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IMPORTANT NOTICE THIS PRELIMINARY PROSPECTUS IS AVAILABLE ONLY: (1) TO QUALIFIED INSTITUTIONAL BUYERS (AS DEFINED BELOW) OR (2) OUTSIDE OF THE U.S. IMPORTANT: You must read the following before continuing. The following applies to the Preliminary Prospectus following this notice, and you are therefore advised to read this carefully before reading, accessing or making any other use of the Preliminary Prospectus. In accessing the Preliminary Prospectus, you agree to be bound by the following terms and conditions, including any modifications to them any time you receive any information from Kenya and the Managers (each as defined in the Preliminary Prospectus) as a result of such access. NOTHING IN THIS ELECTRONIC TRANSMISSION CONSTITUTES AN OFFER OF SECURITIES FOR SALE IN ANY JURISDICTION WHERE IT IS UNLAWFUL TO DO SO. THE SECURITIES DESCRIBED IN THIS PRELIMINARY PROSPECTUS HAVE NOT BEEN AND WILL NOT BE, REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTIONS OF THE U.S. AND MAY NOT BE OFFERED OR SOLD WITHIN THE U.S. (AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT (“REGULATION S”)), EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE OR LOCAL SECURITIES LAWS. THIS PRELIMINARY PROSPECTUS MAY ONLY BE COMMUNICATED TO PERSONS IN THE UNITED KINGDOM IN CIRCUMSTANCES WHERE SECTION 21(1) OF THE FINANCIAL SERVICES AND MARKETS ACT 2000 DOES NOT APPLY. THE FOLLOWING PRELIMINARY PROSPECTUS MAY NOT BE FORWARDED OR DISTRIBUTED TO ANY OTHER PERSON AND MAY NOT BE REPRODUCED IN ANY MANNER WHATSOEVER. ANY FORWARDING, DISTRIBUTION OR REPRODUCTION OF THIS DOCUMENT IN WHOLE OR IN PART IS UNAUTHORISED. FAILURE TO COMPLY WITH THIS DIRECTIVE MAY RESULT IN A VIOLATION OF THE SECURITIES ACT OR THE APPLICABLE LAWS OF OTHER JURISDICTIONS. IF YOU HAVE GAINED ACCESS TO THIS TRANSMISSION CONTRARY TO ANY OF THE FOREGOING RESTRICTIONS, YOU ARE NOT AUTHORISED AND WILL NOT BE ABLE TO PURCHASE ANY OF THE SECURITIES DESCRIBED THEREIN. Confirmation of your representation: In order to be eligible to view this Preliminary Prospectus or make an investment decision with respect to the securities, investors must be either: (1) Qualified Institutional Buyers (“QIBs”) (within the meaning of Rule 144A under the Securities Act) or (2) outside the United States. This Preliminary Prospectus is being sent at your request and by accepting the email and accessing this Preliminary Prospectus, you shall be deemed to have represented to us that (1) you and any customers you represent are either: (a) QIBs or (b) outside the U.S., (2) unless you are a QIB, the electronic mail address that you gave us and to which this e-mail has been delivered is not located in the U.S., (3) you are a person who is permitted under applicable law and regulation to receive this Preliminary Prospectus and (4) you consent to delivery of such Preliminary Prospectus by electronic transmission. You are reminded that this Preliminary Prospectus has been delivered to you on the basis that you are a person into whose possession this Preliminary Prospectus may be lawfully delivered in accordance with the laws of the jurisdiction in which you are located and you may not, nor are you authorised to, deliver this Preliminary Prospectus to any other person. This Preliminary Prospectus does not constitute, and may not be used in connection with, an offer or solicitation in any place where offers or solicitations are not permitted by law. If a jurisdiction requires that an offering of securities described herein be made by a licensed broker or dealer and any Manager or any affiliate of any Manager is a licensed broker or dealer in that jurisdiction, the offering shall be deemed to be made by such Manager or such affiliate on behalf of Kenya or holders of the applicable securities in such jurisdiction. This Preliminary Prospectus has been sent to you in an electronic form. You are reminded that documents transmitted via this medium may be altered or changed during the process of electronic transmission and consequently neither Kenya, the Managers nor any person who controls them nor any director, officer, employee nor agent of them or affiliate of any such person accepts any liability or responsibility whatsoever in respect of any difference between the Preliminary Prospectus distributed to you in electronic format and the hard copy version available to you on request from Kenya and the Managers. Please ensure that your copy is complete. You are responsible for protecting against viruses and other destructive items. Your use of this e-mail is at your own risk, and it is your responsibility to take precautions to ensure that it is free from viruses and other items of a destructive nature.

This Preliminary Prospectus is being distributed for information only and is subject to completion and amendment. This Preliminary Prospectus shall not, and is not intended to, constitute or contain an offer or invitation to sell or the solicitation of an offer to buy, and may not be used as, or in connection with, an offer or invitation to sell or a solicitation to buy any Notes. This Preliminary Prospectus is not a prospectus and constitutes an advertisement only. A final prospectus in relation to the Notes, when published, is expected to be available at the National Treasury of Kenya. Investors should not subscribe for any Notes except on the basis of the information in the final prospectus.

SUBJECT TO COMPLETION, DATED 3 JUNE 2014 PRELIMINARY PROSPECTUS

US$

THE REPUBLIC OF KENYA per cent. Notes due Issue Price: per cent.

The US$ per cent. Notes due (the “Notes”) to be issued by the Republic of Kenya, acting through the National Treasury (the “Issuer” or “Kenya”) are direct, unconditional and unsecured obligations of Kenya. The Notes will bear interest from (and including) 2014 at the rate of per cent. per annum payable semi-annually in arrear on and , each year commencing on 2014. The Notes will mature on (the “Maturity Date”). Payments on the Notes will be made in US dollars without deduction for or on account of taxes imposed or levied by Kenya to the extent described under “Terms and Conditions of the Notes—Taxation”. The Notes have not been and will not be registered under the U.S. Securities Act of 1933, as amended (the “Securities Act”), or with any securities regulatory authority of any State or other jurisdiction of the United States, and may not be offered or sold within the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. For a summary of certain restrictions on resale, see “Transfer Restrictions” and “Plan of Distribution”. The Notes will be offered and sold outside the United States in reliance on Regulation S under the Securities Act (“Regulation S”) and within the United States to qualified institutional buyers (“QIBs”) within the meaning of Rule 144A under the Securities Act (“Rule 144A”). Prospective purchasers are hereby notified that sellers of the Notes may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A. An investment in the Notes involves a high degree of risk. Prospective investors should have regard to the factors described under the heading “Risk Factors” on page 9. This Prospectus has been approved by the Central Bank of Ireland (the “Central Bank”), as competent authority under Directive 2003/71/ EC, as amended (including the amendments made by Directive 2010/73/EU) (the “Prospectus Directive”). This Prospectus constitutes a prospectus for the purposes of the Prospectus Directive. The Central Bank only approves this Prospectus as meeting the requirements imposed under Irish and EU law pursuant to the Prospectus Directive. Such approval relates only to Notes that are to be admitted to trading on the regulated market of the Irish Stock Exchange (the “Main Securities Market”) or on another regulated market for the purposes of Directive 2004/39/EC (the “Markets in Financial Instruments Directive”) or that are to be offered to the public in any member state of the European Economic Area (“EU Member States”). Application has been made to the Irish Stock Exchange for the Notes to be admitted to its official list (the “Official List”) and trading on the Main Securities Market. In addition, the Issuer intends to make an application, after the Notes are delivered against payment, for the Notes to be listed on the Fixed Income Securities Market Segment of the Nairobi Securities Exchange. However, the Notes will not be traded on the Fixed Income Securities Market Segment of the Nairobi Securities Exchange, unless appropriate protocols are put in place after the Notes are delivered against payment. The Notes are expected to be rated B+(EXP) by Fitch Ratings Ltd (“Fitch”) and B+ by Standard & Poor’s Credit Market Services Europe Limited (“S&P”). All references to Fitch and S&P in this Prospectus are to the entities as defined in this paragraph. Fitch is established in the European Union and registered under Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies (the “CRA Regulation”). A rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating organisation. The Notes will be offered and sold in registered form in denominations of US$200,000 or any amount in excess thereof which is an integral multiple of US$1,000. Notes that are offered and sold in reliance on Regulation S (the “Unrestricted Notes”) will be represented by beneficial interests in a global Note (the “Unrestricted Global Note”) in registered form without interest coupons attached, which will be registered in the name of Citivic Nominees Limited, as nominee for, and will be deposited on or about the Closing Date with, Citibank, N.A., London, as common depositary for Euroclear Bank S.A./N.V. (“Euroclear”) and Clearstream Banking, société anonyme (“Clearstream, Luxembourg”). Notes that are offered and sold in reliance on Rule 144A (the “Restricted Notes”) will be represented by beneficial interests in a global Note (the “Restricted Global Note” and, together with the Unrestricted Global Note, the “Global Notes”) in registered form without interest coupons attached, which will be deposited on or about the Closing Date with Citibank, N.A., London, as custodian (the “Custodian”) for, and registered in the name of Cede & Co. as nominee for, The Depository Trust Company (“DTC”). Interests in the Restricted Global Note will be subject to certain restrictions on transfer. Beneficial interests in the Global Notes will be shown on, and transfers thereof will be effected only through, records maintained by DTC, Euroclear, Clearstream, Luxembourg and their respective participants. Except in the limited circumstances as described herein, certificates will not be issued in exchange for beneficial interests in the Global Notes.

BARCLAYS

Joint Lead Managers J.P. MORGAN QNB CAPITAL Co-Manager DYER & BLAIR Prospectus Dated

2014

STANDARD BANK

RESPONSIBILITY STATEMENT Kenya accepts responsibility for the information contained in this Prospectus and declares that, having taken all reasonable care to ensure that such is the case, the information contained in this Prospectus is, to the best of its knowledge, in accordance with the facts and contains no omission likely to affect its import. To the best of the knowledge and belief of Kenya, the information contained in this Prospectus is true and accurate in every material respect and is not misleading in any material respect, and this Prospectus, does not omit to state any material fact necessary to make such information not misleading. The opinions, assumptions, intentions, projections and forecasts expressed in this Prospectus with regard to Kenya are honestly held by Kenya, have been reached after considering all relevant circumstances and are based on reasonable assumptions.

IMPORTANT NOTICE No person has been authorised to give any information or to make any representation other than those contained in this Prospectus in connection with the offering of the Notes and, if given or made, such information or representation must not be relied upon as having been authorised by Kenya or the managers listed in the section entitled “Plan of Distribution” (the “Managers”). Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, constitute a representation or create any implication that there has been no change in the affairs of Kenya since the date hereof. This Prospectus may only be used for the purpose for which it has been published. This Prospectus does not constitute an offer of, or an invitation by, or on behalf of, Kenya or the Managers to subscribe for, or purchase, any of the Notes in any jurisdiction in which such offer or invitation is unlawful. This Prospectus does not constitute an offer, and may not be used for the purpose of an offer to, or a solicitation by, anyone in any jurisdiction or in any circumstances in which such an offer or solicitation is not authorised or is unlawful. The distribution of this Prospectus and the offering, sale and delivery of the Notes in certain jurisdictions may be restricted by law. Persons into whose possession this Prospectus comes are required by Kenya and the Managers to inform themselves about and to observe any such restrictions. This Prospectus is not intended to provide the basis of any credit or other evaluation and should not be considered as a recommendation by Kenya or the Managers that any recipient of this Prospectus should purchase any of the Notes. Each investor contemplating purchasing Notes should make its own independent investigation of the financial condition and affairs, and its own appraisal of the creditworthiness, of Kenya. The Managers have not separately verified the information contained in this Prospectus. Accordingly no representation, warranty or undertaking, express or implied, is made and no responsibility or liability is accepted by the Managers or any of them as to the accuracy or completeness of the information contained in this Prospectus or any other information provided by Kenya in connection with the Notes or their distribution. For a description of certain restrictions on offers, sales and deliveries of the Notes, see “Plan of Distribution”. The Republic of Kenya is a sovereign state. Consequently, it may be difficult for investors to obtain or enforce judgments or arbitral awards. See “Risk Factors—Kenya is a sovereign state and accordingly it may be difficult to obtain or enforce judgments or arbitral awards”. The Notes have not been approved or disapproved by the U.S. Securities and Exchange Commission, any State securities commission in the United States or any other U.S. regulatory authority, nor have any of the foregoing authorities passed upon or endorsed the merits of the offering of the Notes or the accuracy or adequacy of this Prospectus. Any representation to the contrary is a criminal offence in the United States. IN CONNECTION WITH THE ISSUE OF THE NOTES, J.P. MORGAN SECURITIES PLC AS STABILISING MANAGER (THE “STABILISING MANAGER”) (OR PERSONS ACTING ON BEHALF OF THE STABILISING MANAGER) MAY OVERALLOT NOTES OR EFFECT TRANSACTIONS WITH A VIEW TO SUPPORTING THE MARKET PRICE OF THE NOTES AT A LEVEL HIGHER THAN THAT WHICH MIGHT OTHERWISE PREVAIL. HOWEVER, THERE IS NO ASSURANCE THAT THE STABILISING MANAGER (OR PERSONS ACTING ON BEHALF OF THE STABILISING MANAGER) WILL i

UNDERTAKE STABILISATION ACTION. ANY STABILISATION ACTION MAY BEGIN ON OR AFTER THE DATE ON WHICH ADEQUATE PUBLIC DISCLOSURE OF THE TERMS OF THE OFFER OF THE NOTES IS MADE AND, IF BEGUN, MAY BE ENDED AT ANY TIME, BUT IT MUST END NO LATER THAN THE EARLIER OF 30 DAYS AFTER THE ISSUE DATE OF THE NOTES AND 60 DAYS AFTER THE DATE OF THE ALLOTMENT OF THE NOTES. ANY STABILISATION ACTION OR OVER ALLOTMENT SHALL BE CONDUCTED BY THE STABILISING MANAGER (OR PERSONS ACTING ON BEHALF OF THE STABILISING MANAGER) IN ACCORDANCE WITH ALL APPLICABLE LAWS AND RULES. This Prospectus may not be copied or reproduced in whole or in part nor may it be distributed or any of its contents disclosed to anyone other than the prospective investors to whom it is originally submitted. Each purchaser or holder of interests in the Notes will be deemed, by its acceptance or purchase of any such Notes, to have made certain representations and agreements as set out in “Transfer Restrictions”. Notwithstanding anything herein to the contrary, from the commencement of discussions with respect to the transaction contemplated by this Prospectus, all persons may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of the transaction described herein and all materials of any kind (including opinions and other tax analyses) that are provided to such persons relating to such tax treatment and tax structure, except to the extent that any such disclosure could reasonably be expected to cause this transaction not to be in compliance with securities laws. For the purposes of this paragraph, the tax treatment of this transaction is the purported or claimed U.S. federal income tax treatment of this transaction and the tax structure of this transaction is any fact that may be relevant to understanding the purported or claimed U.S. federal income tax treatment of this transaction.

NOTICE TO NEW HAMPSHIRE RESIDENTS NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENCE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF NEW HAMPSHIRE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE OF NEW HAMPSHIRE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT, ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.

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PRESENTATION OF ECONOMIC AND OTHER INFORMATION Annual information presented in this Prospectus is based upon a fiscal year commencing on 1 July in one year and ending on 30 June in the subsequent year, unless otherwise indicated. While the fiscal year ends on 30 June of each year, certain information in this prospectus provided by the Kenya National Bureau of Statistics, including GDP and GDP sector information, are provided as of 31 December of each year. Certain figures included in this Prospectus have been subject to rounding adjustments; accordingly, figures shown for the same category presented in different tables may vary slightly and figures shown as totals in certain tables may not be the sum of the figures which precede them. Statistical information reported herein has been derived from official publications of, and information supplied by, a number of agencies and ministries of Kenya, including the National Treasury, the Central Bank of Kenya and the Kenya National Bureau of Statistics. Some statistical information has also been derived from information publicly made available by third parties such as the International Monetary Fund (the “IMF”) and the World Bank (the “World Bank”). Where such third party information has been so sourced, the source is stated where it appears in this Prospectus. Kenya confirms that it has accurately reproduced such information and that, so far as it is aware and is able to ascertain from information published by third parties, it has omitted no facts which would render the reproduced information inaccurate or misleading. As used in this prospectus, the term “central government” is interchangeable and means the same as “national government”. The Kenya National Bureau of Statistics initiated the process of rebasing and revision of the national account statistics in 2010 and is set to conclude the process by the end of 2014. In this revision, there will be a change in the base year of the national account statistics from 2001 to 2009. The revision will also include revisions to the annual and quarterly national account statistics for the period of 2006 to 2013 and will include the development of supply and use tables to give detailed information on the production processes, the interdependences in production, the use of goods and services and the generation of income in production. Figures that undergo such rebasing may include material revisions from the information provided in this prospectus, including information related to GDP. The Kenya National Bureau of Statistics’ initial estimates for the revised GDP estimate for 2009 is KES486.6 billion higher than previous estimates, this represents a 20.6 per cent. increase in the level of GDP previously reported. Similar statistics may be obtainable from other sources, but the date of publication, underlying assumptions, methodology and, consequently, the resulting data may vary from source to source. In addition, statistics and data published by one ministry or agency may differ from similar statistics and data produced by other agencies or ministries due to differing underlying assumptions, methodology or timing of when such data is reproduced. Certain historical statistical information contained herein is provisional or otherwise based on estimates that Kenya and/or its agencies believe to be based on reasonable assumptions. Kenya’s official financial and economic statistics are subject to internal review as part of a regular confirmation process. Accordingly, the financial and economic information set out in this Prospectus may be subsequently adjusted or revised and may differ from previously published financial and economic information. While Kenya does not expect such revisions to be material, no assurance can be given that material changes will not be made. References to any individual period such as 2010/11 and so on are references to a fiscal year commencing on 1 July in one year and ending on 30 June in the subsequent year. References to any individual period as 2010 and so on are references to a calendar year commencing on 1 January and ending on 31 December in the same year. All references in this document to “Kenyan shilling”, “shilling” and “KES” are to the currency of the Republic of Kenya; to “US dollars”, “US$” and “$” are to the currency of the United States of America; and to “euro” are to the currency introduced at the start of the third stage of European economic and monetary union pursuant to the Treaty establishing the European Community, as amended by the Treaty of European Union. For ease of information, certain financial information relating to the Republic of Kenya included herein is presented as translated into US dollars at the US dollar/KES rates of exchange deemed appropriate by Kenya. Unless otherwise specified, such rates were applicable as of the end of such specified period(s). Such translations should not be construed as a representation that the amounts in question have been, could have been or could be converted into US dollars at that or any other rate. References to “SDR” are to the Special Drawing Right, a unit of account having the meaning ascribed to it from time to time by the Rules and Regulations of the IMF. References in this document to “billions” are to thousands of millions. References to the “government” are to the government of Kenya.

