Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. P-6837-KE

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED CREDIT

OF SDR 86.3 MILLION

OF WHICH SDR 24.5 MILLION

HAVE BEEN ALLOCATED FROM IDA REFLOWS

TO

THE REPUBLIC OF KENYA

FOR A

STRUCTURAL ADJUSTMENT CREDIT

MAY 10, 1996

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit = Kenyan Shilling (Ksh)US$1 = Ksh 58.389 (March 1996)Ksh I = US$0.0171US$1 = SDR 0.6844 (March 1996)

SDR I = US$14612

GOVERNMENT FISCAL YEAR

July 1 - June 30

ABBREVIATIONS AND ACRONYMS

CAS - Country Assistance StrategyCBK - Central Bank of KenyaCCK - Communications Commission of KenyaDGIPE - Department of Government Investments and Public EnterprisesESAF - Enhance Structural Adjustment FacilityESTU - Executive Secretariat Technical UniversityKAA - Kenya Airports AuthorityKPA - Kenya Ports AuthorityKPLC - Kenya Power and Lighting CompanyKPTC - Kenya Posts and Telecommunications CorporationKR - Kenya RailwaysKTC - Kenya Telecommunications CorporationLDP - Letter of Development PolicyLRMC - Long Run Marginal CostMLRRWD - Ministry of Land Reclamation, Regional and Water DevelopmentMOALDM - Ministry of Agriculture, Livestock Development and MarketingMOF - Ministry of FinanceMOH - Ministry of HealthMOLS - Ministry of Lands and SettlementsMOPWH - Ministry of Public Works and HousingNCPB - National Cereals and Produce BoardNSSF - National Social Security FundPCK - Postal Corporation of KenyaPFP - Policy Framework PaperPIP - Public Investment ProgramSAC - Structural Adjustment CreditVERS - Voluntary Early Retirement Scheme

FOR OFFICIAL USE ONLY

REPUBLIC OF KENYASTRUCTURAL ADJUSTMENT CREDIT

Table of Contents

SUMMARY

PART I: THE 1996-98 ADJUSTMENT PROGRAM ................................................. IA. Public Resource Management .......................................................... 1B. Parastatal Reform .......................................................... 6C. Civil Service Reform ............. 1............................................ 11

PART II: RELATION WITH COUNTRY ASSISTANCE STRATEGY ................ 12

PART III: THE PROPOSED STRUCTURAL ADJUSTMENT CREDIT .............. 13

A. Objectives and Size of the Proposed SAC ..................................................... 13B. Procurement and Disbursement ................... ................................. 17C. Implementation, Monitoring and Supervision ................................................... 17D. Performance Indicators .................................................... 18E. Benefits and Risks ..................................................... 20

PART IV: RECOMMENDATION ..................... .................................... 22

Annexes

ANNEX A: Letter of Development Policy with Policy MatrixANNEX B: Kenya Social IndicatorsANNEX C: Kenya at a GlanceANNEX D: Kenya Key IndicatorsANNEX E: Kenya Balance of PaymentsANNEX F: Status of Bank Group Operations in KenyaANNEX G: Supervision Plan

Figures

FIGURE 1: Fiscal Deficit and Money Growth ................................. 2

Ms document has a restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed wiihout World Bank authorization. l

Boxes

Box 1: Public Expenditure Allocation: Government of Kenya Performance ...........5Box 2: Financial Performance of Key Parastatals .................................................... 7Box 3: Debt Sustainability ....................................................... 14Box 4: Five Questions for Higher Impact Adjustment Lending .............................. 21

Tables

Table 1: Fiscal Framework ....................................................... 15Table 2: Selected Performance Indicators ....................................................... 19

This operation was prepared by a team led by Robert Blake (Senior Economist andtask manager (AF2CO)) and including Tom Allen, Kathleen Jordan (AF2CO),Khaled Sherif, Gerard Byam and Ian Knapp (AF2PE), Simon Thomas and JoelMaweni (AF2EI), Gajanand Pathmanathan (AF2AE), Bruce Jones and Reema Nayar(AF2PH), Rogati Kayani (IENTI), and Anand Rajaram, Richard Anson, LucasOjiambo and Dahir Warsame (Nairobi Resident Mission). Reviewing the operationat various points were Richard Westebbe (Consultant), Rashid Faruqee (SA1AN),and Yaw Ansu (DECVP). Mr. David Yuravlivker is Acting Chief, CountryOperations Division and Mr. James W. Adams is Director, Eastern Africa Region.

KENYASTRUCTURAL ADJUSTMENT CREDIT

SUMMARY

Beneficiary: Republic of Kenya

Project Task ID: KE-PA-1334

Implementing Ministry of FinanceAgency:

IDA Amount: SDR 86.3 million (US$ 126.8 million equivalent) of whichSDR 24.5 million (US$ 36.8 million equivalent) have beenallocated from IDA reflows.

Terms: Standard IDA Terms: 40 years maturity with a 10-yeargrace period.

Co-financing None at present.

Disbursement: The proposed Credit will be disbursed through the CentralBank of Kenya. The initial tranche of US$ 81.8 millionequivalent, including the allocation from the IDA reflows,will be available upon Credit effectiveness and the SecondTranche of US$ 45 million equivalent upon completion ofspecified actions.

Background: The Structural Adjustment Credit is based upon theGovernment's Policy Framework Paper, distributed to theBoard February 23, 1996, and related Letter ofDevelopment Policy which set out the Government'smedium term strategy. This strategy has as objective thereduction in poverty and unemployment through anacceleration in economic growth. This is to be achieved by:strengthening monetary and public sector financemanagement and consolidating fiscal discipline; acceleratingand streamlining reform in the civil service and publicenterprises and improving the delivery of infrastructuralservices; liberalization of markets; addressing the socialaspects of development; and eliminating corruption. Thisstrategy is in line with IDA's Country Assistance Strategypresented to the Board January 30, 1996.

Description The SAC will focus on Government reforms in the areas ofpublic sector management, public enterprise and civilservice reform in line with the overall medium termstrategy. Specific reforms supported include: improvementin the quality of public expenditures through expenditurereallocation; enhancement of efficiency of key publicenterprises through restructuring and divestiture ofactivities; reduction in the size of the public sector throughaccelerated privatization; reduction in the size of the civilservice and improvement in efficiency through ministerialrationalization. At the macroeconomic level, the SAC willsupport Government efforts to consolidate the fiscalposition and improve Kenya's external position to levelssustainable over the medium term.

Rationale for IDA The SAC addresses policy areas in which IDA is alreadyInvolvement involved through the provision of technical assistance. As

noted in the CAS, an acceleration in economic growth isessential if sustainable reductions are to be made in povertyin Kenya and improvements in public sector efficiency asone of the key constraints restricting Kenyan growthperformance. The Government's recent macroeconomicpolicy performance, reducing the fiscal deficit andrestricting monetary growth, have set the stage foraddressing these issues as well as demonstrating theGovernment's capacity to carry out the new reformprogram.

Government Government commitment to the program is demonstrated inCommitment the endorsement of the Policy Framework Paper by the

President, its publication and the appointment of aCommission, including outside participants, to oversee itsapplication. In addition, since the announcement of theprogram in February the Government has undertaken anumber of actions. These include: increase in petroleumduties, Cabinet approval of restructuring programs for KRand KPTC, completion of draft legislation for the splittingup of KPTC; seeking bids for outside experts on a contractfor the commercialization of NCPB, appointment of a newchairman of KPA and preparation of a contract for themanagement and operation of container terminal by anoutside expert, announcement of an increase in electricitytariffs, and instructing NSSF to undertake new investmentsonly in Government securities except for a specified level ofdeposits in commercial banks.

Benefits Implementation of the reform program will permit anincrease in real growth to 5-6 percent a year and, byimproving Kenya's internal and external balances, set thestage for a sustainable acceleration in real growth to oversix percent, a rate which is needed for reduction of poverty.Also, by increasing expenditures on programs which benefitthe poor, it will improve the situation of the disadvantageddirectly.

Risks The chief risk associated with the program is failure inGovernment commitment. As noted in the CAS, Kenya'smajor shortcoming in pursuing economic reform has notbeen implementation capacity but commitment, asevidenced in past policy reversals. This risk is exacerbatedby the fact that Presidential and Parliamentary elections arescheduled for 1997; in the past such elections have beenassociated with a reduction in fiscal discipline. Theprogram has sought to address these problems by seekingPresidential endorsement of the overall program togetherwith its publication, by insisting on specific actions (e.g.,tighter expenditure controls and increased independence ofthe Central Bank) to strengthen areas of potential slippage,and by ensuring that a number of key actions (e.g., thecommercialization of NCPB and the conversion of NSSFinto an autonomous pension fund) occur prior to thebeginning of the elections. In addition, the program isclosely linked with the new three-year ESAF arrangement,ensuring an overall coherence.

REPORT AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE EXECUTIVE DIRECTORSON A PROPOSED STRUCTURAL ADJUSTMENT CREDIT

OF SDR 86.3 MILLION (US$ 126.8 MILLION EQUIVALENT)TO THE REPUBLIC OF KENYA

1. I submit for your approval the following report and recommendation on aproposed Intemational Development Association (IDA) Structural Adjustment Credit(SAC) to the Republic of Kenya for SDR 86.3 million, (US$ 126.8 million equivalent),of which SDR 24.5 million have been allocated from IDA Reflows on standard IDA termswith 40 years maturity and a 10 year grace period. The proposed IDA credit wouldsupport the implementation of the Govenmment's medium term reform program. Theproposed SAC is an integral part of the 1996-98 Country Assistance Strategy (KE-15254), discussed by the Board on January 30, 1996. Recent economic and politicaldevelopments, past experience with adjustment, the Govermnent's strategy, and the BankGroup assistance strategy are set out in the Country Assistance Strategy (CAS).Accordingly, this report is limited to the details of the proposed credit.

PART I: THE 1996-98 ADJUSTMENT PROGRAM

2. Program Content. The Government of Kenya's medium term economic policiesare set out in its Policy Framework Paper (PFP) for 1996-98, which was developed incollaboration with the [MF and World Bank staff and distributed to the Board on February23, 1996. This program is reiterated in the Government's Letter of Development Policy(LDP) (see Annex 1). This document highlights poverty reduction as the principalobjective and sets out Government strategies and related policy measures to achieve thisobjective. The proposed medium term framework is consistent with the Bank's CountryAssistance Strategy in this respect. As noted in both the PFP/LDP and the CAS, anacceleration of economic growth is needed for poverty reduction in Kenya. One of therequirements for an acceleration in economic growth is enhanced public sector efficiency.There are three aspects to this: improved public sector resource management to improvespending allocations; parastatal reform to reduce budgetary pressures and increase overalleconomic efficiency; and civil service reform to improve public administration and permitincreased expenditures in areas critical to economic growth. In addition to providingoverall support to the Government's adjustment program, the proposed SAC will focusspecifically on these three areas.

A. Public Resource Management

3. Overview. Kenyan fiscal and monetary discipline weakened substantially in theearly 1990's. At that time, parliamentary and Presidential elections gave rise to a sharp

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increase in unprogrammed spending as well as large scale recourse to Central Bank ofKenya (CBK) credit through overdraft and rediscount facilities. As a result, the fiscaldeficit, measured exclusive of grants, increased in 1992/93 to 11.4 percent of GDP.' Inparallel, the money supply, measured as money and quasi-money (M3) at the end of eachcalendar year, expanded as so-called "political banks" accessed CBK credit through suchdevices as pre-export financing. Consequently, inflation rose and was on the order of 55percent on an annual basis by the end of 1993.

4. Since the middle of 1993, the Government has made major strides in reestablishingoverall fiscal and monetary control. The fiscal deficit, exclusive of grants, fell to 2.6percent of GDP in 1994/95 and money supply growth decelerated to below 15 percent asof the end of 1995 (see Figure 1). However, while the Government has achievedconsiderable success in tightening fiscal and monetary policy at the macro level, it hasbeen less successful in controlling public expenditure allocations. During the last coupleyears, the Government undertook a number of "extraordinary expenditures" (i.e., thepurchase of a Presidential airplane and the construction of an airport at Eldoret) whichwere not explicitly included in the budget and had not been subjected to normalParliamentary review for consistency with overall spending priorities. In addition, theGovernment has had to deal with the unanticipated budgetary consequences of policydecisions taken in other areas, e.g., the National Cereals and Produce Board (NCPB)purchases in 1994/95 of substantial quantities of maize at above prevailing market prices.The effect of these actions was to force the Governrnent to raise additional revenues,thereby contributing to the already high fiscal burden (Government revenues were 31.6percent of GDP in 1994/95), or find offsetting cuts in recurrent and developmentexpenditures to stay close to fiscal deficit targets discussed with the IMF.

Figure 1: Fscal Deflcit and ney Groiwth

30 1 230 , ,., . .................... ~~~~~.. ... ..........125 10

20 I 8

15 -. ... :: x.;.-,-6:

l^ 4 -U-Broad Money (M3)5 2

0 0 - Fiscal Deficit excl. officialtransfers

YEAR

5. Program. Duning the 1996-98 period the Government intends to continue overallfiscal and monetary adjustment. The fiscal deficit (exclusive of grants) is expected to be

I The Kenyan fiscal year runs from July I to June 30 of the following year.

- 3 -

only 1.9 percent of GDP for the current fiscal year and to decline to 1.5 percent of GDPby the middle of 1998. At that level, the deficit would be fully financed by grants. Totake account of a surge in money growth late last year, monetary policy is to be tightenedconsiderably in the current year, with money growth by the end of the year to besubstantially below the rate of nominal income growth. It is expected that these policieswill hold domestic inflation at around 5 percent a year.

6. The Government also intends to tighten expenditure controls to improve thequality of expenditures. As set out in the PFP/LDP, this will involve specific commitmentsat all levels of the budgetary process. At the macro level, to improve transparency, theGovernment will only enter into expenditures which have been provided for in the Budgetand will inform Parliament of any new external borrowing at the start of each session. Aspart of this process, the Government will publish, on a quarterly basis, budgetary outturns.To enhance expenditure effectiveness, all contracts in excess of Ksh 10 million (equal toless than US$ 200,000 at current exchange rates) will be publicly tendered, with theresults of Central Tender Board's decision published. In addition, all contracts in excessof Ksh 2 million (equal to less than US$ 40,000 at current exchange rates) are tonegotiated by an inter-agency team including representatives from the Treasury and theAudit Inspectorate. In addition, the Government has put in place a system in whichMinistries are given monthly (for recurrent expenditures) or quarterly (for developmentexpenditures) ceilings on expenditure commitments. These ceilings are established basedon anticipated budgetary availabilities and have as their objective the avoidance of any newarrears. Accounting officers (who are generally the Permanent Secretaries in eachMinistry) are to adhere to these ceilings and, if they fail to do so, will be sanctioned in linewith existing regulations. A circular has been issued to Accounting Officers spelling outthe specific sanctions. In this regard, earlier this year, the Government suspended anumber of senior officials in the Kenya Revenue Authority, the customs and the KenyaPorts Authority who were allegedly involved in a customs fraud.

7. To enhance the credibility of the Central Bank, the Government intends to presentlegislation to Parliament this June, amending the Central Bank Act to increase itsautonomy. This amendment will include provisions for the insulation of the Govemor andthe Board from outside interference and limits on the Government's access to CentralBank credit to finance its deficit.

8. Fiscal policy has been constrained in recent years by the high levels of domesticdebt issued to finance past fiscal deficits or to soak up excess monetary expansionoccasioned by abuse of CBK credit facilities. Between 1991 and 1994, the domesticindebtedness of the Government (primarily Treasury bills) increased from just under Ksh45 billion to over Ksh 100 billion. This increase, together with high nominal interest rates,resulted in very high domestic interest payments. In 1993/94, payments of domesticinterest accounted for over 36 percent of the Govermment's ordinary revenue. Thisinterest burden substantially complicated government fiscal management. While thisburden has declined somewhat in recent years as nominal interest rates have fallen, interestrates still remain, at over 20 percent for T-bills, substantially above the prevailing rate ofinflation of around 5 percent, implying very high real interest rates associated with

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increases in net domestic indebtedness. To address this problem, the budgetaryframework envisions a net reduction of over Ksh 15 billion in domestic indebtedness overthe 1994/95-1997/98 period.

9. Specific Government commitments as to the overall fiscal framework andimproved expenditure management are set out in its PFP/LDP. These commitments arealso included in Kenya's new three-year Enhanced Structural Adjustment Facility (ESAF)arrangement approved by the IMF on April 26, 1996 and will be monitored in thesecontexts.

10. In the area of expenditure allocations, IDA undertook in 1994 a detailed publicexpenditure review. This review highlighted the need to increase spending on operationsand maintenance. By the early 1990s, the ratio of operations and maintenanceexpenditures to labor costs had declined to about 62 percent of the levels which prevailedin the early 1980s. Measured in real terms, operations and maintenance expenditures percivil servant had fallen roughly 30 percent from the early 1980s levels. In the area ofdevelopment expenditures, there was a need to rationalize investments, to avoid adispersion of resources across a wide array of projects, and to strengthen the projectselection criteria and the links between the Public Investment Program (PIP) prepared bythe Planning Ministry and the annual Budget, prepared by the Finance Ministry.

11. As follow-up to this review, IDA and the Government have been discussingexpenditure priorities and the results of these discussions are reflected in the PFP/LDP. Inthese documents, the Government has indicated its intention to provide adequate fundingfor the basic functions of government: the maintenance of law and order and theadministration ofjustice; the financing of broad-based education and health services; theprovision of economic infrastructure, the support of agricultural research and extension;and the protection of the environment. Within the recurrent budget, there is to be acontinued reallocation in favor of operations and maintenance. In spite of budgetarystringency, GOK-funded ordinary recurrent expenditures, exclusive of interest payments,wages and salaries and special programs, have increased from less than Ksh 20 billion in1993/94 to around Ksh 29 billion in the current fiscal year. In the development budget,the Government has agreed to provide full-funding for all "core" projects and ensure thatat least 75 percent of the development budget is allocated to projects in the core functionalareas of government. Consistent with this, in spite of cutbacks necessitated by the need toadjust for the extraordinary expenditures cited in para. 4, overall developmentexpenditures (foreign plus domestic financed) are expected to increase 14 percent thisfiscal year over last. In addition, the Government will improve project selection criteriaand all new projects will be reviewed before inclusion in the PIP. No project will beincluded in the budget for funding which has not been reviewed for the PIP.

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Box 1: Public Expenditure Allocation: Government of Kenya Performance

Over the last two years, the Government has sought to improve expenditure allocations. In thisregard, the focus has been on two aspects: to increase the funding for core projects in the PublicInvestment Program (PIP); and to increase the share of the development and recurrent budgetsgoing to core functional areas. While the Government has made some progress, much moreremains to be done. Core projects remain under-funded. In the Revised Budget for 1994/95, coreprojects received only 55 percent of their full funding requirements as set out in the PIP. Althoughdata and definitional problems caution against taking this ratio literally, it does neverthelesshighlight one of the main problems of public expenditures in Kenya. At the root of this problem isthe large number of projects, and the failure to achieve a significant reduction in the numberthrough rationalization and to subject new projects to a rigorous vetting procedure. These will beareas of special emphasis in our continuing work with the Government on public expenditures. Asregard allocations to the core functional areas, in the Development Budget there has been a steadyincrease in the proportion of funds allocated to these areas. In 1993/94 these areas accounted for56 percent of the total development expenditures; by 1994/95 this proportion had increased to 78percent. However, progress in the allocation of recurrent expenditures, particularly operations andmaintenance, has been slower. In the 1993/94 Budget, core functional areas accounted for 32percent of all operations and maintenance expenditures. This percentage had only increased to 36percent in the 1994/95 Budget.

