Download Understanding Reform Process in Kenya

Understanding Reform Process in Kenya
Final Draft
Maureen Were1
Rose Ngugi2
Phylis Makau3
Joseph Wambua4
Linet Oyugi5
March 2005
1
Kenya Institute for Public Policy Research and Analysis (KIPPRA), 2KIPPRA and
University of Nairobi, 3Ministry of Finance, 4Central Bank of Kenya (formerly KIPPRA),
5
Institute of Policy Analysis and Research (formerly Ministry of Planning).
Correspondence: [email protected]
Abstract
The study analyzes the reform process in Kenya in the 1980s and 1990s. Like some other
developing countries, macroeconomic instability preceded economic reforms. However,
despite the economic crises of the 1970s, the government was not willing to implement the
market-oriented reforms. Donor pressure in the form of conditionalities for funding was
more effective in pushing the government to embark on the reform process. The 1980s were
characterized by structural adjustment programmes, of which a major component was
liberalization of imports and a shift from import-substitution to export-promotion strategy.
However, the period saw minimal achievements and was marked by lack of commitment to
the reform process. The political establishment became repressive and dictatorial, leading to
agitation for political reforms. Thus, the 1990s saw implementation of comprehensive
economic and political reforms. Stringent conditionalities leading to suspension of donor
funding ensured a speedy and broader implementation of reforms. In particular, the
multilateral financial institutions—IMF and World Bank—set the pace and the reform
agenda throughout the process. Besides donors, civil society was also critical, especially in
pushing for political reforms and good governance. The business community seemed
passive, perhaps for fear of retribution.
Weak commitment to the reform process strained relationship between donors and
government, leading to stop-go pattern in lending and reform implementation. More often
than not, reforms were simply undertaken to hoodwink donors. Thus, reform ownership
remained weak. Even when the government demonstrated its commitment in various policy
papers and documents, or through appointment of reformists in strategic positions,
implementation process was often marred by delays, non-commitment or policy reversals.
Weak commitment was rooted in the political structure that was not supportive of reforms,
especially because of the vested interest groups such as the inner cabinet, which feared loss
of political patronage and power bases with the changes. Resistance to reform and policy
reversals can be attributed to limited consultation and consensus building with key
stakeholders in the design and implementation of reforms, as reforms were hastily
undertaken in a bid to access funding. In some cases, failure to capture public support and
spell out the expected short-term effects of policy changes resulted in policy reversals. This
was exacerbated by the inherent political uncertainty of reforms. While the government
made bold moves in implementing certain reforms like trade liberalization, others such as
good governance and public sector reforms were a major challenge, especially because public
institutions sustained patronage. Despite undertaking the reforms, there were marginal gains
in economic and investment growth as depicted by the dismal performance, especially in the
1990s. Additionally, reforms disproportionately affected the poor and worsened the
asymmetries in income.
ii
Acknowledgements
We would like to thank Christopher Wambua of the Communications Commission of
Kenya, Njeru Kirira, Solomon Kitungu and Dr. Kang’ethe Gitu for their critical comments
on an earlier draft. We are also grateful to the Global Development Network for their
financial support. Errors and omissions are ours.
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Table of Contents
Abstract ............................................................................................................................... ii
Acknowledgements ............................................................................................................. iii
List of Abbreviations and Acronyms .................................................................................... v
1. Introduction................................................................................................................. 1
2. Analytical Framework .................................................................................................. 3
3. Political and Economic Structure Prior to Reforms...................................................... 8
3.1
Political Structure after Independence .................................................................. 8
3.2
Economic Background....................................................................................... 10
4. Economic Reforms in the 1980s ................................................................................ 12
4.1
Driving Forces of the Reform ........................................................................... 13
4.2
Phase I: 1980-84................................................................................................. 15
4.2.1 Economic Reforms ........................................................................................ 15
4.2.2 Performance with the Reforms....................................................................... 17
4.3
Phase II: 1985-1991............................................................................................ 19
4.3.1
Political Developments ............................................................................. 19
4.3.2 Economic Reforms ........................................................................................ 21
4.3.3 Performance with the reforms........................................................................ 25
5
Reform in the 1990s: .................................................................................................. 28
5.1
Driving Forces of the Reform ............................................................................ 28
5.2
Phase III: 1991-1996 .......................................................................................... 30
5.2.1 Political reforms ............................................................................................ 30
5.2.2. Economic Reforms.......................................................................................... 32
5.2.3 Government-donor relationship..................................................................... 41
5.3 Phase IV: 1997-2001................................................................................................. 44
5.3.1 Political arena................................................................................................. 44
5.3.2 Economic Reforms ........................................................................................ 45
5.3.3 Government-Donor relationship.................................................................... 51
5.4
Economic Outcomes ......................................................................................... 53
6.
Winners and Losers................................................................................................... 57
7. Conclusion ................................................................................................................. 58
References.......................................................................................................................... 62
Appendix Table 1: Summary of the Reform process ............................................................ 1
iv
List of Abbreviations and Acronyms
AGOA- African Growth and Opportunity Act
ASAO – Agriculture Sector Adjustment Operation
BOP – Balance of Payments
CBK – Central Bank of Kenya
CG – Consultative Group
CKRC – Constitution of Kenya Review Commission
COMESA- Common Market for Eastern and Southern Africa
DGIPE – Department of Government Investment and Public Enterprises
EAC-East African Community
ECS- Export Compensation Scheme
EPZs- Export Processing Zones
ESAF – Enhanced Structural Adjustment Facility
ESTU – Executive Secretariat and Technical Unit
GDP – Gross Domestic Product
HCDA – Horticultural Crops Development Authority
IDA – International Development Association
IEA— Institute of Economic Affairs
IFIs- International Financial Institutions
IFS- International Financial Statistics
IMF – International Monetary Fund
KACA- Kenya Anti-Corruption Authority
KADU- Kenya African Democratic Union
KAM – Kenya Association of Manufacturers
KANU – Kenya African National Union
KIPPRA— Kenya Institute for Public Policy Research and Analysis
KNUT- Kenya National Union of Teachers
KPTC – Kenya Posts and Telecommunications Corporation
KTMM—KIPPRA-Treasury Macro Model
LDCs- Less Developed Countries
MoH-Ministry of Health
MTEF – Medium Term Expenditure Framework
MUB-Manufacturing under Bond
NARC—National Rainbow Coalition
NBFIs – Non-Bank Financial Institutions
NBK – National Bank of Kenya
NCCK – National Council of Churches of Kenya
NGO – Non-Governmental Organizations
NPE-New Political Economy
ODA- Overseas Development Assistance
PIC- Public Investment Committee
PRGF – Poverty Reduction and Growth Facility
PRPC- Parastatal Reform Programme Committee
PRSP- Poverty Reduction Strategy Paper
SAL – Structural Adjustment Loan
SOE – State–Owned Enterprises
TBR-Treasury bill rate
v
UNDP – United Nations Development programme
URG – Ufungamano Review Group
vi
1. Introduction
Kenya attained independence from Britain in 1963. Since then, the country has gone
through a number of political and economic phases. Like most African countries, Kenya’s
economy in the 1960s and 1970s was characterised by controls and a protective, inwardlooking trade regime. The economy was able to achieve an outstanding economic growth
rate of 6.6% over 1964-73 period. Economically, Kenya was more or less at the same level
as some of the East Asian tigers such as South Korea. However, after a remarkable
economic performance witnessed in the first decade of independence, there was a series of
economic crises, following terms of trade shocks and fiscal indiscipline coupled with several
structural distortions in the 1970s. The oil crises of the 1970s compounded problems by
exposing the country’s vulnerability to external shocks. This was a major blow to the importsubstitution industrialisation strategy inherited at independence. The government responded
to these crises by tightening the trade regime and seeking financial assistance from donors.
By late 1970s, economic management had deteriorated, but the government resisted
dismantling the control regime. It took the government some time to implement marketoriented reforms.1
As the economic crisis deepened, the softest option of borrowing from abroad demanded
liberalization of the economy. Thus, the government, reluctantly, embraced economic
reforms under Structural Adjustment Programmes (SAPs) in the early 1980s. Little was,
however, achieved in the 1980s, as the efforts made were sporadic and characterized by
reversals, delays in implementation of planned activities and lack of commitment. As a result,
the relationship between the government and the development partners began souring, and
the financial support disbursement was delayed.
It was not until the 1990s that a
comprehensive reform program was implemented. Even then there were a lot of demands
and pressure from the development partners for the government to show commitment and
ability to implement the reforms.
1
For details on definition and measurement of market-oriented reforms, see Loayza and Soto (2003).
1
This study attempts to document an in-depth analysis of the reform process in Kenya with
an emphasis on the key economic reforms that were undertaken. The main purpose of the
paper is to contribute to the demand for understanding reform, with specific reference to the
Kenyan experience. The paper seeks to investigate the reform process, with the aim of
analysing and explaining the motivation factors for reform, the role of stakeholders especially
donor community, political and economic constraints faced in the implementation process,
as well as the success and failure of the attempts to undertake reforms in the 1980s and
1990s. Several questions are raised in an attempt to understand and evaluate the reform
process in Kenya. What motivated the mounting of the reform process? What was the role
of the main interest groups and stakeholders? Was the capacity of the government adequate
enough to see through a successful implementation of the reforms? How were the losers
compensated in the process? Was the reform precipitated by a major crisis? Did the reform
enjoy the support of the main political actors? How did the underlying political system
contribute to the success or failure of the reform?
What role did the international
community play?
1.2
Hypotheses
Some of the questions raised above lead us to the following hypotheses.
a) The more severe the domestic economic crisis, the more the government was compelled
to undertake the market-oriented reforms. For instance, although the need to reform the
economy was realized in early 1970s, it did not materialize until the early 1980s when
fiscal and balance of payment (BOP) crises persisted. Even then, a comprehensive
reform programme was only implemented in 1990s after the economic crisis deepened.
Tight budget constraints exacerbated by suspension of donor funding, and deterioration
in economic performance increased the intensity and speed of implementation in the
1990s.
b) Hasty implementation without adequate consultation with key stakeholders and proper
sequencing led to resistance and policy reversals. This was largely occasioned by the fact
that whenever funding was curtailed, reform measures would quickly be put in place in a
bid to satisfy conditionalities and access funding.
c) External pressure, especially in the form of donor conditionalities was the main driving
force for broader reform implementation, particularly in the 1990s when funding became
2
increasingly predicated on actual implementation of reforms. In the 1980s, the
government could afford to get away with piecemeal reforms since it still enjoyed
relatively easy access to bilateral and multilateral aid.
d) Political uncertainty about the effects of reform, vested interests, rent seeking
opportunities and political patronage led to lack of commitment, delays and policy
reversals that were witnessed in the implementation of reforms in various sectors.
Exacerbated by the strong executive, the patron-client political structure was used by
president and the ruling elite for maintaining political power by providing discrete private
benefits such as public sector jobs. It was, therefore, difficult undertaking reforms that
would interfere with such a system or jeopardize political support and power.
e) Reforms had adverse outcomes for the poor and vulnerable groups. In particular,
retrenchment programmes, cuts in public spending and the introduction of cost-sharing
in the social sectors disproportionately affected the poor and the vulnerable groups.
f) Policies that were purely donor-driven in the form of external donor conditionality were
undermined by problems of local ownership and poor implementation.
The paper proceeds as follows. Section 2 outlines the analytical framework while section 3
describes the political and economic structure prior to reforms. The reform process is
analysed in four phases. Section 4 analyses reform in the 1980s under the SAPs. This period
is divided into phase 1 (1980-1984) and phase II (1985-1990). The reforms in the 1990s are
discussed under section 5, which also covers Phase III (1991-1996) during which
comprehensive political and economic reforms were undertaken and phase IV (1997-2001)
during which constitutional and governance issues became critical. The winners and losers of
the reform process are discussed under section 6. Finally, section 7 gives the conclusion.
2.
Analytical Framework
Economic reform is a complex process that calls for various issues in understanding the
process. Moreover, reform is a dynamic and multi-faceted process. This calls for a multidisciplinary approach, in which, at the very least, conceptual issues from political science,
history and economics are involved (Fanelli, 2003). We employ the concepts of institutional
and political economy, as well as foreign aid and conditionality since the latter has been
critical to Kenya’s reform progress.
3
Olson (1965), as cited by Remmer (1997), had long recognised the relationship between
politics and economics by arguing that when economic development influences political
change and political change in turn influences economic development, the two relationships
should be considered together. The now famous “new political economy” (NPE) literature,
as it has become known, views politicians not as benevolent social planners, but as
individuals who maximise their objective functions given the constraints they face and
information they have (Romer 2001). Likewise, voters are viewed not as mechanical actors
but as rational economic agents. A key puzzle has been the striking cross-sectional
differences in economic development, notably the economic success of the East Asian
countries relative to African and Latin American nations. Why has development
programmes succeeded in some countries while failing in others? In addressing this and
other related questions, research work increasingly revolves around the study of the complex
interplay of political institutions, preferences and economic policy outcomes.
This
approach is suited to the study as reform process often entails interplay between political and
economic forces.
The recent wave of democratization in developing countries has sparked renewed interest in
the politics of adjustment. Economic reforms have distributive consequences, creating
benefits for some while creating hardships for others, or simply winners and losers. Thus,
the success of reforms hinges on the government’s ability to mobilize political support for
the programme and also to manage opposition (Haggard and Webb, 1993). It also implies
that ‘vested interests’ become very crucial in assessing the performance of reform efforts.
Fidrmuc and Noury (2003) note that interest groups are organized to basically protect
economic rents and political power. If individuals are highly risk-averse, they may resist
change due to inherent uncertainty. People faced with uncertainties about the outcomes of
the reforms may prefer the status quo. Politicians and bureaucrats also become reluctant to
the reform process as they rely on the interest groups for political support, votes and money.
Haggard and Webb (1993) and Liew et al (2003) observe that economic reforms have a
political element given the distributive consequences, and as a result, politicians may resist
reforms if it constrains them from sustaining their political power. These arguments are
4
critical in analysing how the political establishment influenced the design and
implementation of reforms in Kenya.
In addition to interest groups, one of the key concerns has been the implication of the type
of political regime for reform. It has been argued that authoritarian regimes might be more
successful in initiating reform than democratic ones, particularly given the weaknesses of
democratic institutions in developing countries (see Haggard and Webb, 1993). However,
this claim assumes an enlightened and rational dictator who seeks to maximize the present
value of consumption through pursuing policies that enhance growth, in contrast to a
dictator with predatory behaviour. Empirical support of this hypothesis is usually cited for
the case of Latin America and East Asia (Republic of Korea, Taiwan, Singapore and Hong
Kong) where countries undertook crucial policy reforms under the authoritarian or
administrative auspices. China’s reform experience has also been cited to show that
economic and political liberalization need not go hand in hand (Deyo, 1989; Haggard, 1990;
and Wade, 1990; Qian, 2001).
However, what is perhaps more relevant in the Kenyan case is the issue of predatory
behaviour and how it undermines the success of reforms. Baumol (1990) observes that
wealth gained through productive entrepreneurship can easily be lost to the predatory
actions of officials. While there is no one-to-one correspondence between political and
economic regimes, there is consensus in the literature that successful economic reform in
most developing and transition countries must involve some changes to economic and
political institutions (Liew et al., 2003). Rius and van de Walle (2003) contend that political
clientelism shapes the government’s economic policies. They define political clientelism as
political systems in which politicians primarily maintain their political power and legitimacy
by providing discrete private benefits to key constituencies—e.g. public sector jobs,
privileged access to scarce goods, exemption from taxes or licenses, etc.
As NPE has continued to receive more focus, institutions have emerged as important sets of
explanatory variables (Remmer, 1997). The advocates of the New Institutional Economics
(Coase, 1992; North, 1997; and Williamson, 1994) recognize that a good market economy
requires not only “getting prices right” but also “getting institutions right”. This is because
5
institutions set the rules that affect the behaviour of economic agents in a fundamental way.
