Report No. 1284a-KE FNLE CoPyCurrent Economic Positionand Prospects of KenyaOctober 15, 1976

Eastern Africa Regional Office

FOR OFFICIAL USE ONLY

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may nototherwise be disclosed without World Bank authorization.

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CURRENCY UNIT

The official unit of currency in Kenya is the Kenya Shilling (KSh).However, in accordance with the practice of the Kenya Government, most largevalues in the report are expressed in Kenya Pounds (Kb). KL 1 = KSh 20;KSh 1 = 100 cents.

CURRENCY EQUIVALENTS

In October 1975, the KShilling was devalued and pegged to the SDRat a rate of SDR 1 = KSh 9.66, and the rate vis-a-vis the US Dollar has fluc-tuated since that time. As a proxy for the real exchange rate we have used$1 = KSh 8.30 for the year average in 1976.

Exchange rates used in the report

1972 and earlier years - US$1 = KSh 7.143KL 1 = US$2.80

1973 (year average) - US$1 = KSh 7.00Kb 1 = US$2.85

1974 (year average) - US$1 = KSh 7.143KE I = US$2.80

1975 (year average) - US$1 - KSh 7.40Kb I = US$2.70

1976 (year average) - US$1 = KSh 8.33Kb 1 = US$2.40

FISCAL YEAR

July 1st - June 30th

FOR OFFICIAL USE ONLY

CURRENT ECONOMIC POSITION

AND PROSPECTS OF

KENYA

TABLE OF CONTENTS

COUNTRY DATA Pages No. Para's No.

MAP

SUMMARY AND CONCLUSIONS ................... 1 - 6 i - xxiii

I. THE RESTRUCTURING PROGRAM ..... .............. 1 - 8 1.1 - 1.19

II. DEVELOPMENTS IN 1974 AND 1975 .... ............ 9 - 20 2.1 - 2.26

III. OUTLOOK FOR THE REMAINDER OF THE PLAN PERIOD. 21 - 32 3.1 - 3.27

IV. KEY POLICIES FOR A RETURN TO RAPID GROWTHIN THE 1980's: .33 - 34 4. 1 - 4.30

Agriculture .33 - 38 (4. 1 - 4.15)

Manufacturing .38 - 40 (4.16 - 4.23)

Budget Issues .40 - 44 (4.24 - 4.30)

ANNEX I. Balance of Payments ......................... 1 - 7 1 - 9

II. Real Wages and Income Distribution .... ...... 1 - 2 1 - 4

III. Selected Agricultural Issues .... ............ 1 - 25 1 - 54

STATISTICAL APAPENDIX

This report is based on the findings of a mission that visited Kenyain March/April 1976. The mission was composed of Ms. Hayley Goris (mission chief),Marto Ballesteros (agricultural economist), Marvin Miracle (agricultural Economist,consultant), Franz Schoeroesch (general economist) and Ms. Sally Chan (fiscalmatters). The report's findings were subsequently discussed with the Governmentin September 1976 by a mission consisting of Ms. Goris and El Tigani Ibrahim.

| This document has a rmtrictod distribution and may be used by recipients only in the performanceof thoir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

KENYA SOCIAL INDICATORS DATA SHEET

LAND AREA (THOU KM2I ........................--------------- ~~~~~~KENYA REFERENCE CCUNTRIES (1970)

TOrAL 582.6 MOST RECENTAGRIC. . 19 60 1 97r0 ESTIMATE TANZANIA KOREA, MEP. OF MAURITIUS ,-

GNP PER CAPITA (USS) 80.0 140.0 220.0 120.0 2 70. 0 350.0

POPULATION AND VITAL STATISTICS

POPULATION (MID-YR. MILLION) .3 1 1.-2 13.3 12 .9 /a 3 1. C.9

POPULATION DENSTrYP~R SOJUARE K(M. 1 4. 0 1 9. 0 23.0 14 .0 119.0 408.0

PER SQUARE Km. ALMC. LAND LI8.0 23.0 1320.0 729.0

VITAL STATISTICSCRUDE BIR9TH RATE PER THCUSAND L48.5 L9.0 18.7 50.5 35.U 35.9CRUDE JEATH RATE PER THOUSAND 19.8 17.-0 16.0 23.0 11 .L 8 .9INFANT MO~RTALITY RATE 0/THOU) *. s.c/a .160 .0~ . 58.5

LIFE EXPECTANCY AT BIRTH. (Y95) 1j2.5 L7.5 5 C.-0 4~1.8 57.7 63.2

GROSS REPRODUCTION RATE 3 . 34 3 .4 3 .2 2. 6 2.4

POPJLATION GROWTH TATE (XIT9 TAL 3 .0 9. 1 3.5 3 .0 L 2.3 2.4UROAN 5.8 6.5 6.1 5.6 6.L L.9

URBAN PfIPULA I ION (9I OF TO TAL) 7.3 9.9 11.3 6.0 Lgl.2 4 4. 0

A GE STRUC TURE (PERCENT)o TO14 YEARS 4 6.0 .b 4 8.4 .4 4 .4k 4 2.1 4 1.9

15 TO 64 YEARS 49.:2-b 48.0 . 53.0/b 4.6 5 4 .56i TEARS AND OVER 4 .8.Ž 3.6 .. 2 .A7b 3.3 3 .6

A GE DEPENDENCY RATI 10 1.0 1. I. D .9 /b- 0.9a .8ECONOMIC DEPENDENCY RA T IO 1 .3/c 1.1 I. 1.2 7-,b I4 1 .5 /a

FAMILY PLANNING-ACCEPTORS (CUMULATIVE, tI.O]U) . 66.1 2i46.6 .

USErS (Z OF MARRIED WOMEN) ... . L2.0

EMPLOYMENT

TOTA4L LA 3OR F ORCE (t HOUSAND)3 3100.0 5100.C /C 54CC.0 /a 5 600.:0 /a bIO4CC.0 250.0LA0414 FORCE IN AGRICULTURE C%) n.A.0'7c a6.0 7a 9 1. /a . 50.5 3 UNEMPLOYED C% OF LABOR FORCE) .. .. 5.0 1:

INCOME7 DIST8IBUT ION

Z Or PPIVATE INCOME REC'O ey-

HEIGHEST 5$ OF HOUSEHOLDS . 20.2 d . 351.HIG1MT 20% OF HOUSEHOLDS 5 2... 63.3 Li..5IOWEST 20% OF HOUSEHOLDS S. 3 d 2 .3 7.1LOWEST LOA' 0F HOUJSEH3OLDS I.1. 7 7d . 7.9 17.7

CISIHOIAUTION OF LAND OWNERSHIP

1 OWNED BY TOP 100 OF OWN4ERS . .. 28. 0Z OWNED BT SMAL..EST 10% 06NYRS . .. 2. C

HEALT4 AND0 NUTRITION

POP)LATION PENQ PHYSICIAN 11000.0LB.. 70330.0 /21570.0 / 2bI,c / 409C.0POPULATION -ER NURSING PERSON 1610.0/8jd, 1470.C71' 1300.0 7 4390.0 a TC .C 7- YE.POPULATION -ER HOSPITAL BED 91I0 .0 /a 90 . 76. c 700/ 19 20. 0 250.0

PER CAPITA SUPPLY OF-CALORIES (Z OF REQUIREMENTS) 103.0 101.0 102.0 La70.0 103.0 104.0PROTEIN (GR4MS PER DAY) 75.0 71.0 67.0 ~ 43.0 65.0 5C.0

-OF WHICH ANIMAL AND PLLSE 32 .0 2 9.0 .2 3 .0 1 9.0 1 9.0

DEATH RATE (/THOU) AGES 1-4

EOU CAT ION

ADJUSTED ENROLLMENT RATIOPR IMAR Y SCHOOL L7.0 /e 6L 0 If 71,.0 /e 36.0 f 1EC4. 0 79.0 /cNL.CONOAHY SCHOOL 2.0 7f 9.C -1 1i.0 7Y 3.0 41.0 35.0 /c

YEARS Or SCHOOLING PROVIDED(FIRST AND S ECOND LEVEL) 13.0 1 3.0 1 3 .C 13 .0 1 2. 0 1 4.0

VOCAT IONAL ENROLLMENTC0 OF SECONDARY) 12. 2.0 If20 10.0 /d 16.0 1I.0 L/b

ADULT LITERACY RAT E (C. 3 0.0 LO.0 . 87.0

HOUS 19G

PERSONS PER ROOM (AVERAGE) 2.5 /a . .. 2.7OCCUPIED DWELLINGS WITHOUT

PIPED WATER (7.) 3 .. 0.0 /b.c.e 00.0 /dACCESS TO ELECTRICITY

(2 OF ALL DWELLINGS) .. . . .

RURAL DWELLINGS CONNECTEDTO ELECTRICITY (I) !.. .. 0. 0

CON SUMPT ION

RADIO RECEIVERS (PER THOU POP) 9 .0 4B. 0 4 1 .0 1 1.0 1 26. 0 102.0PASSENGER CARS (PER THOU POP) 8 .0 9 .0 9 .0 .0 2.0 1 5.0ELECTRICITY (KWH/YR PER CAP) 50.0 68.0 86.u 31.0 /a 307.0 271.0NEWSPRINT (KG/YR PER CAP) 0.4 0.5 C.6 0.1 3.4 0.7

SEE NOTES AND DEFINITIONS ON REVERSE

NOTES

UnSeen otharwian nocod, data for 1960 refr to any yoar betwee 1959 ad 1961, for 1970 betwee 1968 ad 1970, aod for Moot Macnot Etimate between1973 and 1975.

- Maaritioa hoe boon. lotleted so an exmpl. of a pr-dainautly agiol -aeomy, uhiob la following es nolightene.dpoIiodonigond to divo-nfcprodottion and pronoct .. caleretad imduatrialieatioe.

URSA 1960 I 1962; /b Bheed on caPlate an- traion of non-African population and of urban African. population, and ona10 percetaaPI. of rura African population aged 0-14, 15-59, and 60 yeare and over, reepnctiely. Ic Ratio of population ondor15 and 60 and nt to total labor forco; Id Rngiat.red, not all practicing in tbe country, nuroing poroocool inciodennidwiono and societalt nidwive; /e 5-Il y.era of age; If Total eacondory inoladne tea..har trafoing at the thirdla-d.

1970 IaRigistored only; lb Ratio of population toder 15 and 65 and ovr to labor force ago 15-59 yearo. Ic Labor forte__ _ae15-59 years; 7l Urban; In Rogiataed,dnot all practicing in tbe country; If 5-Il yasra ofge; /I Total

ectondary inclo.dao tea..bor trainIng at the tbir leve.

MOST REMIT ESTIMATE: Ia 1971' lb 1972; Ic Rlgintered, not all practicing in tbo cnuory; Id 1969-71 averge; In 5-liyearn of ago; If Total encondary Inclodee toac.her training at the thir7d 1ovo.

TANZANIA 1970 /aMinland Tan.oonla lb 1967; Ic Mouoholdn; /d 1965, /e Urban only, /f 7-13 cod 14-19'ynaro of og rep-cciv-ly.

KOREA, REP. OF 1970 IA.4 percentago of enplo nt; lb Megictered; /n igiotored, cout all practtIcing In the country. Id Water pipod inaido.

KAURITIUS 1970 /aRatio of population onder 15 ad 65 ad over to total labor forca; lb Incloding teachobr training. Ic 5-12 aed

13-18 yearn of age reopoctivoly.

M9, cognac 19. 1976

DEFINITIONiS OP SOCIAL IDMICATORS

Land cr00 (thou b.2 Popultion nr suoino Perc" - Population divded by couber of practi-

Total -Totaloufc area copriclog land are and inland watera. c.ing vein ad female grod"ato n"ra. "trained" or 'certified'

- Moo Ht recet soci-tac of agrico1tural rina ucd temporarily or -se00, and sunliary perconel with training orosric.p-.ncetly for crpa, potrc*nrbat 4 kitchen gardens, no to ha. Poola,tiosiear boupital bed - Population, divided by noobnr of bospita1

fallow. hado availa~~~~~~~~~~Jba i'n puLIc end private genera -1and opecialioed boupita1and rehbhilitaci"on .cotar; -cldno caning bones and establiniuseta

CNP Per coPita (U'11 - CN per cpita otiimateo at curet market prices, for cuttdia1 and preven.tive car.calculated by can covrIo _tbhd as World Rack AtlaO (1973-75 booim; Per canitaca. of 'aoioI of -cairencntsl - Conputed iron1960, 1970 and 1975 data. energy equivalent of ne t food eupplino available is osustry patotpit

Per dny; -vilnble aupplies conprioc donosic production, imports leesPonlatiu ac ital ctitcocporta, and chanaca in -ksc; sot aup plies.. eclda animal feed, osods'.Pcpiatoc (md-yr. nilhioul - Au of July firs: if sot -silable, qsantitios used in food procesing and loneno in distrlhutia; require-

ovrago of cow cod-year antinatno, 1960, 1970 And 1975 data, nests were estimated by PAO bace.d on physiological.. seds for norml

activity asd hcslth cons idering enviranmna tr1toPerature, body weighto,Peoulatiosdnst- racreh - Mid-yea pspulation per oquare WeO- age and sen distributiona of population, and allowing 10% for wactemeter (100 hotrs itotal aha.a ousoehold l.evel

Poeiat" dest crocre be sf antic. laud - Conputod no oba for Pre capit. uenly ci procoin isrsn par doe) - Ptocis coccent of p-nagricultural land only, ca~~~~~~~.Pita set aupply of food per day; cot supply of fsod ia defined as

above; requirenants for all countries established by USDA Econonic

vital statistics Meseaech Services provide for a minimu allowance of 60 grams ofCrude birth rotc car thousand - Anual live hirtho pur thousand of mid- total Protein pot day, and 20 irons of animal ad pulse protein, sof

your population. tenoT.or arioest ic averages ading int1960 el 1)170 which 10 grs should he asimaI protein; these standards areI lwrand floe-year eerga ending i 1.1975 for -at reset antbmata. than those of 71 gram of total protein and 23 grams of as i"'Iprotein

Crude death ro tpa r thousod - As,,sl denths per thousand of mid-year as an nuerage for the wend, proposed by FAO in the Third World Foodpopultiss , ten-year erichetic avarages .sding is 1960 and 1970, and Survey.five-ye ena- e ending to 1975 fsr coat macnt emtiatic Pe aits e"roi sunoly iro anmlad pulse - Protein supply of food

Isatmraity race (Itho_) - Annv"sI doetha of isfanta under one year derive froma aimals and puleangospr day.ofaoper thocsa..d live births. Deah ra I I/ttho)a 1-4 - Annxual deaths per thouasd in ago grou

tire Icac t birth (rca) - Average numbe of poets of lis. roais- 1- ers,tocide ishsaggru.sgetdsasiiaorficg ot birth; usua lly five-year scse ending is 1960, 1970 ad malnutrItion.19715r.fordeveloping ountrie..

iron prcrdaction rate-Avorago number of live daughtars a w-na will Educationbc-r in her nurna r-prodo-tiv- period ifshe npriaces. pre....ctgc- dutdarlnsrtIo -Primt oholl - Enrollont of all agesonupecific fertility rtaco, usually fiv-yea avergos ending in 1960, Percentage of primary ocolag ouati on; is-ades childron aged19 70 and 1975 for dove.lapig coun,tries. 6-11 years but adjusted for differnuc lengthe of primary education,

PoYjpulacion _to h rats as total - Conpuod anmual grouch rates of mid- forcsoutrics wIth unisoroa1 education, enrollnent nay emceed 1001xyear opul tton ar _jD-o 1960-70 ad 1970-75. since so pupils are helm sor bova the official school age.

poplaio gruh cotsel urban - Conputed like grouch rate of total Adjustederlmn racks - secondar cobool - Conputed as above,population, different dofisitiana of urban arcs, nay affect conpara- secon,dary eduction requires at least four years fi approved primar

bility ci data among caumurisa. ~instruction; Provides general, voational or teachr training

Urban cpulation a% o1 total) - Macis of urban Is total population; inatructiono forpupilsC of 12 to 17 years of age; corrospande.cedIffrert definicioun of urban areas may affect conporbility of data courses are ganeral ly mecldud. -Tt1ya.o

among countries. T~~~~~~~~~~~eats of uchooltioneroi'ded (1first and second l-eves -Tta uaao

A,:o structr. eret Children (0-14 years), wooking-oge (15-64 years) school ing; a anodr 1ee, vocational instruction may be Pa--

an,d retire1l.d' j _6 y erand over) as percetages of mid-yea pulTin clyorc pealy e-Iudedion ononeuc rato -Rat I.ofs population ndur 15 and 65 and ovr t. Vocatoa nolet aosendr) - Vocational institution

th-c of egos 15 through 64ncud technIcal indutrialor ethe prormZ hc prt

ic-oic do pendocy ratio -_itic of population under 15 ad 65 and over independentlyora depornuonts of secondary insttitution.tc she lbor force in age grou of 15-64 years.C Adult literacy case Il - Literate adults (able tv road and -ice) a

Family pla-ing _ acceotora (omolative. thou) - _ C,slativo n,mbco of prcesctese oi total adult population aged 15 -roarssdovr

acce ptors of birth-control devices undor auspi-e of notional familyPIaocing program sinco inception. man

family nI"ianin - users (S fi married owa,o) - Percentages of married Peron oar oa (av-rane - Average musher of puroos Per -oo isw-no of child-hearing ago (15-44 years) who usc birth-nonrol1 devices occupied conrentional dwellings is urban arena ; dwellings occludeto all natrird .- en ivan - f a.group. non-peonaent tstrucrco ad onoccpied parts.

Occunied duelino withou Rind. watri() -Ocupied coventionalEploy-ntn dulIg is urha and rural area w tbociod orotside piped

Total labor force (thousand) - Econonically 504tcc persons, including waler focilitien as p-rctscgo of all occupied dwellings.armed E.rccs and onamployed but ... luding housruive, studeuts, etc.; Access to electricity ft of all duoltinoel - Co-rentional ducllingsdefic itio is various, cootries ore nout conparablo. with electricit'y In livig quarters as p.erem of total deIlinge in

Labor force in agriculture (X) - Agricultural labor force (is farming, Rurban :and rural areas..forestr, busting sod fishing) s percentage of total labor force. g-r1 dwelings connoed to oleottricity as) - Conpuced as above for

Osolyd( of labor ifco - Unemplo1yed are usually defined so rural dwelns nyp-orson who ore able and sitIng to tabs ao u, out of a job ongive day, remlaind out of a job, and eceking work for a specified Cononetionniniono period not ouce.nding Ms wek; may nout ho taparable betwee Radio r-aceivors leerthou s_P) - All typeo of recivets for radio broad-curirtesdon to different definitions of uneployed sod sonro of casts to gan.ra public per thousand oi population; euoludesdata,e.g.' aployneuc office statistics, aeplo .urve., cpulsory unlicened recivers in m cre and im year uhem registration of

_o_PIoyeent insurance. radio sets wus in effect; data for recant years may not be -oparable

sice out coutries abolished litonning.ioose distribution - Percoctage of privato invoe (both is cas h sod Pas=oner cars feetthou Ppe). - Pancunger cars caption nocor cars

hind) rocoivod by richost 5%, richeet 20%, poornet 20%, and ponreac sea ting less than eight pernns; e..olades abulsocec, hoaruos sod40% of hcua.hold.. oilitsry vehicles.

Eletriit (kh/y or roe) -.A..-Il conaption of idsra,cnDistribution of laud aw,eohip Peraontagee of land oued by wealthiest nria,pblic sod private electricity in kilowatt hours Per- capita;

10%a poorest 10% of Isod ownrs generally based on production data, withoutalo nc for Il...es ingrids hoc allowing for imPorts ad exports of elactriricy.

Health and utrition N-Parint (kg/yr Met cap)-Per capita annual conoption in kilogronPspulation er ehyciciam Population divided.by sn-beriof practioing estimated iron d-.etic prodnetion plus not imports of newprint.physiciaso qualfied irn _ndical achnl at university loud.

KENYA

ECONOMIC INDICATORS

GROSS NATIONAL PRODUCT IN ANNUAL RATE OF GROWTH (%, constant prices)

1974 x 1975 Z 1972 - 1974 1974-1975

GNP at Market Prices 2760.3 100.0 3072.6 100 4.7 0.6Gross Domestic Investment 810.3 29.0 596.7 19.4 14.0 -24.3Gross National Savings 472.0 17.0 370.0 12.0 19.0 -3.0Current Account Balance -322.0 11.7 207.0 6.7 - -Exports of Goods, NFS 950.6 34.4 970.7 31.6 5.2 11.4Imports of Goods, NFS 1,166.8 42.3 1,081.6 35.2 3.9 -19.0

VALUE ADDED BY SECTOR. (In 1972 US $ Million) Average Annual Growth Rates Percentage Share

1972 1974 1975 1972-1974 1974-1975 1972 1974 1975

Agriculture 602 618 617 1.3% -0.2% 32 30 30

Manufacturing and Mining 236 284 295 10.1% 10.1% 13 14 14Other (incl. Government) 1.027 1.148 1.152 5.4% 0.3Z 55 56 56Total 1,865 2,050 2,064 4.4% 0.7% 100 100 100

GOVERNMENT FINANCE

Central Government (FY75) Central Government (FY76)(US$ Mln.) Z of GDP (US$ Mln. X of GDP

Current Receipts 633.1 22.0 698.2 24.7Current Expenditure 580.2 20.6 630.4 22.3Current Surplus 52.'9 1.9 67.8 2.4Development Expenditure 263.8 9.4 349.4 12.3External Finance 61.6 2.2 96.9 3.4

MONEY, CREDIT and PRICES 1972 1973 1974 1975 (In US$ Mln.)

Money and Quasi Money 602.6 764.4 818.7 923.4

Bank Credit to Public Sector 113.1 147.3 172.8 279.5Bank Credit to Private Sector 312.2 407.3 522.8 560.8

(Percentages or Index Numbers)

Money and Quasi Money as Z of GDP 29.0 32.0 28.0 29.0General Price Index (1972-100) 100.0 106.5 124.0 141.4Annual percentage changes in:

General Price Index - 6.5 16.4 14.0Bank Credit to Public Sector 53.0 28.0 19.3 67.7Bank Credit to Private Sector 2.9 28.2 30.7 11.2

NOTE: All conversions to dollars in this table are at the average exchange rate prevailing during the period covered.

TRADE PAYMENTS AND CAPITAL FLOWS

BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1973-75)

1973 1974 1975 US $ Mln. x

(Millions US $)Coffee 102 18.7

Exports of Goods, NFS 697 953 975 Tea 55 10.1Imports of Goods, NFS 751 1192 1104 Meat 12 2.3Resource Gap (deficit = -) -54 -238 -129 Sisal 27 5.0

Oil Produccts 104 19.1Interest Payments (net) ) All other commodities 244 44.9Workers' Remittances )-103 -101 -99 Total 544 100.0Other Factor Payments (net) )Net Transfers 23 17 21 EXTERNAL DEBT, DECEMBER 31, 1975Balance on Current Account -131 -322 -207 US $ Mln

Direct Foreign Investment 103 146 55 Public Debt, incl. guaranteed (incl. EAC) 760.3Net MLT Borrowing Non-Guaranteed Private Debt NADisbursements 65 100 126 Total outstanding & Disbursed NAAmortization 17 17 17Subtotal 48 83 111 DEBT SERVICE RATIO for 1975 -

Capital Grants 2/ . . . x

Other Capital (net)Other items n.e.i. . . . Public Debt. incl. guaranteed (incl. EAC) 5.6Increase in Reserves (+) 20 -54 19 Non-Guaranteed Private Debt NA

Total outstanding & Disbursed NA

Gross Reserves (end year) 190 186 187Net Reserves 3/(end year) 189 185 184

RATE OF EXCHANGE IBRD/IDA LENDING, (Dec. 1975)(Million US $):

1972 1974 Lending to Kenya IBRD IDA

US $ 1.00 = K6 2.80 US $ 1.00 = KL 2.80 Outstanding & Disbursed 106.0 81.2

KSh 1.00 = US$ 0.139 KSh 1.00 = US$ 0.139 Undisbursed 219.5 72.4Outstanding incl. Undisbursed 325.5 153.6

1973 1975Incl. Kenya's share in EAC

US $ 1.00 = Kb 2.85 US $ 1.00 = KS 2.70KSh 1.00 = US$ 0.143 KSh 1.00 = US$0.135 Outstanding Disbursed 182.1 81.2

Undisbursed 242.6 72.41976 Outstanding incl. Undisbursed 424.7 153.6

US $ 1.00 = KE 2.40RSh l.nn = US$ n.12n

1/ Ratio of Debt Service to Exports of Goods and Non-Factor Services.2/ Included in Disbursements MLT Borrowing3/ Excluding IMF

not available

not applicable

October 15, 1976

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SUMMARY AND CONCLUSIONS

i. In response to accelerating world inflation including rising oilprices and the resulting acute balance of payments problem, the Government ofKenya has not only taken short term measures to contain the loss in foreignexchange, but also formulated policies to restructure the economy. The pro-gram includes policies to decrease import dependency and to promote exports,mainly by global fiscal and monetary measures. The ultimate goal is toadjust the economic structure in such a way that high growth rates can bereached again in the 1980's under the now permanently severe balance ofpayments constraint. For the transitional period the Government aims atintroducing policies as rapidly as possible while at the same time preventingthat economic growth falls below socially acceptable levels. The Governmentalso remains committed to improvements in income distribution.

ii. Structural policies will take time to be formulated, accepted, thentranslated into action programs and finally put into effect. To counteractslippages which are unavoidable in this process, a sense of urgency motivatingthe Government on all levels would help to keep the transitional period asshort as possible. In view of the basic constraints inherent in the economy,and the complex policies necessary for change, it will not be an easy task forthe Government to maintain at the same time a reasonable rate of growth duringthe transition. Moreover, even to maintain growth at a lower level say 5.5%,instead of 7.4% as foreseen in the development plan, it will be necessary tofind more foreign financing than Kenya has managed to obtain in the past.Failure to secure enough resources from abroad would leave the Government nochoice but to adjust the growth rate even further downwards.

iii. We consider three issues, namely, agricultural development, changesin industrial policy and restructuring of the Government budget, essentialelements for a successful restructuring policy. They are therefore discussedin some detail in this memorandum.

iv. The Govenment recognizes that it is crucial to improve even furtheron the respectable growth performance in the agricultural sector which reachedabout 4-1/2% overall and 6% in the monetary sector in 1964-1973. It will benecessary for this sector to: (a) increase domestic production; (b) make amajor contribution to import substitution, directly and through resource-basedindustry; (c) open up new export opportunities also directly or throughresource-based industry; and (d) play an even larger role than before inabsorbing labor and maintaining incomes and consumption. Investment of thescarce factor capital in the agricultural sector promises a relatively highreturn as shown in the low incremental capital output ratio for the sector(large scale irrigation schemes may be the exception to this rule). Moreover,investment in the rural areas has the added advantage of promoting regionaldistribution of development and can also contribute to decrease existing in-come inequalities between rural and urban areas.

v. Success depends on more than increased investments in agriculture.In order to obtain the fullest possible effect of these investments, manysupplementary measures have to be taken simultaneously. Measures includeadequate price incentives, improvement in efficiency and reinforcement of

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the right range of supporting services provided by the Government and theprivate sector to farmers; also improvement in related activities such asmarketing and transportation.

vi. In its Action Program, the Government states that it hopes toincrease agricultural production more rapidly mainly through the small scalefarmers. This strategy is well founded in the light of experience in manydeveloping countries, and is further supported by evidence on maize produc-tion in Kenya. It requires that smallholders have better access to the mostimportant services (extension, input supply, marketing and credit), and inthe case of Kenyan maize also utilize hybrid seeds. In addition to produc-tion effects, promoting smallholder agriculture has the added advantage oflowering import dependence and increasing employment opportunities and ruralincomes.

vii. Most farm gate price increases introduced in January 1975 werereflecting import or export parity at the existing exchange rate. A massiveincrease in marketed production of maize confirmed that the price increaseprovided a strong incentive to farmers to expand production. This does notmean, however, that the present price is also adequate in the sense of re-flecting the true comparative advantage of Kenya in maize production.The question whether maize can become a regular and profitable export crophas once again become actual. For some crops such as wheat, weather condi-tions obscured the effect of the price increases. Conversely, prices fordairy products and beef need to be scrutinized carefully. Moreover, the reviewof prices in 1976 left something to be desired; the preparation of the decisionswas not as thorough as necessary and was suffering from the lack of reliableinformation. Definite announcements for beef prices were delayed until July1976, long after prices for milk, sugarcane and rice had been increased againin January 1976.

viii. Domestic retail prices for meat have long been well below exportparity. This constituted a subsidy of higher income consumers at the expenseof lower income producers. Action of beef prices has often been delayed andfollowing the latest measures of July 1976 specific measures regarding beefprices remain to be worked out in discussions between the Government andvarious foreign assistance agencies involved in livestock projects. Govern-ment and consultants will moreover analyze certain aspects more in depth.

ix. Some time ago, the World Bank recommended lower producer pricesfor milk and seasonal price differentiation to even out fluctuations indeliveries. The shortage of milk in the dry season has now become acuteand a substantial increase in producer prices of milk during the dry seasonis now recommended. Moreover, the advantages and disadvantages of uniformversus geographically differentiated prices and the impact of the marketingsystem on prices paid to farmers warrant further study.

x. If the Government considers that it is in the national interestto continue its price fixing activities, both for farmgate prices of majorfood crops and corresponding consumer prices, then the preparation of deci-sions concerning price levels has to be more thorough and systematic. The

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Ministries of Agriculture, Finance and Planning as well as the statutoryboards participate in this process. It is a welcome development that thestaff in the Ministry of Agriculture responsible for this task is now beingreinforced.

xi. It could be argued, however, that Kenya's economy and its agricul-tural sector in particular, are sophisticated enough to warrant an increasedemphasis in the allocation of government talent and resources on other highpriority tasks in agriculture, such as research, training and extension andproject preparation. In particular in maize, the Government could consider togradually limit its intervention in pricing and marketing, to setting minimumprices and acting as the buyer of last resort, thus allowing market forcesmore freedom in determining individual prices. The Maize and Produce Boardwould also be responsible for operating a buffer stock. These recommendationsfully reflect the findings of those Kenyans who had earlier investigated thesematters.

xii. The Government's Action Program includes objectives for restructur-ing the manufacturing sector and stresses the need for reducing the heavyimport dependence by relying increasingly on domestic resources, promotingappropriate input substitution opportunities and encouraging exports. Anumber of policies have also been included in the program such as the exportcompensation, higher sales taxes on both imported and domestically producedgoods and the increase of tariffs on intermediate goods and capital goods.Moreover, the October 1975 devaluation by 8% on average, also placed exportsin a somewhat more favorable position.

xiii. The Government is now preparing a comprehensive policy approach forthe manufacturing and commercial sectors. There is a clear need to changethe framework of trade policies and price incentives within which the enter-prises (predominantly private) operate. An important requirement will be toeliminate the present bias in the system against export oriented industriesand in favor of import substitution industries. More attention has also tobe devoted to existing and potential linkages between manufacturing andagriculture. In addition, the small and medium scale industries now deservemore encouragement since they are better placed to use domestic materials,are less import dependent and have a lower ICOR than large scale industries.Future:industrial growth will depend-on the promotion of efficient industriessome of which may be import substitution oriented but most of which canexport.to markets outside the East African Community.

xiv. The policy:measures to be incorporated in a policy package couldinclude on the export side, stronger export incentives including higher ex-port compensation, and an export credit guarantee scheme. The budget costs ofthe higher export-compensation should be neutralized by raising the salestax to some extent. -In a separate-attempt to boost the production of goodsessential for Kenya's growth, the sales tax could be differentiated furtherwith an increase for luxury goods and a decrease for essential products.On the import side, import licensing which causes great distortions betweenindustrial branches and inefficiencies throughout the sector, could graduallybe liberalized and replaced by a rationalized tariff structure.

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xv. Additional measures are necessary to strengthen the institutional

setup serving industrial policy. The Government task will be to encourage

industries which not only find it financially attractive to operate in Kenyabut are also contributing to Kenya's overall development objectives of

increasing production and employment, especially in the areas outside themajor urban centers, lowering import dependency and promoting exports. Untilnow the Ministry of Commerce and Industry lacks an active special unit to

formulate global and more specific industrial objectives and policies in this

light. Reactivation of such a unit could prove an important asset. A second

unit could be given the tasks of looking after small and medium size business

and formulate its possible contributions to industrial development.

xvi. While financial analysis is common practice in the various agencies

appraising project proposals, economic rate of return analysis could be

undertaken in more depth and in a more uniform manner. A convenient way

to achieve this would be for the Government to issue General Guidelines for

Project Appraisal covering both financial and economic analysis to ensure

that the assessment of individual proposals is in line with the overallindustrialization policy of the Government. These guidelines could be

applied uniformly in all relevant public sector agencies including financinginstitutions such as the Industrial Development Bank.

xvii. The outcome of the FY75 and FY76 budgets was a very rapid increasein expenditure. Underestimation of the impact of inflation was one of themajor underlying factors, but in addition, quite considerable ammounts were

spent without being authorized by Parliament. The government introducedmeasures in April 1976 to prevent further deterioration including a ban on

hiring of new personnel and refusal to permit the start of new projects which

had not yet been included in the budget. Also, the cash flow mechanism was

tightened so that unauthorized spending would no longer be possible.

xviii. The budget outlook for the medium term reveals the need for rapidly

rising income in order to finance rapidly expanding government tasks. Special

factors which cause activities and investments to expand more rapidly than

usual for a developing country like Kenya are, first, the Government's objectiveto promote rural development. Financial means of local authorities and self-help action are insufficient and need increasing supplements from the central

budget. A second factor is related to the reorganization of the EAC corpora-

tions; infrastructure which so far was financed on the Community level --often with substantial foreign assistance -- may now have to be added to and

incorporated in Kenya's national development budget. A more incidental factor

is the fact that a major project, the extension of Nairobi Airport, experienced

serious cost overruns and delays and now needs some form of financing to be

completed. Finally, it appears that Kenya will spend more on defense than in

the past. According to recent Government Forward Budget projections, total

expenditure would have to grow at least at 7% in real terms, which would

allow for a very gradual increase in Government's share in GDP.

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xix. The proposed expansion of Government tasks which appears justifi-able, will require considerable efforts to mobilize additional foreign anddomestic resources, including a further improvement on the already consider-able tax effort. The proposed shares of foreign and domestic financing are33% and 67%, respectively, as compared with about 22% and 78% realized inFY74-76. Within the overall financing requirements for the central govern-ment budget, a special problem may arise with regard to local cost financing.The increasing share of rural development projects in the development budget(accompanied by a smaller share of infrastructure projects) implies anincreased proportion of local costs in the development budget. However, theGovernment projects a decline in the proportion of domestic financing from78% realized in FY74-76 to 67% for FY78-80. This suggests that there is aparticular need for foreign financing to cover local costs. This is alsoapparent in the request for foreign financing in the Government's projectlist.

xx. Not only do the rural development type projects imply a largershare of domestic costs during construction, they also have larger impacton recurrent expenditure needed after construction to keep the projects andprograms operational. The Government has started to study this question onthe technical level in order to set up a projection system for this longterm effect on total recurrent expenditure.

xxi. Efficient execution of projects has become even more importantthan before, because delays now mean rapid cost increases as the resultof high inflation. There may be room for a simple trouble shooting unitto follow progress of the most important foreign financed projects atmore regular than the usual three-monthly intervals. This unit could thenidentify the problems and initiate remedial action.

xxii. Because of a combination of a low level of economic activity inmost economic sectors -- with the exception of construction -- and anexceptionally high price for coffee, the major export product, the balanceof payments is temporarily less constraining in 1976. But the balance ofpayments outlook which emerges from our projections suggests that after1976 things may get worse before they get better. Even if policies toreduce Kenya's import dependence are successful, the decline in importdependence will come about gradually and not in the next few years. Thesame holds true for a successful export promotion drive. Kenya may, there-fore, take at least five years before the results of the restructuring policyhave a significant impact on the balance of payments. Eventually, though,with declining import dependence and increasing export performance andin the absence of an improvement in Kenya's terms of trade the resource gapwill decline and this will with some delay be followed by a decrease in theneed for borrowing from abroad.

xxiii. The balance of payments constraint is expected to make itself feltin full force again from 1977 onwards. IMF facilities could probablycover most of the deficit in 1977, but our preliminary projections need a

reassessment early in the year. It will be more difficult to find adequatefinancing in 1978 and the next few years, since by that time most IMF facili-ties would be utilized and the level of foreign exchange reserves wouldnot permit a drawdown. The options open to Government in order to preventa reduction of imports and risking a slowdown in the economy are to tryand obtain commitments for quick disbursing official loans in 1976 and 1977,or to seek special balance of payments support in 1978 and following years.If these approaches would leave a residual gap, more financing on commercialterms could be utilized for well-prepared and high priority projects. Pro-vided that the export promotion policies of the Government are successful,our debt projections suggest that there is room for utilizing moderate amountsof commercial credit without straining Kenya's debt servicing capacity.

