VZCZCXRO6640
RR RUEHGI RUEHRN
DE RUEHNR #0088/01 0131056
ZNR UUUUU ZZH
R 131055Z JAN 10
FM AMEMBASSY NAIROBI
TO RUEHC/SECSTATE WASHDC 0450
INFO RWANDA COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RUEHNO/USEUCOM FMFO BRUSSELS BE

UNCLAS SECTION 01 OF 03 NAIROBI 000088 
 
SENSITIVE 
SIPDIS 
STATE ALSO FOR AF/E AND AF/EPS 
STATE PASS USAID/EA 
STATE PASS USITC FOR ALAN TREAT, RALPH WATKINS, AND ERLAND HERFINDAHL 
TREASURY FOR REBECCA KLEIN 
COMMERCE FOR BECKY ERKUL 
 
E.O. 12958: N/A 
TAGS: ECON ELAB ECPS EINV EFIN ETRD EAID BEXP PINR ASEC
PTER, KCOR, KE 
SUBJECT: Kenya: Macroeconomic Update 
 
REF: A) 10 NAIROBI 12; B) 09 NAIROBI 1885 
 
¶1. (SBU) SUMMARY In a January 8 meeting with Econoffs, Dr. Geoffrey 
Mwau, Ministry of Finance Economic Secretary,  spoke strongly in 
favor of Kenya applying for a new International Monetary Fund (IMF) 
program in the range of $1 billion over three years.  While 
Minister of Finance Kenyatta is not yet convinced that the GOK 
should make the request, Mwau believes they will do so by the time 
of the Bank/Fund spring meetings.  Mwau stated that the forensic 
audit on the maize scandal is complete and should be released soon. 
Mwau expected that the waiver on duties for maize would be extended 
for another three to six months.  He expressed pride in the MoF 
auditors who uncovered corruption in the Ministry of Education 
(MoE) Free Primary Education Program (FPE) and expected that donors 
would resume funding relatively quickly.  Mwau related serious 
concerns from the MoF perspective regarding the new constitution, 
especially the lack of codified fiscal management and oversight. 
He speculated that without a strong fourth quarter, Kenya would 
likely see 2 percent GDP growth for 2009.  ECON/C expressed concern 
about rumors that Charterhouse Bank (ref B) might be permitted to 
reopen.  Mwau did not believe it was imminent but other more 
credible sources have indicated that it is.  We are actively 
seeking to persuade the GOK not to go forward.  End Summary 
 
 
 
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IMF Program 
 
----------------- 
 
 
 
¶2. (SBU) Mwau strongly favors a new IMF program for Kenya.  He 
believes that a nearly $1 billion program over three years would be 
beneficial to Kenya.  (Note: We heard from the IMF resrep here that 
the request would be $600 million over three years.  End Note) 
Kenya's need for infrastructure improvements, including water, 
road, rail, and energy, require substantial financing.  Mwau cited 
energy sector needs alone of $3 billion over the next three years 
to finance geothermal development and high voltage lines to 
interconnect energy grids with Ethiopia.  He believes that Kenya 
must access as much concessional financing as possible.  Currently, 
Kenya's debt load sits at 43% of GDP and the MoF would like to 
reduce that to 40%.  Without concessional financing offered by the 
IMF, which he believes would trigger further concessional financing 
from the EU and potentially other bodies, Kenya's debt load will 
increase as efforts to sustain development continue. 
 
 
 
¶3. (SBU) The potential IMF program has been held up at the 
ministerial level as a political issue.  The Minister of Finance, 
Uhuru Kenyatta, does not favor the new IMF program over concerns 
whether Kenya could sustain the macro-economic  conditionality of a 
program.  Kenyatta may also be concerned about the USG possibly 
blocking the new IMF program.  Both Mwau and the Permanent 
Secretary of Finance, Joseph Kinyua, believe that Kenya can 
maintain the macro-economic requirements.  Kinyua is expected to 
again request support from Kenyatta for the new program.  The 
possibility remains that requesting an IMF program could be 
approved by the Kenyan cabinet in time for the Bank/Fund spring 
meetings if the politicians can be convinced.  The cabinet-level 
politicians, many of whom will be running for higher office, may 
also be concerned about the timing of a new IMF program prior to 
the elections scheduled for 2012. 
 
 
 
¶4. (SBU) According to the IMF resrep, having heard several 
Executive Directors, including the USED , speak to corruption as a 
"macro-critical issue" at the December 22 Board meeting on Kenya's 
Article IV consultation  the IMF would want to continue working 
governance issues through its public finance management assistance 
program.  At the same time, under a potential IMF program with 
Kenya, he proposed to include a component that tracked Kenyan 
 
NAIROBI 00000088  002 OF 003 
 
 
spending on institutions/programs related to the reform agenda. 
 
 
 
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Maize 
 
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¶5. (SBU) The forensic audit looking into the maize scandal, which 
Prime Minister Raila Odinga promised months ago to release to the 
public, remains unavailable.  According to Mwau, the report is done 
and he has heard of briefings on the final draft but has not seen 
the report itself.  He expects the report to be released soon. 
At a recent World Bank coordination meeting, donors agreed to send 
a joint letter to the Prime Minister requesting the immediate 
release of the audit. 
 