These include secure private property rights protected by the rule of law; impartial
enforcement of contracts through an independent judiciary; appropriate government
regulations to foster market competition; effective corporate governance; transparent
financial systems, etc.
However, Qian (2001) notes that while this type of perspective to institutions is useful in
providing a benchmark of “best-practice institutions” with which today’s most developed
economies have achieved to the development frontier, it does not provide enough
intellectual power for insightful investigations of how reform worked or did not work in
many developing and transition economies. For example, a comparison between Russia and
China over the last decade shows striking outcomes. Neither of them had the rule of law,
secure property rights, effective corporate governance, or strong financial system, but they
exhibited massive performance differences, which obviously cannot be attributed to the
presence or absence of the best-practice institutions. To understand how reform works in
developing and transition countries, Qian (2001) argues that one should also study how
imperfect institutions have evolved to complement the initial conditions and to function as
stepping stones in the transition toward the goal. China’s reform path has, thus shown that
when the growth potential is large, reformers can devise efficiency improving institutional
reforms to benefit all, including and especially those in power (Qian, 2001). Khan (2002) also
argues that distribution and disposition of political power in society is a key determinant to
successful enforcement of institutions, and that why institutions that work well in one
context may fail badly in another. The role of political institutions in shaping economic
reform is well discussed by Rius and van de Walle (2003), who distinguish between “medium
level” set of rules that regulate the behaviour of agents in the economic sphere and “high
level” rules, which determine who has power to make policies or set regulations that
influence the functioning of markets. Of relevance to the study is thus, the need to analyse
not only economic institutions but also how Kenya’s critical institutions of the executive,
legislature and judiciary as entrenched in the constitution affected reform process.
Besides the concepts of political economy and institutions, one international dimension that
is of great importance to Kenya’s reform experience is “conditionality in lending”, which is
6
a central feature of IMF and World Bank lending. Conditionalities are said to play an
important role in ensuring that the respective governments invest in longer-term policy
adjustment if the funding is to be continued. Thus, conditionalities are considered
advantageous in the sense that borrowers may benefit from the imposition of conditions that
increase the probability of loan payback; if it makes lending more available; overall goals of
the programme are mutually accepted, implying that conflicts are mostly second order
(disagreements in terms of the time frames, optimal ways of achieving goals etc); and time
inconsistency problem is overcome, as conditionalities may be used as a commitment device.
However, critics of conditionalities have argued that the design of conditionality is inherently
prone to failure (White 1997). It is far from clear whether conditional aid or lending results
in better policies. Some of theoretical models suggest that the structure of conditionality is
likely to produce slippage (as recipients are encouraged to sign up policies they do not intend
to implement) and to result in donors condoning bad policies since they want to disburse the
funds anyway (see White 1997).
Conditionality debate relates to the issues of how effective the conditionalities have been. If
the conditionalities are in the interest of the recipient countries, why are they not pursued by
the policy makers? Conditionalities may be seen as an impingement of a country's
sovereignty, forcing it to take actions, which are not in its interest. Hence, Drazen (2002)
contends that conditionality makes little or no sense if there is full ownership, but it also
makes no sense if there is no ownership. Furthermore, the success of the reform programme
depends on its implementation, which in turn reflects the political constraints. Thus, Drazen
(2002) contend that a political economy perspective may be useful in understanding the
issues of ownership and conditionality. Given the critical role of IMF and World Bank, it is
important to analyse how conditionality has influenced the reform process.
Generally, understanding reform and the questions that it elicits gives rise to difficult
methodological issues. Since the aim of the paper is understanding reform, the approach
adopted should be problem-driven rather than theory-driven research endeavour (Fanelli,
2003). The analysis is guided by three key questions: why reform? What kind of reform? and how
well did the reform perform? These questions are basically aimed at addressing the context,
content and outcome of reforms. In seeking to address these issues, analytical narrative
7
approach is suggested.2
Analytic narrative of the reform experience can help us to
understand some of the subtle issues and gauge causal and logical relationship in the reform
process in Kenya. This is importantly so, given the nature of the subject—reform process
entails political, institutional and social factors that cannot be effectively handled through the
traditional time series or panel data econometric models.
3.
Political and Economic Structure Prior to Reforms
3.1
Political Structure after Independence
Throughout the colonial period, the country was fostered as a unitary entity in which the
colonial centre in Nairobi exercised overwhelming authority on the localities. The decision
by the outgoing authorities to replace such a system with a loosely organized federal
structure was bound to fail, as it did, largely because the country had no meaningful
experience with power sharing between the centre and localities in the governance process
(Oyugi, 1994).
The preponderance of a unitary system of government took place against a background of
an acrimonious power struggle between the existing two national parties, the Kenya African
National Union (KANU) and the Kenya African Democratic Union (KADU) during the
transitional (self-government) period and early years of independence. Upon winning the
first post-independence elections, KANU, which favoured a unitary system, assumed the
reins of government and embarked on a deliberate effort to destroy the opposition and the
federal constitution (Tamarin, 1978). The new government used the state machinery to
harass and frustrate the opposition. In the face of mounting frustration by the state, KADU
politicians found it difficult to operate and ultimately defected to the ruling party. The
demise of the opposition was quickly followed with the dismantling of the federal
constitution, which by all practical purposes had ceased to function by the end of 1964
(Oyugi, 1994). Attempts by other ethnic groups to organize opposition parties were
suppressed, and by 1969 Kenya had become a de facto single-party state (Throup and
Hornsby, 1998).
2
For more on the methodology of analytical narrative, see Bates et al., 1998 and Bates et al., 2000. Also
refer to Levi (2003) and (2001).
8
The Kenyatta government quickly “Africanised” the civil service and other public sector
appointments in order to consolidate national sovereignty (O’Brien and Ryan, 2001). The
President’s ethnic group, the Kikuyu, the main beneficiaries of education and employment in
the formal sector during the colonial period, became the logical candidates for appointments
to public sector jobs (Barkan, 1995). They were also favoured by the new government in the
allocation of agricultural land and credit.
Having assumed the reins of government at a very advanced age, Kenyatta surrounded
himself with a group of trusted ministers and personalities, drawn largely from his ethnic
community, who constituted the “kitchen cabinet”.
The group had vested interest in
maintaining the presidency in the central province (the president’s home province) to protect
and perpetuate their political and economic interests. The foundation of deepseated politico-economic client system was slowly being laid. The stakes were very high, and
the group orchestrated a series of manoeuvres to dilute the independence constitution
(Oketh-Ogendo, 1972).
Before the first decade of independence, the constitution had been amended ten times to
strengthen the position of the presidency over parliament. The powers and authority of the
executive were enhanced through interference with bureaucratic neutrality and
professionalism. The constitution was changed to make provisions for the president to
appoint and dismiss civil servants without reference to the Public Service Commission.
These powers were used discriminately on the basis of patronage, as senior civil servants
understood that they served in their positions at the pleasure of the president (Anyang’
Nyong’o, 1989). The civil service, however, enjoyed more powers over routine and technical
policy issues during the Kenyatta era relative to the subsequent regime. This was because
Kenyatta’s inner cabinet was content to dominate public policy making process on politically
sensitive matters, and to leave mundane technical policy issues to the civil service.
By the mid 1970s, Kenyatta had grown old and feeble. Without any opposition party, the
inner cabinet became dictatorial and resorted to assassinations and detentions of government
critics mainly backbenchers in parliament. As a result, parliament was reduced to a mere
rubber stamp for decisions already taken elsewhere by the executive (Odhiambo-Mbai,
9
1998).
The period 1975 to 1978 was characterized by a degree of corruption previously
unknown in Kenya. The forcible acquisition of both urban and rural property by members
of the kitchen cabinet and their friends became widespread.
Corruption, nepotism,
favouritism, and inequity grew dramatically over every aspect of the Kenyatta
administration’s sunset years.
It is against this background that Daniel Arap Moi assumed power in August 1978 following
the demise of Mzee Jomo Kenyatta. He moved fast to assure the mourning Nation that he
would follow the footsteps of his predecessor. True to his assurance, the new president
embarked on the business of leading the country using the same state apparatus. Thus
parliament remained subdued. In public policy making, the presidency and the civil service
continued to dominate the process. In no time, Moi resorted to issuing populist policy
statements and directing civil servants to implement them (Odhiambo-Mbai, 1998). The
presidential decrees were meant to consolidate him in the presidency and there is no
evidence to suggest that the decrees were discussed by parliament before the president
announced them. By early 1980s, the constitutional amendments had created an overarching
executive with immense interventionist powers in the economy (Gacheru and Shaw, 1998).
3.2
Economic Background
At independence, Kenya inherited an import-substitution industrialization strategy, which
was highly characterized by a protective trade regime. The economic framework in the early
post-independence years was influenced by the prevailing development paradigms for
developing countries—import substitution largely based on the infant industry argument,
significant role accorded to the state in the economy through government intervention—and
the economic system inherited from colonial era. After independence, the government
expanded its involvement in productive activities through state-owned enterprises
(SOE)(O’Brien and Ryan 2001). This move was largely motivated by Sessional Paper No. 10 on
African Socialism and its Application to Planning in Kenya, which sought to ‘Africanise’ the
economy and jumpstart industrialization. The colonial government had already instituted
public agencies such as marketing boards to control economic activities.
10
Like most African countries, Kenya’s economy in the 1960s and 1970s was predominantly
characterized by controls in virtually all key sectors—domestic product market, foreign
exchange and financial markets, among others. That notwithstanding, the country
experienced a relatively stable environment and remarkable economic growth in the first
decade after independence—with an average Gross Domestic Product (GDP) growth rate of
6.6% during the period 1964-73 (Republic of Kenya 2002). There was expansion of output
and employment fuelled by expansionary fiscal policy and expansion of exports to Tanzania
and Uganda under the East African Community (EAC) common market (Wagacha, 2000).
However, the situation changed drastically as Kenya started experiencing macroeconomic
instability in the 1970s, exacerbated by a series of external shocks witnessed during that
decade. For instance, in 1971, Kenya experienced deterioration in terms of trade, which led
to the first BOP crisis. This was also accompanied by an expansionary fiscal and monetary
policy. Following the first oil shock of 1973, the economy experienced escalating BOP and
current account problems. The government responded by introducing import controls. For
the 1973-75 period, inflation rose from 9.3% to 19.2%, domestic credit increased by over 60
percent and government’s external and internal borrowing also increased (Ndung’u 1993).
Then came a positive shock in the form of commodity (coffee) boom in 1977, which
sparked of a spending spree for government and private consumption, leading to a fiscal
deficit of 9.5 percent of GDP in 1975/76 (O’Brien and Ryan 2001). No attempt was made
to sterilize the coffee money although both the IMF and Central Bank of Kenya (CBK) were
in agreement for the need to do so. The economy was also set back by the collapse of EAC
in August 1977.
The second oil crisis of 1978/79 compounded the problems and exposed the country’s
vulnerability to external factors (Were et. al., 2001). In response, import controls were
tightened further. However, while this reduced imports, it did not stop the decline of foreign
exchange reserves. This seemed to signal the inadequacy of the controlled policy approach to
macroeconomic management in tackling external shocks. But the government was not ready
to dismantle the controlled policy regime. Instead, government reacted to these crises by
tightening the trade regime and seeking external financing assistance. For instance, to restore
macroeconomic stability, the government sought assistance from IMF in 1975 and standby
11
credit agreement was agreed upon in August 1979. But the financial assistance was not for
free—certain conditionalities had to be met. The agenda then was mainly stabilization, fiscal
austerity and dismantling of controls. Initially, government failed to meet most of the
conditionalities agreed upon. For instance, with the export boom drawing to a close, the
ceiling on Central Bank credit to the government proposed by the IMF was greatly exceeded,
and as a result, there were no disbursements of the August 1979 IMF credit.
Despite the shocks, the economy performed fairly well in the 1970s, and was able to achieve
a real GDP growth rate of 5.6 percent for the period 1974-1979. In particular, the
exceptionally high GDP growth rate of 8.2% in 1977 was largely due to the coffee boom
effect. The domestic saving rate averaged 16 percent in the 1970s. However, the country
had serious problems of unemployment and underemployment, income distribution and
land ownership (Ng’ethe and Owino, 1998). It is clear from the turn of events that there
was need for reform from as early as the beginning of 1970s.
4.
Economic Reforms in the 1980s
The 1980s were characterized by the triumph of what has become known as the first
generation of reforms. In most African countries including Kenya, reforms typically entailed
implementation of SAPs initiated by International Financial Institutions (IFIs)3. In the early
1980s, with increasing pressure for structural adjustment reforms, the government began,
though reluctantly, to show some attempts towards adopting liberalization policy— a major
component of which was a shift from import-substitution to export-promotion strategy and
removal of import controls (Were et al. 2002). Going by Swamy (1994), the SAP period can
be classified into two phases: 1980-84 period forms the first adjustment attempt while 198591 period forms the second attempt. These will be characterized as phase I and II of the
reform process respectively. A summary of the entire reform process is given in Appendix
Table 1.
3
Throughout this paper, IFIs refer to IMF and World Bank.
12
4.1
Driving Forces of the Reform
By the early 1980s, it was clear that the macroeconomic policies pursued had glaring
loopholes. At the same time, the economic management had begun to weaken and fiscal
indiscipline was rising. The public sector was overextended. By the end of the 1970s, the
government had equity in about 250 commercially-oriented firms (Ikiara 2000). The large
state-owned enterprises sector was not only lagging behind in economic performance but
also heavily drained the budget. The inability to control expenditures was partly a result of
general lack of discipline in expenditure allocation and execution. Most of state corporations
were highly inefficient despite enjoying economic privileges such as direct subsidies in form
of low interest rate loans, below market rents on government buildings, and exemption from
tax. By the end of 1991, the SOE’s external debt was estimated at US$ 1,021 million, which
was about 18 percent of total public external debt (Aseto and Okello, 1997). In the social
sector, the advent of the economic crises in the late 1970s, coupled with the overstretched
public sector and increased inefficiency became a major challenge to an otherwise ambitious
programme of free university education and health care in public institutions.
Appendix Table 2 shows some of the macroeconomic indicators during the reform process.
The Table shows that in the early 1980s, the time the reform process was getting initiated,
the BOP and current account were hugely in deficit. For example in 1980, the deficits
amounted to US$ 317M and US$ 818M, respectively. There was also scarcity of foreign
exchange reserves as exemplified by the huge negative net foreign reserves. In addition, the
ratio of budget deficit to GDP in 1981 and 1982 was over 7% and the inflation was relatively
high. The economy was in a crisis. Some action had to be undertaken. This happened to be
the time when the IFIs were ready with reform recipe in the form of SAPs.
While initially the government resisted dismantling the control regime, the softest option of
borrowing from abroad apparently demanded liberalization. Consequently, with the rising
pressure from the IFIs, the government started to liberalize the economy through the
famous SAPs that were widely recommended for most of the Less Developed Countries
(LDCs). It was initially conceived that SAPs would restore macroeconomic stability in
developing countries following disruptions of the 1970s. These would be achieved through
greater reliance on market forces and the private sector in most cases by reducing the role of
13
government in the economy.4 Generally, these reforms included deregulation, privatization,
currency devaluation, social spending cuts, lower corporate taxes, trade liberalization and
removal of foreign investment restrictions. SAPs were meant to help many developing
countries to come to terms with the difficult economic situation these countries were facing
in the beginning of the 1980s. Kenya was the first Sub-Saharan African country to receive
structural adjustment lending from the World Bank and later on the first to receive an
Enhanced Structural Adjustment Facility (ESAF) loan from the IMF (O’Brien and Ryan,
2001).
Hence, besides the domestic economic problems, there was also pressure from outside—
notably IMF and the World Bank— to implement reforms as part of the preconditions for
donor funding. The reform programme was therefore driven by both domestic and external
factors. The domestic factors were mainly the economic crisis propagated by such factors as
budgetary problems, imbalances in external accounts, inefficiency problems, deteriorating
economic performance and increasing demand for services (e.g. health and education) in the
face of declining per capita real public expenditures. The external pressure from the IFIs
acted as a catalyst, hence facilitating the process.