I. THE RESTRUCTURING PROGRAM

Introduction

1.1 After a respectable growth performance of 6.6% per year between1964 and 1973, Kenya aspired at continuing and even improving on this record.The Third Development Plan for FY1974-1978 therefore set a somewhat ambitioustarget growth rate of 7.4%. The Government realized that rapid growthrequired structural changes in the economy because the balance of paymentsconstraint was gradually becoming more severe. However, before the Planimplementation got well underway, Kenya was overtaken by a series of setbacksin the world economy and at home which forced the Government to revise itsdevelopment strategy.

1.2 Accelerating world inflation pushed up both Kenya's import andexport prices in 1973. As a result, domestic prices increased by 15%. Theincrease in the consumer price in 1973 was a new pheonomenon after the verymodest 2 to 3% annual price increases which had been customary in Kenya. Thenthe oil crisis started in October 1973 and unchained a series of dramaticimport price increases with a major balance of payments impact in 1974. 1/ Infact, Kenya became one of the countries which was most seriously affected bythe oil price movements. In the same year, the deepening recession in theindustrialized countries was follwed (with some delay, because of inventorybulid-up) by a declining demand for exports of developing countries. Manycommodity prices started falling steeply in mid-1974. Drought conditionsin East Africa, moreover, depressed Kenya's agriculutral output and relatedexports. Over the full year 1974, Kenya's terms of trade dropped by 14percentage points and this serious setback, coupled with relatively smalladverse volume movements of imports and exports, was the major factor leadingto an unprecedented balance of payments deficit in 1974.

1.3 The balance of payments problem thus became a serious and acutepolicy issue instead of a gradually worsening constraint, as had been ex-pected before. As soon as the Government realized that the developmentstrategy laid down in the Plan was no longer feasible, a series of short andmedium term policies were introduced, firstly to limit the immediate loss offoreign, exchange as much as possible and secondly, to begin restructuring theeconomy so that it could resume rapid ,growth in future years even with alower import dependency. Both short and-m edium term policies are importantcomponents of the Government's,reaction to the dramatic events. While thesepolicies were introduced in Kenya, the Government simultaneously appealedfor larger amounts of financial assistance from abroad. The short termmeasures included reducing oil consumption by passing on the price increasesin full to the consumer and to restrict non-essential imports (mainly throughraising-sales taxes-and to a limited extent by tightening import controls).The medium term policies have been brought together in the Government's ActionProgram and this memeorandum will concentrate on this Program published inSessional Paper No. 4-of 1975 on Economic Prospects and Policies. 2/

1/ See Annex I, paragraph 6 for quantification.2/ The terms "Action Program" and "Restructuring Program" used in this

memorandum are synonymous.

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1.4 The degree of uncertainty about economic recovery in the industri-alized countries and futher price movements in international trade was muchlarger than usual in 1975. Rather than drafting another five year DevelopmentPlan, the Government therefore chose to draw its policies together in acomprehensive Action Program which covered the remainder of the original planperiod, that is, FY76 through FY78. The Government now intends to firstprepare in 1976, a rolled-over version of the Action Program covering FY77through FY79 and then, world economic prospects permitting, to start work onthe Fourth Development Plan intended to cover the period FY79 through FY83. 1/

Basic Restructuring Objectives and Strategy

1.5 The basic objective underlying the Action Program was to adjustthe structure of the economy in such a way that a high growth rate could beregained in the 1980's under a permanently more severe balance of paymentsconstraint. While these restructuring policies would be implemented, thetarget growth rate would be kept as high as possible, at 5 to 6% per annuminstead of the 7.4% set in the Development Plan. To maintain the growthof output as much as possible meant that all available resources had to beutilized more efficiently. Further, import dependency had to be reduced;however, imports had to be restrained in a way which has a minimum adverseimpact on production in the next few years. Moreover, more production hadto be directed into exports. It would therefore be necessary to compresspublic and private consumption while keeping investments as high as possible.There would have to be continuous attention to ensuring that investment ischanneled into the most productive and quick yielding uses, in particularin appropriate import substitution and export promotion activities. In bothactivities the agricultural sector would have a major role to play; by fur-ther improvements to its performance it would also have to absorb more laborand maintain incomes in a period of possible slowdown of urban employment.Manufacturing, which would possibly become the most dynamic sector in thelong run, faces a particularly difficult adjustment process in the next fewyears. It would have to improve its resource utilzation and reduce its heavyimport dependence in favor of more domestic resource-based production andexports.

1.6 Rapid price inflation and its undesirable effects presented aproblem which Kenya had not yet encountered. The Action Program attachedcrucial importance to fighting inflation. In order to avoid getting into avicious circle of spiralling inflation, money wages, rents and profits couldnot be allowed to provide full compensation for cost of living increases. Onthe contrary, the Government's objective was to make all groups share in thereal loss in national income resulting from the serious terms of trade loss.

1/ One important feature of this Plan is that grassroots involvement inthe planning process will be secured for the first time through theparticipation of the District Development Committees which have beeninstalled over the last few years.

This approach was expected to hold domestic inflation below world inflation,

thereby helping Kenya to reduce its balance of payments problem.

1.7 Preceding the international crisis the Government had requested

the International Labor Organization (ILO) to conduct an in-depth analysisof employment, incomes and equality in Kenya; this request was in recogni-

tion of the fact that while Kenya's performance -- measured in rapidly

increasing production -- was very good, it was not yet satisfactory in other

aspects of development, such as the distribution of benefits of employment.

The present distribution is not yet as equitable as the Government's develop-

ment strategy intended and may not be acceptable in the long run in a tradi-

tionally rather egalitarian society. Furthermore, unemployment of secondary

school leavers and others continues to grow and although several hundred

thousand farmers did enter into commercialized agriculture, the majority

of the rural population and the lowest strata of the urban population have

yet to emerge from their poverty status. After the ILO had produced its

innovative report, the Government carefully considered the ILO recommenda-

tions and adopted many measures as official policy in its 1973 Sessional

Paper on Unemployment.

1.8 While it was difficult enough to find solutions for unemployment,

income distribution and poverty problems under conditions of rapid growth,

the slowdown of the economy makes these issues even harder to tackle. Em-

ployment growth is an immediate concern for which the Government sees over-

all economic growth plus promotion of the agricultural sector as the general

remedy; moreover, the Government is now building up a Rural Development Fund

which will inter alia, finance a modest program of rural works with seasonal

employment and output goals. In addition, more labor-intensive execution of

projects, for example rural access roads, will be promoted because of its

positive employment effects. The Government remains committed to improve-

ments in income distribution and has stated so in the Action Program and

Budget Speeches. In years of falling income, this would translate in a

policy to make those who are relatively well-off bear the brunt of the na-tional loss in real income, while the income of those who are already living

on the edge of poverty or well below will be maintained as much as possible.

The new emphasis on agricultural production would raise incomes especially

of smaller farmers and provide more services in the rural areas where most

of the poor live, so that the poverty problem would be addressed directly;

moreover, the traditional bias against the rural areas would be offset tosome extent and urban workers would no longer be given privileged treatment.

Major Policies

1.9 The Action Program relies mainly on global monetary and fiscal

policies to achieve its objectives. These policies would be reinforced by

agricultural pricing policies as well as wage policies. General price

control was rejected because it was too inflexible to permit necessary

adjustments in the economy.

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Monetary Policies

1.10 The Action Program would not alter the normal objective of monetarypolicy where regulation of movements in money supply and credit is concerned;the Government would continue to aim at facilitating economic growth whileavoiding that money and credit policies lead to either inflationary or contrac-tionary effects on the economy. The monetary policy would also continue tohave a function in affecting short term business cycle developments; wheneither inflation or recession threaten to occur or are occurring, monetarymeasures would have to be used to correct the movements. Except in case ofmajor changes in import restrictions Kenya's import demand has shown and willcontinue to show a strong correlation with comestic credit expansion orcontraction. The monetary policy would therefore be an important tool forbalance of payments purposes. Interest rates would continue to be the maininstrument for allocating credit. In addition, however, administrativemeasures were to be taken to channel credit for the private sector into themost productive uses, specifically in agriculture, manufacturing, tourism andexport business. Speculative use of credit for buildup of stocks would beprevented. Also, the banks were instructed to give preference to the needs ofsmall businessmen. Foreign-controlled firms in the priority sectors wouldcontinue to have access to domestic credit but within limits; other foreign-controlled firms would have to turn more and more to credit from abroad. Inconcrete terms, commercial bank credit to the private sector was planned toexpand by not more than 12% per annum. 1/ The whole interest rate structurehad been moved for the first time in many ears in 1974 by a few percentagepoints and the Action Program did not propose further increases in the nearfuture.

Fiscal Policies

1.11 Annual budgets offer the Government an important direct meansof introducing changes in the economy; and in order to add the necessaryperspective, the Government uses a three-year forward budget clarifyingbudgetary goals and policies for the medium term. The goals of the forwardbudget are export promotion, import substitution especially in agriculturalcommodities and use of more labor-intensive techniques in suitable projects.The forward budget for FY76 to FY78 included in the Action Program replacedthe public sector expenditure program incorporated in the Development Plan.In line with the scaling down of overall economic growth, the real growthrates of development expenditrue were brought down from 12 to 8% 2/ and ofrecurrent expenditure from 11 to 6% 2/. Notwithstanding the improved publicsavings resulting from the latter target, Kenya would have to rely moreheavily on foreign financing to cover development expenditure. Withinthe reduced development expenditure, the emphasis would switch towards quickyielding, directly productive projects and projects with low import require-ments and high employment potential.

1/ Later relaxed somewhat; see paragraph 1.19.

2/ All in real terms.

1.12 The reduction in growth of recurrent expenditure called for somedifficult decisions, notably the decision to freeze the proportion of recur-rent expenditure devoted to education to 29%. Expressed in growth rates,this would mean an annual increase of only 6% 1/ instead of the 14% 1/envisaged in the Plan. After intensive discussions, the Government formu-lated a policy package which did not actually address the root problem ineducational finances: the very rapid rate of growth of the primary teacherpayroll.which the budget could no longer support. The number of teachersper school was reduced from eight to seventy 2/, promotions would no longerbe quasi-automatic but subject to a restrictive quota system which ties itto classroom performance rather than additional diplomas and teacher sala-ries would be governed by the general wage guidelines. Additional measurescovered'the curtailment of recurrent expenditure growth at secondary andtertiary levels. In a move which is of far wider significance than theexpenditure aspects, the Government moreover established a National Com-mittee on Education Objectives and Priorities to re-define the role of Kenya'seducational system and formulate a plan for action.

1.13 While development expenditure growth had to slow down, its composi-tion was shifted at the same time in order to move away from infrastructurewith relatively larger investments and longer gestation periods -- to sectorssuch as agriculture and rural water supply where relatively small investmentswere expected to yield relatively more rapid and larger increases in outputper unit' invested. Moreover, within the allocation for road constructionthere would be a shift in emphasis from major to secondary and rural roadsas well as experimental labor-intensive construction of rural roads.

Table I-1: SHIFTS IN SHARES OF TOTAL DEVELOPMENT EXPENDITURES

FY 69-73 FY 74-78 FY 75-78Actual Plan Projections Forward Budget Projections

Agriculture andRural Water Supply 13.0% 22.3% 37.3%

Roads, Bridges andBuildings 34.8% 21.3% 16.9%

Source: 'Ministry of Finance and Planning.

1.14 Given the satisfactory revenue performance in the past, thereare limits to the improvements which the system can be induced to yield.Kenya's government has a record of sound budgetary policies. The revenueeffort has been steadily improved with revenue exceeding 20% of GDP by the

1/ All in real terms.

2/ Kenya's primary schools have seven grades.

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early 1970's. Taxes (not counting new taxes) have a positive built-inelasticity vis-a-vis income growth; moreover, by repeatedly introducing newtaxes, most recently the sales tax, the Government has raised the aggregatetax buoyancy (percentage increase of actual tax receipts including new taxesas compared with percentage increasee in GDP) well above the built-in elas-ticity level. Measures to remedy the lack of progressivity of the tax systemwere introduced with the income tax reform and selective introduction in 1973of the sales tax. It will therefore not be easy to match the tax expansionof the past in the coming years. The Action Program stated that for theperiod FY76-78, increased revenue would be necessary to cover essential pub-lic expenditure, to limit public sector use of bank credit in favor of privatesector access and to siphon off excess demand in order to keep price levelsunder control. However, it appears that the Government was overly optimisticas to future expansion possiblities of tax revenue in stating that it is notonly necessary but also feasible to achieve a rapid growth of revenue of 12%per annum 1/, slightly higher than the original Plan target, which would comemostly from existing taxes. With a projected buoyancy of tax revenue of 1.8.This factor has since been reduced to a more realistic but still rather high1.3 (see para. 3.14).

1.15 Specifying some steps by which revenue could still be boosted, theAction Program intended to adjust specific fees and levies upward to preventinflationary effects eroding income from these sources. Local governmentswere expected to follow this example. Further, the Action Program intendedto increase sales taxes on luxury goods which were to be discouraged both indomestic production and imports; further, to modify the tariff structure inconcert with the other EAC countries toward uniformity, reducing protectiveduties on some consumer goods and raising duties on capital goods. Theprimary purpose of these measures was not to increase revenue but to make theinvestment climate in Kenya relatively less attractive for production ofnon-essential consumer goods and more attractive for other production.

Other Policies for Restructuring

1.16 The Action Program enumerated a number of other policies to rein-force the global monetary and fiscal policies, the most important of whichwere agricultural pricing and incomes policies. With regard to the former,the Government's goal was to keep Kenya's cost of production competitive topromote exports and at the same time to ensure that farm prices in relationto increasing costs of inputs result in net incomes which are sufficient tostimulate supply. Consumer prices would be set at levels consistent withfarm prices. (This issue will be discussed in detail in Chapter IV). Inthe latter field, income policies and in particular wage policies would begoverned by revised wage guidlines and increased minimum wages. The guide-lines allowed average wage increases of somewhat less than cost of livingincreases. This average would be achieved by giving only the lowest paid

1/ In real terms, so inflationary effects on revenue are not taken intoconsideration.

workers full compensation and the higher paid progressively less. Minimumwages per month for rural areas, smaller towns and Nairobi and Mombasawere indicated in the Action Program.

1.17 Among other policies were direct measures to limit oil andnon-oil imports; price increases for oil were to be passed on in full tothe consumers and taxes on non-essential use of oil products would beincreased. The development of alternative sources of energy, hydro-powerand geothermal potential, would be accelerated. For non-oil imports theGovernment intended not to introduce general import controls except as alast resort. Instead, preference would be given to using sales taxes as ameans to reduce both imports and domestic production of luxury goods. Thedomestic production of essential goods which had become justifiable as aresult of import price increases would be stimulated, as well as repair andmaintenance enterprises. The possiblity of fuller utlization of existingcapacity would be considered before foreign exchange would be granted fornew capacity; the depreciation allowance would be reconsidered for the samepurpose. The attempts at making the level of import duties more uniformwould continue; in particular, duties on capital goods would be raised.Speculative stock accumulation would be discouraged. The Government alsointended to introduce a capital gains tax to counter speculative uses ofcapital and levies on urban property for municipalities as well as changesin inheritance taxes for redistribution purposes.

Performance Targets in Agreements with IMF and IBRD

1.18 In order to implement its Restructuring Program, the Governmentalso sought and obtained assistance from abroad, most of it from theInternational Monetary Fund and the World Bank Group. Both institutionsagreed to grant Kenya financial support in the light of its difficultbalance of payments situation, in order to help the Government carry outits economic program. The Government on its side pledged to implement theprogram as a whole and gave specific assurances that particular targetswithin the program would be achieved. In the case of the World Bank $30million Program Loan, granted in May 1975, the Government gave threeassurances to the Bank, all relating to improving agricultural sectorperformance: improving the project pipeline, strengthening the planningcapacity of the Ministry of Agriculture and regular review of agriculturalprices.

1.19 While conditions attached to several IMF facilities such asthe oil facilities were rather light, the situation was different in thecase of the new Extended Fund Facility. Kenya was the first country toreach an agreement with the IMF on a three-year financing program, withwhich the IMF entered into the field of policy discussions covering morethan one year at the time. Under the EFF, IMF made available SDR67.2million (about $79 million) to Kenya for use over the period July 1975

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through June 1978, under condition that the IMF would determine the phas-ing of the amounts, by setting six-months ceilings for the cumulativedrawings under EFF, and the Government would observe the performancecriteria established from year to year with the IMF. Two performancecriteria were defined for the period July 1975 through June 1976:1) government borrowing from the bank system would be limited to KSh350million (with a seasonal maximum of KSh450 million); and 2) net domesticassets 1/ of the Central Bank would not exceed KSh490 million by June 30, 1976(see also Appendix Table 6.3) which would imply a total domestic creditexpansion of 19%.

1/ Defined as the sum of currency issued and non-bank private depositliabilities, minus net foreign assets.

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II. DEVELOPMENTS IN 1974 AND 1975

Overall Economic Development

2.1 In many respects, 1974 and 1975 have been the most difficult yearsin Kenya's development since Independence. World inflation, then worlddepression and unfavorable weather conditions at home dominated Kenya'sfortune. The Government did reach quickly by introducing short term meas-ures in-mid-1974 and deciding also on more fundamental medium and long termmeasures, which by early 1975 were brought together in the RestructuringProgram described in Chapter I. However, medium and long term policies taketime to be translated into actual practice and secondly, their impact willmaterialize only gradually since they work within relatively inflexiblesettings where improvements can only be made at the margin. Thus, theGovernment has definitely started the implementation of the RestructuringProgram in 1975, but progress is rather uneven. Some policy decisions havebeen put into effect, others are under preparation and a third set remainsto be acted upon. As a result, actual developments in 1975 reflected morethe economic recession in the country than the Restructuring Program.

2.2 Production in money terms grew by 23% in 1974 and 15% in 1975, butreal GDP growth after allowing for inflation was only 4% in 1974 and less than1% in 1975, far below the revised targets. Employment in the modern sector,which absorbs about 15% of the total labor force, increased by 12% in 1974,but dropped for the first time in many years by 2% in 1975. Per capitalincome in current terms reached $213 in 1974 and $230 in 1975 1/, but behindthese nominal figures lies an unprecedented loss in real purchasing power of5% in 1974 and 3% in 1975, to which the adverse terms of trade developmentscontributed.

Sectoral Growth

2.3 The disappointing growth of agriculture, traditionally Kenya'smost important sector, was a major factor in the overall slowdown of economicactivity. In 1973 and 1974, drought was widespread throughout Kenya, whilethe weather conditions were unfavorable in parts of the country in 1975.Input costs soared and hit in particular those farmers dependent on importedequipment and fertilizer. Manufacturing growth dropped less than growthin the other sectors, but remained well below the past level of 8%. Thislower growth was linked, first, to a drop in domestic and foreign demand.Further, some agro-processing industries had difficulties because of shortageof local raw materials. However, earlier investments in'several new ventures,notably textile and paper plants, now started producing and this helpedmaintain some growth.

1/ See World Bank Atlas.

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Table II.1: SECTORAL GROWTH RATES(In 1972 constant prices)

1973 % Growth Rate

% Proportion 1974 1975

Agriculture (incl. Subsistence) 31.0 + 1.6 - 0.1

Industry (incl. Mining) 13.7 + 5.3 + 4.0Construction and Utilities 8.7 - 3.7 - 0.7

Services (excl. Government) 31.0 - 4.2 - 2.3

Government 15.6 +11.8 + 5.0Total GDP at factor cost 100.0 + 4.1 + 0.7

Source: Economic Survey 1976, Table 2.1

2.4 Construction together with some services sub-sectors has experi-

enced the most severe setback in growth, partly because credit to construc-

tion was curtailed since it was not considred a priority activity. Moreover,

construction costs increased sharply in 1974 and only slightly less in 1975.

In the power sector, the volume of fuel sold in Kenya dropped by 2.5% in

1974 following the sharp fuel price increases, but picked up by 6.7%, thanks

to airplane refuelling and the start of a new paper mill. Consumption of

electricity expanded slightly less than before: by 7.6% in 1974 and 8.2%

in 1975. The exploration of cheap geothermal power has yielded such promis-

ing results that a feasibility study is now under preparation. Other services

such as trade and transport suffered from the disappointing agricultural

production. Tourism maintained its position in Kenya, notwithstanding trans-

port cost increases and recession overseas. Measured by visitor days spent

in Kenya, its volume of business dropped by only 1% in 1974, but increasedby 13% in 1975. The devaluation of the KShilling in October 1975 reduced

the cost of local expenditure by tourists to some extent.

Table II.2: EXPENDITURE ON GDP PERCENTAGEINCREASES IN REAL TERMS (1972=100)

1972 % Prov. 1974 %

Share GDP 1973 1974 1975 Share GDP

GDP at market prices 100.00 + 5.6 + 4.2 + 0.7 100.0

GDY (adjusted for terms of trade losses) 100.00 + 5.6 + 0.0 + 0.1 96.3

Imports of Goods and non-factor services 29.6 + 2.3 + 5.4 -20.9 29.0

Imports of Goods and non-factor services 27.4 + 5.5 + 4.3 -10.5 23.7

(at import prices) Net Imports 2.2 5.3

Total Resources 102.2 + 4.7 + 4.5 - 2.6 101.7

Gross Investments 21.9 - 6.2 +37.3 -24.3 25.7

Consumption 80.3 + 7.7 - 2.3 + 1.6 76.0

Total Uses 102.2 + 4.7 + 4.5 - 2.6 101.7

Gross Domestic Savings 19.7 - 2.8 +16.4 -23.3 20.3

Source: Economic Survey, 1976 Appendix Table 2.4.

Changing Expenditure Patterns

2.5 The total of economic resources available to Kenya in any one yeardepends mainly on Kenya's own output measured in the Gross Domestic Product(GDP). This is corrected for terms of trade losses to arrive at a morerealistic measure of Kenya's import capacity, the Gross Domestic Income(GDY). The terms of trade loss in 1974 amounted to as much as 3.7% of GDP.GDY is normally supplemented by a relatively small net import of goods andservices to fill the resource gap between consumption plus investment andGDY. (Availabiity of foreign financing determines the size of the netimports that Kenya can sustain. Debt servicing capacity decides in turnthe terms and total amount of foreign financing Kenya can safely absorb).In 1974, net imports jumped to 5.3% of GDP which is a level Kenya cannotsustain. Although this percentage dropped to below 2.5% in 1975, this wasdue to exceptionally low economic activity and net imports are bound torise again in the next few years.

2.6 As stated in Chapter I, the restructuring strategy requires thatall resources are used more efficiently but also that some resources areshifted away from consumption in favor of investments. In practice thereis a limitation to this strategy in that it can only work so long as thepopula,tion accepts near stagnating or negative growth of its per capitaconsumption. After having enjoyed a steady increase for many years, thepeople'may not accept this for long and this is one reason why the restruc-turing period should not exceed the medium term.

2.7 Total consumption did drop in 1974 and expanded only slightly in 1975;private consumption showed a 5% decline in 1974 and a 2% increase in 1975, 1/following a nearly 10% increase in 1973 (related to wage increases forlower Government officials). Per capita consumption in the private sectordropped to 10% below the 1973 level in 1975. Public consumption grew by 2% in1974 and 4% in 1975. The increase in investments in 1974, which accompaniedthe drop in overall consumption, unfortunately was not in gross fixed capitalformation -- which has an impact on growth -- but in inventory buildup. Itappears that Kenya is experiencing a series of inventory cycles with stocksbuilding up in 1971 and again in 1974. Import restrictions were tightened in1972, then relaxed in 1973 together with credit. This lasted until the middleof 1974. Inventory accumulation was also anticipating difficulties forimports. In fact, investments in stocks-were 1.7 times as high as the increasein GDP in 1974. Stock drawdown was very slow throughout 1975 and is expectedto continue at least until mid-1976. Private fixed investment dropped by 5.8%in 1974 and picked up by 10.6% in 1975, while public fixed investment fell by9.1% in 1974 and increased in 1975. Gtoss Domestic Savings, (Gross DomesticIncome minus Consumption) increased steeply in 1974; a temporary improvementin public savings contributed to this movement. In 1975, savings dropped by4.3% since more resources were used to bring consumption back to previouslevels.

1/ All 1975 figures are provisional.

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Employment

2.8 Employment started falling in the second half of 1974, and in June1975, for the first time in ten years, the number of persons working in themodern sector was lower than in the previous year. This category covers only15% of the total active population, which is estimated at 48.5% of the totalpopulation, or 6.4 million persons. Although there are no statistics on totalemployment in Kenya, it probably also dropped in 1975 1/. Paradoxically,farmers in some rural areas were having more and more problems finding labor,seasonal and other.

Real Wages and Income Distribution

2.9 While the National Accounts data indicate that for the country as awhole real per capita income has fallen both in 1974 and 1975, it is lessclear what happened to rural and urban incomes. Only the farmers may berelatively somewhat better off than before, but this does not apply to otherworkers in rural areas. As sketched in Annex II, farmers' real incomes mayhave dropped in 1974, but did increase in 1975, while real incomes of lowerincome urban and rural wage earners' dropped throughout. The bulk of middleincome urban workers experienced a partial loss in real income, with a fewexceptions of increases in real incomes in already well paying industries.Hence, some income redistribution from urban to rural areas in terms of realincome levels appears to have occurred, but income distribution within theurban and rural areas may at the same time have become more askew than before.

2.10 In order to measure the Government's success during 1975 in keepingdomestic inflation below world inflation, import prices, representing thatimpact of world inflation of Kenya's economy, can be compared with the GDPdeflator as an index of domestic inflation. Import prices, which soared by57% in 1974, went up by another 18% in 1975, while the GDP deflator, whichrose by 18% in 1974, slowed down only slightly to an increase of 14% in 1975.This would suggest that the Government indeed managed to keep domestic infla-tion somewhat if not much below world inflation. However, the consumer priceindex may be a more relevant measure of domestic price movements, becausewage demands are based on this index and wage costs in turn are an important

1/ Wage employment in the modern sector, the status most Kenyans stilldream of attaining through education, represents only 13% or about810,000 places, of which about 340,000 in the public sector (includingmajority government owned enterprises) and about 470,000 in the privatesector. Private employment rose by 7.4% in 1974 but fell by 5.5% in1975; construction was the hardest hit in that 20% of its employedlost their jobs, but in absolute numbers private employment fell mainlydue to 18,000 wage earners losing their jobs in modern agriculture andforestry. Public employment rose by 10.4% and 3.2%, respectively whichfortunately offset the private movements to some extent; Governmenthired in particular, 24,000 teachers in 1974 and 7,800 in 1975 followingthe official decision to abolish school fees for the first four classesin primary schools.

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factor in Kenya's competitive position in international trade, they co-determine whether export promotion will be successful and the balance ofpayments structure can be improved. The consumer price index shows a lessfavorable development: after an increase of 15% in 1974 it acceleratedto 19% in 1975. When this yardstick is used, the Government has not beensuccessful yet in moderating domestic vis-a-vis international inflation.

Fighting Inflation

2.11 Some of the factors underlying the 1975 price movement will alsohave an effect in 1976. Under strong pressure from organized labor, theGovernment relaxed its wage guidelines and allowed minimum wages in 1975 toincrease more than originally intended while the wage movements did notfully compensate workers for price increases, they compensated for a higherpercentage than intended (see Table II-3). Realized wage increases are inturn bound to exert some pressure on prices. In addition, when for agricul-tural policy purposes the farm gate prices were increased in 1975 and 1976,the Government decided that these measures had to be accompanied by increasesin consumer prices to avoid mass subsidies. Although these parallel priceincreases were commendable, in terms of inflation fighting, they had theunfortunate effect of pushing up the domestic price level. Moreover, theOctober 1975 devaluation of the Kenya Shilling (see para. 2.26) also added anupward push to the domestic price level, which will, however, not show fullyuntil in 1976.

Table II-3: WAGE AND PRICE MOVEMENTSIN 1974 AND 1975

1974 1975

Nominal Wages + 9.5% +15.6%Consumer prices (average) +16.3% +19.2%Real Wages - 6.0% - 2.9%

Source: Economic Survey 1976.

Balance of Payments

2.12 The impact of world inflation and oil crisis hit Kenya's balanceof payments and in particular the trade balance with full force in 1974 andled to an unprecedented overall deficit of $93 million. IMF facilitiesfinanced a large share of the deficit, and the substantial residual gap wasfilled by drawing down Kenya's foreign exchange reserves (see Table II-4).Only because of the slowdown in economic activity in Kenya and disinvestmentin stocks, the trade deficit was less disastrous in 1975 and the overalldeficit declined to $40 million. Kenya received official support from manysides to close the gap in 1975, including IMF assistance as well as an IBRDProgram Loan, given on the strength and in support of the Government's restruc-turing program. Details about balance of payments development are includedin Annex I to this memorandum.

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Table II-4: BALANCE OF PAYMENTS SUMMARY(in Millions of US$)

1973 1974 1975

Imports of goods 624 1033 935

Exports of goods 468 582 573

Trade Deficit -156 -451 -362

Services and Transfers (net) + 23 +129 +155

Current Account Deficit -133 -322 -207

Capital Inflows (Gross) (169) (246) (178)

Amortization ( 17) ( 16) ( 10)

Capital Inflows (net) +152 +229 +168

Overall Deficit + 19 - 93 - 40

Financing: 19 93 40

IMF facilities - 39 59

Use of reserves and errorsand omissions - 19 54 - 19

Source: Economic Survey 1976.

Use of IMF Facilities

2.13 Kenya's quota in the International Monetary Fund (IMF) is SDR 48

million, which is proposed to be increased to SDR 69 million under the 6th

General Review of Quotas. At the beginning of 1974, Kenya had only used

part of its Special Drawing Rights but had no drawings outstanding on other

IMF facilities. During 1974, Kenya first used SDR's as well as its goldtranche, which in balance of payment statistics are both recorded as use

of foreign exchange reserves, do not carry rigid repayment obligations and

are unconditional in the sense that no special economic performance clausesare attached to their use. The bulk of IMF support in 1974 came from the

1974 oil facility, which is a credit to be repaid within the medium term

Table II-5: KENYA'S TRANSACTIONS WITH IMF

(in US$ Million and SRR Million)

1974 1975US$ SDR US$ SDR

Special Drawing Rights 18.0 15.2 - 2.3 - 1.9

Gold Tranche 14.7 12.3 -14.5 -12.0

Oil Facilities 39.2 32.0 34.8 28.8

First Credit Tranche - - 14.9 12.3

Extended Fund Facility - - 9.3 7.7

Total 71.9 59.5 42.2 34.9

of which: Reserve Movements (32.7) (27.5) (-16.8) (13.9)

IMF Facilities (39.2) (32.0) (59.0) (48.8)

Source: IMF

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but conditional only on a country's efforts to restore the balance of pay-ments situation. Kenya also drew the first credit tranche early in 1975;this was followed by use of the remainder of the 1974 plus the 1975 oilfacility and in August 1975 Kenya drew for the first time under the ExtendedFund Facility which, as explained elsewhere, has a heavy conditionality andonly slightly lighter repayment conditions than the regular credit tranches.In line with standard IMF procedures,-Kenya incurred a repurchase obligationin late 1975 of which $14.5 million was used to reinstate the gold tranchewith the IMF.

Foreign Exchange Reserves

2.14 Thanks to the fact that Kenya's reserve position was fairly com-fortable at the end of 1973 ($232 million of foreign assets with monetaryauthorities), it could finance more than half of the 1974 deficit by usingthese reserves. They were drawn down to $187 million at the end of 1974.During 1975, a small increase in reserves 1/ took place and expressed in US$equivalent, reserves rose in value to $191 million, nearly the equivalent oftwo months import value at the end of 1975. Although slighly better than theposition of some other developing countries, this is not a very comfortableposition for Kenya and leav es the Government very little room for maneuver.

Monetary Policy

2.15 After an expansion of about 10% in the first half of 1974, moneysupply fell by 2% in the second half of 1974 and credit to the private sectorgrew more slowly than projected during that period. Thus, the actual devel-opment was more contractionary than intended by the measures introduced inmid-1974 by the Central Bank. By early 1975, the Kenyan authorities fearedvhat there would be a serious loss of foreign exchange during 1975 leading toa strong contractionary effect on the economy and they therefore encouragedthe commercial banks to extend their credit for productive purposes. Thesupply and credit with the IMF in the context of the Extended Fund Facility;a three-year average growth of 16% per annum was projected for total creditand 13% for private sector credit; performance targets were set as described

in paragraph 1.19 for the credit to the public sector and the expansion ofCentral Bank net domestic assets. Again the actual outcome was differentfrom the intentions but this time straying on the expansionary side. Becauseforeign assets increased instead of decreased in 1975, credit expansion waspossible on that basis without substantial increase in the Central Bank's netdomestic assets. The actual total credit expansion of 25% was well above theCentral Bank projection of 16%; credit to the private sector grew only by 11%instead of the projected 13%; on the contrary, credit to the private sectorsubstantially exceeded the ceiling by December 1975 and this blocked Kenyafrom further drawings on the Extended Fund Facility. The IMF staff appraisalof the monetary developments was "the unexpected increase in net credit tothe Government ... came at a period when the demand in the private sector was

1/ Disregarding repayments to IMF.

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depressed and could therefore be absorbed at relatively low cost in terms ofthe balance of payments." In fact, the value and volume of imports fell in1975.

2.16 In mid-1974 the Central Bank also permitted the commercial banks toincrease their effective lending rate to 10%. This was consistent with theupward movements of both deposit and lending rates decided earlier in 1974.Although this was a step in the right direction, the decision left the interestrate (which is expressed in current terms) far below the combined level of theopportunity cost of captal and the long run rate of inflation. It meant thatthe interest rate remained for the time being deficient as a tool for alloca-tion of the scarce factor capital and that more raises would be needed infuture to bring the interest rate closer to the real cost of capital.

2.17 The allocation of credit to productive purposes by means of admin-istrative measures was not yet very effective in the year 1974 as a wholebecause the first semester's movements more than offset the directives ofthe Central Bank given by mid-1974 for the remainder of the year. The CentralBank had indicated that the credit needs of the agriculutral sector should bemet in full, but in reality credit to agriculture grew much more slowly thanthat to manufacturing, construction and imports over the whole of 1974. In1975, the Central Bank directives were cast in more concrete terms: theshare of credit to agriculture, measured against the net deposits of thecommercial banks had to rise from 10% to 17%. This time credit to agricul-ture did indeed increase rapidly, as against slow expansion for manufacturingand an actual decline for credit to construction and imports. Continuation ofrelatively rapid expansion of agricultural credit would support the Government'spoiicy of emphasis on agricultural development. In a connected move the Bankagreed with the Government that the counterpart funds of the Bank's ProgramLoan would be earmarked for use by the Cereals and Sugar Finance Corporation,it would receive the funds as permanent working capital and use them forfinancing of seasonal crop purchase.

2.18 Within this move to expand agricultural credit efforts to providemore credit to small farmers have started, but increases are still limited inview of the total number of smallholders in Kenya. One of the reasons isthat it takes time to expand the institution which is best suited for thispurpose but relatively new in the field, the coopertive system. The Bank'sIntegrated Agricultural Development Project and USAID' s agricultural sectorlending are both aimed at supporting increased credit for the small farmersthat progress in this field will soon accelerate.

Budgetary Policies

2.19 Strictly speaking, FY76 was the first year included in the three-year forward budget, but the FY75 budget was already prepared with the re-structuring policies in mind. Both budgets showed a very rapid increase inexpenditure. Underestimation of the impact of inflation was one of the majorunderlying factors, but in addition quite considerable amounts were spent inFY75 without being authorized by Parliament. Although revenue kept growing ata respectable pace two consecutive large overall budget deficits occurred.

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Table II-6 BUDGETARY DEVELOPMENTS(in KL Million)

FY 74 FY 75 FY 76Actual Actual Prov.

Revenue 189 227 276(% increase) - (20) (22)

Recurrent Expenditure 1/ 151 200 237(% increase) - (32) (19)

Recurrent Surplus 38 27 39Development Expenditure 61 93 114 2/

(% increase) - (52) (23)Overall Deficit 23 66 75Foreign Financing (net) 9 25 26

(% increase) - (178) ( 4)Domestic Long Term Borrowing (net) 8 11 20

(% increase) - (38) ( 5)Short Term Borrowing (net) 5 30 29

(% increase) - (520) (-3)Total Financing 23 66 75

1/ Excluding debt repayment.

2/ Excluding KShl7 million onlent to Cereals and Sugar Finance Corporation(CFSC).

