VZCZCXYZ0006
PP RUEHWEB

DE RUEHNR #2292/01 1511204
ZNR UUUUU ZZH
P 311204Z MAY 07
FM AMEMBASSY NAIROBI
TO RUEHC/SECSTATE WASHDC PRIORITY 0053
INFO RUEHXR/RWANDA COLLECTIVE PRIORITY
RUCPDOC/USDOC WASHDC PRIORITY 2966
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS NAIROBI 002292 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR AF/E, AF/EPS, AND AF/RSA 
DEPT ALSO PASS TO USTR FOR BILL JACKSON 
TREASURY FOR VIRGINIA BRANDON 
 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN EINV EAGR KE
SUBJECT: KENYA: ECONOMIC GROWTH STRONG, POVERTY AND INFLATION 
DECLINING 
 
REFS: A) Nairobi 1981, B) Nairobi 468 
 
SENSITIVE BUT UNCLASSIFIED.  PLEASE PROTECT ACCORDINGLY. 
 
¶1. (SBU) Summary: Kenya's 2006 Economic Survey reports that growth 
hit a 30-year high of 6.1% in 2006, and the GOK predicts 2007 growth 
will be between 5.8 and 6.5%.  The new National Household Survey 
showed the national poverty rate fell from 52.3% in 1997 to 49.1% in 
¶2006.  After peaking in December 2006 at 14.5%, overall inflation in 
Kenya declined in the first quarter to 11.7% in March 2007.  The 
Central Bank of Kenya (CBK) expects overall annual inflation to drop 
in 2007, if good rains continue, but fears the impact of any further 
rises in international oil prices.  Underlying inflation, which 
excludes food, energy and transportation, hovered slightly above the 
CBK's 5% target for money supply management.  Remittances from expat 
Kenyans, appetite for domestic borrowing and GOK election-year 
reluctance to raise interest rates may interfere with CBK's efforts 
to keep money supply growth within limits.  The IMF found that 
overall fiscal and macro-economic performance is good.  End 
summary. 
 
So Much Good Economic News Before an Election 
--------------------------------------------- 
¶2. (U) The Government of Kenya (GOK) released on May 28 the annual 
pre-budget Economic Survey 2007 prepared by the National Bureau of 
Statistics (NBS). The Survey indicates that Kenya's economy grew by 
6.1% in 2006, the highest rate in 30 years.  The hotels and 
restaurants sector grew fastest at 14%, largely due to 14.9% growth 
in tourism.  The wholesale and retail sector grew 10.9%, while 
transport and communication rose 10.8%.  The Business Daily 
newspaper reported that consumer spending of Sh1.2 trillion (about 
US$16 billion) now dwarfs the GOK's Sh267 billion (about US$3.9 
billion)purchases of goods and services, and that private 
consumption has become the biggest contributor to the economy over 
the last five years. The Kenyan shilling has been appreciating 
against the USD for over 20 months, and is currently at about 
sh67/USD.  Planning Minister Henry Obwocha predicted growth between 
5.8 and 6.5% in 2007, depending on whether oil prices stay below 
$75/bl and the shilling remains stable against the dollar.  The IMF 
ResRep issued a statement also projecting over 6% real GDP growth 
rate for 2007. 
 
Foreign Investors Optimistic 
---------------------------- 
 
¶3. (U) A member survey by the East Africa Association, an 
organization of 82 of the largest foreign firms employing over 
100,000, with investments of about USD1.5 billion, also revealed 
significant optimism in the private sector.  Three quarters expect 
higher sales volumes and profits in 2007, 37% plan to significantly 
increase their investment, and 50% plan to hire more staff.  Sixty 
percent of the members expect the business situation to improve in 
2007, but they noted that crime, poor roads, tax administration 
problems with Kenya Revenue Authority (KRA), and long delays at the 
Mombasa port and in the court system remain the greatest threats to 
foreign investment.  Electricity is so expensive and unreliable that 
45% of members have invested in their own generating facilities. 
AIG Global East Africa also predicted no significant shift in 
macro-economic policies, single digit inflation, and 6% growth in 
2007, based on agriculture sector expansion and planned 
infrastructure improvements. However, growth in agriculture may be 
limited as a number of regions are reporting irregular rainfall. 
 