These institutions also set the reform
agenda, mainly in the form of conditionalities as a prerequisite for funding.
Stallings (1992) argues that international influences can impact on domestic policies.
However, as cited by Liew et al., 2003, Kahler (1992) points out that the prominence of IFIs
and lack of alternative sources for finance in the 1980s did not increase the leverage of IFIs
as expected because the proposed programmes were in conflict with the political interests in
developing countries. Despite the economic crisis that had evolved by early 1980s, the
government was not willing to deregulate and liberalise the economy, and only managed to
implement piecemeal reforms as a way of accessing the badly needed financial assistance
from the IFIs. Among other factors, the control regime was still attractive for maintaining
status quo, providing rent-seeking opportunities and political patronage. The situation was
exacerbated by political uncertainty of large-scale reform implementation. Additionally, the
wave of ‘Kenyanisation’ witnessed after independence, coupled with political patronage,
4
For details about the experience of SAPs in Africa, see Helleiner (1992) and Husain and Faruqee (1994),
among others.
14
passed on industries to politically-connected people, who in the wake of liberalization, feared
competition from imports and thus created pressure to resist reforms. Nonetheless, the IFIs
played a critical role in ensuring that government, though unwillingly, began undertaking
SAPs.
4.2
Phase I: 1980-84
4.2.1
Economic Reforms
The first phase of reforms mainly targeted the BOP, with the removal of import controls.
The government presented a structural adjustment programme in Sessional Paper No. 4 of 1980
on Economic Prospects and Policies. Among other policy changes, the programme suggested the
need to eliminate quantitative restrictions on imports and replace them with equivalent
tariffs, relax industrial protection under import substitution strategy and the need for a
relatively high interest rate structure. It also proposed elimination of the No-Objection
Certificates and automatic system of allocating foreign exchange in accordance with demand
and foreign exchange availability instead of depending on administrative scrutiny of import
licences, which caused undue delay. The No-Objection certificates to Kenyan enterprises
gave them the right to prevent all imports viewed as a threat to their domestic market. The
fourth National Development Plan for 1979-83 also recognized that the process of
industrialization and expansion through import substitution had inhibited growth of exports
and had reached its limit, and spelt out the need to reduce protection, expand and diversify
exports. The economic policies contained in the Sessional paper were largely in line with the
World Bank and IMF recommendations and thus, served as the basis on which first
Structural Adjustment Loan (SAL) was agreed upon and subsequently signed in March 1980
between the World Bank and the Government of Kenya.
With the escalating economic crisis, the government urgently needed quick-disbursement,
which happened to coincide with the World Bank’s decision of medium-term BOP support
(programme lending) to help countries adjust to the oil price shock. A planned industrial
sector loan was thus converted into a SAL by adding conditionalities. These conditionalities
included the replacement of quantitative restrictions with tariffs and their rationalization by
1983 (Mwega 1999). This was done with the hope of effecting a quick response in exports,
but the response did not materialize as expected. However, in the 1980/81 budget, some of
15
the proposals were implemented. For example, import controls were relaxed and interest
rates adjusted upwards. A new system of licensing was put in place in November 1981. At
the same time, it was proving difficult to contain government spending and to achieve the
income policy. It was also felt that adopting an export-oriented strategy could adversely
affect some firms.
Thus, the rationalization of trade and tariffs policies was to be
complemented by measures to assist firms with transitional problems. Studies were initiated
with the assistance of UNDP to understand the cost structure of the firms and phase in the
new trade regime by end of 1983.
In 1982, the government approached IMF again, faced with worsening economic status, and
also requested for another SAL from the World Bank. However, by mid 1982, Central Bank
credit to the government had exceeded the agreed ceiling and the agreement was thus
suspended. The second SAL was even more ambitious, taking upon trade reforms, grain
marketing, interest rates, energy and family planning (Swamy 1994). However, the trade
reforms were largely not implemented and the grain marketing was not liberalized. The
Sessional Paper No. 4 of 1982 spelt out further attempts to reform import controls, where
items could be removed from the quota-based schedules to quota-free ones, at a rate to be
determined by the availability of foreign exchange. But because of the growing foreign
exchange crisis, this shift was never implemented. The individual scrutiny of import licenses
was reintroduced in mid-1982.
In terms of export promotion, the idea was to reduce anti-export bias and increase industrial
efficiency. The proposals included simplifying the administration of incentive system, and
introducing an export insurance and finance system. These were in addition to Export
Compensation Scheme (ECS) established in 1974, primarily to compensate exporters of
eligible products for the additional input costs due to the imposition of duties on imported
inputs whose burden was considered pretty high. The scheme allowed the exporters of
eligible goods to claim 10% of the value of export. New and additional exports were
compensated at 15% rate. In 1984, compensation was revised upwards to 15% for general
ECS and downwards to 10% for additional exports, with the objective of providing an
incentive for producers to improve their performance.
16
4.2.2
Performance with the Reforms
By the end of 1983, when the exercise was expected to be complete, minimal achievements
and policy reversals had been witnessed.
Moreover, to the extent that quantitative
restrictions were removed, tariffs were raised on restricted items to even over 100%. In
addition, with the foreign exchange crises of 1982/84, tariffs were increased by 10% across
board. CBK was concerned that the removal of quantitative restrictions would result in loss
of control over the BOP with the dwindling level of reserves. In addition, the programme
was implemented without a consistent framework so that the imposition of high tariffs on
some goods and reduction of tariffs on others were done in an ad hoc manner. Efforts to
improve BOP position, therefore, had very minimal achievements. The fixed exchange rate
regime was not conducive for export promotion while the ECS did not function well. The
designing of ECS was flawed, as it left loopholes that could easily be exploited, thus
defeating the purpose of the reform.
For example, it was felt that the additional
compensation was paid for the price variation and not for the increase in exports. Again,
given that new exporters were eligible for the additional compensation, all they needed to do
was to change the company name and qualify for it. There was also mounting pressure from
the urban elite group who were thought to be a political threat if drastic changes were to be
implemented. The group consisted of urban salary and wage earners, especially employees
of state corporations.
Swamy (1994) argues that this episode of import liberalization was not successful because it
coincided with a period of macroeconomic crisis, which was followed by rapid stabilization,
hence making trade policy to become hostage to the needs of stabilization. He summarises
the first adjustment attempt (1980-84) as one marked by lack of compliance, partly due to
design and timing problems, and lack of government commitment to reform process. The
pervasiveness of the import licensing and regulatory system created enormous opportunities
for rent seeking and for executive discretion. Commitment to the stated policy changes was
limited to a small coterie of top civil servants. The group seemed to underestimate the
strength of the vested interest or overestimate the World Bank’s willingness and ability to
enforce the conditionalities. Due to the unsatisfactory implementation, there was a pause in
adjustment lending for nearly four years.
17
Vested interests aside, the reform agenda was over ambitious and underestimated state
capacity constraints in undertaking a myriad of reforms within the stipulated time. This
confirms the observation made by Rius and van de Walle (2003) that the first generation of
reform programmes typically did not view implementation issues as paramount. However, as
they rightly argue, state capacity is generally posited to be positively correlated with the level
of development, but it would be a mistake to treat state capacity as entirely exogenous to the
political system. The Government’s capacity to implement reforms was compromised by a
weakening economic management brought about by the policy drift of the late Kenyatta
years and a corresponding loss of influence of the Cabinet and civil service technocrats
(O’Brien and Ryan 2001). The constitution powers bestowed on the president to appoint
and dismiss top civil servants at will interfered with professionalism of the civil service as
other factors such as ethnicity, tribalism and patronage became central in appointment and
promotion within the service.
Unlike Kenyatta, Moi lacked adequate room for manoeuvre and the personal authority that
Kenyatta enjoyed. He also lacked a broader ethnic political base comparable to Kenyatta’s
(Hyden, 1995). He thus resorted to concentrating power and authority to the presidency in
order to maintain control of the state. In 1982, the president made a major Constitutional
amendment, which made Kenya de jure one party state. During this period, the presidency
increasingly dominated public policy making process, especially through presidential decrees
(Odhiambo-Mbai, 1998). The civil service was relegated to the position of mere policy
implementers. Even in situations where technocrats had been empowered to come up with
coherent policies, the policies could be contradicted by the ‘presidential decrees’ at the
implementation stage.
In terms of economic outcomes, the first half of the 1980s performed poorly, with real GDP
growth rate declining to about 3.4 percent. Although the economy showed some stability
between 1982 and 1984, virtually no progress was made toward structural adjustment. Like
in many countries, SAPs paid off rapidly in terms of macroeconomic equilibrium such as
lowering of inflation and fiscal deficits. For instance, the stabilization programme undertaken
with the IMF support succeeded in reducing the fiscal deficit to about 2.4 percent in 1983 at
the expense of investment and growth (see Appendix Table 2).
18
4.3
Phase II: 1985-1991
4.3.1
Political Developments
In the political scene, the president continued to consolidate his power. Moi’s dictatorial
tendency intensified and Parliament was subordinated to the ruling party, KANU. In the
mid 1980s, the Moi regime attempted to revitalize the sole political party in the country and
to make it an instrument for public policy making (Odhiambo-Mbai, 1998). KANU national
elections, which had not been held since 1966, were held. The disciplinary arm of the party
was strengthened to deal with errant members. MPs were coerced to toe the party line and
support the policies and reforms undertaken by the government. The president also bloated
the cabinet by making several appointments so that more than a third of the sitting members
of parliament found themselves bound by collective responsibility as members of the
Cabinet or assistant ministers. Further, the president weakened the judiciary by removing
the security of tenure of the attorney general and the Controller and Auditor-General so that
the two were exposed to manipulation by the executive.
The government also increasingly became sensitive to criticism, and resorted to intimidation
and sometimes detention of its opponents. Political arrests and harassments, tortures and
deaths in police custody increased so much that in 1986, Catholic bishops accused Moi and
KANU of “assuming a totalitarian rule”. Press freedom was curtailed, and human rights
abuses became the order of the day. All these measures were geared towards manipulating
the political system in a bid to consolidate Moi’s hold on power (Munene et. al., 1995).
Besides serving the regime’s narrow political interests, the party by and large did not play any
serious role in the public policy making process.
Towards the close of the 1980s, the government changed the electoral system to provide for
queue-voting, which was more amenable to abuse. In the 1988 general elections, the
government used state machinery such as the provincial administration and the police to
coerce voters to queue behind pro-government candidates (Munene et al, 1995). The brazen
rigging that took place unleashed a wave of protest over KANU’s continued monopoly over
political power and intensified the clamour for political pluralism. Moi responded by
19
clamping down on the oppositionists, who now included lawyers, academics, politicians and
the clergy. Although the business community remained silent fearing the retribution by the
state, few of its members quietly helped finance several small publications that were to form
the core of an independent press that critically examined the policies of the Moi regime.
Harassment of government critics was perpetrated with the complicity of an acquiescent
judiciary, which was increasingly used to consign multi-party advocates to detention. The
brutal manner in which the regime sought to silence its critics caught the attention of
international human rights bodies. The system was, however, vehemently defended by a
coterie of sycophants who had amassed fortunes through state power (Munene et al, 1995).
This self-seeking elite had by now become a predatory parasite, which manipulated
patronage to its personal advantage, but to the detriment of the Kenyan economy.
The international community was not amused. Emboldened largely by the end of the Cold
War in 1989, and disillusioned by poor governance (especially massive corruption) and
wanton abuse of basic human rights, western powers demanded the liberalization of the
political system and the economy. Besides the IFIs, United States represented by its
outspoken ambassador Smith Hempstone, Germany and the Scandinavian countries were in
the forefront in demanding for reform (Hempstone, 1997; Munene et al, 1995). The regime
retorted that formation of multiple party system would plunge the country to chaos.
However, to deflate domestic and international pressure, the government in 1990 abolished
the unpopular queue voting in favour of the secret ballot. At the same time, the constitution
was amended to restore the independence of the judiciary. The judiciary, which had become
inordinately corrupt and politicised, however, continued to pander to the autocratic whims
of the executive.
Pressure for democratic change accelerated in earnest in 1990 with civil society movements
and religious leaders providing the momentum and push that ultimately challenged the
hegemony of the Moi state.
In a period of three months an informal grouping of
churchmen, lawyers and disgruntled politicians called for a multi-party political system. The
demands to end the one-party system had culminated in the detention of Charles Rubia and
Kenneth Matiba. The detentions, however, did not stop citizens from coming out for the
20
planned Saba Saba rally on 7th July 1990, which culminated into riots in Nairobi, thereby
leading to scores of deaths.
The deliberate weakening of the democratic institutions, it was felt, created an environment,
which encouraged mismanagement, corruption, inefficiency, excessive political interference
often based on parochial or personal reasons and harassment of indigenous entrepreneurs.
This threatened the welfare of the people who were left with no option but to intensify their
agitation for restoration of democracy, which it was hoped, would help to spur economic
growth. The situation seemed to confirm Olson’s (1990) observation that the absence of
regularized turnover and political competition can give rise to more pervasive and intractable
corruption.
4.3.2
Economic Reforms
Due to the lack of adequate commitment to the reform process and limited implementation
in the first phase, the international funding agencies had to slow down the pace of an
otherwise ambitious reform programme and increase pressure for further demonstration of
government’s commitment. In response, the government prepared the Sessional Paper No.1 of
1986 on Economic Management for Renewed Growth as an indication of its commitment to the
reform process and a demonstration that it had a clear reform strategy. In the policy
document, the government committed itself to adopt an outward-looking development
strategy and proposed several measures to liberalise the economy.
For example, the
Sessional Paper contains policy statements on reforming agricultural marketing, reducing
protection to industry and controlling public expenditure. In line with the development
paradigm of the day, the government also acknowledged the need to limit its primary role in
the development process to facilitating growth of private sector by developing a stable
political and economic climate; providing critical infrastructure; and establishing marketbased incentives. In terms of comprehensiveness, the document marked a major policy shift
towards liberalizing the economy in principle. It was a major departure from Sessional Paper
No. 10 of 1965 that was rooted in the ideology of increased government participation in
economic activities. However, the institutional structure with an executive with immense
interventionist powers in the economy remained intact.
21
With minimal achievement having been made in the implementation process, there was a
shift in the implementation strategy from broad to sectoral basis with the support from the
World Bank. The IMF was to continue monitoring the macroeconomic balances. This was
justified on the basis of limited implementation capacity of the government, and the need to
build greater consensus in support of the reform process (Swamy, 1994). Hence, adjustment
programmes were developed in agriculture (supported by two sector loans in 1986 and
1990), industry (1988), financial sector (1989), export development (1990), and education
(1991) (O’Brien and Ryan 2001; Swamy 1994).
During the reform period, some attempts were made to liberalise the economy, but the level
of progress was still limited. In regard to import liberalisation, the reform programme was
first to reclassify imports into five categories: schedule I (unrestricted licensing), II, IIIA,
IIIB, and IIIC, with progressively stricter licensing requirements (Swamy 1994). Over time,
automatic or unrestricted licensing was extended to schedules II, IIIA and IIIB. Trade
liberalization had started with conversion of quantitative restrictions to tariffs equivalent in
the early 1980s, though less successful. The tariff reform made some progress as depicted by
a declining trend in the economy-wide average tariffs in Table 1 below. In 1990, the
government embarked on a phased tariff reductions and rationalization of the tariff bands.
The highest tariff rate was reduced from 135 percent to 60 percent, while tariff rates on noncompeting imports were lowered.
Table 1: Economy Wide Average Tariffs, fiscal years 1985-92 (in percent)
All schedules
1985
1988
1989
1990
1991
Unweighted
40
39.6
41.3
41.0
38.8
Import-weighted .
29.6
27.3
24.5
22.0
Source: Swamy 1994
That notwithstanding, liberalization process was far from complete. The tariff rates were
still on the higher side (hence high effective protection), the import licensing system was still
in place with considerable executive discretion and foreign exchange restrictions were still in
operation.
