission integration to Kenya’s advantage is also at infrastructure necessary to the Vision 2030 risk. In at least one regional infrastructure goal of increased national energy capacity and project, Kenya has lost out to Tanzania due to related economic efficiencies. By 2030, they land-related costs and time delays associated target an additional 11,230 km of new high with Kenya. In early 2016, Uganda opted out of voltage transmission lines at an estimated cost jointly constructing a crude oil pipeline project of US$ 3.55 billion. This additional infrastructure through Northern Kenya to Lamu, opting instead 44 October 2016 | Edition No. 14 Special Focus to support the construction of a route through protects the right to private property but Tanzania. Part of the motivation for opting out ofalso makes certain provisions for compulsory the Kenya route included the risks in increased land acquisition. While it does not define the costs and time delays due to the complexities of term “compulsory acquisition” it provides for land acquisition in Kenya. instances where the state can deprive a person of private property rights for a public purpose 5.5.3 The gaps in the policy and legislative or in the public interest. This provision acts as framework of compulsory land acquisition the basis upon which the exercise of the power contribute to delays in infrastructure to compulsorily acquire property is exercised. investments. Ideally, the legal process of As seen in Figure 5.15, the process of land involuntary land acquisition should balance acquisition is laid out clearly in the Land Act the desire to promote economic growth and 2012, and the National Land Commission investment with the need to limit harms to (NLC) is the entity that administers the land those whose property is taken involuntarily for a acquisition process. public purpose. In Kenya, the 2010 Constitution Figure 5.15: Land Acquisition Process (from the Land Act, 2012)   • CS  or  the  County  Executive  Committee  member  required  to  submit  request   1     to  the  National  Land  Commission  to  acquire  the  land  on  its  behalf.   • NLC  evaluates  request  for  acquisition     2   • If  satisfied  that  the  request  meets  requirements  under  guidelines  and  provisions   of  Article  40  (3)  of  the  Constitution,  the  NLC  provides  approval.   • Land  is  then  geo-­‐referenced  and  authenticated  by  the  office  of  s urvey  at  relevant   3 national  or  county  government  level.   2   • NLC  then  publishes  a  Notice  of  Intention  to  acquire  land  in  the  relevant  Gazette  or   4 the  County  Gazette.     3 • The  NLC  submits  a  copy  of  the  Notice  and  every  other  person  who  appears  to  be   interested  in  the  land.   5 • Registrar  then  makes  an  entry  into  the  register  of  the  intended  acquisition.   4 • Within  30  days  of  publishing  the  Notice  of  intention  to  acquire  land,  the  NLC   appoints  date  for  inquiry  to  hear  propriety  and  compensation  issues  from  people   6 interested  in  the  land.     • Notice  of  Inquiry  is  published  in  the  Gazette  or  the  County  Gazette  at  least  fifteen   5 days  before  the  inquiry  and  s erved  to  every  person  who  appears  or  claims  to  be   interested  in  the  land.   • Once  land  has  been  compulsorily  acquired,  just  compensation  is  paid  promptly  and   7 in  full  to  all  persons  whose  interests  in  the  land  have  been  determined.    6 October 2016 | Edition No. 14 45 Special Focus The term public purpose is a key principle Figure 5.16: The Land Acquisition Stumbling Blocks behind compulsory land acquisition. A clear definition of what constitutes “public purpose” THE LAND ACQUISITION STUMBLING BLOCKS or “public interest is needed in the legislation to identify whether a project meets a public purpose in order to improve accountability. In many countries, public purpose is not defined What are the standards clearly in the legislation, which creates space for compensation? for acquisition that may not be necessarily for Can the Are there legitimate grievance public purpose in the strictest sense. In Kenya, rights’ holders mechanisms in be identified? place to ensure the term public purpose is defined in the 2012 Is compensation just and prompt? Is compensation standardized? due process can be exercised? Land Act.25 Purposes of transportation, and public utilities and services, feature centrally in Source: Authors construction. the definition. 5.5.3.1 Identifying the legitimate rights’ If not clearly addressed in legislation or holders of the land is a persistent policies, four factors become stumbling challenge blocks that delay compensation and project In Kenya, as in many countries, people who implementation. They are: (i) eligibility criteria have lived on and used land for long periods of to clearly identify the legitimate rights’ holders time will not have any formal documentation of the land; (ii) requirements to provide prompt, of their rights. This is especially the case for adequate and effective compensation; (iii) clear people who hold secondary and tertiary rights standards for determining property valuation ―including women (who often control but do and compensation; (iv) provisions to ensure not own parcels for food production); those that the right to due process and appeal in an (men and women) who own trees, but not land; independent forum in cases of dispute can be those (men and women) who have rights to use exercised (figure 5.16). While international good water sources or pastures but only at certain practice related to the legal framework for land times of the year; those (men and women) who may collect forest products, etc. According to acquisition has five benchmarks,26 this report international statutes, these users of the land has focused on evaluating, through the lens of are considered legitimate rights’ holders due stumbling blocks, the three that have an impact for compensation. In some countries, their on budget execution. legitimate customary rights are recognized under the formal law; in other countries they are not recognized. This Act defines “public purposes” to mean the purposes of— 25 (i). Transportation including roads, canals, highways, railways, bridges, wharves and airports; (ii). Public buildings including schools, libraries, hospitals, factories, religious institutions and public housing; (iii). Public utilities for water, sewage, electricity, gas, communication, irrigation and drainage, dams and reservoirs; (iv). Public parks, playgrounds, gardens, sports facilities and cemeteries; (v). Security and defence installations; (vi). Settlement of squatters, the poor and landless, and the internally displaced persons; and (vii). Any other analogous public purpose. The five benchmarks are: (i) Clear definition of “public purpose” or “public interest”; (ii) Standards for compensation/valuation; (iii) Requirements 26 for consultation; (iv) Recognition and eligibility of legitimate rights’ holders; and (v) Due process standards and judicial review. 46 October 2016 | Edition No. 14 Special Focus These legitimate rights’ holders are recognized and compensating legitimate rights’ holders. In in the Kenya legislation but can be difficult to an apparent contradiction to the constitutional conclusively determine who is eligible and their provision for compensation of occupants in compensation dues. The Constitution of Kenya good faith, the Land Laws (Amendment) Act 2010 provides for compensation for occupants prohibits unlawful occupation of public and in good faith who may not hold title to land that private land. The Constitution allows forced is subsequently compulsorily acquired. Based evictions to take place under certain conditions on this provision, compensation in Kenya is not but mandates the passing of legislation to linked to ownership of registered interests in guide the procedures guiding forced evictions. land and squatters and other occupiers in good The procedures to be followed during faith are entitled to some form of compensation. eviction have been included in the Land Laws Occupiers in good faith are entitled to some (Amendment) Act (2016)27 and stipulate that form of compensation and this is recognized certain measures are to be taken into account in practice in Kenya. For this reason, agencies during evictions. Compensation is, however, acquiring land must perform the due diligence not explicitly mentioned as one such measure. required to identify these occupants, a process that is not clearly guided in the legislation. 