Kenya's economic and financial performance indicators

The International Monetary foundation (IMF) in 2000 assessed Kenya's economic and financial performance to have "deteriorated significantly in the 1990s because of stop-go macroeconomic policies, slow structural reform, and pervasive governance problems that resulted in bouts of financial instability, a rapid buildup of short-term debt, and high real interest rates."  

Since early 1998, the government has been addressing some of the causes of financial instability and low growth. The fiscal deficit (on a commitment basis before grants) has been gradually reduced and is estimated to have been 0.6 percent of GDP in 1999/2000. Monetary policy has been generally conservative. The government has been preparing the ground for key structural reforms in privatization and public service, and since mid-1999 important steps have been taken to address governance problems. These measures have helped increase the confidence of the international community, however investor confidence has been slow to turn around, and real GDP growth declined to 1.4 percent in 1999 from 1.8 in 1998.

Background
Kenya's economic performance weakened over the last decade because of the failure to sustain prudent macroeconomic policies, the slow pace of structural reform, and the persistence of governance problems. The often lax fiscal policy led to a rapid build up of short-term government debt which, in combination with declines in the saving rate, translated into lending rates in excess of twenty percent in real terms. This, together with other high costs of doing business in Kenya - because of corruption, a deteriorating infrastructure, and an inefficient parastatal sector (e.g., utilities, and transportation services) - depressed investment and its effectiveness, and as a consequence economic growth. Since early 1998 Kenya's economic performance was mixed. It has achieved fiscal adjustment against the difficult backdrop of a worsening terms of trade, a dearth of external financing, and adverse weather conditions. At the same time, the rescue of a major bank in late 1998 strained fiscal policy and temporarily weakened monetary policy. In this context, investor confidence has remained weak, and growth has continued to decline.

Following a relaxation in 1996/97 and in the first half of 1997/98, fiscal policy was tightened in the second half of 1997/98 and further in 1998/99. As a result, the overall deficit was reduced from 3.9 percent of GDP in 1996/97 to 2.5 percent in 1997/98 and to 0.7 percent of GDP in 1998/99, compared with a targeted overall balance of zero. The higher deficit in 1998/99 relative to the target reflected unanticipated outlays of 0.9 percent of GDP related to the rescue of the state-owned National Bank of Kenya (NBK). A task force instituted by the government concluded in April 1999 that the stock of domestic arrears was much larger than originally thought and that its accumulation reflected weaknesses in expenditure control and circumvention of relevant financial regulations. 

Monetary policy was cautious throughout most of 1998, but it was relaxed in late 1998 in the context of the rescue of the NBK because the liquidity injection was not fully sterilized. Following a sharp decline in interest rates, a 20 percent depreciation of the shilling, and a considerable loss of official reserves, monetary policy was tightened in mid-1999 partly reversing those developments. The external current account deficit (excluding official grants) widened to about 5 percent of GDP in 1998, reflecting a poor export performance and a worsening in the terms of trade, but an increase in the capital account surplus led to a shift in the overall balance of payments from a deficit of US$13 million in 1997 to a surplus of US$74 million in 1998. Gross official reserves remained virtually unchanged, amounting to US$783 million (2.4 months of imports cover) at end-1998. External arrears, which were reduced by US$95 million to US$23 million at end-1998, were estimated to have increased to US$133 million by early November 1999.

Inflation remained subdued in 1998 and in the first half of 1999. But it increased in the third quarter of 1999 mainly owing to increases in fuel and food prices as well as the lagged effects of the depreciation of the shilling. Real GDP growth slowed from 2.3 percent in 1997 to 1.8 percent in 1998, and it was expected to slow further in 1999, and unemployment continued to increase.

Some Economic Indicators, 1995-2004
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Source: IMF

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