VZCZCXRO7118
PP RUEHGI RUEHRN
DE RUEHNR #0656/01 0661240
ZNR UUUUU ZZH
P 061240Z MAR 08
FM AMEMBASSY NAIROBI
TO RUEHC/SECSTATE WASHDC PRIORITY 4965
INFO RUEHXR/RWANDA COLLECTIVE PRIORITY
RUEHDU/AMCONSUL DURBAN 0155

UNCLAS SECTION 01 OF 02 NAIROBI 000656 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR AF/E, AF/EPS, AND OES/ENV 
USAID FOR AFR/EA 
STATE PASS TO TREASURY FOR VIRGINIA BRANDON 
STATE PASS TO USTR FOR BILL JACKSON 
STATE PASS TO COMMERCE FOR BECKY ERKUL 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV PGOV SOCI KE
SUBJECT: KENYA CHANGES ITS BUDGET PRIORITIES AND TIGHTENS ITS BELT 
 
REF:  (A) 07 NAIROBI 2641  (B) 07 NAIROBI 1981 
 
NAIROBI 00000656  001.2 OF 002 
 
 
¶1. (SBU) Summary: The Government of Kenya (GOK) is appropriately 
making plans to shift its budget focus to reconstruction and recovery 
in the wake of the post-electoral political crisis and resulting 
civil unrest. Enormous resources will be required, with over $14.3 
million already set aside initially for this purpose.  Even with the 
February 28 power sharing agreement inked, it will take more than six 
months to really begin reconstruction work on the ground.  Also, 
redirecting the $2.9 billion in long-term development funding in the 
current year's budget from infrastructure to recovery means that the 
cost of doing business in Kenya will remain high, perpetuating  a 
persistent deterrent to foreign investment, and thus further 
complicating long-term recovery. End summary. 
 
----------------------------------- 
Vision 2030 is No Longer a Priority 
----------------------------------- 
 
¶2. (SBU) In his budget speech of June 2007, Finance Minister Amos 
Kimunya said the FY-2007-08 budget (July 1-June 30, see ref A) was to 
focu on infrastructure, health, and education, i.e. long-term 
investments which were expected to lay the foundation for achieving 
the Vision 2030 goal of middle income prosperity by 2030 (see ref B). 
 However, the damage done in the wake of Kenya's post-electoral 
political crisis has changed the GOK's priorities.  The GOK annually 
submits a budget supplemental in March, and the first priority in the 
FY-2008 supplemental and FY 2008-09 development budget will be 
reconstruction and recovery, which will take the lion's share of the 
budget.  Investments originally intended to lay the foundation for 
Vision 2030 will be a second priority, according to GOK's Planning 
Secretary Stephen Wainana in a February 21 meeting with Econ 
 
SIPDIS 
Specialist. 
 
Treasury Warns Ministries to Cut Spending 
----------------------------------------- 
¶3. (U) In a February 20 circular, Ministry of Finance Permanent 
Secretary Joseph Kinyua ordered agencies to review their medium term 
 
SIPDIS 
expenditure framework (MTEF) reports to "rationalize priorities and 
allocate the resource envelope accordingly."  In another February 20 
circular to all Government accounting officers entitled 
"Implementation of Austerity Expenditure Measures in 2007/2008 
Budget," Treasury said the 2007-08 budget had assumed that stability, 
structural reforms, and higher exports and domestic demand would 
generate 6.4% growth and sufficient tax revenue.  However, revenue 
collection is now likely to decline, while total expenditure is 
expected to rise, creating a larger financing gap than the deficit 
originally planned under the budget.  The circular stated Treasury 
has already received requests for Sh52 billion ($800 million) in 
additional spending, and will limit the additional spending to free 
secondary education, the strategic grain reserve and famine relief, 
support to displaced people, establishment of an endowment fund for 
victims of violence, and enhanced security.  To help pay for these 
new needs, the circular ordered all departments to cut their 
recurrent expenditures as follows: 
 
Training - 25% 
Foreign travel: 25% 
Domestic travel: 20% 
Purchase of office furniture and equipment: 40% 
Expenses for boards, committee conferences, seminars, retreats and 
workshops - 24% 
 
¶4. (U) In addition, the circular ordered agencies to freeze all 
recruitment and purchase of vehicles, even those already approved, 
except for security-related operations.  Development projects which 
are not likely to start this fiscal year should be deferred to the 
next financial year. 
 
-------------------------------- 
Cost of Reconstruction Not Known 
-------------------------------- 
 
¶5. (U) Permanent Secretary of Housing Tirop Kosgey told a press 
briefing on February 21 that the full cost to the government of 
helping the internally displaced victims of post-election violence to 
resettle and rebuild is not yet known. Kosgey said that a team has 
been carrying out an inventory of the damaged property and will issue 
its report in a week's time.  He claimed reconstruction would start 
by the end of March, subject to approval by all government agencies. 
Except where there is urgent need for government services, the PS 
said the reconstruction efforts would give priority to private homes 
over state-owned accommodations. The exercise will not entail a 
value-for-value reconstruction, but will stick to one standard for 
 
NAIROBI 00000656  002.2 OF 002 
 
 
every house. According to Kosgey, the GOK will embrace cost-effective 
methods in the reconstruction, for which it has already set aside 
Ksh1 billion (about $14.3 million). 
 
------- 
Comment 
------- 
¶6. (SBU) In the past, GOK ministries have often turned back as much 
as 70% of their development budgets each year because of 
implementation delays related to capacity and other constraints.  In 
the current context, this is good news, because it means the GOK will 
be able to shift funds fairly quickly to recovery and reconstruction, 
where they are more urgently needed.  Where the reconstruction will 
be carried out depends on whether or how soon displaced people are 
willing to return to their destroyed homes.  Implementation is also 
critical.  In the past, Kenyans, in government, companies, and as 
individuals, have taken advantage of disasters such as famines and 
floods to siphon off GOK and donor funds.  Redirecting the current 
year's $2.9 billion development budget away from improving 
infrastructure also means Kenya's high business costs will persist, a 
deterrent to investors that will hinder long-term recovery.  End 
comment. 
 
RANNEBERGER