5.5.3.2 “Just” compensation of land is provided for in the legislation; but In addition, a poor land records management payment is often not prompt system has made it difficult to find even the “Just” compensation has been determined formal rights’ holders of the land. Confusing in Kenyan courts as compensation that is be laws and procedures for land registration have quantified in accordance with the market resulted in registries of poor integrity, which value of the land being acquired. Legislation may be marred by false ownership claims or often requires that compensation amounts be replete with inaccurate or outdated ownership determined in relation to “market value.” In information. This has undercut trust in the Kenya, the Land Acquisition Act 198328 defines registries and in this case, contributed to an the term “market value” of the land to be incomplete compensation process. In the SGR acquired as “the market value of the land at the project, the NLC reported that paying out the date of publication in the Gazette of the notice KSh 30 billion of compensation money was of intention to acquire the land” and lays out delayed due partly to difficulty in identifying the principles to guide the compensation of both informal and formal rights’ holders, in land using market value. Compensation costs some cases due to the fact that the titleholder under these regulations refer to, at the least, was deceased and no transfer of formal rights compensation of the land, developments on the had been done. land and a 15 percent disturbance allowance. Additional considerations are provided for The recently passed Land Laws (Amendment) including compensation if the remaining land in Act 2016 presents another hurdle to identifying a parcel loses value due to the acquisition. 27 The eviction procedures that must be followed are: • Prior identification of all person participating in the eviction • Prior presentation of formal authorization for the action • Where groups of people are being evicted, government officials or their representatives be present during the eviction • Be carried out in a manner that respects the dignity, right to life and security of those affected • Include special measures to ensure effective protection of the rights of vulnerable groups • Include measures to ensure that there is no arbitrary deprivation of property or possession as a result of the eviction • Include mechanisms to protect property and possessions left behind involuntarily from destruction • Respect the principles of necessity and proportional use of force give affected person first priority to demolish and salvage property 28 Although repealed by the 2012 Land Act, the regulations to the Land Acquisition Act continue to remain in force until the regulations of the newer 2012 Act is put in place. October 2016 | Edition No. 14 47 Special Focus Compensation that is not prompt has halted In Kenya, both the requirements of the NLC and project implementation. The Constitution of the Environment and Social Impact Assessment Kenya requires prompt payment in full to the (ESIA) require Resettlement Action Planning affected party which means that payment is but there are no clear guidelines to regulate made without undue delay and it should be the process. Guidelines on resettlement action in the form of currency, land, or other goods/ planning have been prepared by the NLC, which services that the recipient can readily make use is a first step towards ensuring that restoration of and that serve to put the recipient in at least of livelihoods is considered in compensation as good a position as he or she was in prior to packages. The guidelines, however, are not the expropriation. In multiple projects across complete, as they do not specify the policy Kenya, progress has been suspended pending principles and the planning parameters that payment of compensation. For instance, must be applied and clearly established in order the rehabilitation and upgrading of Lang’ata to guide the formulation of the RAP. Unclear Road affected about 25 property owners near guidelines results in different standards being Galleria Mall whose residential properties were applied across similar contexts opening the door vacated in August 2013, but had still not been for contestation of compensation, which in some compensated 15 months later.29 Works were cases leads to delays in project implementation. halted until compensation was resolved. In other cases, actual compensation costs have Figure 5.17: The Key Assessments in the Environment and Social Impact Assessment exceeded the amount set aside in budgetary allocations, sometimes as much as twice the The Environment What are the environmental impacts of the project? and Social - Assessment is regulated by the Environment (Impact budgeted amount. Not having the money Impact Assessment and Audit) Regulations (2003) Assessment - Results in a NEMA license which allows construction available has delayed payments. (ESIA) to commence Mandated by the Environmental 5.5.3.3 While compensation of land is Management and Coordination What are the social impacts of the project? - The Environment (Impact Assessment and Audit) standardized, livelihood restoration Act (1999) prior Regulations (2003) mandates the preparation of a to any Resettlement Action Plan (RAP) if it is determined is not infrastructure that displacement of persons is necessary works - The NLC has stipulated in their guidelines that a RAP Restoration of livelihoods is an important must accompany any request for land acquisition - In both cases, the guidelines on RAP preparation aspect of “just” compensation but has been need to be clearer – as a starting point, NLC has neglected in the Kenyan legislation. The prepared Terms of Reference to guide the RAP preparation which can be strengthened. overarching objective of livelihood restoration is Source: Authors construction. to enhance, or at least restore, the livelihoods of all displaced people in real terms relative to pre-project levels and to improve the With unclear guidelines, different implementing standards of living of the displaced poor agencies adopt their own compensation and other vulnerable groups. Measures to processes with varying compensation restore livelihoods are established during amounts. In the absence of a clear approach the resettlement action planning or the RAP to RAP preparation, RAPs prepared across process, which is done to ensure that displaced different projects are different in format and persons are not harmed by the project and that content. The SGR and Kipevu New Container they share in the project benefits. Terminal Link Road (KNCTLR) each attracted Report of the Departmental Committee on Lands on Compensation of Evictees of Galleria Mall and the Expansion of Lang’ata Road, Kenya 29 National Assembly, Eleventh Parliament, Second Session, November 2014 48 October 2016 | Edition No. 14 Special Focus an independent RAP process commissioned by investment and projects, at best, there would the Kenya Railways Corporation and the Kenya only a 33 percent chance of any dispute of this National Highways Authority respectively. kind filed in the ELC will be concluded within 12 The two projects shared a corridor in some months. This is shown in Figure 5.18 below. areas and where the project area overlapped, the amount of cash compensation paid to Figure 5.18: Civil Backlog Cases by Type (High Court – June 2013)20 the Project Affected Persons (PAPs) in the SGR project was higher than that paid to the Civil Backlog Cases: Land and Environment cases June 2013 (%) 40 KNCTLR. Stoppages in works resulted from communities protesting that the packages do 33.6 not include livelihood restoration. 30 26.8 24.0 5.5.3.4 Grievances addressed through the 20 court cases have significant delays 15.6 Multiple provisions are made in Kenya to allow 10 aggrieved parties to practice their right to due process and right to appeal in case of disputes. 