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FORWARD-LOOKING STATEMENTS This Prospectus includes forward-looking statements, which involve risks and uncertainties. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes”, “estimates”, “anticipates”, “expects”, “intends”, “may”, “will” or “should” or, in each case, their negative, or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this Prospectus and include statements regarding the government’s intentions, beliefs or current expectations concerning, among other things, the general political and economic conditions in Kenya. All forward-looking statements are based upon information available to Kenya on the date of this Prospectus, and Kenya undertakes no obligation to update any of these in light of new information or future events. Kenya derives many of its forward-looking statements from its budgets and forecasts, which are based upon many detailed assumptions. While Kenya believes that its assumptions are reasonable, it cautions that it is very difficult to predict the impact of known factors, and, of course, it is impossible to anticipate all factors that could affect Kenya’s actual results. These factors include, but are not limited to: External factors, such as: •

the impact of changes in international oil prices;



the impact of changes in other international commodity prices including tea, coffee and horticultural products;



interest rates in financial markets outside Kenya;



the impact of changes in the credit rating of Kenya;



economic conditions in Kenya’s major export markets;



the impact of possible future regional instability;



changes in the amount of remittances from non-residents; and



the decisions of international financial institutions and creditor countries regarding the amount and terms of their financial assistance to Kenya;

as well as internal factors, such as: •

general economic, political and business conditions in Kenya;



the impact of possible future social and political unrest;



present and future exchange rates of the Kenyan currency;



the level of foreign currency reserves;



the impact of natural disasters, health epidemics and agricultural blights;



the level of domestic and external public debt;



domestic inflation;



the ability of Kenya to implement important economic reforms;



the ability of Kenya to upgrade its infrastructure;



the levels of foreign direct and portfolio investment; and



the levels of domestic interest rates in Kenya.

iv

ENFORCEMENT OF CIVIL LIABILITIES Kenya is a sovereign state, and substantially all of the assets of Kenya are located in Kenya. Consequently, it may be difficult for investors to obtain or enforce judgments of courts and/or arbitral tribunals in England, the United States or anywhere else against Kenya. Kenya has not submitted to the jurisdiction of any courts, but instead has agreed to resolve disputes by arbitration in accordance with rules and procedures of the London Court of International Arbitration (“LCIA”). Kenya has waived certain immunities for the purpose of arbitration of disputes arising out of or in connection with the Notes. Kenya has not, however, waived immunity from execution or attachment in respect of certain of its assets. See “Terms and Conditions of the Notes—Governing Law, Arbitration and Enforcement—Consent to Enforcement and Waiver of Immunity”. Kenya is a party to the United Nations (New York) Convention on Recognition and Enforcement of Foreign Arbitral Awards. Kenya’s waiver of immunity is, however, limited. Such a waiver constitutes only a limited and specific waiver for the purposes of the Notes, and under no circumstances shall it be interpreted as a general waiver by Kenya or a waiver with respect to proceedings unrelated to the Notes. Arbitral awards obtained outside Kenya may be enforced in Kenya under the Arbitration Act 1995. Leave to enforce the award as a decree of the High Court must be obtained. Where an order is made against the government for the payment of money or costs, a further application must follow for a certificate of order against the government and must be served on the Attorney General. The amount can then be paid out of appropriations provided in the national budget. Aside from this procedure, no execution, attachment or process may be issued by any Kenyan court for enforcing payment by the government of any money or costs and no person shall be individually liable under any order for payment by the government, any government department or any officer of the government in relation to such money or costs. Injunctive relief and orders for specific performance may not be made by Kenyan courts against the government. Because it may be difficult to obtain or enforce judgments in Kenya, third parties may seek to attach assets of the Issuer abroad, including funds intended for use in payments for other third parties.

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EXCHANGE RATES The currency of Kenya is the Kenyan shilling. The following table sets forth, for the periods indicated, the high, low, average and year end official rates set by the Central Bank of Kenya, expressed in US dollars. These translations should not be construed as representations that KES amounts actually represent such US dollar amounts or could be converted into US dollars at the rate indicated as of any of the dates mentioned in this Prospectus at all. Average

2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 January . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . June . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . July . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 January . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

High Low (KES:US$1.00)

Period End

88.87 84.52

105.96 88.44

80.74 82.27

85.07 86.03

86.90 87.45 85.82 84.19 84.15 85.49 86.86 87.49 87.41 85.31 86.10 86.31

87.61 87.63 86.58 84.99 85.29 86.06 87.41 87.70 87.58 86.79 86.99 86.72

86.08 86.24 85.32 83.77 83.72 84.88 85.83 87.37 86.65 84.72 85.27 85.72

87.61 86.24 85.64 83.82 85.12 86.01 87.28 87.60 86.65 85.15 86.99 86.31

86.36 86.28 86.49 86.71 87.41

86.96 86.58 86.58 87.09 87.86

85.46 86.06 86.18 84.40 86.87

85.88 86.23 86.44 86.87 87.78

Source: Central Bank of Kenya The US dollar versus KES exchange rate as set by the Central Bank of Kenya on 3 June 2014 was US$0.013974 per 1 KES.

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TABLE OF CONTENTS Page

PRESENTATION OF ECONOMIC AND OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ENFORCEMENT OF CIVIL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EXCHANGE RATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . REPUBLIC OF KENYA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . THE ECONOMY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BALANCE OF PAYMENTS AND FOREIGN TRADE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . MONETARY AND FINANCIAL SYSTEM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PUBLIC FINANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PUBLIC DEBT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TERMS AND CONDITIONS OF THE NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . THE GLOBAL NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CLEARING AND SETTLEMENT ARRANGEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TRANSFER RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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iii iv v vi 1 9 22 23 36 61 75 86 95 99 108 110 114 117 123 127

OVERVIEW This Overview must be read as an introduction to this Prospectus. Any decision to invest in the Notes should be based on a consideration of this Prospectus as a whole. This Overview does not purport to be complete and is qualified in its entirety by the more detailed information elsewhere in the Prospectus. Prospective investors should also carefully consider the information set forth in the “Risk Factors” below prior to making any investment decision. Capitalised terms not otherwise defined in this Overview have the same meaning as elsewhere in this Prospectus. See “The Republic of Kenya” and “The Economy”, amongst others, for a more detailed description of the Issuer. References in this Overview to a “Condition” are to the numbered condition corresponding thereto set out in the Terms and Conditions of the Notes. The Republic of Kenya General Kenya occupies a land area of 581,309 square kilometres. Kenya lies on the equator and is bordered by the Indian Ocean in the south east, Tanzania to the south, Uganda to the west, South Sudan to the north west, Ethiopia to the north and Somalia to the north east. Kenya has a population of approximately 44 million. Nairobi is the largest city and the capital of the country. In August 2010, Kenyans overwhelmingly adopted a new constitution (the “Constitution”) in a national referendum. The Constitution introduced additional checks and balances to executive power, including a bill of rights for Kenyan citizens, and significant devolution of power and resources to 47 semi-autonomous newly created counties, each headed by an elected Governor. It also eliminated the position of Prime Minister following the first presidential election under the Constitution, which occurred on 4 March 2013. Uhuru Kenyatta, the son of founding president Jomo Kenyatta, won the March elections in the first round by a close margin and was sworn into office on 9 April 2013. Economy From 2011 to 2013, Kenya’s economy exhibited a positive growth trend. Kenya’s real GDP increased by 4.4 per cent. in 2011, 4.6 per cent. in 2012 and 4.7 per cent. in 2013. Kenya’s capital and financial account registered surpluses of US$2,957.2 million in 2010/11, US$4,150.4 million in 2011/12 and US$3,788.6 million in 2012/13, while its current account registered deficits of US$2,656.1 million in 2010/11, US$3,342.2 million in 2011/12 and US$3,696.5 million in 2012/13. Between 2010/11 and 2012/13, gross official international reserves grew every year. Gross official international reserves were US$4,120.5 million in 2010/11, US$5,241.4 million in 2011/12 and US$5,522.0 million in 2012/13. Gross international reserves represented the equivalent of approximately 2.9 months of imports in 2010/11, 3.4 months of imports in 2011/12 and 3.8 months of imports in 2012/13. Exports of goods increased from US$5,563.6 million in 2010/11 to US$5,960.9 million in 2011/12, and further increased to US$6,251.1 million in 2012/13. Imports of goods increased from US$12,738.1 million in 2010/11 to US$14,903.0 million in 2011/12, and further increased to US$15,833.0 million in 2012/13. From 2011 to 2013, the overall inflation rate in Kenya decreased from 14.0 per cent. in 2011 to 9.4 per cent. in 2012, and further decreased to 5.7 per cent. in 2013. From 2010/11 to 2012/13, the central government recorded fiscal deficits of 4.3 per cent. of GDP in 2010/11, 5.2 per cent. of GDP in 2011/12 and 6.3 per cent. of GDP in 2012/13. The central government’s total public debt reached US$14,717.8 million at 30 June 2011 (47.5 per cent. of GDP), US$18,018.2 million at 30 June 2012 (45.9 per cent. of GDP) and US$22,022.4 million (51.7 per cent. of GDP) at 30 June 2013. Vision 2030 In 2007, the government announced “Vision 2030” as the government’s long-term plan for attaining middle income status as a nation by 2030. In line with Vision 2030, the government prepares successive Medium Term Plans (“MTP”) that outline the policies, programmes and projects that the government intends to implement over a five year period. The first MTP covered the period from 2008 to 2012.

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In the initial year of the first MTP, a number of projects aimed at national healing and reconciliation following the 2007 post-election violence were implemented. Repair of damaged infrastructure, assistance to affected small scale businesses and resettlement of internally displaced persons were all undertaken in order to raise GDP growth (which fell to 1.5 per cent. in 2008 from 7.0 per cent. in 2007) and to promote national reconciliation. The second MTP of Vision 2030 was announced in October 2013. The second MTP gives priority to devolution as specified in the Constitution and to more rapid socio-economic development with equity as a tool for building national unity. The second MTP also aims to build on the successes of the first MTP, particularly in increasing the scale and pace of economic transformation through infrastructure development, and strategic emphasis on priority sectors under the economic and social pillars of Vision 2030. Under the second MTP, transformation of the economy is focused on rapid economic growth in a stable macro-economic environment, modernisation of infrastructure, diversification and commercialisation of agriculture, food security, a higher contribution of manufacturing to GDP, wider access to African and global markets, wider access for Kenyans to better quality education and health care, job creation targeting unemployed youth, provision of better housing and improved water sources and sanitation to Kenyan households that presently lack these. On 14 February 2014, the National Treasury presented to Parliament the Budget Policy Statement, a document that states the government’s plans for raising and spending money in the coming fiscal year 2014/15 and the main priorities on which it will spend its resources. Consistent with the second MTP, the government announced in the Budget Policy Statement that it plans to (i) create a business environment conducive to encourage innovation, investment, growth and expansion of economic and employment opportunities; (ii) invest in agricultural transformation and food security to expand food supply, reduce food prices, support expansion of agro-processing industries and spur export growth; (iii) invest in first class transport and logistics hub and scale investments in other key infrastructure products, including roads, energy and water to reduce cost of doing business and improve competitiveness; (iv) invest in quality and accessible healthcare services and education as well as social safety net to reduce the burden on households and to enhance the nation’s prospects for long term growth and development; and (v) further entrench devolution for the delivery of better government services and enhanced rural economic development. On 28 April 2014 the Cabinet approved the budget estimates for the 2014/15 budget. The budget estimates include allocations, among others, of KES116.7 billion for on-going and new road projects, KES19.4 billion for the Standard Gauge Rail project, KES3.5 billion for an urban commuter rail system, KES1.3 billion for enhancing security to the Jomo Kenyatta International Airport and KES43.6 billion to energy related initiatives. The 2014/15 budget assumes: •

economic growth of 5.8 per cent. for 2014 and 6.4 per cent. for 2015;



inflation will remain in the upper limit target of 7.5 per cent. in 2014;



the net-public debt to GDP ratio will decline from 52.1 per cent. at the end of June 2014 to 49.8 per cent. in 2016/2017; and



for ordinary revenue to be up to 25.5 per cent. of GDP in 2014/15.

Selected Economic Information For the year ended 31 December 2011 2012 2013*

Domestic economy Nominal GDP (US$ millions) . . . . . . . . . . . . . . . . . . . . . . . . . Real GDP (growth rate)(per cent.) . . . . . . . . . . . . . . . . . . . . . . Overall inflation rate (per cent.) . . . . . . . . . . . . . . . . . . . . . . . .

2

31,830 4.4 14.0

39,956 4.6 9.4

44,004 4.7 5.7

2011

For the year ended 30 June 2012

Balance of payments Exports of goods, f.o.b. (US$ millions) . . . . . . . . . . . . . . . . . . . . Imports of goods, f.o.b. (US$ millions) . . . . . . . . . . . . . . . . . . . . Balance of goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current account balance (US$ millions) . . . . . . . . . . . . . . . . . . . Capital and financial account balance (US$ millions) . . . . . . . . . Gross official reserves (end of period) (US$ millions) . . . . . . . .

5,563.6 12,738.1 (7,174.5) (2,656.1) 2,957.2 4,120.5

5,960.9 14,903.0 (8,942.2) (3,342.2) 4,150.4 5,241.4

6,251.1 15,833.0 (9,581.9) (3,696.5) 3,788.6 5,522.0

Public finance Central government revenues (KES millions) . . . . . . . . . . . . . . . Central government expenditures (KES millions) . . . . . . . . . . . . Deficit including grants (cash basis) (KES millions) . . . . . . . . . . per cent. of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

686,309 811,849 (118,772) 4.3

763,453 947,777 (171,742) 5.2

868,167 1,117,018 (232,458) 6.3

2011

At 30 June 2012

2013

2013

Public debt(1) Central government external debt (US$ millions) . . . . . . . . . . . . . 7,765.6 8,893.9 9,808.0 Central government internal debt (US$ millions) . . . . . . . . . . . . . . 6,952.2 9,124.3 12,214.4 Total central government debt (US$ millions) . . . . . . . . . . . . . . . . 14,717.8 18,018.2 22,022.4 per cent. of GDP(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47.5 45.9 51.7

At 31 December 2013

10,181.6 13,778.1 23,959.7 54.5

Notes: * Estimated (1) Central Government Debt excludes certain publicly guaranteed debt such as debt of state-owned enterprises and debt of local government. (2) Figures calculated at 30 June are calculated with the nominal GDP as at 30 June of the year provided, while figure calculated for 31 December 2013 is calculated using nominal GDP as at 31 December 2013. Source: Kenya National Bureau of Statistics; National Treasury; Central Bank of Kenya; and Kenyan authorities and IMF staff estimates and projections for balance of payments figures.

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The Offering Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . The Republic of Kenya, acting through the National Treasury. Notes Being Issued . . . . . . . . . . . . . . . . .

per cent. Notes due amount of US$ .

in the aggregate principal

Issue Price of Notes . . . . . . . . . . . . . . . .

per cent., of the principal amount of the Notes.

Issue Date . . . . . . . . . . . . . . . . . . . . . . . .

2014.

Maturity and Redemption . . . . . . . . . . The Notes will mature on and will be redeemed at par on that date. The Notes are not redeemable prior to maturity. Interest . . . . . . . . . . . . . . . . . . . . . . . . . . The Notes will bear interest from and including 2014 to but excluding at the rate of per cent., per annum, payable semi-annually in arrear on and in each year commencing on 2014. Status . . . . . . . . . . . . . . . . . . . . . . . . . . . The Notes will constitute direct, unconditional, unsubordinated and (subject to a negative pledge, described below) unsecured obligations of the Issuer and will rank pari passu without any preference among themselves and at least pari passu with all other present and future unsubordinated and (subject as provided in the negative pledge described below) unsecured obligations of the Issuer, save only for such obligations as may be preferred by mandatory provisions of applicable law. The Notes are backed by the full faith and credit of the Issuer. Negative Pledge . . . . . . . . . . . . . . . . . . . So long as any Note remains outstanding, the Issuer has undertaken that it will not (save for the specific exceptions provided in the Conditions) create, incur, assume or permit to subsist any Security (as defined in the Conditions) upon the whole or any part of its present or future assets or revenues to secure (i) any of its Public External Indebtedness, (ii) any guarantees in respect of Public External Indebtedness or (iii) Public External Indebtedness of any other person, without, at the same time or prior thereto, securing the Notes equally and rateably therewith or providing such other arrangement as shall be approved by Noteholders. Events of Default . . . . . . . . . . . . . . . . . . Condition 10 (Events of Default) provides that Noteholders who hold at least 25 per cent. in aggregate principal amount of the Notes then outstanding may declare the Notes to be immediately due and payable at their principal amount together with accrued interest if, inter alia, (i) the Issuer fails to pay principal or interest on the Notes when due and continues to do so for 15 business days or 30 days, respectively; (ii) the Issuer does not comply with one or more of the terms of the Notes, the Agency Agreement or the Deed of Covenant and (if capable of remedy) such default continues for 45 days following service of notice by any Noteholder requiring such breach be remedied, (iii) the Issuer is in default or there is an acceleration in maturity in relation to any External Indebtedness or default in any guarantee thereof in excess of US$25,000,000; (iv) the Issuer declares a moratorium in respect of its External Indebtedness; (v) the Issuer ceases to be a member of the IMF or ceases to be eligible to use the general resources of the IMF, (vi) the Issuer denies the validity of the Notes or any of its obligations under the Notes, or it shall become unlawful for the Issuer to perform or comply with all or any of its

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obligations set out in the Notes as a result of any change in law or regulation in Kenya or final and unappealable ruling of a court in Kenya; or such obligations cease to be in full force and effect; or (vii) if any authorisation, consent of, or filing or registration with any governmental authority necessary for the payment of the Notes when due ceases to be in effect; all as more particularly described in Condition 10 (Events of Default). A declaration of acceleration may be rescinded in certain circumstances by the resolution in writing of the holders of at least 50 per cent. in aggregate principal amount of the outstanding Notes in accordance with the procedures in Condition 10 (Events of Default). Noteholder Meetings . . . . . . . . . . . . . . . A summary of the provisions for convening meetings of Noteholders to consider matters relating to their interests is set out in Condition 13 (Meetings of Noteholders and Modification). Withholding Tax . . . . . . . . . . . . . . . . . . All payments by the Issuer under the Notes are to be made without withholding or deduction for or on account of Taxes (as defined in Condition 8 (Taxation)) unless the withholding or deduction for taxes is required by law. In such circumstances, the Issuer may be required to pay additional amounts so that Noteholders will receive the full amount which otherwise would have been due and payable under the Notes; all as more particularly described in Condition 8 (Taxation). Listing . . . . . . . . . . . . . . . . . . . . . . . . . . . Application has been made to the Irish Stock Exchange for the Notes to be admitted to the Official List and trading on the Main Securities Market. In addition, the Issuer intends to make an application, after the Notes are delivered against payment, for the Notes to be listed on the Fixed Income Securities Market Segment of the Nairobi Securities Exchange. However, the Notes will not be traded on the Fixed Income Securities Market Segment of the Nairobi Securities Exchange, unless appropriate protocols are put in place after the Notes are delivered against payment. Form and Denomination . . . . . . . . . . . . The Notes will be in registered form and will be offered and sold in a minimum denomination of US$200,000 and integral multiples of US$1,000 thereof. Settlement . . . . . . . . . . . . . . . . . . . . . . . . The Notes will initially be represented by Global Notes. One or more Restricted Global Notes will be issued in respect of Notes offered and sold in reliance on Rule 144A. The Unrestricted Global Note will be issued in respect of the Notes offered and sold in reliance on Regulation S. Transfer Restrictions . . . . . . . . . . . . . . The Notes have not been registered under the Securities Act, and are subject to certain restrictions on transfers. See “Transfer Restrictions” and “Plan of Distribution”. Use of Proceeds . . . . . . . . . . . . . . . . . . . Kenya expects the net cash proceeds of the issue of the Notes to amount to US$ , which Kenya expects to use for general budgetary purposes, including for the funding of infrastructure projects and repayment of a US$600 million loan incurred in 2011/12 that matures in August 2014. Fiscal Agent . . . . . . . . . . . . . . . . . . . . . . Citibank, N.A., London Branch. Registrar . . . . . . . . . . . . . . . . . . . . . . . . . Citigroup Global Markets Deutschland AG.