12. In the PFP/LDP, the Government requested that, in collaboration with IDA, awide-ranging review of public expenditures be undertaken early this year, to provide thebasis for specific spending decisions in the upcoming budgets. This review has beencompleted and agreement reached on spending allocations for the 1996/97 budget to bepresented to Parliament. These allocations are designed to enhance the quality of publicexpenditures generally and, more specifically, their impact on the disadvantaged. Theyinclude an increase in expenditures on Operations and Maintenance, in order to reverse thetrend cited in para. 10 above. As part of this effort, the Government has agreed toincrease road maintenance expenditures by over 17 percent over 1995/96 levels, in linewith its commitment to achieve full funding of road maintenance requirements by the year2000. The Government also has agreed to increase funding for social programs targetedon the poor and disadvantaged. At the primary level, this includes increased funding forthe school feeding program and the program for provision of school equipment to poorand disadvantaged areas. In addition, the Government has agreed to put in place a newfinancial support program, targeted at girls in disadvantaged areas, to encourage increasedenrollment at the primary level. At the secondary level, the Government has agreed tolarge increases in the existing scholarship program. In the health area, the Governmentintends to increase the share of Ministry of Health's recurrent budget going to preventivecare (i.e., preventive medicine, and promotive health care and rural health services).Finally, the Government has agreed to regular development expenditures (i.e., notincluding any "extraordinary expenditures") at 7 percent of GDP and to substantiallyincrease funding for core development projects. Implementation of the agreed allocations

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and agreement on budget allocations for the 1997/98 budget is a condition for secondtranche release of the SAC.

R Parastatal Reform

13. Overview. The parastatal sector is a substantial drag on the Kenyan economy. Inthe past this has been most evident in the sizable transfers the Government had to make onbehalf of parastatals. These transfers occurred directly (primarily through Governmentfunding of investment costs and operating subsidies) and indirectly (primarily throughbelow market interest rates and fiscal exemptions). The total value of direct and indirectsubsidies was estimated at Ksh 8.6 billion in 1991/92, i. e., greater than the domesticcounterpart for the development budget in that year. However, these subsidies understatethe real costs of the public sector in that several of the key parastatals (the port and thetelecommunications company) were able to exploit their monopoly position and pass onsome of their higher costs to consumers. Under a broader measure, IDA has estimatedthat if the public sector firms operated at the same level of efficiency as private sectorfirms, Kenyan growth would have been 2 percentage points higher each year.

14. The Government has sought to address this problem in recent years with thesupport of IDA through its Parastatal Reform and Privatization Technical AssistanceCredit. To improve financial discipline it has attempted to limit key parastatals access tothe Treasury. While it has had some success in reducing the level of direct subsidies,parastatals continue to benefit from Government financing of guaranteed external debtpayments (an estimated Ksh 2.2 billion this year) and the Government has had to makelarge payments to cover arrears to farmers resulting from excessive maize purchases byNCPB. The Government has had more success in privatization of public enterprises. Outof an original list of 211 "non-strategic" enterprises slated for privatization, theGovernment had by the beginning of this year divested its holdings in over half.2 Inaddition, the Government was in the process of divesting its holdings in another sixenterprises, including Kenya Airways in which the Government had sold 26 percent of itsholdings to KLM and was preparing to sell another 51 percent in the Nairobi StockExchange. However, most of the other privatizations involved the exercise of preemptionrights by existing shareholders and the privatization process has been criticized for lack oftransparency. By contrast, reform of the key parastatals (NCPB, Kenya Ports Authority(KPA), Kenya Railways (KR), Kenya Posts and Telecommunications Corporation(KPTC), and Kenya Power and Lighting Corporation (KPLC)) has progressed veryslowly. In addition, while strictly speaking not a parastatal, the National Social SecurityFund (NSSF) is a growing threat to financial stability as it has been engaged in numerousquestionable investments.

2 Divestiture includes both liquidation and privatization. Privatization is defined as the reduction inGovermment shareholdings to less than 30 percent in the enterprise. In most cases, privatization hasinvolved reducing the GOK holding to zero.

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Box 2: Financial Performance of Key Parastatals

The weak performance of the major parastatals is most evident in their inability to meet theirobligations. Their behavior in this regard is set out below in terms of the changes in their net cashpositions, i.e., the difference between total receipts and expenditures.

Net Cash Position(Ksh million)

1992/93 1993/94 1994/95

KPLC -150 -105 2389KPTC -147 124 -888KR -106 -180 -312NCPB 1806 864 -525KPA 1410 1240 202

As shown in the table, the key parastatals (with the exception of KPA) have in recent years notbeen consistently able to cover their obligations. The resulting cash deficits have been covered bythe Government paying external obligations, either through the accumulation of arrears on taxobligations owed the Government or through overdraft facilities accorded by commercial banks.The deterioration in KPA's performance in 1994/95 is the result of sizable purchases made ofspare parts under less than totally transparent procedures. It should be noted that these figuresoverstate actual performance as they do not take into account the low levels of investmentundertaken by the parastatals, notably KPLC, KPTC and KPA, during this period. These lowlevels are reflected in lower cash outlays for the years in question, but represent the deferral ofessential works which ultimately must be paid for. Effectively, during this period the parastatalswere at best able to cover their obligations, but had little or no capacity for sustained self-financingof investment. The recent improvement in KPLC's financial perfomuance reflects the impact of thetariff increase in March 1994, an action taken to enhance its self-financing capacity.

15. Program. The Government intends to accelerate the pace of structural reformover the 1996-98 period. To this end, it will undertake a series of specific actions in theareas of privatization, institutional oversight and reform of key parastatals.

16. Privatization. The Government has committed to divesting its holdings in theremaining 96 non-strategic parastatals by the end of 1997. Consistent with this objective,the Government has agreed on a divestiture progran covering at least 40 enterprises in1996, of which 20 are to be completed by June. In the first quarter of the year, theGovernment had divested 9 firms, including Kenya Airways and its two subsidiaries,through successful floatation of 51 percent of its shares in the Nairobi Stock Exchange.The Government will also initiate work this year on the divestiture of three parastatalsformerly designated as strategic: Nyayo Buses Corporation, Kenya Pipeline Corporationand Kenya Refinery Corporation. Increased emphasis will be placed on divestiture

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through competitive procedures. Of the privatizations envisioned for this year, roughlyfifteen are expected to occur through competitive bidding or stock floatation, roughlyequal to the total number of competitive transactions to date. To facilitate this process,the Government intends to contract out a significant amount of the preparatory workinvolved in these transactions. To increase transparency, firms to be privatized throughcompetitive bidding will be advertised and selection criteria will be specified in advance,bids will be publicly opened and the results will be published indicating the terms of sale.In addition, quarterly reports are to be prepared on implementation of the privatizationprogram and privatization proceeds will be audited on a semi-annual basis and the resultsof these audits will be made public. Satisfactory implementation of the agreedprivatization program for 1996 and agreement on the privatization program for 1997 willbe a condition for second tranche release.

17. Major Parastatals. Over the 1996-98 period, the Government intends toimplement major restructuring programs for each of the major parastatals. Theseprograms are tailored to the specific situations of each of the enterprises and include suchactions as divestiture of functions, increased contracting out of activities to the privatesector and opening up of capital through direct investment. In addition, the Governmentwill eliminate the remaining implicit subsidies enjoyed by parastatals by charging marketrates for use of Government-owned land, applying a 2 percent guarantee fee to any newloan guarantees provided by the Government, requiring the parastatals to remain currenton their existing obligations and to repay outstanding arrears owed the Government overthe next three years. The objective is to increase the efficiency of these enterprises byincreased private sector involvement and requiring them to operate on the same terms asprivate sector enterprises.

18. National Cereals and Produce Board (NCPB). NCPB originally had a monopolyon the purchase and sales of maize in Kenya and played the central role in maize pricingand distribution. Two years ago the maize market was liberalized, and there are currentlya number of private traders active in Kenya. However, NCPB's role in this newenvironment has not been clearly specified and it continues to have the staff andinfrastructure consistent with its original role of sole maize trader. This ambiguity has ledto periodic episodes where NCPB intervened in the maize market, incurring substantialfinancial obligations and disrupting the development of private trading activity. In1994/95 NCPB intervened heavily in the maize market, purchasing roughly 5 million bagsof maize (equivalent to about 30 percent of total marketed production) at above marketprices. In this process, NCPB accumulated substantial arrears to farmers and substantiallydisrupted the market. In the wake of this development, the Government has decided tocommercialize NCPB by the end of this year, at which time it is to operate free of alloutside interference. This will imply that any activity undertaken by NCPB on behalf ofthe Government will be undertaken on a fee for service basis, thus reducing a major sourceof expenditure slippage in the past. With assistance from IDA, the Government hasprepared a draft contract on the basis of which it intends to engage an outside consultingfirm to assist it in carrying out the commercialization. Bids have been sought from thesefirms and it is expected that the selected firm will be in place by the first part of July.

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Successful implementation of the commercialization program would be a condition forsecond tranche release.

19. Kenya Ports Authority (KPA). KPA is responsible for the operations of the Portof Mombasa which handles the bulk of Kenya's imports and exports as well as serving thecentral African countries. However, KPA's operating efficiency is well belowintemational standards, imposing significant costs on Kenyan producers and consumers.The efficiency of the port has been affected by lack of spare parts and inadequatemaintenance, even though substantial amounts of money have been spent on spare partsand maintenance contracts, with adverse effects on its financial situation and futureprospects (see Box 2). Confronted with this problem, the Government has decided totake drastic action in order to improve port management and efficiency. First, it hasreplaced KPA management with outside managers drawn from port users. Second, it isseeking an outside operator to take over the management and operation of the containerterminal, where most of the cargo is handled. Terms of reference for a contract to this endhave been prepared and invitations to bid to potential outside operators have been issued.Third, it is renegotiating the maintenance contracts to reduce their duration and toestablish performance guarantees and penalties. Finally, it intends to sign a performancecontract with KPA to set out mutually agreed obligations. Signature of the contract withan outside operator to operate and manage the container terminal and signature of aperformance contract acceptable to IDA is a condition for second tranche release.

20. Kenya Railways Corporation (KR). Kenya Railways is a key component in thetransport chain linking the port to the interior. While the freight part of its operation ispotentially profitable, passenger service is not, resulting in poor financial performance. Inaddition, KR's technical performance is sub-standard, largely because of low levels oflocomotive availability. A significant part of the existing fleet needs upgrading andmaintenance, which to date is handled in house, is unsatisfactory. KR has been seeking toimprove its financial performance by a program of staff reductions, financed by land sales.However, its long-term viability depends on shedding loss making services andcontracting out maintenance of locomotives, which will in turn require sizable upfrontinvestments to rehabilitate the existing locomotives. KR management has prepared arestructuring plan calling for separation of passenger and freight operations, theelimination of loss making lines in the absence of Government subsidies, the divestiture ofcertain non-core services and the contracting out of locomotive maintenance. This paperhas been approved by Cabinet, clearing the way for implementation of the program whichif successively implemented would improve KR's efficiency and establish it on a self-sustaining basis. Signature of the locomotive maintenance contracts is a condition forsecond tranche release.

21. Kenya Posts and Telecommunications (KPTC). KPTC is presently the onlypurveyor of telecommunications services in Kenya. In spite of its monopoly position,KPTC's financial performance is poor and it has been unable to undertake neededinvestments to improve the quality and extent of service delivery, resulting in situation inwhich the Kenyan consumer pays high prices for a relatively poor quality service.

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Improving this situation requires an approach which will simultaneously increase KPTCefficiency and provide greater competition in the provision of telecommunicationsservices. IDA has been working with the Government on a major sector programinvolving legislative changes to increase management accountability and efficiency,enterprise restructuring and opening up of capital, and sector liberalization. The mainfeatures of this program involve the splitting of KPTC into three separate entities (atelecommunications company, KTC; a postal company, PCK; and a regulatory authority,CCK), the shedding of non-core functions, the opening up to outside investors of at least30 percent of the capital in KTC and the subsequent opening up of the domestic marketto other operators, on a regional basis. In addition, the Government will enter into a jointventure arrangement for cellular phones; however, the timing of the licensing of a secondcellular operator has not been agreed upon. The Government is in the process ofimplementing this program. The Cabinet has approved the proposed KPTC restructuringand privatization program. Draft legislation for the separation of KPTC has been preparedand will be submitted to Parliament shortly and the Government has liberalized someservices, notably pay phones. Completion of the split of KPTC into three separateentities, opening up to outside investors of at least 30 percent of KTC's capital andagreement on the terms of licensing of a second cellular operator are conditions for secondtranche release.

22. Kenya Power and Lighting Corporation (KPLC). Like the telecommunicationssector, the energy sector is suffering from years of low investment. To meet growingdemands, it has been estimated that over US$1 billion in new investment should beinitiated over the next five years, some of which must necessarily come from privateinvestors. However, for new investment to be feasible the sector as a whole, which is splitbetween several different power generation companies and a single distribution companyall of them Government-owned, needs to be rationalized to permit a clearer appreciationof actual cost levels. In addition, to generate internal funds for the needed investment andto encourage the entry of private investment in electricity generation, electricity tariff ratesneed to be increased to cover fully Long Run Marginal Costs (LRMC). IDA has beendiscussing with the Government a sectoral reform program involving enterpriserestructuring to increase efficiency and enhance self-financing capacities, and which couldbe the basis for an eventual IDA investment credit. The Government is in the process ofimplementing this program and, to this end, recently announced an increase in electricitytariff rates designed to bring the average price of electricity up to at least 75 percent ofLRMC. In addition, bids are to be issued shortly to independent private producers toinvest in power generation in Kenya. The proposed SAC would reinforce these efforts bysupporting key policy-level reforms. The conclusion of performance contracts with allexisting power sector companies, and agreement with IDA on the timing of the adjustmentof the average electricity tariff to 100 percent of LRMC are conditions for second trancherelease.

23. National Social Security Fund (NSSF). The NSSF provides pension benefits tonon-government employees. However, contributors do not play any role in selecting fundmanagement which has been engaged in a number of investments of questionableadvisability. In addition, the fund has not released audited accounts, making oversight

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impossible. The Government has decided to rectify this situation by converting the NSSFinto an autonomous pension fund, controlled by its contributors, by the end of this year.IDA has assisted the Government in preparing the necessary legislation and the putting inplace improved accounting systems as well as in the preparation of a proper actuarialassessment. While awaiting this conversion, NSSF has been instructed to limit its newinvestments to Government securities only, with the exception of 15 percent of its assetsto be maintained in sound and stable financial institutions. The submission of legislationfor the conversion of NSSF into an autonomous pension fund is a condition for release ofthe second tranche.

24. Institutional. Progress in parastatal reform has been hampered in the past by weakinstitutional oversight. The Department of Government Investments and PublicEnterprises (DGIPE) in the Treasury has been responsible for the implementation of the ofthe restructuring program and the Executive Secretariat Technical Unit (ESTU) has beencharged with implementation of the privatization program. ESTU has recently beenbrought under the authority of the head of DGIPE. However, both DGIPE and ESTUhave been under-staffed, which has limited their effectiveness. ESTU and DGIPE arecurrently in the process of recruiting competent new staff. In addition, public enterpriseshave in principle little administrative autonomy, as many of their operational decisions(e.g., employment conditions) are governed by the State Corporations Act. This hasmeant that in cases where major restructuring changes are being implemented, e.g., KenyaAirways, that exemption from the provisions of the Act must be sought.. To facilitate thenecessary rationalization changes outlined above the Government has exempted KPA,KPTC, KPLC, NCPB and Kenya Airports Authority (KAA) from provisions of the StateCorporations Act

C Civil Service Reform

25. Overview. Civil service wages and salaries represent over 33 percent of theGovernment's ordinary revenue. With the fiscal effort, already relatively high, providingadditional resources for increased operations and maintenance and developmentexpenditures in a context of lower budget deficits implies restraining the growth in thecivil service wage bill. However, civil service salaries, particularly at senior levels, are nothigh relative to private sector salaries; the problem lies more in the large number of civilservants, currently over 230,000 not counting over 225,000 teachers. Similarly, theeconomic reforms of recent years have appreciably changed the roles and functions ofmany of the major ministries, which need to be reexamined in this light. There is thus aneed for simultaneously controlling civil service expenditures and increasing civil serviceefficiency through the rationalization of ministries in conformity with their currentfunctions.

26. Since 1993, the Government has been engaged in a wide ranging civil servicereform program which IDA has supported through an Institutional Development and CivilService Reform Project. This program is set out in three phases. In the first phase, theemphasis is on cost containment through staffing rationalization and improved

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establishment control. To this end, the Government has put in place a program VoluntaryEarly Retirement Scheme (VERS) focusing on the lowest grade levels where over-employment is the most evident. The VERS has to date been funded entirely by theGovernment. Departures through natural attrition and the VERS program have resultedin a gross reduction in the civil service of 40,213 between July 1993 and December 1995.However, these reductions were offset by the recruitment during this period of 6,700 newcivil servants, primarily in the areas of security and health; as a result the total number ofcivil servants, which had been 266,054 in July 1993, had fallen to 232,541 as of the end of1995. Work has also been initiated on the development of staffing norms and therationalization of key ministries. Action plans for the rationalization of the Ministries ofHealth (MOH) and the Ministry of Agriculture, Livestock Development and Marketing(MOALDM) have been developed and implementation is currently underway. Work hascommenced on the development of rationalization plans for another four ministries, theMinistry of Finance (MOF), the Ministry of Lands and Settlements (MOLS), the Ministryof Public Works and Housing (MOPWH), and the Ministry of Land Reclamation,Regional and Water Development (MLRRWD).

27. Program. The Government will continue to pursue the program of staff reductionwith the objective of reducing staff by an average of 16,000 per year over the period 1996to July 1997 through natural attrition, the continuation of the VERS scheme and positionrationalization. During this same period, new hires will be limited to no more than 4,500(1,500 between January to July 1996 and 3,000 between July 1996 to June 1997). It isexpected that these measures will bring the overall civil service size down to 212,361 byJuly 1997, i.e., a reduction of over 20 percent in the size of the civil service since July1993. To take account of shortages of certain skilled staff, civil service reductions afterJuly 1997 will be determined in light of the results of the staffing norms study and theministerial rationalization plans. Implementation of the agreed civil service reductionprogram and agreement on a program of staff reductions after July 1997 are conditions forrelease of the second tranche of the SAC.

28. The Government expects to complete the rationalization plans for MOH andMOALDM by the end of this year and the rationalization plans for the other fourministries are expected to be completed by July 1997. In July of this year, theGovernment will select six additional ministries for rationalization; the restructuring ofthese ministries is expected to be completed by the end of 1998. Implementation of theministerial rationalization plans for MOH and MOALDM, the development ofrationalization plans for four other ministries and agreement on the six other ministries forrationalization are conditions for second tranche release of the SAC.