0 The land acquisition legislation stipulates that Below 12 months 12-13 months 24-59 months Over 60 months the NLC must hold an inquiry where anyone with Source: Judicial Case Audit and Institutional Capacity Survey, June 2013. interest in the land and who feels aggrieved by the acquisition process can lodge a complaint. Using the court system to address grievances The Notice of Inquiry must be advertised in the can also exacerbate project costs. The Kenya Gazette 15 days before the date. In addition, the Railway Corporation claimed that it lost KSh NLC must proactively seek out any persons of 37.9 million daily due to a court order in June interest in the land and hand them this Notice 24, 2016 to suspend works until compensation of Inquiry. In addition, the Constitution of Kenya had been paid to Africa Oil and Gas Company, 2010 provides for aggrieved parties access to a one of the companies affected by the project. court of law. Aggrieved parties may file a court As of July 21, 2016, they had estimated a loss at case in addition to, or instead of, using the nearly KSh1 billion due to the suspension.21 Inquiry set up by the NLC. Feeling aggrieved, persons with rights to the Land dispute cases in Kenyan courts take time to land may decide to hold out and refuse to give be resolved. The time cost of land disputes filed up the land. This holding out has an impact in court is significant and this severely affects on the productivity of the infrastructure as it project implementation. A case audit carried limits the expected large-scale effects. During out in 2013 revealed that 66 percent (5,782) the upgrading of the Lang’ata Road, next to of the cases filed in the Environment and Land the Bomas/Galleria Interchange, landowners Court (ELC) had been ongoing for more than a refused to allow demolition of their multi- year, and of those nearly half had been going million shilling properties pending the resolution on for over 60 months. While these cases may of compensation. The functionality of the include issues of land disputes outside public interchange was subsequently compromised. 20 By the time of 2013 case audit, three ELC large registries (Eldoret, Kerugoya and Nyeri) were omitted from the data collection, and after 2013, the industrial court matters relating to land are now included as part of land and environment cases. For these two reasons figures relating to land and environment cases are therefore likely to have increased significantly and will be confirmed once the 2016 audit is published. 21 Business Daily, July 21, 2016. October 2016 | Edition No. 14 49 Special Focus 5.6 From Spending To Growth alignment with the strategies of the Vision 2030 and related Medium Term Plans. Supplement 5.6.1 A system of public investment the Vision 2030 with criteria for emerging management. As in most countries, there investment priorities that are not captured in are opposing forces pulling public investment the Vision and Plans. This could be in the form management in different directions. On one of circulars issued by the National Treasury or hand, technical experts have views and priorities Ministry of Planning and Devolution at the for sector investment plans and specific projects beginning of the financial year. grounded in needs assessments and technical considerations. There is a drive by top officials 2) Project design and appraisal: Draft project and the general public to weed out corruption appraisal guidelines with minimum standards in public life. There are ongoing efforts to for technical design, costing and economic strengthen supervisory functions in budgeting analysis. Implement the guidelines to align with as well as strengthening planning, budgeting increased capacity for design and appraisal etc., and audit and evaluation at all levels. On the and include an independent review or check other hand, drivers of corruption remain. There on the application of the guidelines. Consider is little appetite to limit ad hoc public investment anchoring independent review in the National project priorities being reflected in the annual Treasury. These guidelines should include budget. And PFM systems remain in need of support towards fully and fairly implementing further improvement. uniform land acquisition and resettlement planning processes and compensation practices. While comprehensive PIM reform and Good practices on reducing land-related costs strengthening comprises a relatively complex to improve the productivity of infrastructure agenda, quick-win high-priority actions include: investment can be learnt from practices in other countries. Support compliance with guidelines • Strengthening minimum criteria for project by embedding process requirements in relevant preparation, appraisal and inclusion of a PFM legislation. project in the budget; • Gradually strengthening the role of National 3) Project selection and budgeting: Strengthen Treasury as an independent reviewer of the role and capacity of the National Treasury project proposals before selection for to review and challenge proposals by line funding, while enhancing the capacity to Ministries as part of the annual budget cycle, undertake this role. including sector-specific expertise focused on • Improving transparency and accountability the Ministries, Departments and Agencies with for management of the portfolio of public the largest investment budgets. This would investment projects. amount to strengthening the National Treasury’s role as overseer or supervisor of investment A more comprehensive and longer terms projects that go into the budget. The legal reform action plan and effort should aim at framework (e.g. State Corporations Act, PFM strengthening public investment management Act and PFM Regulations) already provides the along all the PIM functionalities reviewed in basis for National Treasury to strengthen this this KEU: role.22 In addition to this, a public investment plan/portfolio should be included in the budget 1) Strategic guidance: Ensure that investment documentation. Project designs and costings proposals are more stringently reviewed for should also be made publicly available. S.6 of the State Corporations Act, Section 11 of the PFM Act, Regulation 32 of the PFM Regulations. 22 50 October 2016 | Edition No. 14 Special Focus 4) Project implementation: Core PFM systems General (OAG), and supplement the existing (procurement, contract management, cash indicator-based approach to M&E at national management) must be strengthened as level with a focus on project and program envisioned in the refreshed PFM Reform Strategy. evaluation. Part of this would be providing and The recently refreshed PFM Reform Strategy publicizing examples where projects are being anchored by the National Treasury adequately implemented well and what they were doing reflect needed steps, including improving cash that can be emulated by others. management, improving IFMIS functionality and compliance, drafting of regulations in support of 7) Transparency and disclosure: Improve the new procurement act and building capacity, information and transparency by building, etc. However, efforts are needed to accelerate maintaining and using a database of pipeline and make effective this foundational part of the and ongoing projects to introduce investment PFM reform agenda.23 portfolio management. Good steps have been taken with the design of the existing e-Promis 5) Operation: An inadequate asset register, which database that has the technical functionalities to is also in flux because of the ongoing devolution do this, but the data entered in the system is not process, impedes proper management of accurate, is not maintained, and could be used assets once projects are put into operation. more actively. The National Treasury should The ongoing process of asset inventory and initiate a cleaning up of the data in e-Promis opening of fixed asset registers using a modified and should then start using the database for cash basis of accounting needs to be prioritized the purposes discussed above. This would in including processes of survey, demarcations and turn require a reorientation of the reporting valuation of government land. Another key step and accountability surrounding the database, so would be ensuring that projections of the full that stronger incentives are in place to ensure cost of capital projects (including construction, regular updating, quality assurance, and use operations and maintenance) are reflected in of the information. For example, reporting to the annual budget and MTEF. A policy should parliament on the public investment portfolio