Kenya Economy Profile 2012
The regional hub for trade and finance in East Africa, Kenya has been hampered by corruption and by reliance upon several primary goods whose prices have remained low. In 1997, the IMF suspended Kenya's Enhanced Structural Adjustment Program due to the government's failure to maintain reforms and curb corruption. A severe drought from 1999 to 2000 compounded Kenya's problems, causing water and energy rationing and reducing agricultural output. As a result, GDP contracted by 0.2% in 2000.
The IMF, which had resumed loans in 2000 to help Kenya through the drought, again halted lending in 2001 when the government failed to institute several anticorruption measures. Despite the return of strong rains in 2001, weak commodity prices, endemic corruption, and low investment limited Kenya's economic growth to 1.2%.
Growth lagged at 1.1% in 2002 because of erratic rains, low investor confidence, meager donor support, and political infighting up to the elections. In the key December 2002 elections, Daniel Arap MOI's 24-year-old reign ended, and a new opposition government took on the formidable economic problems facing the nation. After some early progress in rooting out corruption and encouraging donor support, the KIBAKI government was rocked by high-level graft scandals in 2005 and 2006. In 2006, the World Bank and IMF delayed loans pending action by the government on corruption.
The international financial institutions and donors have since resumed lending, despite little action on the government's part to deal with corruption. Post-election violence in early 2008, coupled with the effects of the global financial crisis on remittance and exports, reduced GDP growth to 2.2% in 2008, down from 7% the previous year.
Recent Economic Developments and Prospects
The ongoing negative fallout from the 2008 post-election violence, poor rainfall in 2009 and the knock-on effects of the global economic slowdown combined to reduce the momentum of growth in 2009. First, besides the widespread human suffering, the 2008 violence nearly brought the normal conduct of economic activities to a halt. Goods could not reach their target markets because the level of insecurity disrupted transport. Agricultural production was disrupted, especially in the Rift Valley, crops were burnt and animals killed. This all resulted in food shortages. Moreover, investors’ confidence plummeted and is yet to climb back to its pre-violence level.
Second, five years of continuously inadequate rainfall has severely affected the agricultural sector and had a negative impact on power generation owing to Kenya’s reliance on hydroelectricity: about 60% of national-grid connected power is generated through hydroelectric sources. In 2009, not only was the long rainy season late by one to four weeks, it was also erratic and unevenly distributed. As a result, maize (the staple of the Kenyan diet) production in 2009 was estimated at 1.8 million tonnes, i.e. about 30% less than in a normal year. Lower maize production translated into higher prices: for example, in Nairobi wholesale maize prices reached a record level in May 2009, at 33 592 Kenyan shillings (KES) per tonne. The government allowed millers to import maize duty free to alleviate the tensions on the maize market and implemented a food-subsidy scheme in urban areas. Another consequence of the inadequate rainfall was that it forced the Ministry of Energy to adopt a power-rationing schedule and increase the use of fossil-fuel-powered generators. These power shortages had a direct impact on the cost of doing business in Kenya and have been frequently cited as a main barrier to competitiveness. Many businesses have had to purchase generators, which has contributed to increasing production costs.
Third, as in the rest of Africa, Kenya has been affected by the second-round effects of the global economic slowdown. Demand for many of Kenya’s main exports declined, particularly in the horticulture sector. Tourism was particularly hard hit because of the combined impact of the post-election crisis and the global economic slowdown and has only recently been showing signs of recovering to pre-election-crisis levels. Similarly to many other African countries, the Kenyan government initiated a stimulus package to soften the shock from the contraction of export markets. It approved a KES 22 billion, or 300 million US dollar (USD), package which translates into approximately 1% of Kenya’s 2008 GDP or 3% of the government’s total expenditure in that same year.