PART II: RELATION WITH COUNTRY ASSISTANCE STRATEGY

29. As set out in Board document KE-15254, the Bank's Country Assistance Strategyfor Kenya has as its objective to assist the Government in the reduction of poverty throughaccelerated economic growth and employment generation. To achieve this objective, the

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strategy aims at: improving public sector efficiency, enhancing human capitaldevelopment, promoting an efficient private sector, improving environmental managementand targeting interventions for the disadvantaged. The program outlined above focuses onthe first of these priorities, improving public sector management. As set out, the programwould improve fiscal discipline, enhance the quality of public expenditures throughexpenditure reallocations and civil service reform, and increase efficiency throughprivatization and restructuring of public enterprises. Thus, implementation of the programis an integral component of the overall strategy of poverty reduction through acceleratedeconomic growth.

30. The proposed program has been prepared in close collaboration with theInternational Monetary Fund. It is drawn from the Government's PFP, which wasdeveloped jointly with the IMF and the Government and which is the basis for the newthree-year, US$ 216 million Enhanced Structural Adjustment Facility Arrangementapproved by the Fund Board on April 26. Many of the elements of the program alsofigure in the new ESAF Arrangement.

PART m: THE PROPOSED STRUCTURAL ADJUSTMENT CREDIT

A. Objectives and Size of the Proposed SAC

31. The proposed SAC of US$ 126.8 million equivalent (including US$ 36.8 million inIDA reflows) would be disbursed in two tranches. With the approval of the SAC, newIDA commitments to Kenya this year would consist of four credits totaling US$ 277million, not counting the IDA reflows. This level is slightly above the high case forlending set out in the CAS (US$ 250 million). However, IDA lending this year includestwo credits (totaling US$ 166 million) which had been scheduled for presentation in FY95 and which Bank management decided to defer in April of last year because ofeconomic governance concerns. The Government commnitments outlined in para. 6 aboveaddress these concerns and these projects were approved on January 30, 1996. For theperiod FY 97-99, new IDA commitments are expected to average about US$ 230 millionper year, consistent with base case lending of US$ 195-235 million per year set out in theCAS.

Macroeconomic Framework

32. The proposed SAC will support the Government's medium term reform programwhich has as objective consolidating of Kenya's fiscal and balance of payments situationsand an accelerating of real growth to 6 percent per year by the end of the period. Thereform program, if successfully implemented, would set the stage for subsequentattainment of real growth rates in excess of 6 percent per year, which are needed forsustained reduction in poverty in Kenya. A key aspect of this progran is the adjustment inKenya's external and internal (fiscal) balances to sustainable levels, thus permitting higherrates of growth in the medium term without recourse to exceptional financing. Theframework for this external and internal adjustment is set out in the PFP/LDP, which is the

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basis for the proposed credit as well as the recently approved three-year ESAF

arrangement.

External Adjustment

33. The macroeconomic framework underpinning the reform program foresees a

further reduction in Kenya's external balances. From a current account deficit (exclusive

of grants) last year equal to 4.2 percent of GDP, the current account deficit is projected to

decline to 0.8 percent of GDP by 1998. At this level, the current account would be in

surplus if grants are included, implying sustainability over the medium term (see Annex

E). As part of this adjustment to a sustainable external position, there is a need to

strengthen Kenya's external reserve position (gross reserves were equal to only 1.6

months of exports of goods and services in 1995) and to repay relatively large amounts of

non-concessional falling due between now and the year 2000. Part of this adjustment is

expected to be met through an improvement in Kenya's external resource balance,

reflecting the impact of the policy reforms. In the capital account, increased

disbursements of project lending are expected; however, the combination of relatively

heavy debt amortization payments and the need to increase reserves results in some

balance of payments financing requirements if the projected current account adjustment is

to occur without unduly compressing import growth, which is projected to increase in real

terms only 6 percent over the 1996-98 period.

34. These projected needs are expected to be largely met by the new three-year ESAF

program and the proposed SAC, together with continued disbursements of already

committed balance of payments support from bilateral donors. There would remain very

small residual balance of payments gaps, on the order of US$ 55 million per year over the

1996-98 period, which are expected to be filled by additional commitments of balance of

payments support from donors. Under these assumptions, Kenya would, by end-1998,

have attained a reserve coverage, measured in terms of months of imports of goods and

services, of just over 3 months and with a substantially improved debt profile. Its external

debt to GDP ratio would have declined to just over 80 percent and its debt service would

be equal to just over 23 percent of exports of goods.

Box 3: Debt Sustainability

As of end-1995, the present value of Kenya's debt service payments was less than 200

percent of export earnings, i.e., below the threshold above which debt sustainability is

problematic. Under the external adjustment scenario outlined above in which non-

concessional debt is substantially reduced and exports grow, Kenya's debt burden should

improve significantly. Under this scenario the present value of debt service to exports

ratio is projected to decline to about 100 percent by 1998 Thus, assuming implementation

of the reform program, Kenya's debt is expected to be sustainable over the medium term.

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Fiscal Adjustment

35. The reform program foresees a continued consolidation of the Government's fiscalposition. The fiscal deficit, measured exclusive of grants, is projected to decline from 2.6percent of GDP in FY 94/95 to 1.5 percent of GDP by FY 97/98. As part of this fiscalconsolidation, domestic debt levels would be reduced by Ksh 15.6 billion, thus easingpressure on real interest rates, which are currently over 15 percent for new Governmentdebt. These high real interest rates reflect, in part, a risk premium associated withuncertainties about Government commitment to prudent macroeconomic management.The projected fiscal consolidation is expected to substantially reduce this uncertainty,giving rise to lower interest rates.

36. With revenue levels in Kenya already over 30 percent of GDP, the fiscaladjustment is to occur through expenditure restriction. However, in light of the need toincrease operations and maintenance and development expenditures, this implies asubstantial reordering of expenditure priorities in the context of this overall restriction. Asset out in Table 1 below, the projected fiscal adjustment is expected to occur through asharp reduction in the relative GDP share of recurrent expenditures while developmentexpenditures increase slightly. (Development expenditures in FY 95/96 reflect the impactof the "extraordinary expenditures" cited in para. 4 above; adjusting for these,development expenditures would be just over 7 percent of GDP.) However, to meetoperations and maintenance needs, which have suffered in recent years, the fiscalframework foresees a sharp increase in non-wage, non-interest recurrent expenditures,which are projected to increase from 7.6 percent of GDP to roughly 10 percent.

Table 1: Fiscal Framework

(% of GDP)

FY94/9S FY95/96 FY96/97 FY97/98

Revenues and 33.1 35.6 33.6 32.3grants

Total recurrent 26.4 27.8 25.6 24.3

- wages 10.8 10.8 10.5 9.9

-interest 8.0 7.3 5.4 4.5

-other 7.6 9.6 9.8 9.9

Development 7.8 8.1 7.7 8.0and net lending

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37. A key feature of this fiscal scenario is the programmed reduction in high costdomestic debt to permit increases in spending in other critical areas while permitting areduction in the overall fiscal deficit to sustainable levels. However, for this net repaymentto occur, there needs to be adequate levels of external program financing on concessionalterms. The counterpart from the SAC, roughly Ksh 7 billion over the FY 95/96 and FY96/97 period, would provide part of the concessional program support envisioned as partof the fiscal adjustment scenario. In the absence of the SAC counterpart funds, to sustainthe assumed fiscal adjustment the Government would need to either borrow moredomestically at exceptionally high real interest rates, thereby slowing down the assumedreduction in domestic interest rates, or cut back on the projected increases in operationsand maintenance and development expenditures, thereby undermining its longer termobjectives.

Structure of the Credit

38. To support the attainment of these external and internal objectives, the proposedSAC would be disbursed in two tranches. The first tranche of the SAC, US$ 81.8 millionequivalent and consisting of US$ 45 million equivalent together with Kenya's FY96 IDAreflow allocation of US$ 36.8 million equivalent, would be disbursed upon crediteffectiveness. The second tranche of US$ 45 million equivalent would be disbursed uponevidence of satisfactory implementation of the overall reform program, including asatisfactory macroeconomic framework, and the fulfillment of specific conditions relatingto improved public sector management. The medium term nature of the program and thereforms to be implemented, together with the Government's satisfactory overall economicperformance since mid- 1993, argues for commitment of IDA support over the programperiod to enhance the sustainability of the program.

39. Second Tranche. Release of the second tranche of the SAC would take place afterthe Government had completed the following actions:

General

* Made satisfactory progress in overall implementation of the program,including a satisfactory macroeconomic framework (as evidenced by theexistence of an active ESAF arrangement).

Public Resource Management

* Executed the 1996/97 budget consistent with agreed allocations and agreedwith IDA on budgetary allocations for the 1997/98 budget.

Parastatal Reform

* Satisfactorily executed agreed privatization programn in 1996 and agreed withIDA on the privatization program for 1997.

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* Satisfactorily implemented NCPB commercialization program.

* Signed a contract with outside operator for the operation and management ofthe container terminal at KPA and signed a performance contract satisfactoryto IDA with KPA.

* Signed contracts with private operators for locomotive maintenance (KR).

* Completed split of KPTC into three separate entities, offered to outsideinvestors at least 30 percent of the KTC capital, and agreed with IDA ontiming of licensing of a second cellular phone operator.

• Signed performance contracts with all power sector companies and agreedwith IDA on the timing of the adjustment of the average electricity tariff to100 percent of LRMC (KPLC).

* Submitted to Parliament legislation satisfactory to IDA to convert NSSF intoan autonomous pension fund.

Civil Service Reform

* Satisfactorily implemented agreed civil service reduction program and agreedwith IDA on a program of staff reductions after July 1997.

* Implemented rationalization plans for MOH and MOALDM, developedrationalization plans for MOF, MOLS, MOPWH and MLRRWD, andselected, in consultation with IDA, six other ministries for rationalization.

a Procurement and Disbursement

40. Procurement and disbursement arrangements will follow the simplified proceduresapproved by the Board on February 1, 1996. The Borrower will open an account in theCentral Bank of Kenya. Upon IDA notification of tranche release, proceeds of the creditwill be deposited by IDA in this account at the request of the Borrower. If after deposit inthis account, the proceeds of the credit are used for ineligible purposes (i.e., to financeitems imported from non-member countries, or goods or services in the standard negativelist), IDA will require the Borrower to either (a) return that amount to the account for usefor eligible purposes or (b) refund the amount directly to IDA, in which case IDA willcancel an equivalent undisbursed amount of the credit. Although a routine audit of theaccount of the account will not be required, IDA reserves the right to require it.

C Implementation, Monitoring and Supervision

41. The Ministry of Finance will be directly responsible for implementation of theprogram. The overall reforn program which is the basis for the LDP (i.e., Economic

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Reform for 1996-98: The Policy Framework Paper) has been published by theGovernment and is to be overseen by a Presidential Economic Commission, chaired by thePresident and including representatives from the implementing ministries (i.e., Finance,Office of the President, Agriculture, Commerce and Industry, and Central Bank) as well asthe private sector and press. The publication of the program, the creation of theCommission and the inclusion of non-governmental representatives are intended to ensureGovernment commitment to successful implementation of the program. For its part, theIDA will intensively supervise the Credit and is expecting to allocate a total of 27 staffweeks for supervision in FY 96/97. This will be in addition to on-going supervision of theParastatal and Civil Service Reform Projects which will serve to support the achievementof the objectives of the reform program.

D. Performance Indicators

42. Based on commitments in the PFP and LDP, understandings have been reachedwith the Government on key indicators and anticipated outcomes which would bemonitored as part of the supervision of the Credit (see Table 2). These will be used toevaluate the overall success of the reform program in achieving the objective ofestablishing the conditions for sustainable levels of growth to reduce poverty andimproving the situation of the disadvantaged. The indicators, together with theirexpected outcomes, have been selected taking into account certain criteria. First, theindicators and associated outcomes are to a maximum degree quantifiable. Second, therelatively short time period of the reform program has meant focusing on only thoseoutcomes which are likely to be effected during the course of the program.

43. Under the heading of public resource management, close attention will be paid tothe fiscal deficit (measured exclusive of grants). By maintaining the deficit at 2 percent orless of GDP, the Govermment will keep the deficit within levels of available intemal andextemal financing, avoiding recourse to inflationary monetary growth. Within this deficitceiling, there will be a need to enhance the quality of expenditures by increasing spendingon key operations and maintenance activities and development expenditures. In the areaof operations and maintenance, increased expenditures on road maintenance are expectedto encourage domestic production by decreasing transport costs. Increased non-wageexpenditures at the primary school level for the school feeding program and the supply ofschool material and the putting in place of a new financial support scheme to coverprimary school fees for young girls in disadvantaged areas are expected to increase schoolenrollment rates, which have fallen off in recent years. An expansion of the existingsecondary school scholarship program will address the problem of the sharp decline inenrollment rates between primary and secondary levels. Increasing the share of the healthbudget for preventive and rural health care services is expected to lead to an improvementin overall health conditions. In the area of development expenditures, sustainingdevelopment spending at least at 7 percent of GDP will lay the basis for expandingeconomic activity. For public enterprises, improving the operating position of the keyparastatals will enable them to reduce their dependence on limited Govermment resources,freeing these resources for more critical expenditures. Similarly, an acceleration in the

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Table 2: Selected Performance Indicators

Policy Intermediate Indicator Outcome Indicators

Public Resource Management

Fiscal Deficit Maintain fiscal deficit at less Inflation at 5 percent or lessthan 2 percent of GDP

Expenditure Allocations

- increase expenditures on -- increase expenditures on road Increase agricultural andoperations and maintenance maintenance industrial output

-- increase non-wage recurrent Increase gross primaryexpenditures at primary enrollment rate, particularly ofeducation level and financing of girlsfinancial support scheme

-- increase allocations for Increase gross secondary schoolscholarships at secondary school enrollmentslevel

-- increase share of recurrent Improvement in health ofhealth budget going to preventive populationcare

- increase development maintain development Increase real growth in GDPexpenditures (excluding expenditures at 7 percent of GDPextraordinary expenditures) or more

B. Public Enterprises

Major Parastatals Improvement in operating Decrease in Governmentbalance of five major parastatals payments on behalf of parastatals(KPTC, KPA, KPLC, KR andNCPB)

Privatization Complete privatization of Increase private investmentoriginal 211 enterprises by end1997

C. Civil Service Program

Civil service wage bill Reduce size of civil service Keep ratio of wages and salaries

Ito GDP at 10.5 prcent or less

privatization program is expected to lead to an overall increase in private investment. Inthe area of civil service reform, the reduction in the size of the civil service will enable theGovernment to improve civil service remuneration while not increasing the burden of thecivil service on the budget.

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E. Benefits and Risks

Benefits

44. Successful implementation of the adjustment program would set the stage forKenya to move to a higher level growth path permitting sustainable reductions in povertyand unemployment. Internally, the fiscal adjustment process will have been completed

Box 4: Five Questions for Higher Impact Adjustment Lending

1. What is the demonstrated commitment of the Government to the program and/oroperation.

program has been widely discussed within the Government, endorsed by the President and hasbeen published, and non-government representatives have been appointed to the Commissionmonitoring execution of the program; numerous actions have already been taken prior toapproval of the Credit

2. What is the country specific evidential basis for the proposed structural reforms,including their impact on the poor?

the 1995 Poverty Assessment highlights the importance of acceleration of growth as a necessarycondition for reduction in poverty; public sector inefficiency is one of the main constraints tofaster growth; specific actions draw upon findings of other IDA work: CEM-KenyaEmployment Growth for Poverty Alleviation (1993), and on-going PER

3. Are too many institutional development aspects of public, privatization and financialsystem reform being loaded on to the adjustment operation?

necessary institutional development support is already provided for in existing IDA parastataland civil service reform credits; SAC willfocus on implementation ofpolicy-level commitment

4. Are there explicit measures on the level and composition of the fiscal balance?

proposed SAC is set in a medium term fiscal framework with explicit fiscal targets to bemonitored through an IMFESAFarrangement; expenditure composition to be addressed directlyby the SAC

5. What would happen to the macro resource gaps if one or more of the tranches wereheld up?

the adjustment program is to consolidate improvement in external and internal imbalances tolay the basis for higher growth; delay in tranche release would postpone but not necessarilyderail achievement of these objectives

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with the fiscal deficit at levels which are sustainable over the medium term. In addition,expenditure allocations would be more in line with medium term growth requirements,with increased expenditures on development relative to recurrent expenditures and withinrecurrent expenditures, increased expenditures on operations and maintenance. The civilservice reform is expected to be a critical aspect of this envisioned expenditurereallocation. Implementation of the expenditure controls will ensure that the agreedallocations are respected in terms of budget execution. Externally, the current accountdeficit would be at levels which could be financed through normal capital inflows,without recourse to extraordinary balance of payments support. The project finance levelsare quite conservative, below recent historical levels. On the supply side, the programwould increase the growth potential of the economy by reducing the impact of theinefficient parastatal sector through an acceleration of Government withdrawal fromproductive sectors and an increase in the efficiency of those firms remaining in the publicportfolio. With the conversion of NCPB and NSSF into autonomous entities, theGovernment will also substantially reduce the risk that the fiscal consolidation isundermined by unanticipated obligations.

Risks

45. As noted in the Country Assistance Strategy, the critical problem in Kenya has notbeen Government capacity to implement economic reforms but its commitment, asevidenced by past policy reversals. While the Government has in recent yearsdemonstrated its ability to carry out far-reaching economic reforns, these efforts must besupplemented, by expanding and deepening the reform agenda, if growth rates are toattain levels sufficient to reduce poverty over the medium term. This will require areinforcement of Government commitment. At the same time, Kenya will be entering anelectoral cycle in 1997, with Parliamentary and Presidential elections both programmed,with consequently higher risks of slippage and/or policy reversal.

46. The proposed credit has been designed to take account of these risks. First, theGovernment's political commitment to the program has been increased by the President'sendorsement and the publication of the PFP as well as by the creation of a monitoringcommittee including non-governmental representatives. Second, the program has beendeveloped in close collaboration with the RMF and is closely linked with the ESAFarrangement, increasing the overall coherence of the program. Third, the specific actionsunderpinning the program have been designed to be as unambiguous as possible,permitting a close tracking of implementation. Fourth, in the design of the programmaximum reliance has been placed on prior actions to ensure Government commitment tothe program upfront (e.g., issuing bids for contract to operate and manage the containerterminal, issuing of invitation for outside expertise for commercialization of NCPB,legislation splitting up KPTC). In cases where prior actions are not technically feasible,the program design has sought to ensure that irreversible actions are taken early in theprogram period. Examples of these include the commercialization of NCPB and theconversion of NSSF into an autonomous pension fund by the end of 1996.

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47. Nonetheless, there remains a risk of program slippage. IDA intends to monitorclosely the progress of the program and will be prepared to delay or cancel the secondtranche release as appropriate.

PART IV: RECOMMENDATION

48. Recommendation. I amn satisfied that the proposed credit would satisfy theArticles of Agreement of the Association and recommend that the Executive Directorsapprove it.