be agreed and implemented in the annual as part of the budget cycle (for example by budget and MTEF to give funding priority to restructuring the development estimates). routine maintenance, operation and capital maintenance of existing assets. Building a strong PIM system will take time and will have to align a gradual and medium-term 6) Audit and Monitoring and Evaluation strengthening of capacity with strengthening of (M&E): Kenya has an elaborate system for audit, institutions, regulations, guidance and manuals monitoring and evaluation. The monitoring and and stakeholder support. Addressing the lack of evaluation system appears to be less substantive up-to-date and accurate project-level portfolio than is required to identify and address prevailing information should be a first short-term priority. problems in public investment management. Other aspects of the PIM reform agenda will External Audit is being strengthened, but general require a medium-term engagement and can challenges related to audit quality and capacity proceed in parallel depending on resources and also affect its relevance for public investments. reform capacity. A reform action plan for PIM Key recommendations include continuation should center on clear performance indicators of reforms at the Office of the Auditor for results and progress. Kenya’s Public Financial Management (PFM) Performance as measured by the 2012 Public Expenditure and Financial Accountability (PEFA) is 23 evolving with nine B scores, thirteen C scores and nine D scores (PEFA Assessment, Final Report, and August 8, 2012). Comparing the 2008 and 2012 PEFAs, the ratings were reduced for 6 scores, improved for 4 scores and flat for 21 scores, i.e. a relatively modest change in performance. A PEFA is planned for 2016/17. October 2016 | Edition No. 14 51 Special Focus Improving PIM will require strengthening Laws (Amendment) Act 2016 as far as eligibility systems and capacity in Ministries, for legitimate rights’ holders are concerned, Departments and Agencies and SOEs as well needs clarification. Ensuring that compensation as in the National Treasury. As the anchor of is prompt also needs stronger support. The the budget process, the National Treasury is at legislation is, however, strong on laying out clear the core of a strengthened approach to PIM. It standards for determining property valuation therefore fitting that National Treasury takes and compensation, and providing the right the lead in formulating and implementing that to due process and appeal in an independent part of the refreshed PFM reform strategy that forum in cases of dispute. Improving the speed relates to PIM, including by drafting a PIM Action of resolutions in the court system would, Plan. The Presidency is currently increasingly however, also needs to be addressed. getting involved in the national budget process. It would be helpful if the importance of PIM is The Kenya government has proposed changes agreed with the Presidency and that the role of to the way compensation is determined. National Treasury in improving the situation is While challenges are experienced throughout recognized and supported. the land acquisition process, the challenges related to compensation are a major source of To make meaningful improvements to public delays and increased project costs. The focus investment management in Kenya, it will be has consequently been on efforts to reform important to reach out to key stakeholders this aspect of the land acquisition process and and establish consensus on the nature of the legislation has been drafted that proposes problem and the desire to solve it. The purpose capping the amount of cash compensation. of this would be to counter the strong private International practice encourages the use of pressure mobilized around individual projects, market value as the basis for compensation of whether at selection or implementation land and this legislation may cap compensation stage. This KEU special theme offers a large at a ceiling that is below fair market value. number of technical recommendations, which Current estimates suggest that the cost of collectively would result in a higher return on acquiring land in Phase I of the Standard Gauge public investments. However, without buy-in Railway (SGR) project was about 10 percent of and support, the proposed reforms are likely the total cost of the project. This percentage to result in formal changes to regulations and is in line with global experience. Thus, while business processes without a real impact. compensation costs in Kenya are perceived as high, the costs are comparable internationally. 5.6.2 Closing the Gaps in the Land Acquisition Process. This analysis shows that the legal Other proposals in the draft legislation aim to framework in Kenya related to land acquisition reduce speculation. To manage speculation, the has strengths but contains important gaps draft legislation proposes that the compensation when compared against international practice. value of the land is determined as the value three The restoration of livelihoods needs to be years prior to the date of acquisition notice. considered as an element of compensation. Valuation would be done prior to the notice of The RAP process, while guided through existing acquisition and any transfer of titles will also not processes, needs legislative support, and the be allowed for a certain period of time prior to emerging contradiction brought on by the Land the acquisition. It also proposes that land-for- 52 October 2016 | Edition No. 14 Special Focus land swaps are favored over cash compensation. compensation anticipated in the SGR. More can These mechanisms have been practiced be done towards this objective which will reduce elsewhere with varying levels of success and the grievances taken to court for delayed payments. regulatory processes to operationalize them will need to be considered carefully. For example, More broadly, a single, unified legislative the costs of requiring surveying and registration and regulatory framework to govern land of the land parcel to be given in a swap can acquisition and involuntary resettlement present additional bottlenecks. should be developed. Currently, the legal and policy provisions for land acquisition and The draft legislation also proposes removing resettlement in Kenya are scattered in different the automatic stay of execution when a dispute pieces of legislation.24 This fragmentation has is lodged. According to the Environmental produced a complex legal framework governing Management and Coordination Act 1999 compulsory acquisition. Reforms would focus (EMCA), a temporary halting of works is triggered on crafting a single policy or legislative act on when a dispute has been lodged in court. The compulsory land acquisition. The reforms would draft legislation proposes that project works in addition develop comprehensive criteria on be allowed to continue even in cases where identifying legitimate rights’ holders, and fully grievances have been filed in court. The intention support just and prompt compensation and is to reduce the impact of the long delays in the livelihoods restoration. Good practices can be court system on the implementation timeline of drawn from the legislation in other countries the project; however, the stay of execution is put (Annex 2, Box 2.1) in place to ensure that the aggrieved have an opportunity to practice their right to an appeal, The following key “quick wins” emerge: as also advocated in international practice. • Establishing an escrow account at the National Treasury for financing land acquisition and Focus should be as much on ensuring that resettlement to ensure immediate availability funding for compensation is properly budgeted of funds for compensation when needed. and reliably available to facilitate prompt compensation. Reforms should also focus on • Evaluating the current proposal to amend ways to ensure funds for compensation are the legislation on compensation in land available. More accurate budgetary allocations acquisition against international good for compensation are needed as compensation practice. costs are often not reflected in project budgets • Developing a single policy on land acquisition or are under-budgeted. To address the and resettlement, with supporting legislation, funding gap, the Kenya Railway Corporation which reflects