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Viewing cable 06NAIROBI285, Drought's Limited Impact on Kenya's Economy - So

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Reference ID Created Released Classification Origin
06NAIROBI285 2006-01-23 01:22 2011-08-25 00:00 UNCLASSIFIED Embassy Nairobi
VZCZCXYZ0007
RR RUEHWEB

DE RUEHNR #0285/01 0230122
ZNR UUUUU ZZH
R 230122Z JAN 06
FM AMEMBASSY NAIROBI
TO RUEHC/SECSTATE WASHDC 9096
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 2765
RUEHXR/RWANDA COLLECTIVE
RUEHLO/AMEMBASSY LONDON 1839
RUEHFR/AMEMBASSY PARIS 1823
UNCLAS NAIROBI 000285 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR AF/E 
USAID FOR AFR/EA 
LONDON AND PARIS FOR AFRICA WATCHERS 
 
E.O. 12958:  N/A 
TAGS: ECON EAID EAGR EIND EFIN PGOV KE
SUBJECT: Drought's Limited Impact on Kenya's Economy - So 
Far 
 
Ref: Nairobi 5276 
 
1. Summary: Although drought has put 2.5 - 3.5 million 
Kenyans in Northern, Northeastern and Coast provinces in 
desperate need of aid, Kenya's economy grew about 5% in 
2005, and the Central Bank of Kenya (CBK) forecasts stronger 
growth in 2006.  Unless the March-August long rainy season 
fails, tourism, agricultural exports, transportation, and 
other growth sectors are expected to continue to pull the 
economy forward.  The GOK is appealing for international 
contributions and for debt relief to help it defray an 
estimated KSh 17 billion ($233 million) in drought-related 
expenditures.  Inflation led by food prices may rise in the 
next few months, but strong tax revenues, donor support and 
fiscal discipline seem likely to keep the GOK budget and 
interest rates under control.  Failure of the long rains, 
however, would significantly cut growth in 2006.  End 
summary. 
 
Persistent Drought Plagues Certain Districts 
-------------------------------------------- 
 
2. As of January 18, the GOK has claimed that over 37 
districts are being impacted by East Africa's prolonged 
drought, with the most severely affected in North Eastern 
(Mandera, Wajir, Garissa), Eastern (Machakos, Kitui, 
Makueni, Kajiado) and parts of Coast (Kwale, Kilifi) 
provinces.  Some of the areas now experiencing severe 
drought and famine have had consecutive seasonal rainfall 
deficits since March 2004, culminating in failed crop 
harvests and badly degraded fodder for the livestock that 
pastoralist communities rely on.  The long rains across the 
country are expected in late March, but an official at the 
Regional Centre for Mapping of Resources for Development 
noted that severe droughts have often been followed by heavy 
rains and damaging floods. 
 
3. Some areas of Kenya, particularly in Western province, 
had a bumper harvest, and food is available elsewhere in the 
country.  On January 6, the GOK directed that all available 
maize in the country be purchased to meet the emergency 
feeding challenges now and in the coming months.  The 
National Cereals and Produce Board (NCPB) has about 218,000 
metric tons (MT) of maize, with 180,000 MT for strategic 
reserve, 30,000 MT for famine relief, and 8,000 MT for 
commercial purposes.  The main bottleneck has been 
transporting food from surplus areas to drought areas. 
Assistance to the drought areas is expected to total $200 
million through August of 2006, with $140 million for food 
and $60 million for transportation, water, livestock and 
other needs.  The Ministry of Agriculture estimated 2005/06 
maize production would rise 10% to 2.9 million tons of 
maize, assuming normal rains March-May. 
 
4. On January 9, Special Programs minister John Munyes said 
2.5 million persons are on the verge of starvation and/or 
are victims of the drought.  He estimated the total budget 
for aid at KSh28 billion ($385 million) or more. He said the 
Government would contribute Sh17 billion ($233 million), 
while NGOs and donors are being asked to contribute the 
rest.  The GOK's assistance to pastoralists would include 
buying and distributing hay worth Sh300 million, and KSh300 
million to buy their emaciated livestock.  According to 
Munyes' data, the GOK had already spent KSh1.3 billion on 
maize, KSh734 million on beans, KSh421 million of vegetable 
oil and KSh 337 million of milk powder, and allocated KSh 
143.5 million for transportation. On January 17, Munyes 
raised the number of affected persons to 3.5 million (donors 
have not yet verified that figure). 
 