James D. WolfensohnPresident

AttachmentsWashington D.C.May 10, 1996

ANNEX A

KENYA

LETTER OF DEVELOPMENT POLICY FOR 1996 - 1998

April 16, 1996

18 APR W6

CONTENTS

TABLE OF CONTENTS

1. INTRODUCTION 1

HI. ECONOMIC PERFORMANCE 1

o Macroeconomic and Structural Policies 1O Social Policies 3

III. POLICY OBJECTIVES AND STRATEGIES FOR 1996-98 3

o Macroeconomic Objectives 4o Monetary and Financial Sector Reforms 5o Budgetary and Public Expenditure Policies 6o Civil Service Reform 8o Public Enterprise Reform 10O Privatisation 12o Market Liberalisation 13o Sectoral Policies and Programmes 14o Women in Development 21o Youth in Development 22o Targeted Poverty Interventions 22

IV. DATA REPORTING AND STATISTICAL ISSUES 24

V. EXTERNAL FINANCING REQUIREMENTS 24

ANNEX

O Policy Matrix 26

KENYAECONOMIC REFORMS FOR 1996-1998

I. INTRODUCTION

1. Kenya faces a major challenge in reducing unemployment and poverty.The number of people unemployed is currently more than two million and atleast ten million people are living in poverty. In addition, around one-halfmillion people will enter the labor force each year over the next decade. Toachieve significant reductions in unemployment and poverty, the economy willrequire to grow on average by over 6 percent a year for several years. It willalso be imperative that the Government places increased emphasis on socialservices and adequately targeted interventions in favour of the poor.

2. The Government is determined to meet this challenge and has in thisrespect initiated a number of reforms in the last three years. The specificreforms which have been implemented so far include: decontrol of prices;removal of import licensing; removal of exchange controls; liberalisation ofpricing and movement of maize; liberalisation of the petroleum market; andreform of the civil service.

3. This reform framework incorporates the policies and programmes that theGovermnent is committed to pursue over the next three years in order to deepenthe reform process. This will create the conditions necessary to achieve thedesired rapid and sustainable economic growth.

II. ECONOMIC PERFORMANCE

Macroeconomic and Structural Policies

4. Sustained effort by the Government to tighten fiscal and monetary policiessince mid-1993 has been effective in stabilizing the economy and contributingto the revival of economic growth. Gross domestic product (GDP) grew byabout 3 percent in 1994 and by an estimated 5 percent in 1995. The fiscaldeficit has been sharply reduced from over 11 percent of GDP in 1992/93 to2.6 percent in 1994/95. Expansion in money supply, though still high, has alsobeen reduced substantially. Inflation has been reduced substantially. Annualinflation (month over month) declined steadily from a peak of 62 percent in

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January 1994 to 6.9 percent in December 1995. However, after a small surplusin 1993, the current account balance (excluding official transfers) deterioratedto a deficit of 0.4 percent of GDP in 1994, and further to an estimated4.2 percent in 1995.

5. The tight control on the budget was accompanied by tax reforms aimedat reducing the tax rates and broadening the tax base. Expenditures have alsobeen reoriented with more resources allocated to non-wage recurrent outlaysand development expenditures. Progress in controlling expenditure has,however, been slow and some ministries have continued to spend in excess oftheir authorized limits.

6. With respect to structural reforms, the Government has, since mid-1993,made significant strides. It has eliminated exchange controls includingrestrictions on inward portfolio investments and removed all trade restrictions,except for a short list of a few products controlled for health, security andenvironrnental reasons. The number of non-zero tariff rates has been reducedfrom seven to five, and the maximum tariff reduced from 62 percent in 1993/94to 40 percent in 1995/96. With the liberalisation of the maize market inDecember 1993 and the petroleum market in October 1994, all price controlshave been abolished. Steps were also taken to strengthen the financial system,including enhanced prudential supervision of commercial banks, the closure offinancially unsound banks, and strict enforcement of statutory requirements ofnonbank financial institutions (NBFIs), some of which were either transformedinto banks or merged with existing banks. Firm actions were also taken to dealwith the hitherto widespread mismanagement and corruption in the financialsystem involving access to credit from the Central Bank and budgetaryresources.

7. The Government has since 1992 been implementing a major civil servicereform programme aimed at reducing the overall size of the civil service andachieving cost containment, and rendering the civil service more efficient byimproving working conditions. To this end, the civil service has been trimmedby over 33,000 since July 1993.

8. Privatisation of 211 non-strategic public enterprises has started, with theGovernment divesting its holdings in over 100 firms (including 43 tea factoriesin which it turned over the bulk of its shareholdings to farmers) by the end of1995. In addition, it has reduced its holdings in another six enterprises,including Kenya Airways, Kenya Commercial Bank and the National Bank ofKenya. The Government is also making progress in parastatal reform. Initial

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steps to restructure key public enterprises like the Kenya Ports Authority(KPA), Kenya Railways (KR), Kenya Power and Lighting Company (KPLC)and Kenya Posts and Telecommunications Corporation (KPTC), have begun.However, further steps will need to be taken in order to accelerate progress inthis area and thereby improve on the low investment efficiency that limitseconomic growth.

Social Policies

9. The Government has given clear priority to education and health, and hastaken a pragmatic approach in respect to private provision of these services.To date, Kenya has achieved an average life expectancy of 58 and an infantmortality rate of 61 per thousand live births. Many challenges, however,remain. Secondary school enrolment is only 29 percent of the relevant age-group. Child nutrition, after showing improvement during 1982-87, stagnated,and even deteriorated in some areas. It is also estimated that thirty-four percentof the population under five is currently stunted. Child status indicators showsignificant differences according to the education of the mother, which is alsoa proxy for income differences. While there is no indication of majordiscrimination against females in access to basic education and health services,the completion rate for primary school education is lower for females, and intimes of economic difficulty, female students are more likely to drop out ofprimary school. Girls from poor rural families typically do not attendsecondary school. Moreover, female-headed households, i.e., those with nomale support, experience high rates of severe poverty.

10. The lack of sustained economic growth has become the primary constraintto social improvement in Kenya. In particular, economic growth has not beensufficient to generate productive employment opportunities to absorb the rapidlygrowing labour force. Unemployment in urban areas is currently around 25percent. About half of the rural population is living in poverty, and have noaccess to the minimum requirement of food and essential non-food commodities.

III. POLICY OBJECTIVES AND STRATEGIES FOR 1996-98

11. The key development challenge facing the Government over the nextthree years will be to create the conditions for rapid and sustained growth at alevel which will result in a significant reduction in unemployment and poverty.The Government's strategy to meet this challenge will be to: (a) maintainmacroeconomic stability by strengthening monetary and public sector finance

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management, and by-consolidating fiscal discipline; (b) improve the efficiencyof the public sector by accelerating and streamlining reform in the civil serviceand public enterprises, and improving the delivery of infrastructural services;(c) enhance external and domestic competitiveness of the economy throughfurther liberalisation of markets; (d) address the social aspects of developmentparticularly through targeted poverty interventions and increased access of thepoor to social services; and (e) eliminate corruption. The Government intendsto move further away from direct participation in economic activity, and towardthe provision of an enabling environment for private sector development withemphasis on policies which are environmentally friendly and which encouragelabour-using growth.

Macroeconomic Objectives

12. The Government's first priority is to maintain a stable macroeconomicframework while continuing with structural reforms necessary to accelerateeconomic growth. The key macroeconomic objectives for 1996-98 include:(a) achieving higher real GDP growth rising from an estimated 5 percent in1995 to nearly 6 percent in 1998; (b) limiting the annual rate of inflation (endof period) to no more than 5 percent in 1996 and thereafter, close to the rateof inflation projected for Kenya's major trading partners; and (c) strengtheningthe external current account position (excluding official transfers) from a deficitof about 4.2 percent of GDP in 1995 to a deficit of about 1.4 percent of GDPin 1996 and to 0.8 percent by 1998. Gross official reserves are targeted to riseto the equivalent of 4.3 months of imports at end-1998, up from 2.1 months atthe end of 1995.

13. Stable macroeconomic conditions, liberalised markets, and more efficientoperations of the strategic public enterprises are expected to enhance the leveland the efficiency of private investment, and result in increased income and jobcreation. To achieve these objectives, Kenya will require an increase in grossfixed capital formation from 21.7 percent of GDP in 1995 to 23.2 percent in1998. The investment recovery will be financed out of national saving, whichis projected to increase from about 20 percent of GDP in 1995 to 24.5 percentin 1998.

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14. Over the period 1996-98, the agricultural sector is projected to growslightly above 4 percent per annum, with a slight decline in its share as percentof GDP by 1998. Government policies will seek to ensure that broad basedrural development is promoted through appropriate investment in ruralinfrastructure and agricultural research and extension. The manufacturing andthe service sectors are projected to grow at around 7 percent per annum,reaching 18.2 and 36.6 percent of GDP by 1998, respectively.

Monetary and Financial Sector Reforms

15. The primary objective of monetary policy will be to maintain pricestability. To achieve this objective, the Central Bank of Kenya (CBK) will seekto ensure that money supply expands at rates consistent with the growth ofeconomic activities. The Bank will continue to rely mainly on Open MarketOperations (OMO) to manage the supply of money and credit to the economy.Interest rates in such operations will be allowed to vary, as necessary, toachieve this goal. Credit to the financial institutions from the CBK will be keptlow. Foreign exchange intervention by the CBK will be limited to smoothingout short-term fluctuations in the exchange rate.

16. A number of measures will be taken to strengthen monetary policymanagement. Accordingly, the Government will submit a Bill to Parliament byJune 1996 to amend the CBK Act and to give the Central Bank more autonomy.The Government considers this to be critical to sustain price stability. The Billwill define clearly the purposes of the Central Bank and grant it sufficientpowers to discharge its responsibilities more effectively. In addition, the CBKwill seek to improve its capabilities to forecast accurately and on a timely basismovements in reserve money. The Bank will also strive to improve itsintervention techniques in the money and foreign exchange markets.

17. Steps will be taken by the CBK to develop secondary markets in Treasurybills to increase the effectiveness of financial markets. Preparatory work on thelegal and technical infrastructure for the introduction of Repurchase Agreementinstruments (REPOs) will be undertaken in 1996. The Capital MarketsAuthority will also encourage the private sector to establish a central depositoryfor Treasury bills, which would ensure an efficient delivery and payment systemfor the bills. An expanded role for the Nairobi Stock Exchange is envisaged,particularly through a widening of the range of financial instruments traded onthe exchange and assistance in the privatisation of public enterprises.

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18. To strengthen the broader financial system, the National Social SecurityFund (NSSF) will be converted into an autonomous pension fund and necessarylegislation will be presented to Parliament by end-December 1996. Thelegislation will stipulate, inter-alia, that members of the Board be elected bypensioners, and that the Board members elect the chairman. The conversionwill be carried out with the assistance of the World Bank and other donoragencies and will include, inter alia, strengthening of information technologyas well as an actuarial study by an external auditor. Meanwhile, the NSSF hasbeen instructed to invest its revenue in government securities only, except fordeposits in sound and stable financial institutions which will be limited to 15percent of NSSF's total assets. An external audit of the financially troubledKenya National Assurance (KNA) has been completed and specificrecommendations have been made for its restructuring by end-June 1996. Thegeneral insurance business of KNA will be liquidated and the life insurancebusiness will be operated as a closed fund. This means that no new insurancewill be issued and most of the existing staff will be retrenched. Any financialimpact will be reflected in the 1996/97 budget. To consolidate the soundnessof the banking system, no new banking licenses will be issued before end-1996except for large new entrants, i.e., banks with capital larger than Kshs 1 billionwho are judged to offer credible competition to the existing large banks.Moreover, all prudential regulations will continue to be strictly enforced.

Budgetary and Public Expenditure Policies

19. Fiscal policy will continue to be significantly tightened with the objectiveof lowering domestic debt and thereby facilitating the reduction of interest rates.The overall budget deficit (on a commitment basis and excluding grants) istargeted to decline gradually from its 1994/95 level of 2.6 percent of GDP to1.9 percent of GDP in 1995/96 and further to 1.5 percent of GDP by 1997/98.In the process, overall revenue will slightly decrease from 31.7 percent of GDPin 1994/95 to 30.9 percent in 1997/98. On the expenditure side, theprogramme will focus on improving the quality and the sectoral allocation ofpublic spending, as well as strengthening of budgetary control and management.Development expenditure would be increased over the period to help rehabili-tate infrastructure, while recurrent expenditure will be markedly reduced so thattotal expenditure would decline from 34.3 percent of GDP in 1994/95 to 32.3per cent in 1997/98. With the projected availability of grants and externalfinancing and assuming budgetary support from programme financing, this levelof deficit will allow domestic debt to be reduced from 28.1 percent of GDP in1994/95 to 18.4 in 1997/98. The retirement of domestic debt is essential toallow more credit to the private sector and a reduction in real interest rates.

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20. Tax Reform. Steps will be taken to deepen the tax reform which isaimed at reducing the tax burden and broadening the tax base. Maximumimport duties will be lowered further by July 1997, while income tax and VATrates will be lowered to the extent compatible with the deficit target. The taxbase will be broadened by eliminating many of the exemptions from taxes andreducing the scope for tax evasion. In particular, the Government will takeimmediate steps to do away with all discretionary import duty exemptions.Improving tax administration will continue to be an important element of the taxreform programme. In this respect, the Government will ensure the properfunctioning of the newly established Kenya Revenue Authority by improvingremuneration and funding its other operations and by empowering the Authorityto freely hire and dismiss staff in order to encourage diligence, honesty, andperformance. To enhance controls on customs revenues, the Government hasbegun a systematic ex-post reconciliation of actual receipts of customs dutiesand those calculated by the Pre-shipment Inspection (PSI) firms.

21. Public Expenditure Reform. Further steps will be taken on expenditurereform involving strengthening budgetary controls and rationalisingexpenditures. Budgetary controls will be reinforced through increasedtransparency and accountability. To this end, the Government will not enterinto any commitments which have not been included in the Budget andapproved by Parliament. It will strictly enforce and, where necessary,strengthen procedures for the granting of public procurement contracts and forexternal and domestic borrowing. In this respect, no exemption will be grantedin the requirement for the public tender of all contracts exceeding Kshs 10million. Expenditures will be closely monitored on a monthly basis by therecently established unit at the Treasury, and the sanctions of the financialorders and regulations will be strictly applied to Accounting Officers inministries and departments that violate established recurrent and developmentceilings without explicit and prior written approval of the Treasury. Consistentwith this, the Government will publish on a quarterly basis, the preliminarybudgetary outturn. The Government will also take steps to ensure that localgovernment expenditure processes are on a sound footing, particularly given theincreased resources made available to them through the authorization of a50 percent increase in the service rates on businesses.

22. The rationalisation of public expenditures will involve a shift in theallocation of public funds toward the Government's basic functions ofmaintaining law and order and administering justice, financing broad-basededucation and health services, providing economic infrastructure, supportingagricultural research and extension, and protecting the environment. While

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recurrent expenditures will continue to be constrained, limits on the overallgrowth of the wage bill through civil service rationalisation, improvements inthe collection of appropriations-in-aid by ministries, and the shedding of non-essential government services, will permit significant real increases in non-wageoperations and maintenance expenditures, particularly for the basic functions.To this end, the Government will initiate, with assistance from the World Bank,a wide-ranging review of public expenditures during the first half of 1996.This review will be the basis for specific spending decisions in the 1996/97 to1998/99 Budgets.

23. Development expenditures (including net lending) will be increased fromtheir current level of just over 7 percent of GDP. Full annual funding will beprovided for all "'core" projects and allocations to core functional areas willaccount for at least 75 percent of the development budget over the next threeyears. Shortfalls in funding will be met by reallocating funding from non-coreto core projects. The Government will improve the project selection criteria toensure that all new projects are vetted before they are introduced into the PublicInvestment Programme (PIP) in order to ensure consistency with likely availableresources, and that no project will be included in the Budget which is notcontained in the PIP.

Civil Service Reform

24. The first of three phases of the seven-year programme of the Civil ServiceReform Programme, which is intended to increase the efficiency of the Serviceand to improve management capacity, is now underway. As indicated earlier,in order to improve the efficiency of the Service, the programme involves thereduction of positions and staff, implementation of staffing norms for all cadres,improved establishment control, rationalisation of selected ministries and payreform. These actions will be taken consistent with budgetary resourceavailability. In line with the Government's previous commitments, staffreduction measures and the corresponding positions are to be reduced by 16,000per year over 1995/96 and 1996/97, through natural attrition, voluntaryretirement and position rationalisation. During the period January 1996 to June1997, the Government will limit new hires to 3,000 per year maximum, i.e.,no more than 1500 between January and June 1996 and by 3000 between July1996 and June 1997. This will imply net reductions in civil service of 20,180over the period January 1996-June 1997.

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25. In light of emerging staff shortages in certain areas, the Governmnent willring-fence some of the most critical and well-trained but scarce junior staff.During 1996, the Government intends to carry out staff analysis and establishstaffing norms for key cadres. This, together with the results of the ministerialstaff rationalisation programmes, will enable the Government to develop acoherent programme of Civil Service rationalisation for the period 1997/98 andbeyond. This program will be developed by June 1997 taking account of themedium term budgetary outlook.

26. To increase personnel control, the Government is committed to theintroduction of an Integrated Personnel and Payroll Database (IPPD) system inthe Service. By mid-1997, the Government will have completed the first Phaseof this introduction. Similarly, by the end of 1996, modalities will have beenworked out for the introduction of and implementation of performance-relatedpay for identified critical cadres. In addition, and as part of its effort to improveefficiency, the Government will identify key indicators for Civil ServiceOperations and Maintenance (O&M) requirements and give them priority in therecurrent budget expenditures beginning in 1996/97.

27. In the area of ministerial rationalisation, work has already been initiatedin the ministries of Health (MOH), Finance (MOF), Lands and Settlements(MOLS), Public Works and Housing (MOPWH). Land Reclamation, Regionaland Water Development (MLRRWD) and Agriculture, Livestock Developmentand Marketing (MOALDM). For MOH and MOALDM, implementation ofthese plans is underway and is expected to be completed by the end of 1996.The rationalisation of the other four ministries is expected to be completed byJuly 1997. The Government intends to identify by July 1996., six additionalministries for rationalisation with emphasis on the development of staffingnorms which can be applied to determine optimal staffing levels. It isenvisaged that the process of ministerial rationalisation will be complete by theend of 1998.

28. During the period 1996-98, increased attention will be paid to trainingand human resource development in the Civil Service. Training will be gearedtoward the development of special skills in key areas, based on the results ofthe staffing norms and ministerial rationalisation. Towards this end, theGovernment will seek to improve physical facilities in the existing traininginstitutions. Before the end of 1996. it is expected that all critical trainingneeds will have been identified and prioritised.

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Public Enterprise Reform

29. The Government considers the private sector as the only basis forsustainable long term economic growth. Accordingly, it will progressivelyreduce the role of the public sector in the economy through rationalisation ofpublic sector firms and an accelerated programme of privatisation.

30. Rationalisation of Major Parastatals. The Government intends toimplement major rationalisation and divestiture programmes for each of the keyparastatals. In so doing, the Government will seek to increase the role of theprivate sector through direct participation as well as through divestiture of non-core activities. Furthermore, tight budgetary controls will be enforced on theparastatals. This will be achieved by charging market rents for the use of landsheld by the Government, applying a 2 percent fee to any new loan guaranteesprovided by the Government, requiring parastatals to be current on theirfinancial obligations, and eliminating any existing arrears within the next threeyears.