22
Under the export promotion strategy, a host of export incentive and promotion programmes
were initiated. These include Manufacturing under Bond (MUB) and Export Processing
Zones (EPZs) established in 1988 and 1990 respectively. Other export incentive schemes
were Export Guarantee and Credit Scheme, revival of the Kenya Export Trade Authority,
Export Promotion Council and the Export Promotion Programmes Office for tax rebates
on imported inputs for exporters. To promote non-traditional exports such as horticulture,
the Horticultural Crop Development Authority (HCDA) was formed to coordinate the
horticultural industry, advise the government on national policies and farmers on production
and marketing of horticultural crops. Others included the Kenya Exporter Assistance
Scheme and Export Development Programme funded by the World Bank. In addition, the
general rate under ECS was increased from 15% to 20% while additional compensation was
abolished following concerns over its sustainability.
There were also attempts to decontrol domestic prices in the economy. In 1988, Kenya
Association of Manufacturers (KAM) commissioned a study on the experiences of price
controls, which revealed high cost of compliance in terms of time-consuming procedures for
presenting requests for price changes, bureaucratic hassles and the administrative delays
(KAM 1988). It also revealed that price controls effectively protected many inefficient firms
established under import substitution policy and increased opportunities for corruption.
With the survey results, manufacturers successfully lobbied the government for price
decontrols. This is one of the limited cases, where an organised non-political interest group
was pro-reform, hence influencing the trade policy. It managed to conquer resistance from
the monopolies created under the import substitution strategy, perhaps because they were
not formally organised. Restrictive Trade Practices, Monopolies and Prices Control Act was
passed in 1988 to guard against abuse of fully liberalized pricing regime by producers’ cartels
and monopolies.
In the financial sector, very little was achieved, as actions were limited to amendments to the
Banking Act and adjustment of interest rates. Following the mushrooming of Non-Bank
Financial Institutions (NBFIs) and building societies in 1980s, the Banking Act was amended
in 1985 with the aim of strengthening monetary authority control over the banks and
financial institutions, as well as protecting depositors. The licensing procedures were also
23
tightened. Further, amendments were made through the 1988 Finance Act, to enhance
penalties charged under the Banking Act and allow for more transparent disclosure of
information relating to the banking institutions balance sheets to the public. These actions
were motivated by the insolvency problems that some of the financial institutions
experienced in the mid-1980s. In June 1987, maximum lending rate for NBFIs was lowered
as an initiative towards aligning interest rate structure for commercial banks and NBFIs. In
June 1988, minimum saving rate for both commercial banks and NBFIs was lowered with
the aim of giving the commercial banks more room to compete and more flexibility to meet
the differing needs of the customers. In 1989, a comprehensive financial sector reform
programme was adopted characterized by policy and institutional reforms aimed at restoring
monetary control, improving efficiency of banking institutions and facilitating creation of a
market-oriented financial system. The Banking Act was revised in 1989 to strengthen the
activities of the CBK. The shift to indirect monetary policy instruments was initiated in
1988 while Treasury bill rate was liberalized in November 1990.
The government was also under pressure to implement cuts in expenditure on social sectors,
particularly health and education. In the health sector, for instance, this meant a shift from
“free” health care policy to user charges in public health facilities. The government’s intent
to levy fees in government health facilities was first announced in 1979-83 Development
Plan and later reiterated in the subsequent Development Plans of 1984-88 and 1989-1993.
However, despite repeated announcement of policy intentions, the government was still
reluctant to implement the reform. It was not implemented until a decade later. This can be
explained in the context of looming uncertainty over the outcome of reform
implementation—especially political uncertainty regarding the reaction of the masses after
having been used to consumption of ‘free’ health care services and the consequences on the
poor. It took a lot of effort, through a series of donor-funded studies and considerable
pressure from donors for the government to finally levy user charges. However, no
consensus had been reached about their probable effect on service demand by the time of
implementation (Mwabu 1995).
Though hesitantly, the government finally introduced the user charges (cost sharing) in
public hospitals and health centres on 1st of December 1989 through a government Cabinet
24
Paper. As a compensatory mechanism to the losers—basically the poor and the vulnerable,
preventive services and treatment for catastrophic illnesses were exempted from the fees and
the poor were exempted from paying on production of evidence of inability to pay.
Meanwhile, the government dispensaries continued to provide outpatient services free of
charge. However, the policy was reversed in September 1990 by suspending the outpatient
fee, only after nine months since its inception. After implementation, there was a public
outcry through the press that the poor were being denied access to services and there was no
improvement in quality (Collins et al., 1996). This shows how sensitive the government was
about the public response, and was not fully confident despite having implemented the
reform. The media played a key role in highlighting and exacerbating the unpopularity of the
reform.
4.3.3
Performance with the reforms
In general, the extent of reform and pace of implementation was unsatisfactory, as most of
the conditionalities were not met. For instance, by 1991, the last year of the ESAF, three out
of the four quantitative performance criteria were not satisfied, including the ceilings on net
domestic assets of the domestic banking sector, government borrowing from the banking
system and net official international reserves. Swamy (1994) observes that though effort was
made to build broader consensus in the second phase and the pace was incremental,
commitment was patchy and intermittent throughout.
There was concern that
macroeconomic management was deteriorating as a result of lack of budgetary control on
the expenditure front and slow progress in other areas of economic reform. Little was
achieved as the reform effort was characterized by policy reversals, delays as well as failure in
implementation of planned activities. This led to donor dissatisfaction, occasionally resulting
into a halt in adjustment lending as the relationship with development partners began to
sour.
The actual implementation of the reform strategy can be described as sporadic and limited to
selected issues. In fact, reforms were just undertaken on the periphery. The most sensitive
ones, especially those with a direct impact on the electorate or constituents such as
retrenchment in civil service and user fees in social sector were deferred or reversed during
implementation. The intricacies of implementation capacity notwithstanding, major reforms
25
were basically deferred because of the looming political uncertainty of the effects of reforms.
Fidrmuc and Noury (2003) note that if individuals are highly risk-averse, they may resist
changes because of the inherent uncertainty. The government was highly risk-averse as the
controlled policy regime was lucrative for economic rents and political patronage. External
pressure thus coincided with strong domestic patronage and rent-seeking interests especially
by top state elites, thereby ensuring that government was still able to keep enough elements
of control. This situation confirms Rius and van de Walle’s (2003) observation that when
governments oppose the reform but feel compelled to undertake partial implementation,
they are likely to choose undertaking the least onerous, the most easily reversible component
of the reform, and or the one that has the least impact on the status quo.
To understand the reform process, one also needs to understand the context in which the
reforms were being undertaken. For one, the policy-making process was highly centralized,
where public decision-making was exclusive to a small cadre of public elites. Most policies
were a secret of top government officials but would be well known in the circles of
development partners, who after all, were the main driving force and initiators of policy
reforms. Ministries would just be shown a paragraph or sentence to implement, without a
clear understanding of the broader picture. The Cabinet, on the other hand, was not given
copy of the agreements, but a synthesised version by top civil servants. The closed decisionmaking process also meant that the reform process was subject to manipulation by vested
interest groups such as political elites, often to their own advantage.
Lack of consultation was thus, a common phenomenon employed by the government in
development of its policies. This limited the scope of consensus building about the design
and implementation of reforms with relevant stakeholders. It is hence, not surprising that
the reform effort was prone to resistance and reversals. Societal groups for which the policy
outcomes had a direct impact were rarely able to have their preferences or concerns taken
into account before policies were implemented. Such groups have been argued to assert
their social power and influence during the implementation phase, well after policies have
been decided upon (Rius and van de Walle, 2003). This was manifested in the case of user
fees reform in the health sector, where the public outcry forced an intimidated government
26
to reverse the policy. A similar manifestation was later on witnessed under the civil service
reform. The implementation problems and resistance in the introduction of user charges in
the health sector can be explained by lack of consensus building among the different
stakeholders, especially in terms of adequately educating and involving the public and the
health providers, as well as inadequate institutional capacity at Ministry of Health (MoH) to
implement and manage the reform programme.
Additionally, political interference of the civil service undermined the government’s capacity
to implement reform. Senior civil servants often understood that they served at the pleasure
of the president and hence owned their loyalty to him. The situation was further aggravated
by a constitutional amendment in 1988 that gave the President power to fire members of the
Public Service Commission, Judicial Service Commission and the Judiciary. President Moi
used the powers to reduce the preponderance of Kikuyu civil servants, especially in the
higher ranks of the civil service. He replaced them with candidates largely from his
community under the pretext of promoting social cohesion. The parastatal jobs became an
opportune avenue for this venture. This policy had the effect of undermining efficiency in
the public sector, and to a certain degree, replacing one group of rent-seekers with another,
many of whom lacked the experience to run the organizations they inherited (Throup and
Hornsby, 1998). Public institutions, especially parastatals were transformed into conduits of
patronage. It is no wonder the government was not in a hurry to undertake parastatal
reforms.
Although economic performance in the second half of the 1980s was better than the first
half, economic growth started deteriorating continuously from the early 1990s. The average
real GDP increased from 3.4% for 1980-84 period to 5.2% during 1985-89, but dropped to
2.3% in 1991. There was also a notable improvement in BOP and current account deficit
(see Appendix Table 2). The notable improvement in 1986 was occasioned by a mini-coffee
boom, resulting into a BOP surplus. However, in spite of export promotion measures,
export orientation in the 1980s remained weak, largely due to very high effective rates of
protection accorded to domestic industries, exchange rate bias against exports, high cost of
imported inputs, foreign exchange controls accompanied by administrative delays, high
27
transactions costs that militated against the profitability of exports, among others (Were et
al., 2002).
One of the remarkable things about the first generation of reform in the 1980s is the
dramatic build up in nominal aid flows (both gross and net) during the 1980s (see Appendix
Table 3). The government’s pro-west stance during the Cold War period also ensured a
continuous inflow of bilateral aid from the West. Perhaps that is why the government could
afford to get away with piecemeal reforms. It was not until the 1990s that a comprehensive
reform programme was implemented.
5
Reform in the 1990s:
5.1
Driving Forces of the Reform
The 1990s saw a greater degree of economic liberalization and reform implementation,
mainly on a sectoral basis. Even then, the development partners exerted a lot of pressure on
the government to demonstrate commitment and implement reforms. Tight conditionalities
and technical assistance became the major factor in defining the flow of funds to support the
reform process. Hence, the government-donor relationship became critical more than ever
before. Nonetheless, that did not entirely prevent vested political interests.
Reforms were initiated/progressed in virtually all the key sectors (see Appendix Table 1).
The reform period was shaped by the supremacy of the Washington Consensus ideology,
deeply rooted in the belief of markets and limited government intervention; the rapid wave
of globalization and the so called ‘second generation reform’. The latter incorporated good
governance, democratization and need for building institutional infrastructure besides
market liberalization policies. Hence, unlike the prior periods, economic reforms had to be
simultaneously undertaken with political reforms. Unlike the 1980s, there was increased
democratic space and freedom of expression, leading to a more active role of civil society
and the media. Whether such a move accounted for more comprehensive economic reforms
is debatable but it certainly played a role, particularly in exposing corruption and some of the
economic scandals.
28
Domestically, the economic reform period coincided with a growing discontentment about
the monopoly powers created by the one party political establishment (the then ruling party
KANU). The political establishment had become dictatorial. Kenya’s image in international
circles was dented in terms of rising corruption and human rights abuse as exemplified by
detention and oppression of political activists agitating for multi-partyism. Besides the civil
society, pressure for more democracy and good governance became a key agenda for donor
community—multilateral and bilateral funding institutions alike. It was the donor pressure
culminating in the suspension of BOP support in 1991 and domestic agitation for multipartyism that forced the government to relent and repeal Section 2A of the constitution in
December 1991, allowing for multi-party political system.
The curtailment of aid flows for failure to meet some of the conditionalities was one of the
greatest challenges the country faced.
While in the 1970s and 1980s the government
responded to external shocks by increased borrowing and aid inflows, expansionary fiscal
policy and instituting controls, in the 1990s, it no longer had the luxury of using these
options. Unlike in the 1980s, in the later periods, there was slackened donor support,
resulting in a sharp decline in inflows since the peak in 1990 (see Appendix Table 3). With
the disintegration of the Soviet Union and the end of Cold War, which had provided the
bulwark against democratization, Kenya was transformed from a country that was once seen
as an island of political stability and economic success in a turbulent region to being viewed
as just another African state mired in a familiar pattern of decay. The end of Cold War
basically eliminated the geopolitical motivation for aid. With the declining aid flow, external
debt arrears problem emerged for the first time. Net resource flow remained negative for the
better part of the 1990s (Appendix Table 4). The debt burden became so acute that Kenya
had to reschedule its debt in 1994 for the first time. Net foreign exchange reserves were
negative in the early 1990s, and the GDP growth rate was quite low, falling from 5% in 1989
to 2.1% and 0.5% in 1991 and 1992, respectively (see Appendix Table 2).
As the economic performance adversely deteriorated, budgetary crisis deepened and access
to financial resources was curtailed, the IFIs had an upper leverage and thus used the
opportunity to push for reform implementation. Citing Grindle and Thomas (1990), Rius
and Walle (2003) note that policy reform has typically occurred during periods of intense
29
economic crisis, as states delay difficult economic policy reform decisions until the old
economic policy regime has brought about a non-sustainable economic disequilibria. Liew et
al., 2003, make similar observations by arguing that economic crises can tighten economic
constraints to the extent that some countries are forced to reform notwithstanding the
political interest of the ruling party. As hypothesized, this description fits the Kenyan case
especially in the 1990s when the financial constraints became binding due to suspension of
funding. The implementation of reforms not only intensified but the reform agenda was also
broadened. Funds were only disbursed when there were signs that the government was back
on track with the reforms. Donors (IFI and bilateral funding institutions) thus became key
stakeholders in spearheading the reform process. Domestic forces, mainly the media,
opposition and the civil society also played an instrumental role in pushing for political
reforms.
Nonetheless, the fact the donors had the resources or the money that the
government badly needed gave them leverage in speeding the process and forcing the
government to act.
5.2 Phase III: 1991-1996
5.2.1
Political reforms
By mid-1991 the pressure for democratization was accelerating. The civil society and
religious groups became vibrant and to some extent became the voice of the broader,
unorganised segments of Kenyans. At same time, donors continued to steer up pressure.
They had made it clear during the consultative group (CG) meeting in November 1990 that
future aid levels particularly quick disbursing aid to cover budget and BOP support would
depend on the implementation of political reforms. True to their word, in 1991, they
suspended quick-disbursing assistance that had been planned for Kenya. Within a short time,
the constitution was amended to allow for creation of multi political parties.
However, the repeal left intact all other amendments that had concentrated power on the
executive at the expense of the other branches of the government. Thus the enactment fell
short of providing an enabling environment for pluralist politics since most of the provisions
that had been effected by the one party state remained in place. KANU emerged the winner
in the first multi-party elections in 1992. KANU’s victory was partly attributed to the weak
30
and divided opposition. The government took advantage of its position to destabilize the
opposition by encouraging defections through financial and political inducements. Political
patronage became more reinforced in terms of party loyalty. Meanwhile, the civil society
attributed the loss to flawed constitution that gave the ruling party an advantage over its
challengers. As a result, the civil society and the opposition parties made the constitutional
reform their main agenda in the post-1992 elections. In March 1994, for instance, bishops
of Roman Catholic Church released a pastoral letter, in which they called for, among other
things, the complete revision of the constitution. However, there was no meaningful
response from the government.
Due to the mounting internal and external pressure, President Moi indicated in his 1995
New Year message that the constitution would be reviewed, and promised to invite foreign
constitutional lawyers and experts. But nothing seemed to move, and in February 1995, a
gathering of the protestant National Council of Churches of Kenya (NCCK) called for a
two-phase programme over five years to rewrite the constitution with active participation of
the government, political parties and interest groups. There was a turn of events when the
president, in his Madaraka day speech in June 1995, announced that the national assembly
had established a mechanism for making fundamental amendments to the constitution but
ruled out a major overhaul.
