The Multinational Monitor

MAY 1989 - VOLUME 10 - NUMBER 5


Kenya's Challenge

Population Growth and the Economy

by Kauli Mwembe

Nairobi, Kenya --Like much of sub-Saharan Africa, Kenya faces severe economic problems. A rising external debt, a declining currency, a low per capita income and a troublesome international financial climate represent some of the most significant challenges to the country since its independence. Kenya's population growth rate, the highest in the world, intensifies these problems. Despite all this, many Kenyans boast that their economy is stronger than those in neighboring East African countries.

In the 25 years since independence, the Kenyan economy has generally performed well. Between 1964 and 1971 the economy grew at an average annual rate of 6.5 percent. During the same period, the newly developed industrial sector grew at a yearly rate of 8.2 percent, easily outstripping the dominant agricultural sector, even though the latter posted a healthy average annual growth rate of 4.2 percent. The result was a steadily improving per-capita income. As the economy expanded the central government rapidly expanded services.

Since 1971 the economy has grown more slowly, but has weathered a series of domestic and international obstacles remarkably well. The Gross Domestic Product (GDP) has risen by at least 3 percent annually except in 1984, when a serious drought limited economic expansion to less than 1 percent.

This impressive performance is now threatened by the mounting burden of foreign debt. According to the World Bank, Kenya's total debt as of 1987 was $5.9 billion, which represented 77 percent of its Gross National Product (GNP). The country's scheduled payments for 1989 total $614 million, more than a third of its export earnings. Nonetheless, Kenya's debt problems are less severe than those of its African neighbors and countries in Latin America. Neighboring Tanzania's smaller $4.3 billion debt in 1987 was 153 percent of its GNP, and its scheduled debt payments of $386 million this year will be about 86 percent of its export earnings. And, giant Nigeria's total debt of $28.7 billion was 123 percent of its 1987 GNP and its $5 billion in scheduled repayments this year may amount to almost two-thirds of its export earnings.

The Kenyan government has recognized that debt servicing is one of the most critical issues it must address if the country is to continue to progress economically. Domestic interest rates are climbing as more and more of the money supply goes to meet foreign debt repayments.

Kenya relies heavily on foreign investment to stimulate economic development. With mounting debt problems and the tightening of financial markets worldwide, net direct investment in the country has declined and with it, the economy's ability to meet the growing needs of its 22 million people. As a result, the government has increasingly sought multilateral and bilateral aid. All of the major players have been called in: Great Britain, the United States, West Germany, the Scandinavian countries, Japan, the World Bank, the International Monetary Fund and the European Investment Bank. But depending on foreign donors may force Kenya to toe the unpopular IMF austerity line. By emphasizing structural changes aimed at increasing exports that earn foreign currency, the IMF program neglects the needs of the country's population. The goal is to generate domestic savings that will reduce the need to seek outside capital for investment.

Historically, Kenya has welcomed foreign investment, but the government now talks about putting a greater share of the economy in local hands. Native Kenyan entrepreneurs express resentment at being unable to break out of the traditional agricultural sector and into the small business ranks. Much of the hostility to foreign control centers more on Asian entrepreneurs than on Western multinationals. Asians control much of the domestic manufacturing, distribution and retail industries. This situation is reviving efforts to rein in foreign control.

In the late 1960s a campaign to "Kenyanize" the economy achieved few of its desired results. Business owners of both Asian and European descent benefited from government schemes since they could claim Kenyan citizenship. Today, tactics have changed. The call now is for "indigenization" of the economy. Indigenization is aimed at native Kenyan entrepreneurs instead of foreigners who hold Kenyan passports.

Direct foreign investment in the economy is dominated by British companies, with U.S. firms in second place. Among the leading British multinationals in the country is Lonrho East Africa, which has interests in tourism, printing, transportation, office equipment and agriculture.

A number of U.S. companies have sold their Kenyan subsidiaries to local interests. Firestone East Africa Ltd., Union Carbide Ltd. and Fox Theater Ltd. were all sold to native Kenyans. But, these sales are more a consequence of economic conditions in the United States than a deteriorating investment climate in Kenya. According to the U.S. embassy in Nairobi, American firms currently own 73 subsidiaries in Kenya.

Overall, private investment has declined in Kenya recently, as it has in most of Africa. This trend has alarmed the Kenyan government. To try to counter the trend, the government established an Investment Promotion Center (IPC) to act as an intermediary between the key economic ministries of the government and private investors. The IPC's goal is to develop a business climate more conducive to investment by both foreigners and local investors. The problems are clear: lack of adequate incentives for investors, a limited domestic market and government red tape. The Center has tried to streamline bureaucratic procedures. In the past potential investors had to get the approval of several government offices before a proposal could be finalized. It was sometimes a six month process. The IPC has tried to whittle that down to a maximum of two months.