Source: Ministry of Finance and Planning

The Government managed to mobilize more than twice as much long term financingfrom domestic sources, but these intensified efforts to tap the still limitedfinancial market at home provided only part of the answer. The Governmentalso succeeded in tripling the amount of foreign disbursements. A residualdeficit remained, however, and the Government was forced to revert to largeamounts of short term credit. This meant that the public sector preemptedbank credit which was originally earmarked for private sector use. It alsomeant violating the 1975 performance target of Bank credit to the publicsector agreed on with the IMF.

2.20 The ratio of revenue to GDP reached 23.3% in FY75 and the same levelmay be attained in FY76. This is by itself an impressive revenue performance.The sales tax was the major contributor to revenue growth (see Appendix Table5.2). This tax was introduced in FY73 at a uniform rate of 10% but was notapplicable to most basic necessities. Its progressive character was made morepronounced when rates were increased selectively on beer, tobacco, cigarettes,petrol and several luzxury goods including cars in FY75 and FY76. Because thesales tax affects imported and domesticallly produced goods alike, it is a more

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effective tool to discourage consumption of luxury goods than tariff duties,

which would make imported final products more expensive, but would at the

same time raise the protection for competing local products which often have

a high import content. Other changes in taxes to boost revenue were the FY75

increase in corporate income tax from 40 to 45% (on foreign branches from

47.5 to 52.5%) and the tax increase on dividend paid to non-residents from

12-1/2 to 15%. These moves also had an equity effect on that non-wage

incomes were made to carry more of the economic burden. The capital gainst

tax introduced in FY76 had the same dual purpose. Further, a 10% import duty

was imposed on previously duty-free raw materials effective in December 1975

and on capital goods in July 1976, a similar move was announced but temporarily

suspended for a number of capital goods. These tariff measures were contribu-

tions to the ultimate goal of an overall reform of the tariff structure, but

complementary decreases in duties on final goods imports were not yet introduced.

On the export promotion side, an export compensation of 19% was not known and

should be assessed. In FY75 and FY76 they were probably not yet very heavy

because the measure was slow in catching on.

2.21 A closer scrutiny of recurrent expenditure in FY76 shows than in

view of the inflated FY75 expenditure, targets for FY76, the first year of

the forward budget, had in retrospect been based on a fictitiously low base.

As in FY75, the FY76 budget was again announced as an effort to restrain

recurrent expenditure while the momentum of the development budget would not

be sacrificed. It would have required a very strict discipline indeed to

realize these FY76 targets. In reality, the general wage increase granted to

all government workers in July 1975 cost more than budgeted for (see Annex

II) and affected nearly 70% of recurrent expenditure. Moreover, price escala-

tion on goods and services purchases was also 31% higher than forecast. By

December 1975, cash spending under the FY76 budget (added to delayed pay-

ments resulting from preceding year's budgets) had swollen so much that the

Government exceeded its domestic bank credit ceiling agreed upon with the IMF

(see para. 1.19). In April 1976, the Government introduced strict measures

to prevent further deterioration in FY76, including a ban on hiring of new

personnel and refusal to permit the start of new projects which had not yet

been included in the budget. The commitment mechanism was tightened so that

unauthorized spending would no longer be possible and credit ceilings were

renegotiated with the Fund for the second year of the Extended Fund Facility.

It is not clear why these measures were not introduced earlier in FY76,

because this would have helped to keep recurrent expenditure closer to its

budget estimates.

2.22 The FY75 and FY76 increases in recurrent expenditure were very

large in money terms but below the target of 6% growth in real terms stipulated

in the forward budget. However, there is a growth level below which recurrent

expenditure in real terms cannot be reduced for any length of time. This

problem will be discussed in depth in Chapter IV.

2.23 The growth of development expenditure was very high in money terms,

especially in FY75 and to a lesser extent in FY76; however, most of this ex-

pansion was caused by inflation and growth in real terms was much more modest.

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It nevertheless was an implementation of the Government's plan to maintainthe momentum of the development budget as much as possible, even underdifficult circumstances. After the serious efforts undertaken earlier toraise the ministries' capacity to implement development projects, it wouldhave been regrettable if this performance would have been allowed to deteri-orate. As to the composition of development expenditure, the proportion ofdirectly productive activities did indeed show an upward movement in FY75and FY76, while the shares of social and economic infrastructure are bothdeclining. Continuation of the new distribution for a number of years wouldhopefully support GDP growth. But since infrastructure investments are alsoneeded in support of more directly productive investments, it is clear thatinfrastructure investments cannot be compressed below a certain level for anindefinite period.

Table II-7: SHIFT IN COMPOSITION OFTHE DEVELOPMENT BUDGET

(In Percentage of Total Development Expenditure)

Directly Productive Activities FY74 FY75 FY76

Agriculture, manufacturing, 29 29 29natural resources 29 29 29

Social Infrastructure 20 20 20Economic Infrastructure 44 39 30Other Activities 6 5 4

Total 100 100 100

Source: Ministry of Finance and Planning. See also Appendix Table 5.4.

Agricultural Policies

2.24 Among the farm gate price increases introduced in January 1975generally reflecting import or export parity at the exisiting exchange rate,only maize,met with success. The massive increase in marketed production(from 365,000 to 488,000 metric tons or by 34%) confirmed that the priceincrease provided a strong incentive to farmers to expand production asintended. In, fact, the buildup of maize stocks soon exceeded the officialbuffer stock level of two million bags (180,000 MT) and the embargo on ex-ports was quietly lifted. Maize exports in 1975 amounted to 250,000 MT.The question whether maize can become a regular and profitable export crophas once again become actual. The 1975 price was called adequate in that itelicited the required production response; this does not mean, however, thatthe price was adequate in ,the sense of reflecting the true comparative advant-age of Kenya in maize production (see paragraph 2.26). For some other cropssuch as wheat, weather conditions apparently obscured a possible similar

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outcome. Conversely, prices for dairy products and beef continued to be indisarray and are in urgent need of corrective action. Since the issues ofagricultural prices and related marketing are crucial to agricultural develop-ment, we will pay special attention to it in Chapter IV and in Annex III.Progress concerning the three assurances which the Government had given to theWorld Bank under the Program Loan (see para. 1.19) was mixed. The Ministry ofAgriculture did improve its preparation of a project pipeline but delaysoccurred in the efforts to strengthen the Ministry's planning capacity so thatalthough appointment of Kenyan officials started in 1975, outside reinforcementdid not reach Kenya until mid-1976. The regular review of prices of majorcrops also left something to be desired; the preparation of the decisions wasnot as thorough as necessary and was suffering from the lack of information.Definite announcements for beef prices were delayed until July 1976 long afterprices for milk, sugarcane and rice had been increased in January 1976. Apositive note was the effort to expand sugar production by setting up newfactories; on the other hand, Government action on rehabilitation of existingproductin units had not shown much result yet, and the subsector as a wholewas therefore submitted to a special analysis.

Other Measures

2.25 Many fiscal measures aimed at reducing imports of oil and non-oilproducts have been introduced in FY75 and FY76; they are mentioned alreadyin paragraph 2.19. Some of the measures intended to raise the cost ofcapital and ensure a more efficient use of this scarce resource have alsobeen implemented in 1975, for instance, the investment allowance was convertedfrom a general incentive to capital intensive production (amounting to 20% to45% corporate income tax, or a 9% tax reduction) into a regional developmenttool, by continuing it only for investments outside Nairobi and Mombasa. Onother issues such as promoting fuller utilization of existing capacity beforeimports of new equipment are permitted and the promotion of domestic repairand maintenance enterprises, more specific measures remain to be taken.

Devaluation

2.26 On Octover 27, 1975, the Governments of Kenya, Tanzania and Ugandajointly devalued their currency by about 12% vis-a-vis the dollar. Theshilling had since January 1974 been pegged to the US dollar and its valuehad therefore undergone a parallel increase with the gradual strengthening ofthe dollar. This was in direct contrast with the serious balance of paymentsproblem at home. The devaluation intended to correct the increases which hadalready taken place during 1975. In terms of purchasing power vis-a-vis alltrade partners, not only the USA, the devaluation was closer to 8%. TheGovernment demonstrated this by decision that considers the exchange rate asone of its economic policy tools, and is willing to use this tool. The movehas brought the exchange rate somewhat closer to the real scarcity value offoreign exchange. The three countries also replaced their currency's peg tothe US dollar by an SDR peg. Since SDR fluctuations are derived from thefluctuations of a number of major currencies, this will limit the fluctuationsof the shilling in future years and reduce the need for frequent adjustments.

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III. OUTLOOK FOR THE REMAINDER OF THE PLAN PERIOD

Basic Constraints

3.1 Kenya's resource endowment is somewhat different from that of otherAfrican countries in that potentially productive land is now becoming ascarce resource; out of its total land surfact of 583,000 sq. km only about18% has high or medium agriculural potential under the present technology.Most of the remaining land is at best suitable for grazing by livestock andwildlife. Increasing agricultural production will therefore depend not onlyon using the limited possibilities to bring idle land under cultivation, butin particular on increasing productivity per acre of already utlized land.To allocate areas with alternative uses (for instance livestock versuswildlife, or livestock versus culitvation) to their optimum utilization by arational process becomes very important. Moreover, Kenya has to manage itsavailable land resources are carefully as possible and in particular guardagainst losses through erosion. The recently reactivated Land Use Committeehas an important role to play in these tasks.

3.2 Kenya's situation is probably better than that of many otherdeveloping countries with regard to the numbers of available skilled laborincluding managerial talent, but at the same time the scarcity of skilledlabor within Kenya is probably still the most serious long term constraint.The population is growing at least 3.3% per year implying a dubling within 22years. Kenya therefore has abundant unskilled labor with an agriculturalbackground as in most other African countries. Population pressure onagricultural land under the present technology is mounting and is alreadyhigh in some areas. Hence, unskilled labor is migrating from high populationdensity to low population density rural areas and also from rural to urbanareas. Employment opportunities in urban areas (both in informal and formalsectors) do not march the number of job seekers, mainly because the investmentlevel is still insufficient to create the required number of places.

3.3 The skilled labor constraint can only be remedied in the longrun by education. In the medium term it can be temporarily alleviated byemploying non-Kenyans. Improvements in the quality of the large unskilledlabor force will also be-a long run process, but the beginning may be madesoon in case of changes in the educatinal system which are now being studiedby a National Committee for Educational Objectives and Priorities. The Com-mittee is considering changes in orientation of the present educationalsystem, so that market requirements and individual expectations of schoolleavers will be better marched in future years.

3.4 Kenya's capital formation record is quite impressive, mainly thanksto a good domestic savings performance which reached the top of about 20% ofGDP in 1972/74. In addition, Kenya has been fortunate enough in attractinginflows of foreign capital both public and private in considerable amountswhich boosted its capital formation. However, for many years to come, Kenyadoes not appear to have enough land and capital to offer productive employment

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to all. Therefore, family planning is an essential objective of long termplanning. In the medium term unskilled labor will remain an abundant resourcewhereas especially capital will be the relatively scarce factor of production.

3.5 Measures to channel capital to priority uses include various pol-icies to raise the cost of capital which at the moment is still lower thanreal scarcity value of capital. In this context gradual upward movements ofinterest rates over and above the small increased introduced since 1974 areneeded. In order to analyze the issue in a more fundamental way, the Govern-ment commissioned IMF to undertake a study of the interest rate structure.this study was submitted to the Government in December 1975. The study advocatesthe introduction of a somewhat larger rate flexibility over time in order togive the Government a possibility to react more quickly to changing situationsand also a widening of the variations in rates charged. In does confirm thatin general interest rates in Kenya are lower than those in other cuontries,including the countries from which money is borrowed for investment in Kenyaand real interest rates have been negative since inflation accelerated in1973.

3.6 It is clear that if interest rates remain too low over a longperiod of time they cannot perform the function of allocating investmentto priority uses or promoting efficient use of capital; moreover, they makespeculative inventory buildup relatively cheap. Companies are induced toadopt capital- rather than labor-intensive techniques which are not suitedfor Kenya's resource endowment. These structural factors deserve to be givenmore weight in future policy decisions.

3.7 In the medium term, the most severe constraint for the Kenyaeconomy remains the shortage of foreign exchange. Slowdown of economicactivity in 1975 temporarily hid the serious and persistent nature of theproblem but Kenya's import dependency is very high and the pressure on thebalance of payments will no doubt reappear in 1977 and the following years.This is why in the transitional period priority has to be given to policieswhich can lessen this dependence including the use of exchange rate adjust-ments when appropriate.

3.8 In general, the use of devaluation as an economic policy tool canhelp to promote economic restructuring mainly on the export side. Assuminghigh demand elasticities in overseas markets for Kenya's non-traditionalagricultural exports such as vegetables, flowers, etc. and manufacturedproducts, devaluation will make it more profitable for exporters to expandtheir export volumes than before, even though imported inputs have becomemore expensive as well. In order to achieve success, however, Governmentand private efforts are needed to bring about the necessary supply reactionswithin Kenya. Demand elasticities for most traditional exports are probablylow and the world market dictates the price expressed in foreign currency.This price now translates into higher shilling receipts, which will - incase of a reasonably efficient domestic marketing system -- raise farmers'income and keep them interested in selling abroad even if international

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commodity agreements would set limits to expansion of export volume; insome cases even giving them windfall profits. The reaction of the importvolume to the higher prices is expected to be relatively small in allimport categories because of low demand elasticity and low supply elasti-city of substitutes within Kenya.

Objectives, and Policies for the Restructuring Period

3.9 Structural policies take time to be formulated, accepted, translatedinto action programs and then put into effect. To counteract slippages whichare unavoidable in the process, a sense of urgency motivating the Governmenton all levels would help to get action quickly and without adding avoidabledelays. In view of the basic constraints and policies necessary for change,it will not be an easy task for the Government to maintain at the same time areasonable rate of growth during the transitional period. Moreover, even tomaintain growth at reduced levels 1/ it will be necessary to find more foreignfinancing to fill the resource gap than Kenya managed to obtain in the past.Failure to secure enough resources from abroad would leave the Government nochoice but to adjust the growth rate even further downwards. Any room foreven modest improvements in per capita income would then disappear because ofthe rapid population growth and continued terms of trade deterioration.

3.10 On the basis of its estimate of available domestic and foreignfinancing, the Government is now setting its growth target at 5% for 1976,5.5% for 1977 and 5.9% for 1978. The growth rate of 5% in 1976 depends inparticular on an improvement in agriculural production after the very dis-appointing performance in 1974 and 1975. The outlook is reasonable, sinceweather conditions were uneven throughout the country. Industry could probablymatch its growth in 1975, provided that credit is not tightened further andimports of raw materials and intermediate goods will not be restricted further;it is expected that the 1976 balance of payments situation would not requiresuch measures. Construction and utilities could resume with the start ofseveral large infrastructure projecs in 1976 which were signed earlier. Otherservices would follow upward movements in agriculture. However, once thebalance of payments situation would deteriorate again with full economicrecovery in 1977 and 1978, this will constrain imports and hence possiblegrowth. Therefore, it is not expected that the growth rate could rise beyond5.5% in those years.

Agricultural Policies

3.11 In the 1960's and early 1970's the sectoral capital output ratio(ICOR) was lowest in agriculure; of course, within agriculture, large scaleirrigation has a much higher ICOR than rainfed agriculture. Although theaverage agricultural ICOR may now be increasing as development graduallymoves into less well researched crops and areas with lower potential, itremains lower for agriculture than for manufacturing and other sectors.

1/ The level of 5.5% is both lower than the original Plan target and theactual growth in the past.

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Therefore, it is hoped that the emphasis on investments in agriculture whichbegan in 1975 should continue in the next few years. Thanks to recent improve-ments, project preparation should no longer be a bottleneck for public invest-ments. But success would depend on more than that. In order to obtain thefullest possible effect of these investments, many supplementary measures haveto be taken simultaneously. These measures include first of all, adequateprice incentives. The reinforcement of the Ministry of Agriculture which isnow under way promises thorough and systematic preparation of price decisionsin the coming years. Annex III to this report pays attention to pricing andmarketing policies in particular for maize as one of the major actual issuesin agricultural policy. But pricing policies, although important, are not asufficient condition by themselves. Also needed are improvement in efficiencyand reinforcement of the wide range of supporting services for productionprovided by the Government and the private sector to large farmers as well asan increasing number of smallholders, and an efficient agricultral creditsystem. Government services would also require adequate funding. Efficiencyin related activities such as marketing and transportation has to be improvedand services expanded. Existing marketing systems which were set up underdifferent circumstances could be scrutinized and where necessary improved.

Manufacturing Policies

3.12 The Government's Action Program did include objectives for restruc-turing the manufacturing sector, namely reducing the heavy import dependenceby relying increasingly on domestic resources, promoting appropriate importsubstitution and encouraging export. A number of policies were also intro-duced, but they were not brought together in a coherent sector approach. TheGovernment is now preparing a comprehensive policy approach for this sector.There is a clear need to introduce changes in the trade policies and priceincentives framework within which enterprises operate. An important requirementwill be to eliminate the present bias against export-oriented and favor ofimport substitution industries. The export markets outside the East AfricanCommunity will have to be actively explored, since EAC exports offer littleprospect for growth. Policies for the manufacturing sector are discussed inmore detail in Chapter IV, paragraphs 4.16 to 4.23.

Budgetary Policies

3.13 After the large deficits in FY75 and FY76, the Government -- inline with its sound policies in the past -- was anxious to reduce the deficitto more manageable proportions; at the same time, it wanted to avoid curtailingeither recurrent or development expenditure to a point where economic growthand restructuring would be jeopardized. The budget proposal for FY77 under-lined the Government's first objective by setting the use of short term creditat Kb 11 million only. (See Table III-1). This implied an 11% increase inrevenue, which may be on the conservative side, since the buoyancy of revenueof 1.3 set as a target by Government would imply a 15% increase. It furtherset the growth of recurrent expenditure at 9%, which appeared too low in viewof continued inflation and built-in wage increases even without another cost

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of living increase. The original budget proposal for FY77 further providedfor a 12% increase in development expenditure, which allowed its level tobe maintained and even slightly raised in real terms in line with Governmentpolicy objectives.

Table III-1 FY77 Budget Outlook(In Kb Million)

FY74 FY75 FY76 FY77 FY76-FY77ACTUAL ACTUAL PROV. ESTIM. % increase

Revenue 189 227 276 307 +11Recurrent Expenditure 1/ 151 200 237 258 + 9Recurrent Surplus 38 27 39 49Development Expenditure 61 93 114 2/ 128 +12Overall Deficit 23 66 75 79

Foreign Financing (net) 9 25 26 47 +81Domestic Long Term (net) 8 11 20 21 +82Domestic Short Term (net) 5 30 29 11 -62

Total Financing 23 66 70 79

1/ Excluding debt repayment.2/ Excluding KI 17 million onlent to CSFC; decrease in total development

expenditure: -2% from FY76 to FY77.

Source: Ministry of Finance and Planning

3.14 In June 1976, the Government entered into an agreement with IMFconcerning the second year of EFF. The economic program this time includedthree performance targets as conditions for the use of up to SDR 42.4 millionduring the fiscal year. The first permitted an increase in net domesticassets of the Central Bank of Kenya of up to KE 24 million between March 31,1977; this was projected to allow an increase of 21% in domestic credit.Within this overall credit expansion, a second performance target was tolimit government borrowing from the banking system to Kb 25 million duringFY77 and to Kb 30.7 million between March 31, 1976 and June 30, 1977; inaddition, a temporary allowance was made for seasonal peaks during Januaryto June 1977 of .K 4.25 million. The third performance clause referredto the Government's intentions not to introduce multiple currency practicesor to intensify trade and payments restrictions. The second performanceclause -- which referred to Government borrowing from the banking system

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and caused problems during the first year of EFF -- interestingly enoughallows Kb 25 million, well above the Government's original budget estimateof Kb 11 million. Revised estimates now show a somewhat higher growth ofrecurrent expenditure and hence an overall deficit to be financed by bankcredit which is closer to Kb 22 million, and this makes the budget outlookmore realistic than before for the year as whole; it remains to be seen ifthe allowance for seasonal peaks in domestic credit is sufficiently large.

3.15 In addition to raising revenue, efforts co mobilize additionalfinancing should also cover other sources. The FY77 budget included ameasure to expand the domestic financial market; the Central Bank willfacilitate trading in government securities. It also indicated that smallerunits will be sold to attract savings from the general public. After theexpansion In FY76, only a small increase is expected in FY77 though. Accelera-tion of disbursements under the large already existing commitments of foreignbilateral and multilateral agencies becomes all the more necessary. Also,new commitments should be sought for priority projects. Moreover, some fi-nancing on commercial terms should be used to supplement official loans fromabroad in appropriate cases, that is for projects which have been thoroughlyprepared and for which competitive prices and financing terms can be obtained.

3.16 In the Forward Budget, which is now being rolled over to coverFY78-80, the Government's objectives to continue expanding its manifoldtasks and to stimulate growth and restructuring of the economy by expandingdevelopment expenditure imply that the Government budget represents a growingshare of total GDP. This does not preclude the need for efficiency improve-ments throughout the Government nor does it do away with the need to distin-guish high priority projects and activities from lower priorities, both indevelopment and recurrent expenditure and to provide in the first place, forthe high priority category, that is, projects and activities which have amore direct and rapid impact on production as contrasted to those with amore indirect effect and a longer gestation period. Chapter IV, paragraphs4.24 to 4.29 deal somewhat in depth with the Forward Budget.

Balance of Payments Outlook

3.17 The development of the balance of payments which emerges from ourprojections (see Table III-2, p. 27) suggests that after 1976 things will getworse before they get better. As far as we can predict under conditions ofgreat uncertainty, it will take at elast five years for Kenya to see theresults of its restructuring policy in its balance os payments. As a resultof gradually decreasing import dependence and gradually improving exportperformance and notwithstanding the lack of improvement in the terms oftrade, the resource gap will eventually decline to smaller proportions interms of percentage of GDP. Our projections assume that this will happen inthe early 1980's. On the financing side this will be followed with some delayb', a declining need for borrowing from abroad. Since the high level ofborrowipg would only be required -or a number of years, it is acceptable toresort. tc some extent to credit on commerci;tl terms; the future debt servicingcapacIt; .ill be growing once the export promotion effort catclies on, and useof commerci-.l zrodit will unde- hIis perspecti.'e not over--burden Keluya'screditwortnir.ess.

Table III-2 Balance of Payments Forecast(In US$ Million)

PROVIS. PROJECTIONS1975 1976 1977 1978 1980 1982 1985

Imports of Goods 935 1,094 1,249 1,400 1,726 2,146 2,957Exports of Goods 573 747 795 887 1,113 1,435 2,126

Trade Deficit -362 -347 -454 -513 -613 -711 -831

Non-Factor Services (Net) +233 +256 +286 +319 +394 +496 +746

Resource Gap -129 -91 -168 -194 -219 -215 -85

Investment Income andInterest Payments (Net) -99 -92 -129 -123 -155 -198 -264

Current Transfers (Net) +21 +22 +24 +27 +31 +35 +41

Current Account Deficit -207 -161 -273 -290 -343 -378 -308

Private Capital Inflows (Net) 55 39 48 58 72 80 90

Grants 16 25 40 40 50 60 80

Public Capital Inflows (Gross) (110) (150) (200) (205) (245) (325) (336)Amortization (17) (45) (60) (80) (70) (104) (170)

Public Capital Inflows (Net) 93 105 140 125 180 221 166

TOTAL CAPITAL ACCOUNT 164 169 228 223 290 361 336

Overall Deficit ( - ) or -40 +10 -45 -65 -55 -20 +30Surplus ( + )

Source: Mission Projections N.B. Kenya's share of already committed EAC Debt is included.

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3.18 Because of a combination of a low level of economic activity in mosteconomic sectors -- with the exception of construction, which is envisaginga revival thanks to establishment of several factories and power facilitieswhich were contracted earlier -- and an exceptionally high price for coffeeexports, the balance of payments constraint is temporarily less stringentduring 1976. During tnie first seven months, reserves were accumulating andfor the year as a whole a small surplus may occur. Earlier in the vear,when a deficil- had been forecast in relation to an earlier recovery hypothesis,the IMF agreed to provide $28 million of compensatory financing (which iscalculited on the basis of a shortfall in export earnings in the previousyear). Under the second (fiscal) year of the EFF, up to $24 million wouldin principle be availablo if ;tecessary until the end of 1976.

3.19 The balance of payments constraint is expected to make itselffelt again in full strength from 1977 onwards. Looking somewhat closerat the trade balance projections as shown in Table III-3, we expect thatin 1976 imports will grow more rapidlv than GDP (growth estimated at 5%)because of considerable imports of equipment for which contracts were signedin 1975. The table further illustrates that even if policies to reduce Kenya'simport delpendence are successful, the decline in import dependence will mani-fest itself graduallv and not immediately in the next few years. The drivefor domestic sugar production for instance, will first require higher equip-ment imports and it will take at least five years to reach the point wheredomestic demand can be satisfied at a reasonable consumer price level; andthis is probably one of the less complicated import substitution programsthe Government is pursuing. On the export side realism equally suggeststhat the volume of exports as a whole will climb rather slowly even if themost promising non-traditional exports in raw materials and agro-processingsuch as flowers, vegetables and fruits, would move up rapidly; this is be-cause the latter start from a small basis. As the Table also shows, weexpect the terms of trade to turn strongly against Kenya in 1977 (includinga 11% increase in oil prices) and not to turn in favor of Kenya for manyyears to come.

Table III-3: BALANCE OF TRADE PROJECTIONS(In US$ Million and Percentages)

1975 1976 1977 1978 1479 1980 19985

Imporu Value 935 1,094 1,249 1,400 1,726 2,146 2,957% increase volume - 9 5 5 4 4 4X increase price - 7 9 7 7 7 7

Export Value 573 747 795 887 1,113 1,435 2,126% increase volume - 5 3 5 6 6 6% increase price - 12 2 7 7 7

Trade Deficit -362 -347 -454 -513 -613 -7L -^--3

Source: Mission Projections.

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3.20 As shown from Table III-2, page we expect that notwithstanding increas-ing earnings from non-factor services as well as growing net capital inflows asizeable deficit will reappear in 1977, because of unfavorable trade develop-ments. Kenya could under our present assumptions probably cover most of thisdeficit by drawing on various IMF facilities: gold tranche, remainder of EFF,first credit tranche. But because of the preliminary nature of this forecastwe intend to reassess the 1977 outlook early in that year in view of a possibleemergence of a residual gap which would require a special solution.

3.21 It will probably be more difficult to secure sufficient financingfor 1978 and the following years, since by then most of the IMF facilitieswould have been used and foreign exchange reserves would not allow a majordrawdown. The options open to Government in order to prevent a reduction ofimports in 1978 and following years are to try and obtain special balanceof payments support in 1978 and following years or to seek commitments inearlier years (1976 and 1977) for quick disbursing official loans to coverthe gap in following years. Attempts to accelerate disbursements under thelarge existing commitments will be continued and strengthened in any case.Finally, if any or a combination of the above courses of action would stillleave a gap, more financing on commercial terms could be used to fill the gap.In 1975,.the Government has overcome its earlier hesitancy to utilize thisform of financing and has entered into several contracts with suppliers andexport credit institutions. A certain degree of caution is needed so thatthis solution does not lead to a proliferation of low priority projects fi-nanced by commercial credit. The Government intends to secure that theprojects in question have a high priority in the context of the developmentbudget, have been well prepared and that a procedure is followed whichleads to supplies at competitive prices and financial conditions for Kenya.Under those conditions, this course of action is preferable to a severe cut inimports and an ensuing slowdown in economic growth and restructuring. Moreover,our debt projections suggest that there is room for moderate amounts of addi-tional commercial financing from the point of view of Kenya's debt servicingpotential (see also paragraph 3.25).

Medium Term Foreign Financing Requirements

3.22 The projected financing requirements have been expressed as afive-year average over the period 1978 to 1982 in Table III-4. Disbursementsin this period would have to reach $400 million per year of which $80 millionto the private sector recipients and $320 to public sector and publiclyguaranteed debtors.

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Table III-4: FOREIGN FINANCING REQUIREMENTS, 1978-1982(In US$ Million)

Total 5-year1978-1982 Average

Current Account Deficit 1,650 330Amortization Payments (Public) 350 70

Reserve Buildup and IMF Repurchases P.M. P.M.Total Requirements 2,000 400

Privte Medium and Long Term Credit (Net) 350 70Short Term Credit (Net) 50 10Disbursements to the Public Sector 1,600 320

Total Financing 2,000 400

Source: Mission Projections.

3.23 In assessing the possible realization of this level of foreignfinancing we have analyzed the disbursements which actually tok place in 1974

and 1975 according to the Bank's external debt statistics (see Table III-5).

The Government(s efforts to obtain more financing from abroad especially forits development budget did already show in the increase from $82 million in

1974 to $112 million in 1975. Some of the disbursements in 1975, however,represented extraordinary balance of payments support which can not beautomatically counted on for later years. Comparing the target level of

$320 million of average disbursements to the public sector in 1978-1982 with

the actual level of about $100 million on average in 1974 and 1975 indicatesthat disbursements have to increase about three-fold in order to allow Kenya

to maintain its growth rate at 5.5%.

Table III-5: DISBURSEMENTS OF FOREIGN FINANCING TO THE PUBLIC SECTOR 1/(In US$ Million)

1974 1975

International organizations 24 51Governments (Loans only) 47 45

Total Loans from Official Sources 71 96Grants from Official Sources 11 16Total Financing from Official Sources 82 112Suppliers and Export Credits - -

Total Disbursements toPublic Sector 82 112

/1 Excluding disbursements for Kenya-based EAC projects(1974: $23 million, 1975: $25 million)

Source: Ministry of Finance and PlanningAppendix Table 4.2.

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Target Levels for Commitments in 1976-1978

3.24 The level of new commitments which would have to be mobilized in theyears immediately ahead in order to realize the target disbursement levelindicated above would have to be about $230 million per year in 1976-1978and increasing from there. This figure is calculated after taking intoaccount disbursements derived from existing commitments, which are quiteconsiderable: at the end of 1975 these commitments amounted to $550 million,including $367 million which the Government had secured in 1975 alone. Wefeel that, although high, $230 million of new commitments is not out of reachfor Kenya, for the following reasons. Substantial assistance from the EuropeanCommunity has become available to Kenya for the first time for 1975-1980 underthe Lome Convention, mostly in the form of grants. Further, in connectionwith some large projects such as the Gitaru Power and the Kenya Oil ProductsPipeline projects (for both of which the World Bank undertook the projectappraisal and acted as coordinator for the financing plan), suppliers andexport credits are being negotiated in 1976 in addition to those agreed in1975.

3.25 Kenya has been less successful so far in obtaining assistancefrom oil producing countries and their new financial institutions with theexception of the Arab Bank for Economic Development (BADEA) which has showninterest in participating in the Integrated Agricultural Development Project.Hopefully this is the beginning of a regular cooperation with Kenya in itsdevelopments, we think it is not overly optimistic to assume that the officialagencies -- both multilateral and bilateral, traditional and new donors --could jointly commit $200 million per year in the next few years. Kenya'sgood economic performance and her still low level of economic development($230 GNP p.c. in 1975) warrant that this assistance is as much as possibleprovided in the form of grants or on concessionary terms. This would leave agap of about $30 million per year to be covered by suppliers or export credit.

Creditworthiness

3.26 The Government has traditionally followed a conservative policywith regard to foreign borrowing. As of December 31, 1975 its public debtoutstanding and disbursed stood at $520 million; as yet undisbursed debtamounted to $550 million, a well-filled pipeline. Also, the terms of borrow-ing have not hardened very much because shorter maturities and rising interestrates on some loans have been offset in part by interest subsidies and by thefact that some agencies switched from loan to grant assistance. As a result,Kenya's debt service burden is still comparatively light (3.2% of exports in1975, excluding Kenya's share in EAC debt or 4.3% including that debt).Provided exports will expand in future in line with the Government's Restruc-turing Policy, Kenya could therefore if necessary, resort to moderate borrowingon commercial terms during the next few difficult years without impair in itslong term creditworthiness. Our projections suggest that the debt serviceratio would increase to 7% in 1980 and 10% in 1985, which is still consideredan acceptable level, when moderate amounts of commercial credit would be used.

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The Bank Group has steadily expanded its support to Kenya, especially in1975, as an expression of its confidence in the Government's continued soundeconomic policies. In 1974-75 the Bank Group committed an average $131.5million per annum, as against $45.5 million in 1972-73.

Long Term Perspectives

3.27 We expect that with sound policy formulation and implementation inthe remainder of the 1970's, Kenya could resume a satisfactory growth rateof 6.5% p.a. or more in the 1980's. This would also facilitate paying fullattention to income distribution and employment as objectives of equalimportance as growth. Whether this development will take place in realitydepends very much on decisive Government action on a number of major policyissues. We consider three issues, namely agricultural development, industrialpolicy change and restructuring of the Government budget, as crucial. Theyare therefore discussed in more detail in Chapter IV.

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IV. KEY POLICIES FOR A RETURN TO RAPID GROWTH IN THE 1980's

Agriculture

4.1 The Government recognizes that a crucial element in the restruc-turing policy is to improve even further on the respectable growth performancein the agricultural sector, which reached about 4.5% overall and 6% in themonetary sector in 1964-1973. It will be necessary for this sector to (a)increase domestic food production; (b) make a major contribution to importsubstitution, both directly and through resource based industry; (c) open upnew export opportunities, also directly or through resource based industry;and (d) play an even larger role than before in absorbing labor and maintainingincomes and consumption. Investment of the scarce factor capital in theagricultural sector promises a relatively high return as expressed in the lowincremental capital output ratio for the sector. (Large scale irrigationschemes may be the exception to the rule.) Moreover, investment in the ruralareas has the added advantage of better regional distribution of developmentand can also contribute to decrease existing income inequalities between urbanand rural areas.

4.2 By offering adequate price incentives translating into reasonablelevels of net farm income the Government can influence private investmentand production in the agricultural sector, including the smallholder produc-tion. To this end, the Government monitors and adjusts when necessary, themovement of prices of agricultural inputs and outputs. (See paragraphs 4.7to 4.13 which are based on Annex III to this report.) As regards publicinvestment, the Government can increase its total development budget to thelimit of available financing, within this total allot an increasing shareto agriculture and then improve the absorptive capacity of this sector.

4.3 In order to effectively realize projected levels of net income,farmers depend to a large extent on Government agencies to provide themwith extension services and the right assortment and quantities of farminputs (including fertilizer, insecticides, selected seeds and extensionservices) at the right time, although private intermediaries also play arole. The purchase of farm produce in Kenya is to a large extent in thehands of official marketing boards. Furthermore, Government influencesthe credit availability to finance farm improvements, equipment and sea-sonal needs; in the case of larger farmers, credit may in fact be the mostimportant input services which the Government provides whereas for smallerfarmers credit is one of many simultaneously needed services to increaseoutput.

4.4 The development of smallholder agriculture in Kenya has startedbefore Independence and has already shown outstanding results particularlyin the production of tea. Moreover, in coffee and dairying, smallholderdevelopment has also been impressive. Although this momentum of develop-ment has been somewhat dampened during the 1970's, in part due to weatherand external economic factors, it is important to note that the adoption

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rate of hybrid maize by smallholders has grown from 10% in 1968 to about

50% in 1975. The problem that Kenya now faces is that it is becoming in-creasingly difficult to develop smallholder agriculture as it reaches moreand more into annual and subsistence crops in the drier areas. The Govern-ment's actions along these lines are reflected in the effort put into theIntegrated Agricultural Development Project which the Bank has supportedin FY1976. This project deals in a specific way with the development ofinstitutional support for agriculture. The issue is whether existing credit,marketing, extension etc. services can be adapted both quickly and effec-tively in order to deal more directly with the small farmers. Since itwill not be easy to do so, the Government will have to give the attemptits strong support and budget allocations especially those for recurrentexpenditure which is production related should be adequate for this expan-sion with due consideration for efficiency improvements.

4.5 In order to successfully increase agricultural production the Gov-ernment is making the necessary organizational changes in the Ministry ofAgriculture to improve the planning and management capability in that sec-tor. The Government has committed itself to making more qualified trainedKenyan personnel available to the Ministry and to engage up to 13 adviserssupplemented by short term consultants over the next five years and implemen-tation on both has begun. The latter will be provided under a technicalassistance pooling arrangement recently signed between the Government and theHarvard Institute for International Development in 1976. An analysis of thecapacity of the Ministry of Agriculture to carry out the (now more importantthan ever) agricultural development program has led to the creation of a newManagement Systems Evaluation Unit and to a reorganization of the PlanningDivision. The Management Systems and Evaluation Unit will concern itselfwith the social and institutional aspects of agricultural strategy, pro-gram design and implementation, address specific implementation problemsand develop performance, information and control systems for both new andcontinuing programs. The Planning Division will consist of three sections,(a) a strategy section which will be responsible for the development ofan overall strategy, medium term plans, long range forecasts, policy relatedanalysis of the basic distribution, production and marketing problems andplans for the institutional implementation of strategies; (b) a commodityanalysis and policy planning section which will initially engage in thedetailed analysis of the production and marketing of individual commodi-ties and specific inputs, responsibilities for which will eventually shiftto the technical divisions of the Ministry, but whose ultimate mission willbe to analyze policy options with respect to costs, prices, subsidies andshort term commodity opportunities; (c) a project preparations section whichwill appraise specific programs and projects, monitor implementation andrelate the investment program to the budgetary process.