Impact on Growth, Budget, Inflation and Interest Rates 
--------------------------------------------- ---------- 
 
5. The Central Bank of Kenya estimates that Kenya's GDP grew 
about 5% in 2005.  It has predicted 6% growth in 2006, but 
recently stated the drought would cause it to revise that 
forecast downward.  On January 18, investment firm Old 
Mutual Asset Managers (Omam) reduced its 2006 growth 
estimate from 6.2% to 5%.  AIG Global forecast 5.5% growth 
in 2006, given normal rainfall, but warned a failure of the 
next rains could drive 2006 growth as low as 3.2%. Nairobi 
Stock Exchange Chief Executive Chris Mwebesa warned that the 
drought's impact on agriculture could cut 2006 growth to the 
4.5-5.5% range, but that corporate earnings would still 
 
improve compared to 2005.  He expressed concern that Finance 
Minister Mwiaria's decision to slash funding for ministries 
to fund drought relief could slow economic growth. 
 
6. On paper, the GOK has the fiscal resources to buy food in 
Kenya and transport it to those in need.  However, Finance 
Minister David Mwiraria has recently requested that Kenya 
benefit from the G-8 debt relief scheme, in part to help the 
GOK pay for its drought-related commitments.  Mwiraria 
announced the GOK would stay within its budget and keep 
domestic borrowing at current levels, despite spending 
billions of shillings providing food to drought-stricken 
areas, buying livestock and other assistance, by cutting 
Ministry budgets.  The GOK has already borrowed KSh19.9 
billion in the first half of the 2005/6 fiscal year out of 
the 25.3 billion targeted for the whole year. 
 
7. In the first four months of FY05-06, the GOK accrued a 
fiscal deficit of KSh 15.3 billion, while the budget target 
for the FY was 22.5 billion, or 1.7% of GDP.  Some analysts 
predict the GOK might not need to borrow more to deal with 
the famine.  GOK tax revenue collection in the first half of 
FY 05/06 rose KSh14.4 billion, or 11.5% YOY.  However, much 
of that tax revenue is supposed to be refunded, so spending 
it now could cause future shortfalls, should the economy 
slow. 
 
8. Overall inflation from December 2004-2005 rose to 7.6%, 
and rose 6.04% MOM in November 2005 compared to the 3.72% 
MOM increase in October, reflecting rising prices of 
particularly food and drink, fuel and power, and personal 
goods and services.  Nairobi Stock Exchange Chief executive 
Chris Mwebesa warned that drought could cause inflation to 
rise to about 12% in 2006, but he expects short-term 
interest rates to stabilize at around 7-9% because higher- 
than-expected Government tax revenue and budgetary support 
provided by donors should reduce Government borrowing.  Both 
OMAM and AIG agree inflation will rise to 12 percent in the 
first quarter of 2006 due to food price increases, but 
thought inflation could decline if the long rains are timely 
and adequate.  Interest rates on the benchmark 91-day 
Treasury bill have risen slowly from 7.81% on November 10, 
before the drought became headline news, to 8.26 percent in 
mid-January.  AIG said any increase in GOK expenditure over 
KSh10 billion could push interest rates up. 
 
Impact on Exports and Balance of Payments 
------------------------------------------- 
 
9. Tea, horticultural exports led by flowers, and coffee 
remain Kenya's major export commodities.  Although 
production was not significantly affected before December, 
the persistent dryness is likely to have an impact soon, 
making the next rainy season critical.  The Kenya Tea Board 
estimates record production in 2005 of 328 million kilograms 
due to high rainfall in the key growing areas, and expects 
continued growth in 2006 given normal rains.  However, Kenya 
Tea Growers Association (KTGA) chairman Titus Korir 
disagrees.  He claims low rainfall since October have caused 
tea bushes to wilt in some areas, and predicted 2006 
production could fall 25-20%.  KTGA represents large growers 
who account for about 40% of Kenya's production. 
 
10. Kenya Flower Council chairman Erastus Mureithi said his 
members have not reported any decline in production so far, 
but they fear yields will drop if the drought persists. 
Sicily Kariuki, Fresh Produce Exporters Association of Kenya 
chief executive, anticipates a 20 - 30% decline in 
production of fruits and vegetables from December until the 
forecasted start of the March rains.  Horticulture exports 
were KSh33 billion in 2004, but the industry fears it might 
lose up to a third of its production this year, as rivers 
shrink and water levels in boreholes fall.  Mrs. Kariuki 
said small vegetable and fruits farmers who produce most of 
the vegetables and fruits for export, but do not have 
boreholes or reservoirs, are the hardest hit. 
 