As if to affirm the president’s views, the attorney general
indicated in June 1996 that although major constitutional reforms were overdue, they would
have to wait until after December 1997, that is, after the general elections. Resistance to
constitutional reform was expected as that would mean, among other things, trimming the
excessive executive powers and the privileges that went with it. The government also feared
that constitutional reform would level out the playing ground ahead of the 1997 general
elections, denying the ruling party of the clear electoral advantage under in the old
constitution.
Externally, the multi-lateral development partners accused the state of reneging on its
commitment to weed out corruption. Faced with the threat of an aid freeze, the attorney
general published a new bill seeking to establish a commission to review the constitution. In
July 1996, the government announced it would effect minimal reforms before the second
31
multi-party general elections. By the time of general elections, however, nothing had been
achieved.
5.2.2. Economic Reforms
Most of the economic reforms were implemented in the first half of the 1990s. The period
saw bold measures in the reform process especially in trade, civil service, agriculture and
social sectors.
Trade reforms
Trade liberalization had started with conversion of quantitative restrictions to tariffs
equivalent in 1980s. By 1991, quantitative restrictions affected only 5% of imports compared
with 12% in 1987 (Swamy 1994). The average unweighted tariff rate declined from 41.3% in
1989/90 to 34% in 1992/93. In June 1995, the maximum tariff rate was reduced to 40% and
the bands to six. (Mwega 1999).
A speedy progress was made in liberalizing the foreign exchange market. In October 1991
Foreign Exchange Bearer Certificates (Forex-Cs) were introduced, marking the first step
toward liberalization of foreign exchange market (Were, et al., 2001). The Forex-Cs could be
used for automatic import licensing. During the same year, currency declaration forms were
abolished. A series of other measures followed. For instance, in April 1992, a secondary
market for Forex-Cs was established and in August, retention schemes were introduced
allowing 100% retention of foreign exchange earnings from the non-traditional exports. In
February 1993, the retention scheme was extended to the service sector at 50% while foreign
exchange allocation by the CBK was abolished. However, in March of the same year, the
retention accounts were suspended and import licensing and exchange controls reinstated.
Apparently, this led to unsuccessful negotiations between the government and IMF for the
resumption of quick-disbursing loan. Consequently, in May 1993, import licensing was again
abolished and retention accounts reintroduced for all exporters of goods and services at 50%
rate. The government also abolished import licensing so that approval was now only
required for goods on restricted list or for items within government monitored programmes
such as crude oil.
32
Despite the efforts made in liberalizing international trade, the export incentive schemes that
had been put in place to promote exports were not being utilized effectively. In particular,
the ECS was highly abused as issues of political patronage and rent-seeking became critical
in execution of the scheme. For instance, the scheme was used (by Goldenberg International
Ltd and associated companies) to swindle the government billions of shillings in the form of
export compensation for exports that allegedly did not take place, leading to one of the
biggest financial scams.5 The company used a clique of people from the inner cabinet,
creating a web of patron-client relationships with those in key positions of public office, who
perhaps for fear of victimization due to political loyalty, ensured a smooth implementation
and operation of the lucrative scheme despite the irregularities involved.
In so far as the liberalisation reform effort is concerned, the mechanism or manner in which
the ECS was executed left a lot to be desired. For one, what was the essence of retaining the
ECS when trade liberalisation measures where in place, if not for rent-seeking purposes?
This was a policy measure instituted under the controlled trade regime, and had failed to
serve the purpose for which it was instituted. Secondly, the very fact of granting the
company monopoly rights in gold trade was against the spirit of free competition that
liberalisation is meant to foster. Thirdly, the manner in which the scheme was implemented
and executed demonstrated the extent to which vested interest and the executive powers in
appointment or promotion of bureaucrats could compromise professionalism and public
service ethics in execution of duty. Despite the stringent donor conditionalities and donor
aid freeze imposed in November 1991, the scheme was still abused, illustrating how
powerful vested interests and political considerations can be. Fourthly, it had far reaching
implications in the economy, especially in the financial sector. The prudent financial
management that needed to accompany the liberalisation of the financial sector was
compromised, thus significantly derailing the reform process.6 With a freeze on donor
funding, the billions of shillings awarded under the scheme must have been sourced
5
When National Rainbow Coalition (NARC) took over from KANU in December 2002, a Judicial
Commission of Inquiry was set up by president Mwai Kibaki (on 24 February 2003) to investigate
irregular payment of billions of shillings in export compensation to Goldenberg International Ltd and
associated companies in early 1990s, and whether any gold and diamond jewellery were actually exported
and export remittances made to CBK. The company was formed by a young Kenyan businessman of Asian
origin who was irregularly paid Kshs 5.8 billion.
6
See further discussions under financial sector reforms
33
domestically. Most likely, this partly explains the observed surge in domestic stock of debt
(see Appendix Table 4), specifically in 1993.
It was upon realising the extent of the resultant economic crisis that the government
responded by quickly implementing some of the donor demands such as liberalising the
foreign exchange market in an attempt to entice the donors. But unfortunately, with looming
financial crisis and the sky rocketing inflation, that was wrong timing. The shilling
depreciated to unprecedented levels against the dollar (see Figure 1). As one commentator
once put it, “it was like lifting the lid off a pressure cooker without first opening the steam
valve.”7 It was largely the alarm caused by these developments that made the president to
reinstate the foreign exchange controls and import licensing in March 1993, in a bid to
minimise the resultant short run cost of the reform. A hasty implementation without the
necessary preconditions such as macroeconomic stability had worsened the situation, leading
to policy reversal. The Government lost credibility not only in the eyes of donors but also
domestic and foreign investors. From the turn of events, it is clear that rent seeking,
clientelism and patronage informed resistance to complete trade liberalisation.
Figure 1: Nom inal Exchange Rate (Ksh/US $), Jan 1991-Dec 1996
80
70
Kshs per US $
60
50
40
30
20
10
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7
Sunday Nation, March 29, 1998
34
It was not until September 1993, that a decision was made by Minister of Finance to end the
much abused ECS. Further liberalization of the foreign exchange market proceeded. In
October 1993, the official exchange rate was abolished, paving way for freely floating
exchange rate. Other controls on foreign exchange were eased in December 1993, so that
interim dividends could now be remitted to non-resident shareholders. With the trade
liberalization having moved a substantial step, capital controls were relaxed for offshore
borrowing in February 1994 subject to quantitative limits. Over 1993-94, all current account
and virtually all capital account restrictions were lifted. By 1995, all the foreign exchange
restrictions had been eliminated—foreign exchange bureaux were permitted and the
Exchange Control Act was repealed. In May 1995, CBK eliminated all restrictions on trade
in Treasury bills and bonds and trade in other local money market instruments by foreign
individuals and institutions.
Domestically, petroleum market was liberalized in October 1994.
However, price
liberalisation of basic commodities like cereals, especially maize and maize flour was a highly
sensitive one given that these were commodities consumed by the majority of the
population. Politicians would want to act cautiously given the high political uncertainty of
such a reform. Hence, some policy reversals were again witnessed.
Financial sector reforms
Several achievements were made during the period, including liberalization of interest rates,
removal of credit controls, and tightening of the monetary policy operations by streamlining
the money market trading system. Interest rates were liberalized in July 1991, a month after
the introduction of open market operations. However, the reform efforts were thwarted by
political patronage and interference, whereby the politically-connected were allowed to get
unsecured loans from some banks, especially state-owned and politically-connected banks
just before the first multiparty elections. Following the run up to the general elections in
December 1992, there was a heightened activity of financial transactions, as money changed
hands, to finance the then ruling party election campaigns. Part of the finances were linked
to the Goldenberg scam—perhaps in exchange for favours that the company enjoyed—
hence providing means and ways of buying political loyalty or rewarding those that were able
35
to deliver votes, especially with entry of multiparty system which was posing a threat to the
ruling party KANU. Exchange Bank, owned by Goldenberg International, received Kshs
23.9 billion from CBK and other four political banks in a four-day period in early April 1993.
These included Ksh 13.5 billion ($ 210 million) that was paid by CBK. In short, KANU
devised several schemes to finance its election bid, which also translated into printing lots of
money. As would be expected, inflation rose drastically to over 50 percent (see Figure 2). By
April 1993, a financial crisis was imminent. This was a major drawback to the reform effort
that IFIs were struggling to push through.
Figure 2: Inflation rate (monthly), Jan 1991- Dec 1996
70.0
60.0
50.0
40.0
30.0
20.0
10.0
Ja
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The donor community, particularly IMF, raised dissatisfaction pointing to the need to
restore discipline, financial prudence, adequate enforcement and monitoring of the banking
regulations. In particular, the situation created by Exchange bank and other political banks
that were basically instrumental in financing the elections was of great concern. This,
together with the huge unsecured loans amounting to billions of Kenya shillings triggered a
financial crisis and eventual collapse of most of the political banks. Most of the troubled
banks had to be put under liquidation.8 In December 1993, several banks and NBFIs were
eventually closed down in a banking crisis.
8
These included Post Bank Credit, Exchange Bank and Trade Bank.
36
To deal with the resultant monetary overhang, the government, under pressure from IMF,
decided to aggressively mop up the excess liquidity by issuance of Treasury bills. But this
move only acted to create another problem—soaring Treasury bill rate, which also acts an
anchor for other forms of interest rates. At one point, the Treasury bill rate was over 70
percent. This was one of the bases of the high interest rate structure that became almost a
permanent feature of the economy. The lending interest rate has been overly high, reaching
over 30 percent in some years (see Appendix Table 2). Critics of the IMF argue that they
could have done a better job in advising the government to deal effectively with the crisis.
In any case, it was wrong for IMF to have insisted on financial liberalization at a time when
the banking legislation and bank supervision were inadequate (Stiglitz, 2002). Furthermore,
until the amendment of the Central Bank Act in 1996, the independence of CBK, and
therefore monetary policy had been grossly compromised. For example, before the
amendment, the Act allowed the minister for finance to override the decisions of the Bank,
and there was no maximum limit on CBK advances to the government. This encouraged
fiscal indiscipline as well as high budget deficits.
Rolling over the Treasury bills and selling more kept interest rates high and Kenya shilling
strong. The situation evolved into what economists refer to as a “ponzi” game, with the
government issuing attractive debt to repay old ones. The beneficiaries of the game became
financial institutions, especially commercial banks, which held over 50 percent of total stock
of treasury bills. Thus, although an auction market for government paper was created,
financial institutions typically took up most of that paper by arrangement. The dramatic
build in domestic debt and domestic interest rates was also precipitated by resort to domestic
financing following the curtailment in donor funding .
Public sector reforms9
Reforming the public sector was perhaps the most difficult task, as the government kept on
employing delaying tactics. Other than mere job creation, public service employment was also a
9
For the purpose of this paper, public sector reforms include civil service and parastatal reforms.
37
means for political mileage and ethnic or tribal considerations. For instance, with powers to
create and abolish ministries, the president created jobs by splitting existing Ministries, thus
allowing more appointment of Ministers and Permanent Secretaries, among others. More often
than not, this would be in a bid to reward loyalty, balance the tribal equation to ensure that
constituents from key tribes did not feel left out so as to secure votes, and basically creating jobs
for those from the president’s tribe. Due to a bloated public sector, the wage bill became
unmanageable, accounting for about 10% of GDP and about 70% of the recurrent budget by
the late 1980s. This left very little for operations and maintenance, as well as development
expenditure. Part of the reform was to reduce the number of ministries as part of cost
containment.
Having postponed the civil service reform for quite sometime, the government had to finally
launch the reform after much pressure from the development partners. During the
November 1991 CG meeting, the government tabled its strategy for reforming the civil
service. In 1992, civil service reform programme was launched. Various consultative
meetings were held. All the key senior managers of line ministries attended the first workshop,
during which the government outlined the civil service reform action, which was to be
implemented in three stages or phases. The reform was to cover only those civil servants paid
directly by exchequer excluding teachers. A high level steering committee, chaired by the
head of civil service was set up and mandated to report to the Cabinet. Its key role was to set
the overall direction; review and approve reform work plans; and inform the Cabinet on
reform progress. The steering committee was to be facilitated by the Directorate of
Personnel Management, which was charged with the day-to-day management of the reform.
The key members of the steering committee were drawn from a number of ministries and
Office of the President.
Like most reform initiatives, there was not much consultation on the reform with the
stakeholders, though parliament as well as the general public had been informed through the
various budget speeches. The civil servants were not formally consulted. Moreover, the
sequencing of the civil service reform was not properly done. Ideally, the government should
have first defined its core business and key job description, and in this way, identify areas to
38
get rid-off and consequently, the officers and the percentage of staff to lay off. This was not
done. The introductory phase of the retrenchment programme was on a voluntary basis.
This was, however, highly contested especially by the development partners who argued that
the best employees would leave the civil service. As it turned out, when Voluntary
Retirement Scheme was introduced, many of the good subordinate staff left, especially the
technical staff with prospects of getting jobs elsewhere. Others were also enticed by the
money—the golden handshake—and went off on a spending spree only to find themselves
deep in poverty afterwards.
In his budget speech of 1993/94, the Minister for Finance pledged to prune 16,000 civil
servants in a three-year period. In five months, 3,959 employees had been pruned through
natural attrition (retirement) while 13,954 job vacancies that had been budgeted for were
cancelled. The retrenchment programme was restricted to the civil servants, who, for lack of
a formal labour union, would relatively be easier to deal with. Although teachers were a
major contributor to the huge wage bill, they were untouched, largely because of their strong
union (Kenya National Union of Teachers) and the fact that they formed a strong political
base in terms of votes. It is also important to note that the retrenchment programme was
not extended to parastatals. In fact, some of the retrenchees in the civil service could find
their way to parastatals with even higher salaries, thus defeating the purpose of the reform.
In regard to parastatal reforms, nothing much was achieved although some institutional
structure was put in place. Parastatals had become avenues of perpetuating predatory
behaviour by public officials and for a long time, the government was reluctant to divest from
some of the enterprises. The stakes were high, as that would also jeopardize political support
and power.
The reforms basically entailed restructuring and privatization of public
enterprises, with the aim of enhancing the role of the private sector, reducing the claims on
the budget, rationalizing the public enterprise operations, improving regulatory environment
and broadening the base of ownership (Republic of Kenya 1998). In 1990, Department of
Government Investment and Public Enterprises (DGIPE) was created and charged with the
responsibility of overseeing the parastatal reform programme. Parastatal Reform Programme
Committee (PRPC), a high-level policy-making body, was set up under the chairmanship of
the vice-president and Minister for Finance.
A further arm, the Executive Secretariat and
39
Technical Unit (ESTU), was created to manage, coordinate and implement the programme
while approvals were to be made by PRPC. After internal consultations at Cabinet level, the
government drew a privatization programme whose strategies and objectives were spelt out
in Policy Paper on Public Enterprises Reform and Privatization. However, privatization framework
was inadequate as it lacked legislative principles to be followed—basically in the form of
privatization law. The procedures and institutional framework in the policy paper were not
entrenched in the law.
The government categorised public enterprises into strategic (33) and non-strategic (207).
The former were to be restructured to improve efficiency and profitability while nonstrategic parastatals would be privatized. The implementation encountered resistance and
more often than not, laid down procedures were not observed by the implementing
institutions. As Stiglitz (1999) rightly points out, if privatization is conducted in ways that are
largely viewed as illegitimate and in an environment that lacks the necessary institutional
infrastructure, the longer-run prospects of a market economy may be undermined. The
privatisation process lacked both functional and legal autonomy from executive and as such,
privatization did not weaken patronage, as one would expect (Gatheru and Shaw, 1998).
Social Sector Reforms
The major component of the social sector reforms in health and education was
implementation of cost sharing, also known as user charges in the case of health10. Cost
sharing in the public universities was introduced in 1991. Following public discussions and
workshops on the merits and demerits of user charges, and the lessons learnt from the initial
attempt, the government announced a phased re-introduction of user fees in April 1992,
with details of fees, waivers and exemptions, and dates of introduction. This time, the
outpatient fee was reintroduced as a fee to be paid only after receiving treatment. In
addition, there was some effort devoted to developing the institutional capacity. Specifically,
the MoH expanded the Health Financing Secretariat; new management systems were
developed with staff from hospitals, District Health Management Teams and District
Treasuries; a cost sharing operations manual was produced and new accounting and
10
This section focuses on the health sector reform.
