Cablegate: Kenya: Economic Growth Strong, Poverty and Inflation


DE RUEHNR #2292/01 1511204
P 311204Z MAY 07






E.O. 12958: N/A

REFS: A) Nairobi 1981, B) Nairobi 468


1. (SBU) Summary: Kenya's 2006 Economic Survey reports that growth
hit a 30-year high of 6.1% in 2006, and the GOK predicts 2007 growth
will be between 5.8 and 6.5%. The new National Household Survey
showed the national poverty rate fell from 52.3% in 1997 to 49.1% in
2006. After peaking in December 2006 at 14.5%, overall inflation in
Kenya declined in the first quarter to 11.7% in March 2007. The
Central Bank of Kenya (CBK) expects overall annual inflation to drop
in 2007, if good rains continue, but fears the impact of any further
rises in international oil prices. Underlying inflation, which
excludes food, energy and transportation, hovered slightly above the
CBK's 5% target for money supply management. Remittances from expat
Kenyans, appetite for domestic borrowing and GOK election-year
reluctance to raise interest rates may interfere with CBK's efforts
to keep money supply growth within limits. The IMF found that
overall fiscal and macro-economic performance is good. End

So Much Good Economic News Before an Election
2. (U) The Government of Kenya (GOK) released on May 28 the annual
pre-budget Economic Survey 2007 prepared by the National Bureau of
Statistics (NBS). The Survey indicates that Kenya's economy grew by
6.1% in 2006, the highest rate in 30 years. The hotels and
restaurants sector grew fastest at 14%, largely due to 14.9% growth
in tourism. The wholesale and retail sector grew 10.9%, while
transport and communication rose 10.8%. The Business Daily
newspaper reported that consumer spending of Sh1.2 trillion (about
US$16 billion) now dwarfs the GOK's Sh267 billion (about US$3.9
billion)purchases of goods and services, and that private
consumption has become the biggest contributor to the economy over
the last five years. The Kenyan shilling has been appreciating
against the USD for over 20 months, and is currently at about
sh67/USD. Planning Minister Henry Obwocha predicted growth between
5.8 and 6.5% in 2007, depending on whether oil prices stay below
$75/bl and the shilling remains stable against the dollar. The IMF
ResRep issued a statement also projecting over 6% real GDP growth
rate for 2007.

Foreign Investors Optimistic

3. (U) A member survey by the East Africa Association, an
organization of 82 of the largest foreign firms employing over
100,000, with investments of about USD1.5 billion, also revealed
significant optimism in the private sector. Three quarters expect
higher sales volumes and profits in 2007, 37% plan to significantly
increase their investment, and 50% plan to hire more staff. Sixty
percent of the members expect the business situation to improve in
2007, but they noted that crime, poor roads, tax administration
problems with Kenya Revenue Authority (KRA), and long delays at the
Mombasa port and in the court system remain the greatest threats to
foreign investment. Electricity is so expensive and unreliable that
45% of members have invested in their own generating facilities.
AIG Global East Africa also predicted no significant shift in
macro-economic policies, single digit inflation, and 6% growth in
2007, based on agriculture sector expansion and planned
infrastructure improvements. However, growth in agriculture may be
limited as a number of regions are reporting irregular rainfall.

So Are Kenyan Consumers
4. (U) According to a Steadman Group survey in March, 40% of Kenyans
said their living standards had improved compared to last year,
while 60% predicted their economic status would improve in the next.
Forty six per cent of consumers believe investment conditions are
better than they were a year ago, and 67% think spending on basic
products will increase in the year ahead. Forty six per cent of
those interviewed are upbeat about future employment opportunities,
but more than two thirds of Kenyans believe the Government has not
created enough jobs.

NBS launches two other key reports

5. (U) The NBS (formerly known as the Central Bureau of Statistics)
released the donor-funded Kenya Integrated Household Survey (KIHS),
which collected data from May 2005 to May 2006 from over 13,000
households across every district in Kenya. The first Household
Survey done since 1999-2000, it and the awaited appendices are a
huge trove of statistics that will take months to mine. However,

the Survey's launch in early May featured the "Basic Report on
Well-being in Kenya," which documented the reduction of poverty and
improvements in economic and social indicators. NBS measured
welfare and poverty by consumption of food and non-food items.

6. (U) The Well-being Report found the percentage of Kenyans living
below the poverty line fell from 52.3% in 1997 to 49.1% in 2006,
with urban poverty falling from 49.2% to 33.7%. NBS estimated that
16.6 million of Kenya's population of 35.5 million are poor, with
70% of them in rural areas. NBS estimated that economic growth over
the last five years had allowed 2.3 million people to escape
poverty. NBS attributed 2002-2006 growth to stable commodity
prices, growth in tourism, agriculture and manufacturing, and the
impact of development initiatives like the Constituency Development
Fund (CDF) on rural areas. However, with 2.5% population growth,
NBS estimated that, to further reduce poverty, Kenya will need to
sustain growth above 6%, and improve rural roads, electricity, clean
water, and food distribution networks. Although the United Nations
Development Program's (UNDP) Human Poverty Index (HPI) for Kenya
rose slightly from 36.7% in 2004 to 37% in 2006, the HPI measures
poverty differently, looking at indicators including access to
health, water, and doctors.