The stimulus package is expected to have had little effect in 2009, however, owing to delayed disbursement. The money was in fact blocked when parliament deferred voting on an Appropriations Bill, which included the package. The funds were released only in November 2009, and the effects of the stimulus package will be felt mostly in 2010. Given the time taken to tender for services, however, and bearing in mind that additional time is required between the purchasing of the services and their delivery, some of the effects of the 2009 stimulus are likely to be delayed until 2011.
Agriculture accounts for about one-fourth of Kenya’s GDP and employs more than 50% of the labour force. The performance of Kenya’s economy is therefore dependent to a large extent on the agricultural sector. Kenya’s main agricultural products include cereals (maize and wheat), horticulture, industrial crops (sugar cane and pyrethrum), permanent crops (coffee and tea) and livestock. Although the agricultural sector posted positive growth from 2004 to 2008, variance in the growth rate was high. From 1.7% in 2004, the agriculture growth rate increased to 7% in 2005, dropping to 4.6% in 2006 and falling even further to 2.2% in 2007. The main reason for this uneven agricultural growth is inadequate rainfall. The high cost of agricultural inputs, in particular fertilisers, also played an important role. In addition, the agricultural sector contracted by 5.4% in 2008, the worst year on record, owing to the added impact of post-election violence.
While the prices of tea and coffee increased in 2009, Kenya’s production of these and other agricultural products in 2009 was uneven because of adverse weather conditions. In the case of tea, on the one hand, its price grew slowly during the first five months of 2009, increasing from USD 2.30 per kilogram (kg) in January to USD 2.49 per kg in May. It returned to its January 2008 high in September 2009. On the other hand, poor weather reduced Kenya’s tea harvest by 9.1% from 345,818 tonnes in 2008 down to 314,194 tonnes in 2009. Over the same one-year period, horticultural production declined by 6.4%.
Coffee performed better. Production from January to December 2009 increased by 26% to reach 48 900 tonnes, higher than in 2008 (38 705) but lower than in 2007 (52 288) . Coffee prices also increased steadily from USD 2.01 per kg in January 2009 to a year-high USD 3.39 per kg in August, the highest price since January 2007. After August, prices fell in September and October to USD 3.19 per kg. However, the outlook for the 2009/10 harvest is less positive. The Coffee Board of Kenya predicts that output may fall by 13% to 47 000 tonnes in spite of the heavy rains at the beginning of 2010.
Manufacturing in Kenya is dominated by food processing and processing of consumer goods. Kenya also refines crude petroleum into petroleum products, which are mainly consumed locally. Since 2004, the performance of the manufacturing sector has been mixed. In 2004-06 the sector grew by approximately 4.5% before reaching a high of 6.5% in 2007. Growth slowed down to 3.8% in 2008 mainly owing to effects of the post-election crisis and high inflationary pressures. The manufacturing sector is expected to have improved slightly in 2009. From January to August 2009, production rose by 12.3% compared with 8.9% growth over a similar period in 2008.
Tourism accounts for approximately 5% of Kenya’s GDP. The December 2007 violence took a heavy toll on the tourism sector, which has yet to recover its pre-violence performance. In the 2000-07 period, the number of tourist arrivals increased from 1 million to 1.8 million. In 2008, the number of arrivals plummeted because of the post-election violence. In 2009, the sector hoped to reach the million-tourist mark but by end-December 2009 the number of visitors was 952 481. Tourism earnings in 2009 fell by USD 29 million to USD 630 million.
In the recent past the building and construction sectors have been important contributors to Kenya’s economic growth. One reason is the government’s infrastructure-development programme. The government has targeted increased investments in the road networks and the provision of affordable housing. This trend is expected to continue in 2010 as the government intensifies its investment in infrastructure, which should be further enhanced as a result of the stimulus package. Indeed, although Kenya is a major hub for the rest of East African countries, it suffers from an important infrastructure deficit. As a result, transport costs in Kenya amount to 40%-50% of the total cost of production. These higher costs contribute to making it difficult for local products to compete on international markets.
