A Historical perspective and Background brief of Kenya’s Economy
and the issues leading to the formation of the National Economic
and Social Council (NESC)
After experiencing moderately high growth rates during the 1960s
and 1970s, Kenya’s economic performance during
the last two decades has been far below its potential. As a result,
per capita income in constant 1982 prices declined from Kshs 3,813
in 1990 to Kshs 3,360 in 2002. The number of people openly unemployed
currently stands at over 2 million or 14.6 per cent of the labour force, with the youth accounting for 45 percent of the total.
The majority of the unemployed, though educated, do not have necessary
skills. In addition, the number of the working poor is staggering
comprising primarily subsistence farmers, female-headed households
and pastoralists. Disguised unemployment is also a serious problem,
especially in the public sector.
The sharp deterioration in economic performance worsened the poverty
situation. The number of people living in poverty is estimated to
have risen from 11 million or 48 per cent of the population in 1990
to 17 million or 56 per cent of the population in 2001. Welfare
monitoring surveys conducted by the Kenyan Government indicate that
three quarters of the poor live in rural areas while the majority of the urban poor live in slum and peri-urban
settlements. In a number of Participatory Poverty Assessment (PPA)
surveys carried out in the 1990s, the poor attribute their poverty
to natural calamities, and traditions and cultural beliefs that
deny women access to productive assets.
The deterioration in the standard of living in Kenya is demonstrated well
by the worsening in key social indicators over the last two decades. Illiteracy
rates increased as enrolment rates in primary school declined while
life expectancy and child mortality worsened. This disappointing
development has further been complicated by the upsurge of the HIV/AIDS
pandemic.
It is against this background that the Government of the National
Rainbow Coalition (NARC) was elected in December 2002. The major
challenge facing the NARC Government is how to restore economic
growth, generate employment opportunities to absorb the large army
of the unemployed, particularly the youth, and reduce poverty levels.
The overwhelming support given to the new Government was a resounding
indication by Kenyans that they needed radical changes, changes
that would make Kenya an attractive place
to live and a place to feel at home. The NARC Government is convinced
that economic recovery is the primary vehicle through which it can
achieve improved provision of education, health, better infrastructural
services and gainful employment for Kenyans. The Government is convinced that employment
creation is the most effective strategy for halting the increasing
poverty. Immediately after taking office, the new Government commenced
the process of preparing an Economic Recovery Programme, focusing
on the main strategy for reviving the economy and creating jobs.
The Strategy takes into account existing government policy documents
particularly the Poverty Reduction Strategy Paper (PRSP) that was
issued in 2001. It also incorporated the policy proposals contained
in the Manifesto of the National Rainbow Coalition (NARC) and Post-Election
Action Plan. The Strategy document, which was prepared under the
auspices of the Ministry of Planning and National Development, embodies
the views and aspirations of Kenyans, which were collected through
a process of consultative workshops with a wide cross section of
stakeholders.
This Strategy identifies key policy actions necessary to spur the
recovery of the Kenyan economy and is based on four pillars as well
as five cross cutting themes reflecting the overall goals of our
society. First, the Government recognizes that rapid economic growth
will be required over the next four years but in an environment
of macro economic stability. In this context, measures are proposed for enhancing revenue collection, expenditure restructuring,
and a monetary policy that will support the achievement of economic
growth without putting into jeopardy price stability objective.
Four priority areas will form the core of the macro economic framework.
- Firstly, the Government will seek
to maintain revenues at above 21 per cent of GDP to enable the
bulk of Government expenditures to be financed from tax revenues.
This target will be achieved by rationalizing the tax rates, broadening
the tax base to include the informal sector and modernization
of revenue administration.
- Secondly, the Government will restructure
expenditures to be more growth and pro poor oriented. This will
be achieved through the deepening of the MTEF process, implementation
of the Country Financial Accountability Assessment (CFAA) Action
Plan, the Public ExpenditureManagement (PEM) reforms, and utilizing
an annual Public Expenditure Review (PER) to inform the resource
allocation process.
- Thirdly, the Government will focus
its deficit financing on nondomestic sources to enable private
sector credit to grow despite the limited growth in money supply.