How the GOK Measures Inflation
7. (U) On a monthly basis, the NBS releases Consumer Price Index
(CPI) and inflation rates for Nairobi and 12 other urban centers,
and for lower and upper income groups in Nairobi. The "overall"
(headline) inflation rate is based on prices for 10 categories of
goods and services. The NBS measures "underlying" (core) inflation
by removing the volatile categories of food and energy, but the
Central Bank of Kenya (CBK) also removes transportation, since it
relies so heavily on energy prices. The CBK uses its underlying
rate in its monetary policy planning and implementation.
Year-on-year (YOY) inflation compares the current month's CPI with
the CPI in same month in the previous year. Average Annual inflation
compares the average CPI for the last 12 months with the average CPI
of the preceding 12 months. This measure serves as the
seasonally-adjusted inflation rate, and is less volatile.

Overall Inflation Declines in First Quarter
8. (U) Starting in January, the overall inflation rate finally
decelerated, partly because of the comparison with drought-driven
2006 inflation. YOY overall inflation fell each month, from 15.6%
in December 2006 to 5.9% in March 2007. Average annual inflation
declined from 14.5% in December to 11.7% in March. The main change
is that food price inflation declined in the first quarter, both YOY
and month-on-month (MOM), thanks to good rains and increased
supplies. High international oil prices kept fuel and power YOY
inflation in the double digits, but it declined from the December
peak, as did the MOM increases.

9. (U) Low income consumers in Nairobi finally got slight relief in
the first quarter, thanks to lower inflation of food, which
represents 56% of their expenditure. Overall YOY inflation for the
Nairobi low income group fell from 19.2% in December 2006 to 3.9% in
March 2007. Inflation in other urban centers, however, declined
more slowly.

10. (U) In trying to manage the money supply to control inflation,
the CBK continues to face remittances estimated at USD 1
billion/year from expatriate Kenyans, many through informal
channels. The money supply (M3) grew about 18% YOY in the first
quarter, well above the CBK's 10% target, partly because the
interest rates offered on T-bills and bonds were too low to mop up
sufficient liquidity. GOK domestic borrowing to finance the
FY2006/07 budget deficit is running a little above the budgeted
amount, contributing to the slow increase of interest rates during
the quarter. The average 91-day Treasury bill rate rose from 6.0%
in January to 6.3% in March, while the interbank rate increased from
6.4% in January to 6.7% in March.

Underlying Inflation Falling Slowly
11. (U) The CBK's underlying inflation rate excludes food, energy,
and transportation because of their volatility, and the CBK's goal
is to keep the YOY rate below 5%. However, the YOY underlying rate
rose to 5.15% in January 2007, fell slightly in February, but again
rose to 5.13% in March, the highest level in 18 months. Average
annual underlying inflation (seasonally adjusted) rose steadily,
from 3.88% in December to 4.18% in March. The CBK is concerned and
stated that inflation will hinge on international oil prices, the
movements in shilling exchange rate to the US dollar, and success of

monetary policy implementation.

Economy and Fiscal Performance Look Good
12. (SBU) The IMF told donor country reps in early May that the
GOK's overall fiscal performance is good, with both revenues and
expenditures slightly below targets. GOK wage expenditures are on
track. The GOK can easily absorb the recently-announced increase in
teachers' salaries and payment of secondary school tuitions for all
students without an increase in public borrowing through tax
revenues, donor funding and/or budget offsets. Inflation appears
under control, but time will tell how well the GOK is managing the
money supply.

13. (U) Economic growth, increased savings, and improved
communications also have their darker side, like fraud and
defenestration. The CBK has warned Kenyans against risking their
savings with unsupervised and potentially illegal pyramid and ponzi
schemes promising large, quick profits, but many people ignore the
warnings. Hundreds of angry investors demanding their returns
stormed Development Entrepreneurial Community Initiative's office in
Nairobi in May and threw a company officer out an eighth floor
window to his death.

Budget and Vision 2030 Announcements in June
14. (U) The GOK will make two major announcements in June. Finance
Minister Kimunya will deliver the 2007-08 budget to Parliament on
June 14. He will explain how the GOK will fund worthy promises like
paying the tuition fees for all secondary school students, hiring
more teachers, and raising their salaries, while keeping the budget
deficit under control. President Kibaki said he would announce in
June plans to implement his Vision 2030 initiative (Ref A) to boost
annual growth to 10% by 2012 and make Kenya a middle-income economy
by investing Sh500 billion (US$5.4 billion) over the next five years
in 20 flagship projects. The GOK is also in the early stages of
planning to issue bonds through the London or New York Stock
Exchanges to raise funds for infrastructure investments.

15. (U) Overall, the GOK's macro-economic management remains good,
but inflation and rising government domestic debt remain areas for
concern and monitoring. April figures show further declines in
inflation, and T-bill rates declined slightly in mid-May, so the
good news may continue right up to the December general election.


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