the principles of international introduced a railway levy to raise funds for the good practice. The Constitution of Kenya (2010), National Land Commission Act (2012), Land Act (2012), Land Registration Act (2012), Land Control Act 24 (1989), Environment and Land Court Act (2012), Physical Planning Act (1996), Magistrates Court Act (1989), Urban Areas and Cities Act (2011), Community Land Act (2016), Energy Act (2015), Environment Management and Coordination Act (2003), Public Private Partnership Act (2012), repealed Land Acquisition Act (1983), the Public Funds Management Act (2013) and the Land Laws (Amendments) Act (2016). Bills that were pending that have now been included in the Land Laws (Amendment) Act (2016) are the Evictions and Resettlement Procedures Bill (2012) and the Evictions and Resettlement Bill (2014), which were supposed be the legal anchor to regulate forced evictions and resettlement planning. In addition, there are several relevant policies including the National Land Policy (2009) and the National Housing Policy (2008). October 2016 | Edition No. 14 53 © Dasan Bobo, World Bank ANNEX 2 Annex 2 Annex 2, Box 2.1: Drawing from Legislation in Other Countries 1. Identifying and Compensating Legitimate Rights’ Holders The terms for compensation of legitimate rights’ holders who may not have formal rights need to be clearly articulated in legislation. In India, the legislation articulates who are legitimate rights’ holders by providing a definition of landowners that provides some flexibility and looks beyond a cadaster or registry to identify those with legitimate claims to land. India also has a specific Act that provides legal recognition of the customary rights of Scheduled Tribes and other forest dwellers.25 In the Philippines, the type of compensation to be provided to legitimate rights’ holders who do not have formal rights is spelt out in the legislation. Where the government relocates informal settlers, compensation includes ‘adequate basic services and community facilities.’ It can also include land surveys, relief from interest payments made on a loan used for construction or purchase of a land and other exemptions related to land registration. Mozambique is often cited as a country that provides a flexible approach to recognizing legitimate customary rights to land, which allows local people to have some security of tenure without necessarily needing to apply for rights. Rights acquired by customary norms have the same status, technically, as rights that are acquired by a long-term (10-year) good faith occupation of land. 2. Ensuring “prompt” compensation Under the implementing regulations to Tanzania’s Village Land Act of 1999, in cases where payment is not prompt (i.e., within six months of the government approving a claim for compensation), the government (or local government authority) is required to pay interest. 3. Standardizing compensation to include livelihood restoration The Ordinance 317 of Brazilian Ministry of Cities addresses the need to provide housing and public services to people, even those who lack land and formal housing rights, and it expands payment of compensation beyond the replacement of lost assets. It focuses on the need to restore social and livelihood conditions of affected people, including the provisions of public services, and provides that a Social Work Plan be developed alongside a resettlement plan. 4. Ensuring mechanisms for prompt grievance resolution Under India’s 2013 law, and to promote “speedy disposal of disputes”, the government is required to establish a “Land Acquisition, Rehabilitation and Resettlement Authority” to exercise jurisdiction, powers and authority conferred by the act (Ch. VII 51.1). This authority has same powers as a civil court (Ch. VII 60) however, is not bound by rules of civil procedure, but is rather “guided by principles of natural justice and subject to the other provisions” of the act; it can regulate its own procedure. This authority is provided with original jurisdiction over land acquisition. How this specialized court functions and how it compares, in times of timely decision making, accessibility and cost-effective dispute resolution has not yet been determined. In the Philippines under RA 10752, when an expropriation proceeding begins, the appropriate agency is required to initiate expropriation proceedings before the appropriate court by filing a complaint and due notice to the affected party. Owners are permitted to protest compensation offers and the court must make a determination of the amount of compensation to be paid within 60 days of the filing of the case. “The Scheduled Tribes and Other Traditional Forest Dwellers (Recognition of Forest Rights) Act, 2006, No. 2 of 2007” (December 29), Gazette of India 25 56 October 2016 | Edition No. 14 REFERENCES • Community Land Act 2016 (Kenya). • Constitution of Kenya 2010 (Kenya). • Energy Act 2015 (Kenya). • Environment and Land Court Act 2012 (Kenya). • Environment Management and Coordination Act 2003 (Kenya). • Ethics and Anti-Corruption Commission. 2015. Evaluation of corruption in public procurement, 2015. Nairobi. • Evictions and Resettlement Bill 2014 (Kenya). • Evictions and Resettlement Procedures Bill 2012 (Kenya). • Government of Kenya. 2004. Report of the Commission of Inquiry into the Ill-gal/Irregular Allocation of Public Land (referred to as the “Ndung’u Commission Report”). Nairobi. • Hass Consult Limited. Hass Property Index: House Price Index Quarter Four Report 2014 and Quarter Two Report 2016. • Hernando De Soto. (2000). The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. Basic Books. New York. • International Monetary Fund. 2015. Making Public Investment More Efficient. IMF Policy Paper June 2015. Washington, D.C. • International Monetary Fund. 2015. World Economic Outlook, May 2015. • Japan International Cooperation Agency (JICA). 2014. Integrated Urban Development Master Plan for the City of Nairobi, Final Report. • Kenya National Bureau of Statistics. 2016. Economic Survey 2016. Nairobi. • Land Acquisition Act 1983/2010 (Kenya) • Land Act 2012 (Kenya). • Land Control Act 1989/2010 (Kenya). • Land Development and Governance Institute. 2016. LDGI Survey on Status of Public Land Management in Kenya. Nairobi. • Land Laws (Amendment) Act 2016 (Kenya). • Land Laws (Amendments) Act 2016 (Kenya). • Land Registration Act 2012 (Kenya). • Magistrates Court Act 1989/2007 (Kenya). • Maimbo, S. M., Gallegos, H. and Alejandra, C. 2014. Interest Rate Caps Around the World: Still Popular, But a Blunt Instrument. World Bank Policy Research Working Paper No. 7070. • National Housing Policy 2008 (Kenya). • National Land Commission Act 2012 (Kenya). • National Land Policy 2009 (Kenya). • National Treasury. 2016. Medium Term Budget Policy Statement. February 2016. Nairobi. • National Treasury. 2016/2017 Estimates of Revenue, Grants and Loans of the Government of Kenya for the year ending 30th June, 2017. Nairobi. October 2016 | Edition No. 14 57 References • National Treasury. Budget Statement for the Fiscal Year 2016/2017 (1st July – 30th June). Nairobi. • National Treasury. Budget Summary for the Fiscal Year 2016/2017 and Supporting Information. Nairobi. • National Treasury. Quarterly Budget and Economic Review, various issues. Nairobi. • Office of the Controller of Budget. 2015. Annual National Government Budget Implementation Review Report for 2014/15. November 2015. Nairobi. • Physical Planning Act (1996). • Public Expenditure and Financial Accountability (PEFA) Assessment, Final Report. Nairobi. • Public Funds Management Act 2013/2015 (Kenya). • Public Private Partnership Act 2012 (Kenya). • Rajaram, A.; Minh Le, T.; Kaiser, K.; Kim, J.H; and Frank, J. 2014. The Power of Public Investment Management: Transforming Resources into Assets for Growth. World Bank Group. Washington, DC. • Republic of Kenya. 2013. The Judiciary: Judicial Case Audit and Institutional Capacity Survey. June 2013. Nairobi. • Republic of Kenya. 2014. Report of the Departmental Committee on Lands on Compensation of Evictees of Galleria Mall and the Expansion of Lang’ata Road. Kenya National Assembly, Eleventh Parliament, Second Session, November 2014. Nairobi. • Republic of Kenya. 