4.6 Training is of the utmost importance to this program, since inthe long term the success of this effort will depend on attracting andretaiing an adequate number of well trained Kenyan officials in the

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Agriculture Ministry. The Kenyan Heads of the Management Systems Evalua-tion Unit and the Planning Division in cooperation with the Training Divi-sion of the Ministry will develop with the assistance of the advisers, atraining program that begins with the counterpart relationships and encom-passes both local and foreign educational opportunities. It is expectedthat dependence on outside advisers will be greatly reduced over the lifeof the technical assistance pool. The first advisers recruited throughHarvard under the technical assistance pooling arrangement arrived in Kenyain July 1976. The strengthening of planning and implementation is a veryimportant condition for success of the complex organizational machinery ofthe Ministry of Agriculture as well as the Ministry of Cooperatives, themarketing boards, agricultural credit institutions, etc. and this effortcontinues to need full Government support.

4.7 Prices at all levels for the more important food crops agriculturalcommodities are fixed by the Government. Once the price levels are established,the Government then seeks to enforce farm gate prices through direct andsometimes exclusive purchase of produce from farmers by marketing boards; onthe wholesale and retail levels, prices are monitored by the Price Controller,who watches in particular the price movements of 31 basic necessities. Theenforcement of official prices has met with varying degrees of success. Theso-called scheduled commodities include two main food grains, maize and wheat,two main livestock products, beef and milk and also crops like sugar, cottonand rice. In contrast, prices of the four main export crops, coffee, tea,sisal and pyrethrum are largely determined by world market conditions. Farmgate prices for scheduled commodities are formally announced well ahead ofplanttime by the Ministry of Agriculture, wholesale and retail prices by theMinistry of Finance and Planning. Both ministries and the various marketingboards participate in the decision making process. Prices become effectiveupon publication in the Official Gazette.

4.8 The Government realizes that farmers do react promptly and oftenmassively to the prices offered for their products, at least in market sales,and that relative prices between commodities can play a major role in farm-ers' choice of crops. These sales responses are in fact the most concreteindicators of the approximate adequacy or inadequacy of ex-farm prices.While prices are generally fixed in a rational and timely fashion, on occa-sion prices have been set and changed in a rather less orderly fashion underthe influence of sudden changes in market outlook or non-economic considera-tions. Undoubtedly, if the Government considers that it is the nationalinterest to continue its price-fixing activities, staffing will have to bestrengthened and provided with greater facilities along the lines describedin paragraphs 4.5 and 4.6.

4.9 It could be argued, however, that Kenya's economy and its agricul-tural sector in particular are sophisticated enough to warrant increasedemphasis in the allocation of Government talent and resources to other highpriority tasks in agriculture, for instance, research on a wide range ofproducts in addition to hybrid maize, training and extension and projectpreparation and implementation. In particular in maize, the Government

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could consider gradually limiting its intervention in pricing and marketing tosetting minimum prices and acting as the buyer of last resort, thus allowingmarket forces more freedom in determining individual prices. This recommenda-tion fully reflects the findings and recommendations based on a well-reasonedand persuasive analysis found in the 1973 report of the Committee on theMaize Industry. The Committee suggested to free the internal market formaize and produced a clearly unfavorable assessment of the role and perfor-mance so far of the Maize and Produce Board. The Committee singled out themarketing system as the source of most of the problems which had beset themaize industry in the years preceding its report. Quotations of relevantsections from the background and summary and concluding remarks of the partof the report are included in Annex III, paragraph 48. The proposed freeingof maize trade would include exports of maize; in this manner, future losseson exports can hopefully be avoided as well. The Marketing Board would re-main responsible for maintaining an adequate buffer stock to counter cropfailures.

4.10 Several factors make it very difficult to arrive at a correct setof relative farm gate prices which avoids mis-allocation of resources, lossesto the Kenyan economy, income inequities and unwanted surpluses or shortages.Among these factors are the great variations in Kenya's ecology and climateand the limited up-to-date knowledge regarding existing farming systems andproduction techniques for different crops and different types of farms. Inparticular, up-to-date knowledge about response to fertilizer applicationappears very limited although data were probably gathered in the past. Giventhe present limitations in farm data, the available crop budgets and relatedcost estimates prepared by the Government for typical farms do not very accu-rately reflect actual conditions in the varied countryside. The estimatedgross margins per acre which provide benchmarks for the farm gate price pro-posals and the reported production costs per unit of output are hence morenotional than actual figures and may lead to erroneous conclusions and pricerecommendations. Improved farm budgets should be prepared for a series offarms according to size and eco-climate, based on actual practices and de-rived from and kept up-to-date by properly designed and executed surveys.Findings of these surveys would among other things provide a much neededfeedback on progress in various activities of the extension service includ-ing new-style World Bank projects such as the Integrated Agricultural Devel-opment Project.

4.11 Gazetted prices have been increased considerably since 1972, atdifferent times and rates for various crops. During the second half of the1960's Government moved maize prices gradually towards export parity levels.This objective appeared (and still appears) feasible because the successfuladoption of hybrid maize is increasing yields, area planted to maize, pro-duction and sales. However, the policy move toward export parity was inter-rupted by shortages in 1971 and upheavals in international prices for inputsand many agricultural products in 1973 and 1974 leading to repeated increasesin maize producer prices in Kenya. In 1975, the Government returned to anoverall agricultural pricing policy which uses world market prices as a major

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benchmark for determining national price levels. Prices for all major prod-ucts were also announced simultaneously. The January 1975 maize price wasactually close to the export parity price.

4.12 In the case of meat, an export product which could become muchmore important under the right conditions, recommendations had also alreadybeen voiced by an official commission, namely the Livestock and Meat WorkingParty which submitted its report in 1971. The Working Party pointed outthat domestic retail prices were unacceptably low and well below comparableworld market prices and that this constituted an undesirable subsidy tohigher income consumers, at the expense of lower income producers. TheWorking Party recommended that all beef pricing be made on the basis ofexport parity values and that the Kenya Meat Commission's monopoly formeat exports be terminated. The implicit tax burden on cattle producerswas indeed heavy as a result of the prevailing price policy; it can be heldlargely responsible for the continuing decline and critical condition of thebeef subsector. In July 1973, the Government indicated that price controlson all grades of meat would be phased out over three years and a grading inpricing structure relating live weight to carcass value and providing ade-quate incentives to producers would be established within one year of thesigning of the credit.

4.13 World market price upheavals and drought in Kenya postponed theimplementation of this commitment. In June 1976, the Government finallyannounced that prices for the two highest grades of beef were decontrolledand the price for the third grade increased; at the same time, prices forlower quantities were left unchanged. 1/ The Government and various foreignassistance agencies involved in livestock projects (including the Bank) willdiscuss further increases in a continuing process of gradual rationalizationof the Government's policy with regard to beef production and exports.More realistic prices for beef could also open up opportunities for theexpansion of beef substitutes such as pork, sheep and chicken meat. TheGovernment will engage consultants for advice on further steps to improve beefprocessing.

4.14 A pricing problem still prevails in the milk subsector. As wit-nessed by rapid expansion of the number of grade cows, farmers considermilk as a good source of income which moreover yields cash regularly andwithout long delays. The price of milk relative to that of other agricul-tural output was considered too high by the Bank's Agricultural Sector Sur-vey Mission in 1973. By increasing milk prices by a relatively smallerpercentage other than farm gate prices in 1975, .the Government has to someextent corrected the price relationship between milk and other products,although probably not sufficiently. The second milk price problem concernssupply fluctuations over the year. The maintenance of uniform prices throughout

1/ See Table 1, page 5, in Annex III.

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the year has led to such pronounced fluctuations in deliveries, that milk"shortages" during the dry season are now an accepted fact of life in townsand villages. This situation could be improved by a substantial increase(say, 20-25%) in producer prices of milk during the dry season. The advant-ages and disadvantages of uniform versus geographically differentiated priceswarrant further study.

4.15 The fertilizer situation has become more complex in the last fewyears. As far back as 1971, the Havelock Report had recommended that compe-tition in the industry should be increased, because the types of fertilizersimported and sources of supply were not in the country's best interests.Since little up-to-date knowledge is available about the type and quantity ofnutrients which are economically justified for different crops and areas, thisfield deserves to be carefully studied. Without waiting for the results ofsuch a study, the Government agreed to build and operate, together with aprivate company, a fertilizer plant which blends and produces compound typefertilizers; this company also obtained the monopoly for fertilizer imports.Notwithstanding this action, a study of fertilizer impact remains of highvalue to provide guidance for the factory's product-mix and the types offertilizers to be imported.

Manufacturing

4.16 A difficult adjustment process lies ahead for the manufacturingsector which presently is almost completely dependent on imported capitalequipment and spare parts for its investments, and to a large extent depend-ent on imported raw materials and intermediate products to even maintain thepresent flow of production from existing capacity. The FY74-78 DevelopmentPlan had already stated that the thrust of the Government's policy would beto shift the focus of industrialization from import substitution to domesticresource based production and exports, and these objectives were restated inthe Restructuring Program. Until mid-1976, some selective steps to reorientindustrial policy had already been undertaken; these included the introduc-tion in November 1974 of a 10% export compensation for manufactured exportsand the devaluation by about 8% of the Kenya Shilling in October 1976.

4.17 Other policies had been indicated, but the Government either imple-mented them partially or did not yet work out concrete measures. The latterapplies for instance to the promotion of utilizing existing capacity morefully, by multiple shifts or otherwise and to make this a condition beforeimport of additional equipment is permitted. The Government also had rei-terated its intention to make the overall structure of its import dutiesmore uniform, which would imply raising tariffs for raw materials, inter-mediates and capital goods and reducing them for final products. Only partof this policy was implemented: in July 1975 a 10% tariff was introducedon intermediates and in July 1976 the same rate was applied to capital goods;all of these goods had entered duty-free before. No movements were made onfinal product tariffs but instead the sales tax was increased on imports anddomestic production alike of a number of luxury goods. Changing the salestax is easier because this depends on the national authorities only, whilechanges in the tariff require the consensus of the three East African Com-munity partners.

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4.18 What was lacking was a coherent framework in which these policieswould be integrated. Therefore, the Government is now reviewing its prior-ities for development of the industrial sector and preparing a comprehensivepolicy approach to the sector in 1976. Moreover, since small and mediumscale industries appear better suited than large industries to utilize localmaterials, less capital intensive production techniques and offer more employ-ment, the Government is also attempting to organize its presently rather dis-persed assistance to small and medium scale enterpreneurs more efficientlyand to formulate a coherent policy of promotion of small and medium scalebusiness.

4.19 There is a clear need to change the existing trade policy and priceincentive system within which the enterprises in the industrial sector oper-ate. The present system actually places export oriented industries at a dis-advantage vis-a-vis the import substitution industries which are workingbehind a protective tariff wall. Future industrial growth will depend onthe promotion of efficient industries, some of which may be import substi-tution oriented, but most of which can export to markets outside the EastAfrican Community. Foreign exchange earnings through exports are as val-uable, unit for unit, as those earned by imports. Exports can alleviateunderutilization of existing capacity as well and can be relatively morelabor-intensive than import substitution.

4.20 The global policy measures to be incorporated in a comprehensivepackage could include, on the export side, stronger export incentives includ-ing higher export compensation and an export credit guarantee scheme. Thebudget costs of the higher export compensation could be neutralized byraising the sales tax somewhat. In a separate attempt to boost the produc-tion of goods essential to Kenya's growth, the sales tax could be differen-tiated further, with an increase for luxury goods and a decrease for moreessential products. On the import side, import licensing, which causesgreat distortions between industrial branches and inefficiency throughoutthe sector, could gradually be liberalized and replaced by a rationalizedtariff structure.

4.21 Additional measures are necessary concerning institutional andprocedural matters. The Ministry mainly responsible for the manufacturingsector, the Ministry of Commerce and Industry, is at present involved inmany but not all cases of enterpreneurs establishing a business in Kenyaand seeking official consent or assistance; this applies especially to thelarger ventures with or without substantial Kenyan participation. Assumingthat private initiative will continue to play an important role in Kenya'sindustrial sector, the Government's task is to encourage those industrieswhich find it financially attractive to operate in Kenya and can at the sametime prove that they are contributing to Kenya's overall development objectivesof increasing production and employment (especially in the areas outside themajor urban centers), lowering import dependency and promoting exports. Untilnow, this Ministry lacked an active special unit to formulate global and morespecific industrial objectives and policies; an adequately staffed unit could

- 40 -

prove an important asset. A second unit could be given the task of lookingafter small and medium size business and its possible contributions to indus-trial development.

4.22 Various agencies within Government are now appraising project pro-posals submitted by the private sector or, emanating from the public sector;these include the New Projects Committee, the Industrial Protection Committee,the Industrial Survey and Promotion Center as well as financial institutionssuch as the Industrial Development Bank. While financial analysis is commonpractice, economic rate of return analysis, although already somewhat moreadvanced in some of these agencies, should be undertaken in more depth and ina more uniform manner. A convenient way to achieve this would be for theGovernment to issue general Guidelines for Project Appraisal covering bothfinancial and economic analysis, which would ensure that the assessment ofindividual proposals is in line with the overall industrialization policy ofthe Government; these Guidelines should be applied uniformly in all relevantpublic sector agencies, including the financial institutions.

4.23 Another procedural matter (with substantive effects, though) waseased when, in July 1976, the Minister of Finance announced in his BudgetSpeech that industrialists' requests for permission to increase priceswould henceforth be processed in a more pragmatic manner. Instead ofhaving to wait until official approval, price increases can now go intoeffect 30 days after submission to the Price Controller in case this author-ity has not reacted by that time; he retains the right of intervention, how-ever. Requests for private increases have, as before, to be justified ongrounds of cost increases other than wage hikes. This measure can be ex-pected to take away some of the private sector's fears of low financialprofitability and doubts as to Kenya's attractiveness as a country toestablish business. It allows more flexibility in adjustments to changingcircumstances. Provided prices of the items in the lower income householdbudgets are strictly monitored, this decision will not have undesirablesocial implications. It will moreover save the Government considerableresources because the corps of price controllers can remain modest. Expe-rience in other countries shows anyhow that strict enforcement of pricecontrols over a large range of goods is often illusory, because goods arediverted to other countries or to a parallel market in the same country.

Budget Issues

4.24 The budget outlook for the medium term reveals the need forrapidly rising income in order to finance rapidly increasing governmenttasks. In a growing economy like Kenya there is as a rule a continuouslyexpanding need for government services and investments in order to promotedevelopment. In the past ten years the public sector did indeed assume agrowing proportion of total GDP and the trend has even been more pronouncedfor the Central Government budget. Moreover, there are a number of specialfactors in the present situation which require the budget to expand even

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more rapidly than before. First, the Government's objective to promoterural development implies bringing more services and facilities to manyrural areas and secondary city centers. Since the local authorities are

no longer able to finance these facilities out of their own income and the

tasks largely exceed what self-help can contribute, the Central Government

budget has to assume an increasing burden for rural development. A second

factor is related to the reorganization of the EAC corporations; infra-structure expenditure which was so far financed on the Community level --often with foreign assistance -- may now have to be added to and incor-

porated in Kenya's national development budget after appropriate weighingof priorities of these and other investments. 1/ The Kenya region of the

East Africa Railways Corporation alone is already considering a $200 million

investment plan for the next five years. A more incidental factor whichwill increase central budget expenditure in the near future is the factthat a major project, the Nairobi Airport Expansion, has experiencedserious cost overruns and delays and now needs some form of financing to

complete construction so that the already sunk investment can be madeproductive. Finally, it appears that Kenya will spend more on defense inthe coming years than in the past, when the share of defense expenditurewas a fairly modest 5%. According to recent Government projections, total

expenditure in the central budget would, therefore, have to grow at least

at 7% per year in real terms, which would allow for a very gradual increaseof Government's share in GDP.

4.25 The Government is now extending its Forward Budget into FY80.Its projections of Government income show (see Table IV-1) that an over-all growth of 7% in expenditure will require considerable efforts to

mobilize both more foreign and domestic resources. The proposed sharesof domestic and foreign financing are 67% and 33% as against about 78%and 22% realized in FY74-76. Revenue is forecast to grow at a rate of

1.3 times the rate of growth of monetary GDP, or at 8.5% per year on

average in real terms when growth would reach 6.5% per year. It is true

that this tax buoyancy was reached in the past, but this required repeatedintroduction of new taxes and raising tax rates. The tax effort has, there-fore, already reached a high level in Kenya, and to improve it even further

would be a difficult task, requiring a very determined Government effort.The Government's projections further assume that the net inflow of official

assistance (both grants and loans) will remain at least constant in real terms.

This assumption could in the Bank's view be realized through common efforts of

foreign assistance agencies. Net receipts of domestic borrowing from sources

other than banks are also projected to increase in real terms. This would

probably require a special Government (including Central Bank) effort to

strengthen the domestic capital market, which is still rather limited in

size.

1/ Depending on the degree of autonomy granted to the agencies incharge of railways, etc.

Table IV - 1 ACTUAL AND PROJECTED BUDGET DEVELOPMENTSFY 74 - FY 80 (In KE Million)

FY74 FY75 FY76 FY77 FY78 FY79 FY80Actual Actual Forecasti1 Provis Forecastl Revised _ Forward BudgetRevenue 189 227 239 276 267 307 344 373 405% increase - 20% - 22% - 11% 12% 8% 9ZTotal Expenditure 212 293 315 351 335 395 430 460 490% increase - 38% - 20% - 12.5% 9% 7% 7%of which recurrent 1/ (151) (200) (200) (237) (216) (272) (290) (310) (330)% increase - 32% - 19% - 15% 7% 7% 7%aevelopment (61) (93) (115) 2/ (114) 2/ (119) (123) (140) (150) (160)% increase - 52% - 23% - 8% 14% 7% 7%OVERALL DEFICIT 23 66 76 75 68 88 86 87 85Foreign financing (net) 9 25 52 26 42 47 47 50 50% increase - 178% - 4% - 81% _ 6% -of which grants (3) (7) (19) (14) (20) (20) (20) (20) (20)loans (gross) (10) (22) (39) 2/ (18) 3! (30) (35) (36) (37) (40)

repayments (-4) (-4) (-6) (-6) (-8) (-8) t19) (-7) (-10)Domestic Long Termloans (net) 8 11 12 20 16 19 20 22 23% increase - 38% - 82% _ -5% 5% 10% 5%loans (gross) (11) (16) (18) (27) (22) (25) (24) (24) (31)repayment (-3) (-5) (-6) (-7) (-6) (-6) (-4) (-2) (-8)Use of Cash Balances and

Domestic Short TermBorrowing (net) 5 30 12 29 10 22 20 16 12% increase - 500% _ -3% - -24% -9% -20 -25%TOTAL FINANCING 23 66 76 75 68 88 86 87 85

1/ Forward Budget as included in Sessional Paper No. 4 of 1975; in FY 76 constant prices.2/ Excluding K" 16.7 million onlent to Cereals and Sugar Finance Corporation.3/ Including proceeds sinking funds Kn 11 million.4/ September 1976 revision,in. constant FY 78 prices.

Source: Ministry of Finance and Planning

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4.26 Notwithstanding these various efforts, however, residual de-ficits would occur throughout FY78 to FY80. The Government intends tofill these gaps by other financing, either short term bank credit andforeign credit on commercial terms. Moreover, it also intends to coverany shortfalls in revenues, foreign financing or domestic non-bankborrowing by these means. This is because the Government considersthe proposed expansion of its functions essential for restructuring aswell as recovery of growth in the economy. Of course, there continuesto be a need for efficiency improvements throughout the Government andit also remains necessary to carefully select high priority activitiesand projects, that is for the coming years those projects and activitieswhich have a direct impact on production as contrasted to those with amore indirect effect and a longer gestation period; the budget wouldprovide in the first place for these high priority activities. This expansionappears a justifiable goal provided further that measures are taken to keepthe inflationary impact of domestic credit expansion to the public sector to aminimum, for instance rationalization of the import regime.

4.27 Within the overall financing limitations which keep expansionof the central government budget at 7% per year, a special constraint mayarise concerning domestic financing. For the coming years, a larger propor-tion than before of projects in the development budget will concern ruraldevelopment, a smaller proportion infrastructure. Hence, the share of localcosts in the development budget is likely to increase considerably with aparallel decrease in the share of foreign exchange costs. This shift in costcomposition would have to be accompanied by a similar shift in financing forlocal and foreign costs. In individual cases, though, it has been noted thatforeign assistance agencies and other foreign financiers have a preferencefor financing foreign exchange costs and are somewhat reluctant to financelarge portions of local costs; in these cases they left a relatively heavierburden on the Government to find the complementary local resources than in thecase of infrastructure projects. For the development expenditure in theForward Budget as a whole, however, the Government projects a decrease in theshare of domestic financing from 78% realized during FY74-76 to 67% forFY78-80. This suggests a particular need for increasing the provision offinancing which can be used to cover local costs from other than domesticsources, that is, from foreign financial sources. The project list preparedin 1976 (which excludes projects for which commitments have already beenobtained and projects which will be totally financed from domestic sources)indicates within total costs a proportion of around 60% for domestic costs andaround 40% for foreign costs. The requested foreign financing representsabout 60%, which means in effect that it would cover a substantial proportionof domestic costs.

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4.28 In the Government's forecast, recurrent and development expenditurewould both grow at 7% per annum. The terms recurrent and development expendi-ture as defined in the Kenyan budget means that the latter cover all expendi-ture, including salaries and vehicle costs required to establish a new facilityor launch a new program; once the construction phase has been completed though,the necessary expenditure to keep it operating is all called recurrent expendi-ture. This distinction in itself is sufficient warning that budget cuts whichwould be made along conventional object lines, for instance concerning allgasoline or all spare parts expenditure, would be dangerous because they wouldthreaten to slow down not only non-essential but also essential constructionor cause an undesirable drop in mainly social as well as mainly productionoriented projects and programs in operation. But as already indicated in para3.12, it would not be advisable either to apply cuts mechanically to allrecurrent expenditure either. Instead, the following line is preferable sinceit is of great importance to keep production from falling. All activitieswhich have a directly productive and quick yielding character should be givenpreference in the next few years, and this should apply both to recurrent anddevelopment expenditure. An expression of this can be found in the difficultdecision which the Government already took in 1975 when it intended to bringthe growth of educational expenditure under control.

4.29 Not only do the rural development oriented projects imply a largershare of domestic cost during their construction phase, they also have largerimpact on recurrent expenditure needed after construction to operate theprojects and programs. This effect will make itself felt over the somewhatlonger term and the Forward Budget with its three-year horizon is thereforenot the appropriate instrument to forecast its size. An instruction datingfrom 1972 directing technical ministries to include projection of futurerecurrent cost in their project proposals is not operational at the moment.The Government has now started a discussion, however, of methods to dealwith the issues of long term forecasting of recurrent expenditure.

4.30 Efficient execution of projects in accordance with budget pro-visions and, in case of foreign financing, disbursement schedules agreedwith the lending institution, has become even more important than before,because delays now lead to rapid cost increases as a result of high infla-tion. Delays still occur from time to time and the existing monitoringsystem reviews progress in project execution only on a three-monthly basis.There may be room for a simple trouble shooting unit to follow progress ofthe most important foreign financed projects at more regular intervals,identify the problems and initiate remedial action. There was also aneed to improve the submission of claims for reimbursement of lendingagencies, which were often made long after the expenditure had taken placein Kenya. The Government introduced measures to remedy this deficiency inApril 1976.

ANNEX IPage 1

BALANCE OF PAYMENTS DEVELOPMENTSin 1974 and 1975

1. The balance of payments became the central issue in Kenya'seconomic policy in 1974. The acceleration of world market prices, includ-ing rapidly rising oil prices, hit Kenya's trade balance with full force in1974. In the first half of the year, the export prices remained on the highlevel they had started to climb up to in 1973, but in the second semester theydropped steeply. Import prices remained high throughout the year. Netearnings from services (including sales of oil for bunkering ships and refuelingairplanes) more than doubled and net private capital inflows (especially shortterm credit related to inventory build-up) as well as net public capitalinflows grew. Notwithstanding these positive movements, an unprecedentedoverall deficit of about $90 million occurred. IMF facilities financed a largeshare of this deficit, to wit $38 million; the remainder was covered out ofKenya's foreign exchange reserves (see Table 1).

2. For 1975, the Government originally forecast an overall deficitof $140 million, but this did not materialize becuase the economy practicallystagnated with a GDP growth of less than 1% in 1975. Also, after the heavybuild-up of stocks in 1974, 1975 was a year of net disinvestment in inventories.As a result, import volume dropped by 20% and this was the main reason for thesmaller deficit. It was also smaller thanks to special balance of paymentsassistance provided by several bilateral sources, while the World Bank more-over granted a $30 million Program Loan in May 1975 in supprot of the Govern-ment's restructuring program. To cover the residual gap of about $40 millionIMF provided substantial financing in 1975 as in 1974.

Foreign Trade Movements

3. The foreign trade deficit was much larger in 1974 than in the pre-vious record year, 1971 (see Table 2). The price movements dominated thepicture in 1974, both on the export and the import side, while the inventorybuild-up contributed to the 7% increase in import volume. In 1975, priceincreases abated and decreases in volume, especially of imports, were instru-mental in reducing the trade deficit.

Table 1: Balance of Payments, 1972-1975 (In US$ Million and KG Million)

US$ Million KSL Million1972 1973 1974 1975 1972 1973 1974 1975

Imports of Goods 521 624 1,033 935 186 210 369 346Exports of Goods 339 470 582 573 121 165 208 212

Trade Deficit -182 -154 -451 -362 -65 -54 -161 -134Non-Factor Services (Net) +112 +130 +213 +233 +40 +36 +76 +86Resource Gap -70 -54 -238 -129 -25 -18 -85 -48Interest Payments (Net) -34 -103 -101 -99 -12 -36 -36 -37Transfers (Net) +39 +23 +17 +21 +14 +8 +6 +8

Current Account Deficit -64 -131 -322 -207 -23 -46 -115 -77Private Capital Inflows (Net) 46 103 146 55 17 36 52 21Public Capital Inflows (Gross) 48 65 100 126 17 23 35 47Amortization 6 17 17 17 2 6 6 6Public Capital Inflow (net) 42 48 83 111 15 17 29 41

Capital Account Total 88 151 229 167 32 53 82 62

Overall Deficit/Surplus +24 +20 -93 -40 + 9 + 7 -33 -16

Financing of the Deficit -24 -20 93 40 - 9 - 7 33 16

IMF facilities - - 39 59 - - 14 23Change in reserves and errors

and omissions -24 -20 54 -19 - 9 - 7 17 - 7

Source: Economic Survey, 1976See also Appendix Table 3.1

ANNEX IPage 3

1/Table 2: Exports and Imports

1972 1'973 1974 1975

Export Value (in Kb million) 128.2 167.7 218.4 222.5

(% increase price) - (+14) (+36) (+15)(% increase volume) - (+15) (- 3) (-13)

Import Value (In Kb million) 191.1 281.1 366.4 347.3

(% increase price) - (+14) (+57) (+18)(% increase volume) - (- 4) (+ 7) (-20)

Trade Deficit 62.9 -50.4 -147.9 -124.8

1/ Figures differ slightly from those in Table 1 because they still includeoil sales to bunkering ships and refuelling airplanes as merchandiseexports instead of services.

Source: Economic Survey, 1976.

4. Recent price movements in exports and imports were largely dominatedby forces outside Kenya's influence. A return to the earlier exchange rate ofKSh7.143 per US Dollar (US$2.80 - Kl1) took place in early 1974, after the ratehad been KSh6.90 per US Dollar (US$2.90 = KMl) during part of 1973. But thismeant only a drop of 3% in the shilling's purchasing power vis-a-vis the USDollar. The devaluation on October 27, 1975 (and simultaneous change in thepeg to SDR instead of US Dollar) implied a somewhat larger change of about14% vis-a-vis the dollar as of that date. The rate was fixed at KSh9.66per SDR. The drop in purchasing power of the Kenya Shilling amounted toabout 4% vis-a-vis the dollar over the full year 1975 as compared to thefull year 1974. The devaluation will have its full impact only in 1976,when the purchasing power of the KShilling is estimated to be 10% lower incomparison to the full year 1975 vis-a-vis the US Dollar. Since the termsof trade shown in Table 3 was based on prices expressed in KShilling, thedevaluation effects described above are incorporated in their movements.The terms of trade turned sharply downwards with a loss of 13 percentagepoints in 1974 and continued to deteriorate slowly in 1975.

ANNEX IPage 4

Table 3: Terms of Trade Movements(merchandise only; 1971=100)

1972 1973 1974 1975

Export Price Index 111 126 171 196Import Price Index 112 128 201 237

Terms of Trade 99 98 85 83

Source: Economic Survey, 1976Also see Appendix Table 3.3

5. Kenya depends heavily on oil imports for its energy supply; it hasonly limited hydro and geothermal power potential and exploration for oilhas not been successful. Most oil requirements are imported as crude andprocessed in a refinery in Mombasa, which was expanded in 1974; in addition,some processed oil products have to be imported as well. Kenya also exportsoil products to neighboring countries in considerable quantities.

Table 4: Oil and Non-oil Trade(in Kb million)

1973 1974 1975

Imports 218.1 366.4 347.3of which oil and oil products 32.1 81.1 95.0non-oil 195.0 285.4 252.3

Exports 167.7 218.4 222.5of which oil and oil products 21.5 46.1 58.6non-oil 146.2 172.3 164.9

Trade deficit -50.4 -148.0 -124.8of which oil and oil products - 1.6 - 35.0 - 36.4non-oil -48.8 -133.1 - 87.4

Source: Economic Survey, 1976

The deterioration in the trade deficit in 1974 was for 34% due to oil tradeand for 66% to non-oil trade, as Table 4 shows. If the trade volumes hadnot changed from 1973 to 1974, the price effects by themselves would have

ANNEX IPage 5

implied that only 13% of the trade deficit increase was due to oil, and87% to non-oil trade. The actual effect of price and volume movementsjointly was to disrupt the approximate balance in oil trade and replaceit by a deficit, which represented about 25% of the total trade deficitin 1974-1975.

Table 5: Oil and Non-oil Trade(in Kb million)

1973 1974 1975

Imports 218.1 366.4 347.3of which EAC 12.3 13.3 9.9non-EAC 205.8 353.1 337.4

Exports 167.7 218.4 222.5of which EAC 38.8 48.3 46.2non-EAC 128.9 170.1 176.3

Trade deficit -50.4 -148.0 -124.8of which EAC +26.5 + 35.0 - 36.3non-EAC -76.9 -182.9 -161.1

Source: Economic Survey, 1976

6. Kenya's trade surplus with Uganda and Tanzania has traditionallyoffset part of its trade deficit wi,th the rest of the world. The apparentlyexpanding surpluses in trade with EAC countries in 1974 and 1975 hide thedrop in exports of other than oil products (see Appendix Table 3.2). Kenyais aware of the fact that-exports especially of manufactured products to theEAC countries will become increasingly difficult,because of establishmentof competing industries and slow growth of purchasing power. The expansionof its exports will therefore have to be realized in other markets.

7. The great variety of eco-climats in Kenya is reflect in the rangeof its important agricultural export products. In 1975, the six leadingagricultural commodities (disregarding petroleum products) were coffee -16%, tea - 11%, meat and meat products - 3%, hides and skins - 3%, sisal -3%, pyrethrum - 2%. All these are conventional exports. But interestingnewcomers are also appearing: fresh vegetables - 2%, cut flowers - 1.5% 1/,

1/ An important condition for further expansion of vegetables and flowersis rapid transportation to overseas market at reasonable prices.

ANNEX IPage 6

canned pineapple - 1.5%. In processed products, many are based on agri-cultural raw materials. An exception is cement - 2.5% now more valuablethan pyrethrum as an export. (See also Appendix Table 3.6).

Services and Transfers

8. The services balance traditionally brings in net foreign exchange

earnings. Its increase in 1974 and 1975 is mainly due to higher airplanerefuelling and ship bunkerage receipts included in "Other Transporation."Earnings from tourism find their expression partially in gross receipts on

foreign travel. After a drop in 1973 (KL24.3 million), these earningscontinued to grow from 1974 (Kh27.0 million) to 1975 (Kb34.4 million).

Investment income maintained the same level after an important increase had

taken place in 1973 (see Table 6).

Table 6: Services and Transfer(in Kb million)

1973 1974 1975

Freight and Insurance (net) 11.4 18.5 19.2Other transportation (net) 14.3 44.6 46.5

Foreign travel (net) 13.3 13.9 22.4

Other services (net) 2.1 1.8 1.1

Sub-total non-factor services 41.1 78.8 89.2

Investment income (net) -35.7 -36.1 -36.5

Sub-total factor services 5.4 42.7 52.7

Current transfers 7.8 7.0 7.6

TOTAL Services and Transfers 13.2 49.7 60.3

Source: Economic Survey, 1976

ANNEX IPage 7

Capital Movements

9. As shown in Table 7, Private Capital (Net) Long Term includesdirect investments (including reinvested profits) as well as medium andlong term lending. This net inflow increased in 1974, but suffered asetback in 1975 because of the recession. The use of short term creditby the private sector was expanded greatly in 1974 in connection with theinventory build-up; large amounts had to be repaid on balance in 1975.The Government managed to accelerate disbursements from foreign loans andgrants in 1974 and 1975, but some of the loans were one-time extraordinarybalance of payment support which could not be counted upon again for futureyears.

Table 7: Capital Movements(in KL million)

1973 1974 1975

Private Capital (net) Long Term 31.3 41.6 24.3Private Capital (net) Short Term 5.3 10.4 -4.0

Government and GovernmentEnterprises Long term, includinggrants 16.8 29.4 42.1

Government and GovernmentEnterprise short term - 0.7 0.1

Total Capital Movements 53.4 82.1 62.3

Source: Economic Survey, 1976

ANNEX II

Page 1

REAL WAGES AND INCOME DISTRIBUTION

1. For the majority of workers and self-employed who work in ruralareas, statistics on nominal income increases, cost of living increasesand the resulting real wage increases are not yet available 1/. Farmerson the one hand and wage earners in agriculture including landless labor andnon-agricultural wage earners and self employed in the rural areas on theother were affected in different ways. For farmers it appears that increasesin farmgate prices in 1974 were not large enough to offset sharp input costincreases, so that -- to the extent that farmers do indeed receive the offi-cial farm gate prices and on the other hand, do actually use the more realfarm incomes were squeezed in 1974. The situation has probably improvedconsiderably after the more substantial and general price increases for majorcrops in January 1975, so that farmers have probably in general not sufferedreal income losses in 1975.

2. Consumer for agricultural produce prices were raised in line withfarmgate price and this move alone caused the cost of living index in thecities to go up by an estimated 7% to 8% in 1975, while the total urban costof living index for lower paid workers increased by 16% in 1974 and 20% in1975. The general impression is that urban workers did not get full compen-sation for total cost of living increases in 1974 and 1975. Semi-skilled andskilled urban workers in the private sector who are parties to collectivebargaining agreements managed to negotiate substantial raises but not fullcompensation; the wage increases were in principle awarded for a two-yearperiod. However, a number of renegotiations were allowed in the second yearof the agreements and for those workers annual wage increases practicallydoubled, meaning they got more than full compensation. In order to controlwages in this category the Government issues Wage Guidelines to the IndustrialCourt which registers all agreements. Stringent rules laid down in January1975, prescribed that wage increases should on average be held below 75% ofcost of living increases 2/ and set exact amounts for allowable increases;these amounts were tapered by income level and ensured only for lowest paidwage earners full cost of living compensation. Under the threat of a generalstrike, these absolute ceilings were removed from the Guidelines. The 75%limit was generally respected (except in those agreements which were renego-tiated). It appears that workers who were already in branches with higherwages (particularly in heavily protected import substitution) got relativelylarge wage increases than those in other branches, so that within this'"workers' middle class," income became less equally distributed than before.

1/ The Integrated Rural Survey now being completed may be of help at leastfor farmers' income. Systematic surveys of the agricultural sector wouldbe very desirable to obtain this (and other) information.

2/ Productivity increases would no longer justify wage increases.