- Fourthly, the Central Bank will pursue
a monetary policy consistent with low inflation without compromising
the recovery effort.
The second and more fundamental pillar is strengthening of institutions
of governance. The Government is convinced that good governance
underpins sustainable development. In this regard, the strategy
outlines various reforms in public administration, national security,
and law and order.
It also underscores the centrality of the rule of law as opposed
to the ‘rule of man’ in the creation of good governance in Kenya. It is emphasized that poor
governance and the breakdown of law and order have contributed substantially
to higher cost of doing business in Kenya, thereby negatively impacting on the economy. The programme proposes reforms to enhance
efficiency and improvement in governance. Focus will be on building
capacity for institutions involved in making justice accessible
to all, and especially the poor.
Priority actions on the governance front will include implementation
of the provisions of the Anti Corruption and Economic Crimes Act and the Public Officer’s Ethics Act
that
were recently enacted; strengthening the security agencies with
interventions covering training, equipment, housing, recruitment and increased collaboration with neighbouring
countries; strengthening the rule of law through increasing legal
staff, both in the judiciary and the Attorney General’s Chambers,
increasing availability of equipment and facilities, strengthening
the Judicial Service Commission (JSC) and harmonization of laws;
and enhancing local governance through a devolution process arising from the ongoing Constitutional Review
process.
In addition, Public Sector reform will be built around the civil
service reform programme involving rightsizing, pay reform and enhancing
efficiency; privatization of commercial state owned enterprises;
enhancing competition and reforming the regulatory environment to facilitate
the formalization of the informal sector and reduce the cost of
doing business.
The third pillar is rehabilitation and expansion of physical infrastructure.
The Government believes Kenya has the potential to become Africa’s commercial centre. To achieve this vision requires the country
to modernize, and uplift to first world class, its key economic
infrastructure. Poor infrastructure has been identified as a primary
factor that makes production cost excessively high, thereby undermining
the competitiveness of locally produced goods. In particular, roads,
railways and telecommunications have had a serious negative impact
on production. The Strategy has identified policies to rehabilitate
the dilapidated infrastructure while building new ones.
Infrastructural priority actions will fall in six areas.
- Firstly, rehabilitation, reconstruction
and expansion of the road network, including the rural access
roads. This will be done through implementation of the Roads 2000
programme for rural access roads, the concessioning of the Mombasa
Malaba highway for conversion to a dual carriageway, rehabilitation
of the road network and strengthening of the legal and institutional
framework which includes the Kenya Roads Board (KRB).
- Secondly, energy availability will
be improved by linking to the Southern African power pool, completion
of power generation projects including Olkaria and Sondu Miriu,
enhanced revenue collection, increasing connectivity and increasing
competition in the sector.
- Thirdly, the telecommunications sector
will be opened up to increased competition and private sector
participation. Fourth, the railway sector will be revamped by
restructuring and eventually privatizing Kenya Railways through
concessioning. Fifth, the port of Mombasa will be converted to a landlord
port and this will enable the private sector to participate in
its modernization, while construction of a bypass at Dongo Kundu
will eliminate the need for ferry services and potentially enable
the conversion of the port into a free-port. Air transport will
be improved through modernization and expansion of facilities
and increasing the role of the private sector.
- The fourth pillar is investment in
the human capital of the poor. The Government believes a well
educated and healthy population is an important factor in enhancing
productivity and the overall performance of the economy. While
the impact on the economy will not be immediate, there is no doubt
investment in human capital is an important ingredient to the
realization of poverty reduction objective. Priority interventions
in the socio economic sphere will focus on seven areas. These
include putting in place measures to achieve 100 percent net enrolment
at primary level; enhancing secondary education by expanding bursaries
to cater for at least 10 percent of enrolled students, rehabilitating
laboratories and classrooms and standardizing teacher student
ratios at 35:1;meeting the health challenge through the establishment
of a comprehensive National Social Health Insurance Fund (NSHIF)
which will provide both in patient and out patient services to
all Kenyans; continuing the battle against the HIV/AIDS pandemic
by putting in place an integrated approach to prevention, increasing
community involvement and ensuring the special health care needs
of the infected are met; carrying out legal and institutional
reforms to enhance employment creation, reforming the system of
arbitration to minimize employment disputes and strengthening
the role of productivity measurement in the labour reward process;
conversion of the NSSF into a pension fund; and provision of low
cost housing.