 
 
¶6. (SBU) Mwau expects that the maize duty waiver will be extended 
for at least three months and potentially for six months through 
June.  According to Mwau, the maize duty waiver must be justified 
and processed through the East African Community (EAC) although our 
understanding is that the GOK has not sought EAC agreement to 
previous waivers.  Mwau would like the waiver to extend through 
June and believes that the extension should have been signaled in 
November.  His understanding is that the current request is only 
for three additional months.  Kenyan media has reported a great 
deal of conflicting information on the maize duty waiver situation 
with the Minister of Agriculture, William Ruto, claiming that the 
extension is already done and the Kenya Revenue Authority stating 
that the extension isn't needed and should end.  With the current 
waiver expiring in January, importers have halted fresh orders of 
maize which is raising concerns over price hikes and further food 
insecurity. 
 
 
 
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Free Primary Education Scandal 
 
----------------------------------------- 
 
 
 
¶7. (SBU) Mwau expressed a great deal of pride about the MoF 
auditor's role in bringing to light the Free Primary Education 
Program scandal (ref A).  He stated that the audit was purely a MoF 
initiative and demonstrated the strong internal audit capabilities 
of the MoF.  (Note: According to the World Bank, the MoF commenced 
the audit at the Bank's request.  End note.)  Apparently, the MoF 
has built fraud "traps" into all of the World Bank funded projects 
and Mwau is confident in the MoF ability to stop corruption.  He 
believes that the key to fighting corruption now involves focusing 
the judiciary in actually prosecuting and convicting those guilty 
of fraud.  In opposition to what we have previously learned 
regarding the scandal, Mwau claimed that the audit had covered the 
full financial year and only uncovered the one month of fraud.  The 
UK Department for International Development (DfID) previously 
informed us that the audit had only covered one month and further 
audits would be requested to cover the full year and the previous 
year; a view shared by the World Bank.  Mwau also expected that 
donor funding would resume quickly and stated that donor funding 
had not actually been cut off, which also contradicts what we been 
told directly from DfID and the WB. 
 
 
 
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MoF Constitution Concerns 
 
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NAIROBI 00000088  003 OF 003 
 
 
¶8. (SBU) Mwau expressed serious concerns regarding the draft 
constitution.  His primary concern involves the lack of financial 
controls and oversight in the draft.  The MoF does not retain its 
control over borrowing or accounting in the new constitution.  He 
believes that only a strong MoF will be able to keep Parliament in 
check especially regarding sound macroeconomic stability, which 
heretofore has been one of Kenya's strengths. 
 
 
 
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GDP Growth 
 
---------------- 
 
 
 
¶9. (SBU) GDP growth in Kenya stagnated in the third quarter of 2009 
at zero percent growth due to drought, electricity shortages and 
reduced construction.  Unless fourth quarter growth is impressive, 
Mwau believes 2009 GDP growth will be lucky to come in over two 
percent.  If fourth quarter growth is strong, GDP growth could hit 
2.5 percent; the IMF and WB share Mwau's forecast of 2-2.5% growth. 
For 2010, Mwau thought that growth would come in between three and 
four percent.  He seems to be more optimistic and believes four 
percent is more likely and five percent remains in the realm of 
possibility, especially if the short rains continue through 
January.  The rains help with agriculture, a key component of 
growth, as well as electricity generation. Mwau believes that 
manufacturing should pick up in 2010 and mining could also see a 
big year as industrial scale development of gold mining in Western 
Kenya begins.   The World Bank recently told donors it expects 3.5% 
growth in 2010, assuming a steady global recovery and no new shocks 
to Kenya's economy.   The IMF generally shares the Bank's forecast. 
Central Bank of Kenya (CBK) Governor Ndung'u told us 2010 has 
started well for Kenya's economy with good rains and anticipated 
benefits from further East African Community (EAC) integration.  He 
is concerned about recent U.S. job numbers which sent a "shiver" 
through markets and lagging horticulture (cut flowers in 
particular) exports.  The CBK chief is also worried about the 
effect of continued high energy prices on the country's ability to 
bounce back in 2010. 
 
 
 
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Charterhouse Bank 
 
------------------------- 
 
 
 
¶10. (SBU) EconCouns expressed Embassy concerns about the possible 
re-establishment of Charterhouse Bank (ref B), a criminal entity 
posing as a bank which was closed several years ago.  Mwau did not 
have any direct knowledge of the possible re-opening.  He didn't 
think that the re-establishment was close to becoming reality.  He 
noted that PS Kinyua was concerned and had taken a strong position 
against it.  He also related that with the passage and signing of 
the Anti-Money Laundering bill, Kenya had more tools to deal with 
the kinds of activities previously seen at Charterhouse Bank.  All 
that said, other, more credible sources, including in the PM's 
office, continue to indicate that a reopening of this "bank" is 
imminent.  On January 13, the CBK Governor told us that while 
permission to reopen the bank was not imminent, he strongly implied 
that it was just a matter of time.  We are actively working to 
persuade the GOK at the highest level that this would be a mistake. 
 
 
 
 
RANNEBERGER 
RANNEBERGER