31. National Cereals and Produce Board. The Government will by end-1996 transform the National Cereals and Produce Board (NCPB) into acommnercially viable entity free to make independent commercial decisions.Experts will be engaged for this purpose. The experts are expected to beginwork by June 1996, based on terms of reference agreed with the World Bank.Principles governing this commercialisation, including expanding the privatesector role in maize marketing, and the interim operating rules for NCPB havebeen finalised.

32. Kenya Ports Authority. To improve the efficiency of Kenya PortsAuthority (KPA), the Government has requested Singapore Port Authority(SPA) to manage and operate the container terminal at the port of Mombasa.SPA has agreed in principle, and the necessary contract will be signed beforethe end of March 1996. KPA will also at that time have completed the re-negotiation for the two ten-year equipment maintenance contracts it entered intoin 1994, limiting the duration of these contracts to five years and establishingperformance guarantees and penalties. A performance contract between theGovernment and KPA will be completed before April 1996. The contract willinclude arrangements to implement the recommendations of the ongoing staffrationalisation study.

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33. Kenya Railways Corporation. A programme for the restructuring ofKenya Railways (KR) which has already been initiated will be accelerated earlyin 1996, based on the paper to be considered by Cabinet in February 1996. Itwill include the separation of passenger and freight services, the discontinuationof loss-making services, the contracting out of locomotive maintenance, thedivestiture of marine services, and staff reductions. The maintenance contractswill be signed by August 1996 and staff numbers will be reduced to 14,500 bythe end of 1996. A performance contract will be entered into before the endof May 1996.

34. Kenya Posts and Telecommunications Corporation. The Governmentwill issue, early in 1996, a policy statement spelling out the privatisationprogramme for Kenya Posts and Telecommunications Corporation (KPTC).Legislation will be presented to Parliament in March 1996 seeking to splitKPTC into three separate entities: posts, telecommunications, and a regulatoryauthority. If approved, the three entities will be established by December 1996.The Government will open to outside investors at least 30 percent of the capitalof the new telecommunications entity through the participation of a strategicinvestor and through public flotation. The entity will also engage in jointventures with private investors in activities such as cellular telephones. As partof this process, KPTC has recently liberalised telecommunication servicesbeginning with pay phones and Very Small Aperture Terminals (VSAT) forprivate operators. KPTC will also divest its non-essential services includingworkshops and buildings by September 1996.

35. Power Sector Companies. Legislation is now being prepared toseparate the regulatory and commercial functions of the power sector, facilitaterestructuring of the sector and promote private investment. This will bepresented to the Parliament by the middle of 1996. An action plan is also beingformulated which will provide for the commencement of the separation ofgeneration, transmission and distribution, and articulate the reforms in theorganisation, management and financial structure of the Kenya Power andLighting Company (KPLC) and other power companies. The implementationof the action plan will commence in June 1996. Performance contracts for allpower sector parastatals will be entered into for implementation commencingbefore the fourth quarter of 1996. Early in 1996, bids will be invited forinvestment by independent private producers in power generation.

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36. Institutional Arrangements. To increase managerial autonomy in publicenterprises, a Government Order will be issued early in 1996 exempting keyparastatals (excluding Kenya Railways, which is already exempted, butincluding Kenya Airports Authority) from provisions of the State CorporationsAct. The Ministry of Finance has also begun filling its staff positions chargedwith monitoring the reform programme.

Privatisation

37. The Government aims to complete by the end of 1997 the divestiture of'all remaining (96 entities) "non-strategic" enterprises. This will be done intworoughly equal installments. In addition, in 1996 work will be initiated onthe divestiture of three formerly strategic enterprises: Kenya PipelineCorporation, Kenya Petroleum Refineries and Nyayo Bus Corporation. TheGovernment is progressively reducing its holdings to a modest minorityshareholding in the National Bank of Kenya and Kenya Commercial Bank.

38. The Government will take steps to ensure access for a wide spectrum ofKenyans in the ownership of enterprises to be divested. In order to build andmaintain public confidence in the programme, the Government is committed toensuring the utmost possible transparency in the implementation of divestitures.To achieve this, where shareholders do not hold clearly established pre-emptiverights, the Govermnent will employ competitive bidding using transparentprocedures: (i) firms (or their assets) to be sold will be widely publicized inadvance; (ii) pre-qualification criteria and ranking methodology will be clearlypublicized with the call for bids; (iii) bids will be opened publicly; and (iv)results will be published at the conclusion of each sale listing the terms of sale,the offers received, and the price at which the sale took place. Quarterlyreports will be prepared and published on the implementation of theprivatisation programme and on the privatisation proceeds and their uses. Semi-annual audits on the privatisation proceeds and uses will also be prepared andmade public.

Privatisation" is understood to mean that the Government(including its various departments, ministries, holdingcompanies, agencies, etc.) has divested its holdings in the firmto 30 percent or below the blocking share" as stipulated in thefirms articles of agreement.

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Market Liberalisation

39. Trade Reform. The Government will continue with the followingprocess of trade and investment liberalisation. Import tariffs will be furtherrealigned, with the aim of achieving by July 1997 no more than three non-zerorates, and a lower trade weighted average tariff. The discriminatory elementsof the supplementary levy on sugar will be eliminated by December 1996. Thesuspended duty on petroleum imports, introduced in November 1994 to givetemporary protection to Kenya Petroleum Refineries Limited following thepetroleum market liberalisation, will be eliminated by October 1996, contingenton the completion of the LPG import unloading pipeline (see para 54). Specificduties on cereal imports will be abolished by end-1996. By that time anti-dumping legislation consistent with the World Trade Organisation (WTO) ruleswill be presented to Parliament, and anti-dumping duties on cereal imports willbe imposed in accordance with the law. The Government will also work withUganda and Tanzania, under the framework of the Permanent TripartiteCommission for East African Cooperation, toward an eventual goal of an EastAfrican common external tariff and harmonized investment regulations, as wellas a more active use of regional currencies.

40. Given its commitment to export-oriented growth, the Government intendsto implement a strategy for industrial development that is intended to developand diversify Kenya's industrial exports. The strategy will focus on creatingthe conditions to encourage private investment in activities where Kenya couldbe competitive. Underpinning this strategy will be a broad based effort,through appropriate training and incentives, to make all relevant Governmentagencies active promoters of investment and trade. The policy instruments toenable such growth will include simplification of licensing and tax regulationsand procedures, and provision of improved infrastructure services. Effectiveenforcement of the low and simple tariff structure will reduce uncertainty andpromote investment in areas where Kenya has a comparative advantage.

41. Domestic Market Liberalisation. The Government will undertakefurther reforms to ease restrictions on business entry and operations whileputting in place appropriate safeguards against anti-competitive behavior. Thiswill be achieved by rationalisation and a reduction in the number of nationaland local fees and licenses required for new businesses, and through minimisingrestrictions on retail and wholesale trade and investment under variouslegislation. Actions on this front will be taken within the context of reforms ofthe fiscal base of local authorities. The Government is also committed to takingcorrective measures to ensure that farmers, consumers and traders benefit from

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a liberalised market. In this respect, the liberalisation of maize marketing andthe establishment of a competitive seed industry will be crucial. To speed upresolutions of commercial cases, the Government intends to introduce additionalcourts in major towns.

Sectoral Policies and Programmes

42. Agriculture. The main aim of agricultural sector policy will be toaccelerate agricultural growth, increase small-holder productivity, and expandrural employment. With the substantial deregulation of the domestic marketsfor all agricultural commodities, this objective will be pursued under aliberalised system where the private sector plays the key role in production,marketing and processing. The Governrment has already liberalised the seedsubsector; additional measures will be taken to strengthen the subsector,including the establishment of financially sustainable breeder and foundationseed units at the research centers of KARI, and the improvement of planthealth, quality and quarantine services and facilities through theoperationalisation of the Kenya Plant Health and Inspectorate Services(KEPHIS).

43. The Government is also taking steps to improve the operations of KenyaCooperative Creameries (KCC), with a view to improving its financial viabilityand enhancing the farmers' role in the management of the affairs of theorganization.

44. Consistent with these changes is the proposed restructuring of MOALDMwhich will be completed by the end of 1996. This will reorient the role andstrategic functions of the Ministry so as to effectively facilitate private sectorinitiatives, with emphasis on providing strengthened research, extension andother essential services to farmers. A number of services, such as tractor hireand some veterinary services, will be privatised and cost recovery introducedfor others. KARI, which plays an important role in the generation anddissemination of knowledge and related technology, will also be restructuredduring 1996/97 within the context of the joint donor financed Second NationalAgricultural Research Project (NARP II). This restructuring will include thereview and streamlining of user charges in order to reflect acceptable cost-sharing and cost-recovery in the financing of research. To strengthen theapplication of science and technology to agricultural development, the existinglegislative framework will be reviewed; in this respect, a review of the Scienceand Technology Act (Cap.250) has already been initiated.

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45. Food security is of paramount concern to the Govermnent. To thisobjective, the Governmrent will maintain a strategic maize reserve stock of upto 3 million 90-kilogram bags and will develop rules governing its management.While it is expected that the actions of private traders will serve to stabilize themaize market in most years, under exceptional situations, the Government willsupplement these private efforts to reduce uncertainty and ensure food securityby financing purchases and sales of maize.

46. Environment. The National Environmental Action Plan (NEAP), whichwas formally adopted by the Government in June 1994, sets the framework fordealing with the crucial urban, rural and coastal environmental problems whichneed to be urgently addressed. Since its completion, the challenge has been totranslate NEAP's broad concerns about environmental management into anoperation programme of effective policy, legislative and institutional action.The Government will soon be presenting to Parliament, as a Sessional Paper,a comprehensive environmental programme. An action plan to operationalisethis programme, including the establishment of an institutional framework, willbe initiated before the middle of 1996. The Government is currently preparingan environmental legislation which, after broad-based consultation, will bepresented to Parliament by the end of the third quarter of 1996. It is theGovernment's intention to establish a Land Use Commission to address landtenure and land use policy issues, with a view to improving sustainableagricultural productivity and the food security situation, as well as in ensuringthat biodiversity considerations are properly considered in land-use decisions.

47. The Government is particularly concerned about the state of thewoodlands. The decline in areas of indigenous high forests and the degradationof biodiversity and forest product resources within them has reached criticallevels. The use of woodlands in arid and semi-arid lands as grazing areas andwood fuel continues to accelerate. Industrial plantations have been inadequatelyrestocked and lack production-oriented management. The Government'sForestry Policy Statement addresses these various concerns, particularlyinadequate restocking which is addressed by requiring loggers to replant clear-felled plantations. The Policy Statement will be presented as a Sessional Paperto Parliament in March 1996. Necessary supportive amendments to the ForestAct will be presented to Parliament in September 1996.

48. The Government is in the process of updating the policy on wildlifeconservation and management (as contained in Sessional Paper No. 3 of 1975)and the Wildlife Conservation and Management {Amendment} Act of 1989 torespond to changing conditions and objectives of wildlife and biodiversity

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conservation. The new policy framework centers on three main goals:(i) conserving of biological diversity and representative indigenous ecosystems;(ii) promoting environmentally sustainable tourism; and (iii) promotingcompatible land use in priority biodiversity areas, and channeling the benefitsthereof to the local communities. A revised policy and legislation will delineatethe roles and responsibilities of the Kenya Wildlife Service and of otherGovernment and non-Government stakeholders in the implementation of thisparticipatory approach. The draft policy is being prepared by the KenyaWildlife Service and is expected to be approved by the middle of 1996, with therevised legislation to be presented to Parliament by the end of 1996.

49. Road Transport. The Government recognizes that inadequatemaintenance over many years has led to a significant deterioration in the roadnetwork. The introduction of a special levy on motor fuels in 1994 to beearmarked for road development and maintenance was a major step to deal withthis problem. The activities to be financed by the fund are contained in therelevant Act. The Government will also ensure that at least 50 percent of thefunds required for routine and periodic road maintenance (including urbanareas) will be provided in the budgetary allocations in 1995/96. This level willbe progressively raised to fully finance routine and periodic road maintenanceby the turn of the century.

50. A strategic plan for the road sector is now being prepared for approvalby the Government in June 1996, and outlines the framework for: (i) capacitybuilding and increased use of the private sector in both roads maintenance andconstruction; (ii) plans for provision of adequate and sustainable funding forroad maintenance; (iii) provide guidelines for transparent management and useof the fund; and (iv) setting priorities for roads investments.

51. Water. Draft legislation amending the Water Act will be presented toParliament to address concerns regarding national water resources managementand planning. A National Water Policy Paper is also being prepared forGovernment approval. A comprehensive investment plan for the rehabilitationand extension of existing water supply schemes, many of which are in poorcondition as a result of inadequate maintenance by financially weak operatingagencies, has also been recently prepared and is now being implemented. Thelow level of cost recovery has been a major factor contributing to inadequatemaintenance. To address this, the Government will progressively implementits policy of charging urban consumers water tariffs sufficient to cover capitalamortization and O&M costs, while setting rural tariffs to cover O&M costsonly.

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52. Energy. The implementation of a sound policy framework and anappropriate investment programme to address the increasingly serious shortfallsin power supply is of high priority to the Government. The Government has,therefore, prepared a rolling five-year least cost investment programmecomprising urgent investments in power generation, transmission anddistribution as well as investments to facilitate importation of liquid petroleumgas (LPG) and the transportation of other petroleum products. Construction offive power stations, two of which will be developed and operated by the privatesector, will add a total of 338 MW to existing capacity at the turn of thecentury. The Government attaches great importance to rural electrification andis therefore also reviewing cost-effective options for providing electricity to therural areas, including policies to encourage the use of renewable energyresources (e.g. wood fuels, photo-voltaics and windmills).

53. To mobilize resources required to supplement external borrowing infinancing the power sector investment programme and to encourage economicconsumption of electricity, tariffs will be adjusted to ultimately cover long-runmarginal costs (LRMC). As an interim measure, tariffs will be raised to75 percent of LRMC by the beginning of June 1996 following resolution ofoutstanding administrative/legal issues. An update of the November 1993 TariffStudy, to be completed in the third quarter of 1996, will provide the basis forthe Government to establish the magnitude and phasing of further adjustmentsrequired to achieve LRMC after taking due consideration of the cost of powerfrom independent power producers and the sector's overall financingrequirements.

54. Deregulation of the procurement, distribution and pricing of petroleumproducts was announced in October 1994. The objective of the deregulationwas to create a more competitive environment which would improve theavailability of petroleum products and lower prices in the long-term. Becauseof the lack of import facilities for LPG, temporary (two year) arrangementswere made for: (i) the annual processing of about 1.6 million tons of crude oilby the refinery to ensure production of about 250,000 tons of the current annualdemand for LPG; and (ii) protection of the refinery by levying duties onimported products. To achieve the full benefits of deregulation, removal of thefollowing existing constraints to competition is required: (a) urgent constructionof LPG import facilities comprising pipeline connection between the ShimanziOil Terminal and the new storage tanks and rail/road loading facilities to beconstructed at Mombasa; (b) review and implementation of options forcontinued use of the petroleum products pipeline as a common carrier; and (c)installation of a product testing laboratory in Mombasa. Part of the LPG import

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facilities, to be constructed on a priority basis, include the LPG unloadingpipeline from Shimanzi Oil Terminal to Mombasa Refinery Compound wall andthe vapour return line from that point. As indicated in paragraph 39, suspendedduties on petroleum imports will be completely removed by October 1996,contingent on completion of the LPG import unloading pipeline.

55. Population. Kenya has been pursuing an active population policy.While there has been remarkable success in reducing fertility over the lastdecade, the population of Kenya is still growing at a high rate of around3 percent per annum. Continued emphasis will thus be placed on familyplanning service delivery to achieve higher contraceptive use and on thepromotion of programmes such as social marketing and community-based deliv-ery to address demand for these services. To ensure better coverage of thepopulation in the delivery of these services, greater reliance will be placed onprivate and other non-government entities. To reflect this, the Government isin the process of restructuring the National Council for Population andDevelopment (NCPD) to de-emphasize its role in service delivery and to turnit into a policy-making, coordinating and advocacy entity. Over the longer run,following the U.N. Cairo Conference on Population, Kenya will emphasize theintegration of population policy into the overall policy framework. This willinclude specific interventions in primary education and reproductive health,particularly for disadvantaged families.

56. Health. The Government is firmly committed to major reforms in thehealth sector. The recently prepared Health Policy Framework sets out acomprehensive approach to improve the quality and availability of healthservices, including specific measures to be undertaken over the next three years,namely, (i) the adoption of a strategy to reduce the prevalence of disease amongthe population; (ii) the decentralization of financial and administrative authorityto districts, beginning in the first half of 1996; (iii) the shifting of a larger shareof the financial burden of curative care from the Ministry of Health's (MOH)budget to insurance schemes of the National Hospital Insurance Fund (NHIF) 2

and competing private financial entities; (iv) an increase in resources devotedto the completion, maintenance and repair of existing facilities and equipment;(v) the strengthening of key health management information systems at thedistrict level; and (vi) the restructuring of the MOH to support these reforms.The Budget of the MOH will continue to reflect the shift to preventive health

2 The Government is currently reviewing the scope forexpanded enrollment and coverage in the NHIF. The new draft Billof the NHIF reflects an intention to include self-employed andthe Jua Kali (Informal) sector.

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care away from hospital care, particularly Kenyatta National Hospital whereefforts are underway to improve its efficiency and financial autonomy. TheGovernment is committed to limit the share of MOH's budget to the hospital to12 percent beginning 1996/97, subject to adequate progress being made inensuring other facilities are in place to serve the Nairobi area. Efforts toimprove the quality of health services under constrained budgetary conditionsrequires that funds be mobilised through increased user charges. Thecontribution of user charges will therefore have to be raised from their currentlevel of 12 percent of MOH's non-wage recurrent budget to about 18 percentin 1997/98.

57. To address the problem of AIDS and other sexually transmitted diseases,the Government is implementing a National AIDS and Sexually TransmittedDisease Control Programme (NASCP), and has prioritized capacity building atnational and district levels to integrate AIDS into the development plans. Stepsare also being taken to minimize the socio-economic impact of HIV/AIDS andto strengthen HIV/AIDS epidemiological surveillance. A Policy Paper on AIDSis being finalised, which includes appropriate institutional arrangements tocoordinate the implementation of the NASCP. As part of a pilot projectsupported by donors, non governmental organisations (NGOs) are beginning toplay a key role in control and prevention of sexually transmitted infections. Allannual district health plans include funds earmarked for NGO activities, and theauthority to incur expenditures has been delegated to the District MedicalOfficer for ten districts and municipalities.

58. Nutrition. Recent evidence points to high rates of infant mortality somedeterioration in already adverse child nutritional status indicators. Anaemia andmalnourishment among women are also significant, although the precise extentis unknown. To reverse these trends, the Government will review allnutritional interventions to shift its financing to more cost-effective programmestargeted at infants, pre-school children and pregnant women, particularly inrural areas, with selected interventions for older children in poor districts. Thiswill include examining the role of communities in financing the school feedingprogramme to ensure its sustainability, assessing and monitoring the nutritionalsituation, preventing specific micro-nutrient deficiency, improving youngchildren feeding, and caring for socially and economically deprived nutritionalvulnerable groups.