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ISIN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common Code . . . . . . . . . . . . . . . . . . . . CUSIP . . . . . . . . . . . . . . . . . . . . . . . . . . . Further Issues . . . . . . . . . . . . . . . . . . . . The Issuer may from time to time, without notice to or the consent of the registered holders of the Notes, issue additional securities that will form a single series with the Notes, subject to certain conditions set out in Condition 15 (Further Issues). Governing Law . . . . . . . . . . . . . . . . . . . The Agency Agreement, the Deed of Covenant and the Notes (including any non-contractual obligations arising from or in connection with any of them) are governed by, and will be construed in accordance with, English law. Arbitration . . . . . . . . . . . . . . . . . . . . . . . Any dispute arising out of or in connection with the Notes shall be resolved by arbitration under the Arbitration Rules of the London Court of International Arbitration, as more particularly described in Condition 16 (Governing Law, Arbitration and Enforcement). The parties have expressly excluded the jurisdiction of the courts. Risk Factors . . . . . . . . . . . . . . . . . . . . . . Any one or more of the risk factors below could affect Kenya’s economy, its ability to fulfil its obligations under the Notes and your investment in the Notes. Risks Relating to the Republic of Kenya . . . . . . . . . . . . . . . . . . . . . . . . .



Emerging market investment generally poses a greater degree of risk than investment in more mature market economies because the economies in the developing world are more susceptible to destabilisation resulting from domestic and international developments.



A significant portion of the Kenyan economy is not recorded.



The statistical information published by Kenya may differ from that produced by other sources and may be unreliable. Statistical information may also be more limited in scope and published less frequently than in the case of other countries such that adequate monitoring of key fiscal and economic indicators may be difficult.



An unsuccessful administration of the devolution of power under the Constitution could result in weak fiscal management, control, accountability and transparency, and delay or increase the cost of implementing the national MTP. Implementing the transition to devolved government, in tandem with many other reforms to the institutions of national government, poses enormous challenges.



Because the legal reforms in a number of areas were adopted fairly recently and are largely untested, any perceived inadequacy in the Kenyan legal system may generally deter foreign and domestic investment in Kenya and adversely affect Kenya’s economic growth. In addition, no assurance can be given that these reforms might not lead to increased costs for the government and adversely affect Kenya’s economic growth.



Kenya continues to be challenged by internal security issues.

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Political instability may ensue if the International Criminal Court (the “ICC”) at The Hague ultimately convicts President Uhuru Kenyatta or Deputy President William Ruto.



Kenya has in the past experienced volatility and violence related with acquisition or maintenance of political power. If significant political violence occurs again, Kenya’s capital markets, level of tourism and foreign investment, among other things, may suffer and potentially affect Kenya’s economic condition. In addition, political instability may affect the stability of the Kenyan economy.



An escalation in tensions with Kenya’s neighbours could materially disrupt the Kenyan economy and have negative consequences for Kenya in its international diplomatic and trade relations.



Stability and growth in Kenya may be threatened if the government fails to address high levels of poverty, unemployment and inequality in income.



Failure to address actual and perceived risks of corruption and money laundering may adversely affect Kenya’s economy and ability to attract foreign direct investment.



Kenya may be unable to meet its economic growth and reform objectives and policies which may adversely affect the performance of the Kenyan economy.



High inflation could have a material adverse effect on Kenya’s economy and its ability to service its debt, including the Notes.



Further increases in the public sector wage bill could crowd out spending in much-needed infrastructure investment and social protection. Reforms which negatively impact the remuneration of civil servants could, however, lead to protests, demonstrations and strikes by civil servants. Instability in the civil service sector could, in turn, affect the stability of the Kenyan economy.



Failure to significantly improve Kenya’s infrastructure could adversely affect Kenya’s economy, competitive ranking and growth prospects, including its ability to meet GDP growth targets.



A sudden reversal of accommodative monetary policies in developed markets may cause capital outflows from emerging and frontier markets, and generate a negative impact on emerging and frontier economies, such as Kenya.



Natural disasters such as floods and droughts have negatively affected Kenya in the past and may negatively affect it in the future.



Any shortage of water in Kenya could have an adverse effect on Kenya’s economy and its level of economic growth.



Chronic power shortages, over-dependence on hydropower and high energy costs may negatively impact economic growth.



Kenya’s energy sector relies exclusively on imported oil to meet its petroleum requirements and is therefore vulnerable to oil price increases and any prolonged weakening of the Kenya shilling against the US dollar.

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Risks Relating to the Notes . . . . . . . . . .



Health risks could adversely affect Kenya’s economy.



Any significant depreciation of the Kenyan shilling against the US dollar or other major currencies might have a negative effect on Kenya’s ability to repay its debt denominated in currencies other than the Kenyan shilling, including the amounts due under the Notes.



An investment in the Notes may not be suitable for all investors.



Events in other emerging markets, including those in other African countries, may negatively affect the Notes.



The credit ratings of the Notes are subject to revision or withdrawal, either of which could adversely affect the trading price of the Notes.



Legal investment investments.



The liquidity of the Notes may be limited and trading prices may fluctuate.



Fluctuations in exchange rates and interest rates may adversely affect the value of the Notes.



Definitive Notes not denominated in an integral multiple of US$200,000 or its equivalent may be illiquid and difficult to trade.



The terms of the Notes may be modified, waived or substituted without the consent of all the Noteholders.



Kenya is a sovereign state and accordingly it may be difficult to obtain or enforce judgments or arbitral awards against it.



Payments made in certain EU Member States may be subject to withholding tax under the EU Savings Directive.

8

considerations

may

restrict

certain

RISK FACTORS An investment in the Notes involves a high degree of risk. You should carefully consider the risks described below as well as the other information contained in this Prospectus before buying any of the Notes. Any of the following risks could materially adversely affect Kenya’s economy and your investment in the Notes. The risks described below are not the only risks Kenya faces. Additional risks and uncertainties not currently known to Kenya or that Kenya currently deems to be immaterial may also materially affect Kenya’s economy and its ability to fulfil its obligations under the Notes. In any such case, you may lose all or part of your investment in the Notes. Risks Relating to the Republic of Kenya Investing in securities in emerging markets such as Kenya generally poses a greater degree of risk than investment in more mature market economies because the economies in the developing world are more susceptible to destabilisation resulting from domestic and international developments. Investing in securities in emerging markets such as Kenya generally poses a greater degree of risk than investment in more mature market economies because the economies in the developing world are more susceptible to destabilisation resulting from domestic and international developments. These risks include, but are not limited to, higher volatility and more limited liquidity in respect of the Notes, greater political risk, a fragile export base, budget deficits, lack of adequate infrastructure necessary to accelerate economic growth and changes in the political and economic environment. Although significant progress has been made in reforming Kenya’s economy and its political and judicial systems, Kenya is still in the process of developing the necessary infrastructure, regulatory and judicial framework that is essential to support market institutions and broad-based social and economic reforms. Emerging markets can also experience more instances of corruption by government officials and misuse of public funds than more mature markets, which could affect the ability of governments to meet their obligations under issued securities. Investors should also note that emerging markets such as Kenya are subject to rapid change and that the information set out in this Prospectus may become outdated relatively quickly. Any such political risks, budget deficits, lack of sufficient infrastructure or unimplemented government reforms may adversely impact Kenya’s economy. In addition, Kenya’s economy and macroeconomic goals are susceptible to adverse external shocks, including the recent global economic crisis, the ongoing instability in the international financial markets, the recent turmoil in the European banking system and the sovereign debt market of certain members of the European Monetary System. If economic recovery from the global recession is slow or stalls and some of Kenya’s primary trading partners continue to experience economic difficulties or euro area members experience difficulties issuing securities in the sovereign debt market or servicing existing debt, it could result in fewer exports by Kenya, which relies on the export market. The European Union is Kenya’s second largest export market and accounted for 21.0 per cent. of total exports in 2012. The Common Market for Eastern and Southern Africa (“COMESA”) remained the dominant destination of exports accounting for 70.1 per cent. of the value of total exports to Africa in 2012. The value of exports to COMESA decreased slightly from US dollar 2.1 billion in 2011 to US dollar 2.0 billion in 2012. Russia, India and China, three of the five countries that are considered fast developing economies (“BRICS”, Brazil, Russia, India, China and South Africa), recorded approximately 5.7 per cent. of total exports in 2012 (excluding Brazil) and have become a new source of tourism in Kenya. However, Italy, Germany, U.S. and UK, which accounted for a combined 48.6 per cent. of departing tourists, remain the major source of tourism. A decline in demand for exports from Kenya’s major trading partners, such as the European Union or COMESA countries, or a decline in tourism receipts, could have a material adverse impact on Kenya’s balance of payments and have a material adverse affect on Kenya’s economic growth. A significant portion of the Kenyan economy is not recorded. A significant portion of the Kenyan economy is comprised of the informal, or shadow, economy. Based on information from the Kenya National Bureau of Statistics, approximately 82.5 per cent. of employment in 2012 was in the informal sector. The informal economy is not recorded and is only partially taxed, resulting in a lack of revenue for the government, ineffective regulation, unreliability of statistical information (including the understatement of GDP and the contribution to GDP of various sectors) and inability to monitor or otherwise regulate a large portion of the economy. Lack of effective regulation and enforcement in this sector also gives rise to other issues, including health and safety issues. Although the government is attempting to address the informal economy by streamlining certain regulations, particularly tax laws, there can be no assurance that such reforms will adequately address the issues and bring the informal economy into the formal sector thus having a material adverse effect on Kenya’s economic growth. 9

The statistical information published by Kenya may differ from that produced by other sources and may be unreliable. Statistical information may also be more limited in scope and published less frequently than in the case of other countries such that adequate monitoring of key fiscal and economic indicators may be difficult. The National Treasury, Kenya National Bureau of Statistics and the Central Bank of Kenya all produce, and prior to August 2010 the Ministry of Finance produced, statistics relating to Kenya and its economy. Although collaborative efforts are being taken by the relevant agencies in order to produce accurate and consistent social and economic data, there may be inconsistencies in the compilation of data and methodologies used by some of these agencies, and in common with many developing economies, given the relative size of the informal economy in Kenya there may be material omissions or misstatements in the statistical data prepared by such agencies. As a result, there can be no assurance that these statistics are as accurate or as reliable as those published by more developed countries. In addition, Kenya’s statistical information may also be more limited in scope and published less frequently than in the case of other countries such that adequate monitoring of key fiscal and economic indicators may be difficult. Some of the statistics contained in this Prospectus for 2011, 2012 and 2013 may be indicated as estimated or provisional figures that are subject to later revision. In particular, prospective investors should be aware that figures relating to Kenya’s GDP, its balance of payments and other figures cited in this Prospectus may be subject to some degree of uncertainty and that the information set forth in this Prospectus may become outdated relatively quickly, which may result in such figures being revised in future periods. Although there have been significant efforts to improve the compilation of Kenya’s balance of payments data in recent years, including through technical assistance provided by the IMF, errors and omissions in the balance of payments data persist and may complicate the assessment of such data. The inability to improve compilation of key fiscal and economic indicators may affect how effectively government policy is made in response to such statistical information and thus have a material adverse effect on Kenya’s economic growth. An unsuccessful administration of the devolution of power under the Constitution could result in weak fiscal management, control, accountability and transparency, and delay or increase the cost of implementing the national MTP. Implementing the transition to devolved government, in tandem with many other reforms to the institutions of national government, poses enormous challenges. Prior to the promulgation of the Constitution, Kenya had a system of provincial administration through which Provincial Commissioners held significant power, including responsibility for law and order, but were civil servants appointed by, and directly accountable to, the national government. After the Constitution was promulgated in 2010, the governance framework in Kenya was fundamentally altered by abolishing the provincial administration, promoting devolution and creating a two-tier government—one at the national level and the other in each of the 47 counties, led by locally elected Governors and County Assemblies. Under the new system of devolution, government functions have been distributed between the two levels of government. In addition, the Constitution provides that (i) counties must be allocated not less than 15 per cent. of all revenue collected by the national government; (ii) marginalised areas will receive an additional 0.5 per cent. of all the revenue collected by the national government to bring the quality of basic services including water, roads, health facilities and electricity in those areas to the same level as that generally enjoyed by the rest of the country; (iii) a Commission on Revenue Allocation will make recommendations for equitable sharing of national government revenue between the national and county governments, and among the county governments, thus likely reducing total fiscal receipts for the national government; (iv) a county government may also impose property rates, entertainment taxes, service charges and other taxes that it is authorised to impose by law in order to raise revenue; and (v) counties will be responsible for establishing and abolishing offices in the public service, appointing persons to hold such offices and removing them from holding or acting in those offices. Given that the devolution of governmental power in Kenya is a relatively recent event and is still in process, an unsuccessful administration of the devolution of power could result in weak fiscal management, control, accountability and transparency of national accounts. In addition, counties have development responsibilities that are central to the implementation of the central government’s MTP, among them agriculture, county hospitals and public health, early childhood education, cooperatives, trade, county roads, fisheries and livestock. Harmonising the medium term plan with county integrated development plans and urban plans will require coordinated action between national and local government authorities. A failure in coordination or cooperation between national and local governments may result in delays or increased costs to the completion of the projects and programmes contained in the national MTP. Furthermore, implementing the transition to devolved government, in tandem with many other reforms to the institutions of national government, poses enormous challenges such as: the movement of staff from line 10

ministries and local authorities to county governments without disruption in service delivery or labour unrest; establishing systems in the 47 counties to enable them to operate quickly after the county governments were elected in 2013; coordination among counties with respect to the construction of inter-county roads; potential duplication of expenditures at national and county levels; and capacity building at the county level to ensure that they can make their own laws, manage new powers and resources, and properly plan, execute and report county budgets. Capacity building will include training to use government wide electronic systems such as the Integrated Financial Management Systems (“IFMIS”), the automated system for public finance management, and Kenya Electronic Single Window System (“KESWS”), the automated system for clearance of import and export documents, and move away from the old manual systems. Some of these challenges were manifest during 2013 when doctors that were impacted by the implementation of devolution went on strike demanding that their salaries and allowances not be paid at the county level. In addition, during the counties’ first fiscal year 2013/14, county governments experienced challenges in planning, executing and reporting on budgets because of timing challenges, with elections having just been concluded in March 2013, as well as human resource capacity constraints. In February 2012, the National Assembly enacted three laws to implement devolution. Together with the provisions of the Constitution, these laws provide a set of institutional arrangements for managing transition through a Transition Authority, an independent body with broad membership and powers to coordinate implementation by the various organs of the government. Although there is a legal framework for managing transition a great deal of work remains to be done. No assurance can be given that there will be a smooth transition or that there will not be service delivery disruptions which could adversely affect residents or businesses, and in turn materially adversely affect the country’s growth prospects. Because legal reforms in a number of areas were adopted fairly recently and are largely untested, any perceived inadequacy in the Kenyan legal system may generally deter foreign and domestic investment in Kenya and adversely affect Kenya’s economic growth. In addition, no assurance can be given that these reforms might not lead to increased costs for the government and adversely affect Kenya’s economic growth. The justice system in Kenya is going through major changes. The reform of the legal and institutional framework includes reforms to the judiciary and the police services. With respect to the judiciary, a new and independent Judicial Service Commission responsible for nominating judges was created and competitively appointed with the approval of Parliament. On 22 March 2011, a Judicial Service Act was enacted that establishes the mandate and membership of the Judicial Service Commission, creates a Judiciary Fund, and regulates appointment and removal of judges, among other things. Judges and magistrates have undergone public vetting and many new judges and magistrates have been appointed to increase capacity. Infrastructure development, including the construction of new courts and the purchase of equipment, has been completed. The Chief Justice and the Deputy Chief Justice of the Supreme Court were competitively appointed with the approval of Parliament. In addition, the judiciary now has its own Judiciary Fund and the government has increased funding from KES2 billion in 2011/12 to KES16.5 billion for 2013/14. Moreover, new court procedural rules have also been promulgated, which are aimed at improving efficiency. Because the legal reforms in a number of areas were adopted fairly recently and are largely untested, any perceived inadequacy in the Kenyan legal system may generally deter foreign and domestic investment in Kenya and adversely affect Kenya’s economic growth. With respect to the police services, the Constitution has provided for major changes to security and police governance, including provisions to diminish political manipulation and increase accountability of the police. The Constitution also merged the prior two police forces (the Kenya Police Service and the Administration Police Service) into one National Police Service. In August 2011, three key police reform laws were passed: the National Police Service Act, 2011, which provides for the establishment, structure, powers and operations of the police service; the National Police Service Commission Act No. 30, which makes further provisions for the functions and powers of the National Police Service Commission and the qualifications and procedures for appointment of such; and the Independent Policing Oversight Authority Act, 2011, which provides for civilian oversight of the work of the police and establishes the Independent Policing Oversight Authority, as well as its functions and powers. Reforms to the police force are still in early stages and are continuing. No assurance can be given that these reforms might not lead to increased costs for the government and materially adversely affect Kenya’s economic growth.