So Are Kenyan Consumers 
------------------------ 
¶4. (U) According to a Steadman Group survey in March, 40% of Kenyans 
said their living standards had improved compared to last year, 
while 60% predicted their economic status would improve in the next. 
 Forty six per cent of consumers believe investment conditions are 
better than they were a year ago, and 67% think spending on basic 
products will increase in the year ahead.  Forty six per cent of 
those interviewed are upbeat about future employment opportunities, 
but more than two thirds of Kenyans believe the Government has not 
created enough jobs. 
 
NBS launches two other key reports 
---------------------------------- 
 
¶5. (U) The NBS (formerly known as the Central Bureau of Statistics) 
released the donor-funded Kenya Integrated Household Survey (KIHS), 
which collected data from May 2005 to May 2006 from over 13,000 
households across every district in Kenya.  The first Household 
Survey done since 1999-2000, it and the awaited appendices are a 
huge trove of statistics that will take months to mine.  However, 
 
the Survey's launch in early May featured the "Basic Report on 
Well-being in Kenya," which documented the reduction of poverty and 
improvements in economic and social indicators.  NBS measured 
welfare and poverty by consumption of food and non-food items. 
 
¶6. (U) The Well-being Report found the percentage of Kenyans living 
below the poverty line fell from 52.3% in 1997 to 49.1% in 2006, 
with urban poverty falling from 49.2% to 33.7%.  NBS estimated that 
16.6 million of Kenya's population of 35.5 million are poor, with 
70% of them in rural areas.  NBS estimated that economic growth over 
the last five years had allowed 2.3 million people to escape 
poverty.  NBS attributed 2002-2006 growth to stable commodity 
prices, growth in tourism, agriculture and manufacturing, and the 
impact of development initiatives like the Constituency Development 
Fund (CDF) on rural areas.  However, with 2.5% population growth, 
NBS estimated that, to further reduce poverty, Kenya will need to 
sustain growth above 6%, and improve rural roads, electricity, clean 
water, and food distribution networks.  Although the United Nations 
Development Program's (UNDP) Human Poverty Index (HPI) for Kenya 
rose slightly from 36.7% in 2004 to 37% in 2006, the HPI measures 
poverty differently, looking at indicators including access to 
health, water, and doctors. 
 
How the GOK Measures Inflation 
------------------------------ 
¶7. (U) On a monthly basis, the NBS releases Consumer Price Index 
(CPI) and inflation rates for Nairobi and 12 other urban centers, 
and for lower and upper income groups in Nairobi.  The "overall" 
(headline) inflation rate is based on prices for 10 categories of 
goods and services.  The NBS measures "underlying" (core) inflation 
by removing the volatile categories of food and energy, but the 
Central Bank of Kenya (CBK) also removes transportation, since it 
relies so heavily on energy prices.  The CBK uses its underlying 
rate in its monetary policy planning and implementation. 
Year-on-year (YOY) inflation compares the current month's CPI with 
the CPI in same month in the previous year. Average Annual inflation 
compares the average CPI for the last 12 months with the average CPI 
of the preceding 12 months.  This measure serves as the 
seasonally-adjusted inflation rate, and is less volatile. 
 
Overall Inflation Declines in First Quarter 
-------------------------------------------- 
¶8. (U) Starting in January, the overall inflation rate finally 
decelerated, partly because of the comparison with drought-driven 
2006 inflation.  YOY overall inflation fell each month, from 15.6% 
in December 2006 to 5.9% in March 2007.  Average annual inflation 
declined from 14.5% in December to 11.7% in March.  The main change 
is that food price inflation declined in the first quarter, both YOY 
and month-on-month (MOM), thanks to good rains and increased 
supplies.  High international oil prices kept fuel and power YOY 
inflation in the double digits, but it declined from the December 
peak, as did the MOM increases. 
 