ANNEX IIPage 2

3. Another category of workers in the private sector, unskilledlabor, faces a different mechanism. The influence Government has on theirwages passes through the Minimum Wage Legislation. Part of these workers whoare employed in regularly inspected enterprises do probably in fact receivethe legal minimum wage; others working in places where the law is not enforcedearn less than the minimum wage. The same is probably true for most workersin the urban informal sector and in small farms. Also under pressure of thegeneral strike, the categorical minimum wages were increased in May 1975. Theindustrial-minimum wage went up by 25%, slightly more than the increase incost of living since the last minimum wage adjustment in 1974. The minimumwage for agricultural workers was raised by as much as 65%, which was in linewith the Government's objective to reduce existing wage differentials byincreasing the lower wages, but certainly over-compensating price increases.On balance, the minimum wage increases thus came out far higher than theintended less than 100% compensation; to the extent that these wage increasesare really paid, and no offsetting productivity increases are realized, theycan have an undesirable inflationary impact on the economy. It appearslikely, though, most workers in this group did not get the full increase inminimum wages and thus suffered losses in real income both in 1974 and 1975.

4. In the public sector Government can control wages in a more directway, through budgetary procedures. In this category Government has the bestopportunity to strictly implement the overall wage objectives. Real wages forthe public sector as a whole fell in 1974 and 1975, but these aggregatefigures hide some interesting specific developments. For instance, the sharpdrop in average real wage income in the parastatal agencies reflects more themassive hiring of teachers in the lower pay scales compared to the previousaverage for that category, than restraint in wage increases for cost of livingincreases for existing personnel. In central government (excluding teachers),average nominal wages went up by 12.6% in 1974 and by 21% in 1975, providingnearly 100% compensation. The latter percentage included tapered wage increasesfor cost of living increases exceeding the original budget provisions of 15%to 5%. Although this may at first sight suggest that Government did not heedits own wage policy objectives as an employer, the 1975 increases have to bejudged in the context of developments in the last few years. The last cost ofliving increase had taken place in 1973 and then only for lower income employees;the others had seen their incomes eroding. In 1974, Government did not givein to pressures for general wage increases and real wages did decline. The1975 increase therefore in part compensated for losses in real wages in 1974and 1973.

ANNEX IIIPage 1

SELECTED AGRICULTURAL ISSUES

1. This Annex is not an Agricultural Sector Survey. Instead of coveringall major policy issues, it focuses on two areas: the adequacy of producerprices of selected major commodities, and the impact of farm size on landproductivity, employment generation, and income distribution. In reviewingprice incentives, special emphasis has been placed on the two principalfoodgrains (maize and wheat) and the two main livestock products (beef andmilk); relatively less important crops like sugar, cotton and rice are brieflyconsidered. These are major commodities for which producer prices are inprinciple controlled or established by the Government, unlike prices of thefour main export crops (coffee, tea, sisal, and pyrethrum) where world marketconditions largely determine prices received by farmers. The enquiry intorelative advantages of large versus small farms is particularly relevant todefine an agricultural development strategy in a country like Kenya, whichfaces a high population growth rate and a growing scarcity of land suitablefor cultivation.

I. BACKGROUND

A. Production

2. Aggregate farm production has grown little in the last two years.Certainly marketed production has shown meager overall progress. Aftercarefully reviewing the available information, the Mission's assessment ofmajor developments is summarized in the paragraphs that follow. The over-all stagnation in 1974-75 hides a slight growth in crop production offsetby a decline in beef and dairy production, at least in production marketedthrough official channels. Unusual rainfall patterns in 1975 influencedcrop production, favorably for maize and unfavorably for wheat; while belowaverage precipitation during the long rains season affected adversely thecattle and dairy industries. Climatic variations continue to impart aconsiderable degree of risk to agricultural activities in Kenya; on balance,however, economic factors are significant determinants of observed productiontrends.

3. Maize production has on average increased considerably over thepast five years: deliveries to the government monopoly (the Maize andProduce Board (MPB) reached a record 488,000 tons in 1975. The steepdecline in wheat production since 1970 was arrested in 1974, when produc-tion increased to 159,000 MT. A renewed decline to about 145,000 tons,mainly due to excessive rainfall at harvest time, occurred in 1975. Theupward trend, however, is expected to resume in 1976 given an estimated20 percent increase in area planted. Higher yields due to the spread ofhybrid seeds (paras 11 - 14) have been a major factor in increasing maizeproduction, and since large areas remain suitable for hybrid maize, furtheryield and output increases are expected during the coming years. Wheatproduction, on the other hand, tends to parallel changes in area, undernormal weather conditions.

ANNEX IIIPage 2

4. Milk production dropped sharply in 1974 and again in 1975 to about230 million liters owing mainly to progressively smaller dry season deliveries.Cattle deliveries to the Kenya Meat Commission (KMC) slightly increased in1974 over the 1973 level to 160,000 head (still 20% below 1972), and declinedagain by 16% in 1975. Also significantly, the average cold dressed weightof the animals delivered has declined from about 150 kg per animal in theearly 1970's to about 124 kg in 1974 and 1975. As a consequence, KMC'scarcass meat processed declined about 13% in 1974 and 16% in 1975. 1/

5. Milk and cattle figures marketed through official channels un-doutedly understate actual production and sales. Increasing amounts havebeen delivered to local traders and private butchers in attempts to getaround uneconomically low official prices. Local sales of KMC beef, forexample, declined from about 15,000 tons in 1970 to 3,000 tons in 1975; sinceno widespread meat shortages are evident in retail markets, unofficial sourcesmust have considerably increased their supplies, although, in all likelihood,at a considerable cost in terms of quality and hygiene.

6. Cane and sugar production increased by about 11% in 1974 due tothe full operation of the new (1973) and more efficient complex at Mumias.A drop of 4% occurred in 1975, as increased Mumias production was offsetby lower output in the other four complexes. Current production is about1.65 million tons of cane and 164,000 tons of sugar. Seedcotton productiondeclined by about 7% in 1974 and regained the 1973 level in 1975 (about16,000 tons). Paddy rice is grown only under irrigation and the bulk is pro-duced at the Mwea scheme. Production gradually increased from 1970 to 1973in step with the expansion of the scheme, and has remained static during thelast two years at about 32,000 tons from some 8,500 cultivated ha.

7. Among the major export crops, coffee production declined about2% in 1974 from the 1973 peak level of 71,000 tons, and a further 6% in1975 to just over 66,000 tons. Tea production, which increased 38% between1970 and 1973, declined slightly in 1974 and regained in 1975 the 1973level at 56,700 tons. High world prices elicited a 50% Increase in sisalproduction in 1974 to 86,500 tons; production in 1975 fell to 44,000 tonsin response to the sharp price decline and lower yields due to previousyear's overcuttings. Pyrethrum production gained considerably in 1974both in terms of dried flower output and of their pyrethrin content; a moremodest output increase coupled with a drop in pyrethrin content occurredin 1975, bringing the estimated production of extract to 204 tons. Horti-cultural production increased considerably in 1974 and 1975. The expansionof a canning plant in Thika was accompanied by a doubling of pineapple pro-duction to 83,000 tons. Vegetables, fruits and fresh flowers grew rapidlyand helped diversify exports.

B. Inputs

8. Government's awareness of the vital role of widespread adoptionand proper use of non-traditional inputs in the evolution of the agricul-tural sector led to the appointment of a Working Party in September of 1970.

1/ However, meat production by KMC improved in 1976.

ANNE) 'IPage

The detailed terms of reference, given by the Minister of Finance, directed

the Party to examine current practices and make recommendations to overcome

perceived deficiencies or obstacles to optimal use of fertilizers, agricul-tural machinery and agricultural chemicals (insecticides, fungicides andherbicides). The Party submitted its report in April 1971. Printed soonthereafter, it became commonly known, for the name of its chairman, as the"Havelock Report". This report remains the only thorough analysis of moderninput (other than improved seed) use in Kenyan agriculture; its findingsand recommendations were summarized and assessed by the Agricultural Sector

Survey Mission in 1973 (cf. especially Annex 19), which expressed overallagreement with it.

9. Fertilizers. According to the Havelock report, phosphate appli-cation in 1969 amounted to about 23,400 tons, and that of nitrogen to about14,700 tons. This was the nutrient content of the estimated 105,000 tonsof fertilizer applied in that year. Additional findings of the study werethat: (a) wheat and maize were the main recipients of phosphate, with over

80% of the total; (b) about 27% of nitrogen application went to tea, 23% tomaize, 17% to coffee, and 15% to wheat. The remainder was mostly appliedto sugar cane; (c) fertilizer was used predominantly (80% of the total) bylarge farms. Small farms used significant amounts only for maize (phospate),and coffee and tea (nitrogen). Fertilizer use probably declined considerablyin 1974 and 1975 in reaction to steeply higher prices 1/. No effort has beenmade, however, to update the findings of the Havelock Report.

10. If these findings are correct and still fairly represent currentpractices, there is considerable scope to improve fertilizing practices inKenya. Heavy yearly applications of phosphate, a generally recommendedpractice by the Kenyan agricultural services which, judging from importstatistics, is widely followed, may well be higher than necessary. Nitrogenapplication to the wheat varieties grown in Kenya is likely to increaselodging and lower yields. Maize response to nitrogen, even in the case ofhybrids, is not universally thought to be economically justified. 2/ Accord-ingly, the assumed (and likely) reductions in fertilizer use in the pasttwo years probably had little impact on yields, with the possible exceptionof tea and coffee. In some cases, in fact, the net effect may on balanceprove beneficial.

11. The fertilizer situation in Kenya has become more complex in thepast two years. Until 1974, fertilizers were imported and distributed byprivate firms, usually local branches of large international concerns. TheHavelock report pointed out and documented that these firms tended to selecttypes of fertilizers and sources of supply that were not in the country'sbest interests, and that collusion among them resulted in unwarrantedly highprices. The report recommended that measures be taken to remedy these prac-tices and to increase competition in the industry. Regrettably, recent

1/ Fertilizer use definitely went down in the case of smallholder tea.

2/ For a good overview, see Dr. Judith Heyer's article "Who benefits fromthe price increases" in the Weekly Review, February 8, 1975.

ANNEX IIIPage 4

measures have moved in the opposite direction. An expected shortage offertilizers in the long rain seasons of 1974, prompted the Government toimport directly; established firms were denied import permits except forminor amounts of special varieties. Import statistics show total netimports of 13,000 tons in 1972, 116,000 tons in 1973, and a sudden jump to174,000 tons in 1974. End-1974 stocks were estimated at about 40,000 tons 1/;import statistics show that 1975 imports were 104,000 tons. In 1975, theKenyan Government agreed with the N-Ren Corporation of Cincinnati to build andoperate a fertilizer blending plant in Mombasa using mainly imported components,with an annual capacity of 240,000 tons of NPK compounds. N-Ren also receiveda monopoly for fertilizer imports after 1975.

12. Other chemicals. Information on other agricultural chemicalssuggests that value went up by 31% in 1974 and 14% in 1975. It is very likelythat increased prices discouraged their use in volume terms in the same wayas fertilizer use.

13. Improved Seed. Two major seed improvement research programs areunderway. They are carried out by Government research stations, and deal withmaize (National Agricultural Research Stations at Kitale, Embu and Katumani),and wheat and barley (National Plant Breeding Station at Njoro). Maizeresearch concentrates on the development of hybrids and composites, and hasachieved excellent results. Wheat and barley research is mainly geared todeveloping rust resistant varieties, and its accomplishments so far havebeen modest.

14. The Kenya Seed Company (KSC), a joint undertaking of the govern-mental Agricultural Development Corporation (ADC) and the private KenyaFarmers' Association (KFA), engages in seed multiplication, partly directlyon its own farm at Kitale but mostly on contract with large farms. Some ofthese are owned by ADC. Seed inspection and certification are the responsi-bility of the Kenya Inspection Service for Seeds (KIS), established in 1970with Dutch assistance; it functions as part of the Scientific Research Divisionof the Ministry of Agriculture. Approved seeds are packed at KSC premises.Maize seed is treated with lindane/thiram and packaged into 10 kg bags, therecommended dosage to plant one acre. Complete instructions for proper useare printed in every package in English and Kiswahili. The distributionsystem was established by KSC: numerous changes made to improve its perform-ance, particularly to make the product known and available to large numbersof small farmers, resulted in the emergence in a very short time, of aremarkably efficient and responsive distribution system. The Kenya Farmers'Association (KFA) has gradually taken over a part of this vital activity.

15. Hybrid maize was adopted by farmers at a remarkably fast rate 2/.Gerhart's thorough study, based on a 1973 survey, documents and seeks toexplain the spectacular success in developing and achieving farmers' adoption

1/ USDA; "Kenya: Annual Agriculture Situation Report", February 6, 1976. p. 6.

2/ John Gerhart, The Diffusion of Hybrid Maize in Western Kenya CIMMYT, Mexico,1975, with an Appendix on "The 1974 Kenya Maize Surveys" by Olof Hesselmark,a Swedish economist/statistician seconded by SIDA to MPB.

ANNEX IIIPage 5

of hybrid maize the Western Kenya. The first hybrid varieties suitable forthe region were introduced in 1963. The model frequency for first use ofhybrid seed by farmers varied from two years after its introduction in zone 2(high altitude, moderate rainfall, comprising half of Kericho and Nandi, theentire Uasin Gishu and Trans Nzoia, and almost all of Bungoma districts), toeight years in zone 3 (altitude below 1500 m, moderate rainfall, comprisingpart of Busia, and the entire Siaya, Kisumu and South Nyanza districts.(Corresponding intervals were ten years for Iowa corn farmers, and three forPunjabi wheat farmers.) Ten years after introduction, hybrid seed was planted

by 90% of the farmers in suitable zones (1 and 2) of Western Kenya, and by16% of the farmers in the marginal zone 3. Even in zone 3, 20% of the farmersnot using hybrid seed reported that they had tried it but found its use un-warranted (yields less, yields are less certain, does not do well).

16. Difference in farm size had a negligible influence on adoption ofhybrid seed. In Gerhart's words "small farmers in Kenya have not been ex-cluded from enjoying the benefits of hybrid maize and have adopted it withalacrity where environmental circumstances warrant it". 1/ Another importantfinding of the survey was that fully 97.5% of the farmers interviewed wereaware of the need to buy seed every year and in fact did so, contrary tothe presumption and corresponding advice of some agricultural experts, thathybrid maize is not practical for developing countries.

17. Gerhart attempts to explain the success story of hybrid maize,and to identify factors that may be generalizable. The site-specificity ofagricultural technology, even within one region of one (admittedly verydiverse) country, is properly stressed. Key contributing factors which maybe replicable elsewhere, including Kenya for a number of other crops, areidentified as the existence of a first rate research and seed productiontechnology and the commercial system of seed production and distribution 2/;the Government is commended for refraining from interfering with KSC manage-ment (except as far as attempting to set prices and even here management'sopposition to subsidizing seed sales carried the day) in spite of havingmajority ownership. Also mentioned is the contribution of the extensionand training services of the Ministry of Agriculture.

18. A 1974 Maize Farmers Survey, inspired by Gerhart's work, is analyzedby Hesselmark. The Survey covered the Western region plus the Central High-lands, comprising Central and part of Eastern provinces. For Western Kenya,the 1974 Survey corroborated Gerhart's findings, and contributed new insightslargely based on observed differenes with Central Highlands findings, andon deviations between actual and recommended seeding densities. Hybrid

1/ Op. cit., P. 24.

2/ "An already existing commercial sector that created the demand for theproduct; a systematic breeding and agronomic research program withclose ties to the users of its product and to the extension services;quality staff and remarkable staff continuity; a locally based commercialproduction company ready to put the product into widespread use, foreign,governmental, and producer supplied financial support; and contacts withinternational research institutions." (op. cit., p. 49).

ANNEX IIIPage 6

maize was commercially introduced in Central Kenya in 1968, after the ResearchStation at Embu succeeded in breeding and testing a medium maturity variety

that would do well under the considerably different climatic conditions pre-

vailing in Central Region two distinct and relatively short rainy season).Farmer's acceptance was extraordinarily rapid. Further experimentation pro-

duced a still superior hybrid which was bred, tested (out-yielding the "local"variety by 61%) and distributed in 1970. Hybrid seed sales in the Western

and Central Regions since 1967/68 have grown as follows:

Western Region Central Region% Increase % Increase

Units from previous Units from previousYear (10-kg bags) year (10-kg bags) year

1967/68 36,000 - 10,500 -1968/69 64,000 78 13,200 261969/70 80,000 25 27,700 1101970/71 127,000 59 45,800 65

1971/72 135,000 6 68,100 491972/73 185,000 37 82,700 22

1973/74 205,000 11 120,000 451974/75* 218,000 6 150,000 25

Average Compoundrate of growth 29% 46%

* Estimate

Source: Hesselmark, in Gerhart, op. cit., p. 57

19. Sales In Western Region may be levelling off due to nearly 100%adoption (although the sudden jumps in 1970/71 and 1972/73 are unexplained).The survey indicates that 55% of the Central Region farmers had adopted hybridmaize in 1974, compared to 95% in the Western Region. Hence, increases in the

use of hybrids, in yields/ha, and in total production are likely to continue InCentral Province for the next few years. Research to breed new varieties

continues, in Kitale as well as Embu. At Kitale, the program now has a longerrange focus, geared to breeding high protein (particularly high lysine) varieties.At Embu, in additon to the nutritional objectives, work continues on breeding animproved hybrid capable of outperforming In dry years the local (Muratha) varietyand the early maturity Katumani, an inexpensive synthetic widely used in drierareas, which outyields other varieties under low rainfall conditions.

20. Hesselmark also found that practiced plant density is substantiallybelow recommendations. KSC recommends 45,000 - 53,000 plants/ha in pure standsdepending on variety. The 1974 survey results, however, indicate that actualplant density in pure hybrid stands is only about 34,400 plants. Since KSCestimates the area planted with hybrids on the basis of bags sold and an

assumed use of one bag per acre, the actual figure may be underestimated by25%, i.e. the area currently under hybrid maize in Western and Central Regionsmay be estimated at roughly 200,000 ha.

ANNEX IIIPage 7

II. PRICES AND MARKETING

A. Product Prices

21. For all the so-called scheduled commodities, which include theseven under study, prices at all levels are fixed by the Government. Pro-ducer prices are formally announced by the Ministry of Agriculture; whole-sale and retail prices by the Ministry of Finance and Planning. BothMinistries, as well as the different Marketing Boards, participate in thedecision-making process. Prices become official on publication in theOfficial Gazette (hence "gazetted" prices). On occasion, however, priceshave been set and changed in a rather less orderly and thoughtful manner,seemingly reflecting hasty reactions to undesirable events (e.g. forecastshortages), and numerous extra-economic but very real considerations.

22. The Government has become increasingly aware that farmers reactpromptly and often massively (at least as far as market sales) to theprices they receive for their products, and that relative prices can playa major role in their choice of what to produce. Advisory groups withinthe Ministries of Agriculture and of Finance and Planning are responsible formaking price recommendations consistent with vaguely defined production andincome objectives. Improvements on the side of the Ministry of Agricultureare under preparation and experts recruited through the Harvard Institute forInternational Development will assist in this process. In the context ofthe Program Loan and more recently the Integrated Agricultural DevelopmentProject the Government has confirmed its intention to undertake a regularreview of agricultural commodity prices in conformity to the AgriculturalAct. Within the Ministry of Agriculture a unit will be set up to formulaterecommendations on absolute and relative agricultural prices and to reviewannually the farm gate prices of meat, milk, maize, seed cotton, groundnuts,beans, sunflower seed and passion fruit; prices will be published simul-taneously by December 15 of each year. Undoubtedly, if the Government con-siders that it is in the national interest to continue its price-fixingactivities, staffing will have to be strengthened and provided with greaterfacilities.

23. It could be argued, however, that Kenya's economy and specificallyits agricultural sector are sophisticated enough to warrant increased emphaisin the allocation of Government talent and resources to other high prioritytasks in agriculture, for example, research, training and extension, andproject preparation. The Government should gradually move to a system oflimiting its intervention in pricing and marketing to setting minimum pricesand acting as buyer of last resort, allowing market forces more freedom insetting individual prices. This is not a consideration put forward by whatmight be taken as a group of outside experts of classical vintage: in fact,the most cogent and persuasive analysis of this second alternative, and themost forceful recommendation that it be followed are found in the 1973 Reportof the Select Committee on the Maize Industry (see para. 29).

ANNEX IIIPage 8

24. It is extremely difficult to arrive by "fiat" at a correct setof relative farm prices in Kenya which avoids misallocation of resources,real welfare losses to the economy, gross inequities and unwanted surplusesor shortages. When, in addition, national policy dictates that prices mustbe uniform, geographically as well as seasonally, misallocation and netwelfare losses are inevitable. Among the factors that seriously aggravatethe difficulties of centralized decision making, mention must be made of:(a) the extreme ecoclimatic variety of the country; and (b) the limited upto date knowledge regarding prevailing farming systems and productiontechnologies for different crops and types of farms; in particular, verylittle is known about yield response to fertilizer application of individualcrops under different ecoclimatic conditions. How much fertilizer should beprofitably used, and how much is in fact applied, are veritable enigmas:probably, the same is true regarding insecticides, fungicides and weedkillers.

25. It follows from the above that crop budgets and related costestimates prepared by the Ministry of Agriculture for a "typical" farm, inno way reflect actual conditions in the varied countryside. The estimatedgross margins per acre, which reportedly provide the benchmark for theirfarmgate price recommendations, and the reported production costs per bagof different commodities are, in fact, notional figures which may lead toerroneous conclusions and price recommendations. Improved farm budgets,based on actual practices ascertained by properly designed and executedsurveys, would certainly be valuable as sources of information on farmincomes and technologies that would, among other things, provide a muchneeded feedback to the extension services. These budgets, however, shouldnot be used as the exclusive criterion to make product pricing decisionsin an open economy, at least not for internationally tradable commoditiesas are those considered in this report.

26. Gazetted producer prices have been considerably increased since1972: the timing, frequency, and magnitude of the changes have varied con-siderably among products, as follows:

ANNEX IIIPage 9

Table 1. Movements in Producer Prices

IncreaseCommodity 1972 1973 1974 1975 1976 1972/1976

Maize (Sh/bag) 1/ 35(Jan) 40(Oct) 45(Aug) 65(Jan) - 86Grade 1

Wheat (Sh/bag) 48(Jan) 53(Jan) 90(Oct) 100(Jan) - 108Grade 2-5 58(Sept)

70(Dec)

Beef (Sh/kg, c.d.w.)

Prime grade 4.70(Feb) 4.90(Jul) 5.35 5.90(Feb) Free(July) -

Choice 4.45 4.87(Jul) 5.30 5.85(Feb) Free(Jul) -

F.A.Q. 4.20 4.61(Jul) 5.20 5.50(Feb) 7.00-7.50 2/ 67Standard 3.15 3.67(Jul) 4.20 4.85(Feb) 4.85 54Commercial 2.80 3.19(Jul) 3.70 4.25(Feb) 4.25 52

Milk (Sh/gal) 3.50 - - 3.75(Jan) - 21

4.25(Oct)Cotton (Grade AR)

(Sh/kg) 1.05 1.40 2.00 2.50(Jan) - 138

Sugar Cane (Sh/t) 46(Jan) - 62(Feb) 92(Jan) 105(Jan) 128(West Kenya) 52(Apr)

Rice (Sindano)(Sh/kg) .40 .55 .85 .90(Jan) 1.10 175

1/ These are actually prices paid at MPB depot. MPB "decrees" prices tobe paid at farmgate, allowing for estimated transport costs and licensedtraders' commission. This results in slight regional price differentials:from Sh/60.50/bag in Central Province to Sh. 57.50 in Rift Valley Southin 1975/76.

2/ FAQ fed - 7.50; FAQ gross fed 7.00; FAQ feedlot receives a bonus ofKSh 0.30/kg.

Source: Offical Gazettes.

ANNEX IIIPage 10

27. Producer price increases of this magnitude had to be translatedinto higher consumer prices if unmanageable subsidies were to be avoided.The Government did actually pursue this course, as the following figuresof retail prices in the Nairobi area indicate:

Table 2. Movements in Consumer Prices

Increase1972 1973 1974 1975 1976 1972/1976

(Aug) (Feb) (Feb) (%)

Maize meal 0.85 0.85 1.10 1.40 1.40 65(Grade I)

Bread (White) 1.70 2.10 2.40 2.90 2.90 41

straight run

Wheat flour 1.35 1.35 2.00 2.55 2.55 89

Meat (Beef)Low Grade 5.84 6.40 6.40 6.40 7.40(Jul) 27High Grade

(sirloin) 11.00 12.28 12.60 13.33 14.75(Jul) 34

Milk (liter) 1.60 1.60 1.60 1.60 1.90 191.80(Oct)

Sugar 1.85 2.40 2.40 3.50 4.50 143

Rice (Sindano) 1.65 1.65 2.20 2.30 3.00 82

Source: Official Gazettes

Crops Prices

28. A little historical perspective is required to interpret and assessthe recent changes in producer prices. Regarding the two major grains, maizeand wheat, government policy during the second half of the 1960's was to movedomestic prices so as to gradually achieve export parity levels. In the caseof maize, the objective appeared clearly attainable: *the successful hybridseed program was raising yields so considerably, that area planted, productionand sales had a distinct upward trend notwithstanding lower producer prices.In the case of wheat, where corresponding technological improvements did notexist, lower producer prices only led to lower plantings and output.

29. During 1970, adverse weather caused a considerable drop in production

and sales of maize. Unwise management of MPB stocks, which were nearly depletedas a consequence of excessive exports (about 500,000 tons in the previous threeyears, reportedly losing over KSh. 700 million in the process), combined with

ANNEX IIIPage 11

the production shortfall, resulted in a severe maize shortage in 1971, theabandonment of the policy of moving toward export parity prices and,shortly afterwards, the appointment of a Parliamentary Select Committeeon the Maize Industry to make recommendations to the House, in particular:"(a) to find ways and means of increasing maize production both for localconsumption and for export; (b) to raise, guarantee and stabilize theprice of maize in the country; and (c) to look into the question of properstorage, marketing and distribution of maize-meal throughout the country".The Committee interpreted its mandate regarding storage, marketing anddistribution to cover maize rather than meal alone; its report, submittedin June 1973, contains a strong and carefully reasoned recommendation tofree the internal market for maize, as well as a clearly unfavorableassessment of the role and performance of the MPB, singling out themarketing system as the source of most of the problems besetting themaize industry (see para. 49).

30. The lack since 1970 of an adequate and consiste&t long run maizeprice policy was duly noted by the Committee. Shortly after the report wascompleted, the well-known upheavals in world economic conditions began, andthe judicious recommendations of the Committee were completely ignored.Dramatic increases in input prices (fertilizers, machinery and equipment,chemicals, petroleum products) and in world prices of agricultural productscharacterized 1973 and 1974. These factors probably account for the repeatedand substantial increases in producer prices for maize and wheat during thoseyears: rapidly changing conditions in international markets made it difficultto forecast future developments. Furthermore, domestic events, largely un-related to economic factors, were seriously depressing wheat production belowdomestic consumption levels.

31. When the Government adopted in 1975 an integrated pricing policy forthe crops under review, world market prices were used as a major criterionto establish domestic producer prices of individual commodities. This ex-plains why all prices were changed in January 1975, and why for some commidi-ties prices were raised more than for others; it would also explain why maizeand wheat prices have remained unchanged since then, in spite of the continueddemands for higher prices by, among others, the Kenya National Farmers Union(KNFU), allegedly needed by sharp increases in "costs". The Government ofKenya then took a major step forward, which will hopefully soon be followedby further and even more courageous measures regarding reform of the marketingsystem.

32. The export parity price for Kenya maize at the beginning of 1975was about Sh.65/bag. 1/ Average costs of imported wheat were $147/ton in 1973,and $190/ton in 1974, delivered Nairobi, equivalent to Ksh95 and Kshl22/bagrespectively. Lower prices, however, prevailed in January 1975, and no re-versal of this downward trend appeared likely. (As it turned out the averagecost of Kenyan wheat imports in 1975 was about $135/ton or Ksh9O/bag.) The

1/ J. Heyer, op. cit., p. 27. The IADP Appraisal mission reached the sameconclusion on the basis of June 1975 data (see Annex 16, tables 2 and3 of Appraisal Report).

ANNEX IIIPage 12

producer price of KshlOO/bag announced in January 1975 was roughly in linewith likely import parity levels, and any slight excess could be properlyjustified on the grounds of achieving self-sufficiency. The sharp increasein the retail price of wheat flour was a complementary measure adopted toserve the same objective by curbing domestic consumption, which likewiseproved successful, since sales of wheat flour were 20% lower during thefirst quarter of 1975 than during the corresponding period of 1974.

33. The increse in cotton prices might be similarly explained,although the merits of Kenya exporting the bulk of her lint productionat prices that do not seem to command any premium in world markets 1/,and simultaneously importing large quantities of cotton textiles, whileexisting textile mills are used at only 10% capacity, deserve a thoroughstudy. The study should also analyze the possible advantages of switchingfrom cotton varieties currently grown to varieties producing shorter staplelength but substantially higher yields; the latter varieties would alsoconform better to domestic textile industry requirements.

34. Unlike the other farm products considered above, sugar is subjectto a high excise tax plus equalization levey, collected at the factory, and anequivalent duty on imports. Four sugar complexes were in operation prior to1973, all but one consisting of nucleus estate and outgrowers. Cane yieldsand sugar extraction rates were relatively low allegedly because of poorhusbandry practices, faulty choice of sites (poorly drained soils in severalcases), and overall management inefficiencies. A new complex was inauguratedin 1973 in Western Province (Mumias) with a completely new structure offactory- outgrown relations, which has so far had more satisfactory results.Currently domestic sugar production amounts to 180,000 tons annually, whileconsumption is estimated at 240,000 tons. 2/ Government policy is to seekself-sufficiency within five yars.

35. Consumer prices of Kshl.65/kg in 1971 exceeded the cost of importedsugar (about Kshl,050/ton) suggesting that consumers were at that time beingtaxed to support the relatively higher cost domestic industry. Imported sugarcosts, however, increased rapidly to about Kshl,740/ton in 1973, Ksh2,500/tonin 1974, and about Ksh4,200/ton in 1975. The set of prices finally decreed bythe Kenyan government is a cleverly designed response in the light of domesticand world conditions: the-increase in sugar cane prices to producers makesits cultivation more attractive and competitive with other crops than beforeaccording to the recent Tate & Lyle Sugar Expansion Report 3/; the ex-factory

1/ Average prices received from Kenyan lint fob Mombasa were USU36/lb in1973 and US043/lb in 1974, while average prices of Mexican fiber ofroughly comparable length (1-1/16") were US062/lb and USJ66/lb respecti-vely cif N. Europe.

2/ Consumption dropped below 200,000 tons following consumer price increasescoupled with a drop in real income.

3/ The Bank's appraisal mission for the South Nyanza Sugar Project isanalyzing the adequacy of present producer prices under 1976 circum-stances.

ANNEX IIIPage 13

price provides an adequate return to capital and management, and shouldencourage prompt execution of the proposed expansion program; and theconsumer price is roughly in line with prices paid for imported sugar, andat Ksh4.50/kg close enough to prices in Tanzania (TSh5.00/kg) to discouragesmuggling. The substantial margin between ex-mill and retail prices islargely collected by the government under the forms of excise tax andEqualization Fund charge. The equalization levy provides considerableflexibility to adjust consumer prices to changes in world conditions with-out having to modify correspondingly producers or ex-mill prices.

Beef Prices

36. In contrast to the measures affecting crops analyzed above, anddespite clear signs and warnings from various sources that action wasneeded, no satisfactory measures have been taken concerning beef prices.Once again, the most pointed criticism of existing conditions and recom-mentations for reform have been voiced by officially appointed commissions,in this case the Livestock and Meat Working Party which submitted itsreport in 1971.

37. The Working Party's principal criticisms were levelled at the pri-cing policies of the Kenya Meat Commission (KMC), although in theory theresponsibility for establishing retail, wholesale and producer prices lieswith the Ministries of Agriculture and Finance, with advice from KMC. TheWorking Party pointed out that domestic retail prices were unacceptablylow and well below comparable world prices, and that this constituted anundesirable subsidy of higher income consumers at the expense of lowerincome producers. Prices paid producers were too low on the basis ofexport parity equivalents, and the differentials among grades too narrowin relation to their true values. The Working Party recommended that allbeef pricing be made on the basis of export parity values, and that KMC'smonopoly for meat exports be terminated.

38. The implicit taxation of cattle producers through this pricingpolicy has indeed been heavy, and is largely responsible for the continuingdecline and current critical condition of the sector. Prices received byproducers were less than half the export parity equivalent (on the basisof fob Mombasa prices received by KMC) during the 1968-72 period. The 1972Bank mission which appraised the Second Livestock Project found that pro-ducer prices were then about 25% below export level, and during negotiations,the Government gave assurances that "price controls on all grades of meatwould be phased out over 3 years following a plan acceptable to IDA; and agrading and pricing structure relating live weight to carcass values andproviding adequate incentive to producers would be established within oneyear". Action on these assurances has been much delayed until July 1976in discussions between the Government and foreign assistance agencies, includ-ing the Bank, involved in livestock projects. Specific measures regardingbeef prices remain to be worked out. In addition the issue of exporting maizeor using it as livestock feed, will have to be analyzed. It is hoped thatconsultants financed under the project will make a thorough analysis of thenumerous and complex issues involved.

ANNEX IIIPage 14

Milk Prices

39. Milk pricing was sharply critized by the Bank's 1972 AgriculturalSector Survey Mission, which recommended lowering producer prices generallyby 15 - 20%, and introducing seasonal price differentiation to even outfluctuations in deliveries. Neither recommendation was heeded, and althoughthe intervening inflation has gradually taken care of the first problem, themaintenance of uniform prices has so exacerbated the seasonal fluctuationsin milk deliveries that milk "shortages" during the dry season are now anaccepted fact of life in towns and villages. A substantial increase (20 -25%) in producer prices of milk during the dry season is recommended here.The advantages and disadvantages of uniform and geographically differentiatedprices and the impact of the marketing system on prices paid to farmerswarrant further study.

B. Inputs

40. Farm input rpices have increased, in Kenya as elsewhere, considerablyand in some cases dramatically, since 1972. The magnitude of the increases,however, has differed significantly among inputs. The fragmentary informationavailable is presented in the following table (in Ksh/unit).

ANNEX IIIPage 15

Table 3. Increase in Agricultural Input Prices

Prices Increase Proposed IncreaseInputs 1972 1975 1972/1975 1976 Price 1976/1976

A. Yield Increasing

Improved Seeds

Maize (10 kg) 20 22 10% 25 14%

Wheat (50 kg) 32 80 150% 100 25%

Fertilizers

Phosphatic (DSP, ton) 570 3,125 448% 2,500 -20%

Nitrogenous (CAN, ton) 580 2,120 265% 1,800 -15%

Compound (25-5-5, ton) 760 3,100 308% 1,700 -45%

Insecticides (index) 100 120 20% 200 67%

B. Labor Substituting

Herbicides (index) 100 250 150% 330 32%

Tractor (45 HP) 30,000 78,000 160% n.1. -

Gasoline (liter) 1.05 2.40 129% 1.50 4%

C. Labor and Implements

Wages (monthly) 75 150 100% 150

Hoe (unit) 19.70 28 42% n.a.

D. Beef and Dairy

Stockfeed maize (bag) 28 78 179% n.a.

Bran (45 kg) 13.65 21.85 60% n.a.

Molasses (Drum) 30 60 100% n.a.

Cuppertox Dip 1,803 3,043 69% n.a.

Sources: KNFU and Ministry of Agriculture; Economic Survey 1976.

ANNEX IIIPage 16

Changing Factor Prices and Production Techniques

41. The general drift of input price increases has been to placelabor saving techniques (motorized cultivation and chemical weeding, forexample), at a relative disadvantage vis-a-vis labor intensive techniques.Furthermore, since labor saving inputs are almost wholly imported, thisfact should be taken into account in decisions concerning relative advantagesof large versus small farms. In particular, the often mentioned economiesof scale ingrain farming appear questionable under present conditions. Aprima facie case exists for studying, in the near future, the feasibility andappropriate means to expand smallholder cultivation of major crops such aswheat which are at present grown almost exclusively in heavily mechanizedlarge farms in Kenya.

42. Wheat growing by smallholders has been tried in Kenya to a verylimited extent, with inconclusive results. Experience in neighboringcountries like Ethiopia, including the overall success of the Bank's mini-mum package project in that country, despite the numerous socio-politicalobstacles of recent years, provides evidence of the practicability of wheatgrowing by small farmers. An analysis of this experience and of possiblemodifications to adapt it to Kenyan conditions, is strongly recommended.The likely gains to the economy in terms of increased and lower cost wheatproduction and of improved incomes and employment of relatively poorersectors of the Kenyan rural population appear high indeed.