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Kenya continues to be challenged by internal security issues. Kenya has from time to time experienced internal security concerns. For example, on 21 September 2013, a terrorist attack occurred at the Westgate Mall in Nairobi. The al-Shabaab group, an extremist militant group, claimed responsibility for the attack and resumed its threats of continued attacks, not only against Kenya but also against Western countries for their intervention in Somalia. Al-Shabaab claimed that the attack at Westgate Mall was prompted by the presence of Kenyan troops in southern Somalia as part of the peacekeeping forces of the African Union Mission in Somalia (“AMISOM”). Al-Shabaab also announced that it would continue its attacks until Kenya withdrew its troops from Somalia. Since 2012, there have been numerous attacks involving grenades or explosive devices in Kenya. Between January 2012 and January 2014, a total of 27 improvised explosive device (IED) attacks occurred in Kenya, causing the deaths of 128 people and injuring another 427. The attacks mostly occurred in the North Eastern, Nairobi and the Coast regions, targeting police stations and police vehicles, nightclubs and bars, churches, a mosque, a religious gathering, a downtown building consisting of small shops and a bus station. In addition to attacks which were carried out in this period, Kenyan law enforcement authorities have also disrupted several suspected terrorist plots, including attempted car bombings in Nairobi and Mombasa. In May 2014, following a series of fatal attacks and attempted attacks in Nairobi and Mombasa between 24 April and 16 May, the UK, US, France and Australia issued new travel advisories advising their citizens to avoid or reconsider travel to certain areas within Kenya. The UK and US were, respectively, the largest and third largest sources of foreign tourists to Kenya in 2013. Accordingly, these travel warnings may have a significant impact on the level of foreign tourism, and may have a wider economic impact as tourism is one of Kenya’s largest sources of foreign exchange, and the industry is one of Kenya’s largest employers. See “The Economy—GDP—Tourism” for more information. Approximately 500,000 Somalis live in the Dadaab refugee complex in north east Kenya. Originally established in 1991 to house refugees from the Somali civil war, the Dadaab complex has elicited tension among the surrounding communities. Some have alleged that the existence of the settlement can compromise border security and have caused significant law and order problems within Kenya’s territory. In November 2013, the Somali and Kenyan governments signed an agreement with the United Nations High Commission for Refugees to begin repatriating Somali refugees. While most repatriations are done voluntarily, any forced repatriation of Somali refugees, or even the perception of such repatriation, could potentially build resentment among affected individuals and enhance al-Shabaab’s appeal and recruitment efforts in Kenya. There can also be no assurance that repatriated persons will not seek to return to Kenya. In addition, the Mombasa Republican Council, a separatist organisation based at the coastal town of Mombasa, has demanded that Mombasa secede from the rest of the country. The Council was formed in 1999 to address perceived historical injustice against the indigenous people of the coast who do not own land. The government believes that members of Mombasa Republican Council could potentially be a recruiting ground for al-Shabaab. Kenya also suffers from high crime rates. The total number of crimes reported to the police increased by 2.8 per cent. from 75,733 in 2011 to 77,852 in 2012. The total number of crimes reported to the police declined by 7.7 per cent. from 77,852 in 2012 to 71,832 in 2013. The number of reported offenders increased from 82,052 in 2011 to 83,853 in 2012 and declined to 81,900 in 2013. Although, the number of persons who committed offences against morality (i.e., rape, incest, sodomy, bestiality, indecent assault and bigamy) and other offences against persons declined by 8.7 per cent. from 28,270 in 2011, 25,809 in 2012 to 28,899 in 2013, the total number of persons reported to have committed homicides increased by 25.3 per cent. from 2,494 in 2011 to 3,124 in 2012 and declined by 10.9 per cent to 2,784 in 2013. The number of persons reported to have committed robbery and other thefts increased by 7.9 per cent from 32,595 in 2011 to 35,168 in 2012 and declined by 3.3 per cent to 32,240 in 2013. If the level of instability, crime or violence increases in the future, Kenya’s level of tourism and foreign investment, among other things, may suffer and potentially materially adversely affect Kenya’s economic growth. Political instability may ensue if the ICC at The Hague ultimately convicts President Uhuru Kenyatta or Deputy President William Ruto. On 8 March 2011, President Uhuru Kenyatta, Deputy President William Ruto and radio executive Joshua Arap Sang were summoned to appear before the ICC at The Hague following accusations of crimes against humanity 12

related to the violence that occurred in the aftermath of the 2007 presidential elections. President Kenyatta and Deputy President Ruto have been cooperating and appearing at the proceedings, consistent with the ICC Rules of Procedure and Evidence. These rules have recently been amended to provide that defendants may be excused from appearing in person, under certain circumstances. President Kenyatta has been charged but the prosecutor has requested an adjournment of the hearing in his case. On 31 March 2014, the ICC rejected the request by President Kenyatta for the termination of the case and set a commencement date of 7 October 2014 for the trial. The ICC also rejected a prosecution request to suspend the proceeding indefinitely pending compliance by Kenya with its cooperation obligations. As at the date of this Prospectus, the proceedings have not interfered with, and the ICC has shown sensitivity not to interfere with, the ability of the President and the Deputy President to fulfil their constitutional duties, although there can be no guarantee that this will always be the case. Further, the political impact of a conviction, if confirmed after appeal, of either the President or the Deputy President cannot be predicted. Any ensuing political instability as a result of a conviction may impact your investment in the Notes. In accordance with Article 146(b) of the Constitution, if the office of the President and Deputy President is vacant, or the Deputy President is unable to assume the office of President, the Speaker of the National Assembly shall act as President and an election to the office of President shall be held within sixty days after the vacancy arose. However, should political instability occur due to the ICC ultimately convicting the President or the Deputy President, such political instability could adversely affect Kenya’s economic growth. See “Legal Proceedings” for more information. Kenya has in the past experienced volatility and violence related with acquisition or maintenance of political power. If significant political violence occurs again, Kenya’s capital markets, level of tourism and foreign investment, among other things, may suffer and potentially affect Kenya’s economic condition. In addition, political instability may affect the stability of the Kenyan economy. Kenya has in the past experienced volatility and violence related with the acquisition or maintenance of political power. During the 1992, 1997 and 2007 elections, threats, harassment and violent clashes between supporters for different parties occurred. Although the 2002 election campaign experienced a significant decrease in political violence compared to its two proceeding elections, political rallies did on some occasions lead to violence. Violence erupted after the disputed elections in 2007, which left an estimated 1,133 people dead and more than 500,000 people displaced while fleeing the violence. A power sharing agreement was signed on 28 February 2008 and a unity government with the Party of National Unity and Orange Democratic Movement began on 17 April 2008. The agreement also provided for the prosecution in the ICC or in Kenya of those connected with inciting the violence. Although Kenya held peaceful elections in 2013, no assurance can be made that incidents of political violence or political instability will not occur in the future. If significant political violence or political instability occurs, Kenya’s capital markets, level of tourism and foreign investment, among other things, may suffer and potentially materially adversely affect Kenya’s economic growth. An escalation in tensions with Kenya’s neighbours could disrupt the Kenyan economy and have negative consequences for Kenya in its international diplomatic and trade relations. Kenya has in the past been involved, and may continue to have, in territorial disputes with its neighbours. In 2008, Migingo island was claimed by both Kenya and Uganda. A joint re-demarcation line of the border was launched on 2 June 2009 to recover and to place survey markers on land, making delineation of the boundary on the lake more precise. The two countries have established a joint technical experts committee to demarcate the borderline along the island. Also, Kenya has submitted to the U.N. Commission on the Limits of the Continental Shelf its filing on claims to mineral exploitation rights on waters beyond the 200 nautical mile baseline. Somalia and Kenya are in discussion over the non-objection of their respective submissions. See “Republic of Kenya— Border Disputes” for more information. An escalation in tensions with Kenya’s neighbours could materially adversely affect the Kenyan economy and have negative consequences for Kenya in its international diplomatic and trade relations. Stability and growth in Kenya may be threatened if the government fails to address high levels of poverty, unemployment and inequality in income. Despite recording annual real GDP growth rates of 4.4 per cent., 4.6 per cent. and 4.7 per cent. in 2011, 2012 and 2013, respectively, poverty remains high in Kenya, with approximately 45 per cent. of the population living below the poverty line in 2013. Kenya’s most recent employment data is derived from the 2005/06 Kenya

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Integrated Household Budget Survey, which recorded overall unemployment at approximately 12.7 per cent. and youth unemployment of approximately 25 per cent. The country’s Vision 2030 acknowledges that there are also large disparities in incomes and access to education, healthcare and land, as well as to basic needs, including, clean water, adequate housing and sanitation. High and persistent levels of poverty and unemployment and increasing inequality may individually or in the aggregate have negative effects on the Kenyan economy. However, if these reforms do not address the high levels of poverty, unemployment and inequality, such continued conditions may materially adversely affect Kenya’s economic growth. Failure to address actual and perceived risks of corruption and money laundering may adversely affect Kenya’s economy and ability to attract foreign direct investment. Although Kenya has implemented and is pursuing major initiatives to prevent and fight corruption and money laundering, both remain important issues in Kenya. Kenya is ranked 136 out of 175 in Transparency International’s 2013 Corruption Perceptions Index and placed at the 12.4 percentile rank (with 100 the highest rank) on the World Bank’s Worldwide Governance Indicators for 2012. Although the total number of cases handled by the Kenya Ethics and Anti-Corruption Commission declined by 51.0 per cent. from 7,326 in 2011 to 3,592 in 2012 following the enactment of the Ethics and Anti-corruption Commission Act, 2011 and the Anti-Corruption and Economic Crimes (Amnesty and Restitution) Regulations, 2011, corruption continues to be a concern. On 18 October 2013, the Financial Action Task Force on Money Laundering (“FATF”) established by the G-7 countries identified Kenya as one of 11 jurisdictions with strategic anti-money laundering deficiencies. Since 2002, Kenya has implemented various initiatives aimed at combating corruption, money laundering and financing of terrorism. Parliament has enacted several pieces of legislation dealing with corruption and money laundering, including the following: the Anti-Corruption and Economic Crimes Act 2003 which provides for the prevention, investigation and punishment of corruption, economic crime and related offences; the Proceeds of Crime and Anti-Money Laundering Act 2009 which establishes the offence of money laundering and introduces measures for combating the offence; the Ethics and Anti-corruption Commission Act 2011 creating an agency responsible for investigating and litigating corruption cases, tracing assets and recovery of illegally acquired public assets; and the Prevention of Terrorism Act 2012, as amended, which gives law enforcers more powers in fighting terrorism. On 28 March 2013, the Proceeds of Crime and Anti-Money Laundering Regulations, 2013 were issued by the Minister for Finance which provide for the due diligence and reporting requirements of certain reporting institutions licensed and regulated by Kenyan regulatory authorities. The government has developed a strategy as part of its MTP to address corruption in government, specifically in the public procurement sector. Under the plan, the government aims to (i) implement an e-procurement and interactive system to enable any supplier to bid for tenders in a transparent manner, (ii) execute laws such as the Ethics and Anti-corruption Commission Act, 2011 and the Anti-Corruption and Economic Crimes (Amnesty and Restitution) Regulations, 2011 (which provides for interest on property or money irregularly obtained, the procedures for amnesty applications and restitution of property to rightful owners), and (iii) enhance the investigative capacity of and grant prosecutorial powers to the Ethics and Anti-Corruption Commission. There is no certainty, however, as to the success of these measures. Failure to implement these strategies, continued corruption in the public sector and deficiencies in the systems for addressing money laundering activities could have a material adverse effect on the Kenyan economy and may have a negative effect on Kenya’s ability to attract foreign investment. See also “Legal Proceedings” for recent allegations against the Governor of the Central Bank of Kenya and “The Economy—Major Infrastructure Projects—Expansion of Railway Transport” for a discussion of the procurement process in the Mombasa to Nairobi Standard Gauge Railway project. Kenya may be unable to meet its economic growth and reform objectives and policies which may adversely affect the performance of the Kenyan economy. Although the government has announced its intention to pursue a series of economic and fiscal reform initiatives, including those set forth in Vision 2030 and the second MTP, no assurance can be given that such initiatives will be adequately funded, will achieve or maintain the necessary long-term political support, will be fully implemented or prove successful in achieving their objectives. Continued pursuit of long-term objectives such as those set forth in Vision 2030 and the second MTP will depend on a number of factors including continued political support at many levels of the Kenyan society, adequate funding, effective transition to devolved government, improved security, power sector reform, availability of human capital and significant coordination. The significant funding requirements for these plans may prove difficult or impossible to meet. Kenya may be unable to complete planned flagship projects or may experience difficulties implementing reforms. If the 14

government is not able to fund or implement the medium-term objectives contained in the second MTP, or if there is a delay in such funding or implementation, then the government may not be able to meet the long-term strategic objectives set forth in Vision 2030, which could result in a material adverse effect on the economy. High inflation could have a material adverse effect on Kenya’s economy and its ability to service its debt, including the Notes. Historically, inflation in Kenya has fluctuated significantly from year to year. International food and petroleum prices in the past resulted in inflation levels as high as 14.0 per cent. in 2011, although inflation has decreased to 9.4 per cent. in 2012 and further to 5.4 per cent. for the eleven month period ended November 2013. For more information on historical inflation rates, please see “Monetary and Financial System—Inflation and interest rates”. Although tighter monetary policies have historically helped to curb inflation, the impact on inflation of higher fuel and other import prices is beyond the government’s control. There can be no assurance that the inflation rate will not rise in the future. Significant inflation could have a material adverse effect on Kenya’s economy and the ability to service the Notes. Further increases in the public sector wage bill could crowd out spending in much-needed infrastructure investment and social protection. Reforms which negatively impact remuneration of civil servants could, however, lead to protests, demonstrations and strikes by civil servants. Instability in the civil service sector could, in turn, affect the stability of the Kenyan economy. In 2012, the government raised wages for doctors, nurses, teachers and lecturers. Combined with the addition of new public employees, the adjustment in civil service remuneration raised the government’s wage bill from approximately 30 per cent. of government revenue in 2009/10 (7.0 per cent. of GDP) to approximately 33.9 per cent. of government revenue (7.8 per cent. of GDP) in 2012/13. Any further increases in the wage bill could crowd out spending in needed infrastructure investment and social protection. The government has sought to contain pressures on the wage bill by rationalising the salary scheme for all levels of government in line with the Public Finance Management Act (2012) (the “PFMA”) and limit the scope for ad hoc wage increases. The Salaries and Remuneration Commission is currently conducting a nationwide job evaluation to gradually move to a harmonised salary scales framework for both central and county government levels. The government is committed to be guided by the Salaries and Remuneration Commission’s advice and has set a target ceiling of 7 per cent. of GDP for all general government wages in the medium term. Reforms to address the wage bill could include reductions in public sector employment in addition to decreases in remuneration. Resistance to these reforms by those who will be immediately affected may be followed by protests, demonstrations and strikes. Instability in the civil service sector could affect the stability of the Kenyan economy. On the other hand, if the government fails to implement reforms to the wage bill, the government’s fiscal position could deteriorate and the Kenyan economy may be materially adversely affected. Failure to significantly improve Kenya’s infrastructure could adversely affect Kenya’s economy, competitive ranking and growth prospects, including its ability to meet GDP growth targets. Failure to grow the key sectors of its economy may constrain Kenya’s economic growth. The lack of infrastructure (including inadequate power supply and transportation systems) may be a significant constraint in further development in the key sectors of the economy and Kenya’s current rate of growth may decline in future periods as a result of poor infrastructure development. Over the last five years, however, Kenya has made progress in the development and expansion and improvement of airports, ports, rail, pipelines, hydropower, geothermal plants, ferries, housing and public works facilities. It has, among other things, expanded and modernised the Kisumu International Airport and selected airstrips countrywide and began such process on the Jomo Kenyatta International Airport, improved shipping and maritime facilities with the dredging and widening of Mombasa Port and the development of Berth No.19, upgraded the commuter rail core system with the completion of JKIA Commuter Rail Phase I and the construction of a railway station at Syokimau, and constructed 2,200 km of roads and rehabilitated/reconstructed 1,863 km of roads. Nevertheless, government concerns still exist over the length of future planning and consultative processes, inadequate funding, prioritisation among projects in light of uncertainties related to devolution, contracting disputes and low/poor maintenance of key projects. For example, the government has identified that: •

in the aviation sector, there is a lack of adequate and skilled flight safety inspectors and reconstruction of the Jomo Kenyatta International Airport is necessary as a result of a significant fire in August 2013;



in the shipping and maritime sector, there is inadequate equipment and machinery that limits handling capacity at the ports and a lack of a training vessel to offer practical sea time to commercial shipping trainees; 15



in the railway sector, a large capital outlay is required to construct standard gauge railway lines and commuter rail services, and there are inadequate trained engineers, encroachments of unauthorised buildings upon railway lines and aging wagons;



in the road transport sector, there is rapid urbanisation and increased traffic volume, lack of specific standards and capacity for devolved county roads, a large maintenance backlog of the road network, weak enforcement of axle load rules and regulations, high cost/delays in relocation of utilities and services along and across road reserves, and high cost of road construction; and



in the public works sector, there are delayed projects under the Economic Stimulus Programme and high rental accommodation charges in foreign missions abroad.

