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Cablegate: Kenya: Macroeconomic Update

VZCZCXRO6640
RR RUEHGI RUEHRN
DE RUEHNR #0088/01 0131056
ZNR UUUUU ZZH
R 131055Z JAN 10
FM AMEMBASSY NAIROBI
TO RUEHC/SECSTATE WASHDC 0450
INFO RWANDA COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RUEHNO/USEUCOM FMFO BRUSSELS BE

UNCLAS SECTION 01 OF 03 NAIROBI 000088

SENSITIVE
SIPDIS
STATE ALSO FOR AF/E AND AF/EPS
STATE PASS USAID/EA
STATE PASS USITC FOR ALAN TREAT, RALPH WATKINS, AND ERLAND HERFINDAHL
TREASURY FOR REBECCA KLEIN
COMMERCE FOR BECKY ERKUL

E.O. 12958: N/A
TAGS: ECON ELAB ECPS EINV EFIN ETRD EAID BEXP PINR ASEC
PTER, KCOR, KE
SUBJECT: Kenya: Macroeconomic Update

REF: A) 10 NAIROBI 12; B) 09 NAIROBI 1885

1. (SBU) SUMMARY In a January 8 meeting with Econoffs, Dr. Geoffrey
Mwau, Ministry of Finance Economic Secretary, spoke strongly in
favor of Kenya applying for a new International Monetary Fund (IMF)
program in the range of $1 billion over three years. While
Minister of Finance Kenyatta is not yet convinced that the GOK
should make the request, Mwau believes they will do so by the time
of the Bank/Fund spring meetings. Mwau stated that the forensic
audit on the maize scandal is complete and should be released soon.
Mwau expected that the waiver on duties for maize would be extended
for another three to six months. He expressed pride in the MoF
auditors who uncovered corruption in the Ministry of Education
(MoE) Free Primary Education Program (FPE) and expected that donors
would resume funding relatively quickly. Mwau related serious
concerns from the MoF perspective regarding the new constitution,
especially the lack of codified fiscal management and oversight.
He speculated that without a strong fourth quarter, Kenya would
likely see 2 percent GDP growth for 2009. ECON/C expressed concern
about rumors that Charterhouse Bank (ref B) might be permitted to
reopen. Mwau did not believe it was imminent but other more
credible sources have indicated that it is. We are actively
seeking to persuade the GOK not to go forward. End Summary

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IMF Program

-----------------

2. (SBU) Mwau strongly favors a new IMF program for Kenya. He
believes that a nearly $1 billion program over three years would be
beneficial to Kenya. (Note: We heard from the IMF resrep here that
the request would be $600 million over three years. End Note)
Kenya's need for infrastructure improvements, including water,
road, rail, and energy, require substantial financing. Mwau cited
energy sector needs alone of $3 billion over the next three years
to finance geothermal development and high voltage lines to
interconnect energy grids with Ethiopia. He believes that Kenya
must access as much concessional financing as possible. Currently,
Kenya's debt load sits at 43% of GDP and the MoF would like to
reduce that to 40%. Without concessional financing offered by the
IMF, which he believes would trigger further concessional financing
from the EU and potentially other bodies, Kenya's debt load will
increase as efforts to sustain development continue.

3. (SBU) The potential IMF program has been held up at the
ministerial level as a political issue. The Minister of Finance,
Uhuru Kenyatta, does not favor the new IMF program over concerns
whether Kenya could sustain the macro-economic conditionality of a
program. Kenyatta may also be concerned about the USG possibly
blocking the new IMF program. Both Mwau and the Permanent
Secretary of Finance, Joseph Kinyua, believe that Kenya can
maintain the macro-economic requirements. Kinyua is expected to
again request support from Kenyatta for the new program. The
possibility remains that requesting an IMF program could be
approved by the Kenyan cabinet in time for the Bank/Fund spring
meetings if the politicians can be convinced. The cabinet-level
politicians, many of whom will be running for higher office, may
also be concerned about the timing of a new IMF program prior to
the elections scheduled for 2012.

4. (SBU) According to the IMF resrep, having heard several
Executive Directors, including the USED , speak to corruption as a
"macro-critical issue" at the December 22 Board meeting on Kenya's
Article IV consultation the IMF would want to continue working
governance issues through its public finance management assistance
program. At the same time, under a potential IMF program with
Kenya, he proposed to include a component that tracked Kenyan

NAIROBI 00000088 002 OF 003


spending on institutions/programs related to the reform agenda.

--------

Maize

--------

5. (SBU) The forensic audit looking into the maize scandal, which
Prime Minister Raila Odinga promised months ago to release to the
public, remains unavailable. According to Mwau, the report is done
and he has heard of briefings on the final draft but has not seen
the report itself. He expects the report to be released soon.
At a recent World Bank coordination meeting, donors agreed to send
a joint letter to the Prime Minister requesting the immediate
release of the audit.