Kenya’s fiscal deficit (excluding grants) reached 5.8% of GDP by the end of the 2008/09 fiscal year compared with a deficit of 5.9% of GDP in the previous fiscal year. Total government revenue and grants are expected to drop to 23.6% of GDP in the fiscal year 2009/10, close to 1 percentage point lower than in the previous year. The lower revenue arose because of the slowdown in the economy that led to a decline in taxes.
Total government expenditure for the fiscal year 2008/09 increased by 11% but was KES 80.3 billion below the target of KES 676.0 billion. This can be compared with a total government expenditure of KES 535.2 billion in the fiscal year 2007/08 which was also KES 110.0 billion below the target. It is estimated that government expenditure will reach 29.7% and 30.6% of GDP in the fiscal years 2009/10 and 2010/11 respectively.
Kenya’s debt ratio has been declining every year since 2000, when it stood at 59% of GDP. The largest fall was in 2008 when it dropped by 6 percentage points from the previous year and reached a low of 38%. In fact, Kenya’s external debt peaked in 2004 then fell by more than 10% by 2007. It then increased slightly in 2008. Net domestic borrowing increased from KES 13.9 billion in the fiscal year 2007/08 to KES 69.4 billion in 2008/09. The increase in borrowing was mainly attributed to bridging the budget deficit.
Kenya’s good track record in debt has given the government the necessary fiscal space to borrow in order to implement the fiscal stimulus. The sale of a Kengen – a state-owned power-producing company – KES 15 billion 10-year term bond carrying an interest rate of 12.5% was completed on 8 September 2009. This first-ever infrastructure bond was oversubscribed by at least 68%. The government issued a second bond worth KES 18.5 billion on 8 December 2009. This second bond was oversubscribed by 238%. The government issued a third infrastructure bond in the amount of KES 14.5 billion (USD 180 million) in February 2010. The bond performed very well, receiving subscription worth 243% of the target amount. Of the KES 14.5 billion to be issued, a total of KES 8 billion (USD 100 million) will be spent on roadbuilding and refurbishment of civil works, KES 3.5 billion (USD 44 million) for irrigation projects and the rest for exploration of geothermal energy sources. The extent of the oversubscription registered in the first two bonds is testimony to the volume of liquidity available in the domestic Kenyan market. Repeated issuance of such bonds by the government, however, can crowd out private sector investment if banks opt to place their liquidity in these low-risk bonds instead of funding risky private-sector projects.
Although Kenya’s debt-to-GDP ratio is still low by current international standards, it should be noted that the two local infrastructure bonds in 2009 amounted to an increase of 4.4% and 10% of total and domestic debt respectively. Bearing in mind that domestic debt increased by about one-third between 2004 and 2008, fiscal deficit for 2009/10 is forecast at 6.1% of GDP http://www.africaneconomicoutlook.org/?id=(the highest since 1996), and that economic recovery in 2010 is uncertain, prudent fiscal management is required.
The principal objective of the Central Bank of Kenya (CBK) is to formulate and implement monetary-policy directives with the aim of achieving and maintaining stability in the general price levels. The CBK defines price stability as the containment of inflation at less than 5%. A Monetary Policy Committee (MPC), which was established on 30 April 2008 to replace the Monetary Policy Advisory Committee, convenes at least once every two months. The MPC is responsible for formulating monetary policy.
The central bank rate was on a downward trend in 2009 with the objective of stimulating aggregate demand by boosting credit availability. The MPC lowered the CBK rate to 7.75% in September 2009 from 8.0% in July 2009. The committee further lowered the rate to 7% in November 2009.
Short-term rates have to some extent mirrored the downward trend in the CBK rate. The 91-day treasury bill rate declined from 8.4% in December 2008 to 6.9% in November 2009. The 182-day treasury bill rate declined from 8.9% in November 2008 to 7.9% in November 2009. The interbank rate followed a similar trend, falling from 6.8% in November 2008 to 1.7% in November 2009. The decline in the interbank rate was a reflection of liquidity availability in the economy. The 2010 outlook for interest rates is stable.