A failure to significantly improve Kenya’s infrastructure in order to support growth in the key sectors of its economy may constrain Kenya’s overall economic growth, which may in turn result in a material adverse effect on Kenya’s ability to meet its debt obligations, including those under the Notes. For more information on risks to growth of key sectors of the economy, see “Kenya may be unable to meet its economic growth and reform objectives and policies which may adversely affect the performance of the Kenyan economy”. A sudden reversal of accommodative monetary policies in developed markets may cause capital outflows from emerging and frontier markets, and generate a negative impact on emerging and frontier economies, such as Kenya. A sudden reversal of accommodative monetary policies in developed markets may cause capital outflows from emerging and frontier markets, and generate a negative impact on emerging and frontier economies, such as Kenya. Of significance, short-term private capital flows, a large source of financing for Kenya’s capital and financial account, may decline if developed markets scale back accommodative monetary policy measures and adversely affect funding for the current account deficit. As of 30 June 2013, short-term private capital flows of US$1.5 billion financed 39 per cent. of Kenya’s capital and financial account. A portfolio shift to larger economies with increasing yields could lead to a depreciation of the Kenyan shilling and increase exchange rate volatility. Higher volatility in the exchange rate could bring uncertainty in the currency market. Faced with uncertainty, investors tend to postpone making investment decisions, which could lead to less investment in the economy and have a material adverse effect on Kenya’s economy. Natural disasters such as floods and droughts have negatively affected Kenya in the past and may negatively affect it in the future. Like other countries in Africa, Kenya has historically been affected by a variety of natural disasters, including floods and droughts. Natural disasters such as floods may lead to casualties, the destruction of crops and livestock, the outbreak of waterborne disease and the destruction of infrastructure, such as roads and bridges. Droughts may negatively affect the supply of agricultural commodities, the food supply in general and the generation of hydroelectric power. During 2012, Kenya experienced serious floods in certain areas which resulted in the destruction of infrastructure, crops and loss of human life and livestock. In addition, during the first quarter of 2012, some parts of Kenya also experienced drought conditions that resulted in reduced production of milk and tea. Expenditures associated with natural disaster relief efforts may adversely affect Kenya’s budgetary position and, as a result, may impair Kenya’s ability to service the Notes. In addition, because agriculture and forestry has historically accounted for a significant portion of Kenya’s GDP (25.9 per cent. of GDP in 2012), Kenya’s economy is particularly vulnerable to natural disasters such as floods and droughts, thus any such natural disasters could have a material adverse effect on its economy. Any shortage of water in Kenya could have an adverse effect on Kenya’s economy and its level of economic growth. Kenya is classified as a water scarce country by the United Nations (“UN”). According to the Kenya Population Census, 2009, 27.9 per cent. of the population obtained piped water from water service providers while 37.2 per cent. obtained their water from either improved or unimproved springs, wells or boreholes. Over 29 per cent. received their water supply from other unsafe sources like streams, lakes, ponds and 5.9 per cent. received water from water vendors. Kenya also has historically been affected by droughts. In recognition of the importance of sustainable management of water resources, the government initiated reforms in the sector including, among others, the rehabilitation and protection of Kenya’s five water towers; review of six catchment area management strategies; construction of 50 sand dams and/sub-surface dams along seasonal rivers especially in arid and semi-arid land; mapping of shared water resources of the country; and development of a national water allocation plan. Kenya could face water shortages, however, if planned reforms are not implemented. Such 16

water shortages could have an impact on the agriculture and forestry products sector of the economy including the important exports of tea and horticulture, potentially leading to trade and current account imbalances. Any shortage of water in Kenya could have a material adverse effect on Kenya’s economy and its level of economic growth. Chronic power shortages, over-dependence on hydropower and high energy costs may negatively impact economic growth. In spite of investments in the power sector in recent years, lack of reliable electricity supply remains a serious impediment to Kenya’s economic growth and development. Recorded peak electricity demand, which is considered suppressed, stands at 1,664 MW recorded in October 2013, while the unsuppressed demand is estimated at 1,700 MW, thus depicting a shortfall of 546 MW after providing for a 30 per cent. margin. Insufficient power generation, aging or insufficient infrastructure, inadequate funding and weak distribution networks result in frequent power outages, high transmission and distribution losses and power rationing, particularly during the dry season. Droughts also have impacted electricity generation as Kenya depends on hydropower generation for much of its power generation capacity (46.3 per cent. of total power generation in 2012). During severe droughts, electricity generation is switched from hydropower to more expensive thermal generation. Kenya also suffers from high energy costs of up to US$0.21 per Kwh compared to approximately US$0.06 per Kwh in India and China. The government has identified the improvement of electricity generation, transmission and distribution infrastructure as a critical element in meeting economic growth and development objectives. To address these issues, the government has launched a series of policy initiatives under Vision 2030 and the second MTP. The government has identified the exploitation of “green growth” opportunities such as the use of carbon credits (especially in reforested catchment towers), clean energy use in geothermal, hydro, wind and solar power, the promotion of natural products initiatives, promotion of resource efficiency and clean production systems as elements of a strategy to improve the energy infrastructure and promote development of a reliable, adequate and cost effective energy supply. In addition, the government has identified major projects in the power sector expected to be completed by 2018 such as the development of an additional 3,085 MW of geothermal energy at Olkaria, Menengai and Silali-Bogoria and the development of multi-purpose dams such as the High Grand Falls dam (700 MW), the Magwagwa dam (120 MW), the Arror dam (60 MW) and the Nandi Forest dam (50 MW). The government also intends to develop the transmission network to minimise transmission distances and losses. No assurances can be given that Kenya will be able to effectively reform the power sector or that the reforms will not cost significantly more than what is estimated. Failure to adequately address the significant deficiencies in Kenya’s power generation, transmission and distribution infrastructure could lead to lower GDP growth and reduce the country’s ability to attract investment, thereby causing a material adverse effect on Kenya’s economy. Kenya’s energy sector relies exclusively on imported oil to meet its petroleum requirements and is therefore vulnerable to oil price increases and prolonged weakness in the Kenya shilling to US dollar exchange rate. Kenya’s energy sector relies exclusively on imported oil to meet its petroleum requirements. Accordingly, a rise in the international price of oil significantly affects Kenya’s economy because, among other things, a higher oil price increases Kenya’s imports bill and thereby increases its trade and current account deficits and exerts upward pressure on prices and inflation. Kenya procures oil through an open tender system, under which the government tenders for petroleum products to be purchased every month. The oil marketing company that offers the lowest price on freight and premium wins the tender and is contracted to deliver the petroleum products on behalf of the other licenced oil marketing companies. The participants in the tender are all licenced import and wholesale oil marketing companies. This tender is done online. Because the price is fixed for the amount of oil needed for a month, Kenya will not be able to take advantage of any decreases in the market price of oil during the month of purchase. Oil prices and markets historically have been volatile, and they are likely to continue to be volatile in the future. Prices of oil are subject to wide fluctuations in response to relatively minor changes in the supply of, and demand for, oil, market uncertainty and a variety of additional factors that are beyond Kenya’s control. These factors include, but are not limited to, political conditions in the Middle East and other regions, internal and political decisions of OPEC and other oil producing nations to decrease or increase production of crude oil, domestic and foreign supplies of oil, consumer demand, weather conditions, domestic and foreign government regulations, transport costs, the price and availability of alternative fuels and overall economic conditions. Further, international oil prices are typically denominated in US dollars, and so prolonged weakness in the exchange rate of the Kenyan shilling against the US dollar will increase the local cost of petroleum and other 17

oil-based products, even if there is no change in the international price of oil. Should oil prices increases and prolonged weaknesses in the Kenya shilling to US dollar exchange rate occur such events could have a material adverse effect on Kenya’s economy. Health risks could adversely affect Kenya’s economy. HIV/AIDS, tuberculosis (which is exacerbated in the presence of HIV/AIDS) and malaria are major healthcare challenges in Kenya and other East African countries. In the period 2010/11 to 2012/13, national HIV prevalence declined from 7.2 per cent. to 5.6 per cent. of adults aged 15-64 years, while prevalence dropped from 3.8 per cent. to 2.1 per cent. of adults aged 15-24 years and 10.5 per cent. to 6.4 per cent. of adults aged 25-34 and the total number of persons living with HIV is estimated to be in the region of 1.6 million. About 25 million Kenyans live in malaria endemic regions of the former provinces of Western, Nyanza and the Coast, with a majority of them under the age of 15. While combination therapies and use of indoor residual spraying have resulted in reduction of prevalence from 38 per cent. in 2010 to 21 per cent. in 2012; some regions of Western and Nyanza, however, still have contributed to little or no changes in the period 2010/11 to 2012/13 (between 37 per cent. and 47 per cent.). No assurance can be given that the high prevalence rate of HIV/AIDS, tuberculosis, malaria, or other diseases in Kenya will not have a material adverse effect on the economy of Kenya. Any significant depreciation of the Kenyan shilling against the US dollar or other major currencies might have a negative effect on Kenya’s ability to repay its debt denominated in currencies other than the Kenyan shilling, including the amounts due under the Notes. The Kenyan shilling experienced considerable volatility during 2012. The shilling depreciated against most of the selected major trading currencies as reflected in the overall trade weighted exchange rate index, which increased by 1.0 per cent. from 109.6 in 2011 to 110.8 in 2012. The shilling weakened against the pound sterling, euro and US dollar by 6.0, 3.2 and 1.1 per cent., respectively, in the year ended at 31 December 2012. For the three month period ended 31 December 2013, the Kenya shilling depreciated against the US dollar, pound sterling and euro by 0.01, 0.04 and 0.02 per cent. respectively. For the same period, the shilling appreciated against the Japanese yen by 0.05. The shilling stood at KES86.31 to the US dollar at end of December 2013. At 31 December 2013, 28.1 per cent. of the public external debt was denominated in US dollars, 34.7 per cent. was denominated in euros, 14.4 per cent. was denominated in Japanese yen and 5.8 per cent. was denominated in pound sterling. Any significant depreciation of the Kenyan shilling against the US dollar or other major currencies might have a material adverse effect on Kenya’s ability to repay its debt denominated in currencies other than the Kenyan shilling, including the amounts due under the Notes. Risks Relating to the Notes An investment in the Notes may not be suitable for all investors. Generally, investment in emerging markets such as Kenya is only suitable for sophisticated investors who fully appreciate the significance of the risks involved in, and are familiar with, investing in emerging markets. Investors are urged to consult their own legal, tax and financial advisers before making an investment. Such risks include, but are not limited to, higher volatility and more limited liquidity in respect of the Notes, a fragile export base, budget deficits, lack of adequate infrastructure necessary to accelerate economic growth and changes in the political and economic environment. Emerging markets can also experience more instances of corruption by government officials and misuse of public funds than do more mature markets, which could affect the ability of governments to meet their obligations under issued securities. Investors should also note that emerging markets such as Kenya are subject to rapid change and that the information set out in this Prospectus may become outdated relatively quickly. Each potential investor in the Notes must determine the suitability of that investment in light of its own circumstances. In particular, each potential investor should: •

have sufficient knowledge and experience to make a meaningful evaluation of the Notes, the merits and risks of investing in the Notes and the information contained in this Prospectus or any applicable supplement; 18



have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in the Notes and the impact the Notes will have on its overall investment portfolio;



have sufficient financial resources and liquidity to bear all of the risks of an investment in the Notes, including where the currency for principal or interest payments is different from the potential investor’s currency;



understand thoroughly the terms of the Notes and be familiar with the behaviour of any relevant financial markets; and



be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic, interest rate and other factors that may affect its investment and its ability to bear the applicable risks.

Events in other emerging markets, including those in other African countries, may negatively affect the Notes. Economic distress in any emerging market country may adversely affect prices of securities and the level of investment in other emerging market issuers as investors move their money to more stable, developed markets. Financial problems or an increase in the perceived risks associated with investing in emerging market economies could dampen foreign investment in Kenya, adversely affect the Kenyan economy or adversely affect the trading price of the Notes. Even if the Kenyan economy remains relatively stable, economic distress in other emerging market countries could adversely affect the trading price of the Notes and the availability of foreign funding sources for the government. Adverse developments in other countries in sub-Saharan Africa, in particular, may have a negative impact on Kenya if investors perceive risk that such developments will adversely affect Kenya or that similar adverse developments may occur in Kenya. Risks associated with sub-Saharan Africa include political uncertainty, civil unrest and conflict, corruption, the outbreak of diseases and poor infrastructure. Investors’ perceptions of certain risks may be compounded by incomplete, unreliable or unavailable economic and statistical data on Kenya, including elements of the information provided in this Prospectus. See “—The statistical information published by Kenya may differ from that produced by other sources and may be unreliable”. The credit ratings of the Notes are subject to revision or withdrawal, either of which could adversely affect the trading price of the Notes. The Notes are expected to be rated B+ (EXP) by Fitch and B+ by S&P. The ratings may not reflect the potential impact of all risks related to structure, market, additional factors discussed above, and other factors that may affect the value of the Notes. A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating organisation. Other than pursuant to Article 16 of the Prospectus Directive, Kenya has no obligation to inform Noteholders of any revision, downgrade or withdrawal of its current or future sovereign credit ratings. A suspension, downgrade or withdrawal at any time of a credit rating assigned to Kenya may adversely affect the market price of the Notes. Fitch and S&P are established in the European Union and registered under the CRA Regulation. In general, European regulated investors are restricted under the CRA Regulation from using credit ratings for regulatory purposes, unless such ratings are issued under the CRA Regulation (and such registration has not been withdrawn or suspended). Such general restriction will also apply in the case of credit ratings issued by non-EU credit-rating agencies, unless the relevant credit ratings are endorsed by an EU-registered credit rating agency or the relevant non-EU rating agency is certified in accordance with the CRA Regulation (and such endorsement or certification, as the case may be, has not been withdrawn or suspended). Legal investment considerations may restrict certain investments. The investment activities of certain investors are subject to legal investment laws and regulations, or review or regulation by certain authorities. Each potential investor should consult its legal advisers to determine whether and to what extent the Notes are legal investments for it, the Notes can be used as collateral for various types of borrowing and other restrictions apply to its purchase or pledge of the Notes. Financial institutions should consult their legal advisors or the appropriate regulators to determine the appropriate treatment of the Notes under any applicable risk-based capital or similar rules.

19

The liquidity of the Notes may be limited and trading prices may fluctuate. The Notes have no established trading market. While application has been made to list the Notes on the Irish Stock Exchange and any one or more of the Managers may make a market in the Notes, they are not obligated to do so and may discontinue any market making, if commenced, at any time without notice. There can be no assurance that a secondary market will develop for the Notes or, if a secondary market therein does develop, that it will continue. If the Notes are traded after their initial issuance, they may trade at a discount to their initial offering price, depending upon prevailing interest rates, the market for similar securities, general economic conditions and the financial condition of Kenya. Fluctuations in exchange rates and interest rates may adversely affect the value of the Notes. The Issuer will pay principal and interest on the Notes in US dollars. This presents certain risks relating to currency conversions if an investor’s financial activities are denominated principally in a currency or currency unit (the “Investor’s Currency”) other than US dollars. These include the risk that exchange rates may significantly change (including changes due to devaluation of the US dollar or revaluation of the Investor’s Currency) and the risk that authorities with jurisdiction over the Investor’s Currency may impose or modify exchange controls. An appreciation in the value of the Investor’s Currency relative to the US dollar would decrease the Investor’s Currency-equivalent yield on the Notes, the Investor’s Currency equivalent value of the principal payable on the Notes and the Investor’s Currency equivalent market value of the Notes. Government and monetary authorities (including where the investor is domiciled) may impose (as some have done in the past) exchange controls that could adversely affect an applicable exchange rate. As a result, investors may receive less interest or principal than expected, or no interest or principal. In addition, investment in the Notes involves the risk that subsequent changes in market interest rates may adversely affect the value of the Notes. Definitive Notes not denominated in an integral multiple of US$200,000 or its equivalent may be illiquid and difficult to trade. The Notes have denominations consisting of a minimum of US$200,000 plus integral multiples of US$1,000 in excess thereof. It is possible that the Notes may be traded in amounts that are not integral multiples of US$200,000. In each, such holder who, as a result of trading such amounts, holds an amount which is less than US$200,000 in his account with the relevant clearing system at the relevant time may not receive a Certificate in respect of such holding (should Certificates be printed) and would need to purchase a principal amount of Notes such that its holding amounts to US$200,000. If Certificates are issued, holders should be aware that Certificates which have a denomination that is not an integral multiple of US$200,000 may be illiquid and more difficult to trade than Notes denominated in an integral multiple of US$200,000. The terms of the Notes may be modified, waived or substituted without the consent of all the Noteholders The Terms and Conditions of the Notes contain provisions for convening meetings of Noteholders to consider matters affecting their interest. The provisions permit defined majorities to bind all Noteholders including Noteholders who did not attend and vote at the relevant meeting and Noteholders who voted in a manner contrary to the majority. Kenya is a sovereign state and accordingly it may be difficult to obtain or enforce judgments or arbitral awards against it. Kenya is a sovereign state and has waived only certain immunities and has not submitted to the jurisdiction of any court outside Kenya, but instead has agreed to resolve disputes by arbitration in accordance with rules and procedures of the London Court of Arbitration. As a result, a LCIA arbitration proceeding is the exclusive forum in which a holder may assert a claim against Kenya. In addition, it may not be possible for investors to effect service of process upon Kenya within their own jurisdiction, obtain jurisdiction over Kenya in their own jurisdiction or enforce against Kenya judgments or arbitral awards obtained in their own jurisdiction. See “Enforcement of Civil Liabilities” and Condition 16(b) (Arbitration).

20

Payments made in certain EU Member States may be subject to withholding tax under the EU Savings Directive. Under EC Council Directive 2003/48/EC on the taxation of savings income (the “Savings Directive”), EU Member States are required, from 1 July 2005, to provide to the tax authorities of another EU Member State details of payments of interest (or similar income) paid by a person established within its jurisdiction to (or for the benefit of) an individual resident, or certain types of entity established, in that other EU Member State. However, for a transitional period, Luxembourg and Austria will (unless during that period they elect otherwise) instead operate a withholding system in relation to such payments. The current rate of withholding under the Directive is 35 per cent. The transitional period is to terminate at the end of the first full fiscal year following agreement by certain non-EU countries to exchange information procedures relating to interest and other similar income. The Luxembourg government has announced its intention to elect out of the withholding system in favour of automatic exchange of information with effect from 1 January 2015. The Council of the European Union has adopted a Directive (the “Amending Directive”) which will, when implemented, amend and broaden the scope of the requirements of the Savings Directive described above. The Amending Directive will expand the range of payments covered by the Savings Directive, in particular to include additional types of income payable on securities, and the circumstances in which payments must be reported or paid subject to withholding. For example, payments made to (or for the benefit of) (i) an entity or legal arrangement effectively managed in an EU Member State that is not subject to effective taxation, or (ii) a person, entity or legal arrangement established or effectively managed outside of the EU (and outside any third country or territory that has adopted similar measures to the Savings Directive) which indirectly benefit an individual resident in an EU Member State, may fall within the scope of the Savings Directive, as amended. The Amending Directive requires EU Member States to adopt national legislation necessary to comply with it by 1 January 2016, which legislation must apply from 1 January 2017. A number of non-EU countries and certain dependent or associated territories of certain EU Member States have adopted similar measures to the Savings Directive. If a payment were to be made or collected through an EU Member State which has opted for a withholding system and an amount of, or in respect of, tax were to be withheld from that payment pursuant to the Savings Directive or any other Directive implementing the conclusions of the ECOFIN Council meeting of 26-27 November 2000 on the taxation of savings income or any law implementing or complying with, or introduced in order to conform to such Directive, neither the Issuer nor any paying agent nor any other person would be obliged to pay additional amounts with respect to any Note as a result of the imposition of such withholding tax. Furthermore, once the Amending Directive is implemented and takes effect in EU Member States, such withholding may occur in a wider range of circumstances than at present, as explained above. The Issuer is, however, required to maintain a paying agent in an EU Member State, if any, that will not be obliged to withhold or deduct tax pursuant to the Savings Directive. Noteholders should consult their own tax advisers regarding the implications of the Savings Directive in their particular circumstances.