2016. “The Division of Revenue Bill, 2016.” Kenya Gazette Supplement No. 27, National Assembly Bills No.4. Nairobi. • Sambiri, J. M.; Otieno, D. O.; Maurice, M.; Ongiyo, O. C., and Rombo, K. 2014. Lending Rates and its Impact on Economic Growth in Kenya. Journal of Economics and Sustainable Development, Vol.5, No.19. • The Scheduled Tribes and Other Traditional Forest Dwellers (Recognition of Forest Rights) Act, 2006 (India). • United Nations Human Settlements Programme (UN-HABITAT ). 2010. Annual Report 2010. Nairobi. • Urban Areas and Cities Act. 2011 (Kenya). • Were, M. and Wambua, J. 2013. Assessing the determinants of interest rate spread of commercial banks in Kenya: An empirical investigation. KBA Centre for Research on Financial Markets and Policy. Working Paper Series, WPS/01/13. • World Bank. 2013. “Kenya Economic Update Edition 9.” Nairobi. • World Bank. 2016. “Logistics Performance Index, 2016”, accessible on http://lpi.worldbank.org. • World Economic Forum. 2015. “The Global Competitiveness Report 2015-2016.” Geneva. 58 October 2016 | Edition No. 14 STATISTICAL TABLES Statistical Tables Table 1: Macroeconomic environment 2009 2010 2011 2012 2013 2014 2015 GDP growth Rates (percent) 3.3 8.4 6.1 4.6 5.7 5.3 5.6 Agriculture -2.3 10.0 2.4 2.9 5.4 3.5 5.6 Industry 3.7 8.7 7.2 4.2 5.3 6.5 6.9 Manufacturing -1.1 4.5 7.2 -0.6 5.6 3.2 3.5 Services 6.2 7.3 6.1 4.7 5.4 5.8 5.5 Fiscal Framework (percent of GDP)/1 Total revenue 19.4 19.4 18.8 19.2 19.2 19.0 18.6 Total expenditure 24.0 23.5 23.7 25.1 25.6 28.2 26.9 Grants 1.0 0.5 0.4 0.5 0.5 0.5 0.5 Budget deficit (including grants) -5.8 -3.4 -4.5 -5.4 -5.9 -8.1 -7.2 Total debt (net) 36.6 39.1 37.0 38.5 43.7 44.8 48.9 External Account (percent of GDP) Exports (fob) 12.2 13.1 13.9 12.3 10.6 10.1 9.4 Imports (cif) 25.6 28.7 33.8 30.8 29.2 28.6 24.5 Current account balance -4.6 -5.9 -9.1 -8.3 -8.8 -9.8 -6.8 Financial account -10.2 -8.1 -8.2 -11.0 -9.4 -11.4 -8.0 Capital account 0.7 0.6 0.6 0.5 0.3 0.4 0.4 Overall balance -3.0 -0.4 2.1 -2.4 -0.7 -2.4 0.4 Prices Inflation (average) 10.5 4.1 14.0 9.6 5.7 6.9 6.6 Exchange rate (average K Sh/$) 77.4 79.2 88.8 84.5 86.1 87.9 98.2 Source:Kenya National Bureau of Statistics, National Treasury and Central Bank of Kenya End of FY in June (e.g 2009 = 2009/2010) 1/Figures for 2015 are actuals for 2015/16 Table 2: GDP growth rates for Kenya SSA and EAC (2010-2014) 2010- 2010 2011 2012 2013 2014 2015 2015 Kenya 8.4 6.1 4.6 5.7 5.3 5.6 6.0 Sub-Saharan Africa 5.5 4.3 3.6 4.7 4.6 3.0 4.3 Uganda 5.2 9.7 4.4 3.3 4.8 5.0 5.4 Tanzania 6.4 7.9 5.1 7.3 7.0 7.0 6.8 Rwanda 7.3 7.9 8.8 4.7 7.0 6.9 7.1 Source: World Economic Outlook(IMF) and Kenya National Bureau of Statistics. 60 October 2016 | Edition No. 14 Statistical Tables Table 3: Kenya annual GDP GDP, 2001 constant GDP/capita, current Years GDP, current prices GDP growth prices prices K Sh Billions K Sh Billions US$ Percent 2007 2151 2766 847 6.9 2008 2483 2772 926 0.2 2009 2864 2864 943 3.3 2010 3169 3104 992 8.4 2011 3726 3294 1013 6.1 2012 4261 3444 1185 4.6 2013 4745 3640 1261 5.7 2014 5398 3834 1368 5.3 2015 6224 4051 1377 5.6 Source: Kenya National Bureau of Statistics and World Bank Development Indicators. Table 4.a: Broad sectors growth (half year, percent) Year Half Agriculture Industry Services GDP 2012 H1 2.9 3.9 4.8 4.4 H2 3.1 4.5 4.6 4.6 2013 H1 6.6 7.6 5.5 6.7 H2 3.9 3.1 5.2 4.7 2014 H1 2.2 8.5 5.8 5.3 H2 5.3 4.5 5.7 5.3 2015 H1 3.5 7.0 6.2 5.4 H2 8.6 6.8 4.9 5.9 2016 H1 5.3 5.8 6.9 6.1 Source: World Bank, based on data from 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 + Helath + Other services + FISIM October 2016 | Edition No. 14 61 62 Table 4.b: Quartely growth rates (percent) AGRICULTURE INDUSTRY SERVICES GDP Years Quarters (Q:Q-3)/ (Q:Q-3)/ (Q:Q-3)/ (Q:Q-3)/ Q/Q-1 Q/Q-4 Q/Q-1 Q/Q-4 Q/Q-1 Q/Q-4 Q/Q-1 Q/Q-4 (Q-4:Q-7) (Q-4:Q-7) (Q-4:Q-7) (Q-4:Q-7) October 2016 | Edition No. 14 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 -3.5 4.3 4.8 3 -22.7 2.0 1.9 3.8 4.6 4.7 5.2 4.5 4.8 -1.5 4.5 4.5 4 1.3 4.1 2.9 6.7 4.4 4.2 1.9 4.8 4.7 2.5 4.7 4.6 2013 1 52.2 6.5 3.9 -0.2 9.3 5.1 -2.4 3.3 4.4 8.6 5.8 4.9 2 -10.4 6.8 5.1 -4.2 6.0 6.0 2.8 7.7 5.1 -1.9 7.5 5.7 3 -22.9 6.6 6.1 4.6 6.8 6.6 2.4 4.8 5.1 -2.6 6.3 6.1 4 -3.9 1.1 5.4 -0.4 -0.3 5.3 2.7 5.6 5.4 -0.6 3.1 5.7 2014 1 53.8 2.2 4.1 6.7 6.5 4.7 -2.8 5.2 5.8 10.3 4.7 5.4 2 -10.4 2.1 2.8 -0.6 10.5 5.8 4.0 6.4 5.5 -0.8 5.9 5.0 3 -19.3 6.8 2.9 -1.6 4.0 5.1 1.4 5.3 5.6 -3.3 5.2 4.8 4 -6.6 3.8 3.5 0.6 5.0 6.5 3.5 6.1 5.8 -0.3 5.5 5.3 2015 1 52.5 2.9 3.7 8.2 6.6 6.5 -2.9 6.0 6.0 9.7 5.0 5.4 2 -9.5 4.0 4.2 0.2 7.4 5.8 4.2 6.3 6.0 0.1 5.9 5.4 3 -18.2 5.5 4.0 -1.1 7.9 6.7 1.7 6.6 6.3 -3.2 6.0 5.6 4 -1.0 11.8 5.6 -1.4 5.7 6.9 0.3 3.3 5.5 -0.6 5.7 5.6 2016 1 43.3 5.1 6.3 8.3 5.7 6.7 0.5 6.9 5.7 10.0 5.9 5.9 2 -9.1 5.5 6.6 0.3 5.9 6.3 4.2 6.9 5.9 0.3 6.2 6.0 Source: World Bank, based on data from Kenya National Bureau of Statistics. Statistical Tables Statistical Tables Table 5: Inflation Year Month Overall inflation Food inflation Energy inflation Core inflation 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 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 2015 July 6.6 12.1 0.6 4.4 August 5.8 9.9 1.1 4.3 September 6.0 9.8 1.5 4.4 October 6.7 11.3 2.0 4.4 November 7.3 12.7 2.3 4.2 December 8.0 13.3 2.9 5.1 January 7.8 12.7 2.9 5.4 February 7.1 10.8 3.2 5.2 March 6.5 9.4 2.1 5.4 April 5.3 6.8 2.0 5.2 2016 May 5.0 6.6 1.8 4.7 June 5.8 8.9 1.4 4.5 July 6.4 10.8 0.9 4.4 August 6.3 10.9 0.1 4.6 September 6.3 10.9 0.2 4.6 Source: World Bank, based on data from Kenya National Bureau of Statistics. October 2016 | Edition No. 14 63 Statistical Tables Table 6: Tea production and exports Production Price Exports Exports value Year Month MT K Sh/Kg MT K Sh million 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 April 23,837 258 28,262 7,189 May 37,523 297 27,016 7,506 June 32,286 319 35,915 11,263 2015 July 30,942 344 30,623 10,146 August 28,410 330 27,687 9,481 September 36,484 327 33,528 11,413 October 41,343 333 40,246 13,538 November 40,382 313 36,714 12,126 December 46,387 309 42,779 13,768 January 50,308 279 36,575 11,013 February 43,969 253 43,287 12,199 March 45,330 234 37,571 9,887 2016 April 37,571 214 39,313 9,517 May 36,573 223 44,901 10,658 June 35,603 243 52,175 12,613 Source: Kenya National Bureau of Statistics. 64 October 2016 | Edition No. 14 Statistical Tables Table 7: Coffee production and exports Production Price Exports Exports value Year Month MT K Sh/Kg MT K Sh million 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 April 3,714 310 3,948 1,901 May 2,969 289 4,383 2,236 June 0 0 4,220 2,068 2015 July 2,086 339 3,938 1,943 August 3,286 371 3,991 1,790 September 2,643 364 3,405 1,617 October 1,768 320 4,400 2,019 November 1,268 337 2,769 1,244 December 1,282 435 2,528 1,092 January 3,432 462 2,449 1,184 February 5,220 486 3,277 1,636 March 6,835 437 4,169 2,206 2016 April 4,513 340 4,804 2,540 May 4,731 263 4,814 2,170 June 1,747 268 4,983 2,369 Source: Kenya National Bureau of Statistics. October 2016 | Edition No. 14 65 Statistical Tables Table 8: Horticulture exports Exports Exports value Year Month MT K Sh million 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 March 21,259 10,510 April 21,410 6,223 May 19,160 6,300 June 16,904 5,140 2015 July 17,359 8,551 August 16,175 5,824 September 25,188 8,187 October 22,179 9,905 November 19,428 8,095 December 20,179 7,399 January 20,160 10,936 February 22,335 10,163 March 24,313 11,157 2016 April 25,931 8,639 May 10,783 7,029 June 20,157 10,311 July 17,981 5,587 Source: Kenya National Bureau of Statistics. Annex 9: Local electricity generation by source 66 October 2016 | Edition No. 14 Statistical Tables Table 9: Local electricity generation by source Month Hydro Geo-thermal Thermal Total Year KWh million KWh million KWh million KWh million KWh million 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 April 264 359 121 744 May 301 380 103 784 June 297 362 109 769 2015 July 305 353 143 801 August 319 378 112 808 September 306 389 99 794 October 310 402 100 812 November 300 393 89 782 December 307 387 92 786 January 322 392 93 808 February 297 392 95 784 March 335 383 112 830 2016 April 303 394 102 800 May 334 403 92 830 June 348 342 113 803 July 337 393 110 840 Source: Kenya National Bureau of Statistics. October 2016 | Edition No. 14 67 Statistical Tables Table 10: Soft drinks, sugar, galvanized sheets and cement production Soft drinks Galvanized Sugar Cement Year Month litres sheets MT MT (thousands) MT 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 63,227 21,304 511,298 February 40,021 57,917 20,078 465,471 March 50,388 63,389 22,797 550,556 April 39,699 46,280 20,674 537,452 May 40,185 44,081 23,132 516,513 June 35,381 46,098 20,358 516,185 2015 July 38,720 47,957 18,415 570,904 August 34,994 54,089 20,871 553,929 September 44,450 61,069 20,581 561,235 October 42,226 56,360 26,024 557,589 November 39,297 43,401 25,764 510,747 December 44,467 48,089 16,938 486,306 January 37,670 64,499 21,330 532,729 February 38,771 59,863 20,102 533,773 March 43,454 65,909 20,120 540,792 2016 April 48,800 535,147 May 45,122 546,899 June 536,471 Source: Kenya National Bureau of Statistics. 