40
reporting systems put in place. Revenue collection targets were also set. The revised policy
was introduced in phases and on pilot basis (Collins et al., 1996). The re-introduction was
sequenced, starting with the national referral hospital in April 1992, provincial hospitals in
July 1992, district hospitals in January 1993 and at the health centres in July 1993. Like
before, no fee was charged for services offered at the dispensaries. In addition, the groups
of the population exempt from the fees had been expanded to include civil servants, the
military and the unemployed (Owino and Were 1998). The new (revised) reform was
accompanied by the other changes or reforms, notably the decentralization of management.
The successful implementation of the revised policy compared to the initial attempt can be
attributed to consultation and consensus building among stakeholders (e.g. senior medical
and administrative staff); gradual and sequenced implementation, with the quick success at
the higher level facilitating implementation at lower levels and enhancing acceptance; and
relatively stronger institutional framework put in place. The broad range of automatic
exemptions to compensate losers was apparently, also helpful in gaining political and public
acceptability of the user fees, although the revenue foregone was high.
Hence after
achieving acceptance, the exemptions for civil servants and children between 6 and 15 years
were removed, since there was no clear public health benefit (Collins et al., 1996).
We can hence infer from the cost-sharing experience that successful implementation is
enhanced when there is consensus building, the process is gradual, sequenced and the
necessary institutional capacity is developed. However, the nature of the reform in question
and how widely it affects the economy should be taken into consideration. Additionally, a
reform can be reversed if its effects threaten the positions of the political system in power,
especially when the side effects of the reform became apparent.
5.2.3
Government-donor relationship
The 1990s were characterized by stop-go relationship with donors, leading to aid embargos
and intense pressure from donor agencies to undertake various reforms. For instance, quick
disbursements were suspended in 1991 due to what was described as rising levels of
corruption, failure to correct macro-economic imbalances caused by fiscal indiscipline, slow
reforms in the civil service and privatization of public enterprises, lack of accountability of
public enterprises and a slow pace of political reforms. In December 1992, IDA cancelled
41
final tranche of agricultural sector adjustment operations credit (ASAOII) citing policy
reversal in maize market liberalization, while disbursement of the second tranche of the
export sector adjustment credit was held up until May 1993. The World Bank also
postponed disbursement of the second tranche of the programmes due to poor
implementation of several conditions attached to sectoral programmes. As a result, there
was a large external financing gap.
By then the instability in macroeconomic framework, partly instigated by the financial scam
was becoming apparent. To help restore economic stability and facilitate the process, a
shadow programme11 was agreed upon between the government and IMF in April 1992.
However, the government quickly veered off-track as political concerns overwhelmed
economic management issues. IMF/IDA mission in autumn 1992 and spring of 1993 found
evidence of significant violation of monetary targets due to abuse of the pre-shipment export
financing scheme12 and access of certain commercial banks to CBK overdraft and rediscount
facilities, all of which had some links with the Goldenberg scandal. This created a strained
relationship between the government and the donors.
In attempt to gain lost confidence and facilitate access to donor-funded external financial
flows, the president made changes by replacing key government officers who were in office
when the Goldenberg scandal started. In January 1993, Musalia Mudavadi replaced Professor
George Saitoti as the Minister for Finance, while Micah Cheserem replaced Eric Kotut who
resigned as governor of CBK. The new officers gained good will from donors as reformists,
and influenced a decision by World Bank to call for a CG meeting to discuss Kenya’s case in
Paris in November 1993. They pushed through various reforms that were being sought by
the IMF and World Bank. After some speedy reform implementation, Kenya applied for a
one-year arrangement under ESAF in November 1993. With the usual conditionalities, IMF
11
A stabilization programme, which IMF monitors without providing the funds, until it is convinced that it
is time to do so.
12
Pre-export finance scheme was a soft loan that was extended by the CBK in early 1990s to exporters through
their commercial banks, but ended up being abused. In March 1993, commercial banks were advised not to
enter into new commitments under the facility.
42
approved US$ 63 million credit under ESAF in December 1993, half of which was to be
disbursed immediately.
After IMF opened its doors, there was some good will from donors. For example, after the
December 1994 meeting the World Bank released the final tranche of US $77M of its
education sector credit while the IMF disbursed the remaining US$33M under its ESAF.
Bilateral donors, who often use IMF and World Bank as a benchmark in regard to funding
decisions, also followed suit. In January 1995, Japan announced a US$20M grant for BOP
support.
IDA also announced a US$21.4M credit to support Kenya’s civil service
rationalization. In February 1995, an IMF team arrived in Nairobi to open talks on new
three-year ESAF worth US$200M. However, there was still concern on the need for fiscal
discipline. Hence, IMF announced it would monitor the budget monthly. But in September
1995, IMF announced that talks with the government on ESAF of US$200M had effectively
stalled because the Fund needed to convince itself that the government was vigorously
prosecuting public officials and others accused of the Goldenberg scam. It was proving
difficult for the government to deal with the issue objectively, given the complicity of some
members of the Cabinet and the inner Cabinet in the scam.
In April 1996, the long awaited ESAF was finally approved after the government reiterated
its commitment to reform in the Policy Framework Paper 1996-1998. The government pledged
to recover the money lost in the Goldenberg scandal, allow greater autonomy of the CBK,
operate the budget at cash basis, halt spending not covered by parliamentary approval and
introduce commercial autonomy in some of the parastatals.
Also targeted was the
mismanagement and corruption at Mombasa port. The broad objective was to bring in fiscal
and public sector transparency. However, the bilateral donors were more concerned with
non-economic factors. Their concern was the then forth-coming general elections, including
the role of electoral commission, the funding of parties, creating a level playing ground for
all parties including licensing of meetings, the role of the provincial administration and
access to the media.
43
However, four months after approval, nothing seemed to move as scheduled. A joint
mission from IMF and World Bank that left Kenya in mid-August 1996 expressed concern
about the level of government borrowing from the CBK. They also noted that certain
strategic targets set out in the Policy Framework Paper had not been achieved on schedule.
IMF thus, decided to withhold the release of the second tranche of the approved ESAF until
these conditions were satisfied. Another IMF mission in December 1996 expressed concern
about the government’s commitment to the reform process. By this time, corruption was
raging and the government’s record on good governance was far from acceptable.
Although the IFIs ensured a greater degree of reform implementation, they were overambitious in their reform agenda given the prevailing conditions and institutional
framework. They at times pushed the reform agenda too far and too fast, and the fact that
the government yielded to their demands did not necessarily mean they were ready and
willing to fulfil the conditionalities. They took institutional capacity and political will to
implement reforms for granted. Strict targets and schedules, including stipulating what laws
the parliament should pass and when, undermined consensus building and local ownership
of the reform process. If conditionalities are expected to overcome time inconsistency
problems, in the Kenyan case, they did not. This is exemplified by the inherent policy
reversals and stop-go pattern in reform implementation.
5.3 Phase IV: 1997-2001
5.3.1
Political arena
The 1997 general elections were held with almost similar conditions to those that prevailed
in 1992 general elections. Opposition parties were still divided, the government-owned
Kenya Broadcasting Corporation still favoured KANU, and politically instigated tribal
clashes cropped up again. The only minor change was amendments to some laws, aimed at
reducing incidents where political rallies were violently broken up by the police. In addition,
some constitutional and legal reforms were introduced to ensure independence of the
Electoral Commission. These changes were, however, not adequate to level the playing field.
This minimalist approach to constitutional reform was geared towards ensuring that
President Moi wins his second and last term in office in keeping with the limit set forth by
44
the constitution. Moreover, the political elite, including the inner cabinet, most of whom had
been associated with the Goldenberg scam and other improprieties, wanted the status quo to
be maintained for their own personal interests. KANU emerged the winner.
Campaign for constitutional change continued. The president finally approved the
Constitutional Review Act in 1998, setting the agenda for a thorough review. But in early
1999, he again made a turn about, stating that the entire process was a waste of time and
money and that the new constitution should be debated in parliament. However, the groups
opposed to the fact that parliament was best suited to review the constitution initiated a
parallel process at Ufungamano House, dubbed the Ufungamano Review Group (URG).
This was largely spearheaded by religious leaders. In November 2000, the president finally
appointed a respected constitutional lawyer, Professor Pal Yash Ghai, to chair the
Constitutional of Kenya Review Commission (CKRC). Luckily, Ghai succeeded in merging
the differing factions and soliciting views across a wide range of groups throughout the
country. But as it were, by the time the third multiparty general elections were being held in
2002, a new constitution had not been put in place, despite a people-driven draft being
ready. To date, the constitutional debate still rages on, even with new NARC government,
which came to power on the platform of constitutional reform.
But one may ask, what has constitutional reform got to do with economic reform? As
observed earlier, a long era of centralization of unchecked powers in the executive was
launched after independence. Constitutional reform was meant to introduce more
transparency and accountability in the government structure and operations, thereby
militating against the effects of vested interest groups and rent-seeking, which have had a
profound effect on reform process in Kenya.
5.3.2
Economic Reforms
Failure to make significant moves in fulfilling governance conditions led to suspension of
ESAF in August 1997.
By this time, emphasis in conditionalities was not merely on
economic targets but also implementation flaws and poor governance.
45
For example,
although all imports were in principle liberalized or automatically licensed, supervisory
reports indicated that, in practice, there was lack of automaticity and transparency, and
undue influence restricted imports that competed with domestic production. Moreover,
although the banking laws and the supervision apparatus were strengthened, political
considerations prevented effective prudential oversight. There were concerns about
widespread corruption and poor human rights record as well as the politically instigated
tribal or ethnic clashes witnessed in the run up to general elections in December 1997.
Thus, much of the reform effort was geared towards fulfilling conditionalities that led to the
suspension of funding, particularly governance (read corruption) issues. For example, the
government established the Kenya Anti-Corruption Authority (KACA) in 1997 to address
corruption in the economy. With donors still dissatisfied with the fight against corruption,
the president put up a team in July 1999, with members mainly drawn from the private
sector, to occupy key positions in government. The team was headed by Dr. Richard Leakey
(a renown conservationist and one of the leading lights in the opposition at that time), who
was appointed as head of civil service and Secretary to the Cabinet. He was mandated to
remove inefficient and corrupt officials and to right-size the civil service. The team was
dubbed ‘dream team’ in the public and media circles, as it was expected to put the country
back to economic recovery path and root out the rampant corruption in government.
Within a few weeks of his appointment, Leakey sacked a raft of parastatals chiefs and sent
the fraud squad into a number of government departments. Four key senior officials in
three parastatals were replaced. While there was no doubt that the reforms were having an
impact on the working practices of public bodies, these actions were, however, thwarted by
the senior political hardliners with power bases.
Efforts to stamp out corruption were heightened when, in February 2000, the parliamentary
Public Investment Committee (PIC) forwarded to the head of civil service, a list of
individuals whom it accused of misappropriating public funds and, therefore, unfit to hold
public office. But no prosecution took place and the issue was simply said to be cheap
propaganda. Further efforts to stamp out corruption were thwarted when on 27th December
2000, in a move that was seen as largely viewed to be political, the High Court ruled that
46
KACA was a constitutionally illegal body, triggering a public outcry.13 In addition, the
parliament rejected two bills in the fight against corruption i.e. the civil service code of
conduct bill and the anti-corruption and economic crimes bill. It was argued that the bills
were purely donor-initiated and the government was simply doing it to fulfil the
conditionalities. These developments cast doubts on the government’s commitment to
fighting corruption.
Vested interests, particularly by the kitchen cabinet still obscured
significant changes. It was apparent that the kitchen cabinet associated with past misdeeds
was either re-asserting itself or the hiring of technocrats was a mere smokescreen to
hoodwink donors into releasing withheld funds. That notwithstanding, the period saw
progress in implementation of some economic reforms, particularly the public sector
reforms that had lagged behind.
Public Sector Reforms
The second phase of the civil service reform was re-launched in 1998, largely driven by the
government’s needs for new funding from donors, and the IFIs’ pressure for a leaner and
efficient government. The target was to reduce the civil service by 30% and a target of
32,000 staff was agreed upon. Within a short while, committees were set up in Ministries to
decide who was to leave, especially at the lower cadre levels. Although there was a criteria to
be followed, this was never circulated to the civil servants. This left civil servants guessing
who was to be next and created anxiety and suspicion among officers. However, the rightsizing was halted by parliament before the target had been achieved. Expectedly, it was
argued that there was no enough consultations about the policy, which was viewed to have
been implemented as directive from donors. The parliament argued that a Sessional paper
should have been done before implementing the policy and, hence lobbied to stop the
process. This further exemplifies how hurried implementation without adequate consultation
and consensus building among key stakeholders affected successful implementation of
reform.
In September 1999, the president announced ministerial changes, which saw the number of
ministries reduced from 27 to 15. This was viewed as the phase two of the much touted
recovery strategy after the appointment of the technocrats into senior civil service positions.
13
KACA was later reconstituted as Kenya Anti-Corruption Commission, which is currently operational.
47
But this was just a change in portfolio as none of the ministers or assistant ministers was
dismissed. Instead, they ended up sharing a ministry, thus defeating the purpose of the
reform. That was not surprising given that the power base of the president was vested in
offering posts to regional power breakers who could deliver him the support of their ethnic
constituencies.
With the appointment of Leakey it was expected that the process of cutting back the civil
service would resume. It was expected that he would use as a start, the civil service reform
medium term strategy 1998-2001, which called for the reduction of some 126,000
employees—60,000 teachers and 66,000 civil servants. The Poverty Reduction and Growth
Facility (PRGF) was also committed to retrenching 32,000 public-sector employees in the
2000/2001 period. However, the reform suffered another setback when the sacking of
25,783 civil servants was halted, after the civil servants came together and sued the
government.
They accused the government of contravening the employment Act by
terminating employment contracts without adequate notice. The court ruled that the civil
service retrenchment plan should be suspended and new arrangements worked out.
The
matter was complicated by the fact that many civil servants had still not received their
redundancy packages. Hence there were also squabbles in regard to the compensatory
mechanism. At least 19,000 civil servants had received retirement letters since the
programme started in September 2000.
Fiscal reforms continued in early 2000 with the rationalization of the budget process. A
major component of the reform was adoption of the Medium Term Expenditure
Framework (MTEF) to budgeting, which replaced the previous forward-rolling budgeting
system. The aim was to move revenue and expenditure more closely into balance and
achieve fiscal discipline. The new budgeting approach was to be directly linked to the
priorities contained in the Poverty Reduction Strategy Paper (PRSP). However, with no specific
targets, sanctions and incentives where necessary, fiscal discipline remained elusive. This
was exacerbated by weak institutional structures. For example, although budget execution is
a prerogative of parliament, mechanisms to control discretionary spending within executive
remain weak. Only the Office of the President can discipline the Permanent Secretaries,
48
who also act as accounting officers in their respective ministries (Kirira 2002). The office of
the Controller and Auditor General does more of auditing and little of the control function
(Gacheru and Shaw, 1998). Moreover, the high turnover of Permanent Secretaries to the
Treasury intimidated holders of this office, who are also delegated with financial control and
management, thus undermining their authority and firmness on financial matters and
expenditure management (Kirira 2002).
The government kept on dragging its feet in regard to parastatal reforms. By the end of
1998, the government had sold shares in only 25 enterprises in which it had direct ownership
out of the 165 (Anyang’ Nyong’o 2000). Privatisation proceeded without a privatization law,
thus leaving loopholes for manipulation.14 Moreover, the government avoided privatizing
some of the parastatals that caused a major drain on the budget, thus bringing to fore the
question of whether the objectives of parastatal reforms have all been met.
During 1999/2000 fiscal year, a number of state-owned corporations were to be restructured
and privatised.15 However, none of the planned privatisations were undertaken. Kenya
Reinsurance, Chemilil and Mumias were all brought to the point of sale but their
privatisation was postponed because of the lower than expected independent valuations for
their assets.