In spite of the lower CBK rate, the average commercial-bank lending rate remained unchanged from January to October 2009 at 14.78%. The savings rate dropped from 2.10% in January 2009 to 1.85% in October 2009 while the average deposit rate stood at 5.19% in January 2009 and at 5.03% in October 2009. The average deposit rate reflects the ample liquidity in the economy. To a large extent, the unwillingness or inability of commercial banks in Kenya to lower their lending rates limited the ability of the CBK to have an impact on the economy through changes in its official rate.
The Kenya shilling appreciated vis-à-vis the US dollar between January 2009 (KES 78.90 per US dollar) and September 2009 (KES 75.60 per US dollar). This appreciation is the consequence of the depreciation of the USD against most major currencies over that period and the stability of internal Kenyan prices. The Kenyan shilling is expected to remain stable in 2010 as effects of the international financial crisis bottom out. Some exporters have raised concerns that a strong exchange rate may affect Kenya’s ability to compete on international markets. There are no indications, however, that the central bank will deviate from its objective of price stability.
In 2009, the most significant development in the Kenyan monetary system was the introduction of the Real Time Gross Settlement (RTGS) system in October 2009 to process all high-value payments. The RTGS system is also known as the Kenya Electronic Payments and Settlement System (KEPSS). It facilitates interbank settlement on a real-time basis. If the total payment is less than KES 1 million, investors may pay using a banker’s cheque. However, for payments of KES 1 million and above, investors will be required to use the KEPSS through their banks. Investors will be required to instruct their banks directly to make payments to the CBK instead of issuing cheques. The KEPSS is a safe and faster means of transferring funds (within two hours of initiating instructions) enabling commercial banks to manage their liquidity efficiently. It also provides the CBK with a better monetary-policy management tool.
The Kenya National Bureau of Statistics (KNBS) introduced weights and a new consumer-price basket in 2009. It also replaced the arithmetic mean with the logarithmic mean to compute the Consumer Price Index (CPI). Another important change that was effected was that the weight for food in the CPI was brought down to 40.3% from 50.5%. As a consequence of those changes, the inflation rate computed with the new CPI is significantly lower than with the old index.
The 12-month overall average annual inflation rate for 2009 exhibited a monthly downward trend over the course of the year. From a high of 17% in March 2009, it had fallen to around 8% in July and reached 5% in October. As a result, Kenya posted a single-digit average annual inflation rate of 9.25% in 2009. The decline in inflation levels was largely attributed to the fading effects of the post-election crisis, the global economic slowdown and falling prices of seasonal food items.
Kenya was able to maintain its ratings in 2009. Standard & Poor’s sovereign ratings remained at a positive B, while the Fitch ratings also remained at B+ for long-term foreign debt, B for short-term foreign debt and BB- for domestic long-term foreign debt. The pronouncement of these ratings was based on macroeconomic prudence and political reform in spite of the adverse effects of the global financial and economic crisis.
While Kenya’s trade deficit as a share of GDP improved by 3.1 percentage points in 2009, this was largely the consequence of the global economic slowdown, which led to a larger contraction in imports than in exports. The value of imports as a share of GDP fell by 3.8 percentage points, largely because of a lower oil bill, which dropped by approximately one-third thanks to the decline in world oil prices. Exports are estimated to have fallen by close to 10% in 2009, mainly because of lower revenue from manufactured goods, raw materials and horticulture. Kenya’s coffee exports grew in 2009 by roughly 13 000 tonnes to reach 64 574 tonnes, the highest level since 2001. Relative to 2008, the higher coffee exports translated into a KES 6.5 billion, or 64%, increase. Tea exports in 2009 fell, on the other hand, by 71 000 tonnes to 319 000 tonnes relative to 2008. As a result, revenue in Kenyan shillings from tea exports contracted by 2.5%. Fresh horticulture exports also performed poorly in 2009, when export revenue fell by 8%.