68 October 2016 | Edition No. 14 Statistical Tables Table 11: Tourism arrivals Year Month JKIA MIA TOTAL 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 April 49,933 4,020 53,953 May 50,764 2,511 53,275 June 59,867 3,218 63,146 2015 July 72,515 5,728 78,243 August 63,332 7,546 70,878 September 54,162 5,114 59,276 October 66,441 6,049 72,490 November 53,622 7,718 61,340 December 50,015 9,070 59,085 January 66,185 9,407 75,592 February 62,856 9,983 72,839 2016 March 49,996 8,551 58,547 April 51,311 3,869 55,180 May 59,294 3,578 62,872 Source: Kenya National Bureau of Statistics. October 2016 | Edition No. 14 69 Statistical Tables Table 12: New vehicles registration All body types Year Month (number) 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 April 20,730 May 22,837 June 25,070 2015 July 21,132 August 17,380 September 18,596 October 18,740 November 23,209 December 22,308 January 14,690 February 12,771 2016 March 10,280 April 13,693 Source: Kenya National Bureau of Statistics. 70 October 2016 | Edition No. 14 Statistical Tables Table 13: Exchange rate Year Month USD UK pound Euro 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 April 93.4 139.6 100.7 May 96.4 149.1 107.5 June 97.7 152.2 109.7 2015 July 101.2 157.5 111.4 August 102.4 159.8 114.1 September 105.3 161.5 118.2 October 102.8 157.4 115.3 November 102.2 155.4 109.8 December 102.2 153.3 111.1 January 102.3 147.5 111.1 February 101.9 145.9 113.0 March 101.5 144.2 112.6 2016 April 101.2 144.8 114.8 May 100.7 146.3 114.0 June 101.1 144.3 113.7 July 101.3 133.4 112.1 Source: Central Bank of Kenya. October 2016 | Edition No. 14 71 Statistical Tables Table 14: Interest rates Short-term Long -term Overall Year Month Average Interest 91-Treasury Central weighted Interbank deposit Savings rate bill bank rate lending rate spread rate 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 7.1 8.6 8.5 6.7 1.6 15.9 9.3 February 6.8 8.6 8.5 6.7 1.5 15.5 8.8 March 6.9 8.5 8.5 6.6 1.5 15.5 8.8 April 8.8 8.4 8.5 6.6 1.9 15.4 8.8 May 11.2 8.3 8.5 6.6 1.5 15.3 8.7 June 11.8 8.3 10.0 6.6 1.9 16.1 9.4 2015 July 12.9 10.6 11.5 6.3 1.4 15.8 9.4 August 18.8 11.5 11.5 6.9 1.5 15.7 8.8 September 19.9 14.6 11.5 7.3 1.7 16.8 9.5 October 14.8 21.7 11.5 7.5 1.7 16.6 9.0 November 8.8 12.3 11.5 7.4 1.3 17.2 9.8 December 7.3 9.8 11.5 8.0 1.6 18.3 10.3 January 6.1 11.4 11.5 7.5 1.6 18.0 10.4 February 4.5 10.6 11.5 7.5 1.4 17.9 10.4 March 4.1 8.7 11.5 7.2 1.3 17.8 10.6 2016 April 4.0 8.9 11.5 6.7 1.4 17.9 11.2 May 3.8 8.2 10.5 6.4 1.7 18.1 11.7 June 4.6 7.3 10.5 6.8 1.6 18.2 11.4 Source: Central Bank of Kenya. 72 October 2016 | Edition No. 14 Table 15: Credit to private sector Total private Manu- Building Trans- Mining Private Con- Other sector Agricul- and con- port and Finance Real and Statistical Tables Year Month annual ture factur- Trade struc- and in- estate quarry- house- sumer Business activi- growth ing tion commu- surance nication ing holds durables services ties rates 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 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 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 April 19.9 20.8 21.6 23.6 12.6 32.3 49.2 17.7 -17.1 29.5 13.1 19.7 -8.9 May 20.9 20.5 25.8 23.0 14.5 27.0 50.8 21.3 -13.7 31.5 11.6 16.4 -3.9 June 20.5 24.0 20.0 25.9 15.5 33.8 43.3 19.4 -22.1 31.2 21.6 15.8 -11.1 2015 July 21.2 28.5 22.3 26.7 19.8 33.4 46.8 15.5 -17.9 28.6 21.5 25.3 -12.6 August 21.0 28.7 25.3 25.9 22.1 30.0 50.5 15.0 -18.0 28.5 21.0 22.5 -14.2 September 20.8 21.4 19.3 29.7 27.9 29.0 45.7 12.5 -5.4 26.6 19.0 15.9 -0.9 October 19.5 17.2 20.2 23.6 37.6 32.1 26.4 9.8 -15.5 18.2 18.0 24.1 8.6 November 18.7 12.5 20.8 22.2 34.0 32.3 28.5 10.6 -22.8 16.7 15.3 19.3 14.6 December 18.0 14.1 16.2 21.3 30.7 26.5 0.0 6.2 -11.3 9.1 14.3 63.5 -1.0 October 2016 | Edition No. 14 73 74 October 2016 | Edition No. 14 Total private Manu- Building Trans- Mining Private Con- Other Year Month sector Agricul- factur- Trade and con- port and Finance and in- Real and house- sumer Business activi- annual ture ing struc- commu- surance estate quarry- holds durables services ties growth tion nication ing rates January 17.0 20.1 16.1 25.9 25.0 28.9 19.4 6.2 -9.3 15.1 16.0 17.8 8.2 February 16.0 23.5 18.8 23.1 20.0 26.3 18.0 7.4 1.7 12.7 13.2 19.6 -0.4 March 15.5 20.1 21.2 22.1 23.5 21.1 19.5 12.5 10.4 10.7 13.9 14.9 -7.7 2016 April 13.5 17.0 15.0 18.6 22.7 18.6 23.1 13.4 5.3 10.8 11.8 7.7 -2.9 May 10.9 22.3 11.8 17.3 16.1 16.3 14.4 8.0 10.6 8.4 11.6 10.4 -14.3 June 8.7 15.2 12.2 11.3 12.9 13.8 15.0 10.1 6.5 6.1 3.2 6.4 -8.1 Source: Central Bank of Kenya. Statistical Tables Statistical Tables Table 16: Money aggregate Growth rates Money supply, Money supply, Money supply, Reserve money (yoy) M1 M2 M3 January 19.9 16.7 17.1 10.3 February 20.3 17.8 16.2 9.9 March 20.4 19.0 17.3 7.7 April 16.9 16.1 16.6 17.7 May 19.9 18.4 17.8 11.9 June 21.3 18.8 18.2 12.6 2014 July 18.9 18.8 19.3 7.3 August 21.0 20.0 21.8 15.2 September 12.6 17.1 19.4 11.2 October 12.9 18.4 18.9 13.5 November 13.5 17.8 17.5 9.3 December 13.2 18.6 16.7 18.5 January 11.4 17.0 16.0 15.8 February 10.0 17.2 18.6 22.9 March 11.9 16.4 16.4 11.8 April 13.4 17.2 17.3 12.0 May 10.0 14.8 16.5 15.0 June 9.6 16.4 18.6 14.9 2015 July 13.0 16.0 16.4 25.8 August 10.5 14.3 14.0 2.9 September 8.5 12.7 13.5 16.7 October 11.7 14.0 13.9 24.5 November 9.1 12.2 13.5 13.0 December 9.3 12.8 14.1 3.3 January 11.2 10.8 11.1 9.1 February 9.9 9.8 9.1 -1.0 March 10.9 10.5 11.0 16.1 2016 April 10.1 9.5 9.2 9.0 May 12.4 9.5 8.3 7.6 June 13.0 8.9 7.9 4.9 Source: Central Bank of Kenya. October 2016 | Edition No. 14 75 Statistical Tables Table 17: Mobile payments Number of Number of Value of Month Number of agents customers transactions transactions (Millions) (Millions) (Billions) 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 April 129218 26.1 84.9 213.7 May 129735 26.5 89.9 230.2 June 131761 26.5 90.7 227.9 2015 July 133989 26.7 94.0 238.9 August 136042 27.0 94.1 248.2 September 138131 27.3 96.3 247.5 October 140612 28.5 102.8 255.8 November 142386 30.1 101.3 236.4 December 143946 31.6 107.4 267.1 January 146710 29.1 108.1 243.4 February 148982 29.5 114.1 257.2 March 150987 30.7 121.7 273.6 2016 April 153762 31.4 120.2 269.8 May 156349 31.3 122.6 277.9 June 162465 31.4 121.8 271.0 Source: Central Bank of Kenya. 76 October 2016 | Edition No. 14 Statistical Tables Table 18: Nairobi stock exchange (20 share index) and the Dow Jones (New York) Month Number of agents January 4856 February 4933 March 4946 April 4949 May 4882 June 4885 2014 July 4906 August 5139 September 5256 October 5195 November 5156 December 5113 January 5212 February 5491 March 5248 April 5091 May 4787 June 4906 2015 July 4405 August 4176 September 4173 October 3869 November 4016 December 4041 January 3773 February 3862 March 3982 2016 April 3990 May 3828 June 3641 August 3179 Source: Nairobi Securities Exchange and New York Stock Exchange. October 2016 | Edition No. 14 77 Statistical Tables Table 19: Nominal and real exchange rate NEER REER Year Month 2003=100 2003=100 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 February 117 59 March 116 58 April 118 59 May 122 60 June 124 61 2015 July 127 63 August 129 63 September 132 64 October 129 63 November 127 62 December 127 61 January 126 59 February 126 60 March 126 60 2016 April 127 60 May 126 59 June 126 59 Source: Central Bank of Kenya. 