21

USE OF PROCEEDS Kenya expects the net cash proceeds of the issue of the Notes to amount to US$ which Kenya expects to use for general budgetary purposes, including for the funding of infrastructure projects and repayment of a US$600 million loan incurred in 2011/12 that matures in August 2014.

22

REPUBLIC OF KENYA Location and Geography Kenya occupies a land area of 581,309 square kilometres. Kenya lies on the equator and is bordered by the Indian Ocean in the south east, Tanzania to the south, Uganda to the west, South Sudan to the north west, Ethiopia to the north and Somalia to the north east. Kenya has a population of approximately 44 million. It is divided into 47 semi-autonomous counties that are headed by Governors who were elected in the first general election under the Constitution in March 2013. Nairobi is largest city and the capital of the country. Kenya has a warm and humid climate along its Indian Ocean coastline, with wildlife-rich savannah grasslands inland towards the capital. Nairobi has a cool climate that gets colder approaching Mount Kenya. Further inland there is a warm and humid climate around Lake Victoria, and temperate forested and hilly areas in the western region. The north-eastern regions along the border with Somalia and Ethiopia are arid and semi-arid areas with near-desert landscapes. Lake Victoria, the world’s second largest fresh-water lake and the world’s largest tropical lake, is situated to the southwest and is shared with Uganda and Tanzania. The “long rains” season occurs from March/April to May/June. The “short rains” season occurs from October to November/December. The rainfall is sometimes heavy and often falls in the afternoons and evenings. The temperature remains high throughout these months of tropical rain. The hottest period is February and March, leading into the season of the long rains, and the coldest is in July and August. Kiswahili and English are both official languages in Kenya, and Kiswahili is the national language. Border Disputes Maritime Border with Somalia On 6 May 2009, Kenya submitted to the UN Commission on the Limits of the Continental Shelf, information on the limits of the continental shelf beyond 200 nautical miles from the baselines from which the breadth of the territorial sea is measured. The submission is intended to give Kenya the right to explore and exploit mineral resources on this additional territory under the Convention on the Law of the Sea. Kenya and Somalia are in discussion with regards to their respective submissions to the UN Commission. Migingo Island Migingo is a 2,000-square-metre (half-acre) island in Lake Victoria. In 2008, the island was claimed by both Kenya and Uganda. The rationale for dispute revolves primarily around the lucrative fishing rights, mostly for valuable Nile perch. In July 2009, the Ugandan government shifted its official position, stating that while Migingo Island was in fact Kenyan, much of the waters near it were Ugandan. In April 2009, the Ugandan flag was lowered and Ugandan security personnel withdrew from the island. A joint re-demarcation line of the border was launched on 2 June 2009 to recover and to place survey markers on land, making delineation of the boundary on the lake more precise. The two countries have established a joint technical experts committee to demarcate the borderline along the island. The committee has held several meetings aimed at concluding the exercise. Ilemi Triangle The Ilemi Triangle is an area of disputed land in East Africa, measuring between 10,320 and 14,000 square kilometres (3,985 and 5,405 sq mi). The territory which borders Ethiopia is claimed by South Sudan and Kenya. Since its independence, Kenya, however, has had de facto control of the area. History Kenya was not a unified political entity prior to the last decade of the 19th century. In 1890, Britain established the East Africa Protectorate, which in 1920 became a crown colony by the name of Colony of Kenya. Organised resistance to colonial rule began in the 1920s, intensified in the 1940s, and became violent in 1952 following the formation of the Mau Mau Resistance movement. After nearly eight decades of colonial rule, Kenya gained independence from Great Britain on 12 December 1963 and became a republic a year later. Jomo Kenyatta, an icon of the struggle for liberation, led Kenya as Prime Minister, and later President, from independence in 1963 until his death in 1978, when President Daniel arap Moi took power in a constitutional succession. The country 23

was a de facto one party state from 1969 until 1982 when the ruling Kenya African National Union (“KANU”) made itself the sole legal party in Kenya. President arap Moi acceded to internal and external pressure for political liberalisation in late 1991. The ethnically fractured opposition failed to dislodge KANU from power in elections in 1992 and 1997, which were marred by violence and fraud, but were viewed as having generally reflected the will of the Kenyan people. President arap Moi stepped down in December 2002 following fair and peaceful elections. Mwai Kibaki, running as the candidate of the multi-ethnic, united opposition group, the National Rainbow Coalition (“NARC”), defeated KANU candidate Uhuru Kenyatta (the son of founding President Jomo Kenyatta) and assumed the presidency following a campaign centred on an anti-corruption platform. Kibaki’s NARC coalition splintered in 2005 over a constitutional review process. Government defectors joined with KANU to form a new opposition coalition, the Orange Democratic Movement (“ODM”), which defeated the government’s draft constitution in a popular referendum in November 2005. President Kibaki’s re-election in December 2007 brought charges of vote rigging from ODM candidate Raila Odinga and unleashed two months of violence in which an estimated 1,133 people died. African Union-sponsored mediation led by former UN Secretary General Kofi Annan in late February 2008 resulted in a power-sharing accord bringing Mr. Odinga into the government in the restored position of Prime Minister. The power-sharing accord included a broad reform agenda, the centre piece of which was constitutional reform. In August 2010, Kenyans overwhelmingly adopted the Constitution in a national referendum. The Constitution introduced additional checks and balances to executive power, including a bill of rights for Kenyan citizens, and significant devolution of power and resources to 47 newly created counties. It also eliminated the position of Prime Minister following the first presidential election under the Constitution, which occurred on 4 March 2013. While allegations of irregularities in the voting process were made, the elections were not marred by violence and the result was confirmed by the newly constituted Supreme Court, which dismissed the opposition’s appeal. Uhuru Kenyatta, running against a field including Prime Minister Odinga, won the March elections in the first round by a close margin and was sworn into office on 9 April 2013. Population The population of Kenya was approximately 44 million as at July 2013. According to the 2009 population census, ethnic groups in the nation are represented as follows: Kikuyu (22 per cent.), Luhya (14 per cent.), Luo (13 per cent.), Kalenjin (12 per cent.), Kamba (11 per cent.), Kisii (6 per cent.), Meru (6 per cent.), other African (15 per cent.) and non-African (Asian, European, and Arab) (1 per cent.). The vast majority of Kenyans are Christian (83 per cent.), with 47.7 per cent. regarding themselves as Protestant and 23.5 per cent. as Roman Catholic of the Latin rite, while other Kenyans are Muslim (11.2 per cent.), irreligious (2.4 per cent.) or have indigenous beliefs (1.7 per cent.). Population density is estimated at approximately 75 persons per square kilometre, with approximately 24 per cent. of the population living in urban areas. Nairobi, the capital of the country and its largest city, has an estimated population of 3.4 million. Other main cities of Kenya are Mombasa, Kisumu and Nakuru with estimated population of 966,000, 388,000 and 307,000, respectively. Kenya has a diverse population that includes most major ethnoracial and linguistic groups found in Africa. There are an estimated 42 different communities, with Bantus (67 per cent.) and Nilotes (30 per cent.) constituting the majority of local residents. Cushitic groups also form a small ethnic minority, as do Arabs, Indians and Europeans. The country has a young population with 73 per cent. of residents aged below 30 years. The following table sets out selected comparative macroeconomic statistics regarding certain socioeconomic indicators for 2012 (unless otherwise indicated) for Kenya and for certain other countries. Selected Comparative Socieconomic Statistics

Zambia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ghana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kenya . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tanzania . . . . . . . . . . . . . . . . . . . . . . . . . . . . Uganda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rwanda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Burundi . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Per capita GDP (in constant 2005 US$)

Life expectancy (in years)(1)

Adult literacy rate(2)

Doing Business Ranking(3)

Debt/GDP 2013 Estimate(4)

798 724 595 483 405 390 153

55.8 60.8 60.4 60.1 58.0 62.9 53.1

61.4 71.5 72.2 67.8 73.2 65.9 86.9

83 67 129 145 132 32 140

31.8 53.1 50.7 42.7 30.7 23.5 47.6

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Notes: (1) 2011 data. (2) 2010 data, except for Kenya and Zambia, which are 2007 data, and Burundi, which is 2008 data. (3) Doing Business Index 2014. (4) Estimated Source: World Bank Statistical Compendium; The World Factbook Public Health Kenya’s public health policy is guided by the policy of having the highest attainable standard of health in a manner responsive to the needs of the population. At the national level, the Ministry of Health has been working to move towards the devolution model provided by the Constitution. A two-tier system is being implemented which provides a role for institutions at the national and county level, instead of the previous sector wide approach. Under the current health sector approach, the sector is comprised of the Ministry of Health and eight semi autonomous government agencies namely, Kenyatta National Hospital, Moi Teaching & Referral Hospital, Kenya Medical Research Institute, Kenya Medical Supplies Agency, Kenya Medical Training College, National Health Insurance Fund, National Aids Control Council and HIV & AIDS Tribunal, which provide the Ministry of Health with support of the following core functions through specialised health service delivery; medical research and training; procurement and distribution of drugs; and financing through health insurance. Under the proposed framework to comply with devolution, the Ministry of Health is primarily responsible for developing national policy, providing technical support, monitoring quality standards of performance of the county governments and community organisations, providing guidelines on tariffs and conducting studies required for administrative and management purposes. During this transitional period of 2012-2017, the national government will also support the establishment of capabilities of the institutions at the county level. As a result of the Constitution, most of the delivery of health services will be provided by the counties, with further responsibilities at the county level being provided at a sub-county and community level. The one exception is the Ministry of Health will retain national referral services, which are comprised of all secondary and tertiary referral facilities that provide specialised services. The county health services will be responsible for all level 4 (primary) hospitals and services in the county, including those managed for non-state entities. The county health services thus will be primarily responsible for comprehensive in-patient diagnostics, medical surgical and rehabilitative care, including reproductive health services, specialised outpatient services and facilitating and managing referrals from the sub-county and community health level. The sub-county health management will comprise all level 2 (dispensary) and level 3 (health centres) facilities, including those managed by non-state entities. The primary responsibilities at this sub-county level is for disease prevention and health promotion, basic outpatient diagnostic, medial surgical and rehabilitative services, inpatient services for emergency patients waiting referral, patient observation and normal delivery services. The sub-county level institutions are also responsible for facilitating referrals from the community health level. Finally, the community health level comprised of the community units in the county have as their primary responsibilities the promotion of better health behaviours, recognition of signs and symptoms of conditions requiring referral and facilitation of community diagnostics, management and referrals to the higher levels. As of 30 June 2013, the Ministry of Health owned and operated 3,965 facilities or 42.9 per cent. of all health facilities in the country, with private institutions and private practices, faith based organisations, other public institutions, and non-governmental organisations owning and operating, 3,500 (37.8 per cent.), 1,053 (11.4 per cent.), 438 (4.7 per cent.), and 293 (3.2 per cent.), respectively. The table below provides summary statistics about the public health system for the periods presented. Public Health System 2010

Number of primary care facilities Number of registered medical personnel Medical personnel in training

As of December 31, 2011 2012

7,111 100,411 8,985

Source: Ministry of Health

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8,006 95,960 8,261

8,375 105,369 11,338

The table below provides the total actual expenditures by programme for the periods presented. Expenditures by Programme

Curative Health Preventative and Promotive Health Research and Development

2009/2010

2010/2011 (KES millions)

2011/2012

26,818.70 9,670.60 7,398.00

25,109.20 17,090.44 6,454.00

29,314.70 29,588.99 8,283.00

Source: Ministry of Health HIV/AIDS, Malaria and Tuberculosis HIV/AIDS, tuberculosis and malaria are major healthcare challenges in Kenya and other East African countries. In the period 2010/11 to 2012/13, national HIV prevalence declined from 7.2 per cent. to 5.6 per cent. of adults aged 15-64 years, while prevalence dropped from 3.8 per cent. to 2.1 per cent. of adults aged 15-24 years and 10.5 per cent. to 6.4 per cent. of adults aged 25-34 and the total number of persons living with HIV is estimated to be in the region of 1.6 million. Tuberculosis infections are mostly opportunistic infections relating to immune system suppression due to HIV. In 2013, there were 11,186 deaths due to tuberculosis compared to 10,611 deaths due to tuberculosis in 2012, an increase of 5.4 per cent. About 25 million Kenyans live in malaria endemic regions of the former provinces of Western, Nyanza and the Coast, with a majority of them under the age of 15. While combination therapies and use of indoor residual spraying have resulted in reduction of prevalence from 38 per cent. in 2010 to 21 per cent. in 2012; some regions of Western and Nyanza, however, still have experienced little or no changes in the period 2010/11 to 2012/13 (between 37 per cent. and 47 per cent.). Education The education sector has as its overall goals to increase access to education and training, improve quality and relevance of education, reduce inequality as well as develop knowledge and skills in science, technology and innovation for global competitiveness. The education sector is comprised of the Ministry of Education, Science and Technology, the Teachers Service Commission and their affiliated institutions. In order to align the sector with the Constitution, international commitments and other policies such as Kenya Vision 2030 there are several reforms being considered to reshape the sector. The national government’s role is in setting policy, allocating the national education budget and supervising and regulating the education system. At the school level, the sector is already decentralised. However, decisions regarding what specific functions currently performed by the Ministry of Education, Science and Technology will be devolved to the counties and if there will be a management level equivalent to an education department at the county level is still to be determined. Expenditures by the Ministry of Education, Science and Technology were KES179,000 million, KES207,460 million, KES247,715 million for the periods 2010/2011, 2011/2012 and 2012/2013, respectively. Other recent initiatives in the sector include: •

Creation of programmes targeting marginalised children, such as the School Feeding and Gender in Education programmes;



The construction/rehabiltiation or expansion of 560 secondary schools. Under the economic stimulus initiative, commenced in 2009 a total of KES6.3 billion was disbursed to 355 secondary schools. Construction/rehabilitation works aimed at transforming the 200 schools into centres of excellence is still ongoing and under the infrastructure programme, funds were disbursed to 371 schools for rehabilitation/expansion and work is ongoing. Cumulatively 60 schools have been upgraded from the former provincial schools to national schools and an additional 27 provincial schools have been earmarked for upgrading to national schools in 2013/14;



Establishment of a voucher system programme in the five poorest districts. The programme seeks to enhance financial assistance targeting vulnerable groups to supplement the already existing initiatives including the school feeding and nutrition programme, bursary, free primary education and free secondary education.

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Primary, Secondary and Higher Education At present basic education covers two years of pre-school, eight years of primary education, four years of secondary education and four years of basic university degree. The table below provides student enrolment in primary and secondary schools for periods provided below Primary and Secondary School Enrolment 2010

Primary school(1) Secondary school(2)

2011 2012 (thousands of students)

9,381 1,653

9,857 1,768

9,971 1,915

Notes: (1) Figures are provisional for the periods 2010, 2011 and 2012. (2) Figures are provisional for the 2012 period. Source: Ministry of Education, Science and Technology. As of 2013, there are 22 public universities and nine constituent university colleges and 35 private universities. The table below provides student enrolment in public and private universities by the period Enrolment in Public and Private Universities 2010/2011

2011/2012

2012/2013

Public Universities(1) Private Universities

139,770 37,848

157,916 40,344

195,528 45,023

Total enrolment

177,618

198,260

240,551

Notes: (1) Includes information as to enrolment only as to the following universities: University of Nairobi, Kenyatta University, Moi University, Egerton University, Jomo Kenyatta University of Agriculture and Technology, Maseno University, Masinde Muliro University of Science and Technology, Kenya Polytechnic University and Mombasa Polytechnic University College. Source: Ministry of Education, Science and Technology. Political System General Kenya is a multi-party democratic state comprising the executive, the legislature, the judiciary and the devolved government. The President, the Deputy President, and the Cabinet constitute the executive branch of the Kenyan government. The President is Head of State and government, the Commander in Chief of the Kenya Defence Forces and the chairperson to the National Security Council. The President is elected by registered voters in a national election for a five-year term and can only be re-elected for one additional term. The Deputy President is the principal assistant of the President and deputises the President in the execution of the President’s functions. The Cabinet comprises the President, the Deputy President, the Attorney General and the Cabinet Secretaries who should not be less than 14 and not more than 22. The President nominates and, with the approval of the National Assembly, appoints Cabinet Secretaries. Kenya currently has 18 Cabinet Secretaries. The legislature is composed of the Senate and the National Assembly. The total number of Senators is 67 members. Fourty-seven are elected by the registered voters in the 47 counties of Kenya, 16 women members are nominated by political parties according to their proportion of members in the Senate, four members (two men and two women) represent the youth and persons with disabilities and are elected on the basis of proportional representations by use of party lists. The Speaker is an ex officio member of the Senate. The Speaker is elected from candidates who are not Senators by the votes of two-thirds of all the Senators. If no candidate reaches the required number of votes, then a runoff election is held between the two candidates that received the highest and next highest number of votes; however, if more than one candidate receives the highest number of votes, then only the candidates that received the highest number of votes will participate in the runoff election. The candidate who receives the highest number of votes in the runoff election will be declared the Speaker. 27

Each of the 290 constituencies elect a member to the National Assembly. Under the Constitution, there must be a women’s representative member of parliament elected from each county, guaranteeing a minimum of 47 women members in the National Assembly. Twelve additional members are nominated by parliamentary political parties according to their proportion of members in the National Assembly. The total number of members to the National Assembly is 349. Similar to the Senate, the Speaker is an ex officio member of the National Assembly and is elected from candidates who are not members of the National Assembly. The procedure for election of the Speaker of the National Assembly is similar to the election of the Speaker of the Senate. As at 31 December 2013, the coalition of political parties supporting President Kenyatta holds 53.6 per cent. (187/349) of the seats in the National Assembly and 49.3 per cent. (33/67) of the seats in the Senate. The most recent presidential and legislative elections in Kenya took place in March 2013 and the next presidential and legislative elections are scheduled for August 2018. Since the occurrence of the 2007-2008 post-election violence, Kenya has made concerted efforts to put in place an institutional framework intended to facilitate peaceful transfer of power. The most notable measures that have been implemented are the following: •

the promulgation of the Constitution, which contains elaborate provisions in respect of the general election cycle and the requirement that election petitions be determined within six months after the declaration of the results, establishes the Supreme Court of Kenya, whose mandate includes hearing and determining petitions arising out of a presidential election, and provides for the process of the swearing in a newly elected President;



the enactment of legislation containing provisions aimed at addressing concerns that might have contributed to the 2007 post election violence as further detailed below;



the establishment of various independent commissions whose mandates are to implement the provisions of the Constitution as further detailed below;



undertaking extensive on-going judicial reforms aimed at instilling public confidence in the Kenyan judicial system, in particular the public vetting of judicial officers including Magistrates and Judges of Kenya’s subordinate and superior courts, respectively; and



the establishment of the Constitutional Implementation Oversight Committee, which is a select committee of Parliament established under the Constitution and whose mandate is to maintain oversight over the implementation of the Constitution.