The economic crisis in industrialised countries prompted concerns that the Kenyan diaspora would suffer income losses and reduce their remittances, but remittances into Kenya were resilient in 2009. The CBK reported total remittances of USD 609 million (KES 47.1 billion), slightly lower than 2008 remittances in US dollars (USD 611 million), but higher in Kenyan shillings (KES 42.3 billion). It should be noted that in 2008 remittances were increased by the Safaricom and the Co-operative Bank Initial Public Offerings (IPO).
Private Sector Development
The 2010 World Bank Doing Business report ranked Kenya 95 out of 183 economies, down from a ranking of 84 in 2009. Kenya’s performance worsened in all 10 sub-categories of the report, except in the Getting Credit category, where Kenya maintained its excellent fourth rank, and in the Trading Across Borders category, where Kenya moved up two positions but is still 147 out of 183 countries. Perceived corruption remains a challenge, as Kenya ranked 146 out of 180 worldwide according to Transparency International’s 2009 Corruption Perception Index. Compared with 2008, Kenya improved its worldwide ranking by one position in 2009 but remained in the 32nd position in sub-Saharan Africa. As in many other African countries, Kenyan small and medium enterprises are seriously constrained by the lack of long-term credit. This is putting a strain on entrepreneurial activity. To counter this, the CBK announced a plan to give a greater impetus to existing development banks.
In 2009, Kenya launched the first-ever automated bond-trading market in East and Central Africa. Automated trading on government bonds started on 27 November 2009. As of 30 November 2009 the Kengen bond was the only private fixed-income security that was uploaded and trading on the automated system. Other corporate bonds will follow soon.
In 2009, the Nairobi Stock Exchange (NSE) experienced a bearish run as a consequence of the global financial crisis, which prompted an investors’ flight. Over the one-year period starting in September 2008, the NSE 20 share index fell from 4 180 to 3 005. In the course of 2009, the NSE reached a low of 2 474.75 in February. The number of shares traded declined from 485.3 million in September 2008 to 231.69 million in September 2009, while market capitalisation declined from KES 972 billion in September 2008 to KES 772 billion in September 2009. Selling by foreign investors contributed to panic selling among local retail investors.
During 2009, the number of banking institutions remained constant at 45. There is no indication of any significant adverse effects on the sector by the global financial crisis to date. Non-performing loans rose by 15.8% from KES 56.3 billion in August 2008 to KES 65.2 billion at 31 August 2009. This increase in non-performing loans was attributed to a decline in the overall performance of the economy. Following the commencement of the Microfinance Act in May 2008, the CBK licensed Faulu Kenya DTM Limited in May 2009 as a deposit-taking microfinance institution. An important development in the Kenyan banking landscape occurred in February 2010 when the first credit-reference bureau, Credit Reference Bureau Africa Limited, was licensed.
Kenya has been leading the mobile-banking revolution by allowing mobile-phone owners to make person-to-person transfers irrespective of distance and pay bills. Mobile banking has reached the unbanked population and contributed to reduce the costs of doing business. The success of mobile banking is illustrated by the exponential growth of Safaricom’s M-Pesa, a "one-stop shop" for integrated and converged data and voice communications solutions, which after being launched in March 2007 broke the 9 million customers mark in January 2010.
Other Recent Developments
For the year ending in June 2009, the Kenya Power and Lighting Company added 207 000 new customers to the national grid. This represents an increase of 19.5% over the previous year and brings the number of connections to 1.3 million. Nonetheless, the addition of new customers will be constrained by Kenya’s ability to add more power-generating capacity. Indeed, peak demand is estimated at 1 044 megawatts while effective capacity is 1 280 megawatts. The headroom of 10% is below the desired margin of 15% commonly accepted in the industry and indicates the urgency of adding new capacity to meet the country’s demand. It should be noted that some progress was made in 2009 as the 51-megawatt Rabai power station came into operation in September 2009, easing power rationing in the Coast region. Much remains to be done, as currently only 18% of Kenyans have access to electricity in their homes, with only 3% of families in rural areas having access. The government has established a KES 10 billion Energy Sector Recovery Project (ESRP) with the objective of reinforcing and upgrading the network and thus allowing 1 million more customers to be connected.