6. (SBU) Mwau expects that the maize duty waiver will be extended
for at least three months and potentially for six months through
June. According to Mwau, the maize duty waiver must be justified
and processed through the East African Community (EAC) although our
understanding is that the GOK has not sought EAC agreement to
previous waivers. Mwau would like the waiver to extend through
June and believes that the extension should have been signaled in
November. His understanding is that the current request is only
for three additional months. Kenyan media has reported a great
deal of conflicting information on the maize duty waiver situation
with the Minister of Agriculture, William Ruto, claiming that the
extension is already done and the Kenya Revenue Authority stating
that the extension isn't needed and should end. With the current
waiver expiring in January, importers have halted fresh orders of
maize which is raising concerns over price hikes and further food
insecurity.

-----------------------------------------

Free Primary Education Scandal

-----------------------------------------

7. (SBU) Mwau expressed a great deal of pride about the MoF
auditor's role in bringing to light the Free Primary Education
Program scandal (ref A). He stated that the audit was purely a MoF
initiative and demonstrated the strong internal audit capabilities
of the MoF. (Note: According to the World Bank, the MoF commenced
the audit at the Bank's request. End note.) Apparently, the MoF
has built fraud "traps" into all of the World Bank funded projects
and Mwau is confident in the MoF ability to stop corruption. He
believes that the key to fighting corruption now involves focusing
the judiciary in actually prosecuting and convicting those guilty
of fraud. In opposition to what we have previously learned
regarding the scandal, Mwau claimed that the audit had covered the
full financial year and only uncovered the one month of fraud. The
UK Department for International Development (DfID) previously
informed us that the audit had only covered one month and further
audits would be requested to cover the full year and the previous
year; a view shared by the World Bank. Mwau also expected that
donor funding would resume quickly and stated that donor funding
had not actually been cut off, which also contradicts what we been
told directly from DfID and the WB.

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MoF Constitution Concerns

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NAIROBI 00000088 003 OF 003


8. (SBU) Mwau expressed serious concerns regarding the draft
constitution. His primary concern involves the lack of financial
controls and oversight in the draft. The MoF does not retain its
control over borrowing or accounting in the new constitution. He
believes that only a strong MoF will be able to keep Parliament in
check especially regarding sound macroeconomic stability, which
heretofore has been one of Kenya's strengths.

----------------

GDP Growth

----------------

9. (SBU) GDP growth in Kenya stagnated in the third quarter of 2009
at zero percent growth due to drought, electricity shortages and
reduced construction. Unless fourth quarter growth is impressive,
Mwau believes 2009 GDP growth will be lucky to come in over two
percent. If fourth quarter growth is strong, GDP growth could hit
2.5 percent; the IMF and WB share Mwau's forecast of 2-2.5% growth.
For 2010, Mwau thought that growth would come in between three and
four percent. He seems to be more optimistic and believes four
percent is more likely and five percent remains in the realm of
possibility, especially if the short rains continue through
January. The rains help with agriculture, a key component of
growth, as well as electricity generation. Mwau believes that
manufacturing should pick up in 2010 and mining could also see a
big year as industrial scale development of gold mining in Western
Kenya begins. The World Bank recently told donors it expects 3.5%
growth in 2010, assuming a steady global recovery and no new shocks
to Kenya's economy. The IMF generally shares the Bank's forecast.
Central Bank of Kenya (CBK) Governor Ndung'u told us 2010 has
started well for Kenya's economy with good rains and anticipated
benefits from further East African Community (EAC) integration. He
is concerned about recent U.S. job numbers which sent a "shiver"
through markets and lagging horticulture (cut flowers in
particular) exports. The CBK chief is also worried about the
effect of continued high energy prices on the country's ability to
bounce back in 2010.

-------------------------

Charterhouse Bank

-------------------------

10. (SBU) EconCouns expressed Embassy concerns about the possible
re-establishment of Charterhouse Bank (ref B), a criminal entity
posing as a bank which was closed several years ago. Mwau did not
have any direct knowledge of the possible re-opening. He didn't
think that the re-establishment was close to becoming reality. He
noted that PS Kinyua was concerned and had taken a strong position
against it. He also related that with the passage and signing of
the Anti-Money Laundering bill, Kenya had more tools to deal with
the kinds of activities previously seen at Charterhouse Bank. All
that said, other, more credible sources, including in the PM's
office, continue to indicate that a reopening of this "bank" is
imminent. On January 13, the CBK Governor told us that while
permission to reopen the bank was not imminent, he strongly implied
that it was just a matter of time. We are actively working to
persuade the GOK at the highest level that this would be a mistake.


RANNEBERGER
RANNEBERGER

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