As mentioned above, several independent commissions have been established under the Constitution with unique respective mandates aimed at entrenching constitutionalism, respect for the rule of law, and the implementation of the devolved system of government. The independent commissions include: •

the National Cohesion and Integration Commission (the “NCIC”), which is established under the National Cohesion and Integration Act, 2008 (the “NCIC Act”). The NCIC was established to facilitate and promote equality of opportunity, good relations, harmony and peaceful co-existence between persons of the different ethnic and racial communities of Kenya, and to advise the government on all aspects in respect thereof. In addition, the NCIC has the lead role in promoting the elimination of all forms of discrimination on the basis of ethnicity or race, promoting tolerance, understanding and acceptance of diversity in all aspects of national life and encouraging full participation by all ethnic communities in the social, economic, cultural and political life of other communities, promoting arbitration, conciliation, mediation and similar forms of dispute resolution mechanisms in order to secure and enhance ethnic and racial harmony and peace, investigating complaints of ethnic or racial discrimination and to make recommendations to the Attorney-General, the Kenya National Human Rights Commission or any other relevant authority on the remedial measures to be taken where such complaints are valid, identifying and analysing factors that inhibit the attainment of harmonious relations between ethnic communities, particularly barriers to the participation of any ethnic community in social, economic, commercial, financial, cultural and political endeavours, amongst other roles set out in the NCIC Act;



the Kenya National Commission on Human Rights (the “KNCHR”), which is established under the Kenya National Commission on Human Rights Act, 2011. The functions of the KNCHR include, among others, promoting the respect for human rights and developing a culture of human rights in Kenya, monitoring, investigating and reporting on the observance of human rights in all spheres of life in Kenya, to receive and investigate complaints about the alleged abuses of human rights and taking 28

steps to secure appropriate redress where human rights have been violated, and on its own initiative or the basis of complaints, to investigate or research a matter in respect of human rights, and make recommendations to improve the functioning of state organs; •

the Independent Electoral and Boundaries Commission, which is established under the Independent Electoral and Boundaries Commission Act, 2011 and whose role is to supervise elections and referenda at the county and national government levels;



the National Police Service Commission established under Article 246 of the Constitution and whose role includes staffing of the National Police Service, and exercising disciplinary control over the members of the National Police Service;



the National Land Commission established under Article 67(1) of the Constitution and whose functions include, managing public land on behalf of the national and county governments and initiating investigations, on its own initiative or on a complaint, into present or historical land injustices and to recommend appropriate redress; and



the Commission for the Implementation of the Constitution established under the Constitution and whose mandate is to monitor, facilitate and oversee the development of legislation and administrative procedures required to implement the Constitution, to co-ordinate with the Attorney-General and the Kenya Law Reform Commission in preparing for tabling in Parliament, the legislation required to implement the Constitution, preparing and submitting a report every three months to the Constitutional Implementation Oversight Committee of Parliament in respect of progress made in the implementation of the Constitution, and any impediments to its implementation, and to work with each Constitutional commission to ensure that the letter and spirit of the Constitution is respected.

In addition to the Constitution and statutes already mentioned above, the following statutes have been enacted with the aim of fostering the peaceful transition and transfer of power: •

the Assumption of the Office of President Act, 2012 (the “AOP Act”), which came into force upon the announcement of the date of the first elections in March 2013 under the Constitution. The provisions of the AOP Act apply in relation to the assumption into office by the President and the Deputy President and it sets out the procedure for the swearing in ceremony of the President and the Deputy President;



the National Police Service Act, 2011 (the “NPS Act”) that among other provisions, provides for the recruitment, enlisting and training of police officers and the implementation of the ongoing police reforms, which involve among other measures, the public vetting of senior officials serving in the National Police Service; and



the Land Act, 2012 and the Land Registration Act, 2012, which were enacted in line with Article 68 of the Constitution and were intended to address unequal distribution of land, one of the perceived causes of the 2007 post election violence. The two statutes revise, consolidate and rationalise existing land in accordance with the Constitutional principles aimed at ensuring equitable access to land, security of land rights, transparent and cost effective land administration, among others.

The judiciary comprises of three superior courts: the Supreme Court; the Court of Appeal; and the High Court. The Supreme Court is the highest judiciary organ consisting of the Chief Justice, the Deputy Chief Justice and five other judges. The Supreme Court has original jurisdiction to hear and determine disputes relating to the office of the President and appellate jurisdiction to hear and determine appeals from the Court of Appeal and any other court or tribunal as prescribed by national legislation. The Court of Appeal consists of the number of judges, being not fewer than 12, as may be prescribed by an Act of Parliament. This court has jurisdiction to hear appeals from the High Court and any other court or tribunal as prescribed by an Act of Parliament. The High Court consists of such number of judges prescribed by an Act of Parliament and has: (i) unlimited jurisdiction in civil and criminal matters; (ii) jurisdiction to determine any infringements of the rights and freedoms under the Bill of Rights, to hear appeals from a decision of a tribunal appointed under the Constitution to consider the removal of a person from office and to hear any questions with respect to the interpretation of the Constitution; (iii) and supervisory jurisdiction over all other subordinate courts and any other persons, body or authority exercising judicial or quasi-judicial functions. The Constitution establishes 47 counties, each with its own county government. County governments consist of a county assembly and a county executive. 29

The county assembly is made up of members elected from different wards in the county, the number of special seat members necessary to ensure that no more than two thirds of the membership of the assembly are the same gender and the number of members of marginalised groups, including persons with disabilities and the youth prescribed under an Act of Parliament. The speaker of the county assembly is an ex officio member and is elected by the county assembly from among persons who are not members of the county assembly. The executive authority of the county is vested in and exercised by a county executive committee. The executive committee consists of the county governor, the deputy governor and the members appointed by the county governor with the approval of the county assembly (from among persons who are not members of the assembly). Voters in each county elect their governor. Each county governor nominates a person who is qualified for nomination as county governor as a candidate for deputy governor. The governor and the deputy governor shall not hold office for more than two terms. Some of the provisions of the Constitution with regard to devolved governments are still in the process of being implemented. Parliament is required to enact legislation within three years of the adoption of the Constitution to support the full implementation of devolved government. The 2010 Constitution and Devolution After the 1997 general elections, Parliament enacted the Constitution of Kenya Review Act (2002) that formed the legal groundwork for constitutional reforms. A constitutional review body was created to provide civic education, seek public input and draft a new constitution to be studied by a National Constitutional Conference. The draft constitution, however, was rejected in the 2005 referendum. The draft constitution was eventually revived after the 2007 post-election violence in Kenya. A Committee of Experts published a proposed constitution on 23 February 2010 that was presented to Parliament. Parliament approved the proposed constitution on 1 April 2010. The proposed constitution was subjected to a referendum on 4 August 2010, approved by 67 per cent. of Kenyan voters, and became the Constitution. The Constitution introduced additional checks and balances to executive power, including a bill of rights for Kenyan citizens, and significant devolution of power and resources to 47 newly created counties. Although devolution is one of the key concepts in the Constitution, it is not new to Kenya’s political history. Prior to Kenya’s independence in 1963, there was already a movement to transfer significant powers to regional authorities. While regional governments during the period after independence could be characterised as having some autonomy, successive central government administrations moved rapidly to centralise and consolidate state power. The clamour for devolution grew during the 1990s. Although there were some piecemeal decentralisation efforts from 1998 to 2006 with the introduction of devolved (geographically earmarked) funds (such as the Local Authority Transfer Fund created through the LATF Act No 8 of 1998, the Road Maintenance Levy Fund created through the Kenya Roads Act, 2007, the Rural Electrification Fund created through the Energy Act of 2006 and the Constituency Development Fund created through the CDF Act of 2003), it was not until the adoption of the Constitution that devolution was placed at the core of the law of the land and the political system. The implementation of devolution as established in the Constitution, however, will require a process by which important acts must be approved by Parliament. The acts passed in accordance with the Constitution include the Urban Areas and Cities Act, The County Governments Public Finance Management Transition Act, 2013, Division of Revenue Act, The National Government Co-ordination Act, The Transition County Allocation of Revenue Act, 2013, The Transition County Appropriation Act, 2013, The County Governments Act and The Public Finance Management Act. Audit Report Article 229 of the Constitution requires that an audit report be submitted to Parliament within six months after the end of each fiscal year. The Auditor General prepares the initial draft of the audit report with the information that the Ministries have made available to him at the time of submission, which is often incomplete at such time and, as a result, the Auditor General is understandably unable to account for all public funds in the government accounts of the prior year. Consequently, the draft report submitted to Parliament typically has significant audit queries. The Ministries continue to provide the required information and, at the time the report is adopted by Parliament, virtually all outstanding queries in the submitted report typically will have been addressed. If the Parliament finds a weakness in internal controls it makes a recommendation for improvement, and National Treasury is required to respond within six months through a memorandum which, if adopted by Parliament, concludes the audit. For the fiscal years 2010/2011 and 2011/2012, the audit reports are currently under scrutiny 30

by the Public Accounts Committee of Parliament. For the fiscal year 2012/2013, the Auditor General has not yet submitted a report to Parliament. Legal Proceedings ICC Proceedings On 8 March 2011, President Uhuru Kenyatta, Deputy President William Ruto, former Industrialisation Minister Henry Kosgey, former head of Public Service and Secretary to the Cabinet Francis Muthaura, radio executive Joshua Arap Sang and former police commissioner Mohammed Hussein Ali were summoned to appear before the ICC at The Hague following accusations of crimes against humanity related to the violence that occurred in the aftermath of 2007 presidential elections. The government of Kenya and the National Assembly both attempted to put in place mechanisms to have the cases tried in Kenya. The government appealed to both the UN Security Council and the ICC itself regarding the admissibility of the case. The National Assembly voted in favour of removing Kenya as a state party to the Rome Statute, the international treaty which established the ICC. Despite this opposition, the suspects cooperated with the proceedings and attended preliminary hearings in The Hague in April 2011 and confirmation of charges hearings in September of that year. The Pre-Trial Chamber II of the ICC confirmed the charges against Kenyatta, Ruto, and Sang and declined to confirm the charges against Ali, Kosgey, and Muthaura. The trial of Ruto and Sang began on 10 September 2013, while that of Kenyatta was set to begin on March 2014, but the prosecutor has requested an indefinite adjournment of the hearing citing insufficient evidence. President Kenyatta and Deputy President Ruto have been cooperating and appearing at the proceedings, consistent with the ICC Rules of Procedure and Evidence. These rules have recently been amended to provide that defendants may be excused from appearing in person, under certain circumstances. The prosecutor in President Kenyatta’s case has requested an adjournment of the hearing in his case. On 31 March 2014, the ICC rejected the request by President Kenyatta for the termination of the case and set a commencement date of 7 October 2014 for the trial. The ICC also rejected a prosecution request to suspend the proceeding indefinitely pending compliance by Kenya with its cooperation obligations. As at the date of this Prospectus, the proceedings have not interfered with, and the ICC has shown sensitivity not to interfere with, the ability of the President and the Deputy President to fulfil their constitutional duties, although there can be no guarantee that this will always be the case. Further, the political impact of a conviction, if confirmed after appeal, of either the President or the Deputy President cannot be predicted. Governor of the Central Bank of Kenya On 11 February 2014 the Director of Public Prosecutions ordered the arrest and prosecution of the Governor of the Central Bank of Kenya, Njuguna Ndung’u, alleging abuse of office for failure to comply with public procurement regulations related to the award of a contract for the installation of security software at the Central Bank of Kenya. Governor Ndung’u has denied the allegations and sought an order that he could not be arrested or charged. On 14 February 2014, the High Court of Kenya ruled that the Ethics and Anti-Corruption Commission, the Director of Public Prosecutions and the police could not arrest or charge Governor Ndung’u until his petition before the High Court was heard and determined. A hearing to determine this petition had been set for 14 May 2014. In May 2014, three successive judges recused themselves from hearing the case and the hearing on 14 May 2014 was vacated. The case was referred to Chief Justice for the appointment of a new judge. The Chief Justice has referred the case to a judge of the Judicial Review Division of the High Court. As of 2 June 2014, no new date has yet been set for the hearing. If Governor Ndung’u is charged, he would be suspended from office and the Deputy Governor of the Central Bank of Kenya, Haron Sirima, will temporarily take over the duties of the Governor. Anglo Leasing In December 2003, the Department of Immigration contracted for a loan for the issuance of secure passports and the equipment to be used at Kenya’s borders. Kenya’s procurement laws were not followed and a company named “Anglo Leasing and Finance Company Ltd.” was awarded the contract. Subsequent review revealed that there were 18 contracts similar to the one arranged by Anglo Leasing and Finance Company Ltd. and these contracts have been collectively referred to as the “Anglo Leasing contracts.” On 12 August 2004, the then Ministry of Finance suspended all payments pursuant to the 18 contracts pending further investigation. Investigations followed by the Ministry of Finance, the Public Accounts Committee of Parliament, the Controller and Auditor General. Additionally, PricewaterhouseCoopers, an independent auditor, was contracted to conduct a forensic audit and valuation of the Anglo Leasing contracts. The various reports 31

concluded, among other things, that Kenyan’s procurement laws were not followed, there was gross overpricing for goods and services, pre-financing payments were made, Kenya was paying interest on its own funds, in some cases, and there was evidence of corruption and abuse of office. Of the 18 Anglo Leasing contracts, (i) four contracts with a value of KES18.9 billion were cancelled and KES1 billion were recovered; (ii) three contracts with a value of KES6.8 billion have been completed and paid out; and (iii) eleven contracts with a value of KES30.6 billion were at various stages of completion. Of the eleven partially completed contracts, six have not been active, two have been settled directly with the parties and two had final judgments totaling approximately US$14.8 million plus interest and costs entered against Kenya in courts in Switzerland and England. On 19 May 2014, Kenya paid a negotiated amount of US$16.4 million concerning these two judgments. The negotiated amount was due on 28 April 2014. The Attorney General of Kenya does not believe that the claimant creditors will seek further payments from Kenya, but if they do, Kenya is prepared to resolve the matter. As for the eleventh contract, which involved a contract for the design, supply and installation of various electronic security equipment for the National Intelligence Service, the contractor terminated the contract in October 2013 and sent Kenya a claim for approximately KES3.05 billion. The claimant has yet to file any litigation to enforce its claim. In May 2014, the President ordered an investigation by the Ethics and Anti-corruption Commission into the corruption allegations in connection with the Anglo Leasing contracts. Given the public scrutiny associated with the contracts, the government will oppose vigorously any claim connected to the Anglo Leasing contracts. International Relations WTO Membership Kenya has been a member of the World Trade Organisation (the “WTO”) since 1 January 1995. In connection with Kenya’s WTO membership, the government is committed to supporting the progressive elimination of export subsidies as well as the substantial reduction of trade-distorting domestic support, whilst ensuring that it retains the right to support its own producers. As part of Kenya’s goal of ensuring its citizens have access to foreign goods and services that are not readily available in the country, the government is committed to engage in successive WTO Services negotiations to improve market access in partner WTO countries. United Nations Kenya has been a member of the UN since 1963. Kenya recognises the vital role of the UN in establishing and maintaining international peace and security, as well as in sustainable development and democratisation. Kenya continues to contribute military, police and corrections personnel to UN peace keeping operations with most of them being in Africa. Kenya has peacekeepers in Somalia, Sudan, South Sudan, Sierra Leone and Liberia. EU Relations Kenya participates in political, trade and co-operation relations with the EU through the “Cotonou Agreement”, the revised draft of which the EU and 79 countries in Africa, the Caribbean and the Pacific (the “ACP”) signed in March 2010. The agreement has the objective of reducing and eventually eradicating poverty consistent with the objectives of sustainable development and the gradual integration of the ACP countries into the world economy. The agreement is designed to establish a comprehensive partnership, based on three complementary pillars: development cooperation, economic and trade cooperation, and the political dimension. World Bank and IMF Kenya has been a member of the World Bank and the International Monetary Fund (“IMF”) since 1964. See “Public Debt—Relations with the IMF” for more information on Kenya’s relationship with the IMF. Regional Relations African Union. Kenya is an active member of the African Union (“AU”), the successor of the Organisation of African Unity (“OAU”), which formally launched in July 2002 at a meeting in South Africa of African heads of state. The AU is modelled on the EU and has plans for a parliament, a central bank, a single currency, a court of justice and an investment bank. These plans include the Pan-African Parliament, which was inaugurated in March 2004 and has since held a number of sessions, although it does not yet play a legislative role. AMISOM. The African Union Mission in Somalia (“AMISOM”) is an active regional peace support mission set up by the Peace and Security Council of the African Union with the full support of the UN. The principal aim of the mission is to provide support for the Federal Government of Somalia in its efforts to stabilise the country and 32

foster political dialogue and reconciliation. AMISOM is also mandated to facilitate the delivery of humanitarian aid and create necessary conditions for the reconstruction and sustainable development of Somalia. AMISOM staff come from a wide range of nations across Africa, although a large number of its troops come from five countries: Uganda, Burundi, Djibouti, Kenya and Sierra Leone. AMISOM was created with an initial six-month mandate though subsequent renewals of its mandate by the AU Peace and Security Council and the UN Security Council have been authorised. UN Security Council resolution 2124 renewed the mandate of the troops to 31 October 2014. The strength of AMISOM uniformed personnel stands now at 17,731, including 3,664 from Kenya. East African Community. Kenya is also an active member of the East African Community (“EAC”). The EAC is a regional intergovernmental organisation of the Republics of Burundi, Kenya, Rwanda and Uganda and the United Republic of Tanzania. The Treaty for Establishment of the East African Community was signed on 30 November 1999 and entered into force on 7 July 2000 following its ratification by the original three partner states—Kenya, Tanzania and Uganda. Rwanda and Burundi acceded to the treaty on 18 June 2007 and became full members on 1 July 2007. The EAC aims at widening and deepening co-operation among its members in, among others, political, economic and social fields for their mutual benefit. The EAC countries established a customs union in 2005 and a common market in 2010. The common market comprises over 133 million people across five member states with a total GDP of approximately US$79 billion. The EAC expects to enter into the next phase of integration which contemplates monetary union and the entry into a political federation of the East African states. The EAC customs union has assisted to level the playing field for the region’s producers by imposing uniform competition policy and law, customs procedures and external tariffs on goods imported from third countries, which has supported the region to advance its economic development and poverty reduction agenda. Further to this, the customs union has promoted cross-border investment and served to attract investment into the region. As an enlarged market with minimal customs clearance formalities, it is more attractive to investors than the smaller markets of individual nations. In addition, the customs union offers a more predictable economic environment for both investors and traders across the region, as regionally administered Common External Tariff (CET) and trade policy tend to be more stable. Private sector operators based in the region with cross-border business operations are able to exploit the comparative and competitive advantages offered by regional business locations, without having to factor in the differences in tariff protection rates, and added business transaction costs arising from customs clearance formalities. The regionally based enterprises are also getting better protection, as enforcement of the CET is at a regional level. Most importantly, however, is the signalling effect that arises from the member states agreeing to implement a common trade policy in their relationship with the rest of the world. This is important in view of the developments at the global level, where countries are entering into economic partnership as regional groupings. The EAC common market provides for freedom of movement for all the factors of production between the member states, the factors of production thus become more efficiently allocated, further increasing productivity. For both business within the market and consumers, a single market is a very competitive environment, making the existence of monopolies more difficult. This means that inefficient companies will suffer a loss of market share and may have to close down. However, efficient firms can benefit from economies of scale, increased competitiveness and lower costs, as well as expect profitability to be a result. Consumers have benefited by the single market in the sense that the competitive environment brings them cheaper products, more efficient providers of products and also increased choice of products. What is more, businesses in competition will innovate to create new products; another benefit for consumers. Other benefits include common and coordinated policies that increase efficiency especially in those countries that are behind in instituting good policies. In addition, the common regulatory regime and frameworks ensure that best practice within the regional framework are not only in place but are also adhered to. The use of a single market ensures that good procedures will be instituted and practiced. This creates an efficient bloc that operates in a higher indifference curve in consumption and efficient production curve.

