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Cablegate: Kenya: September Economic Highlights

VZCZCXYZ0003
RR RUEHWEB

DE RUEHNR #2007/01 2661429
ZNR UUUUU ZZH
R 231429Z SEP 09
FM AMEMBASSY NAIROBI
TO RUEHC/SECSTATE WASHDC 1071
INFO RUCPDOC/USDOC WASHDC 3229
RUEHRC/USDA FAS WASHDC 1854
RUEATRS/DEPT OF TREASURY WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEHXR/RWANDA COLLECTIVE
RUEHBS/USEU BRUSSELS

UNCLAS NAIROBI 002007

STATE ALSO FOR AF/E AND AF/EPS

STATE PASS USAID/EA

STATE PASS USITC FOR ALAN TREAT AND PHILIP STONE

TREASURY FOR REBECCA KLEIN

COMMERCE FOR BECKY ERKUL AND USPTO OFFICE OF ENFORCEMENT

LABOR FOR QTERNATIONAL LABOR AFFAIRS

SIPDIS

E.O. 12958: N/A
TAGS: EAGR ECON ELAB ECPS EINV EFIN ETRD ENRG PINR KCOR
KE
SUBJECT: KENYA: SEPTEMBER ECONOMIC HIGHLIGHTS

REF: (a) Nairobi 1854, (b) Nairobi 1452, (c) Nairobi 1517

This cable is not/not for internet distribution.

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TABLE OF CONTENTS
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1. KENYA BUREAU OF STANDARDS CHIEF SACKED; POTENTIAL POSITIVE STEP
2. GDP GROWTH BELOW TARGET, GOK MULLS IMF PROGRAM REQUEST, AND
FOOD/ENERGY PRICES SET TO RISE
3. AMBASSADOR PRESSES FOR AGRICULTURAL REFORM IN FACE OF RECURRING
DROUGHT
4. TURKANA WIND PROJECT PROMISES NEW ENERGY CAPACITY


1. KENYA BUREAU OF STANDARDS CHIEF SACKED; POTENTIAL POSITIVE STEP

Head of Civil Service Francis Muthaura fired Dr. Kioko Mang'eli, the
managing director of the Kenyan Bureau of Standard (KEBS) on
September 10. Scandals involving imported maize and oil inspections
as well as constant complaints from the private sector over the
flood of counterfeit products in Kenya reportedly led Muthaura to
dismiss Mang'eli. Contacts tell us the Prime Minister's office also
pushed for the sacking. The Kenyan Association of Manufacturers,
American Chamber of Commerce of Kenya, and the Kenya Private Sector
Alliance reacted very positively to the move but cautioned on the
continuing need for institutional reforms at KEBS.

However, Minister of Industrialization Henry Kosgey, who oversees
KEBS, contradicted the offices of Muthaura and the PM in Parliament
on September 17, stating "Mang'eli is still the MD." According to
Kosgey, only he has the authority to fire Mang'eli. While it
appeared Mang'eli would remain in office pending the outcome of
consultations among his supporters and detractors in government,
September 22 media reports (combined with information from our own
contacts) indicate that Mang'eli has been replaced by his Deputy.
Comment: This is a potentially positive step for Kenya. Mang'eli
was at the center of a range of corrupt practices. His successor
will have to prove him/herself to be committed to the fight against
counterfeiting as well as corruption for this move to be ultimately
considered a success. End comment.

2. GDP GROWTH BELOW TARGET, GOK MULLS IMF PROGRAM REQUEST,
FOOD/ENERGY PRICES SET TO RISE

In a September 21 meeting with a senior GOK Finance Ministry
official, we learned that the global economic crisis plus the
ongoing drought and other domestic limitations have driven growth
below the Government's projection of 3 percent in 2009 (ref b).
While official statistics are not out yet for the second quarter,
our contact warned that growth was "bad." The official also warned
that not much should be made of the first quarter growth number of
3.9 percent which only represented a return to normal levels of
economic activity following the negative growth brought about by
2008's post-election violence during the same period.

Meanwhile, difficult economic times are reflected in Kenya's ability
to borrow and collect revenues. The Finance official said that the
GOK is now having increasing difficulty raising money through
short-term, 90-day Treasury bills which are undersubscribed. News
reports have also noted investor/tax payer concerns about whether a
KSH 18 billion "infrastructure" bond earlier in 2009 was used for
infrastructure at all. According to our contact, there is a KSH 6
billion revenue shortfall for the first two months of the fiscal
year owing to the overall economic slowdown and gaps in the Kenya
Revenue Authority's collections. In hopes of assisting with these
looming difficulties, the official told us the GOK is still likely
to pursue a Poverty Reduction and Growth Facility from the IMF
(previous information indicates that it would be for $500 million -
ref c). A formal request to the IMF could come as early as
mid-October.

Inflation reached 18% (8/08-9/09) and the Central Bank of Kenya has
warned that consumers will continue to face high food and energy
prices throughout the remainder of the year. Pervasive drought has
caused poor agricultural and livestock production, higher water
prices, and continuing reliancQon imported maize - all contributing
to pressure on food prices. Drought also has led to higher energy
prices as Kenya increasingly relies on imported fuel for power
generation to compensate for lost hydropower. A year ago, imported
fuel contributed roughly 20% of the electricity to the national
grid; last month it contributed 30%. With any luck, the Oct-Nov
rainy season, boosted by El Nino, will bring ample rain to improve
agriculture and hydro production, easing both food and energy prices
in 2010 for already cash-strapped Kenyans.

3. AMBASSADOR PRESSES FOR AGRICULTURAL REFORM IN FACE OF RECURRING
DROUGHT

At a September 15 donor's meeting hosted by Prime Minister Odinga
and World Bank Country Director Johannes Zutt, the Ambassador
focused on the USG's $165 million (thus far in 2009) response to
Kenya's food crisis. The Ambassador also emphasized our long-term
recommendations, including Kenya's removal of duties on all grains
through next June and restructuring of the National Cerealsand
Produce Board (NCPB). The Ambassador also described the new USG-led
global food security initiative. Prime Minister Odinga said the
current drought in Kenya is the most severe in years. He reported a
40 percent decline in maize production and that 70 percent of lakes,
ponds, and pans were dried out completely. The PM spoke to the
resources that Kenya has brought to bear and sought additional donor
assistance. Multiple donors, led by the U.S., provided details on
current assistance levels as well as additional assistance in the
pipeline. All donors also focused heavily on the need for long-term
reform and planning to avoid a recurrence of drought and its effects
here given that drought is a regular, chronic threat to the
country.

4. TURKANA WIND PROJECT PROMISES NEW ENERGY CAPACITY

The Lake Turkana Wind Project (LTWP) is a 310 MW renewable energy
wind power project planned for Northern Kenya. If this project
succeeds, Kenya's power capacity could increase by 25%. The project
has not broken ground yet. However, per the current schedule, wind
power generation could begin in June 2011 with completion of the
project by July 2012. This $590 million project is primarily
financed by the African Development Bank. Dutch companies will
develop the project using Danish turbines. The Lake Turkana
Transmission Line Project (TRANSCO) involves the construction oQa
266 mile transmission line from Lake Turkana to a sub-station north
of Nairobi. This portion of the project will cost $180 million and
be commercially financed. Work on the transmission line has not
broken ground yet either. The GOK is requesting USAID support on
technical capacity building for the Kenyan Transmission Company
(KETRACO) during negotiations with TRANSCO. USAID is preparing a
Statement of Work and expects capacity building activities to begin
in November 2009.


RANNEBERGER

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