However, the government restructured the KPTC, by splitting it into three
separate entities, namely the sector regulator (Communications Commission of Kenya), the
public postal operator (Postal Corporation of Kenya) and the public telecom utility (Telkom
Kenya). KPTC had accumulated a debt of about Kshs 6 billion, which was mainly due to
corruption and inefficiency. In early December 2000 the president stated that 49% stake in
the Telkom Kenya would not be sold unless foreign investors made what the government
deemed to be reasonable bids. Although the cabinet finally approved the sale of 49% stake
of Telkom Kenya (to Mount Kenya consortium) in January 2001, it was later suspended.
Among the underlying reasons for terminating the sale was the fear that privatising the
14
There has been a privatization bill which is yet to be turned into law.
These included the Kenya-Reinsurance Corporation, the then Kenya Posts and Telecommunication
Corporation (KPTC), Chemilil and Mumias Sugar companies. Kenya Ports Authority and Kenya Railways
were to be commercialized.
15
49
public utility would jeopardize the business interests of politically-connected individuals in
government and close avenues for corruption and rent-seeking.
Financial sector reforms
In the financial sector, the aftermaths of unsecured loans and political banks continued to
felt.
Further instability was experienced when five banks were put under statutory
management by the CBK in 1998, after failing to meet their financial obligations. The bank
failures were attributed to high non-performing loans due to poor lending practises, conflict
of interest, loans to non-viable projects, insider lending to directors and undercapitalisation.
Some banks such as the state-owned National Bank of Kenya (NBK) had huge amount of
non-performing loans. By late 1998, the financial problems at NBK became so acute that the
government had to save the bank with a cash injection of Kshs 2 billion. To arrest the
waning confidence in the banking sector, tougher regulations were put in place. CBK was
given increased power to censure commercial banks that failed to comply. Penalties for noncompliance were also raised. There was increased capital base requirement together with
strict enforcement of capital/lending ratios and the provision of credit within strict limit and
with the appropriate security. Other regulations to be observed included the need for
financial institutions to publicly display or publish their audited accounts promptly.
There was some financial stability in 1999. Three out of five banks under statutory
management were restructured and re-opened. During the 2000/2001 period, measures
undertaken included amendment of the banking Act to restrict insider lending and
enforcement of banking laws especially in regard to lending and provisioning for nonperforming loans. That notwithstanding, the experience with the banking crises and high
interest rates attest to the fact something was not right in the reform process. Financial
market liberalisation was based on the believe that competition among banks would lead to
lower interest rates. But that has not been the case. Pradhan (1997) observes that the success
of financial liberalisation process depends on the appropriateness of macroeconomic policy,
institutional development and structural reforms. Leite (1993) add that strong banking
regulatory and supervisory policies ensures viability and health of the industry and, enhances
50
effectiveness of interest rate liberalisation. The hurried financial market liberalisation saw a
situation where the amendments to the banking legislation and
tight regulatory and
supervision policies were being put in place long after the implementation of the reform.
Moreover a successful interest rate liberalisation also calls for the need to attain fiscal
discipline, which was not the case.
5.3.3
Government-Donor relationship
Donor dissatisfaction with reforms particularly in regard to corruption persisted. After
KANU won the general elections in 1997, Mr. Simon Nyachae, who was appointed as the
minister for finance, came to be regarded as one of the few members of parliament that
made concerted effort to tackle rampant corruption in public sphere. But it was not long
before the minister was relinquished of his post. He was replaced by Mr. Francis Masakhalia
in February 1999.
The IMF team visiting the country in early March 1999 was encouraged by the government’s
performance in the economic sphere with respect to monetary and fiscal policies but not
corruption. The new minister for finance was mandated to tackle the excessive government
expenditure and deal with the huge unpaid government bills, also known as pending bills.
The stock of pending bills, which stood at Kshs. 2227 million as at 30th June 1991, had
significantly increased to Kshs. 10976 million by June 1999—an increase of about 392%
(Kirira 2002).
Pending bills was one of the loopholes used to gain access to public coffers
by either paying contractors for substandard work, inflated bills or for services at times not
delivered. It was, and indeed it is, a reflection of financial indiscipline and poor management
in the public sector. For example, projects and programmes were initiated without taking
into consideration their financial implications and at times without seeking parliamentary
approval, which is illegal.
In his 1999/2000 budget speech, the minister issued strict
guidelines under which the outstanding government bills were to be paid off in a transparent
and open procedure. But before he could make any meaningful progress, he was removed
from office only after six months and replaced by Mr. Chris Okemo.
51
After the July 1999 visit, the IMF team was still dissatisfied with governance reforms and
therefore, deferred any decision about re-establishing the ESAF. The mission noted that
KACA had failed to take any action even with its limited mandate. The deferral of funding
came as a bitter blow to the government, which had already factored the donor support in
the budget. It was then that president Moi, in his usual tactful style, made a swift move and
appointed the ‘dream team’, in a bid to improve credibility and Kenya’s badly dented image
in the eyes of donors and international community. However, when the IMF team visited the
country in early 2000, there was no indication of aid resumption. During the visit, the
mission reviewed the progress made in improving governance and discussed an economic
programme on which to base the new PRGF, which replaced the EASF. By this time,
poverty had become widespread while the economy was in doldrums. In fact, it was in the
year 2000 when the economy recorded a negative real GDP growth rate of –0.3% in Kenya’s
economic history. With no money coming despite his initiatives, president Moi accused the
donors of shifting goal posts. But as he was doing that, back home a coalition of opposition
politicians, civic leaders and professionals appealed to the IMF and the wider donor
community not to release financial assistance to Kenya because the government had not
fulfilled its pledges to implement constitutional reforms.
IMF set tough terms when it finally agreed to lend to Kenya. In August 2000, IMF approved
a US$ 198M credit to support the three-year PRGF programme. As it often happens, the
agreement with IMF opened up the door for funds from other donors such as World Bank,
African Development Bank, European Union, United Kingdom and Japan. But the
relationship between the government and the IFIs went sour again at the beginning of 2001.
IMF’s major areas of concern included the stalled privatisation bill; failure of parliament to
enact the pending civil service code of ethics and economic crimes bill. Consequently, in
March 2001, IMF decided to withhold lending to Kenya again, citing insufficient progress in
the proposed reforms. As had become routine, there was a heightened activity in terms of
reform implementation in a bid to fulfil the conditionalities following the curtailment of
funding. For instance the cabinet approved the re-establishment of the KACA as an
autonomous body operating under the constitution.
52
The donor-government relationship depicts a carrot-and-stick approach to the reform
process. It is this approach that largely ensured that major reforms were implemented. That
notwithstanding, this approach raises issues of ownership of reforms since reforms became a
donor agenda and were hurriedly implemented in a bid to appease donors to release funding.
As it turned out, this often left little or no room for consultation with the relevant
stakeholders in the design and implementation of reforms. Additionally, the manner in
which discussions between IMF and government took place, in itself did not promote broad
consensus, since it was often restricted to Ministry of Finance and Central Bank. Although
donors eventually managed to push their agenda through, there are cases when such a move
would be met by stiff domestic resistance especially on sensitive reform issues like civil
service reform or where the proposed reforms threatened rent seeking and other economic
and political interests of the ruling elite.
The fact that implementation of reforms was reactive rather than proactive not only
undermined local ownership but also affected sustainability of reforms. There has been lack
of a clear long-term vision as IFIs have preoccupied themselves with setting and re-setting
short-term targets, which the government strives to achieve if only to access funding. The
problem is that, as Stiglitz (2002) contends, many of the reform policies became ends in
themselves rather than means to more equitable and sustainable growth.
5.4
Economic Outcomes
Economic reforms are often undertaken with the aim of promoting high growth and
improved welfare in the long-run. For instance, trade liberalization measures are undertaken
on the assumption that they will eventually improve the exports and economic growth
(Mwega 1999). Trade liberalization was also expected to lead to a diversification of exports
with the discovery of new markets and products. Following liberalization of the foreign
exchange in 1993, there was an immediate positive response in terms of imports and exports.
In particular, the export response seems to have been combined with a price effect due to a
steep devaluation of the Kenya shilling in 1993. In totality, the effect was a rise in export
earnings. Export earnings rose from 13% of GDP in 1992 to over 20% between 1993 and
1996.
53
However, in general, export growth has been highly erratic, based on fluctuations in earnings
from a few traditional primary commodity exports and the tourism sector. Figure 3 shows
the value of commodity exports and total value of exports of goods and services, both as a
proportion of GDP. The trend of total export value of goods and services mimics that of
commodity exports, underscoring the importance of the latter in total export value. While
certain non-traditional exports such as horticultural products have experienced rapid growth
in the last few decades, manufactured goods make only a small proportion of total exports—
mainly targeting the EAC and Common Market for Eastern and Southern Africa
(COMESA) markets. Kenya’s trade share (value of imports plus exports in GDP), which is
a commonly used indicator of openness, shows no clear trend but has been over 50% since
the 1970s, reaching the peak in the first half of 1990s, following liberalization of the foreign
exchange market. The value of exports of goods and services as a percentage of GDP has
been below 30 percent except for a few years, particularly 1993 following the steep
depreciation of the shilling (see Figure 3 and Table 2).
0.45
0.40
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
value as a proportion of GDP
Figure 3: Export value as a proportion of GDP
total export value/GDP
commodity export value/GDP
Table 2: Key Macroeconomic Aggregates
Variable
1975-
1980-
1985–
1990-
1997–
79
84
1989
1996
2001
(% Volume change)
54
Real GDP
5.6
3.4
5.2
2.3
1.2
Private investments
3.2
0.9
10.2
1.3
0.4
Government investments
5.9
0.5
9.3
5.4
-0.5
Exports of goods and services
-1.9
0.6
6.2
7.1
2.0
Imports of goods and services
0.3
-5.5
8.4
9.5
1.8
(% 3.0
0.8
4.0
3.5
1.5
Wage employment (private & government) 0.9
1.1
1.3
1.5
1.7
Informal sector employment (millions)
0.3
0.35
1.6
3.8
Total investments (% of GDP)
24.3
20.2
16.4
24.3
Total Savings (% of GDP)
10.6
13.2
9.3
10.6
Wage
employment—private
sector
change)
(millions)
Value of imports and exports as % of GDP
62.7
57.1
50.7
64.7
60.8
Value of Exports as % of GDP
30
26
23.5
32
26
Population (in millions)
14.1
17.1
20.3
24.0
29.5
Nominal exchange rate (Ksh/US $)
7.8
11.1
17.5
43.6
68.9
Short-term interest rate (TBR-91 days)
4.8
10.5
13.4
23.7
17.1
9.9
21.3
6.6
-3.8
-1.5
-3.2
Monetary variables
Inflation
Current account (% of GDP)
-5.6
-6.4
Source: computed from KIPPRA-Treasury Macro Model (KTMM)
In general, the real GDP growth rate has been highly erratic, but depicts a declining trend
over time (see Figure 4 and Table 2). Growth performance has remained depressive in the
1990s and in the new millennium, with a declining growth in volume of investments (both
private and public) and exports. The value of total investment to GDP ratio has remained
below 25 percent while total savings as a proportion of GDP has been about 11 percent.
Given the population growth rates of about 2 % per annum in recent decades, it is evident
that real per capita income has been on decline since the mid-1990s. This partly accounts
for the declining wage employment in the formal sector, leading to a surge in the informal
sector employment. The Welfare Monitoring Survey II of 1994 estimated unemployment at
21.3% of the population aged 15 years and above excluding students. The formal sector
55
constitute only a small proportion of the economy and many activities are largely undertaken
in the informal sector, which has expanded rapidly in recent years.
Figure 4: Trend in Real GDP growth, 1966-2002
14
real GDP growth
12
10
8
6
4
2
real gdp
19
94
19
96
19
98
20
00
20
02
90
92
19
19
86
88
19
19
82
84
19
19
78
80
19
19
74
76
19
19
19
19
19
19
66
68
-2
70
72
0
Linear (real gdp)
The monetary variables—exchange rate, short-term interest rate and inflation have remained
fairly stable over time except in 1993 when they sky-rocketed (see Table 2 and Appendix
Table 2). 1993 is a unique year in Kenya’s economic history, as this is the year when there
was a major turbulence in many macroeconomic variables. This can be attributed to
economic as well as political factors following the rise to multi-party democracy and the
financial scams that were linked to the Goldenberg scandal. From the analysis, this is largely
a political business cycle. The literature on political business cycle postulate that parties in
power will manipulate policy in the short run in order to maximize their electoral chances
(Haggard and Web 1993). KANU used the financial sector for such manipulation in order to
finance its election bid.
Poverty remains widespread, and by 2000, 56% of the population was estimated to be below
the poverty line (Mwabu et al., 2002). With an estimated population of about 31 million, the
population structure exhibits a high dependency ratio (107 dependents for every 100 active
persons), with almost half of the population below age 15. Although Kenya holds key
56
potential in spearheading economic development in the region, the challenges that lay ahead
cannot be overemphasized.
6.
Winners and Losers
Although its ultimate goal is a better-off society, reform has distributive consequences,
resulting into winners and losers in the process (Fidrmuc and Noury, 2003).
However,
given the multiplicity and dynamism of reform, it is not that easy to precisely identify
winners and losers. Moreover, reform might benefit one sector while hurting another sector.
In general, the beneficiaries of economic liberalisation were largely the capitalists, traders,
firms that were able to compete, and large-scale exporters. One of the most affected sectors
following trade liberalization was the local textile industry, which collapsed due to cheap
imports. Consequently, the cotton industry also collapsed.16 The resultant unemployment
affected a wide range of people given the backward and forward linkages in the textile
industry. These included farmers (cotton growers), employees in the cotton and textile
factories, and middlemen and women. Small-scale traders proliferated the industry with sale
of imported second hand clothes. Poor farmers and low-skilled income earners are likely to
have been disproportionately affected, but arguably, they benefited to the extent that they
could easily access cheaper imported second hand clothes and other domestic products.
Business associations like KAM benefited to the extent that they were able to easily and
cheaply access imported capital and intermediate goods. Trade liberalisation also opened
avenues for non-traditional agricultural exports such as horticulture. On the losing front
were small-scale farmers with lack of credit and technological skills to access the world
markets. Others included Sanyo, a Japanese- Kenya joint venture in electronics. To the
extent that the protective trade regime provided avenues for rent seeking, losers also
included individuals who benefited from the system by rent-seeking.
In the financial sector, there has been a concentration of banks in the urban areas, which
target upper and middle-income earners, thus shutting out the majority of rural population as
well as low-income earners and the working poor in urban areas. Additionally, the lending
rates have been relatively high, thereby denying potential borrowers access to credit facilities.
16
Currently, there are plans to revive the cotton industry under the African Growth and Opportunity Act
(AGOA).
57
These include small-scale firms, businesses and entrepreneurs. Reforms in other sectors
such as health, education and civil service disproportionately affected the poor and the
vulnerable groups. With the introduction of user charges in public health institutions, the
losers were majority of the poor who have been unable to afford basic modern health care
and the vulnerable groups such as mothers and children. Owino and Were (1998) found that
compensatory system of waivers and exemptions was no longer operational in many public
health facilities and potential beneficiaries were not even aware of such a system. Most poor
families have also been unable to give their children basic education. Thanks to the
programme of free primary education under president Kibaki’s new government, there has
been a surge in primary school enrolment.
The victims of retrenchment programme were mainly employees in the lower cadres in civil
service, who, given the little compensation package and massive unemployment exacerbated
by poor economic performance, often joined the pool of the poor. Overall, it can be argued
that distributional consequences of reforms deepened the asymmetries in incomes and
access to resources.
7.
Conclusion
Kenya’s path to reforms was largely driven by external pressure from donors, particularly the
IFIs, as well as domestic economic crisis following the effects of the oil crises in the 1970s
and economic mismanagement. Initially, the government was not willing to dismantle the
protective economic regime, which was also attractive for rent-seeking opportunities and
political patronage. This was exacerbated by the political uncertainty of large-scale reform
implementation. Though reluctantly, Kenya embarked on the reform process under SAPs in
the early 1980s, as borrowing from abroad was predicated on undertaking certain reforms in
the form of conditionalities.