¶9. (U) Low income consumers in Nairobi finally got slight relief in 
the first quarter, thanks to lower inflation of food, which 
represents 56% of their expenditure.  Overall YOY inflation for the 
Nairobi low income group fell from 19.2% in December 2006 to 3.9% in 
March 2007.  Inflation in other urban centers, however, declined 
more slowly. 
 
¶10. (U) In trying to manage the money supply to control inflation, 
the CBK continues to face remittances estimated at USD 1 
billion/year from expatriate Kenyans, many through informal 
channels.  The money supply (M3) grew about 18% YOY in the first 
quarter, well above the CBK's 10% target, partly because the 
interest rates offered on T-bills and bonds were too low to mop up 
sufficient liquidity.  GOK domestic borrowing to finance the 
FY2006/07 budget deficit is running a little above the budgeted 
amount, contributing to the slow increase of interest rates during 
the quarter.  The average 91-day Treasury bill rate rose from 6.0% 
in January to 6.3% in March, while the interbank rate increased from 
6.4% in January to 6.7% in March. 
 
Underlying Inflation Falling Slowly 
-------------------------------------- 
¶11. (U) The CBK's underlying inflation rate excludes food, energy, 
and transportation because of their volatility, and the CBK's goal 
is to keep the YOY rate below 5%.  However, the YOY underlying rate 
rose to 5.15% in January 2007, fell slightly in February, but again 
rose to 5.13% in March, the highest level in 18 months.  Average 
annual underlying inflation (seasonally adjusted) rose steadily, 
from 3.88% in December to 4.18% in March.  The CBK is concerned and 
stated that inflation will hinge on international oil prices, the 
movements in shilling exchange rate to the US dollar, and success of 
 
monetary policy implementation. 
 
Economy and Fiscal Performance Look Good 
--------------------------------------- 
¶12. (SBU) The IMF told donor country reps in early May that the 
GOK's overall fiscal performance is good, with both revenues and 
expenditures slightly below targets.  GOK wage expenditures are on 
track.  The GOK can easily absorb the recently-announced increase in 
teachers' salaries and payment of secondary school tuitions for all 
students without an increase in public borrowing through tax 
revenues, donor funding and/or budget offsets.  Inflation appears 
under control, but time will tell how well the GOK is managing the 
money supply. 
 
¶13. (U) Economic growth, increased savings, and improved 
communications also have their darker side, like fraud and 
defenestration.  The CBK has warned Kenyans against risking their 
savings with unsupervised and potentially illegal pyramid and ponzi 
schemes promising large, quick profits, but many people ignore the 
warnings.  Hundreds of angry investors demanding their returns 
stormed Development Entrepreneurial Community Initiative's office in 
Nairobi in May and threw a company officer out an eighth floor 
window to his death. 
 
Budget and Vision 2030 Announcements in June 
------------------------------------------- 
¶14. (U) The GOK will make two major announcements in June.  Finance 
Minister Kimunya will deliver the 2007-08 budget to Parliament on 
June 14.  He will explain how the GOK will fund worthy promises like 
paying the tuition fees for all secondary school students, hiring 
more teachers, and raising their salaries, while keeping the budget 
deficit under control.  President Kibaki said he would announce in 
June plans to implement his Vision 2030 initiative (Ref A) to boost 
annual growth to 10% by 2012 and make Kenya a middle-income economy 
by investing Sh500 billion (US$5.4 billion) over the next five years 
in 20 flagship projects.  The GOK is also in the early stages of 
planning to issue bonds through the London or New York Stock 
Exchanges to raise funds for infrastructure investments. 
 
Comment 
------- 
¶15. (U) Overall, the GOK's macro-economic management remains good, 
but inflation and rising government domestic debt remain areas for 
concern and monitoring.  April figures show further declines in 
inflation, and T-bill rates declined slightly in mid-May, so the 
good news may continue right up to the December general election. 
 
Ranneberger