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59. Education. The Government's principal objectives in this sector over thenext three years will be to reverse the recent declines in primary and secondaryenrolment and completion rates, particularly of girls from poor households, andto improve the quality of education at all levels. This will involve areallocation of public expenditures from university education towarddisadvantaged students in primary and secondary education, and an increase inthe effectiveness of these expenditures. Means-tested bursary programme tosecondary schools will be expanded in 1996/97. The Government will alsowork out arrangements and plan to introduce a bursary programme directed atgirls in primary schools--especially those at the upper primary level in rural andslum areas. Initiatives for pre-primary education and early childhooddevelopment will also be strengthened. To improve the quality of education,the Government will maintain its policy of not recruiting new untrained teachersat the primary level.

60. The Government has in place policies to encourage the participation ofthe private sector in the establishment and operations of educational institutions.The Goverrnent is also encouraging the sector to enhance its participation inthe production of all educational materials. To this end, the capacity of theKenya Institute of Education (KIE) will be strengthened and a review of policieson publishing educational materials prepared by the Institute will be carried out,with the aim of enabling the private sector to participate effectively with the twoparastatals publishing educational books, that is, Jomo Kenyatta Foundation(JKF) and Kenya Literature Bureau (KLB).

61. Enhancing the efficiency and responsiveness of educational institutionsthrough the decentralisation of decision-making will be an important objective.This will be achieved by increasing the capacity, responsibility andaccountability of local authorities and of boards and committees of educationalinstitutions for funding arrangements and management performance. In thiscontext, the Government is establishing Provincial Education Boards,strengthening District Educational Boards and reviewing and rationalising theresponsibilities of the Teachers Service Commission (TSC). Changes at TSCwill involve decentralising its functions more appropriately at the school or locallevel and strengthening TSC's capacity to manage more appropriately thosehandled centrally. In addition, the Education Acts and regulations are beingreviewed and a plan of action prepared to decentralise management andfinancial decision-making, permitting councils and boards of educationalinstitutions to determine fees from 1996/97.

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62. Consistent with the decentralisation strategy, determination of fees tosupplement Government grants to meet especially the actual cost of tuition,accommodation and catering, will be fully devolved to University Councils forthe 1996/97 academic year. Reforms have also been recently undertaken in theadministration of Student Loan Schemes. The Higher Education Loans Board(HELB), which has now taken over the functions of the former Student LoanScheme Unit from the Ministry of Education (MOE), will make full use of itsenhanced legal powers for loan recovery. The Board intends to progressivelyincrease the role of commercial banks in lending to students, initially ascontractors for loan disbursements and recovery, with the long-term aim of en-couraging them to accept some portion of the repayment risk.

63. In the area of skills training, the Government, through the Ministry ofResearch, Technical Training and Technology (MRTT&T) aims at improvingthe capacity of Kenya's technical training institutions. This will be donethrough the updating of equipment in the training institutions as well as theimprovement of their management. In addition to these efforts, theGovernment, through the MRTT&T, plans to develop a national Skills TrainingStrategy through a process involving all key stakeholders.

Women in Development

64. The Government will continue its efforts to ensure that women participateand benefit equally from the development process through their integration intomainstream activities. Recent studies show that women are not grosslydiscriminated against in Kenya, but there are subtle differences which have acumulative effect on the welfare of women, such as drop-out rates of primaryeducation, and low enrolment and completion rates for secondary and higherlevels of education. Women are also disadvantaged in their access to land, andare particularly vulnerable in the event of divorce, separation or beingwidowed.

65. Efforts to improve opportunities for women will continue to focus onincreasing their access to education and health. Given the increasinglyimportant role played by women in the rural sector, the Government will alsostep up its efforts to redesign agricultural extension services to provideinformation directly relevant and accessible to rural women. The budget-neutral recruitment of women as extension staff, use of women's groups todisseminate technical information, and integration of home economic messagesand information on appropriate labor-saving technologies are importantcomponents of the latter. The Government will initiate ways and means to

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improve access of women to productive resources such as agricultural inputs,water, fuel wood, credit and skills. Towards this goal the Government willsupport rural water supply systems that feature community participation andNGO involvement, and that can significantly improve the quality of life ofwomen and the community as a whole. In addition, the Government willensure that women in the small and medium enterprise sectors have access toexisting skills upgrading training of the Jua Kali (Informal Sector) programmeso as to address their specific needs.

Youth in Development

66. About 15.5 million people or 60 per cent of Kenya's population areyoung people below twenty-five years of age. Of this total, around 5 millionare below 6 years, over 5 million are in primary schools, about 600,000 insecondary schools and about 50,000 are in local and overseas universities.There are also well over 4 million youths outside the school system, either asunemployed or undertaking small-scale income generating activities, in bothrural and urban areas.

67. The Government recognises that the most important resource is itspeople. It is necessary therefore that steps are taken to give the youth correctguidance so that they may grow into useful citizens and leaders of tomorrow.More importantly, steps must be taken to harness the energies and talents of theyouth by directing them into productive activities. Towards this objective, theGovernment will in the period 1996-98, strive to develop appropriateprogrammes tailored in particular to help alleviate the unemployment problemamong the youth. This will involve designing and funding of youthdevelopment programmes and projects through Youth Self-Help Groups whichalready exist in both rural and urban areas. The District DevelopmentComnnittee (DDC) mechanism will play an important role in this regard.

Targeted Poverty Interventions

68. While the policies in support of growth and the social sectors aredesigned to ensure that the benefits of development reach the poor, targetedinterventions will be required to provide income support to those who cannotwait until the growth process gathers full steam as well as those who cannotreadily participate in it because of special handicaps, such as geographicalisolation. The most important targeted interventions will be in rural areaswhere the need for wage employment is most acute. In this respect, theGovernment will allocate funds to expand its intensive rehabilitation and

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maintenance of minor roads, given the importance of these roads and theircurrent state of disrepair. Flexibility will be built into the scheme to enhanceit during drought years. The Government will also develop community-basedmodalities for providing support to the rehabilitation and maintenance of waterprojects, including boreholes, water pans and dams, and will seek to establisha pilot water fund in 1997. Special attention is being given to the poor in aridareas through programmes designed to meet their basic needs and to increasetheir integration with the rest of the economy. Special emphasis will be placedon the rehabilitation of stock routes on a selective basis, improvements indrought management and relief, and on the immunisation and school health andfeeding programs.

69. Sanitation and safe water needs of the urban poor requires urgentattention. The Government will take steps to deal with these needs by licensinga larger number of kiosks and by supporting, financially and technically,community-based initiatives in waste removal and sanitation. To help alleviatethe related shelter problem in urban areas, access to low-cost housing will beencouraged through cooperative societies.

70. The informal sector is the main source of income for about a quarter ofrural households and possibly more in urban areas, and energising the sector isan effective means of reducing poverty. It is, however, constrained by limitedaccess to formal credit and laws and regulations which often lead to harassment.To help alleviate the credit constraint, the Government will encourage theexpansion by donors of micro-enterprise schemes, and will seek to ensure thatwomen groups in both urban and rural areas are specifically targeted. In orderto address sector needs, the Government has mounted a national Jua Kaliprogramme aimed at addressing issues related to safe working sites, skillsupgrading, access to power and water, access roads, land allocation, andmarketing. This programme has helped many artisans gain access to theseservices although it has been constrained by financial limitations. TheGovernment aims at expanding and intensifying the programme which, as wellas emphasizing addressing the above issues, will seek support of donors toexpand and improve delivery systems of micro-enterprise lending schemes andinvolve a review of laws and regulations inhibiting the sector and undertakingappropriate amendments.

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IV. DATA REPORTING AND STATISTICAL ISSUES

71. The quality of economic data base is generally satisfactory in Kenya. Inthe medium term, the Government will: (i) strengthen the Central Bureau ofStatistics and allocate sufficient financial resources to construct a quarterlycomposite index of economic activity, re-base constant price national accountsdata, and compile a producer price index; (ii) take measures to improve thetimeliness of the recording of reliable economic statistics, especially thoserelating to balance of payments and external financing of the governmentexpenditure and the real sector.

V. EXTERNAL FINANCING REQUIREMENTS

72. The current account balance, excluding official transfers, is projected toshow a cumulative deficit of about US$ 310 million over the period 1996-98(Table 2). Together with the scheduled amortization payments and the targetedbuild-up of international reserves, Kenya's external financing requirement isestimated about US$2.4 billion over the three-year period. It is expected thatprivate capital inflows, mainly from foreign direct investments and short-termtrade credits, would amount to around US$ 300 million. Potential financing ofUS$1.5 billion is identified from bilateral and multilateral donor agencies, inthe form of grants (US$0.4 billion) and concessional loans (US$ 1.1 billion)subject to confirmation at the Consultative Group Meeting. After taking intoaccount identified external financing, a financing gap of about US$550 millionremains for the period 1996-98. The gap for 1996 is estimated at US$224million. It is expected that the gap will be closed by disbursements under aWorld Bank Structural Adjustment Credit (SAC) and associated InternationalDevelopment Association (IDA) reflow, disbursements under the IMF EnhancedStructural Adjustment Facility (ESAF) and commitments made at the March1996 Consultative Group meeting.

73. At end-1995, the external debt of Kenya's public sector amounted toabout US$6.4 billion, or about 80 percent of GDP. Kenya borrowedextensively on non-concessional terms in the second half of the 1980s; sincethat time, new borrowing have been on concessional terms. In present valueterms, in 1995 the external debt amounted to 191 percent of exports and theexternal public debt service was equivalent to 24.9 percent of exports of goodsand services. Consistent with the lower current account deficits associated withthe medium term balance of payments scenario described above, the externaldebt will decline as a percentage of GDP. In addition, as the older non-concessional debt is being repaid and new financing is provided on concessional

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terms, the overall concessionality of the external debt is expected to increaseover the medium term. As a result of these two factors, the present value ofthe debt will decline to 83 per cent of exports by 2005 along with the ratio ofdebt service payments to exports of goods and services which would fall to lessthan 10 percent.

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KENYASUMMARY AND TIMETABLE OF POLICY ACTIONS, 1996-1998

OBJECTIVES AND STRATEGIES AND MEASURES TIMINGPOLICIES

Overall objective of Policies that encourage environmentally sustainable, 1996-1998poverty reduction via labor intensive growth supplemented by publicmaintaining a stable, low expenditure programmes focused on the financing ofinflation macro-economy, basic social services targeted at the poor.while continuing withstructural reformsnecessary to revive GDPgrowth to 5-6 percent perannum in 1996-1998.

Monetary & FinancialSector Policies

Monetary policy to 1. NDA to be reduced substantially with limited 1996maintain price stability foreign exchange market intervention. Broad money

to grow in line with nominal income; sharply curtailnet credit to the Government.

2. Present the Bill amending the CBK Act to June 1996Parliament.

Financial sector reform 3. Submit legislation to Parliament converting the Dec 1996National Social Security Fund (NSSF) into a pensionfund.

Jan. 19964. Limit the level of deposits in sound and stable onwardsfinancial institutions to 15 per cent of NSSF's totalassets.

5. Instruct NSSF to invest its funds in Government Jan 1996securities only until pension fund is established. onwards

6. Develop secondary markets in Treasury bills. 1996

7. Encourage establishment of a central depository 1996for Treasury bills by the private sector.

8. Facilitate an increase in the range of financial 1996instruments traded at the NSE.

9. Improve CBK's technical capacity to intervene in 1996domestic money and foreign exchange markets.

10. Institute restructuring of KNA June 1996

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Budgetary and PublicExpenditure Policies

Fiscal policy will be 1. Reduce the overall budget deficit (on a 1995/96-significantly tightened, comnitment basis but before grants) to 1.9 percent of 1997/98thereby allowing substantial GDP in 1995/96. The budget deficit will be reducedlowering of domestic further to 1.5 percent of GDP by 1997/98.interest rates to spureconomic activity.

Broadening of tax base and 2. Strengthen the management of the Kenya Revenue Continuousreduction of rates and Authority.efficient tax collection.Safeguard customs 3. Treasury to ensure receipt of ex post Immediatelyrevenue. reconciliation reports of PSI agencies. and continuous

Tighter expenditure 4. Sanction Accounting Officers in ministries that 1996-98control. violate established recurrent and development ceilings

without explicit, prior written (PS/Treasury) approval.

5. All expenditures to be included in the budget and 1996-1998approved by Parliament. No exceptions to be grantedto requirement for public tendering of all contractsexceeding K Sb 10 mnillion.

6. Local government expenditure processes to be 1996-1998strengthened and rationalised.

Rationalize public 7. Increase expenditure on O&M, especially on areas 1996-1998expenditure to maximize covering the basic functions of Government, byimpact on economic growth restraining personnel expenses, improving collectionand poverty reduction. of recurrent appropriations in aid, and eliminating

non-essential Government services as identified in thePublic Expenditure Review (PER).

8. Increase regular development expenditures from 1996-1998current level of roughly 7 percent of GDP.

9. Provide full annual funding allocation for all 1996/97'core" projects with at least 75 percent of the onwardsdevelopment budget for spending in core functionalareas.

10. Initiate detailed PER with World Bank support Feb., 1996

11. Introduce project approval authority in Ministry From 1997-98of Finance and Planning to ensure that Public budget cycleInvestment Programme (P[P) is consistent withavailability of budgetary resources.

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Civil Service Refonn

Undertake civil service 1. Reduce staff levels and their corresponding 1995/96 --reforms to increase the positions by a further 16,000 a year. New hiring to 1996/97efficiency of the service be restricted to no more than 1500 during January -and to improve public June 1996 and 3000 during July 1996 - June 1997.sector managementcapacity.

2. Finalise a rationalisation programme with new June 1997targets for civil service reductions for 1997/98 andbeyond.

June 19973. Introduce first phase of IPPD System for CivilService

4. Complete implementation of rationalisation plans Dec. 1996for Ministry of Health (MOH) and Ministry ofAgriculture, Livestock Development and Marketing(MOALDM).

5. Complete rationalisation of the Ministries of July 1997finance (MOF), Lands and Settlements (MOLS),Public Works and Housing (MOPWH), and LandReclamation, Regional and Water Development(MLRRWD).

6. Identify six (6) additional ministries for July 1996rationalisation.

7. Complete rationalisation of the six additional Dec. 1998ministries.

Public Enterprises

Achieve commercially 1. Exempt KAA, KPA, NCPB, KPTC and KPLC March 1996viable operation of strategic from provision of the State Corporations Act topublic enterprises with enhance managerial autonomy.Government andmanagement relationshipbased on arms-length,monitorable performance 2. Eliminate indirect subsidies to parastatals by: June 1996criteria. applying 2 percent guarantee fee to all new guarantees

provided by the Government and charging parastatalsmarket rents on use of land leased from Government.

3. Commence implementation of action plan to June 1996eliminate parastatal cross debts and parastatal debts toTreasury.

Complete divestiture of 4. Complete divestiture of remaining parastatals from Dec. 1997parastatals, while ensuring original list in two roughly equal tranches.that public confidence ismaintained by transparencyin the process ofprivatisation.

5. Complete divestiture proceedings for Nyayo Bus Dec. 1996Corporation.

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6. Institute divestiture procedures for Kenya Pipeline June 1996Corp, Kenya Petroleum Refineries.

7. Reduce Government's position in National Bank of June 1996Kenya to below 25 percent.

8. Reduce Govemment's position in Kenya Dec. 1996Commercial Bank to less than 50 percent.

9. Commence publication of: (i) regular quarterly March 1996reports on the implementation of the privatisationprocess; (ii) quarterly reports on use of privatisationproceeds; (iii) semi-annual audits on use ofprivatisation proceeds (June 1996; and (iv) salesnotices on completion of sales.

10. Adopt competitive bidding for all divestitures with March 1996fully transparent procedures.

External Policies

To achieve a sustainable 1. Progressively reduce import tariff with the aim of July 1997external current account achieving no more than 3 non-zero rates, and a lowerposition over the medium- trade-weighted average tariff.term.

2. Eliminate suspended duty on petroleum imports October 1996introduced in November 1994.

3. Abolish specific duties on cereal imports. Dec. 1996Present to Parliament anti-dumping legislationconsistent with WTO rules and impose anti-dumpingduties on cereal imports in accordance with the law.

Domestic MarketLiberalization

Ease restrictions on 1. Reduce number of national and local fees and 1996-1998business entry and licenses for new start-ups and mninimize restrictions onoperations. retail and wholesale trade under Trade Licensing Act.

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Agricultural Policies

To accelerate agriculture 1. Complete rationalisation programme for KARI. June 1997growth, increasesrnallholder productivity 2. Submit to Parliament revisions to the Cooperative March 1996and expand rural off-farm Act defining new and more independent role ofemployment as well as cooperatives in a liberalised agricultural sector.improve food security.

3. Implement actions to improve operations of KCC. March 1996

Establish competitive seed 4. Issue policy statement related to the liberalisation March 1996industry. of the seed market.

5. Establish financially self-sustaining breeder and 1996foundation seed units at KARl's research centers andimprove public plant quarantine facilities to enableimport and export of seed.

Ensure longer term 1. Issue letter of invitation for proposals for March 1996sustainability of liberalised provision of services to undertake commercialisationmaize market. of NCPB.

2. Experts in place to prepare and implement June 1996commercialisation program of NCPB.

3. Establish NCPB as a commercial entity, free to Dec. 1996make independent commercial decisions.

4. Establish modalities for maintenance of strategic Dec. 1996maize reserve stock and market interventions.

5. Implement agreed operating rules for NCPB 1996during transition period.

Environment

Government to focus on 1. Initiate the implementation of an action plan to June 1996implementation of the operationalise environmental policies articulated in theNEAP. Comprehensive Environmental Policy Sectoral Paper.

2. Present to Parliament necessary environmental Sept. 1996legislation, following broad-based consultations.

3. Present Forestry Policy Paper to Parliament March 1996

4. Present to Parliament legislative amendments to Sept. 1996Forest Act based on GOK approved Forest PolicyStatement.

5. Complete and begin implementation of Kenya June 1996Wildlife Service's land use policy study.

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6. Present to Parliament revised wildlife legislation. Dec. 1996

7. Establish Land Use Commnission. Dec. 1997

Infrastructure, Transportand Communications

Roads: 1. Adopt strategic plan for the road sector that June 1996includes defining activities to be financed by the road

Arrest deterioration of the maintenance levy to address the maintenance,road network rehabilitation and upgrading of roads, including

procedures for transparent management of the roadfund and mechanism to ensure that all the levy fundsare used effectively for road maintenance.

2. Provide budgetary allocations for at least 50 1996/97percent of funds required for routine and periodicroad maintenance.