Electricity generated in 2009 fell by 4.9%, from 5,694 to 5,414 million kilowatt hours. Geothermal power production increased by 32.7% in 2009 compared in 2008. This partially compensated for the 34.6% decline in hydropower generation following the inadequate rainfall experienced in the country. Consumption of electricity fell by 0.7% in 2009. This can be explained by power cuts in major cities in Kenya, which forced individuals to turn to alternative energy sources.
A major development in 2009 was the coming into operation of two fibre-optic cables linking Kenya with the rest of the world. The East African Marine System (TEAMS) submarine fibre-optic cable, spearheaded by the government of Kenya, arrived in Mombasa in June 2009. The SEACOM fibre-optic cable came into operation in July 2009. SEACOM was privately funded, is 75% African-owned and will provide bandwidth on an open-access basis, thus allowing equal access to all operators. As a result, bandwidth has increased sevenfold.
Public Resource Mobilisation
The Kenyan tax system is managed and administered by the Kenya Revenue Authority (KRA). The KRA was established in 1995 as a semi-autonomous government agency. Its overall objective is to provide operational autonomy in revenue administration. Since the inception of the KRA, revenue collection has continued to grow.
In Kenya there are direct and indirect taxes as well as import duties. In addition to corporate and personal income tax, value added tax (VAT) on goods and services, customs and excise duties, and stamp duty, there are also a number of statutory levies. Local authorities are legally permitted and mandated to collect business-licensing levies and determine rates, water payments, land rent and parking fees. Multinational corporations (MNCs) in Kenya pay corporate tax at a rate of 37.5%. There are no general preferential treatments in regards to tax for MNCs, though depending on the sectors of their trade, MNCs may get some tax holiday. Tax breaks are mainly given to firms in horticulture, manufacturing and the Export Processing Zones (EPZs).
VAT was introduced in Kenya in 1990 to replace the sales tax. This was done based on the argument that VAT had a higher revenue potential, and that its collection and administration was more economic and efficient. The current VAT rate is 16% for all items subject to this tax. The current personal-income tax ranges from 10% to 30%. The general corporation tax for all incorporated businesses in Kenya is 30%. Tax on interest is 15% while land rates are 0.6% of the land value. There are no taxes on capital gains.
In Kenya, taxes are collected by self-assessment and by withholding tax on payments to residents and non-residents. Employers must withhold and account for income tax on employee remuneration and benefits (the Pay As You Earn, or PAYE, system). There are several legislations that govern tax administration in Kenya.
According to a compliance survey undertaken by the Kenya Institute for Public Policy Research and Analysis (KIPPRA) and the Ministry of Finance, 51% of taxpayers view the corporate tax rates as high. In addition, about 86% of taxpayers view PAYE rates as being either very high or high. About 62% of taxpayers hire accountants to prepare VAT returns. An interpretation of this could be that the tax structure in Kenya is complicated for the average taxpayer. Complexity is a key contributor to low compliance in Kenya. The high tax rate is another challenge that results in low compliance. Another key contributor to low tax compliance is the large number of individuals in the informal sector and in agriculture.
One important feature of corporate tax collection in Kenya is the Electronic Tax Register (ETR). A law requiring all VAT-registered businesses to install ETR was legislated in the financial year 2004/05. It was refined in 2006/07 to provide that a tax invoice in Kenya should imply an ETR-generated receipt. The aim of the ETR system is to enhance voluntary tax compliance by taxpayers. The main gains of the ETR system are that it improves record-keeping by traders, it reduces the tax-audit period, there are fewer tax disputes and court cases, it reduces fraudulent accounting and it has increased VAT revenue in Kenya.