The Government strongly believes that recovery is primarily the result
of improvements in the productive sectors of the economy including
agriculture, tourism, trade and industry. Existing research suggests
that factors responsible for the poor performance of the productive
sectors other than those already discussed include the high cost
of engaging in productive activities, high cost of capital particularly
for medium and small scale enterprises (MSEs), lack of supportive
services and weak institutions. The programme outlines specific
policies and institutional reforms that will be implemented in order
to revive the various sectors. Also emphasized in all sector policies
is the removal of various regulatory impediments that increase the
cost of doing business.
Productive sectors’ interventions will be focused on 5 areas.
Interventions in agriculture will focus on providing a single enabling
legislation to replace the large number of excising legislations
in the sector, rationalizing roles and functions of agricultural
institutions to empower resource poor farmers and increase institutional
efficiency, strengthening extension services and increasing smallholder
access to credit. Institutional reform will also include revamping
the co-operative movement by reviewing the Cooperative societies Act to improve governance
in the sector and addressing issues of indebtedness in the sector.
Interventions in the manufacturing sector will be built around an
Industrial Master Plan which will lay the groundwork
for the first phase of Kenya’s industrialization strategy and restore the sector to a rapid growth
path.
The tourism sector will be promoted through increased funding for marketing, upgrading
the tourist police force to make it more effective and diversification
of markets, both in terms of geographical distribution and customer
base. The Government will also be putting in place an Investment Code to consolidate investment incentives, protection and institutional framework
in a single legislation to establish a one-stop office for investment
promotion activities.
Export promotion will be carried out within the framework of an
export development strategy to ensure maximum export earnings are achieved for minimum promotional costs.
The Government will also promote the Micro and Small Enterprises
Sector (MSE) by finalizing and implementing a Sessional paper on
the sector, focusing on employment creation and formalization of
informal activities.
The state of the financial sector is very important in supporting
economic recovery.
The recovery programme outlines the main challenges facing the country’s financial
sector and identifies priority policies and institutional reforms
to ensure a vibrant financial sector supportive of the country’s
development programmes. Financial sector reform will be built around a Financial Sector Assessment
Programme (FSAP) which will identify the strengths, weaknesses and
synergies in the sector. Among the issues to be considered are whether
there is adequate justification for an overall financial sector
regulator.Financial sector reform will concentrate on reducing the interest
rate spread, enhancing investor confidence and consumer protection
in the sector, dealing with the problem of Non Performing Loans
(NPLs) and creating an independent insurance regulator.
The Government recognizes that the benefits of economic growth may
still not reach all the people, particularly the most disadvantaged
members of the population. Consistent with the Government’s goal
of fighting poverty, the programme outlines some social sector interventions
that are critical in addressing the problem of poverty. The pro-poor
spending proposals particularly in health and education are important
in reducing the state of inequality.
The Government is aware of the weak implementation record that has
in the past characterized its economic management. This has cost
the country dearly in terms of withdrawal of much needed budgetary
support by our development partners leading to non-completion of
projects. The NARC Administration is fully committed to implementing
the policies contained in this recovery programme. In this regard,
the Government will put in place an implementation framework to
ensure that the programme is implemented.
To assist in this process, an implementation matrix, which is attached
to this document, will be used to monitor and evaluate progress
at each stage of implementation. Priorities will be in three areas.
- Firstly, establishment and institutionalizing
a mechanism for monitoring and evaluation following
the work already done in the Ministry of Planning and National
Development.
- Secondly, establishment of the National
Economic and Social Council (NESC) through an Act of
Parliament.
- Thirdly, ensuring that the implementation
matrix is adhered to.
Finally, the Government acknowledges that it is committed to improving
the enabling environment for business and will strive to remove
the various impediments that may hamper private sector development.
Read more on the following Reports from the Ministry of Planning
& National Development :
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