3. Progressively raise budgetary allocation to finance 1996-2000full routine and periodic road maintenance by 2000.

Railways:

Restructure Kenya 1. Present policy paper on restructuring KR for Feb. 1996Railways to improve its Government approval.efficiency

2. Agree to performance contract between GOK and May 1996KR.

3. Separate service accounts and establish passenger March 1996service as an autonomous business.

4. Bring Gulf Marine Services to the point of sale. June 1996

5. KR to contract out full maintenance of August 1996locomotives to private contractors.

6. KR to reduce staff level to 14,500. Dec. 1996

Ports: 1. KPA to complete renegotiation of the two 10 year March 1996equipment maintenance contracts, limiting duration

Improve the efficiency of and establishing performance guarantees.Kenya Ports Authority

2. Sign contract for external management and March 1996operation of the container terminal.

3. Complete Performance Contract between GOK April 1996and KPA.

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Telecommunications: 1. Issue of telecommunications sector policy early in 1996The extension and efficient statement and privatisation programme.delivery oftelecommunications 2. Divest non-essential services (workshops, Sept. 1996services to remove buildings).constraint to more rapideconomic growth and the 3. Present legislation enabling the separation of Mar. 1996long term development of KPTC into three separate entities to Parliament.Kenya.

4. Establish three separate entities for posts, Dec. 1996telecommunications and a regulatory authority.

5. Sale to outside investors at least 30 percent of the Mar. 1997new telecommunications after separation.

6. Liberalise telecommunications services beginning 1995-1996with pay phones and VSAT terminals for privateoperators.

Water: 1. Prepare an operational plan and progressively 1996-1998implement declared government policy of charging

Improve management of urban consumers a water tariff to cover capitalwater resources. amortization and 0 & M costs while setting rural

tariffs to cover only O&M.

2. Present to Parliament amendments to Water Act to Dec. 1996address concerns regarding national water resourcesmanagement.

EnergyImplementation of a sound 1. Invite bids for investment by independent private March 1996

policy framework and an producers in power development.appropriate investment programto address the increasinglyserious shortfalls in power 2. Present appropriate legislation for separation of June 1996supply. regulatory and commercial functions to Parliament.

3. Complete action plan for reorganization of the power June 1996sector, including separation of accounts of power sectorcompanies.

4. Commence implementation of agreed performance Sept. 1996contracts for all power sector parastatals.

5. Adjust electricity tariffs to 75 percent of LRMC. June 1996

6. Agree with IDA on timing of adjustments of electricity Oct. 1996tariffs to cover LRMC.

7. Remove the temporary import tariff on petroleum Oct. 1996products.

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Human ResourceDevelopment

Population:Further reduction in population 1. Adopt plan for restructuring NCPD into a policy- June 1996growth rates via continued making, coordinating and advisory entity.emphasis on family planningservice delivery to achievehigher contraceptive use.

Health:Devote relatively more of 1. Limit the share of the MOH budget devoted to KNH to 1996/97the Ministry of Health budget to 12% (subject to adequate progress being made in reformpreventive and primary and rehabilitation of other facilities serving the Nairobiservices; increase efficiency and area).financial autonomy of Kenyatta June 1996National Hospital (KNH), and 2. Give full authority to KNH Board to determine chargesencourage facility-level at KNH, with the exception of TB, AIDs and childrenmanagement and under 5.decentralization.

3. Increase user charge collections to about 16 % of MOH 1997/98budget in 1996/97 and 18% in 1997/98 (with 25% of thisgoing to primary and preventive health care).

Implementation of major 4. Decentralise financial and administrative authority to 1996reform measures in the districts, beginning with a phased approach.health sector as indica-ted in the Health PolicyFramework.

5. Complete detailed audits of the NHIF for fiscal years from Dec. 19961991/92 through 1994/95.

6. Finalise and begin implementation of action plan to shift Dec. 1996part of the financial burden of curative care from the Ministryof Health budget to insurance schemes, including the NationalHospital Insurance Fund (NHIF) and private providers.

7. Present legislation to Parliament amending the NHIF Act to 1996/97allow coverage of the self-employed and workers in the JuaKali sector.

8. Finalise and begin implementation of action plan to July 1996consolidate and strengthen key health management informationsystems to support the policy making role of the Ministry ofHealth in budgeting, planning and management functions in thedistricts.

AIDS:

Finalise Policy Paper on AIDS. June 1996

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Nutrition:Reduction in infant 1. Finalise and begin implementation of an action plans for (i) Dec. 1996mortality, and improvement nutritional interventions with a view to shifting budgetin nutritional status of financing to more cost-effective programmes targeted atchildren as well as adult infants, pre-school children, and pregnant and disadvantagedwomen. women, with selected interventions for older children in poor

districts, the landless and ASAL areas; and (ii) communityfinancing of the school feeding programme.

Education Policies andReforms: 1. Make adequate budget allocation to expand means-tested 1996/97

The Government's key bursary programmes for secondary school students andobjectives during this PFP introduce a means-tested bursary programmes for primaryperiod are to increase schools, both especially targeted to girls from poorenrollment rates among girls households.in poor households, toincrease completion rates forprimary education, and to 2. Adopt policies to enable the private sector to participate 1996improve quality at all levels with JKF and KBL for publication of educational materialsof the system. The objectives prepared by KIE.to be met within the contextof a further rationalisation ofpublic expenditures, 3. Complete and commence implementation of plan of action June 1996improved management of to rationalize TSC functions and responsibilities.education (includingdecentralization of decisionmaking), and expanded 4. Revise Education Acts and regulations and prepare plan of Sept. 1996private sector participation. action to decentralise management and financial decision-

making, including determination of fees to councils and boardsof educational institutions up to university level.

5. Prepare and implement a plan of action for the HELB to June 1996increase progressively the role of the commercial banks in loanrecovery.

6. Present to Parliament legislation to harmonise the various June 1996acts relating to CHE and the public universities.

7. Prepare, through MRTT&T. a National Skills Training Dec. 1996Strategy.

Further Targeted PovertyInterventions

Provide support to 1. Finalise and begin implementation of drought management 1996population who cannot system which would improve the timeliness and targetwait until the growth accuracy of emergency food distribution response.acceleratesand who cannot readilyparticipate in it because ofspecial handicaps, such asgeographic isolation.

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2. Implement road construction and maintenance schemes to 1996-1998seek to generate employment for the poor at wages defined byexisting wage guidelines.

3. License more water kiosks, support community based 1996-1998initiatives in waste removal and sanitation, and encourageaccess to low cost housing through cooperative societies.

4. Design and commence implementation of a community- Sept. 1997based pilot water fund.

5. Finalise and approve ASAL strategy and action plan which Dec. 1996will include programmes designed to provide a safety net toenhance the economic integration of such population groupswith the rest of the economy, and to improve the humancapital base of the population.

Technical Assistance

Enhance functioning of 1. Develop plan of TA to improve the fumctioning of money 1996financial markets and and foreign exchange markets.institutional monitoringcapacity. 2. Place a resident advisor on:- 1996

(a) expenditure control(b) administering revenue authority

3. Seek TA to build a producer price index and construction 1996of a quarterly index on economic activity.

35

ANNEX B I of 2

KenyaMost Same regjon4ncone group Next

La'-'Single yer recent Su-4 higherUnit of edmate Saharan LOW- incone

Indicator mneaure 1970-75 1980-835 1989-94 Africa Incomw group

Priority Poverty Indicators

POVERTYUpper poverty line local curr. ..

Headcount index % of pop. .. 37Lower poverty line local curr.Headcount index % of pop. .. ..

GNP per capita USS 250 300 250 500 390 1,670

SHORT TERM INCOME INDICATORSUnskilled urban wages local curr. .. ..

Unskilled rual wages 136Rural terms of trade

Consumer price index 1987-100 26 89 424Lower income

Food"Urban .. 93 116Rural

SOCIAL INDICATORSPublic expenditure on basic social services % of GDP .. 7.1Gross enrollment ratiosPrimary % school age pop. 95 99 91 71 105 104

Male " 103 102 92 77 112 105Female 87 96 91 64 98 101

MortalityInfant mortality per thou. live births 98 66 59 92 58 36Under 5 mortality .. .. 90 161 101 47

ImmunizationMeasles % age group .. 63.0 36.0 51.4 86.2 77.4DPT .. 70.0 36.0 53.5 89.1 82.0

Child malnutrition (under-5) " .. 22.0 22.5 .. 38.2Life expectancyTotal years 51 56 59 52 63 67Female advantage 4.0 4.2 3.5 3.5 2.4 6.4

Total fertility rate births per woman 8.1 7.7 4.9 5.9 3.3 2.7Maternal mortality rate per 100,000 live births .. 510 646

Supplementary Poverty IndicatorsExpenditures on social security % of total gov't exp. 3.2 0.1 0.1Social security coverage % econ. active pop. .. ..

Access to safe water: total % of pop. 17.0 28.4Urban 100.0 61.0Rural 4.0 21.0

Access to health care

Population growth rate GNP per capita growth rate Dvlpetdaodb+ (average annual, percent) N (averge anual, percent) Developenta mon

6 L0 Life expectancy

T

4~~~~~~~~~~~~~~~~

-s O~~ ~ ~ ~ ~~~~~~~~NP GroTss2 ~~~~~~~~~~~~~~~~~~~~~~~~~~~per ~ ~primary

I ~~~~~~~ ~~ ~ ~~~~~~~~~capita > enrollment

1970-75 1980-85 1989.94 1970-75 t980-85 1989-94 JAcs osf ae

m Kenya Kenya

- Low-inc-ome Low-income

a. See the technical notes, p.387

. b. The development diamond, based on four key indicators, shows the avenge level of development in the countrycompared with its income group. See the introduction.

ANNEX B 2 of 2

KenyaMom Soam rere wcou group Net

Latestl.gkye. recenl Sub- ItiscrUnit of estiuc Sakrn LOW inca,o

Indicator nwasure 1970-75 198-5 1989-94 AVe. Incomv group

Resources and ExpendituresHUMAN RESOURCESPopulation (mre-1994) thousands 13,741 19,997 26,017 571,902 3,182,221 1,096,881Age dependency ratio ratio 1.12 1.14 ;.00 0.94 0.66 0.63Urban % of pop. 12.9 19.7 26.9 30.6 28.3 55.9Population growth rate annual % 3.7 3.5 2.6 2.8 1.7 1.3

Urban 7.8 7.3 5.7 4.9 3.2 2.7

Labor force thousands 6,618 9,401 12,923 254,250 1,590,533 488,647Agriculture % of labor force 84 St 80 65 67 36Industry 6 7 7 9 I4 26Female 46 46 46 41 39 40Labor participation ratesTotal % of pop. 48 47 50 44 50 45Female 22 22 23 37 41 36

NATURAL RESOURCESArea thou. sq. km 580.37 580.37 580.37 24,273.83 40,391.42 40,594.43Density pop. per sq. km 23.68 34.46 43.67 22.90 77.44 26.66Agricultural land %of land area 44.93 45.31 45.37 50.61 52.42 41.05Change in agricultural land annual % 1.22 0.80 0.00 0.01 0.16 -1.38Agricultural land under irrigation % 0.16 0.16 0.26 0.86 17.84 11.40Forests and woodland thou. sq. km .. 12.56 11.87 5,323.14 7,632.00 5,969.25Deforestation (net) % change, 1980-90 .. .. 0.56

INCOMEHousehold income

Share of top 20% of households % of income 60 .. 62Share of bottom 400/. of households 9 .. 10Share of bottom 20% of households 3 .. 3

EXPENDITUREFood % of GDP 28.3 23.4 ..

Staples 12.2 11.3 ..

Meat, fish, milk, cheese, eggs 7.3 6.7 ..

Cereal imports thou. metric tonnes 86 279 569 14,051 36,922 68,936Food aid in cereals " 2 340 287 5,079 8,516 5,771Food production per capita 1987- 100 104 96 78 102 115 102Fertilizer consumption kg/ha 1.7 4.2 4.7 5.3 58.5 46.3Share of agriculture in GDP % ofGDP 30.2 28.5 24.4 19.5 27.6 14.0Housing % of GDP 8.7 8.3 ..

Average household size persons per household 5.0 .. 4.9Urban 5.0 .. 3.1

Fixed investment: housing % of GDP 3.5 3.1 ..

Fuel and power % of GDP 1.7 1.7 ..

Energy consumption per capita kg of oil equiv. 114 101 107 251 373 1,602Households with electricity

Urban % of houeholds .. .. 37.0Rural .. .. 2.0

Transport and communication % of GDP 5.6 5.6 ..

Fixed investment: transport equipment 2.7 1.7 ..

Total road length thou. km 50 65 63

INVESTMENT IN HUMAN CAPITALHealthPopulation per physician persons 7,900 6,512 9,851 .. .. 3,064Population per nurse 2,525 942Population per hospital bed o00 590 602 1,316 1,034 592Oral rehydyration therapy (under-5) % of cases .. 69 37 38EducationGross enrollment ratiosSecondary % of school age pop. 13 21 25 24 48 63Female 9 16 23 23 42 62

Pupil-teacher ratio: primary pupils perteacher 33 34 31 40 39Pupil-teacher ratio: secondary 25 20 17 .. 20Pupils reaching grade 4 % of cohort 97 68 ..

Repeater rate: primary % of total enroll 5 13 ..

Illiteracy %of pop. (age 15+) .. 35 31 53 35Female % of fem. (age 15+) .. 47 30 54 46

Newspaper circulation per thou. pop. 10 14 14 12 .. 236

World Bank International Economics Department, April 1996

ANNEX C: Kenya at a GlanceSub-

POVERTY and SOCIAL Saharan Low-Kenya Africa income Development diamond'

Population mid-1994 (millions) 26.0 572 3,182 Life expectancyGNP per capita 1994 (US$) 260 500 390GNP 1994 (billions USS) 6.6 286 1.241

Average annual growth, 1990-94 1Population (%) 2.7 2.7 1.8 GNP G rossLabor force I%) 3.4 2.8 1.9 per primary

Most recent estimate (latestyearavailable sknce t9S9) capita enrollment

Poverty: headcount index (% of populatin) 37Urban population I% of total populakton) 28 31 28Life expectancy at birth (years) 59 52 63Infant mortality (per 1,000 Ihe birfths) 58 92 68Child malnutrition f% of children under 5) 23 .. 38 Access to safe waterAccess to safe water (% of popuJation) . .. 67Illiteracy (% of population age 15+) 22 .. 35Gross primary enrollment I% of school-age populathon) 91 71 105 -Kenya

Male 92 77 112 Low-incone groupFemale 91 64 98

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1976 1986 11994 19 : Economic ratlos,

GDP (billions USS) 3.3 6.1 6.9 7.9 Openness of economyGross domestic investment/GDP 18.1 26.0 20.9 22.9Exports of goods and non-factor services/GDP 29.8 25.3 38.6 37.0Gross domestic savings/GDP 13.5 24.9 23.7 21.7Gross national savings/GDP 9.2 22.6 20.4 18.7

Current account balancetGDP -8.6 -7.0 -0.4 -4.2 Savings InvestmentInterest payments/GDP 1.4 2.7 4.3Total debt/GDP 39.6 68.1 106.0Total debt servicelexports 14.9 39.2 33.3Present value of debt/GDP .. .. 75.1Present value of debt/exports .. .. 193.3 .. Indebtedness

1975-84 1985-95 1994 1995 1996-04(average annual growth) KenyaGDPmp 4.8 3.3 3.9 5.0 5.3 -Low-incomegroupGNP per capita 1.1 0.1 3.1 3.7 2.9Exports of goods and nfs 0.3 5.1 -1.3 7.5 3.5

STRUCTURE of the ECONOMY1976 1986 1994 1995 Growth rates oroutputand Investment(%)

(% Of GDP) 20Agriculture 34.2 32.5 29.1Industry 20.2 19.1 17.4 . 10

Manufacturing 12.0 11.7 105 . .Services 45.6 48.4 53.5 .1 s- 93 94 .5

Private consumption 68.2 57.6 61.5 61.6 .20General government consumption 18.3 17.5 14.7 16.8 PImports of goods and non-factor services 34.5 26.4 35.7 38.2 GDI GD

(average annual growth) 197684 1985-95 1994 1995 Growth rates of exports and imports I%)

Agriculture 3.8 1.7 3.1 45Industry 4.8 3.5 2.0 .. l

Manufacturing 6.3 4.3 1.9 . 30Services 6.0 4.3 3.3 15

Private consumption 3.3 3.6 10.3 0.7General government consumption 4.3 5.5 8.6 10.3 s0 94 9sGross domestic investment 1.8 0.4 18.7 10.9 .15Imports of goods and non-factor services -3.7 4.7 30.3 5.3 -Expons -ImportsGross national product 5.0 3.0 5.8 6.4

Note: 1995 data are preliminary estimates. Figures in italics are for years other than those specifled.The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond willbe incomplete.

Kenya

PRICES and GOVERNMENT FINANCE1976 1986 1994 1995 Infladon (%)

DomesfYc pilces(% change) soConsumer prices (Ave. Nairobi CPI) 19.1 10.7 28.8 1.7 40

Implicit GDP deflator 11.3 8.2 15.7 0.9 .020

Govemment finance (in fiscal years) 1 974/75 1984/85 1993/94 1994/95 ,0(% of GDP)Current revenue .. 21.6 29.2 31.7 oCurrent budget balance .. -0.8 -1.0 5.2 go DI 92 93 94 95Overall surplus/deficit (on commitment basis .. -7.5 -8.0 -2.6 -GDP def -CPI

and exci grants)

TRADE

(millions USS) 1976 1986 1994 1995 Export and Import levels (mill. USS)Total exports (fob) .. 940 1,482 1,783 3.000

Fuel 118 65 73 2,500

Coffee . 281 233 302 2.000

Manufactures 117 159 184 11..l1Total imports (cif) 1,486 2,044 2.606 ' . ..

Food 112 180 205 i __________________

Fuel and energy 461 332 329Capital goods . 340 503 578 5000F

Export price index (1987=100) .. 90 122 ..Import price index (1987=100) .. 81 77 .. 99 90 i 92 93 94 95Terms of trade (1987=100) .. 111 157 .. LExports mImports

BALANCE of PAYMENTS

(millions USS) 1975 1985 1994 1995 Current account balance to GDP ratio (%)Exports of goods and non-factor services 955 1,552 2,645 2,954 2Imports of goods and non-factor services 1,131 1,850 2,448 3,0533_Resource baiance -176 -297 197 -99 89 91 392 9 94 95

Net tactor income -93 -213 -374 -365Net current transfers -13 81 148 128 4-

Current account balance, -ebefore official transfers -281 -429 -30 -336 .F

Financing items (net) 244 397 134 203 -10.Changes in net reserves 38 33 -104 133 -12

Memo:

Reserves including gold (mill. USS) 173 417 625 453Conversion rate (/ocaV/USS) 7.3 16.4 56.1 51.0

EXTERNAL DEBT and RESOURCE FLOWS

1975 1985 1993 1994(esitions US$) Composition of total debt. 1994 (mill. US$)Total debt outstanding and disbursed 1,290 4,178 7,120 7,273 G A

IBRD 106 751 566 501 688 501IDA 81 408 1,631 1.789

Total debt service 151 621 627 888 F

IBRD 6 85 156 155 12769 BIDA 1 5 19 21 1789

Composition of net resource flowsOfficial grants 31 195 292 311Official creditors 87 135 142 66Private creditors 33 8 -37 -276Foreign direct investment 17 18 2 4 C

Portfolio equity 0 0 0 0 4E 06

World Bank program 2151

Commitments 219 6 92 64 A- IBRD E - BiiateralDisbursements 51 113 226 97 B - IDA D - Other multilateral F - PrvatePrincipal repayments 1 35 108 115 C - IMF G - Short-terrmNet flows 50 77 119 -18Interest payments 6 55 67 62Net transfers 44 22 52 -79

International Economics Department 5/10/96

Note: Government fiscal year (July to June).