11. Preliminary statistics from the Coffee Board of Kenya 
report Kenya exported 40,218 tons in the October 2003- 
September 2004 year, and that higher global prices lifted 
export earnings 15% to KSh8.2 billion ($111.7 million). 
Central and Western Kenya, where the bulk of coffee is 
grown, did not experience drought, but inadequate March-May 
rains would likely cut 2006 production below the GOK's 
 
forecast of 65,000 tons. 
 
12. To support poor pastoralists whose herds are dying, the 
GOK is buying cattle and livestock.  Some of the livestock 
is slaughtered and the meat distributed, some is sent to 
agricultural stations for future use in restocking herds 
after the drought, and others are being exported.  In mid- 
January, 1,000 head of cattle and 1,500 goats from areas 
less impacted by the drought and valued at KSh38 million are 
scheduled for export to Mauritius. 
 
13. It will not be clear until the second half of 2006 
whether Kenya will need to increase food imports, and what 
impact that might have on the balance of payments and the 
currently strong shilling.  In the first nine months of 
2005, Kenya's balance of payments recorded a $397 million 
surplus, as the rising surplus in the capital and financial 
account overcame deterioration in the current account. 
 
Impact on Wildlife, Tourism Limited, So Far 
------------------------------------------- 
 
14. Tourism is Kenya's other main export, and is a major 
employer as well.  Drought could affect the strong growth 
trend in the tourism sector if the animals disperse, die, or 
move away from parks and reserves in search of water.  Kenya 
Wildlife Service (KWS) spokeswoman Connie Maina recently 
told the press that wildlife, notably elephants, have left 
parks in search of water.  Maina said the most-affected 
sanctuaries are the Tsavo National Park, in southeastern 
Kenya and the highly popular Maasai Mara National Reserve in 
the southwest.  In the Maasai Mara, wardens say that between 
60 and 80 hippos have died as water levels in the Mara river 
drop.  Maina said the situation is still manageable, but the 
problem would become serious if the March rains fail. 
 
Students Have Difficulty Attending School 
------------------------------------------- 
 
15. Press reports claim that at least 10,000 students in 
North Eastern Province had not reported to class three days 
after the semester break ended, presumably because they 
moved with their family's livestock in search of water and 
pasture. About 20 schools were reported as deserted by 
teachers who had fled to towns such as Garissa, Wajir and 
Mandera because of famine. School principals told the press 
that the lack of kale, maize and beans was forcing them to 
find alternative foods for their boarding students. 
 
Prolonged Drought Would Threaten Power and Water Supplies 
--------------------------------------------- ------------ 
 
16.  Hydropower provides 80% of Kenya's electricity, and a 
prolonged drought could cause a repeat of the power 
rationing Kenya experienced in 2000.  Demand for power has 
grown steadily, and is expected to rise 9% in 2006.  KenGen 
Operations Chief Richard Nderitu assured the press there was 
enough water behind the dams to sustain normal generating 
levels for the first quarter of 2006, and that KenGen has 
diversified its sources by expanding geothermal power 
generation to 16% of production.  However, he also admitted 
the poor rains in 2005 had reduced the water flowing into 
the reservoirs.  The Federation of Kenya Employers estimates 
failure of the next rains would create a capacity shortfall 
of between 87MW and 117MW between March and June 2006.  Tea 
Growers Association Chairman Korir claimed the decline in 
river flow since October has already cut the power supply 
from large tea producers' own hydropower plants, forcing 
them to use more expensive diesel generators or to buy power 
from KenGen.  There have also been recent reports that 
Nairobi and other urban centers may face water rationing (as 
in 2000) if the long rains are not normal or better in 2006. 
 
17.  Comment:  Although human and animal deaths will likely 
continue for months, the current consensus is that Kenya can 
weather the drought without serious damage to the national 
economy because the most seriously impacted areas are not 
significant contributors to Kenya's GDP.  However, everyone 
will be watching for the onset of the long rainy season in 
late March.  A shortfall would lead to more serious 
consequences for the entire economy. 
 Bellamy