Fertilizers

43. Fertilizers have been subsidized in Kenya for many years at asubstantially higher rate for phosphatic than for nitrogenous fertilizers.Since the largest users of fertilizers were large farmers, the scheme wassubject to increasing criticism and subsidies were progressively reduced.The latest fertilizer price list (February 1976) indicates that priceswill be from 15 to 45% lower than in 1975. Each type of fertilizer willbe sold at uniform prices throughout the country, all compound fertilizerswill be sold at the same price, and to encourage small farmers to use com-pounds, their price is artifically reduced and the price of simple fertilizerscorrespondingly increased. This may be a temporary measure only. But sincelittle is known about the type and quantity of nutrients economically justifiedfor different crops and areas, this field deserves to be studies carefully toeventually provide guidance for the KENREN product mix as well as the type offertilizers to be imported.

C. Marketing

Introduction

44. Statutory marketing boards with varying degrees of formal or effec-tive monopoly powers exist for the major commodities considered in this report.The major ones, the Maize and Produce Board (MPB) and the Kenya Meat Commis-sion (KMC) have been subject to continuous criticism and periodic crises,

ANNEX IIIPage 17

which have prompted the establishment of Parliamentary Committees or Working

Parties to investigate their operations. The reports of the Working Party

on Meat and Livestock )1971) and of the Select Committee on the Maize Indus-

try (1973) openly pointed out and documented the adverse effects of the

existing marketing regulations and rigidities, and of the inefficient manage-

ment of the parastatal agencies responsible for their implementation. The

reports contained detailed recommendations for reform, which hitherto have

not always been heeded by the Administration. The deficiencies in KMC's

operation became so pervasive, however, that this agency is currently being

reorganized.

45. Previous Bank reports have acknowledged the existence of these

marketing problems and Government reports, expressing general agreement with

the latter and endorsing their recommendations. The most recent Bank state-

ment is contained in Annex 13 of the Integrated Agricultural Development

Project appraisal report. The present Mission feels that, while previous Bank

statements correctly analyzed the situation and presented remedial measures,

they did not adequately stress that their findings and recommendations fully

reflected those of the Kenyans who had investigated these matters.

46. Although the reports of the Committees referred to above were

written before the dramatic changes in world and domestic market conditions,

their statements concerning marketing deficiencies and recommendations for

reform have become even more important now than at any time before. It is

however, possible that progress noted earlier in the area of producer pricing

(para 31) could be compromised unless current ricing and marketing procedures

are suitabley modified. This applies, in particular, to marketing of maize

and the role of the MPB.

The Maize and Produce Board

47. The MPB is statutory board created by the "Marketing and Agricul-

tural Produce Act" and the "Maize Produce Act". During 1973/74 it marketed

over 38 varieties of produce including maize, several types of beans, oil-

seeds, millet and a few other minor crops. It is vested with "monopoly"

powers for marketing these commodities in the sense that all movements ex-

ceeding 2 bags of maize across district boundaries or exceeding 10 bags within

district boundaries must be marketed through an agent of MPB. Even so, on

average it handles less than 15 percent of the total maize crop.

48. The Integrated Agricultural Development Project appraisal report

analyses the operations of the MPB and identifies the major aspects of its

policies and organization that are particularly inimical to efficient commo-

dity marketing. Rather than covering the same ground here, we believe that

it is more appropriate and, we hope, more effective to quote at some length

from the Background and Summary and Concluding Remarks of the Report of the

Select Committee on the Maize Industry (underlines added):

ANNEX IIIPage 18

"The Select Committee was apointed primarily as aresult of Members' concern over the repeated shortagesof maize that have been experienced in Kenya recently,

and Members' lack of confidence in Government effortsto take proper action to avoid them.

The importance of the maize industry in Kenya stemsfrom the fact that maize is the staple food of the

majority of Kenya's people. Shortages of maize affecta large proportion of the population, and are particularlyserious for the poorer section of the population. Theyalso affect wages and the cost of living in the towns,which itself influences the development of much ofKenya's industry.

"Maize is produced by large and small farmers all overKenya. There is no other crop that is so widely grown,and that is of such crucial importance to the bulk of thefarming population as a source of income and as a sourceof food. Most of Kenya's maize is grown on small-holdingsand most of it never reaches official marketing channels.Between 10 and 30 percent of the total crop is marketedthrough the Maize and Produce Board, depending on the year,and a declining proportion of this is coming from largefarms. There are few rural areas in which maize is notproduced, but many rural areas are net importers ofmaize, certainly from time to time. Thus farmers alsohave an interest in the consumer side of the maize market.

"The recent development of the maize industry has beengreatly influenced by the successful production of hybridvarieties of maize with far greater yield potential thanmost of the varieties that were previously in use. Thehybrid maize breeding programme in Kenya is now well knowninternationally and it is cited as part of the "GreenRevolution" through which high yielding varieties havetransformed the food position of many countries in thedeveloping world. Kenya's hybrid maizes can give verylarge increases i yield under the right conditions, andthey should enable Kenya to feed her growing populationwithout any difficulty. Roughly 30 percent of kenya'smaize area is now under hybrids.

"Tax-payers, through the Government, have a substantialstake in the sound development of the maize industry. TheGovernment has subsidized the maize industry in a numberof ways in the past, and it continues to do so. It hasalso been involved in emergency assistance at time of

ANNEX IIIPage 19

famine, some of which may be unnecessary. Tax payers havean interest in ensuring the efficient use of their fundsin assisting the maize industry and this is somethingconsidered at many junctures by the Committee.

Summary and Concluding Remarks

"The Committee found that recent shortages had littleto do with production which is thriving. Indeed, it ispartly due to the spectacular increases in productionover the last few years that the industry is now facingproblems. The difficult move from self-sufficiency toexport is still premature, but the Committee hopes thatit will not be long before increases in the efficiency ofthe industry will make it possible. The Committee foundthat much of the blame for the recent shortages of maizerests with the Maize and Produce Board and the Government.

The Committee considers that the special position of maizeas the staple food in Kenya warrants Government supportto ensure that adequate reserves are always available.Consumers should not be asked to bear a major part of thecost of ensuring adequate supplies as they do at present.The Committee found that the maize marketing system isthe source of most of the problems faced by the maizeindustry currently, and indeed that the whole system isin danger of breaking down. The Committee came to theconclusion that a free internal market for maize would solvemany of the problems. But the Maize and Produce Board wouldstill have an important role in guaranteeing and establishingthe price, and in managing the national stocks of maize. Toperform its functions efficiently, the board needs to begiven clear responsibilities and then allowed to get onwithout interference. The Committee noted the absence ofa national food policy in Kenya and recommended its produc-tion which it feels is especially necessary to accompanythe transition to a free internal market for maize.

"The Committee also appreciates that some people will feeluneasy or even apprehensive about entrusting the distribu-tion of maize to a free market. It urges them to considerwhether they feel any less uneasy about the current state ofaffairs outlined in the report, and to recognize that anorganized market is not necessarily an efficient one. TheCommittee feels that the current system is performingextremely poorly in distributing maize in Kenya at presentand that a free internal market would almost certainly do

ANNEX IIIPage 20

this more efficiently and more equitably. 1/

"Finally, the implementation of the Committee's recom-mentations will require substantial amendments to the Act.The Committee recommends that suitably drafted amendmentsbe laid before the House once the recommendations areaccepted.

"Let the National Assembly of the Republic of Kenya givea lead to the Government and the nation in initiating a newpolicy for maize so that our farmers have the encouragementthey deserve and our people never have to go short of maizeagain."

The Committee does not state the reasons that might make poeple uneasyor apprehensive about a free market system. These reasons have else-where been summarized in "the following set of propositions: 1. Thenational economic welfare requires that the incomes of large farmersbe protected against competititon from low-cost producers. 2. Thenational economic welfare requires that supplies of domesticallyproduced maize offered for sale be adequate to meet the needs of thepopulation. 3. Because African (small) farmrs grow maize for theironw use, the amount they produced and market is not influenced by theprice at which maize can be sold. 4. Kenya is dependent on largefarmers for a stable supply of maize. 5. The African farmer's in-experience in commercial exchange makes him an easy victim of ex-ploitation trade. 6. The present system for marketing food cropsis an introduction of European and Asians. Markets and marketingwere not known in precolonial Kenya, and there was no indigenousbase from which could grow the kind of African-operated marketingsystem that supplies the populations of southern Nigeria. 7. Ifthere are many traders, marketing costs will be high, if there arefew traders, they will combine to enjoy excessive profits." (Jones,William 0., Marketing Staple Food Crops and Tropical Africa, CornelUniversity Press, 1972, pp. 205-207).

ANNEX IIIPage 21

III. EFFICIENCY ASPECTS OF FARM SIZE

49. In its Action Program, the Government states that it hopes toincrease agricultural production more rapidly, mainly through the smallscale farmers. This strategy is well-founded in light of experience inmany developing countries, and is further supported by evidence on maizeproduction in Kenya (paras. 52 to 55). In order to ensure that small-holders are enabled to perform as well as large farmers (or better) ona substained basis, it is of the utmost importance that they have regularaccess to the most important services (extension, input supply, marketingand credit) and in the case of Kenyan maize, also utilize hybrid seed.In addition to production effects, promoting smallholder agriculture hasthe added benefits of lowering import dependence, and increasing employ-ment opportunities and rural incomes. Through its support for the inte-grated agricultural development program, the Bank has endorsed this policyemphasis. Since all crops, both subsistence and cash crops, are encouragedunder this program, the results will contribute both to production fordomestic consumption and exports.

50. The above is not to say that medium and large scale farms wouldnow cease to get Government attention. Their production remains a sub-stantial component in agricultural output and deserves continued support.

Findings from Earlier Studies

51. The data available strongly support the proposition that smallfarmers, particularly those farming less than 40 acres, have generatedmuch more employment, while using less capital and substantially lessskilled manpower and foreign exchange thatn large farmers. They appear,at the same time, to have achieved higher yields of maize per acre provid-ing hybrid seed has been adopted. The results from the sample survey ofsettlement schemes by the Statistics Division, Central Bureau of Statisticsin 1967/68 ad the case studies of African-owned large farms, made by theMinistry of Agriculture in Trans Nzoiz in 1970/71 1/ are sufficientlystriking to warrant emphasis. Moreover, data from a 1975 sample surveyon maize have recently become available. 2/

52. The earlier studies show the performance of farmers with less than10 acres to be greatly superior, both in terms of gross output per acre andemployment, to any category of large farms in the study, gross output peracres being over three times higher for small farms and employment (per 100usable acres) almost nine times higher. The differences that generallyprevail may be larger still since all the large farms in this study arelocated in what the survey team considered to be a "comparatively 'good'

1/ "A Comparison of the Intensity of Cultivation on Large and Small Farmsin Kenya, " Kenya Statistical Digest, Vol. X, No. 1, March 1972, pp. 4-9.

2/ 0. Hesselmark, Maize Yields in Kenya, 1975, (unpublished), 1976.

ANNEX IIIPage 22

farming district." 1/ whereas the settlement schemes are scattered through-out the country. Moreover, these data were collected at a time when hybridmaize was said to have reached almost all the large farms (99 percent) butless than 7 percent of the small farms. 2/ Differences in the strain placedon foreign exchange were even more striking. Small farms with as much as40 acres spent no more than one-fifth as much as machinery cultivation thanthe most labor intensive large farms.

Recent Data on Maize Yields

53. The recent report by 0. Hesselmark at the Maize and Produce Boardprovides further information on maize yields. Hesselmark's data are derivedfrom a random sample of 748 farms during the last half of 1975. 3/ For eachin the sample one maize field was selected at random, the plant populationcounted, and the average volume of maize ears measured. The result, convertedinto yields per hectare, were grouped by ecological zones, of which one,zone 7, is defined to consist almost entirely of large farms in the Rift Valley,while the other eight are all small farm areas. (Table 4.) 4/

54. Small farmers appear to have achieved yields clearly superior tothose obtained by large farmers in one area of Western Kenya (Zone 1) 5/about the same average yields in one area (Zone 2); just slightly loweryields in one area (Zone 8); and vastly lower yields in the other 5 areas(but Hesselmark notes that two of the latter were badly hit by drought in1975). The higher yields in Western Kenya appear to have been achieved be-cause of differences in husbandry practices since Hesselmark's study showsit cannot be caused by hybrid seed. In fact, as noted earlier, the smalland medium farmers of Western Kenya had a lower adoption rate of hybridmaize seed than larger farmers. Yet, as noted, one of these groups of smalland medium farmers averaged yields 11 percent higher while the other group

1/ Statistical Digest, 1972, p. 4.

2/ Ibid. and Hesselmark, in Gerhart, op. cit., pp. 54 and 57. Two of thesmall and medium farm areas in Western Kenya had less than 11 percentof farmers adopting hybrid maize by 1967/68 but by 1975 the adoptionrate had mushroomed to over 80 percent. (see Table 4 below).

3/ The paper describes in great detail the sampling procedure followed.

4/ One part of Western Kenya, Zone 1, is designated on his graph of yieldsas a "small and medium" farm area but definitions are not provided.

5/ This is squarely at variance with the- Bank's 1975 report on rehabilitationof group farms in Kenya which comments: "... the large scale farms whichcommonly use hybrid seeds have consistently higher (maize) yields; in 1972these average 1,600 kg per hectare, with the better farmer reaching 4,000kg/ha." (IBRD, Kenya: Appraisal of Group Farms Rehabilitation Project,Report No. 583a-KE, February 14, 1975, Annex 1, p.6).

ANNEX IIIPage 23

had yields about the same (1 percent lower) than the large farmers.John Gerhart, in a study of the rapid spread of hybrid maize in WesternKenya, based on field work carried out in 1973, observes that in this areasmall farmers seem to weed more intensely and give greater care to harvestingand drying operations. 1/ This is also given some support from Hasselmark'swork on husbandry practices. In his survey 71 percent of small farmers inlow rainfall areas of Western Kenya reported clean weeding while only 65percent of large farmers reported they had followed that recommendation(Table 5). 2/

1/ Gerhart, op. cit., p. 44.

2/ However, at the same time only 55 percent of the small farmers withthe best yields (Zone 1) reported adoption of this practice, althougha larger percentage of Zone 1 farmers had adopted each of the otherrecommended practices. Their higher yields are presumably explainedby such things as the combined effect of these other practices plusthe higher percentage adopting hybrid maize, and of course possiblybetter rainfall conditions in their zone.

ANNEX IIIPage 24

Table 4: Kenya - Maize Yields According to the 1975 Maize Yiled Survey

Number Percentage Yieldsof farms farmers planting (metric

Hybrid maize tons/ha)

1. (Western Kenya, small andmedium farms, high rainfall) a/ 84 85 4.14

2. (Western Kenya, small farmslow rainfall, highlands) b/ c/ 96 82 3.67

3. (Western Kenya, small farmslow rainfall, lowlands) b/ c/ 83 35 3.08

4. (Central Province, smallfarms, lowlands) d/ 91 28 2.06

5. (Central Province, smallfarms, highlands) c/ 88 57 3.37

6. (Eastern Province, small farms) 82 21 0.66

7. (Rift Valley, large farms) 112 99 3.71

8. (Rift Valley, Central Province,small farms, highlands) e/ 32 72 3.53

9. (Coast Province, small farms) 80 7 1.66

748

Source: Data from Hesselmark, 1976, pp. 19 and 27. Hesselmark, 1975 in Gerhart1975, p. 53; and Gerhart, 1975 p. 21. No definitions of farm sizes areprovided by Hesselmark but Gerhart defines large farms as those withover 50 acres. Hesselmark employs Gerhart's zone definitions forWestern Kenya.

a/ Rainfall over 60 inches per year.

b/ Rainfall less than 60 inches per year.

c/ Elevation over 1,500 meters.

d/ Elevation below 1,500 meters.

e/ Elevation not specified.

ANNEX IIIPage 25

Table 5: Kenya - Inputs and Maize Husbandry Practices,Large Farms and High-Yield Small andMedium Farms, 1975

Planted Row Used Used Thinned Clean Inter-Zone early Plant- Fertil- Insecti- Weeded Planted

(percent)

1. (Western Kenya,small and mediumfarms, highrainfall) a/ 15 17 64 25 62 55 35

2. (Western Kenya,small farm, lowrainfall) a/ 7 72 20 4 47 71 48

3. (Rift Valley,large farms) a/ 26 100 90 57 47 65 19

Source: Data from Hesselmark, 1976, p. 27.

a/ See Table 1 for definitions.

TABLES

A. POPULATION, EMPLOYMENT AND WAGES

1.1 Population 1969, 1975 and 1980; and Population Density byProvince, 1969.

1.2 Wage Employment in Public and Private Sectors by Industry, 1970-75.1.3 Wage Employment in the Public Sector, 1970-75.1.4 Average Earnings in Public and Private Sectors by Industry, 1970-74.1.5 Average Real Wage Index, 1967-75.

B. NATIONAL INCOME ACCOUNTS

2.1 GNP by Industrial Origin (at current prices), 1964, 1970, 1972-75.2.2 GDP by Industrial Origin (at constant 1972 prices), 1964, 1970, 1972-75.2.3 Expenditure on GDP (at current prices), 1964, 1970, 1972-75.2.4 Expenditure on GDP (at constant 1972 prices), 1972-75.2.5 Capital Formation by Industry (at current prices), 1964, 1970, 1972-75.2.6 Capital Formation by Industry (at constant 1972 prices) 1964, 1970,

1972-75.

C. BALANCE OF PAYMENTS

3.1 Balance of Payments, (in KL million), 1970-75.3.2 EAC and Non-EAC Trade, (in KE million), 1970-75.3.3 Export and Import Trade Indices and Terms of Trade, 1971-75.3.4 Direction of Trade (as % of total), 1971-75.3.5 Summary of Kenya's Trade with EAC Countries, 1970-75.3.6 Total Exports of Major Commodities (in KL million and % share

in total value), 1970-75.3.7 Composition of Exports to Uganda and Tanzania by Major Commodities,

1970-75.3.8 Total Imports by SITC Category (KL million and % share in

total value), 1970-75.3.9 Selected Net Imports, 1969-75.

D. PUBLIC DEBT OUTSTANDING

4.1 External Public Debt Outstanding, December 1975.4.2 External Debt Outstanding, Commitments, Disbursements and

Service Payments, 1965-1995.4.3 External Public Debt Outstanding, December 1975: Kenya's Share of

East African Community Debt.4.4 External Debt Outstanding, Commitments, Disbursements and Service

Payments, 1965-1990: Kenya's Share of EAC Debt.

-2-

E. PUBLIC FINANCE

5.1 Summary of Central Government Finance, 1969/70 - 1975/76.5.2 Recurrent Revenue by Category, 1969/70 - 1976/77.5.3 Functional Classification of Recurrent Expenditure, 1969/70 - 1976/77.5.4 Functional Classification of Development Expenditure, 1969/70 - 1976/77.5.5 Revised Forward Budget, FY1977-80.5.6 Composition of Central Government Development Outlays Under

Forward Budget, 1973/74 - 1978/79.

F. MONEY, BANKING AND PRICES

6.1 Lower and Middle Income Consumer Indices, Nairobi, 1971-75.6.2 Monetary Survey, 1971-75.6.3 Summary Accounts of the Central Bank, 1971-75.6.4 Allocation of Commercial Bank Credit to Private Sector, 1971-76.6.5 Foreign Exchange Reserves of Central Monetary Authorities, 1970-75.

G. AGRICULTURAL STATISTICS

7.1 Land Utilization in Kenya.7.2 Land Utilization Under Large Farms, 1965, 1970-74.7.3 Acreage Under Principal Crops in Large Farms, 1965, 1970-74.7.4 Acreage Under Principal Crops in Small Farms and Settlement Schemes,

Crop Year 1967/70.7.5 Number of Holdings of Large Farms by Size, 1965, 1970-74.7.6 Marketed Production of Principal Crops.7.7 Livestock and Related Products: Value of Gross Marketed Production, 1970-75.7.8 Dairy Production, 1970-74.7.9 Average Prices to Producers for Principal Crops, 1970-75.7.10 Percentage Change in Average Prices to Producers of Principal Crops, 1970-75.7.11 Livestock and Dairy Produce: Price to Producer for Meat, Butterfat

and Whole milk.7.12 Percentage Change in Prices to Producers of Livestock and Dairy Products.7.13 Agricultural Inputs. 1970-74.

H. STATISTICS ON INDUSTRY

8.1 Large Scale Manufacturing Firms and Establishments: Number of Firms andNumber of People Engaged, 1970-73.

8.2 Large Scale Firms and Establishments: Labor Costs and Gross Value ofProduction, 1970-73.

8.3 Quantity Index of Manufacturing Production, 1970-75.

Table 1.1: POPULATION 1969, 1975 AND 1980; AND POPULATION DENSITY BY PROVINCE, 1969

1969 1/Population Land area Density

(sq km) (per sq-km)

Nairobi 509,000 684 745

Coast 944,000 83,041 11

N. Eastern 246,000 126,902 2

Eastern 1,907,000 154,000 12

Central 1,676,000 13,173 127

Rift Valley 2,210,000 170,000 13

Nyanza 2,122,000 12,525 169

Western 1,328,000 8,223 162

Total 10,943,000 569,249 19

2/1975 -

Total 13,251,000 569,249 23

2/1980 -

Total 15,688,000 569,249 28

1/ Census 19692/ Estimate by Population Division, IBRD

SOURCE: Kenya Statistical Abstract, 1975.

Table 1.2: WAGE EMPLOYMENT IN PUBLIC AND PRIVATE SECTORS BY INDUSTRY, 1970-1975

(in Thousands)

1970 1971 1972 1973 1974 1975

Agriculture and Forestry of which: 204.5 211.1 246.9 265.4 261.1 240.1Agricultural and livestock production in large farms (178.6) (179.1) (187.2) (208.2) (200.9)

Mining and Quarrying 2.9 3.0 3.2 3.1 3.9 3.4

Manufacturing of which: 82.3 92.8 84.8 94.4 101.3 99.6Spirits, beer and tobacco (3.1) (3.3) (3.2) (3.2) (3.5)Spinning, weaving and finishing textiles (3.3) (3.3) (3.9) (4.8) (5.3)Cordage, ropes and twine (1.2) (2.5) (3.3) (3.4) (3.3)Manufacture of wearing apparel, except footwear (3.0) (3.9) (3.8) (3.8) (4.4)Sawmills, planing and other wood mills (5.0) (5.7) (6.0) (6.2) (7.4)Printing, publishing and allied industries (4.0) (4.4) (3.9) (4.1) (4.4)Manufacture of railroad equipment (10.7) (10.4) (12.4) (14.1) (12.5)

Electricity and Water 4.8 5.2 5.1 5.4 5.7 7.5

Construction 30.8 34.8 37.6 41.2 44.4 39.4

Wholesale and Retail Trade, Restaurants and Hotels 32.6 35.9 47.6 46.6 57.0 50.3

Transport and Communication 44.9 45.6 45.3 44.1 46.3 45.2

Financing, Insurance, Real Estate and Business Services 9.9 10.7 17.5 20.3 21.9 23.6

Community, Social and Personal Services, of which: 231.8 240.6 231.8 240.9 284.6 300.2Education Services (58.4) (58.6) (75.2) (80.4) (107.3)Domestic Services (37.7) (38.0) (38.0) (40.2) (48.2)

Total Wage Employment in Formal Sector 644.5 679.7 719.8 761.4 826.2 809.4

SOURCE: Kenya Statistical Abstract, 1972 and 1975 ., Kenya Economic Survey,1976.

Table 1.3: WAGE EMPLOYMENT IN THE PUBLIC SECTOR, 1970-1975

(in Thousands)Prov.

1970 1971 1972 1973 1974 1975

Central Government 159.6 164.0 133.0 135.7 139.5 142.8

Parastatal Bodies 1/ 18.4 18.8 78.4 86.1 113.7 125.8

Local Government 23.7 23.8 25.8 27.0 27.8 24.2

E. A. Community General Fund Services 3.1 3.2 3.7 3.8 4.2 3.6

E. A. Railways Corporation 22.5 22.6 23.3 23.4 21.6 21.4

E. A. Harbours Corporation 2.2 3.1 3.0 3.3 3.2 3.2

E. A. Posts and Telecommunications Corp. 5.5 5.8 5.8 5.6 6.0 6.4

E. A. Airways Corporation 3.8 3.7 3.9 3.6 3.7 3.3

E. A. Cargo Handling Services Ltd. 8.7 9.9 9.1 9.4 9.3 8.7

Other E. A. Public Bodies - 0.8 1.0 __1.1_ 1.1 1.2

Total 247.5 255.7 287.0 298.9 330.1 340.6

1/ Including Teachers.

SOURCE: Kenya Statistical Abstract, 1972 and 1975, Kenya Economic Survey, 1976.

Table 1.4: AVERAGE EARNINGS IN PUBLIC AND PRIVATE SECTORS BY INDUSTRY, 1970-74

(KL per worker)Prov.

Sector 1970 1971 1972 1973 1974 1975

Agriculture and Forestry 77.5 84.0 108.3 108.7 116.7

Mining and Quarrying 334.1 331.3 293.2 360.0 364.8

Manufacturing 384.0 372.4 380.8 410.8 436.8

Electricity and Water 436.3 456.2 437.6 473.6 489.6

Construction 312.5 323.5 331.0 343.7 349.7

Wholesale and Retail Trade; 450.0 456.9 470.4 492.5 504.8and Restaurants and Hotel

Transport and Communications 462.1 442.6 466.2 515.9 597.6

Financing, Insurance, 686.9 695.8 877.2 811.4 872.9Real Estate and BusinessServices

Community, Social and 264.9 286.1 315.8 347.3 366.4Personal Services

Average, all sectors 261.4 272.2 287.4 303.6 332.0 384.2

1/ Earnings are defined as all cash payments, including basic salary, cost of

living allowances, profit bonus, together with the value of rations and free

board, and an estimate of the employer's contribution towards housing. Earnings

exclude provident pensions, emplovers' contricutions to the National Security Fundor private funds and personal emoluments for the armed forces. Earnings in

rural non-agriculture sectors are excluded.

SOURCE: Kenya Statistical Abstract 1974 and 1975; and Economic Survey 1976.

Table 1.5: AVERAGE REAL WAGE INDEX, 1967-1975

(1967 100)

1967 1968 1969 1970 1971 1972 1973 1974 1975

Average Wage Index 100 105 107 115 119 126 133 145 168(at current prices)% Increase 5 2 8 4 7 7 12 23

Consumer Price Index 100 101 101 103 ill 115 133 154 185(Lower Income, Nairobi)% Increase 1 0 2 8 4 18 21 31

Average Real Wage Index 100 104 106 112 107 110 100 94 91% Increase 4 2 6 -5 3 -10 -6 -3

'/ Average Real Wage equals Average Vage Index divided by Consumer Price Index.

SOURCE: Kenya Economic Surveys, and Monthly Statistical Digest, October 1975.

Table 2.1: CROSS NATIONAL PRODUCT BY INDUSTRIAL ORIGIN, 1964, 1970, 1972-75

(KI Million at Current Prices)Prov.

1964 1/ 1970 1Y 1972 1973 1974 1975

A. Outside Monetary EconomyAgriculture, Forestry and Fishing 75.6 95.4 115.8 120.9 137.0 179.5Building and Construction 5.8 9.6 11.7 13.7 14.7 15.6Water 2.1 4.2 5.0 5.2 5.3 5.5Ownershtips of Dwellings 5.5 10.4 14.1 16.7 18.7 20.2

Total 89.0 119.6 146.6 156.5 175.7 220.9

B. Monetary Economy1. Enterprises and Non-project Industries

Agriculture 53.1 72.3 94.4 ]07.4 123.1 128.9Forestry 1.9 3.8 3.6 4.3 5.4 5.7Fishing 0.9 1.2 1.3 1.3 1.5 1.7Mining and Quarrying 1.5 2.4 2.2 3.2 3.1 3.5Manufacturing 34.2 62.1 82.1 97.8 125.9 149.2Electricity and Water 4.8 7.8 8.9 9.3 10.4 12.2Building and Construction 6.8 16.8 35.7 38.7 43.4 45.5Wlole, Retail Trade, Restaurants and Hotels 33.0 48.7 66.3 80.5 115.9 120.3Transport, Storage, and Communications 24.5 40.8 39.6 46.1 55.7 60.0Finance, Insurance, Real Estate and Business Services 9.9 21.1 31.4 36.8 46.8 55.0Ownership of Dwellings 13.3 21.6 27.2 30.2 35.4 46.0Other Services 11.9 20.1 14.7 17.3 22.1 25.0

Total 195.7 318.7 407.4 473,0 588.7 653.7

2. Private Households (Domestic Services) 2.9 4.1 5.1 6.2 7.3 8.9

3. Government Services 42.5 76.5 107.2 113.6 136.0 1.58.6

Total Product Monetary Economy 241.1 399.3 519.7 592.7 731.9 821.2

Total Gross Domestic Product at Factor Cost (Monetary & 330-1 518.9 666.2 749.2 907.6 1042.0Non-Monetary)

+ Indirect Taxes 26.9 54.9 65.1 91.1 123.7 139.8- Subsidies 0.4 1.2 1.3 2.3 1.8 0.9

Total Gross Domestic Product at Market Prices 356.6 572.6 730.0 838.0 1029.5 1180.9(annual rate of growth) (10.0) (14.8) (22.9) (14.7)

Net Factor Incomes from abroad -10.6 -21.0 -21.7 -44.0 -43.5 -43.0

Total Gross National Product 346.1 551.7 708.3 794.1 985.9 1138.0inrual rate of growth) (9.8) (12.1) (24.2) (15.4)

GDP (at ni,.iket prices) per Capita (Khn) 36.3 46.2 55.2 60.0 70.3 77.8

I/ Niot yet revised

SOURCE: Kenya, Economic Survey, 1976

Table 2.2: GROSS DOMESTIC PRODUCT BY INDUSTRIAL ORIGIN, 1964, 1970, 1972-75

(Ki Million at Constant 1972 Prices)

Prov.1964 1/ 1970 1/ 1972 1973 1974 1975

A. Outside Monetary EconomyAgriculture, Forestry and Fishing 75.6 95.6 115.8 115.3 118.9 119.4Building and Constrt,ction 5.8 6.9 11.7 12.1 12.3 12.7Water 2.1 2.7 5.0 5.1 5.2 5.3Ownership of Dwellings 5.5 7.5 14.1 14.7 15.4 16.0

Total 89.0 112.7 146.6 147.2 151.7 153.4

B. Monetary Economy1. Enterprises and Non-project Insstitutions

Agriculture 53.1 74.0 94.4 96.7 96.2 95.2Forestry 1.9 2.9 3.6 4.0 4.5 4.5Fishing 0.9 1.0 1.3 1.2 1.1 1.2Mining and Quarrying 1.5 2.6 2.2 3.2 2.9 3.0Manufacturing 34.2 52.5 82.1 93.1 98.5 102.5Electricity and Water 4.8 7.1 8.9 9.2 10.1 11.2Building and Construction 6.8 12.1 35.7 35.5 32.0 30.1Wholesale, Retail Trade, Restaurants and Hotel]s 33.0 43.3 66.3 76.3 77.8 72.0Transport, Storage, and Communications 24.5 41.2 39.6 43.8 43.2 40.6Finance, Insurance, Real Estate and Business Services 9.9 19.7 31.4 34.7 38.4 39.9Ownership of Dwellings 13.3 17.9 27.2 28.6 29.4 30.3Other Services 11.9 20.3 14.7 14.6 16.8 17.0

Total 195.7 295.1 407.4 440.8 451.0 447.32. Private Households (Domestic Services) 2.9 3.6 5.1 5.7 6.5 7.4

3. Government Services 42.5 73.8 107.2 110.0 123.0 129.1

Total Product Monetary Economy 241.1 372.4 519.7 556.1 580.4 583.8Total Gross Domestic Product at Factor Cost (Monetary 330.1 485.1 666.2 703.3 732.0 737.2

and Non-monetary)

1/ Not yet revised; 1964 prices

SOURCES: Kenya, Statistical Abstract, 1975, and Kenya, Economic Survey 1976.

Table 2.3: EXPENDITURE ON GROSS DOMESTIC PRODUCT, 1964. 1970, 197»

(KL Million at Current Prices)

Prov.

1964 1/ 1970 1/ 1972 1973 1974 1975

Consumption Expenditure 295.2 437.8 585.6 682.2 817.3 1,001.3

Private 245.8 344.7 456.9 542.4 640.8 773.3

Public '.9.4 93.1 128.7 139.8 176.5 228.0

Gross Investment 46.6 139.7 160.5 167.0 289.4 221.0

Gross Fixed Capital Formation:Private 40.0 90.8 166.0 182.3 203.7 234.8

Public 4.3 21.9

Changes in Stocks 2.3 27.0 -5.6 -15.2 85.8 -13.8

Net Tilports of Goods and Services -14.9 '.8 16.1 11.2 77.3 41.4

Exports 119.1 170.8 200.1 240.6 339.5 359.3

Imports 104.2 175.6 216.2 251.8 416.7 400.6

GDP at Market Prices 356.7 572.7 730.0 838.1 1,029.5 1,181.0

(Annual Rate of Growth %) (10.0) (14.8) (22.8) (14.7)

1/ Not yet revised.

SOURCE: Kenya, Statistical Abstract, 1975, and Kenya, Economic Survey, 1976

Thble 2.4: EXPENDITURE ON GROSS DOMESTIC PRODUCT, 1972-75

(KL Million at Constant 1972 Prices)

Prov.1972 1973 1974 1975

Consumption Expenditure 586 631 610 620Private 457 502 478 4TPubIic 129 129 132 137

Gross Investment 160 150 206 156Gross Fixed Capital Formation: 166 163 151 162

Private 102 90 85 94Public 64 73 66 68

Change in Stocks -6 -13 55 -6

Net Imports of Goods and Services 16 10 43 19Exports at Import Parity 200 211 190 170Imports 216 221 233 189

GDY at Market Prices 730 771 773 776(Annual Rate of Growth %) (e-63 (0.025) (0.04)

Terms of Trade Losses 1/ - - 30 33

GDP at Market Prices 730 771 803 809(Annual Rate of Growth %) (5.6) (4.2) (0.7)

1/ Difference between export value deflated by export price index and export value deflated byby import price index.

SOURCE: Economic Survey 1976 and Mission Estimates.

Table 2.5: CAPITAL FORMATION BY INDUSTRY, 1964, 1970, 1972-1975

(KL Million at Current Prices)

Prov.1964 1/ 1970 1/ 1972 1973 1974 1975

A. Outside Monetary EconomyTraditional Dwellings 5.2 9.2 11.6 13.5 15.1 16.0B. Monetary Economy

1. Enterprises and Non-Profit Institutions:Agriculture 6.8 12.4 14.6 14.4 21.1 23.7Forestry 0.2 0.2 0.3 0.3 0.2 0.3Mining and Quarrying 0.3 1.3 1.7 1.5 3.6 2.1Manufacturing 5.8 13.0 28.2 31.8 29.9 29.6Electricity and Water 1.3 3.7 8.5 12.2 10.0 19.7Building and Construction 1.9 7.0 8.5 9.1 7.0 8.3Wholesale, Retail Trade, Restaurants & Hotels 3.0 4.4 13.2 14.5 L4.3 15.4Transport, Storage, and Communications 10.3 19.9 22.5 28.0 35.5 49.9Finance, Insurance, Real Estate, and Business Services 0.7 1.8 2.1 2.0 4.0 2.7Ownership of Dwellings 2.2 9.8 19.2 16.2 9.8 22.;Other Services 2.3 8.3 2.6 3.3 4.4 5.0

Total 34.7 81.6 121.4 133.3 ] 9.9 179.3

2. General Government 4.3 21.9 33.1 35.4 38.7 39.'

Outside Monptary Economv 5.2 9.2 11.6 13.5 15.1 16.0Monetarv Economy 39.1 103.5 154.5 168.7 188.6 218.8Total 44.3 112.7 166.0 182.3 203.7 234.8

C. Percentage Rates of GrowthOutside Monetary Economy 6.0 17.0 11.5 6.0Monetary Economy 21.7 9.2 11.8 16.0

Total 20.2 9.8 11.7 15.3

1/ Not yet revised.

SOURCE: Kenya, Statistical Abstract, 1975, and Kenya, Economic Survey, 1976.