Since the financial year 2001/02, tax receipts have been on the rise. Total tax revenue increased from KES 248 billion (22% of total revenue) in the fiscal year 2001/02, to KES 550 billion (35% of total revenue) in 2008/09. This increase can be attributed to higher individual and corporate incomes. Indirect taxes, however, have exhibited a mixed performance during the same period. The share of import duties to total public revenue has been on the decline: from 8.7% in 2001/02 to 6.63% in 2008/09. The decline in this share can be attributed to the progressive rise in overall tax revenue.
Total non-tax revenue since the financial year 2001/02 has had a mixed performance, falling from a high of KES 31 billion in 2001/02 to a low of KES 20 billion in 2005/06 and recovering to reach KES 27 billion in 2008/09. The swings in non-tax revenue are mainly attributed to the privatisation of state corporations in Kenya. In the fiscal year 2001/02, the government collected KES 31 billion from the privatisation of Kenya Commercial Bank. Mumias Sugar Company (Kenya’s largest sugar miller) was also privatised in late 2001, when the government offloaded 40% of its shareholding through an Initial Public Offer at the NSE.
Reforms at the KRA and the inauguration of a new government focused on restructuring trade corporations increased non-tax revenue to KES 35 billion in the fiscal year 2003/04. The reforms at KRA, which included the practice of hiring management on performance contracts attached to specific targets, are generating results.
Over the same period, the percentage of tax revenue to total revenue has largely remained in the range of 83% to 90%. This means that government activities in Kenya are mainly funded by tax resources. The percentage of non-tax revenue to total revenue has been on the decline from 13% in the fiscal year 2001/02 to 5% in 2008/09, due in part to the lack of government emphasis on raising revenue from non-tax sources. These sources should be explored to increase public revenue in Kenya.
The KRA initiated a Revenue Administration Reform and Modernisation Programme (RARMP) in the fiscal year 2004/05. The objective of the RARMP was to transform the KRA into a modern, fully integrated and client-focused organisation. The second phase of the RARMP ended in 2009. Several reforms and modernisation moves were still being implemented towards the end of 2009. These include customs, domestic taxes, and road transport. In addition, at the level of the KRA, a project of business automation and human-resource revitalisation is also being undertaken.
In the first phase, many positive developments in revenue administration were achieved.
• Income tax, VAT and Domestic Excise were merged to form the Domestic Taxes Department.
• The Simba system to facilitate self-assessment was implemented and the Post Clearance Audit function was strengthened.
• A Support Service Department was created to consolidate support functions and enhance taxpayer services and the Office of Regional Heads was formed to bring services and decision making closer to taxpayers.
• The KRA Information and Communication Technology (ICT) strategy was developed to act as the blueprint for all future automation programmes.
• Employee-development programmes were undertaken and terms of service for staff improved.
Further reforms are needed, especially in the payment of taxes. According to the World Bank 2010 Doing Business report, Kenya dropped by six positions in the Paying Taxes category compared to the previous year. The total tax rate as a percentage of profit is 49.7% compared to the sub-Saharan average tax rate of 67.5%. The number of hours spent in preparing, filing and paying taxes in Kenya is 417 compared with 306 in sub-Saharan Africa and the world average of 286. These indicators reveal that Kenya needs to ease its tax-revenue collection procedures.
The informal sector in Kenya is large and accounts for about 18% of GDP. Many small-scale but prosperous business people have several ways of evading taxes. Most businesses in the informal sector do not fulfil business-registration requirements and therefore have no legal tax obligations. They also have weak accounting capabilities, thus record-keeping, which is the basis for taxation, becomes difficult.
The KRA is using various measures to make firms operating in the informal sector pay taxes. One of these measures is to use single business-permit fees. Taxing the turnover of these businesses is another measure being employed by the KRA. The mandatory use of electronic tax registers by all businesses in Kenya has also netted the informal sector into the tax system. Nonetheless, tax evasion remains high in the informal sector, which is the fastest-growing segment in Kenya. The informal sector will therefore remain an important challenge for the KRA in the coming years.