However, it was not until the 1990s that comprehensive reforms were implemented. Even
then, development partners exerted a lot of pressure, adopting carrot-and-stick approach to
ensure reform implementation. Stringent conditions leading to suspension of funding kept
the government on its toes. In particular, IFIs set the pace and the reform agenda through
58
out the reform process. Donor conditionalities were broadened to include political
democracy and good governance besides the traditional economic policies. Thus, the reform
period also coincided with political reforms, a major component of which was change to
multi-partyism and agitation for constitutional reform. Besides the donors, civil society and
religious groups played a critical role, particularly in pushing for political reforms
Weak commitment to the reform process strained relationship between the donors and the
government, leading to stop- go pattern in lending and reform implementation. Although the
government announced policy reforms in National Development Plans and prepared policy
papers to demonstrate its commitment, the implementation process was often characterised
by delays, non-commitment and policy reversals, leading to lack of consistency. Weak
commitment was rooted in the political structure that was not supportive of both political
and economic reforms, especially because of the vested interest groups, which feared losing
their political patronage and power bases. For example, it was difficult to reduce the size of
the public sector since public institutions had become conduits of patronage, particularly by
the executive. Even when the president appointed reformists or team of experts to drive the
reform process, there was limited space for manoeuvre, as the political interest groups such
as the inner cabinet were always a hindrance.
The IFIs used aid and donor funding as a bargaining tool. Knowing this, the government,
mainly with the president’s tactful intervention, would dance to the music by donors to
access funding only to relax once the funds were obtained. The reform process hence
became a stop-go affair, sometimes undertaken simply to hoodwink donors. The process
was reactive rather than proactive. As a result, there was weak ownership of reforms.17
Moreover, there was no specific attempt to coordinate and prioritise reforms. Implementing
Ministries looked at the reforms with suspicion as nobody got to know what the other was
doing or what was next. Each Ministry could be given a paragraph to implement without
any knowledge on how the whole idea was conceptualised and how it linked with other
Ministries. Thus, the reform agenda failed to spell out a clear long-term path. The IFIs
17
As one government officer once commented, the reform agenda was viewed as the donors’ baby, such that
every time the donor team left the country, reform agenda became orphaned.
59
themselves also lacked a clear focus, as they preoccupied themselves with short-term targets
and failed to view reform a whole. It is thus, not entirely surprising that issues of timing and
sequencing were often not taken into consideration. They also took institutional capacity and
political constraints for granted.
Given weak institutional framework and ownership of reforms, sustainability was and still
remains a real challenge. Enforcing the right institutional infrastructure was itself a major
challenge, given the influence of interest groups with political connections within
government. Policy reversals and uncertainty about the reform can be attributed to lack of a
clear analysis of the reform impact, poor preparation and limited consultation in the design
and implementation, as reforms were often hastily implemented due to donor pressure. This
was made worse by the closed decision-making system. In some cases, the reversals were
made as a way of minimizing the short run cost of the reforms or inherent political
uncertainty. That notwithstanding, the government made a bold move in implementing
reforms such as trade liberalisation, which, it was feared, would cause many firms to lose.
Other reforms, however, proved sensitive and difficult to implement, especially those with
immediate welfare implications on wider population such as cost-sharing in health sector,
liberalisation of basic commodities like cereals, and down-sizing of the civil service. These
were associated with high political uncertainty given the majority of the losers were bound to
be common citizens, who also form the majority of voters. Hence there were delays and
reversals.
Despite undertaking the market-oriented reforms, results show marginal gains with
economic growth and investment. Economic growth has been dismal, especially in the
1990s. On the social front, poverty worsened, having been estimated to be 56% by 2000.
Overall, reforms disproportionately affected the poor and other vulnerable groups—smallscale farmers with less ability and technological skills to access the world markets, employees
in lower cadres in the civil service, and mothers and children in the case of health sector.
The beneficiaries were largely the capitalists, traders, and firms with the ability to compete.
In general, the distributional consequences of reforms deepened the asymmetries in income
and access to resources.
60
61
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Appendix Table 1: Summary of the Reform process
Phase
Dominant reforms
Political
environment
1980-1984
Attempts
to
import controls
Macro
and
stabilization
Constitutional
reforms
to
consolidate
political power
1985-1991
1991-1996
1997 - 2001
remove
fiscal
Import liberalization
Export
promotion
schemes and incentives
Tariff Reduction
Political
repression
Political reform
Trade liberalization
Capital controls relaxed
Financial liberalization
Cost sharing in social
sector
Civil service reform (first
phase)
Shift to multiparty system
Attempts to fulfill the
conditions set by donors
on governance/corruption
Civil service reform
Fiscal reforms (MTEF etc)
Parastatal reforms
Constitutional
review
committee is
formed paving
way
for
constitutional
Public
and
donor demand
for
a
democratic
political system
Call
for
constitutional
reform
Governmentdevelopment
partner
relationship
Government
compelled
to
implement
economic reforms
for
continued
assistance
to
macroeconomic
stability
Deterioration
in
donor-government
relationship,
as
political
reform
became a condition
for
disbursing
funds.
Suspension of BOP
support in 1991
Curtailment
of
donor funding
Conditionalities
broadened
to
include governance
issues
Resumption
of
donor funding in
1993
Donors hands-off
Suspension
of
funding in 1997 and
2001
1
Implementation
strategy
Key actors or
pushers of reform
Issues of concern
Broad
approach
Development
partners
Lack of government
commitment to the
reform process
Sectoral approach
adopted
and
programmes
planned
for
different sectors
Civil
society,
multilateral
and
bilateral donors, and
business community
Unfavorable political
system
Government
officers who posed
as reformist were
given
the
responsibility.
Speedy
implementation of
reforms especially
before 1994
President appointed
a team of experts to
push the reforms
and
reduce
corruption
in
government
Multilateral
and
bilateral
donors,
Civil society
Clergy/Churches
KAM
Limited move with
public sector reforms
based
Donors and civil
society
Government
commitment
governance
wanting
to
issues
Experts given the
responsibility found it
difficult to penetrate
the politics
reform
Appendix Table 2: Macroeconomic Indicators
PERIOD
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
GDP
5.23
4.62
4.01
3.06
2.89
4.40
8.13
7.66
4.92
3.99
5.97
3.40
3.04
0.35
5.13
5.54
4.87
5.14
5.09
4.21
2.08
0.48
0.24
3.03
4.82
4.64
2.36
INVEST
25.3
23.2
21.2
30.8
20.5
23.0
27.0
34.3
26.1
35.4
33.3
26.4
25.0
25.5
25.5
21.8
24.3
25.0
24.7
24.3
21.3
16.9
17.6
19.3
21.8
20.4
18.5
NETRES
1,200
1,331
1,546
962
534
1,446
3,610
1,954
3,275
1,830
128
(2,167)
(1,027)
(374)
(1,975)
(411)
(2,159)
(3,651)
(2,370)
(5,450)
(7,945)
(5,975)
30,146
15,903
23,546
47,434
55,669
RES
1,230
1,416
1,603
1,347
1,427
2,301
4,259
2,732
4,780
3,784
2,577
2,957
5,459
6,444
6,807
7,115
4,753
5,558
7,310
6,630
5,339
6,315
34,527
28,227
25,683
47,266
44,499
BOP
(43)
84
269
(220)
72
(317)
(306)
(160)
98
62
(52)
137
(25)
(44)
122
(93)
(44)
(257)
412
62
(142)
39
120
CAB
(220)
(120)
35
(661)
(495)
(878)
(563)
(308)
(50)
(130)
(118)
(47)
(503)
(472)
(590)
(527)
(213)
(180)
71
98
(400)
(74)
(377)
GCON
91.84
77.13
84.42
89.50
76.99
76.97
93.58
79.42
66.74
77.14
63.17
64.58
83.20
73.36
74.22
72.86
65.20
71.91
67.20
66.49
57.19
58.61
51.72
44.70
47.84
54.43
59.36
2
DEF
-2.6
-5.7
-4.4
-3.0
-6.0
-6.1
-3.1
-2.4
-6.1
-2.5
-7.5
-7.7
-2.4
-3.7
-3.7
-4.8
-7.5
-3.7
-3.8
-4.3
-5.0
-1.3
-4.5
-5.8
-1.3
1.2
-2.2
GEXP
19.4
24.2
21.0
21.0
26.9
25.8
21.0
28.2
32.8
31.0
35.3
34.4
26.6
29.1
23.5
25.1
28.5
25.1
26.7
28.2
29.7
26.7
28.0
33.9
31.0
28.5
27.2
GREV
16.7
18.4
16.5
18.0
21.0
19.7
17.9
25.7
26.2
28.0
26.8
26.0
23.7
24.6
19.3
19.5
20.3
20.4
21.4
21.2
22.4
22.1
20.9
25.8
26.9
27.6
24.1
GDC
5.3
11.5
12.4
18.7
27.5
25.4
19.4
25.7
25.4
24.4
33.4
41.1
33.6
33.4
32.2
37.9
40.5
35.0
31.4
39.0
37.1
31.5
28.2
37.3
32.2
29.1
27.3
PSC
87.6
82.2
81.4
76.8
64.7
65.4
70.4
70.8
68.1
72.5
64.3
55.1
59.3
59.2
60.6
55.3
49.2
53.4
58.7
52.1
53.4
59.4
63.7
54.3
59.4
62.3
64.1
LEND
9
9
9
9.5
10
10
10
10
10
10.58
12.42
14.5
15.83
14.42
14
14
14
15
17.25
18.75
19
21.07
29.99
36.24
28.8
33.79
30.25
TBILL
1.42
3.45
1.92
4.63
6.08
5.54
2.13
4.29
6.01
5.26
7.61
12.58
14.15
13.24
13.9
13.23
12.86
13.48
13.86
14.78
16.59
16.53
49.8
23.32
18.29
22.25
22.87
EXR
7.143
7.143
6.9
7.143
8.26
8.31
7.947
7.404
7.328
7.569
10.286
12.725
13.796
15.781
16.284
16.042
16.515
18.599
21.601
24.084
28.074
36.216
68.163
44.839
55.939
55.021
62.678
INF
8.89
17.33
16.06
10.47
13.53
14.77
7.80
13.16
12.23
22.30
12.83
9.75
12.25
5.16
6.25
9.91
11.09
13.31
17.55
25.01
43.46
29.80
0.50
7.87
10.91
1998 1.77
17.3 53,787
47,103
74
(363)
61.60
-0.8
26.6
25.1
28.0
59.1
29.49
22.83 61.906 5.44
1999 1.42
16.1 55,121
57,816
87
(90)
61.56
-0.7
27.6
26.2
23.4
59.7
22.38
13.87 72.931 4.48
Source: IFS and KIPPRA
Key: GDP is gross domestic product growth rate; INVEST is investment rate defined as the ratio of gross investment to GDP; NETRES is net foreign reserves; RES
is foreign reserves; BOP is balance of payment (US$M); CAB is current account balance (US$M); GCON is ratio of government consumption to total government
expenditure; DEF is the ratio of budget deficit to GDP; GEX is the ratio of government expenditure to GDP; GREV is the ratio of government revenue to GDP;
GDC is public sector credit to net domestic credit; PSC is private sector credit to net domestic credit; LEND is nominal lending rate; TBILL is the nominal treasury
bill rate; EXR is the exchange rate (Kshs/US$); INF is the inflation rate.
Appendix Table 3: Donor Funding (in US $ Million)
Year
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
Growth in Growth in
Grant
Net
BOP
TA Gross
Net ODA
ODA including Debt
(%)
Loans Forgiveness Gross ODA ODA Support Grant ODA (%)
35.5
30.6
66.1
57.5
27
42.2
37.8
80
67
21.0
16.5
55.7
85.8
141.5
72.3
76.9
7.9
87.1
54.1
141.2
95.8
-0.2
32.5
77.8
72.9
150.7
119.4
38
27
6.7
24.6
98.2
89.4
187.6
130.6
75.7
24.5
9.4
148.8
109.9
258.7
160
44.3
37.9
22.5
139.9
113.7
253.6
165.2
5
-2.0
3.2
168.8
174.6
343.4
252.5
35.4
52.8
213.1
218.9
432
350.6
25.8
38.9
232.1
248.8
480.9
396.5
162.4
128
11.3
13.1
237.1
298.7
535.8
449.3
37.7
128
11.4
13.3
317.8
260.2
578
485.1
249.7 115.8
7.9
8.0
242.6
277
519.6
400.5
139
122.1
-10.1
-17.4
3
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
373.5
215
287.9
352.5
387.3
538.3
405
461.2
329
329
256
566
359
171
194
120
308
282.1
311.5
349.2
400.1
567.1
553.6
1185.3
640.9
659.6
552.1
503.8
463.4
388
382
350
336
340
655.6
526.5
637.1
752.6
954.4
1091.9
1590.3
1102.1
988.6
881.1
759.8
1029.4
747
553
544
456
648
411.1
438.7
458
572
809
967
1053
873
894
911
677
732
606
458.9
473.9
290
147
125
30
271.5
320.6
281.2
172.6
1.2
192.6
46.6
124.1
115.8
109.6
116.9
156.3
154.5
178.4
174.7
208.3
222.9
281.5
260.3
191
220
192
180
151
140
138
26.2
-19.7
21.0
18.1
26.8
14.4
45.6
-30.7
-10.3
-10.9
-13.8
35.5
-27.4
-26.0
-1.6
-16.2
42.1
2.6
6.7
4.4
24.9
41.4
19.5
8.9
-17.1
2.4
1.9
-25.7
8.1
-17.2
-24.3
3.3
-38.8
Source: Policy Timeline and Time Series Data for Kenya: An Analytical Data Compendium
Appendix Table 4: Analysis of Domestic and External Debt (Millions of Kenya Shillings)
Fiscal
years
1989/90
Total
Domestic
Debt
52,521
Domestic
Interest
6,786.60
Growth in
Domestic
debt(%)
Domestic
debt/GDP
28.6
Total External External
Debt*
Interest
68,380.00
3,217.80
4
Total
repayment
(external
debt)**
Growth in
Total
Net Resource External
disbursement Flow
debt(%)*
16760.6
1990/1
10,462.40
21.09
63,597
1991/2
10,920.20
11.34
70,809
1992/3
23,775.80
58.59
112,295
1993/4
44,448.80
45.01
162,843
1994/5
25,897.00
-26.65
119,446
1995/6
29,320.80
0.76
120,356
1996/7
25,544.20
32.17
159,077
1997/8
32,037.14
7.95
171,730
1998/9
27,903.20
1.50
174,305
1999/00
21,409.40
18.26
206,127
2000/01
20,576.91
3.71
213,772
Sources: Treasury, CBK publications and Analytical Data Compendium
30.5
89,179.00
29.7
123,157
38.1
267,423
44.4
238,809
27.6
266,271
24.2
262,024
27.6
242,174
26.1
257,018
24.4
337,026
27.0
303,972
24.6
4,460.00
4,777.00
4,077.40
10,310.80
9,471.00
10,670.40
8,101.20
7,775.74
8,186.40
7,508.40
3,848.58
12,900.94
12,929.17
9,991.82
33,152.17
30,115.48
32,589.33
28,870.71
31,523.22
32,580.76
35,064.65
14,501.92
23027.9
8913.0
25007.9
45420.8
19515.1
23987.1
18903.7
23450.5
16645.9
16707.2
10,126.9
-4,016.1
15,016.0
12,268.6
-10,600.4
-8,602.2
-9,967.0
-8,072.7
-15,934.9
-18,357.4
-14,501.9
30.4
38.1
117.1
-10.7
11.5
-1.6
-7.6
6.1
31.1
-9.8
Table notes: *The increase in 1992/3 was principally due to the steep depreciation of the Kenya shilling against the dollar. **Total repayment includes interest and
principle. Generally, the domestic debt has a tendency to vary depending on the source.
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