78 October 2016 | Edition No. 14 Table 20: National Fiscal position Actual (percent of GDP) 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16* Revenue and grants 19.8 18.9 20.5 19.9 19.2 19.7 19.7 19.5 19.0 Statistical Tables Total revenue 18.7 18.2 19.4 19.4 18.8 19.2 19.2 19.0 18.6 Tax revenue 17.1 17.0 17.9 17.7 17.1 17.2 18.1 17.7 17.6 Income tax 6.8 6.9 7.2 7.5 7.8 8.3 8.9 8.8 8.5 VAT 4.8 4.7 4.9 5.0 4.4 4.1 4.6 4.5 4.4 Import duty 1.4 1.4 1.4 1.3 1.3 1.3 1.3 1.3 1.2 Excise duty 2.7 2.6 2.5 2.3 2.0 1.9 2.0 2.0 2.1 Other revenues 1.4 1.4 2.0 1.5 1.6 1.7 1.3 1.3 1.3 Railway levy 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Appropriation-in-aid 1.5 1.2 1.6 1.7 1.7 2.0 1.1 1.3 1.0 Grants 1.1 0.7 1.0 0.5 0.4 0.5 0.5 0.5 0.5 Expenditure and net lending 23.1 22.3 24.0 23.5 23.7 25.1 25.6 28.2 26.9 Recurrent 17.4 16.3 16.9 17.2 16.3 18.1 15.5 14.8 15.4 Wages and salaries 6.3 5.8 5.7 5.8 5.5 6.1 5.5 5.1 4.7 Interest payments 2.1 1.9 2.1 2.2 2.1 2.7 2.7 3.0 3.3 Development and net lending 5.7 6.0 7.1 6.4 7.4 6.8 6.3 8.8 6.9 Transfer to counties 0.0 0.0 0.0 0.0 0.0 0.2 3.8 3.9 4.0 Parliamentary service 0.0 0.0 0.0 0.0 0.0 0.0 0.4 0.4 0.3 Judicial service 0.0 0.0 0.0 0.0 0.0 0.0 0.3 0.2 0.2 Fiscal balance Deficit excluding grants (commitment basis) -4.4 -4.0 -4.6 -4.2 -4.9 -5.8 -6.4 -9.2 -8.4 Deficit including grants (commitment basis) -3.3 -3.4 -3.6 -3.6 -4.5 -5.4 -5.9 -8.7 -7.9 Deficit including grants (cash basis) 0.3 -4.4 -5.8 -3.4 -4.5 -5.4 -5.9 -8.1 -7.2 Financing October 2016 | Edition No. 14 79 80 October 2016 | Edition No. 14 Actual (percent of GDP) 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16* Foreign 0.3 1.5 0.8 0.8 2.8 1.9 2.1 3.7 4.1 Domestic borrowing -0.6 2.8 5.0 2.7 1.6 3.8 4.0 4.4 3.1 Public debt to GDP (net) 33.4 35.4 36.6 39.1 37.0 38.5 43.7 44.8 48.9 External debt 19.1 20.2 18.9 21.0 19.6 18.7 22.2 24.5 27.5 Domestic debt 18.6 19.5 21.9 22.2 21.5 23.3 25.3 24.4 27.6 Memo: GDP (Calendar year current market prices, KSh 2,483 2,864 3,169 3,726 4,261 4,745 5,398 6,224 billions) GDP (Fiscal year current market prices, KSh 2,317 2,673 3,017 3,448 3,994 4,503 5,072 5,811 6,566 billions) Source:Quarterly Budget and Economic Review, August 2016 (National Treasury) *Provosional Statistical Tables Statistical Tables Table 19: County Fiscal Framework 2013-14 2014-15 2015-16 Year Budget Actual Budget Actual Budget Actual Expenditure 228.6 169.4 326.2 258.9 361.1 Development 123.4 36.6 144.9 90.4 160.7 Recurrent 165.2 132.8 181.3 167.5 200.4 Revenue 280.8 224 338.1 304.2 373.7 Equitable Share 213.4 193.4 242.4 226.7 259.7 Equalization Fund 190 226.7 Local revenue 67.4 26.3 50.4 33.9 56.6 Grants 16.5 2.57 27.2 Conditional Grants 15.8 1.87  25.9 DANIDA Grant[1] 0.7 0.7 0.8 World Bank[2] 0.5 Balance brought forward 4.3 38.1 41.7 30.2 Balance -7.8 54.6 17.9 46.2 12.6 Pending Bills (as of end-June) 37.6 Source: The Office of the Controller of Budget [1] DANIDA Grant to supplement financing for county health facilities [2] World Bank Grant to supplement financing of county health facilities October 2016 | Edition No. 14 81 82 Table 22: 12-months cumulative balance of payments BPM6 Concept (US$ million) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015* A. Current Account, n.i.e. -505 -796 -1821 -1713 -2371 -3821 -4205 -4838 -5998 -4325 Merchandise A/C -3243 -4222 -5593 -4952 -6216 -8355 -9315 -10243 -11319 -9580 Goods: exports f.o.b. 3509 4153 5067 4526 5248 5834 6212 5846 6219 5982 Goods: imports f.o.b. 6752 8375 10659 9479 11464 14189 15527 16089 17538 15563 October 2016 | Edition No. 14 Oil 1745 1919 3051 2192 2673 4082 4081 3838 4026 2500 Services 1013 1263 1377 1084 1744 1994 2602 2926 2405 2329 Services: credit 2431 2938 3260 2904 3789 4131 4990 5130 5066 4496 Services: debit 1418 1675 1883 1820 2045 2138 2387 2204 2662 2167 Income 1725 2162 2395 2156 2101 2540 2507 2479 2916 2926 B. Capital Account, n.i.e. 168 157 94 261 240 235 235 158 275 257 C. Financial Account, n.i.e. -677 -2247 -1423 -3782 -3252 -3425 -5542 -5183 -7008 -5070 Foreign Direct Investments -27 -1001 -384 -1452 -1117 -1364 -1142 -920 -1045 -1088 Private Investments (Medium 21 16 25 -81 -156 1 -218 -273 -3716 156 and Long-term) Official Investments (Medium -671 -1262 -1064 -2249 -1979 -2062 -4182 -3990 -2248 -4139 and Long-Term) D. Net Errors and Omissions 235 -805 -189 -1215 -947 -734 -348 -134 168 -1256 E. Overall Balance -575 -802 493 -1115 -174 896 -1223 -369 -1453 255 F. Reserves and Related Items 575 802 -493 1115 174 -896 1223 369 1453 -255 Reserve assets 618 941 -480 1322 154 246 1455 859 1333 -361 Credit and loans from the IMF -6 116 -17 199 -34 284 193 177 -119 -107 Exceptional financing 48 23 30 8 13 858 38 312 0 0 Gross Reserves (USD Million) 3331 4557 4641 5064 5123 6045 7160 8483 9738 9794 Statistical Tables Statistical Tables Official 2415 3355 2875 3847 4002 4248 5702 6560 7895 7534 Commercial Banks 916 1202 1765 1217 1121 1797 1458 1923 1843 2259 Imports cover (calender year) 3.5 4.0 2.8 4.1 3.6 3.1 3.8 4.3 4.7 5.1 Import cover (36 mths imports) 3.9 4.4 3.1 3.9 3.9 3.4 4.0 4.3 4.9 4.8 Memo: Annual GDP at Current Prices 25,826 31,958 35,895 37,022 40,000 41,953 50,411 55,101 61,395 63,398 (USD Million) Source: Central Bank of Kenya. October 2016 | Edition No. 14 83 Statistical Tables Table 23: Growth Outlook Annual growth (percent) 2014 2015 2016e 2017f 2018f BASELINE GDP Revised projections 5.3 5.6 5.9 6.0 6.1 Previous projections (KEU 13) 5.3 5.6 5.9 6.1 6.2 Previous projections (KEU 12) 5.3 5.4 5.7 6.1 Private consumption 4.6 5.3 5.9 6.4 6.6 Government consumption 6.0 15.4 6.3 7.3 5.6 Gross fixed capital investment 14.8 5.2 5.7 6.7 6.7 Exports, goods and services 5.3 -0.9 0.1 5.2 6.0 Imports, goods and services 10.6 -1.2 6.2 7.6 7.6 Agriculture 3.5 5.6 5.6 5.4 5.4 Industry 6.5 6.9 5.7 5.7 5.6 Services 5.8 5.5 5.6 6.2 6.6 Current account balance, % of GDP -9.8 -6.8 -5.6 -6.1 -7.0 Fiscal balance, % of GDP -7.0 -8.3 -8.8 -7.8 -7.4 Source: World Bank. Note: e(estimate); f(forecast) 84 October 2016 | Edition No. 14 Beyond Resilience Increasing Productivity of Public Investments Kenya is one of the bright spots in the Sub-Saharan Africa due to robust domestic demand, a stable macroeconomic environment, and the economic dividend from prevailing low oil prices. This report has four main messages: First, for the eighth consecutive years, economic growth in Kenya will outperform the Sub-Saharan African average. The World Bank projects that Kenya’s growth rate will reach and be sustained at around 6 percent in the medium term. Ongoing infrastructure investments will ease supply side constraints, lower the cost of doing business and boost Kenya’s competitiveness. At the same time growth in private consumption is fueled by a surge in remittances, an emerging middle class and the demographic divided. These two levers of growth—infrastructure investment and private consumption—will benefit from a stable macroeconomic environment characterized by low inflation and currency stability. Second, Kenya’s economy remains vulnerable to risks that could derail the growth momentum. Domestically the recent capping of interest rates could lead to unintended consequences and election related spending could result in fiscal slippage. Adverse la nina climatic conditions could curtail agricultural growth prospects which remain largely weather dependent. In the external sector, subdued global demand could dampen the demand for Kenya’s exports, while volatility in global financial markets could trigger destabilizing capital outflows. Third, the report argues that reforms to address systemic weaknesses in the Public Investment Management (PIM) are warranted. The identified PIM system improvements can enhance the execution of infrastructure projects which in turn can accelerate the catalytic impact of public investment on economic growth. Fourth, the report argues that there is urgent need to address challenges related to land acquisition, compensation and Resettlement Action Plans (RAPs), which lead to significant delays and cost escalation in the execution of public infrastructure projects. As in the past, we are proud to have worked with many key Kenyan stakeholders during the preparation of this report. We hope that you too will join us in debating topical policy issues that can contribute to fostering growth, shared prosperity and poverty reduction in Kenya. World Bank Group Delta Center Join the conversation: Menengai Road, Upper Hill Facebook and Twitter P. O. Box 30577 – 00100 @Worldbankkenya Nairobi, Kenya #KenyaEconomicUpdate Telephone: +254 20 2936000 Fax: +254 20 2936382 http://www.worldbank.org/en/country/kenya Produced by Macroeconomics & Fiscal Management, Social Urban Rural & Resilience, Trade & Competitiveness, Energy & Extactives and Governance Global Practices Africa Region