Table 2.6: CAPITAL FORMATION BY INDUSTRY, 1964, 1970, 1972-75

(K1 Million at Constant 1972 Prices)

Prov.1964 1/ 1970 1/ 1972 1973 1974 1975

A. Outside Monetary EconomyTraditional Dwellings 5.2 6.6 11.6 12.0 12.6 13.0

B. Monetary Economy1. Enterprises and Non-Profit Institutions:

Agriculture 6.8 10.9 14.6 13.1 16.8 15.7Forestry 0.2 0.2 0.3 0.2 0.2 0.2Mining and Quarrying 0.3 1.2 1.7 1.3 2.7 1.3Manufacturing 5.8 12.3 28.2 28.9 21.9 18.5Electricity and Water 1.3 3.2 8.5 10.5 7.2 11.9Building and Construction 1.9 6.6 8.5 8.3 5.3 5.2Wholesale, Retail Trade, Restaurants & Hotels 3.0 3.8 13.2 13.4 10.7 9.6Transport, Storage and Communications 10.3 18.5 22.5 25.2 26.3 30.9Finance, Insurance, Real Estate and Business Services 0.7 1.5 2.1 1.9 2.8 1.6Ownership of Dwellings 2.2 7.1 19.2 14.6 14.5 14.8Other Services 2.3 6.9 2.6 2.7 3.1 3.0

Total 34.7 72.3 121.4 120.1 111.3 112.8

2. General Government 4.3 16.6 33.1 31.0 27.4 23.9

Outside Monetary Economy 5.2 6.6 11.6 12.0 12.6 13.0Moneatry Economy 39.1 88.9 154.5 151.1 138.7 136.7

Total 44.3 95.5 166.0 163.1 151.3 149.6

C. Percentage Rates of GrowthOutside Monetary Economy -1.8 3.8 5.2 2.9Monetary Economy 21.8 -2.2 -8.2 -1.5

Total 19.8 -1.8 -7.3 -1.1

1/ Not yet revised.

SOURCE: Kenya Statistical Abstract, 1975, and Kenya Economic Survey, 1976.

Table 3.1: BALANCE OF PAYMENTS 1970-1975

(Kb Million)

Prov.

1970 1971 1972 1973 1974 19 7 5Debits! Credits/ Debits/ Credits/ Debits/ Credits! Debits/ Credits! Debits/ Credits/ Debits! Credits/Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities

A. CURRENT ACCOUNT1. Merchandise Transactions; Imports (c.i.f.)

Exports (f.o.b.) 152.5 102.0 196.2 104.9 186.0 120.5 219.0 164.5 367.6 207.5 342.7 212.12. Non-Monetary Gold Movements 0.1 - 0.2 - 0.4 - 0.2 - 0.9 - 3.6 -

3. Freight and Insurance 0.1 11.1 0.2 12.0 0.4 12.0 1.7 13.1 1.0 19.5 1.8 21.04. Other Transportation 9.3 18.7 8.5 20.6 9.3 21.1 9.9 24.2 22.7 67.3 26.2 72.75. Foreign Travel 7.4 18.5 8.7 23.9 9.9 27.3 11.0 24.3 13.1 27.0 12.0 34.46. International Investment Income 25.0 16.9 21.1 12.3 25.1 12.9 45.1 9.4 49.8 13.7 46.6 12.17. Government Transactions n.e.s. 10.8 12.4 12.2 13.2 11.5 5.8 10.4 5.1 10.7 7.8 10.6 7.88. Other Services 7.3 6.3 7.8 7.3 8.2 13.3 11.2 13.3 9.6 11.4 12.1 13.29. Private Transfers 6.4 6.8 6.9 6.9 6.4 6.8 8.1 8.4 9.0 9.8 8.2 8.3

10. Government Transfers 3.7 12.4 3.8 24.6 4.2 17.4 3.9 11.4 - 8.3 14.4 - 7.6 15.1 -TOTAL CURRENT ACCOUNT 222.6 205.1 265.6 225.8 261.5 237.2 320.5 273.7 492.7 378.4 473.4 396.7of which: Visible Balance 152.5 102.0 196.2 104.9 186.4 120.5 219.2 164.5 368.5 207.5 346.3 212.1

Invisible Balance 70.1 103.1 69.4 120.9 75.1 116.7 101.3 109.2 124.2 170.9 127.1 184.6

B. CAPITAL MOVEMENTS11. Private Cr. 0.3 15.4 0.2 17.3 0.2 16.8 Cr. 0.2 36.4 0.4 52.4 1.0 21.3

11.1 Short-term Cr. 0.8 - Cr. 0.1 - 0.3 2.5 0.6 5.9 0.7 11.1 0.3 Dr. 3.711.2 Long-term 0.5 15.4 0.3 17.3 Cr. 1.0 14.3 Cr. 0.8 30 5 2/ Cr. 0.3 41.32/ 07 25.0 2/

12. Government 0.8 9.0 Cr. 0.7 Dr. 4.5 0.8 15.9 0.8 17.6 - Cr. 0.4 21.4 - Cr. 0.4 35.7 -13. Government Enterprise Cr. 4.9 3.1 Cr. 1.5 1.5 Cr. 1.5 Dr. 1.3 5.3 5.3 5.8 14.1 3.1 9.0

13.1 Short-term. , .. . ,. .. .. - - 2.1 2.8 0.4 0.313.2 Long-term .. ., .. .. .. .. 5.3 5.3 3.7 11.3 2.7 8.7

TOTAL 4.4 27.5 Cr. 2.0 14.3 Cr. 1.4 31.4 5.9 59.3 5.8 87.9 3.7 66.0

C. MONETARY SECTOR14. Central Bank of Kenya

14.1 With I.M.F. 4.9 2.1 2.3 2.3 - - - - - - - -14.1.1 Holdings of S.D.R.'s - - - - - - 0.5 - Cr. 6.3 - 1.014.1.2 S.D. Account - 0.5 - -14.1.3 Other - - - - - - 0.2 - - 13.7 1.6 17.814.2 All other transactions 13.2 0.1 Cr. 25.5 Dr. 0.1 10.5 - 10.7 - Cr. 6.0 4.5 3.0 4.1

15. other Financial Institutions 0.5 0.4 Cr. 1.4 1.5 Cr. 1.5 - 2.4 2.1 3.6 7.3 3.4 4.0TOTAL 18.6 2.6 Cr. 24.6 3.7 9.0 - 13.8 2.6 Cr. 8.7 25.5 9.0 25.9Total Capital Account (B & C) 23.0 30.1 Cr. 26.6 18.0 7.6 31.4 19.7 61.9 Cr. 2.9 113.4 12.7 91.9

1/ Excludes Capital Grants.2/ Includes Capital Grants.

SOURCE: Economic Survey. 1973-1976.

Table 3.2: EAC and Non-EAC Trade, 1970-75

(Kn Million)

1970 1971 1972 1973 1974 1975

Overall trade balance -55.0 -87.9 -62.9 -48.8 -151.2 -124.3(Overall trade balance of oil) (-0.4) (-0.4) (4.7) (-1.3) (-39.4) (-36.2)

Total exports 103.0 112.3 128.3 167.0 215.3 223.1(total exports of oil) (14.2) (17.8) (15.4) (20.9) (42.6) (59.3)Total imports 158.0 200.2 191.2 215.8 366.5 347.4(total imports of oil) (14.6) (17.4) (20.1) (22.2) (82.0) (95.5)

EAC trade balance 15.4 18.0 19.2 26.8 33.3 35.9(EAC trade balance of oil) (5.8) (7.2) (8.1) (7.8) (12.2) (20.9)

Exports 31.4 34.0 32.8 39.3 46.8 46.0(exports of oil) (5.8) (7.2) (8.1) (8.4) (12.9) (21.3)Imports 16.0 16.0 13.6 12.5 13.5 10.1(imports of oil) (0.0) (0.0) (0.0) (0.6) (0.7) (0.4)

Non-EAC trade balance -70.4 -105.9 -82.1 -75.6 -184.5 -160.2(Non-EAC trade balance of oil) (-6.2) (-6.8) (-12.8) (-9.1) (-51.6) (-57.1)

Exports 71.6 78.4 95.5 127.7 168.5 177.1(exports of oil) (8.4) (10.6) (7.3) (12.5) (29.7) (38.0)Imports 142.0 184.3 177.6 203.3 353.0 337.3(imports of oil) (14.6) (17.4) (20.1) (21.6) (81.3) (95.1)

Sources: East African Community) East African Customs and Excise Department AnnualTrade Report of Tanzania. Uganda and Kenya, 1970, 1971 and 1972. MonthlyTrade Statistics of Tanzania. Uganda and Kenya. Dec. 1974 and Dec. 1975.

Table 3.3: EXPORT AND IMPORT TRADE INDICES AND TERMS OF TRADE, 1971-75

(1971 = 100)

Index Numbers % Ciange

1971 1972 1973 1974 1975 1972 1973 1974 1975

ExportsQuantity 100 103 118 114 101 3 15 -3 -11Price 100 111 126 171 196 11 14 36 15Value 100 114 149 195 198 14 31 31 2Value (KL Million) lo.,.] 123.4 161.4 211.3 215.0

ImportsQuantity 1CC' 89 85 91 73 -11 -4 7 -20Price 100 112 128 201 237 12 14 57 18Value 100 100 109 183 173 -5 14 68 -5Value (KL Million) 200.1 191.1 218.1 366.4 347.3

Terms of TradeAll Items 100 99 98 85 83 -1 -1 -13 -2

Non-Oil Items 100 101 101 90 86 1 0 -11 -4

SOUr:CE: Kerya Economic Survey, 1976.

Table 3.4: Direction of Trade, 1971-75

(As percentage of total)

1971 1972 1973 1974 1975

Destination of exports

Western Europe 31 39 38 32 32United Kingdom 14 16 12 8 10Other EEC 12 17 19 19 17

of which:Germany, Federal Rep. of (6) (7) (8) (8) (9)

Other Western Europe 4 6 7 5 5Eastern Europe 2 1 1 1 1United States and Canada 6 6 6 5 6Africa 43 37 35 39 36

of which: EAC (30) (26) (23.: (23) (21)Asia 7 8 10 10 9

Japan 2 2 3 2 2Other Asia 5 6 7 8 7

Middle East 3 2 2 3 2Other countries 2 2 3 3 5Aircraft and ships stores 7 6 4 6 8

Total 100 100 100 99 99Total (Kb Million) 112 128 168 218 223

Origin of net imports

Western Europe 52 53 50 4, 44United Kingdom 28 26 23 1 20Other EEC 19 21 22 23 19

of which:Germany, Federal Rep. of (8) (9) (9) (10) (8)

Other Western Europe 5 6 5 5 5Eastern Europe 3 2 2 1United States and Canada 9 7 9 9Africa 9 8 7 5 3

of which: EAC (8) (7) (6) (4) (3)Asia 16 15 20 19 16

Japan 10 9 12 11 9Other Asia 7 6 8 8 7

Middle East 8 10 10 21 24Other countries 3 4 2 2 3

Total 100 100 100 100 100Total (Kn Millii,) 200 191 218 366 347

SOJRCEC: Kenya, Economic -r-ev, 197°-; and sta,r estimates.

Table 3.5: SUMMARY OF KENYA'S TRADE WITII EAC COUNTRIES, 1970-1975

(KL Million)

1975

1970 ]971 1972 1973 1974 1975 I II III IV

Uganda f T1Exports 16.7 19.2 16.5 21.9 29.3 25.9 5.0 6.7 7.0 7.0

Imports 10.1 i 8.0 7.6 4.7 3.8 1.4 0.6 0.3 0.3

Balance 6.7 11.2 8.9 17.2 1 25.5 24.5 4.4 6.4 6.7 6.7

_ _ _ _ _ _ _ _ _ _ _~~~~~~~~~~~ _ _ _ _ j _ _ _ _ _ _ _ _ _ _ _ _ _ _

Tanzania

Exports 14.8 i 14.7 16.3 16.9 4 19.0 20.3 4.8 4.4 4.8 6.3

Imports 6.0 7.9 5.9 7.6 9.6 8.4 1.3 2.0 2.3 3.1

Balance 8.8 6.8 . 10.4 9.3 9.4 11.9 3.5 2.4 2.5 3.2

Total

Exports 31.5 33.9 32.8 38.8 48.3 46.2 9.7 11.1 11.8 13.3

Imports 16.0 15.9 13.5 12.3 13.4 9.8 1.9 2.3 2.6 3.4

Balance 15.5 18.0 19.3 26.5 34.9 36.4 7.8 8.8 9.2 9.9

SOURCE: Kenya Economic Survey, 1975 and 1976; Central Bank of Kenya, Ninth Annual Report, 1975; and

East African Community Monthly Trade Statistics for Tanzania, Ugand and Kenya, March, June,

September, and Cecember 1975.

Table 3.6: TOTAL EXPORTS OF MAJOR COMMODITIES, 1970-1975

(KW Million and % Shares in Total Value)

Value

1970 1971 1972 1973 1974 1975

Coffee 22.3 19.5 24.8 35.8 38.4 35.2Tea 12.7 11.9 16.5 17.0 19.4 22.9Meat and Products 2.9 3.7 4.9 3.7 4.5 5.0Other Food and Beverages 4.0 2.4 2.6 3.2 4.8 4.3

Total Food and Beverages 41.9 37.5 48.8 59.7 67.1 67.4

Sisal 1.9 1.5 2.1 4.8 17.0 7.3Other Primary Industrial Supplies 7.8 9.4 12.8 23.7 19.8 23.2

Total Primary Industrial Supplies 9.7 10.9 14.9 28.5 36.8 30.5

Total Agricultural Products 51.6 48.4 63.7 88.2 103.9 97.9

Fuel Products 14.4 18.4 19.3 21.3 45.6 58.2

Manufactured Goods 37.1 40.2 40.3 51.8 61.8 58.7

TOTAL EXPORTS 1/ 103.1 107.1 123.4 161.4 211.3 215.0

% Share

1970 1971 1972 1973 1974 1975

Coffee 21.6 18.2 20.1 22.2 18.2 16.4Tea 12.3 11.1 13.4 10.5 9.2 10.7Meat and Products 2.8 3.5 4.0 2.3 2.1 2.3Other Food and Beverages 3.9 2.2 2.1 2.0 2.3 2.0

Total Food and Beverages 40.6 35.0 39.5 37.0 31.8 31.3

Sisal 1.8 1.4 1.7 3.0 8.0 3.4Other Primary Industrial Supplies 7.6 8.8 10.4 14.7 9.4 10.8

Total Primary Industrial Supplies 9;4 10.2 12.1 17.7 17.4 14.2

Total Agricultural Products 50.0 45.2 51.6 54.6 49.2 45.5

Fuel Products 14.0 17.2 15.6 13.2 21.6 27.1

Manufactured Goods 36.0 37.5 32,7 32.1 29.2 27.3

TOTAL EXPORTS 100.0 100.0 100.0 100.0 100.0 100.0

1/ These figures differ from those given in the Balance of Payments table (3.1), becauseof valuation and coverage adjustments made to them.

SOURCE: Kenya iconolnic Survey 1974 and 1976.

Table 3.7: COMPOSITION OF EXPORTS TO UGANDA AND TANZANIA BY MAJOR COMMODITIES, 1970-75

(KL '000)

1970 1971 1972 1973 1974 1975Uganda Tanza.,Uganda,Tanza. Uganda Tanza. Uganda Tanza. Uganda Tanza. Uganda Tanza.

COFFEE 11 -- 13 -- 8 -- 2 -- -- -- -- --

TEA 60 418 31 266 22 46 -- 6 2 2 1 1

MEAT 205 148 192 127 215 132 122 65 49 113 68 61

SISAL --

OTHER AGRICULTURAL GOODS 4,651 3,876 5,403 3,931 5,442 6,273 6,479 6,309 6,906 6,922 6,675 9,391

PETROLEUM 4,340 1,260 4,7861 1,404 4,859 1,546 4,880 1,759 10,178 1,619 15,954 5,245

MANUFACTURED GOODS 7,431 9,050 8,725 9,015 5,961 8,289 10,415 8,715 12,152 10,393 3,004 5,631

TOTAL 16,698,14,752.19,150 14,743, 16,507 16,286 21,898 16,854 29,287 19,049 25,702 20,329

SOURCE: Kenya Statistical Abstract 1975, and East African Community Annual Trade Statistics 1975, forTanzania, Uganda and Kenya.

1/Table 3.8: TOTAL IMPORTS BY SITC CATEGORY. 1970-1975

(in KL Million and % shares in total valiin)

Value % Shares1970 1971 1972 1973 1974 1975 1970 1971 1972 1973 1974 1975

0 Food and Live Animals 9.8 14.6 15.1 16.2 16.4 13.2 6.2 7.3 7.9 7.4 4.5 3.81 Beverages and Tobacco 2.4 2.9 2.5 2.2 3.9 3.5 1.5 1.4 1.3 1.0 1.1 1.02 Crude Materials, Inedible, 3.9 6.0 5.6 6.9 10.7 8.1 2.5 3.0 2.9 3.2 2.9 2.3Except Fuels

3 Mineral Fuels, Lubricants & 15.1 17.3 20.9 23.5 82.0 95.5 9.6 8.6 10.9 10.8 22.4 27.5Related Materials

4 Animal and Vegetable Oils 3.3 4.6 3.9 5.0 8.6 7.6 2.1 2.3 2.0 2.3 2.3 2.2and Fats

5 Chemicals 15.5 19.1 19.9 26.5 53.3 38.1 9.8 9.5 10.4 12.2 14.5 11.06 Manufactured goods classi- 42.2 51.3 44.2 56.5 88.6 57.6 26.7 25.6 23.1 25.9 24.2 16.6fied chiefly by material

7 Machinery and Transport 49.1 65.3 62.2 64.5 80.3 102.9 31.1 32.6 32.5 29.6 21.9 29.6Equipment

8 Miscellaneous Manufactured 12.0 17.8 15.4 16.3 21.2 20.1 7.6 8.9 8.1 7.4 5.8 5.8articles

9 Commodities and Transactions 4.8 1.3 1.4 0.5 1.1 0.7 3.0 0.6 0.7 0.2 0.3 0.2not classified according tokind

Grand Total 2/ 158.() 200.1 191.1 _18.0 3b6.4 347.3 100.0 100.0 100.0 100.0 100.0 100.(

1/ Including transfers between Partner States.2/ These figures differ from those given in the hsalance of Payments tible (3.1), because of valuationand coverage adjustments made to them.

SOURCE: Annual Trade Report of Tanzania, Uganda. ind Kenva, ]q70-75.

Table 3.9: SELECTED NET IMPORTS, 1969-1975

(KI '000)

Motor Agricultural Industrial Fabrics PaperCrude Vehicles Machinery Machinery Iron Fabrics of and Pharma-Petro- and and (including and of Synthetic Paper ceutical Fertili-leum Chassis Tractors electrical) Steel Cotton Fibres Products Products zers

1969 .. .. 10,168 9,894 1,911 15,427 6,473 1,923 2,354 5,697 2,459 2,2721970 .. .. 11,023 11,473 2,420 22,413 9,004 1,022 3,849 6,648 2,712 3,0411971 .. .. 12,798 16,676 3,004 29,972 11,311 1,174 3,776 8,313 3,288 3,0631972 .. .. 14,587 13,492 3,266 34,082 10,167 769 3,488 7,702 3,586 3,7451973 .. .. 17,557 11,464 3,028 38,861 14,410 618 6,749 10,171 3,944 4,3311974 .. .. 67,027 22,226 3,284 40,479 26,958 1,272 8,253 17,497 6,546 15,2711975 .. .. 86,822 - 21 5 640 6,266 56,130 14,480 684 5,390 10,789 6,586 11,350

SOURCES: Economic Survey 1973 and 1976. and East African Community Monthly Trade StAtj'tics, "ec. 1975.

Table 4.1: EXTERNAL PUBLIC DEBT OUTSTANDING, DECEMBER 1975

(US $ Million)

Type of Creditor Debt OutstandingCreditor Country Disbursed Undisbursed Total

Suppliers Credits:Germany (Fed. Rep. of) 9.8 - 9.8United Kingdom 0.7 - 0.7France - 41.5 41.5

U.S.A. - 4.0 4.0

Total Suppliers Credits 10.5 45.5 56.0

Private Bank Credits:Bahamas 0.3 - 0.3

United Kingdom 0.4 8.4 8.8U.S.A. 17.6 - 17.6

Total Private and Bank Credits 18.3 8.4 26.7

Publicly Issued Bonds:United Kingdom 21.5 - 21.5

Total Publicly Issued Bonds 21.5 - 21.5

Privately Placed Bonds:United Kingdom 0.5 - 0.5

Total Privately Placed Bonds 0.5 - 0.5

Other Private DebtU.S.A. 2.0 15.0 17.0

Total Other Private Debt 2.0 15.0 17.0

Loans from International Org:African Dev. Bank 2.8 3.6 6.4

Arab Fund for Econ. & Social Dev. - 3.6 3.6IBRD 106.0 219.5 325.5IDA 81.2 72.4 153.6

Total Loans from International 190.0 299.1 489.1

Loans from Governments:Cannada 2.7 19.7 22.4

Denmark 5.8 3.8 9.6Finland - 4.4 4.4

Germany (Fed. Rep. of) 32.1 31.2 63.4

Israel 0.3 0.1 0.5

Italy 7.7 0.1 7.8Japan 9.5 26.5 36.0Netherlands 9.8 20.7 30.5

Sweden 41.8 20.3 62.1

Switzerland 4.6 - 4.6

United Kingdom 127.5 32.6 160.1U.S.A. 35.6 23.1 58.7

U.S.S.R. 0.3 0.2 0.5Total Loans from Governments 277.7 182.8 460.5

Total External Public Debt 520.4 550.8 1071.2

Notes: (1) Only debts with an original or extended maturity of over one yearare included in this table.

(2) Debt outstanding includes principal in arrears but excludes interestin arrears.

(3) The following uncommitted parts of frame agreements and standbys arenot included in this table.

Loans from Governments

Japan 3,421

Total 3.421Total Uncommitted Frame Agreements and Standbys 3,421

Source: IBRD External Debt Division.

Table 4.2: EXTERNAL DEBT OUTSTANDING, COMMITMENTS, DISBURSEMENTS AND SERVICE PAYMENTS, 1965-1995 1/

(US $ Thousand)

Debt Outstanding at Transactions OtherBeginning of Period During Period Changes

Disbursed Including S E R V I C E P A Y M E N T S Cancel-Year only Undisbursed Commitments Disbursements Principal Interest Total lations Adjustment 2/

(1) (2) (3) (4) (5) (6) (7) (8) (9)

1971 283,733 393,434 77,505 48,089 7,758 12,236 19,994 32,167 18,3331972 307,473 449,347 97,059 68,632 10,458 14,459 24,917 1,316 -22,0711973 348,353 512,561 102,672 65,041 12,445 16,269 28,714 2,075 7,4161974 405,416 608,129 163,905 74,373 12,586 18,046 30,632 3,544 14,4411975 475,033 710,345 367,243 96,676 11,970 19,410 31,380 2,788 51,6201976 3/ 520,396 1,071,210 - 152,136 25,726 24,870 50,596 - -1,1981977 645,609 1,044.286 - 135,947 24,808 30,079 54,887 - -1,1841978 755,559 1,018.294 - 109,610 35,460 34,070 69,530 - - 7461979 828,960 982,088 - 75,085 27,747 37,228 64,975 - - 2691980 876,028 954,072 - 37,757 29,351 38,910 68,261 - - 2731981 884,448 924,448 - 17,902 30,945 39,043 69,988 - - 3021982 870,814 893,201 - 10,938 36,398 37,800 74,198 - - 1581983 845,196 856,645 - 8,125 36,177 36,178 72,355 - - 61984 817,138 820,462 - 2,709 38,179 34,632 72,811 - - 101985 781,658 782,273 - 503 41,373 32,851 74,224 - - 21986 740,790 740,902 - 89 42,501 30,759 73,260 - - 71987 698,371 698,394 - 23 43,186 28,616 71,802 _ 61988 655,214 655,214 - - 43,002 26,337 69,339 - - 81989 612,204 612,204 - - 43,552 24,077 67,629 _ 31990 568,655 568,655 - - 44,445 21,791 66,236 - - 41991 524,206 524,206 - - 44,256 19,395 63,651 - - 31992 479,947 479,947 - - 40,603 17,129 57,732 - - 31993 439,341 439,341 - - 39,157 15,048 54,205 - - 81994 400,176 400,176 -- 38,047 13,015 51,062 - - 61995 362,123 362,123 - - 38,587 11,061 45,648 - 2

1/ External public debt outstanding as of December 31, 1975.2/ This column shows the amount of arithmetic imbalance in the amount outstanding including undisbursed from one

year to the next. The most common causes of imbalances are changes in exchange rates and transfer of debtsfrom one category to another in the table.

3/ The following figures are projected.

SOURCE: IBRD, External Debt Division.

Table 4.3: EXTERNAL PUBLIC DEBT OUTSTANDING, DECEMBER 1975: KENYA'S SHARE OF EAST AFRICAN COMMUNITY DEBT 1/

(US $ Million)

Type of CreditorCreditor Country Debt Outstanding

Disbursed Undisbursed Total

Suppliers Credits:Italy 5.7 - 5.7

Total Suppliers Credits 5.7 - 5.7

Publicly Issued Bonds:United Kingdom 17.6 - 17.6

Total Publicly Issued Bonds 17.6 - 17.6

Loans from International Orgn:IBRD 76.1 23.1 99.2UN Development Program 0.2 - 0.2

Total Loans from InternationalOrganizations: 76.3 23.1 99.4

Loans from Governments:Canada 18.0 5.3 23.4Germany,(Fed. Rep. of) 2.4 - 2.4

Sweden 2.4 3.8 6.3United Kingdom 11.3 - 11.3

United States 3.8 - 3.8Zambia 2.3 - 2.3

Total Loans from Governments 40.3 9.2 49.5

Total External Public Debt 139.9 32.3 172.2

1/ For the purpose ot this table, Kenya's share has been tentatively set at 50% of total EAC debt.

Source: IBRD External Debt Division

Table 4.4: EXTERNAL DEBT OUTSTANDING, COMMITMENTS, DISBURSEMENTS AND SERVICE PAYMENTS, 1965-1990:KENYA'S SHARE OF EAST AFRICAN COMMONITY DEBT 1/

(US $ Thousand)

Debt Outstanding at Beginning of Period Transactions During Period Other ChangesDisbursed Including S E R V I C E P A Y M E N T S Cancel-

only Undisbursed Commitments Disbursements Principal Interest Total lations Adiustment 2/

(1) (2) (3) (4) (5) (6) (7) (8) (9)

1971 84,476 135,807 6,390 14,583 3,837 4,913 8,750 1,554 -1,4991972 91,990 135,307 32,998 10,503 5,702 5,723 11,424 - -3,8361973 92,994 158,767 23,188 18,591 5,535 5,449 10,984 107 791974 106,039 176,234 6,943 22,734 3,702 6,367 10,069 12 2981975 125,632 179,760 3,622 24,837 3,986 6,308 10,294 - -7,1561976 3/ 139,920 172,240 - 14,546 7,697 7,842 15,539 -1977 146,154 163,929 - 8,992 8,861 8,064 16,925 -1978 145,828 154,611 - 5,929 6,354 7,876 14,229 -1979 100,059 147,912 - 1,556 6,522 7,737 14,258 -1980 139,716 141,014 - 785 6,816 7,460 14,276 -1981 133,281 133,794 - 348 6,492 7,127 13,619 -1982 126,701 126,866 - 130 6,807 6,784 13,591 -1983 119,552 119,587 - 32 11,542 6,082 17,623 -1984 107,731 107,735 - 4 8,033 5,272 13,305 -1985 99,637 99,637 - - 6,678 4,780 11,457 -1986 92,959 92,959 - - 7,032 4,394 11,425 -1987 85,927 85,927 - - 6,293 4,024 10,317 -1988 79,636 79,636 - - 6,618 3,678 10,296 -1989 73,015 73,015 - - 6,974 3,312 10,286 -1990 66,042 66,042 - - 7,382 2,920 10,302 -1991 58,660 58,660 - - 7,743 2,502 10,245 -1992 50,916 50,916 - - 7,395 2,067 9,462 -1993 43,521 43,521 - - 7,822 1,628 9,450 -1994 35,697 35,697 - - 7,732 1,154 8,886 -1995 27,965 27,965 - - 6,015 722 6,737 -

1/ External public debt outstanding as of December 31, 1975. For the purpose of this table, Kenya's share has been tentatively set at 50% of total EAC debt.2/ This column shows the amount of arithmetic imbalance in the amount outstanding including undisbursed from one

yeat to the next. The most common causes of imbalances are changes in exchange rates and transfer of debtsfrom one category to another in the table.

3/ The following figures are projected.

SOURCE: IBRD, External Debt Division.

Table 5.1: SUMMARY OF CENTRAL GOVERNMENT FINANCE, 1969/70 - 1975/76

(Kn Million)

Prov.1969/70 1970/71 1971/72 1972/73 1973/74 1974/75 1975/76

Recurrent Revenues 97.9 124.0 141.6 149.0 190.1 226.1 273.8

Recurrent Expenditures 89.4 110.4 128.7 139.6 163.7 207.2 247.2

Recurrent Surplus +8.5 +13.5 +12.9 +9.4 +26.3 +18.9 +26.6

Development Project Earnings & Other Misc. Receipts 0.4 0.4 0.4 0.6 0.6 0.4 0.1

Foreign Grants 1.4 0.8 1.8 0.5 3.5 6.6 12.6

Surplus Available for Financing DevelopmentExpenditures 10.3 14.7 15.1 10.5 30.4 25.4 39.3

Development Expenditures 32.1 46.4 51.9 61.8 66.4 94.2 137.0

Overall Deficit -21.8 -31.7 -36.8 -51.3 -36.0 -68.3 -97.7

Financing of the Deficit:

External Loans 10.8 10.9 11.5 24.7 14.4 22.0 38.0

Domestic:Long-term Borrowing 13.6 8.1 15.6 21.3 18.9 15.5 52.8Short-term Borrowing 5.1 15.0 1.1 6.8 -2.9 12.7 39.2Grants 0.05 0.03 0.02 0.02 - 0.04 0.04

Changes in Cash Balances (Increase +) +7.8 +2.4 -8.5 +1.5 -5.6 -18.1 +32.3

SOURCE: Kenya Statistical Abstract, 1972, 1975; and Economic Survey 1976.

Table 5.2: RECURRENT REVENUE BY CATEGORY 1969/70 - 1976/77

(K1 Millions)LatestActuals Revised Estimates

lY69/70 1970/71 1971/72 1972/73 1973/74 1974/75 1975/76 1976177

Taxes on net income and profits 31.6 40.5 46.9 53.5 57.7 76.6 90.5 97.7

Income tax 29.2 37.8 45.0 50.2 56.2 76.6 90.5 97.7Graduated personal tax 2.4 2.7 1.8 3.3 1.5

Taxes on property 0.5 0.7 0.7 0.7 0.8 0.8

Taxes on goods and services 18.3 21.4 26.9 33.9 60.0 76.9 90.5 98.6

Sales tax - - - 2.7 32.0 46.9 58.4 64.0Excise duties 13.2 15.3 16.2 16.8 20.8 22.7 23.5 26.5Motor vehicle taxes 3.2 4.1 5.0 5.3 3.0 3.0 3.4 4.2Taxes and licenses n.e.s. 1.9 2.0 5.7 9.1 4.2 4.3 5.2 3.9

Taxes on international trade 24.8 29.2 31.9 27.7 39.8 42.1 68.0 l/ 80-0 1/

Import duties 24.4 28.7 31.5 27.0 39.8 42.1 49.1 5r; 1Export duties 0.4 0.5 0.4 0.7 -- **

Other taxes 1.1 1.3 1.3 1.3 2.2 2.1 3.2 3.8

Stamp duties 1.1 1.3 1.3 1.3 2.2 2.1 2.1 2.5Hotel Accomodation tax .I .. .. .- *- .. 1.1 1.3

Nontax Revenue 21.7 31.0 33.8 31.9 29.6 33.4 28.9 28.8

Total Recurrent Revenue 97.9 124.0 141.6 149.0 190.1 231.9 262.2 284.0

1/ Includes excise duties.

Srurcr: Kenya Statistical Abstract, 1975 and 1976. Estimates of Revenue, 1974/75, 1975/76. 1976/77,and Data Provided by Kenyan Authorities.

Table 5.3: FUNCTIONAL CLASSIFICATION OF RECURRENT EXPENDITURE91969/70 - 1976/77

(KL Millions)Prov. Prov.

1969/70 1970/71 1971/72 1972/73 1973/74 1974/75 1975/76 1976/77

General Services 32.2 43.6 47.7 46.9 55.6 62.5 77.6 80.6

General Administration 6.3 6.5 9.1 8.9 11.0 13.3 16.4 17.0Law and order 11.1 11.9 14.5 14.4 16.6 19.0 20.8 21.1Defense 5.4 6.1 8.4 9.7 12.8 17.6 17.9 18.4Revenue collection 2.3 2.5 3.0 3.0 3.1 3.9 4.5 5.0Other 7.1 16.6 12.7 10.9 12.1 15.2 18.0 19.1

Social Services 24.8 36.2 44.5 51.6 59.6 79.5 94.2 105.7

Education 15.8 25.9 31.2 37.3 42.9 56.9 69.3 75.2Health 6.1 7.5 9.6 10.6 12.1 16.9 19.1 24.4Other 2.9 2.8 3.7 3.7 4.6 5.7 5.8 6.1

Housing and Community Services 4.4 5.3 6.8 8.1 9.5 11.0 14.0 14.8

Housing 0.1 0.1 0.1 0.1 0.1 0.1 .2 .2Roads 2.9 3.5 4.6 5.8 7.0 7.9 9.7 9.7Waterworks 1.4 1.6 2.0 2.1 2.3 2.9 3.9 4.8Other 0.1 0.1 0.1 0.1 0.1 .1 .2 .1

Economic Services 16.3 16.7 19.7 20.8 23.1 28.0 35.5 34.9

Agriculture 7.8 8.0 9.5 10.2 12.0 13.5 18.3 16.1Labor 0.3 0.3 0.4 0.4 1.4 0.4 .5 .5Game, fisheries, parks, etc. 0.7 0.8 1.2 1.4 0.4 1.8 2.4 3.2Lands, mining, etc. 0.8 0.9 1.3 1.4 1.5 1.9 1.9 2.1Commerce and Industry 2.9 2.4 1.6 2.0 1.4 2.8 4.0 3.3Transport 0.6 0.7 0.9 1.0 1.2 1.7 1.7 2.0Construction 3.2 3.6 4.8 4.4 5.2 6.3 6.7 7.7

Unallocable and other purposes 11.7 8.5 9.9 12.2 15.9 21.4 27.7 35.2

Interest 6.6 7.4 8.7 10.6 12.0 14.5 20.0 27.2Transfer to local authorities 4.6 0.5 0.5 0.8 2.8 6.0 6.5 6.1Other 0.5 0.6 0.6 0.8 1.1 .9 i.- 1.9

Total recurrent expenditure 89.4 110.4 128.7 139.6 163.7 208.9 249.0 271.2

SOURCE: Kenya Statistical Abstract, 1972, 1973, 1975 and 1976.

Table 5.4 FUNCTIONAL CLASSIFICATION OF DEVELOPMENT EXPENDITURE,

1969/70 - 1976/77

(KL Millions)

Prov. Prov.1969/70 1970/71 1971/72 1972/73 1973/74 1974/75 1975/76 1976/77

General services 2.6 3.3 4.9 6.7 4.9 5.3 4.8 6.4

General administration 1.0 1.5 1.5 3.1 2.0 1.7 2.2 3.1Law and order 0.9 1.5 2.5 1.4 1.5 2.0 1.4 2.3Defense 0.3 0.3 0.9 2.2 1.4 1.4 1.2 1.1Revenue collection 0.4 - - - - 0.2 - -

Social services 4.1 4.9 7.7 6.4 7.0 10.6 11.5 15.7

Education 1.8 1.7 2.5 3.1 3.2 5.1 3.9 6.9Health 1.9 2.6 2.6 2.2 2.3 3.5 4.3 .5Other 0.4 0.6 2.6 1.1 1.5 2.0 3.3 2.3

Housing and community services 11.8 17.1 22.1 25.8 26.5 28.0 33.5 38.6

Housing 2.5 2.7 3.2 4.2 4.3 4.9 4.7 4.5Roads 8.8 13.6 17.6 19.6 19.7 18.6 16.9 17.4Waterworks 0.5 0.8 1.3 2.0 2.5 4.5 11.9 16.7

Economic services 12.6 19.9 16.7 21.1 27.0 46.4 80.5 60.4

Agriculture 4.8 5.1 7.1 6.4 9.9 18.1 37.7 25.9Electricity and power 2.6 4.0 0.1 1.2 0.9 1.5 3.5 5.6Labor - - - - - - - -Game, fisheries, parks, etc. 0.6 1.0 1.2 1.6 1.6 2.3 2.6 3.3Lands, mining, etc. 0.9 1.0 1.4 1.2 1.3 1.5 1.9 2.5Commerce and industry 3.1 6.8 5.5 7.7 7.8 10.3 18.7 10.3Transport 0.5 1.8 1.1 2.7 5.1 11.7 14.4 lu.9Construction 0.1 0.2 0.3 0.3 0.4 1.0 1.7 1.9

Unallocable and other purposes 1.0 1.1 0.4 1.9 1.1 2.1 4.9 6.7

Transfers to local authorities 0.3 0.4 0.4 1.8 1.1 2.0 3.2 3.9Other 0.7 0.7 - 0.1 - 0.1 1.7 2.6

Total development expenditure 32.1 46.4 51.9 61.8 66.4 92.4 135.2 127.6

SOURCE: Kenya Statistical Abstract, 1975 and 1976.

