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Cablegate: Kenya Changes Its Budget Priorities and Tightens Its Belt

VZCZCXRO7118
PP RUEHGI RUEHRN
DE RUEHNR #0656/01 0661240
ZNR UUUUU ZZH
P 061240Z MAR 08
FM AMEMBASSY NAIROBI
TO RUEHC/SECSTATE WASHDC PRIORITY 4965
INFO RUEHXR/RWANDA COLLECTIVE PRIORITY
RUEHDU/AMCONSUL DURBAN 0155

UNCLAS SECTION 01 OF 02 NAIROBI 000656

SIPDIS

SENSITIVE

DEPT FOR AF/E, AF/EPS, AND OES/ENV
USAID FOR AFR/EA
STATE PASS TO TREASURY FOR VIRGINIA BRANDON
STATE PASS TO USTR FOR BILL JACKSON
STATE PASS TO COMMERCE FOR BECKY ERKUL

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV PGOV SOCI KE
SUBJECT: KENYA CHANGES ITS BUDGET PRIORITIES AND TIGHTENS ITS BELT

REF: (A) 07 NAIROBI 2641 (B) 07 NAIROBI 1981

NAIROBI 00000656 001.2 OF 002


1. (SBU) Summary: The Government of Kenya (GOK) is appropriately
making plans to shift its budget focus to reconstruction and recovery
in the wake of the post-electoral political crisis and resulting
civil unrest. Enormous resources will be required, with over $14.3
million already set aside initially for this purpose. Even with the
February 28 power sharing agreement inked, it will take more than six
months to really begin reconstruction work on the ground. Also,
redirecting the $2.9 billion in long-term development funding in the
current year's budget from infrastructure to recovery means that the
cost of doing business in Kenya will remain high, perpetuating a
persistent deterrent to foreign investment, and thus further
complicating long-term recovery. End summary.

-----------------------------------
Vision 2030 is No Longer a Priority
-----------------------------------

2. (SBU) In his budget speech of June 2007, Finance Minister Amos
Kimunya said the FY-2007-08 budget (July 1-June 30, see ref A) was to
focu on infrastructure, health, and education, i.e. long-term
investments which were expected to lay the foundation for achieving
the Vision 2030 goal of middle income prosperity by 2030 (see ref B).
However, the damage done in the wake of Kenya's post-electoral
political crisis has changed the GOK's priorities. The GOK annually
submits a budget supplemental in March, and the first priority in the
FY-2008 supplemental and FY 2008-09 development budget will be
reconstruction and recovery, which will take the lion's share of the
budget. Investments originally intended to lay the foundation for
Vision 2030 will be a second priority, according to GOK's Planning
Secretary Stephen Wainana in a February 21 meeting with Econ

SIPDIS
Specialist.

Treasury Warns Ministries to Cut Spending
-----------------------------------------
3. (U) In a February 20 circular, Ministry of Finance Permanent
Secretary Joseph Kinyua ordered agencies to review their medium term

SIPDIS
expenditure framework (MTEF) reports to "rationalize priorities and
allocate the resource envelope accordingly." In another February 20
circular to all Government accounting officers entitled
"Implementation of Austerity Expenditure Measures in 2007/2008
Budget," Treasury said the 2007-08 budget had assumed that stability,
structural reforms, and higher exports and domestic demand would
generate 6.4% growth and sufficient tax revenue. However, revenue
collection is now likely to decline, while total expenditure is
expected to rise, creating a larger financing gap than the deficit
originally planned under the budget. The circular stated Treasury
has already received requests for Sh52 billion ($800 million) in
additional spending, and will limit the additional spending to free
secondary education, the strategic grain reserve and famine relief,
support to displaced people, establishment of an endowment fund for
victims of violence, and enhanced security. To help pay for these
new needs, the circular ordered all departments to cut their
recurrent expenditures as follows:

Training - 25%
Foreign travel: 25%
Domestic travel: 20%
Purchase of office furniture and equipment: 40%
Expenses for boards, committee conferences, seminars, retreats and
workshops - 24%

4. (U) In addition, the circular ordered agencies to freeze all
recruitment and purchase of vehicles, even those already approved,
except for security-related operations. Development projects which
are not likely to start this fiscal year should be deferred to the
next financial year.

--------------------------------
Cost of Reconstruction Not Known
--------------------------------

5. (U) Permanent Secretary of Housing Tirop Kosgey told a press
briefing on February 21 that the full cost to the government of
helping the internally displaced victims of post-election violence to
resettle and rebuild is not yet known. Kosgey said that a team has
been carrying out an inventory of the damaged property and will issue
its report in a week's time. He claimed reconstruction would start
by the end of March, subject to approval by all government agencies.
Except where there is urgent need for government services, the PS
said the reconstruction efforts would give priority to private homes
over state-owned accommodations. The exercise will not entail a
value-for-value reconstruction, but will stick to one standard for

NAIROBI 00000656 002.2 OF 002


every house. According to Kosgey, the GOK will embrace cost-effective
methods in the reconstruction, for which it has already set aside
Ksh1 billion (about $14.3 million).

-------
Comment
-------
6. (SBU) In the past, GOK ministries have often turned back as much
as 70% of their development budgets each year because of
implementation delays related to capacity and other constraints. In
the current context, this is good news, because it means the GOK will
be able to shift funds fairly quickly to recovery and reconstruction,
where they are more urgently needed. Where the reconstruction will
be carried out depends on whether or how soon displaced people are
willing to return to their destroyed homes. Implementation is also
critical. In the past, Kenyans, in government, companies, and as
individuals, have taken advantage of disasters such as famines and
floods to siphon off GOK and donor funds. Redirecting the current
year's $2.9 billion development budget away from improving
infrastructure also means Kenya's high business costs will persist, a
deterrent to investors that will hinder long-term recovery. End
comment.

RANNEBERGER

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