changes its ways

Introduction - Reforms - Harsh Times - Economy - Investment - Finance - Stock exchange
International Markets - Industry - Transport - Tourism - Telecom - Energy
Agriculture - Natural Ressources - Conclusions

Mr Y.F.O. Masakhalia

Mr. HON. Y.F.O. Masakhalia
former Minister of Finance

Interview with

Mr Masakhalia,

Nairobi, April 28th, 1999

Kenya's economy has stagnated in the past few years, recording a 2.3. % growth in 1997 as compared to 4.6.% in 1996. This is mainly due to a bad performance and slow down of key sectors such as agriculture, manufacturing, tourism and exports. What kind of structural reforms have you set in place in order to help the economy recover?

Let me make brief comments in relation to a few areas where we have directed high priority in our reform process.

First for the public sector we have adopted a balanced budget policy. One of the reasons for our adoption of the balanced budget approach is the necessity of reducing the large domestic debt. Kenya has a large domestic debt which was caused by excessive government borrowing in the period 1992 - 1994, which in turn arose from large budget deficit levels. If we continued to maintain a policy of large deficits in our budgets we would cause further growth of our domestic debt, which incidentally, is now being serviced by about 38 per cent current annual revenue. The growth of the domestic debt has also been contributed to by high interest rates which have prevailed in recent years. Our recent policy of maintaining a balanced budget has entailed reduction of domestic borrowing to the lowest possible levels. This has led to a fall in 91 days Treasury bills interest rate from 28% in January 1998 to under 9% in April 1999, although it has again risen to about 14 %. This of course has had a favorable effect of reducing the levels of interest rates in the banking sector.

Secondly, we have also maintained similar discipline in the monetary sector. Here we have maintained low rates of growth in money supply. Overall in the past year we recorded a growth rate of only 3% in money supply. This low growth rate in money supply has made it possible for our economy to acieve a low level of inflation.

Thirdly, another policy priority area is privatization. We have since 1993 been pursuing a plicy of privatization which entails enterprises which have been government owned and managed being sold off to the private sector. To date 168 parastatal enterprises engaged in commercial and related activities have been privatized. We are currently pressing ahead with privatization of major parastatals including Kenya Posts and Telecommunications, Kenya Railways and the Power Sector.

Furthermore, reforms that have related to liberalization were implemented some years ago. We implemented the policy of liberalization in the area of transactions in the Kenya Shilling. The value of the Kenya Shilling is currently determined by market forces. There are no restrictions on transfers of foreign exchange. We have also abolished licensing of imports and exports.

International donors are also reluctant to invest large quantities of money in Kenya. Why is that so?

Let me indicate that investors who know Kenya well and understand us are not shying away from investing in our economy. Kenya is a stable peaceful country. There are, however, others who may have hesitated to invest in our economy. They have done so mainly for political reasons arising from such events as the up-surge of the movement of multi-party politics in the early years of this decade and related matters. Before 1992 we had a one party state. There was agitation for a multi-party system of government, but appropriate changes were made in our constitution that paved the way for a multi-party elections in 1992. There have also been criticisms relating to corruption. These may have contributed to foreign governments reduction of the flow of official aid, which in turn caused a down turn in the performance of our economy.

Kenya in my view has been judged harshly. Events relating to demonstrations and similar events have been reported abroad with excessive exaggeration. They have been perceived as shortcomings on the part of Kenyan authorities in the management of both political and economic affairs, and have impacted negatively on our image.

An example of one of the reasons Kenya has been portrayed in a bad light is the Goldenberg case.

In this particular case crimes were committed by a few individuals who are reported to have been paid large amounts of money, purportedly as compensation for earning foreign exchange through gold exports. It turned out that exports were not made. In my view, Kenya has been judged excessively harshly by this episode, which, it should be noted, was perpetrated by a few individuals. What is important is for us to put in place mechanisms for apprehending individuals who commit crimes. The law should be made to take its course. Law and order government agencies should be appropriately equipped to deal with these crimes. We have, in fact, established the Kenya Anti-Corruption Authority to deal with these cases.
Because of the perception from the international community that Kenya has not effectively dealt with such problems, some aid programs including ESAF were suspended in 1997. Suspension of ESAF meant that some of the resources we could have received to us. Program aid, balance of payment support, and budget support assistance resources, cannot by convention be made available to a developing country without an IMF program in place. We have been in this position for much of the period since 1992. The international community needs to understand that the entire economy, and the people are subjected to suffering arising form the consequences of this kind of situation. An economy starved of resource inadequacy is inevitably plunged into economic recession. Incidentally, we have carefully analyzed our resource flows. We are now a net resource exporter in our public budget. This brings up the question of growth. We are endeavoring to carry out a broad range of reforms so that we can create an environment which can lead to private sector resource inflows, as well as increased official aid resource flows, that would reverse the resource flows, that would reverse the situation of Kenya being a net exporter of resources, to the country being a net importer of external resources. This should enable the economy to access the appropriate levels of resources for investment and growth.

What can you tell us about the relation between the inflation rates of Kenya and suspension of the international funding programs?

The policies I have briefed you about, the balanced budget, liberalization, privatization, are all part of economic policy framework which covers both macro economic and sector policies. The inflation rate in the past year was 6 per cent, single digit, in spite of the very high level of interest rates. With the decline of interest rates and a tight monetary policy in addition to the balanced budget strategy we expect to maintain a low level of inflation.

Could you give us some figures regarding the economic climate of Kenya in the past few years?

In 1998 GDP registered the growth about 1.8%. in terms of the fiscal year from July 1998 - 1999 it is estimated GDP growth was around 1.6%. we have a GDP projected figure for the new fiscal year (1999 - 2000) of 3%. This is against the background of the population growth of 2.6%. this takes us to a policy of poverty alleviation and creation of employment. In the medium term we are going to pursue policies which accord priority to the creation of employment opportunities and alleviation of poverty as the priority objectives. In order to achieve these objectives we will promote two strategies launched by His Excellency, the President. The first relates to promoting growth and development especially in the goods and services sector for household consumption. This is designed to address the problems of poverty, through achievement of diversification of the economic and production base of the economy and high rates of growth and development.

The second interventionist strategy relates to intervention approaches of poverty alleviation and covers programs targeting the poor, including women and youth, who live in both rural and urban areas including the slums dwellers. We want to evolve ways of effectively adMinistering services, education, infrastructure, water, and housing to serve the needs of these disadvantaged groups. A revolving fund has been launched to served this purpose.

The economy is too concentrated on agriculture and tourism, what plans are there to increase the base of economy?

It is correct that agriculture is a dominant sector in our economy. I must, however, emphasize that our development strategy emphasizes the need for diversification of our economic activities. This entails directing attention to promoting the development of the processing and service sectors. Industrialization is being accorded high priority and a sessional paper articulating the industrialization process to the year 2020 has been adopted by Parliament. Further, our development strategy focuses attention to the rapid expansion of the service sectors including: internal and external trade, transport and communication, the banking and the financial sector, to name but a few. I must emphasize that the government considers its role as being that of establishing and maintaining an enabling environment for private enterprises to invest and manage production, and service units in all these sectors. The private sector is thus perceived to be the engine of growth and development.

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© World INvestment NEws, 1999.
This is the electronic edition of the special country report on Kenya published in Forbes Global Magazine.
November 29th 1999 Issue.
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