ANNEX D

Kenya: Key Indicators, 1991 -2001

Actual Prel. ACL ProjectionIndicators 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Real Growth Rates (/:Gas Dometic Product (GDPmp) 1.4 -0.8 0 4 3.9 5 0 5.0 5.3 5.7 6 0 6 5 7 0

Real Per Capita Grovth Rates (%):Gross Dmestic Product (GDPmp) -1 4 -3.5 -2.3 1.2 2.4 2.4 2.8 34 3.6 42 47

Debt & Debt Senvce (LT+ST+WF):TotaDOD(LISSmill. 7455.0 6907.0 7120.0 7273 0 75187 7779.4 8031.8 81737 8178.4 8163.4 80479DOD/GDP (¶1) 92.7 86.9 129.0 106.0 94.2 958 89.6 82.3 759 69.5 626Debt Service (USS nmill.) 718.4 669.7 630.3 856 7 876.6 8604 819 7 785 3 862.2 841.9 813.9DebtServiceJExpots(/) 31.9 31.0 27.0 32.1 29.4 28.4 25.7 23.2 243 22.5 202DebtService/GDP(¶4) 8.9 84 114 12.5 11.0 106 91 79 8.0 72 63

Resource Baulce/GDP (%) -1.5 -0.5 4.1 2.9 -1 2 1.1 0.7 0.7 0 5 02 0 8Domestic Ssving/GDP (9/) 19.7 17 0 22.5 23.7 21.7 24.0 24.0 24.6 24 7 24 5 25 1Gross Investment/GMP() 21.3 17.4 18.4 20.9 22.9 229 23.3 239 242 243 243ICOR -22.1 51.2 54 4.0 42 4.4 41 3.9 39 36 34

ConunuerPriceIndex(.growth) I/ 19.6 27 3 46.0 28 8 17 50 50 50 50 50 50GDPDeflator(/ growth) 11.6 16.7 24.5 156 09 4.4 48 4.8 50 50 50

Expons (GNFS) Vol. Gr. Re (%) -0.6 0 6 2.0 -1 3 8.9 2.4 2.6 3 7 3 8 3 9 43Expos (GNFSYGDP (5/) 27 3 27.1 391 38 6 37 0 370 35 3 33 8 32 3 31 7 31 2

imports (GNFS) Vol. Gr. Rate (/.) -4.5 -2 3 -10.3 30 3 7 5 -4 0 4.3 5.4 6 2 66 6 0Imports (GNFSYGDP (5/) 28 8 27.6 34 9 35 7 38 2 35 9 34 6 33 1 32 3 31 5 30 4

BOP CurrentBaiance (USS mill.) -350.6 -325 2 4 3 -29 9 -336 4 -108.6 -109 2 -75 8 -78 9 -90 3 4 9Gros Reserve (months impots G&S) 0 8 0.9 2.3 2 6 1 6 2.2 2.8 3 3 3 3 3 3 3 5

Actual Est. ProjectionFical Dao in percenuae 2/ 1991/92 1992/93 1993/94 1994/95 1995/96 1996 1997 1998 1999 2000 2001CentrilGovtRevenues & Grants/GDP 26.4 25.6 30 3 331 35 6 34 2 32 5 318 312 304 29 5Cental GovttExp. inc net lending/GDP 295 356 37.2 343 360 347 32.9 32.2 31.2 302: 88Budget Def eKcl anmts/GDP 4 9 -11.4 -8 0 -2.6 -1 9 -I 8 -1.5 -1 4 -10 -08 -0 2Budge Def inclgun S/GDP -3 0 -10 0 -6 8 -1.2 -0 3 -0 5 -0 4 -0 4 0 0 0 1 0 7

1/ Avenge nnualNairobi Consumer Price Index excluding rent.2/ Hstorical fiscal data s in fiscal year beginnng July 1. Projections are in calendar year

ANN1EX E

Kenya - Balance of Payments(USS nillons at cuesnt prias)

Prelinm AcL Projoctions1991 1992 1993 1994 1995 1996 1997 1993 1999 2000 2001

Total exports of GNFS a/ 2249.7 2150.7 2319.7 2644.8 2954.3 3007.4 3162.3 3357.6 3532.3 3725.1 4005.7Merchandise (FOB) 1069.6 1003.7 1135.6 1431.6 1783.0 1733.0 1391.0 2043.1 2136.0 2344.3 2557.1Nonfactor services 1130.1 1142.0 1134.1 1163.2 1171.3 1219.4 1271.3 1314.5 1346.3 1330.2 1448.6

Total Imporu of GNFS 2371.9 2189.1 2091.6 2448.3 3053.3 2916.3 3095.3 3235.7 3479.9 3701.7 3904.2Merchandise (FOB) 1632.2 1603.4 1334.6 1761.7 2246.4 2120.1 2247.5 2400.3 2569.7 2757.3 2927.1Nonsfactor services 639.7 530.7 707.0 636.6 306.9 796.2 348.3 335.4 910.2 943.9 977.1

Resource balance -122.2 -33.4 223.1 196.5 -99.0 91.1 66.5 71.9 52.9 23.3 101.4

Net factor income -372.3 -355.0 -360.1 -373.3 -365.5 -323.3 -303.4 -233.0 -270.9 -255.7 -242.3Factor receipts 5.6 7.4 11.3 21.6 24.0 13.1 22.6 29.1 22.4 23.3 26.5Factor payments 377.9 362.4 371.4 395.4 339.5 346.9 331.0 312.1 293.3 279.0 269.3

Interest (scheduled) 349.0 327.5 231.9 313.3 313.0 293.3 233.3 273.7 272.3 254.2 237.5

Net private current transfers 143.9 63.2 136.4 147.4 123.1 129.1 132.7 135.2 139.1 142.0 146.3Current receipts 191.0 257.5 192.7 208.4 197.5 196.3 203.3 203.2 210.4 212.8 217.5Current paymenes 47.1 189.3 56.3 61.0 69.4 67.7 71.1 73.0 71.4 70.3 71.1

Current account balance -350.6 -325.2 4.3 -29.9 -336.4 -108.6 -109.2 -75.3 -73.9 -90.3 4.9

Official capital grants 204.1 214.2 94.0 30.3 90.4 137.0 136.2 134.0 133.0 133.0 133.0

Pnvate investment (net) 13.9 6.0 1.5 4.0 12.9 15.9 15.3 29.9 29.1 55.0 30.2Direct foreign investment 13.9 6.0 1.5 4.0 12.9 15.9 15.3 29.9 29.1 55.0 30.2

Net LT borrowing b/ 109.3 -130.7 59.7 -277.3 -43.6 99.0 153.3 75.5 5.5 -41.0 -70.6Disbursements cJ 563.2 336.4 439.5 252.2 475.3 567.3 529.6 472.3 529.1 497.3 460.9Repayments (scheduled) 453.9 467.1 429.8 529.5 524.4 504.3 46.7 436.6 523.5 533.3 531.5Net other LT inflows (gapfill) 0.0 0.0 0.0 0.0 0.0 36.0 90.4 39.4 0.0 0.0 0.0

Adjustments to scheduled debt service 223.0 313.0 49.0 0.0 6.1 -55.3 0.0 0.0 0.0 0.0 0.0

Debt service not paid 223.0 313.0 49.0 500.6 6.1 0.0 0.0 0.0 0.0 0.0 0.0Reduction in arrears/prepayments (-) 0.0 0.0 0.0 -500.6 0.0 -55.3 0.0 0.0 0.0 0.0 0.0

Other capital flows -295.3 -1.5 122.1 327.2 142.3 37.5 3.7 23.6 33.0 37.0 0.0Net short-term capital -273.0 21.0 73.0 -65.0 137.0 37.5 33.0 42.5 4.0 49.0 0.0Net capital flows n.c.i. d/ -15.0 -61.1 -176.2 5.7 5.3 0.0 -34.3 -13.9 -3.0 -12.0 0.0Errors and omtssions -7.3 33.6 225.3 336.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Change in net international reserves e/ 90.6 -75.3 -330.6 -104.3 132.3 -125.5 -204.3 -137.2 -126.7 -93.6 -147.6of which [AF Credit 3.5 -32.3 -30.4 18.5 -39.2 12.0 1.5 5.7 -66.4 -43.9 -44.9

MTemorandum itemsTotal gross reserves 134.0 132.3 474.6 625.3 453.3 591.6 793.6 991.9 1052.6 1097.7 1200.6Tot. gross res (in months' imporu G&S) U 0.8 0.9 2.3 2.6 1.6 2.2 2.3 3.3 3.3 3.3 3.5

Exchange ratesAnnual average (Ksh/USS) g/ 27.5 32.2 53.0 56.1 51.0 55.0 55.0 55.0 56.4 57.9 59.4At end year (Ksha/USS) 23.1 36.2 63.2 44.3 53.0 55.0 55.0 55.7 57.2 53.7 60.2

CurrentAccount Balance as%GDP 4.4 4.1 0.1 -0.4 4.2 -1.3 -1.2 43. 70. -0.43 0.0

ai Goods and nonfactor serviecs.bi 'L"T denotes "long-term."ci Histoncal data from Debt Reporting System (DRS).d/ "n.e.i." denotes "not clsewhere included".e '-' indicates increase in assets.

S -G & S" denotes "goods and services".g/ "Kshs" denotes "KCenya shillings".

Annex FPage I of 3

STATUS OF BANK GROUP OPERATIONS IN KENYA

STATEMENT OF BANK LOANS AND IDA CREDITSAs of March 31, 1996

(US$ millions)

(Less Cancellations)Fiscal Undis-

Credit No. Year Purpose Bank IDA bursed

Fifty-four (54) loans and sixty seven (67) credits closed, 985.87 1519.23of which SAL, SECAL or Program Loan/Credit: (60.90) (925.45)

Cr.19040 1988 Population III 12.09 4.90Cr.19730 1989 Geothermal Development 40.70 3.00Cr.20600 1990 Third Nairobi Water Supply 64.80 21.54Cr.20620 1990 Coffee Improvement II 46.80 15.76Cr.21110 1990 Population IV 35.00 30.27Cr.21980 1991 Forestry Development 19.90 10.45Cr.21990 1991 National Agric. Ext. ll 24.90 17.95Cr.22040 (S) 1991 Agric. Sector Adjustment 11 41.52 5.42Cr.23090 1992 Universities Investment 55.00 46.12Cr.23 100 1992 Health Rehabilitation 31.00 23.58Cr.23330 1992 Mombasa and Coastal Water II 43.20 25.35Cr.23340 1992 Wildlife Services 60.50 26.43Cr.24400 1993 Parastatal Reform TA 23.32 18.04Cr.24450 1993 Agric. Sect. Mngt. II 19.40 13.73Cr.24600 1993 Emergency Drought Recovery 20.00 9.09Cr.25960 1994 Micro & Small Enterprise 21.83 21.17Cr.26710 1995 Institutional Development 25.35 22.96Cr.26860 1995 Sexually Transmitted Infections 40.00 39.38Cr.27970 * 1996 ARID Lands 22.00 21.58Cr.281 10 * 1996 Urban Transport 115.00 112.41

Cr.28120 * 1996 Nairobi Mombasa Road 50.00 49257

Total 985.87 2331.54 538.70of which repaid 733.04 528

Total held by Bank & IDA 252.83 2271.66Amount sold 11.74of which repaid 11.74

Total undisbursed 538.70

(S) Indicates SAL/SECAL Loans and Credits.* Not yet effective.

Kenya Annex F

STATEMENT OF IFC INVESTMENTS Page 2 of 3As of March 31, 1996

(In Millions US Dollars)

Oriinal Gross Commitnents

UndisbIFC Held by Held by incl.

Fiscal Years Committed Obligor Type of Business IFC Loan Equity Ptpnt. Totals IFC Ptpnt. Ptpnt.

1967/73 a/ Kenya Hotel Properties, Ltd. Hotels and Tourism 4.20 0.72 0.96 5.88

1970/74/77/79/81/88/90/9 Panafrican Paper Mills (E.A.) Ltd. Timber, Pulp and Paper 52.26 5.79 3.97 62.02 24.87

1972 Tourism Promotion Services (Ken Hotels and Tourism 1.63 0.79 2.42 0.04

1976 Rift Valley Textiles Limited (RIV Textiles 6.87 2.77 1.30 10.94 2.06 0.39

1977 a/ X - Loans to small & medium scal Financial Services 2.00 2.00

1980/84 Development Finance Company o Financial Services 5.07 1.31 6.38 1.31

1981 a/ Kenya Commercial Finance Com Financial Services 5.00 5.00

1982 a/ Bamburi Portland Cement Compa Cement and Construction M 4.43 4.43

1982 Diamond Trust of Kenya Limited Financial Services 0.80 0.80 0.80

1982/87 Industrial Promotion Services (Ke Financial Services 1.17 1.17 1.17 0.62

1983 a/ Tetra Pak Converters Limited Timber, Pulp and Paper 2.17 0.37 2.54

1984/92 Leather Industries of Kenya Limit Manufacturing 2.12 0.63 2.75 0.63

1986 Equatorial Beach Properties Limit Hotels and Tourism 3.67 3.67 5.36

1986 a/ Madhupaper Intemational Limited Timber, Pulp and Paper 8.50 1.97 28.65 39.12

1986 a/ Oil Crop Development Limited Food and Agribusiness 9.65 1.40 11.05

1988/92 Ukulima Tools Ltd. Motor Vehicles and Components (includ 0.06 0.06 0.06

1989 Premier Foods Industries Ltd. Food and Agribusiness 0.11 0.11 0.11

1989 a/ PremierRefrigeration and Engine Food and Agribusiness 0.14 0.14

1990 Frigoken Ltd. Food and Agribusiness 0.06 0.06 0.06

1991 Malaa Industries Limited Food and Agribusiness 0.53 0.16 0.69 0.69

1991 Novaskins Tannery Ltd. Manufacturing 0.14 0.14 0.14

1992 a/ Integrated Wood Complex Limite Timber, Pulp and Paper 0.40 0.40

1992/93 Allpack Industries Limited Timber, Pulp and Paper 0.36 0.36 0.36

1993 Future Hotels Limited Hotels and Tourism 0.50 0.50 0.43

1994 Aura Garments Manufacturing Li Textiles 0.30 0.30 0.30

1994 East Africa Reinsurance Company Financial Services 1.10 1.10 1.10 0.30

1994 Mosi Limited Food and Agribusiness 0.29 0.29 0.23

1994 a/ Sawa Flora Limited Food and Agribusiness 0.32 0.19 0.51

1994 Waterfront Hospitality Limited Hotels and Tourism 1.00 1.00 1.00 1.00

1995 Capital Fish Kenya Limited Food and Agribusiness 0.65 0.65 0.65 0.65

1995 Intemational Hotels (Kenya) Limi Hotels and Tourism 6.00 6.00 6.00 4.80

1995 Island Farm Food and Agribusiness 0.50 0.50 0.50 0.50

1995 Kihingo Roses Limited Food and Agribusiness 0.52 0.52 0.49

1995 Vegpro Kenya Limited Food and Agribusiness 0.95 0.95 0.95 0.15

1996 Jacaranda Hotel Ltd. Hotels and Tourism 0.50 0.50 0.50 0.50

1996 Magadi Soda Company Limited Chemicals and Petrochemica 9.00 9.00 9.00 8.60

Total gross conimitments b/ 129.03 19.25 35.67 183.95

Less cancellations, terminations, repayment & sales 80.67 8.80 35.28 124.75

Total commitments now held c/ 48.36 10.45 0.39 59.20 58.81 0.39 17.12

Pending Commitments

AEF-K-REP BANK 1.00 1.00

Kenya Annex FSTATEMENT OF IFC INVESTMENTS Page 3 of 3

As of March31, 1996(In Millions US Dollars)

Original Gross Commitments

UndisbIFC Held by Held by incl.

Fiscal Years Committed Obligor Type of Business IFC Loan Equity Ptpnt. Totals IFC Ptpnt. Ptpnt.

AEF-KENFUNDS 0.17 0.17

AEF-KENFUNDS MGT 0.09 0.09

AEF-WAKATE CENTR 0.43 0.43 0.86

Panafrican Paper Mills (E.A.) Ltd. Timber, Pulp and Paper 15.00 15.00

Total pending commitments 15.43 1.69 17.12

Total commitments held and pending commitments 63.79 12.14 0.39 76.32

Total undisbursed commitments 16.20 0.92 17.12

a/ Investments which have been fully cancelled, termninated, written-off, sold, redeemed or repaid.

b/ Gross commitments consist of approved and signed projects.

c/ Held commitments consist of disbursed and undisbursed investements.

ANNEX G

KENYA

STRUCTURAL ADJUSTMENT CREDIT

Supervision Plan

IDA Supervision Input

1. Supervision of the SAC is expected to involve 27 staff weeks exclusively in FY97,as second tranche disbursement is anticipated by June 30, 1997. This will be in addition toIDA supervision of the on-going Parastatal and Civil Service Reform projects whichsupport implementation of the SAC. SAC Supervision will concentrate on the followingkey areas: assessment of the macroeconomic framework, compliance with agreed publicexpenditure allocations, implementation of the privatization program, progress inrestructuring of key parastatals, reduction in the size of the civil service and developmentand implementation of the ministerial rationalization plans. In addition, the supervisionwill focus on the supply side response to the program, as reflected in GDP growth andprivate investment activity, as well as its social impacts as reflected in school enrollmentrates and health indicators.

Organization and Timing of the Supervision Activities

2. The task manager will have the overall responsibility for supervising the SAC. Inthis regard, he will be assisted by the Economist in the Resident Mission, who will take thelead in supervising the public expenditure component of the SAC. As part of thesupervision effort, the task manager will call upon specialized expertise in key areas, e.g.,telecommunications (specifically the restructuring of KPTC), ports, and energy (therestructuring of the power sector). The Resident Mission will also play a central role insupervision, through the on-going monitoring of progress in the privatization and civilservice reform programs. The macroeconomic framework will be monitored inconjunction with the IMF, with whom a close collaboration will continue to be maintained.The Government's PFP/LDP will provide the framework for the SAC supervision. In thisregard, the first supervision mission is envisioned for August 1996 as part of thepreparations for the new PFP. At that time, IDA, together with the IMF, will review withthe Government progress in implementation of the reform program and define issueswhich would be addressed in the update of the PFP. A second supervision mission isenvisioned for six months later, to finalize discussions of the PFP. It is expected that thismission would be combined with a perforrnance review, prior to release of the secondtranche.

2

Borrower's Contribution to Supervision

3. The Ministry of Finance will have overall responsibility for management of theprogram, and for monitoring and reporting requirements as described in Article III of theCredit Agreement. As noted in Section III.C of the President's Report, a PresidentialEconomic Commission has been established under the Chairmanship of the Head of Stateand including representatives of the main implementing ministries as well as from theprivate sector and the press. This Commission is specifically charged with monitoring theimplementation of the PFP, which has been published in its entirety. The Commission willassess progress in program implementation against the benchmarks specified in the PFP,thus increasing ownership of the program and enhancing the chances of successfulcompliance.

IMAGING

Report No: P- 6837 KEType: PR