Despite the significant growth of Kenya's industrial sector, agriculture remains the foundation of the country's economic vitality, accounting for two-thirds of the GDP and providing a livelihood for 60 percent of the population. Through a land reform program, the government assists peasant farmers in forming cooperatives that qualify for low-interest loans, enabling them to buy land from absentee landlords or land that is considered unproductive. These cooperative groups subdivide their holdings for individual ownership. This land reform program is one of the most successful in the developing world.

Coffee and tea are Kenya's principal agricultural exports. Coffee was the country's leading foreign currency earner until 1987. In that year, world coffee prices declined and coffee exports fell to $277.7 million, down from $445.6 million in 1986. The international coffee market remained depressed in 1988 and export earnings are expected to hover around the 1987 level. To compensate for the loss, the government is attempting to triple coffee production over the next decade.

Kenya is the third largest tea exporter in the world, after India and Pakistan. In 1987, tea exports earned $181.5 million. World market prices for tea have worked against Kenya's attempts to increase its export earnings. From 1978 to 1987, the country increased its tea exports by almost 60 percent, but its earnings rose by only 11 percent.

Dropping world commodity prices have forced the country to double its efforts just to stay in place. The government has often ignored basic needs to earn foreign currency. Investments in the agricultural sector are devoted mainly to the increase of export sales rather than improving the Kenyan diet. About 83 percent of the country's agricultural production is exported, including 95 percent of its coffee.

Kenya is trying to reduce its heavy reliance on coffee and tea by developing other export crops. The most successful diversification to date has been in the sale of fresh fruits, vegetables and flowers. Exports of these truck-farm crops earned $100 million in 1987, up more than a third from the $73 million in sales the previous year. Other alternative crops being promoted are pyrethrum, used to make insecticides, and sisal fiber, but export sales of these products remain disappointing.

With the decline in coffee export earnings, tourism has become the country's top source of foreign-currency. Tourism earned Kenya $327.8 million in 1987, an 18 percent increase from the previous year. That trend appears to be continuing, with a 13 percent jump in earnings for the first quarter of 1988 over the first quarter of 1987. The number of tourists is also climbing, though not as rapidly as the government had hoped. A total of 663,000 tourists arrived in 1987; the Ministry of Tourism had set a target of 700,000. Still, the 1987 figure represents an 8 percent increase over the previous year and almost double the number of arrivals in 1983. Most of the visitors come from West Germany, followed by Great Britain, the United States, Switzerland, Italy, France and Scandinavia. One sign of the expected growth in this area is the interest shown by Lonrho. It recently purchased Nairobi's world-famous Norfolk Hotel, adding it to an already impressive list of hotel units managed by Lonrho Hotels Kenya.

Two potential threats to the booming tourist industry are the slaughter of wildlife, particularly elephants, by poachers, and the spreading AIDS epidemic. The government has taken steps to counter each threat, enacting tough anti-poaching measures to save the national elephant herd and revealing a new openness about the spread of AIDS in the country so that AIDS prevention programs can be launched.

The worst threat to the country's economic health, however, is its unrestricted population growth. Its growth rate of 3.8 percent a year is the highest in the world. If growth continues at this pace the current population of 22 million will double in 20 years. The government has initiated a range of programs and activities designed to reduce the growth rate. It published and distributed population policy guidelines and formed a National Council for Population and Development in 1982. The council is charged with the responsibility of coordinating population control efforts around the country. The message of both the council and the guidelines is that Kenya will not allow continued unrestricted population growth to produce a large segment of ill-fed, unhealthy, uneducated and unemployed people whose standard of living can only degenerate from one generation to the next.

As a result of the booming population growth, the country faces a serious unemployment problem, which the government admits will worsen over the next decade despite its best efforts. The government estimates the unemployment rate is now about 14 percent and acknowledges that it will rise to at least 20 percent by the year 2000. The problem is aggravated by a shortage of available arable land. More than two-thirds of the land is designated as arid or semi-arid land where agriculture is impossible without heavy investment in irrigation equipment. The government is doing what it can to train workers for other jobs; it spends about 38 percent of the national budget on education.

But this emphasis on education creates its own Catch-22. With additional large expenditures required for health and other basic services, the government is left with little money to invest in creating jobs in the economic sector for the people it has educated. The government must choose between educating its people for jobs that may not exist, or ensuring the creation of new jobs but not having skilled workers to fill them. This leaves Kenya dependent on foreign investment to make the equation work.

Kauli Mwembe has written on business for the Kenya Times. He is currently writing for the Daily Nation in Nairobi.

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