Table 5.5: REVISED FORWARD BUDGET, FY78-80

FY76 FY77 FY78 FY79 FY80Provis. Revised Forward Budget

Revenue 276 307 344 373 405Recurrent Expenditure 1! 237 272 290 310 330Recurrent Surplus 39 35 54 63 75Development Expenditure 114 2 123 140 150 160OVERALL DEFICIT 75 88 86 87 85

Foreign Grants 14 20 20 20 20External Borrowing (net) 12 27 27 30 30Domestic non-bank borrowing (net) 20 19 20 22 23Short Term Borrowing (net) 29 22 20 16 12

TOTAL FINANCING 75 88 86 87 85

NB. All figures in current prices except FY79 and FY80 which are in FY 78 prices.

1/ Exclusive of debt amortization payments.2/ Exclusive of KL 17 million onlent to CSFC.

Source: Ministry of Finance and Planning.

Table 5.6: COMPOSITION OF CENTRAL GOVERNMENT DEVELOPMENT OUTLAYS UNDER FORWARD BUDGET, 1973/74 to 1978/79

(KE Million and Percentage of Total Investment)

ACTUAL ACTUAL ESTIMATES ESTIMATES 6/ ESTIMATES 7/ FORECAST 8/ FORECAST 8/1973/74 1974/75 1975/76 1975/76 1976/77 1977/78 1978/79

Directly Productive

Agriculture 1/, and 19.9 33.0 72.4 55.7 48.3 67.8 76.5Natural Resources 2/

(% share) (29.3) (35.6) (52.5) 9/ (45.9) (37.8) (47.6) (52.3)

Infrastructural

Economic Infrastructure 3/ 30.0 36.1 38.4 38.4 44.2 38.7 33.9(% share) (44.4) (38.9) (27.8) (31.7) (34.7) (27.1) (23.2)

Social Infrastructure 4/ 13.7 18.9 22.0 22.0 28.8 30.4 30.8(% share) (20.3) (20.4) (15.9) (18.1) (22.5) (21.3) (21.1)

Other 5/ 4.0 4.7 5.2 5.2 6.3 5.5 4.9(% share) (6.0) (5.1) (3.8) (4.3) (4.9) (3.8) (3.3)

TOTAL 67.7 92.7 138.0 121.3 127.6 142.4 146.1(% share) (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) (o00.0)

1/ Includes rural water supply projects.2/ Natural Resources cover mining, wildlif & tourism, and forest development.31 Covers power & communications, conference centers, land surveys & adjudication, and works.4/ Covers education, housing & social services, health, labor, and land settlements.5/ Covers information & broadcasting, security & defence, and administration.6/ Excludes KJ 16.7 million special transfer to Cereals and Sugar Finance Corporation.7/ Development Budget figures.8/ Revised Three-year Forward Budget; in constant 1976 prices.9/ The relatively high percentage is partly due to increase in the government capital subscription and loans to

enterprises, including KL 16.7 million to the Cereals and Sugar Finance Corporation which is partly financedby the World Bank program loan.

SOURCE: Ministry of Finance and Planning, Government of Kenya.

Table 6.1: -LOWER AND MIDDLE INCOME CONSUMER INDICES, NAIROBI, 1971-75

(August 1971=100)

March1971 1972 1973 1974 1975 1976

Middle Income Index .100.0 105.0 117.8 121.6 140.1 145.1(% increase) (5.0) (12.8) (13.8) (18.5) (5.0)

Lower Income Index 100.0 103.9 118.9 125.0 145.3 151.2(% increase) (3.9) (15.0) (16.1) (20.3) (5.9)

SOURCE: Kenya Statistical Abstract, 1975 and Economic Survey 1976.

Table 6.2: MONETARY SURVEY, 1971-77

(Kt Million)

ProjectionsJune Dec. June Dec. Mar. June Dec. June

1971 1972 1973 1974 1974 1975 1975 1976 1976 1976 1977

Net Foreign Assets 61.7 69.3 79.1 70.1 63.4 65.4 66.5 80.2 75.0 64.5 73.7

Central Bank of Kenya 60.6 70.5 78.7 73.4 66.4 67.7 70.2 81.0 78.7 68.1 77.3Government 2.1 2.1 3.0 1.7 1.8 1.6 1.8 0.4 1.8 1.8 1.8Commercial Banks -1.0 -3.3 -2.6 -4.6 -4.8 -3.9 -5.4 -1.2 -5.4 -5.4 -5.4

Domestic Credit 134.7 151.9 194.5 221.3 248.3 277.3 311.1 328.1 345.0 379.2 417.5

Government (net) 13.5 18.2 25.5 24.8 46.1 50.8 75.0 2/ 79.5 85.0 3 97.5 110.0CSFC and AFC 1/ 3.9 12.6 14.3 11.8 4.0 22.9 12.9 19.7 ) ) )Other Public Sector 9.0 9.6 11.9 9.2 11.6 11.5 15.6 15.2 ) 260.0 ) 281.7 ) 307.5Private Sector 108.4 111.5 142.9 175.6 186.7 192.2 207.7 213.8 ) ) )

Other Items (net) 3.4 - 1.1 7.3 1.4 -7.1 -2.6 -4.0 -2.6 -2.6 -2.6

Money plus quasi-money 188.9 215.2 268.2 292.4 292.4 307.7 342.0 371.1 388.0 390.0 427.1

70.2 76.9Currency 37.5 45.1 49.5 51.2 54.7 51.5 62.2 62.4 69.9 319.7 350.2Deposits 151.4 170.1 218.7 241.2 237.7 256.2 279.8 308.8 318.2

SDR Allocation 4.1 6.1 6.5 6.7 6.7 6.7 -- 2/ -- _

51.1 61.6IMF Credit - - - -- 14.0 21.2 33.1 33.1 29.5

1/ Cereals and Sugar Finance Corporation, and Agricultural Finance Corporation.2/ The domestic counterpart of Kenya's SDR allocations (KL 6.7 million) was transferred in September 1975 to Treasury

deposits with the Central Bank of Kenya.3/ Based on the ceiling incorporated in the attached letter of intent. Subsequent information on the 1975/76 budget

outturn suggests that this figure will be lower.

SOURCE: Central Bank of Kenya, Economic and Financial Review, October-December 1975; balance sheets of the CentralBank of Kenya and the commercial banks (consolidated); data provided by the Kenyan authorities; and staffprojections.

Table 6.3: SUMMARY ACCOUNTS OF THE CENTRAL BANK, 1971-75

(KL Million)

As at end of1971 1972 1973 1974 1975

Net Foreign Assets 60.6 70.5 78.7 66.4 70.2

Domestic Credit 6.1 -1.1 -2.8 36.3 50.6

Government (net) 5.2 -1.5 -3.2 24.1 45.2 2/CSFC and AFC 1/ - - - - 3.4Other Public Sector 0.4 0.4 0.4 0.4 0.4Commercial Banks 0.5 - - 11.8 1.7

Other Items (net) -5.0 0.3 0.9 7.9 -6.6

Liabilities to Banks 19.4 17.1 18.0 31.7 15.3

Money plus quasi-money 38.2 46.6 52.3 58.2 65.8

Currency 37.5 45.1 49.5 54.7 62.2Deposits 0.8 1.5 2.8 3.5 3.7

SDR Allocation 4.1 6.1 6.5 6.7 _ - 2/

IMF Credit - - - 14.0 33.1

1/ Cereals and Sugar Finance Corporation, and the Agricultural Finance Corporation.2/ The domestic counterpart of Kenya's SDR allocation (KL C.7 Killion) was transferred to

Treasury Deposits with the Central Bank of Kenya.

SOURCE: Central Bank of Kenya Economic and Financial Review, Jan.-Mar. 1975 and IMF.

Table 6.4: ALLOCATION OF COMMERCIAL BANK CREDIT TO PRIVATE SECTOR 1/, 1971-76

(KL Millions)

Jan. Feb.1971 1972 1973 1974 1975 1976 1976

Agriculture 12.6 12.0 17.8 20.5 36.9 39.8 40.0

Manufacturing and Mining 25.0 25.5 29.5 46.3 47.3 50.8 49.3

Building and Construction 5.3 7.1 8.0 14.7 10.9 11.6 11.5

Trade 38.5 33.9 40.7 58.9 54.4 54.5 55.8Export (11.3) (8.9) (12.1) (17.7) (15.2) (15.0) (16.6)Import (10.3) (7.8) (9.4) (15.2) (13.3) (13.0) (13.6)Domestic (16.9) (17.2) (19.2) (26.1) (25.9) (26.5) (25.6)

Transportation 3.9 3.1 3.7 7.0 7.2 6.8 6.8

Financial Institutions 2/ 3.4 4.1 11.8 6.9 6.4 4.0 6.3

Other Enterprises 11.8 14.1 19.1 24.1 34.3 36.7 36.2

Households 10.9 12.5 19.6 19.0 22.0 22.1 23.2

Total 111.4 112.3 150.2 197.4 219.4 226.3 229.1

1/ Include foreign currency bills discounted.2/ Adjusted to exclude commercial banks' holdings of promissory notes of the Cereals and Sugar

Finance Corporation and the Agricultural Finance Corporation.

SOURCE: Kenya Economic Survey, 1974 and 1976.

Table 6.5: FOREIGN EXCHANGE RESERVES OF CENTRAL MONETARY AUTHORITIES, 1970-1975

(KL Million, end of year situation)

1970 1971 1972 1973 1974 1975

Central Bank of Kenya (net)

S.D.R.'s 2.1 0.4 6.6 0.7 0.8 1.8Foreign Reserves 71.6 50.8 58.9 66.7 66.4 69.1Foreign Liabilities (other than I.M.F.) -0.5 -0.4 -1.0 -0.3 -0.5 -0.8

Net Foreign Reserves of Central Government 0.1 0.9 0.7 0.1 0.2 0.4Total Net Foreign Reserves of Central 73.3 51.8 65.2 67.2 66.9 70.6Monetary Authorities

General Account with I.M.F.

Subscription 12.9 14.0 14.0 15.5 15.8 17.4I.M.F. holding of Kenya Currency 9.6 10.5 10.5 11.6 29.5 47.3Net use of Fund Credit 1/ -3.2 -3.5 -3.5 -3.9 13.7 30.0

Counterpart Liability: S.D.R. Account 2/ - - 6.1 6.7 6.7 6.7

1/ Figure in minus indicate reserve position with the Fund2/ Liability of the member country, corresponding to the issue of S.D.R.'s

SOURCE;. Kenya Economic Survey, 1976.

Table 7.1: LAND UTILIZATION IN KENYAI'

(in km2)

Land UseZone I Zone II Zone III Zone IV Zone V Zone VI Total Land Townshipa

Area & OtherAgricul- Forest Govern-mt

ture Reserves Reserves

Western Province 90 5,000 3,000 - - - 8,090 7,388 813 232/Nyanza 'rovince - 2,000 10,500 - - - 12,500 12,000Rift Valley Province - 26,700 15,300 34,500 75,40O 20,600 172,500 156,650 9,500 5,850Central Province 500 9,300 3,000 - 300 - 13,100 9,500 -_---3,60n_Eastern Province - 4,900 2,400 7,300 63,000 77,000 154,600 141,000 13,500 X

N. Eastern Province - 5,00a_ - 120,000- -- 125,000 ..

Coast Province - 5,000 17,000 8,500 56,000 -86,500 60 14 950

Total Area 582 6475/ 396 538

1/ Zone I is at high altitude above the tree line. Vegetation is moorland or grassland but barren land is common. Use islimited to water catchment and tourism.Zone II embraces the bulk of Kenya's forests. The agricultural potential of the zone is high, particularly in thehighlands. Tea, coffee and pyrethrum are important cash crops at higher altitudes and there is potential to developmacademia production; at lower elevations cotton yields well.Zone III has medium agricultural potential. The zone contains most of the large-scale mixed farming areas.Zone IV is of marginal agricultural pptential. Commercial ranching and sisal plantations arg features of this zone.Important concentrations of game occur in this zone particularly in the Masai Mara Reserve and the Nairobi NationalPark and complementary Kitengela game conservation areas.Zone V is of moderate range potential. Wildlife are important in many areas, and the zone is the focus of ruch of thepresent and proposed livestock development programs. The risk of crop failure is great.Zone VI is of low range potential. Grass growth, mainly of annual species, comes in flushes following the erraticrainfall and leads to the nomadism of the pastoral occupants of the zone.

2/ 330 km2 alienated to large-scale holdings are not included in this figure3/ Not developed due to the tsetse challenge.4/ Of which 14,000 km2 is the Tsavo National Park.5/ Figures do not add up to total due to rounding.

SOURCE: Agricultural Sector Survey--Kenya, Volume I. Zone delineation by Pratt, D.J., Greenway, P.J., and Gwynne, M.D.(1966) Journal of Applied Ecology 3, pp. 369-382.

Table 7.2: LAND UTILIZATION UNDER LARGE FARMS1965, 1970 - 74

('000 hectares)

1965 1970 1971 1972 1973 1974

Temporary crops 336.5 301.2 202.3 302.1 291.5 301.6Temporary meadows 88.3 98.9 101.9 95.2 92.2 97.3Temporary fallow 56.8 95.8 65.9 69.8 64.1 78.7Permanent crops 177.4 161.5 156.5 146.3 149.3 158.4Uncultivated meadows and pastures 1817.6 1780.4 1776.5 1755.7 1810.7 1792.7Forest land 127.2 123.7 140.6 149.7 135.5 126.7All other land 136.1 127.1 147.2 169.6 114.4 118.3

Total 2739.9 2688.6 2680.9 2688.4 2657.7 2673.7

SOURCE: Kenya Statistical Abstract, 1975

Table 7.3: ACREAGE UNDER PRINCIPAL CROPS IN LARGE FARMS

1965, 1970-74

('000 Hectares)

1965 1970 1971 1972 1973 1974

Sisal 107.2 85.1 82.1 67.9 74.0 81.9

Tea 19.3 23.8 23.8 23.8 25.5 26.3

Sugarcane 18.3 26.4 28.1 26.9 27.1 29.3

Coffee 29.5 29.5 28.4 29.4 28.6 28.5

Wattle (for sale as bark) 23.8 17.2 16.6 16.1 13.7 13.6

Pyrethrum 4.8 3.3 3.7 3.6 3.2 4.3

Wheat 108.5 212.1 92.7 89.2 83.6 89.3

Maize 3.9 59.3 66.3 77.2 75.8 63.7

SOURCE: Kenya Statistical Abstract, 1975

Table 7.4: ACREAGE UNDER PRINCIPAL CROPS IN SMALL FARMSAND SETTLEMENT SCHEMES, CROP YEAR 1969/70

('000 Hectares)

Sigl rop-/ Mixed Crop!' Total

Cereals

Maize. 275.2 720.5 995.7Millet 18.1 75.8 93.9Sorghum 25.0 116.2 141.2Wheat 5.5 5.5Other cereals 0.9 2.4 3.3

Pulses 11.4 468.2 479.6

Crops

Coffee 51.1 11.4 62.5Tea 19.3 0.3 19.6Cotton 37.7 27.9 65.6Sugarcane 11.1 17.2 28.3Pyrethrum 10.7 4.6 15.3Cashewnut 1.2 33.2 34.4Other crops 60.4 299.3 359.3

Total 589.1 958.0 1547.1

1/ For crops planted twice a year during the long rains and short rains, the acreage for bothseasons are counted. For other crops, the average of the acreage cultivated during theshort and long rains is taken.

2/ The total acreage under "mixed crops" is less than the sum of acreage for each crop owingto the incidence of multiple cropping.

SOURCE: Kenya Statistical Abstract, 1975

Table 7.5: LARGE FARMS: NUMBER OF HOLDINGS BY SIZE 1965,1970-74

Size of holdings in hectares 1965 1970 1971 1972 1973 1974

0 - 49 565 741 754 770 767 779

40 - 99 247 304 292 286 298 302

100 - 199 338 364 362 369 380 392

200 - 299 286 321 325 328 337 335

300 - 399 228 253 244 256 259 259

400 - 499 185 218 219 208 202 216

500 - 999 468 498 484 496 489 498

1,000- 1,999 262 243 224 223 210 207

2,000 - 3,999 114 107 113 110 107 113

4,000 -19,999 114 111 109 107 102 102

20,000 i and over 13 15 13 13 14 14Total 2820 3175 3139 3166 3165 3217

SOURFCE: Renya Statistica) Abstract. 1975

Table 7.6: MARKETED PRODUCTION OF PRINCIPAL CROPS

('00 0 Metric Tons)

1970 1971 1972 1973 1974 1975

Wheat 221.5 205.7 164.4 124.6 159.5 145.5

Maize 205.7 256.6 373.0 440.8 365.4 487.8

Rice Paddy 28.5 30.0 33.8 36.1 33.2

Pyrethrum Extract 0.1 0.1 0.2 0.2 0.2 0.2

Sugar - Cane 1451.2 1378.0 1062.3 1545.1 1719.1 1654.6

Seed Cotton 14.0 16.8 17.0 16.2 15.0 16.1

Clean Coffee 58.3 59.5 62.0 71.2 70.1 66.2'

Sisal 43.9 44.8 41.2 58.1 86.5 43.6

Tea 41.1 36.3 53.3 56.6 53.4 56.7

1/ Deliveries to the Marketing Board only.2/ Only including cane delivered to the sugar factories for the production of white sugar

SOURCE: Kenya Statistical Abstract, 1975. Kenya Economic Survey, 1976,

Table 7.7: LIVESTOCK AND RELATED PRODUCTS: VALUE OF GROSS MARKETED PRODUCTION, 1970-1975

(KL'O00)

Table 7.7: LIVESTOCK AND RELATED PRODUCTS: VALUE OF GROSS MARKETED PRODUCTION, 1970-1975

(KL'000) 1970 1971 1972 1973 1974 1975 1/

Cattle and calves for slaughter 13,324 13,330 16,510 16,353 17,610 18,325Sheep, goats, and lambs for slaughter 1970 47U971 7Yt72 8T473 7%A74 1,133375 bU376Pigs for slaughter - 750 553 61T 65T- 7Wr- - 928Poultry and eggs 998 1,032 1,207 1,360 1,104 994

CattlqO%id calves for slaughter 13,324 34_,330 4Z0,510 ?t,353 T•Y610 41%,325 222SheepF1icfr,tWdaWdi1t%mbs for slaughter 475 604 733 8418251,1707951,20j,1371,21A3768, 3 24Pigs Ia*rysIJA %sv 7506,806 59t30063i0,89065t 1,305720,l009288,676Poultry and eg¶lbJ4al g9%3, 304,o0 -Ok604 3f9,2 4718 343 36V1712, 1o2,4 57 99l,845Wool 346 220 205 503 480 222Hides and Skins 604 841 1,170 1,205 1,298 1,324Dairy Products 6,806 9,300 10,890 11,305 10,100 8,676

_Total 23.303 26,049 31.438 32,172 32,457 31,845

1/ Forecast based on data available for the first two quarters of 1975.

1/ Fo¶WIsii bd:lb%ri1_AEfirqa%MetItftth1 9 bIrst two quarters of 1975.

SOURCE: Kenya Statistical Abstract, 1975

Table 7.8: DAIRY PRODUCTION, 1970-74

1970 1971 1972 1973 1974 1975

2/ 2/ 2/ 2/ 2/ 2/Recorded Milk Production 1/ ('000 litres) 232,013- 220,351- 268,437- 279,658- 249,843- 230,607"

Wholemilk and Cream ('000 litres) 103,138 108,374 124,550 148,816 160,009 157,956

Butter and Ghee (Metric tons) 5,493 4,092 5,696 5,543 4,457 4,191

Cheese (Metric tons) 484 495 730 988 588 462

Evaporated Milk (Metric tons) 2,678 2,679 4,826 5,129 3,249 1,626

Dried Wholemilk Powder (Metric tons) 2,286 2,320 2,927 3,697 2,592 2,289

Dried Skimmilk Powder (Metric tons) 2,440 3,228 4,080 3,814 3,019 2,772

Other Products (Metric tons) 338 393 235 159 71 1

1/ Deliveries of milk and butterfat to the Kenya Co-operative Creameries and other sales licensed bythe Kenya Dairy Board.

2/ Wholemilk equivalent.

SOURCE: Kenya Statistical Abstract 1975 and Economic Survey 1976.

Table 7.9: AVERAGE PRICES TO PRODUCERS FOR PRINCIPAL CROPS, 1970-75

(Sh per 100 kg)

1970 1971 1972 1973 1974 1975

Wheat 45.1 50.6 50.6 56.7 80.4 10.5

Maize 27.5 33.3 38.9 38.9 46.4 70.0

Rice Paddy 50.7 48.4 50.8 50.1 58.6 105.0

Pyrethrum Extract 31,024.8 35,700.0 39,617.7 41,536.3 43,393.0 43,000.0

Sugar Cane 4.5 4.5 5.0 5.2 6.2 8.9

Seed Cotton 99.2 104.8 115.5 121.6 155.3 192.0

Clean coffee 747.8 636.5 778.9 920.7 1008.0 1000.0

Sisal 78.1 67.8 90.4 243.0 424.0 323.0

Tea 673.8 650.5 601.5 592.7 720.6 808.0

SOURCE: Kenya Statistical Abstract, 1975. Kenya Economic Survey, 1976.

Table 7.10: PERCENTAGE CHANGE IN AVERAGE PRICES TO PRODUCERS OF PRINCIPAL CROPS, 1970-75

1970 1971 1972 1973 1974 1975

Wheat -17.3 12.2 0.0 12.1 40.4 31.3

Maize -0.2 21.2 16.7 0.0 17.9 52.2

Rice Paddy -7.5 -4.7 5.1 -1.4 18.0 78.0

Pyrethrum Extract -4.6 15.1 11.0 4.8 3.6 0.0

Sugar cane - - 10.6 3.6 1.9 4.4

Seed Cotton 1.7 5.6 10.2 5.3 27.0 23.9

Clean Coffee 18.6 -14.9 22.4 18.2 9.5 -0.8

Sisal -13.3 -13.2 33.3 111.6 122.0 -23.8

Tea 8.9 -3.5 -7.5 -1.5 21.6 12.1

SOURCE: Kenya Statistical Abstract, 1975. Kenya Economic Survey, 1976.

Table 7.11: LIVESTOCK AND DAIRY PRODUCE:

PRICE TO PRODUCER FOR MEAT,!/BUTTERFAT AND WHOLE MILK, 1970-74

(K. Shillings)

1970 1971 1972 1973 1974 1975

Beef (per Kg): GAQ 3.49 4.06 4.43 4.77 5.29FAQ 3.32 3.76 4.08 4.42 4.96

Mutton (per Kg): A 4.19 4.38 4.60 4.90 6.76B 3.35 3.53 3.77 4.30 5.80

Highland Lamb (per Kg) 5.75 5.90 6.12 6.23 7.53

Pigs Baconers 2/ (per Kg) 3.55 3.70 4.18 4.26 5.67 6.36

Butterfat 3/ (per Kg) 6.38 7.24 7.35 7.11 7.20

Whole Milk 4/ (per Litre) 0.53 0.69 0.77 0.77 0.77 0.85

l/ All prices of meat quoted are for passed grades.2/ Average price paid by Uplands Bacon Factory.3/ Average price paid by Kenya Co-operative Creameries Ltd.4/ The price given for wholemilk is the weighted average payout for the

three groups of milk designated by K.C.C. is "quota milk", "contract"milk, and "milk for separation". These distinctions were abolished inJuly, 1970.

SOURCE: Kenya Statistical Abstract, 1975. Kenya Economic Survey, 1976.

Table 7.12: PERCENTAGE CHANGES IN PRICE TO PRODUCERS OF LIVESTOCK AND

DAIRY PRODUCE, 1970-1975

1970 1971 1972 1973 1974 1975

Beef (per kg): GAQ 16.3 16.3 9.1 7.7 10.9FAQ 0.6 13.3 8.5 8.3 12.2

Mutton (per kg): A 0.0 4.5 5.0 6.5 38.0B 0.0 5.4 6.8 14.1 34.9

Highland Lamb (per kg) 0.2 2.6 3.7 1.8 20.9

Pigs Baconers (per kg) -13.8 4.2 13.0 1.9 33.1 1.1

Butterfat (per kg) -3.4 13.5 1.5 -3.4 1.3 1.1

Whole Milk (per litre) 1.9 30.2 11.6 0.0 0.0 1.1

SOURCE: Table 7.11 and Kenya Statistical Abstract, 1975. Kenya Economic Survey, 1976,

Table 7.13: AGRICULTURAL INPUTS, 1970-74

(K36 '000)Prov.

1970 1971 1972 1973 1974 1975Material Inputs

Fertilizers 3,607 3,711 4,224 5,893 12,876 11,472Other agricultural chemicals 2,236 1,640 2,936 3,124 4,090 4,659Livestock drugs and medicines 1,321 1,152 1,683 1,488 1,762 2,506Fuel 2,372 2,720 3,028 3,337 15328 ?6,773Power 358 370 430 445 5 ,Bags 512 1,057 1,465 1,806 2,328 2,858Manufactured feeds 1,354 1,487 2,124 2,841 4,606 5,450Seeds 340 800 736 1,206 1,475 2,233Spares and maintenance of machinery 1,042 919 946 921 )Office expense 159 157 158 158 '(1,756 |1,875Small implements 236 318 302 201Other 168 200 238 283 ) _

Total 13,705 14,531 18,270 21,677 34,221 37,826

Services Inputs

Marketing, research and publicity 1,028 1,181 1,848 1,788 1,828Artificial insemination 70 50 18 15 15Airial spraying 93 57 83 75 78Accounting, Secretarial and Auditing 530 556 595 630 684services

Tractor services 371 388 425 450 467Private veterinary services 30 30 30 30 30Government seed inspection services 4 9 16 17 18Farm planning and survey services - - - 1 1Governmental veterinary innoculation 30 32 23 18 15services

Insurance 200 200 200 200 200Transportation 260 254 292 313 314Other 150 150 150 150 150

Total 2,766 2,907 3,680 3,687 1/ 3,800 2/ 4,555Total Inputs 16,471 17,438 21,950. 25,364 37,657 42,381

1/ Actual total is 3,843.2/ Actual total is 4,314.

SOURCE: Kenya Statistical Abstract, 1975 and Economic Survey 1976.

Table 8.1: LARGE SCALE MANUFACTURING FIRMS AND ESTABLISHMENTS 1/: NUMBER OF FIRMSAND NUMBER OF PEOPLE ENGAGED 2/

Number ofFirms and Establishments Numbers Engaged

Prov. Prov. Prov. Prov.INDUSTRY 1970 1971 1972 1973 1970 1971 1972 1973

Meat & dairy products 6 5 6 5 3662 4177 4083 4137Canned fruit & vetables 4 5 6 5 1661 1777 2081 2106Grain mill products 5 6 7 7 2080 2285 1893 2094Bakery products, sugar and 10 13 16 18 3471 3854 5198 6971sugar confectionary

Misceallaneous foods 4 4 30 38 1021 1107 5499 7161Spirits, beer, malt, tobacco 6 6 8 9 3336 3697 4119 4626and soft drinks

Textiles 18 17 20 23 6627 7621 8932 9943Foot wear, clothing and 29 30 35 37 4096 4339 4778 4929made-up textiles

Sawn timber 37 37 42 44 4990 5383 5908 6350

Furniture and fixtures 11 12 14 13 905 1243 1498 1493Paper and paper products 9 9 10 12 1427 1535 1858 1958Printing and publishing 13 14 13 16 2075 2290 2178 2359Leather and rubber products 7 7 9 9 990 1052 1612 1799Basic industrial chemicals and 5 5 10 7 818 824 1576 1368petroleum

Paints, soap and vegetable oils 8 10 13 12 1090 1261 1811 1852Pyrethrum extract 1 1 1 1 101 366 456 482Miscellaneous chemicals 11 11 8 11 1112 1199 1493 1233Clay and glass products 6 7 8 7 740 929 1152 1100Cement 2 2 3 3 1100 1181 1589 1603Other non-metallic products 6 7 8 9 563 826 579 689Metal products 19 20 23 27 4087 4673 5298 5046Non electrical machinery 7 6 8 6 565 409 712 632Elecgrical machinery 8 7 6 6 3645 4145 4360 4088Shipbuilding and repair 4 5 4 4 1243 1390 2964 2872Railway rolling stock 1 1 1 1 10756 10725 14015 14015Motor vehicle body buildingand repairs 28 31 11 11 4873 5508 1328 1358Aircraft repairs 2 2 2 3 1053 1228 1043 1132Miscellaneous manufacturing 11 11 13 14 1190 1312 1487 1835

TOTAL 278 291 335 358 69277 76336 89500 95231

1/ Large scale enterprises are defined as those with 50 or more employees.2/ Include full-time workers and also self-employed and family workers.

SOURCE: Kenya Statistical Abstract, 1975.

Table 8.2: LARGE SCALE FIRMS AND ESTABLISHMENTS 1/ : LABOR COSTS AND GROSS VALUE OF PRODUCTION, 1970-73

(KL'000)

Labor Costs Gross Value of Production

Prov. Prov. Prov. Prov.1970 1971 1972 1973 1970 1971 1972 1973

Meat and daiiry products 1991.5 1782.4 2112.3 2026.4 3145.1 2484.1 3004.5 3804.0Canned fruit and vegetables 355.8 410.1 437.0 451.4 341.3 647.7 605.5 1191.1Grain mill products 772.1 804.7 819.3 856.0 1947.4 2062.6 1926.0 2213.7Bakery products, sugar and sugar confectionary 1043.0 1214.3 1407.7 2336.7 2338.3 2398.6 2189.0 4422.9Miscellaneous foods 413.0 449.6 422.8 1454.2 1130.4 1222.6 780.8 6269.9Sprits, beer, malt, tobacco, and soft drinks 2325.8 2578.5 2534.6 2949.6 6680.0 7981.1 8756.0 9278.9Textiles 1329.6 1638.5 2194.5 2435.9 2250.0 3142.5 4306.1 5759.0Footwear, clothing and made-up textiles 1049.5 1069.3 1263.6 1435.1 1954.3 2144.6 2633.9 2541.3Sawn timber 807.6 897.2 1494.9 1266.0 1166.4 1262.5 1805.1 1994.9Furniture and fixtures 306.6 349.9 556.5 434.3 467.9 664.3 843.1 655.6Paper and paper products 776.3 895.0 1010.8 1286.4 1471.9 1572.0 1844.7 2530.4Printing and publishing 1354.5 1516.5 1250.4 1786.9 1876.3 1991.5 2409.2 2821.9Leather and rubber products 349.2 414.2 700.1 986.6 684.6 883.7 1859.6 3303.5Basic industrial chemicals and petroleum 618.2 669.3 1204.7 1152.7 2729.0 3502.2 4739.3 5825.9Paints, soap and vegetable oils 700.4 780.0 1639.1 1308.1 1818.3 1899.4 4990.9 4199.9Pyrethrum extract 102.1 251.4 323.4 289.1 170.4 1265.9 1081.9 421.1Miscellaneous chemicals 463.1 533.4 670.7 875.9 1308.7 1547.4 1366.2. 2450.5Clay and glass products 256.0 293.5 314.6 386.2 551.3 713.7 919.2 1012.6Cement 706.3 934.8 1134.3 1189.6 2715.3 3171.5 3202.2 4146.6Other non-metallic products 99.1 123.7 305.0 208.3 173.1 282.3 682.7 864.8Metal products 1882.4 1859.0 2455.1 2601.3 3746.4 3992.1 4684.1 6540.2Non-electrical machinery 351.9 227.7 216.8 194.1 479.4 320.4 403.5 305.8Electrical machinery 1883.6 1865.1 2097.9 2176.8 3064.6 3216.8 3425.0 4190.2Shipbuilding and repair 522.0 597.4 649.4 639.4 700.2 735.3 1293.1 1596.7Railway rolling stock 2217.0 2220.0 2056.5 1831.2 2438.4 2441.5 2261.7 1972.6Motor vehicle body building and repairs 1957.6 2223.4 597.6 1039.9 3336.4 3708.2 1193.9 1357.1Aircraft repairs 1172.0 1413.7 1310.2 1436.9 1290.1 1548.3 1449.0 1538.5Miscellaneous manufacturing 438.2 491.1 672.5 645.5 693.6 881.9 950.4 1455.4

Total 26244.4 28503.7 31852.3 35680.5 50674.1 57684.5 65608.5 84710.0

1/ Large scale enterprises are defined as those with fifty or more employees.

SOURCE: Kenya Statistical Abstract 1975.

Table 8.3: QUANTITY INDEX OF MANUFACTURING PRODUCTION, 1970-1975

(1969 = 100)

PercentageProv. change

1970 1971 1972 1973 1974 1975 1974 to1975

Coffee Milling .. .. .. 107.3 135.8 129.7 149.3 117.6 131.5 11.8Meat Processing .. .. .. 108.4 100.1 100.6 82.0 73.1 64.0 -13.1Dairy Products .. .. .. 105.7 100.6 121.4 135.2 134.4 126.4 -6.0Canning of Fruit and Vegetables .. 130.9 141.9 154.4 230.0 200.9 329.2 63.9Canning and Preserving of Fish .. 110.0 90.0 90.0 90.0 90.0 11(.0 22.2Grain Milling .. .. .. 119.2 116.5 120.1 130.8 131.3 125.7 -4.3Bakery Products .. .. .. 115.4 160.0 188.5 205.1 214.5 206.5 -3.7Sugar .. .. .. 108.9 107.7 79.2 121.4 142.8 138.8 -2.8Confectionery .. .. .. 97.1 98.2 120.0 125.9 62.4 52.9 -15.2Miscellaneous Food .. .. .. 102.3 113.3 146.4 160.5 184.0 207.3 12.7

Total Foodstuff Processing 111.8 118.1 127.7 142.6 143.9 147.0 2.2

Beverages .. .. .. 120.7 141.2 162.6 198.2 228.2 234.7 2.8Tobacco .. .. .. 114.6 123.3 127.6 143.7 169.6 167.1 -1.5

Total Beverages andTotal Beverages and Tobacco .. 119.1 136.4 153.3 183.7 212.6 216.7 1.9

Cotton Ginning . . .. .. 119.5 130.3 125.1 119.2 122.4 131.4 7.4Knitting Mills .. .. .. 110.2 127.3 120.5 119.0 117.5 118.6 0.9Cordage, Rope and Twine .. .. 48.4 82.3 118.4 147.7 116.1 161.2 38.8Spining and Weaving .. .. .. 128.6 146.5 142.6 171.2 211.3 218.9 3.6

Total Textiles .. .. .. 91.8 115.5 127.5 149.4 148.9 171.0 14.9Footwear .. .. .. 103.5 128.6 136.1 125.5 130.1 139.0 6.8Clothing and Wearing Apparel .. 124.4 120.4 141.4 188.1 167.4 174.1 4.0Canvas Goods .. .. .. 133.4 100.9 96.3 100.6 102.0 121.6 19.2

Total Footwear and Clothing .. 121.3 118.2 119.6 153.9 144.1 154.1 6.9Wood Products .. .. .- 102.5 98.6 105.1 111.2 107.2 108.3 0.6Furniture and Fixtures .. 112.5 133.3 195.9 216.7 225.0 283.3 25.9

Total Wood Products and Furniture 106.7 113.1 143.1 155.4 156.6 181.7 16.0

Paper .. .. .. 112.0 125.8 128.2 144.7 149.8 239.7 60.0Printing .. .. .. 111.6 136.8 113.4 135.3 145.6 157.1 7.9

Total Paper and Printing *- 111.7 134.2 116.9 137.5 146.6 176.5 20.4

Leather and Leather Products .. 79.6 102.0 130.4 140.4 140.7 107.0 -24.0Rubber and Rubber Products .. 116.5 135.0 161.8 347.5 349.3 298.3 -14.6Chemicals .. .. .. 101.4 113.0 117.8 127.1 129.3 132.8 2.7Petroleum Products .. .. .. 99.9 118.2 116.5 122.3 132.5 133.2 0.5Non-Metallic Minerals .. .. 122.8 123.5 132.0 130.0 135.3 145.1 7.2Metal Products .. .. .. 111.1 121.9 132.9 166.4 158.4 157.3 -0.7Non-Electrical Machinery .. .. 117.4 119.4 128.3 216.9 256.9 242.0 -5.8Electrical Machinery .. .. 115.0 123.9 124.1 138.6 154.0 150.6 -2.2Transport Equipment .. .. 102.4 112.1 110.9 115.6 125.7 126.5 0.7Miscellaneous Manufacturing .. 126.4 173.4 174.8 132.6 150.2 169.1 12.6

ALL MANUFACTURING 110.0 121.6 127.8 144.9 153.4 159.5 4.0

SOURCE: Kenya Economic Survey, 1976.