Social Context and Human Resource Development
The 2008-09 Kenya Demographic and Health Survey (DHS) revealed that the total fertility rate has continued its downward trend and stood at 4.6 children, the lowest ever recorded. There are nonetheless important fertility differentials across regions, with a total fertility rate of 2.9 in urban areas and 5.2 in rural areas. There has also been an important fall in childhood deaths, as the infant mortality rate in the 2008-09 DHS shows a fall to 52 per 1 000 live births compared with 77 in 2003. Similarly, over the same period, the under-five mortality rate has decreased from 115 deaths per 1 000 live births to 74.
Both the central and local governments have progressively allocated and availed funds to the health sector over the years. Central-government expenditure on health increased from KES 17.6 billion in the fiscal year 2004/05 to KES 22.3 billion in 2006/07. In the fiscal year 2008/09, expenditure on health stood at KES 27.7 billion. For the local government, expenditure on health services increased from KES 1.3 billion in the fiscal year 2004/05 to KES 1.6 billion in 2008/09. From 2004 to 2008, the number of health institutions increased by 19.8% to 5 712 by 2008. This increase can be attributed mainly to the use of the Constituencies Development Fund (CDF) to construct health facilities in most constituencies in the country.
Full immunisation coverage for children improved from 59% in 2004 to 71% in 2008. In the last five years, malaria has been the leading cause of disease-driven morbidity in Kenya followed by respiratory diseases and diarrhoea. In 2008, 9.31 million cases of malaria were reported, representing 32.8% of all diseases reported in Kenya. Respiratory-system disease had a reported incidence of 6.8 million cases. The reported cases of diarrhoea in the country in 2008 were 1.98 million representing 7% of all diseases reported in Kenya. Since late 2008, there has been an outbreak of cholera in Kenya. At November 2009, reported cases of cholera in 2009 were 4 700 with 120 deaths.
HIV/AIDS continues to be a major concern for Kenya. The 2007 Kenya AIDS Indicator Survey (KAIS) report released in September 2009 reveals that 7.4% of those aged 15 to 49, i.e. 1.4 million Kenyan adults, are HIV positive. This represents an increase of 0.7 percentage points from 2003. Although overall prevalence rates are higher in urban (8.4%) than in rural areas (6.4%) the prevalence among men in rural areas has increased by 1.7 percentage points from 2003. The government has embarked upon a full information campaign and subsidises antiretrovirus (ARV). Approximately 150 000 persons are estimated to be on ARV.
The gross total expenditure on education increased from KES 85 billion in the fiscal year 2004/05 to KES 122 billion in 2008/09. The total number of educational institutions increased from 62 721 in 2004 to 70 790 in 2008. The gradual expansion in the provision of education services in Kenya can be attributed to the implementation of the Free Primary Education programme in 2003 and the introduction of the Free Tuition Secondary Education programme in 2008.
Primary-school enrolment increased from 7.49 million in 2004 to 8.56 million in 2008. On the other hand, the total number of primary school teachers declined by approximately 8 000 in that same period. Secondary school enrolment increased by 49% from 2004 to 2008, although the number of secondary school teachers declined from 47 584 to 43 016 during the same period. Student enrolment in universities increased from 91 541 in the academic year 2004/05 to 122 847 in 2008/09. This significant increase can be attributed to the continued need for higher education and the accessibility of part-time studies in most public and private universities. The number of students attending secondary school and universities will increase in the coming years, putting increased pressure on the resources at those levels. An additional challenge will be to ensure that the quality of training is not adversely impacted by the significantly larger number of students.
According to the 2009 Human Development Report, roughly 20% of the population lives on less than USD 1.25 a day and about half of the Kenyan population lives below the poverty line. Urban poverty is of particular concern. Indeed, by some measures, 60% of Nairobi’s population is estimated to live in slums characterised by poor housing conditions, lack of basic amenities (e.g. water, sanitation and electricity) and high levels of insecurity.