33

On 30 November 2013, the protocol on monetary union was signed by the member states, establishing a target to have a unified currency by 2023. The protocol will be implemented over a ten-year period, subsequently leading to creation of a regional central bank whose mandate is to stabilise financial prices. The protocol aims to provide a wide scope of cooperation in monetary and financial sectors among the EAC member states. Member states are expected to surrender monetary and exchange rates policies to one authority leading to a single currency regime within the region. Kenya has benefited from EAC integration with trade in goods and services increasing since the launch of the customs union. In 2012, EAC member states accounted for 26.1 per cent. of Kenya’s total exports, with Uganda as the leading destination within the EAC, accounting for approximately 49.6 per cent. of exports to the EAC. In a bid to enhance trade within the EAC, member states have been addressing issues relating to movement of goods and services. Recently, the heads of state of Kenya, Uganda and Rwanda launched a project to revamp the existing railway from the port of Mombasa to Nairobi extending to Kampala, Uganda, which will also have links to Kigali, Rwanda. A new railway, road and pipeline under the LAPSSET project is expected to be built from Lamu, Kenya to South Sudan, which also will have a connection to Ethiopia. The infrastructure projects are expected to boost trade and economic integration in the EAC member states. The three member states also launched the single customs territory that saw the reduction of transit time for goods from Mombasa port to Kigali from 22 days to eight, and to Kampala from 18 days to five days. South Sudan, Somalia and Ethiopia have expressed interest in joining the EAC. COMESA. Kenya attaches great significance to COMESA, as it provides a market for its manufactured products. The COMESA region is a vibrant economic area and membership in the free trade area was launched in October 2000, and has since been a catalyst to increased trade and investment. The COMESA member states are Burundi, Comoros, Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Libya, Madagascar, Malawi, Mauritius, Seychelles, Sudan, South Sudan, Swaziland, Zambia and Zimbabwe. Currently, COMESA (which includes members of the EAC) is the leading destination of Kenya’s export, constituting over 33.9 per cent. of total exports. Kenya’s exports to COMESA increased by 63 per cent. from KES111.1 billion in 2008 to KES175.7 billion in 2012. Kenya’s leading exports to COMESA include tea, cement, natural sodium carbonate, iron and steel bars and cigarettes. Kenya now hosts a number of COMESA institutions which include, the Monetary Institute, ZEP-RE (re-insurance company) and COMESA reference laboratory for plant health at the Kenya Plant Health Institute. Within the framework of EAC and COMESA, Kenya has been negotiating the Tripartite, an umbrella of organisations consisting of three of Africa’s regional economic communities, which are EAC, COMESA and South African Development Community (“SADC”). The first Tripartite summit was held on 22 October 2008 in Kampala, Uganda, and the heads of state conveyed in their communiqués a sense of urgency for the establishment of single free trade area covering the 26 countries of COMESA, EAC and SADC. The objective of the Tripartite is to contribute to the broader objectives of the AU, namely accelerating economic integration of the continent and achieving sustainable economic development, thereby alleviating poverty and improving quality of life for the people of Eastern and Southern Africa region. The Tripartite works towards harmonisation of the various regional integration programmes of its member regional economic communities. These regional integration programmes focus on expanding and integrating trade and include the establishment of a free trade area, a customs union, a monetary union, and a common market; as well as infrastructure development projects in transport, information, communication, technology and energy sectors. The Tripartite negotiations for the first phase were meant to be completed by June 2014. However, current indications are that negotiations are likely to conclude by the end of 2014. Kenya is expected to benefit from the Tripartite framework due to an increase market for goods and services as well as increased investments with member states. Nile Water Agreement of 1929. The Nile Water Agreement of 1929 grants Egypt the majority share of the Nile River’s waters. Under the treaty, Egypt is guaranteed access to 55.5 billion cubic metres of water out of a total of 84 billion cubic metres. To forestall any potential disputes, the Nile Basin Initiative was formally launched in February 1999 by the water ministers of nine countries that share the river—Egypt, Sudan, Ethiopia, Uganda, Kenya, Tanzania, Burundi, Rwanda and the Democratic Republic of Congo, with Eritrea as an observer. The Nile Basin Initiative is a partnership among the Nile riparian states that “seeks to develop the river in a cooperative 34

manner, share substantial socioeconomic benefits, and promote regional peace and security”. The Nile Basin Initiative has been signed by six countries, including Ethiopia. Rwanda, Tanzania and Kenya are in the process of ratifying. Egypt and Sudan have not signed the Initiative. Relations with Neighbouring Countries South Sudan. South Sudan remains a country with special links to Kenya premised on cultural, social, political, economic and other strategic factors. Culturally, the border communities share languages and traditions. Furthermore Kenya has hosted many of South Sudan’s refugees during the struggle for independence. When South Sudan achieved independence in 2005, some of the refugees returned to South Sudan. The foregoing factors have contributed to the close relations both between the governments and the people of the two countries. Kenya also helped the negotiation processes between South Sudan and Sudan leading to the birth of the new country of South Sudan. This included the signing of the Comprehensive Peace Agreement in Nairobi in January 2005. Following the independence of South Sudan, the two countries agreed on several initiatives aimed at strengthening and formalising relations. As a priority area, Kenya supported South Sudan in establishing its new government system. Kenya also strongly supports the African Union process led by the High Level Implementation Panel aimed at securing permanent and conclusive solutions to the pending issues between these nations including, resolution over the disputed area of Abyei and the border dispute between South Sudan and Sudan. When internal conflict broke out in South Sudan in December 2013, some of the South Sudanese refugees returned to Kenya. In January 2014, under an African Union initiative, Kenya was designated to receive political prisoners as a precondition to the cessation of hostilities between Sudan and South Sudan. Kenya continues to support South Sudan in developing a stable, prosperous and peaceful state. Several Kenyan citizens currently reside in South Sudan, run businesses, offer technical expertise and human resource, notwithstanding the several other Kenyan firms investing in the new state. A new railway, road and pipeline under the LAPSSET project is expected to be built from Lamu, Kenya to South Sudan, which also will have a connection to Ethiopia. Mobilisation of funds are underway for the construction of the 1,800 kilometre LamuSouth Sudan and Ethiopia Railway. See “The Economy—Major Infrastructure Projects—Development of the Lamu Port-Southern Sudan-Ethiopia Transport (LAPSSET) Corridor”. Additionally, given South Sudan’s position as an immediate neighbour with Kenya and its ensuing participation in East African development projects, the government expects relations between the two countries to be strengthened in various strategic fields of national development. Somalia. Kenya enjoys cordial relations with the Somalia Federal Government. The launch of the Joint Commission of Cooperation in June 2013 aims to boost bilateral ties as well as provide a platform for the economic and technical cooperation between Kenya and Somalia. Following the conflict in Somalia in October 2011, Kenya intervened to help stabilise, promote peace and reconciliation in the war torn country, which has contributed to good bilateral relations between the two countries. In addition, Kenya is involved in regional peace initiatives in Somalia and has contributed troops to the AMISOM peacekeeping forces in Somalia. Uganda. Kenya has cordial relations with Uganda, which is Kenya’s largest export destination. Exports to Uganda totalled US$893 million in 2011 and US$784 million in 2012. There is a large population of Kenyan students in Uganda. Ethiopia. Kenya has cordial relations with Ethiopia. Kenya plans to import electricity from Ethiopia under the Eastern Electricity Highway Project, a project that aims to connect Ethiopia’s electrical grid with Kenya’s and allow Ethiopia to sell its surplus power to Kenya. Funding is expected to be provided by the World Bank, African Development Bank and the French Agence Française de Développement. In addition, a new railway, road and pipeline under the LAPSSET project is expected to be built from Lamu, Kenya to South Sudan, which also will have a connection to Ethiopia. Mobilisation of funds are underway for the construction of the 1,800 kilometre Lamu-South Sudan and Ethiopia Railway. See “The Economy—Major Infrastructure Projects—Development of the Lamu Port-Southern Sudan-Ethiopia Transport (LAPSSET) Corridor”. Tanzania. Kenya has cordial relations with Tanzania. Exports to Tanzania totalled US$491 million in 2011 and US$535 million in 2012. Imports from Tanzania totalled US$184 million in 2011 and US$167 million in 2012. Kenya, Tanzania and Zambia are planning to construct a power grid interconnection among the three countries. Funding for construction of the project, expected to be between US$650 million and US$800 million is still to be sourced. 35

THE ECONOMY Background and Economic History Kenya is the largest economy in East Africa and is a regional financial and transportation hub. After independence, Kenya promoted rapid economic growth through public investment, encouragement of smallholder agricultural production, and incentives for private (often foreign) industrial investment. Kenya has experienced continued growth in GDP over the last few years, driven primarily by growth in (i) financial intermediation, (ii) wholesale and retail trade, repairs and (iii) construction sectors of the economy. Real GDP grew 4.4 per cent. in 2011, 4.6 per cent. in 2012 and 4.7 per cent. in 2013. This growth was largely attributed to continued growth in the wholesale and retail trade, repairs sector, which in real terms grew 7.3 per cent. in 2011, 9.0 per cent. in 2012 and 7.5 per cent. in 2013. The World Bank has forecasted Kenya’s GDP growth to be 5.1 per cent. in 2014. Vision 2030 In 2007, the government announced “Vision 2030” as the government’s long-term plan for attaining middle income status as a nation by 2030. In line with Vision 2030, the government prepares successive MTPs that outline the policies, programmes and projects that the government intends to implement over a five year period. The first MTP covered the period from 2008 to 2012. In the initial year of the first MTP, a number of projects aimed at national healing and reconciliation following the post election violence were implemented. Repair of damaged infrastructure, assistance to affected small scale businesses and resettlement of internally displaced persons were all undertaken in order to raise GDP growth (which fell to 1.5 per cent. in 2008) and to promote national reconciliation. Up to the year 2012, progress recorded included the following: •

enrolment in early childhood education increased by 40 per cent. from 1.72 million in 2008 to 2.4 million;



transition rate from primary to secondary education increased from 64 per cent. in 2008 to 77 per cent.;



the number of students enrolled in university education increased by 103 per cent. from 118,239 in 2008 to 240,551;



a total of 2,200 km of roads were constructed exceeding the MTP target of 1,500 km;



three undersea submarine fibre optic networks linking Kenya to the global internet networks were completed including 5,500 km of terrestrial fibre optic network;



total installed capacity for generation of electricity increased by 22 per cent.; and



enactment of the Constitution.

The second MTP of Vision 2030 was announced on October 2013. The second MTP gives priority to devolution as specified in the Constitution and to more rapid socio-economic development with equity as a tool for building national unity. The second MTP also aims to build on the successes of the first MTP, particularly in increasing the scale and pace of economic transformation through infrastructure development, and strategic emphasis on priority sectors under the economic and social pillars of Vision 2030. Under the second MTP, transformation of the economy is focused on rapid economic growth on a stable macro-economic environment, modernisation of infrastructure, diversification and commercialisation of agriculture, food security, a higher contribution of manufacturing to GDP, wider access to African and global markets, wider access for Kenyans to better quality education and health care, job creation targeting unemployed youth, provision of better housing and provision of improved water sources and sanitation to Kenyan households that presently lack these. Macroeconomic stability continues to be a key objective in the second MTP. The second MTP aims at sustained growth in agriculture, manufacturing, and service sectors in order to achieve an overall GDP growth rate of 10 per cent. by 2017. To sustain and increase the growth momentum inherited from the first MTP, the second MTP aims to increase local savings, remittances from the Kenya diaspora and foreign direct investment in all the sectors. The second MTP also aims at an enhanced regional and international trade strategy to grow and diversify exports, in order to improve balance of payments position and ensure exchange rate stability. 36

The second MTP aims to sustain and expand physical infrastructure to ensure that it can support a rapidlygrowing economy, the demands imposed on it by higher rural and urban incomes, and by new economic activities. A national spatial plan and county specific spatial plans will be developed in order to rationalise utilisation of space for economic and social development. In addition, air transport facilities will be expanded within the country and Kenya will strengthen its position as the air transport hub in the region. Priority will also be given to improving the efficiency of ports, and the implementation of the single window clearance system. With the construction of the standard gauge railway line from Mombasa to Malaba, rail transport will be expected to handle 50 per cent. of the freight cargo throughput, thus easing the pressure on roads, lowering the cost of doing business, and enhancing trade and regional integration in Eastern Africa. The new Lamu port and the LAPSSET corridor will be implemented as part of upgrading the national transport framework in collaboration with other countries in Eastern Africa. To relieve congestion in Kenya’s main urban areas, planned mass rapid transit systems will be constructed. Expansion of roads will be continued. With regard to energy, a strategy is in place for modernising energy infrastructure network, increasing the share of energy generated from renewable energy sources, and providing energy that is affordable and reliable to businesses and homes. Development in the information and communications technology sector (“ICT”) will build on achievements realised under the first MTP. This will include a modern ICT policy aimed at more growth and regulation that is necessary to increase local and foreign investment in ICT. The policy will provide for more utilisation of digital technology in goods and service sectors. The government intends to promote the use of ICT in learning institutions starting with schools and improve cyber security in order to facilitate more use of ICT in business and commercial transactions. New policies will also aim at facilitating usage of ICT in research and development, and to drive learning and innovation in the Kenyan economy. In addition, the second MTP aims to ensure that on-going efforts in land reform, security of land tenure, more efficient registration of titles and records, and resolution of historic grievances are completed. Security and rule of law at both levels of government will remain a priority. The government will seek to address insecurity in the country in order to provide individual safety to Kenyans, to address investors’ concerns about security-related increase in cost of doing business in Kenya and to minimise crime whose occurrence affects the poor and the residents of arid and semi-arid lands disproportionately. This will require a better trained and equipped Kenya Police Service backed by research and technology. In line with the Constitution, security force regulations and behaviour will be made to conform to local and international human rights standards. The economic pillar in the second MTP consists of six priority sectors: tourism; agriculture, livestock and fisheries; trade; manufacturing; financial; business process outsourcing and information technology enabled services; and a recently added seventh priority sector, oil and other minerals. The overall strategy for the tourism sector is to turn the country into a top 10 long haul tourist destination in the world. This will be achieved through growth and diversification of tourist sources from the traditional areas (i.e., Western Europe and North America), and from non-traditional sources in the Middle East and East Asia. The sector will also market new high- end tourist segments like business, cultural and ecological tourism. Construction of two coastal resort cities and three upcountry tourist resort cities in Isiolo, Lamu and Lake Turkana will be initiated and measures taken to increase bed capacity, to open more five-star hotels and improve the standards of tourist accommodation and facilities. Under agriculture and livestock, the second MTP gives top priority to increased acreage under irrigation in order to reduce the country’s dependence on rain fed agriculture. Measures will be taken to mechanise agricultural production, revive cooperatives and farmers unions and subsidise farm inputs to raise productivity. Trade within and outside the country remains a priority sector of the economic pillar. Over the plan period the government expects to strengthen economic partnerships with neighbours in East Africa and the rest of Africa. Foreign policy will aim at increasing international trade, and international economic partnerships. The second MTP gives additional attention to growth and diversification in the manufacturing sector with the aim of increasing the sector’s contribution to Kenya’s GDP and foreign exchange earnings. To achieve this, three special economic zones targeting manufacturing in Mombasa, Kisumu and Lamu will be established. Other initiatives in the sector include building clusters for meat and leather products, a stronger dairy sector, and the development of industrial and SME parks that will provide linkages to other sectors like agricultural and services. The government will aim at universal access to ICT, development of digital content, promoting e-government services and encourage the establishment of more ICT based industries. 37

Oils and other mineral resources is a new priority sector under the economic pillar of the plan. In the plan period, the government aims to develop the policy, legal, and institutional framework for the exploitation and management of Kenya’s natural resources (oil, gas and other minerals). It will also ensure that legislation for transparency and fair sharing of the revenue generated is enacted, and safeguards erected to protect the environment and to avoid risks usually associated with huge inflows of resource-based external earnings. Under education, the government aims to continue strengthening access to universal primary education and to provide wider access to secondary education for all primary school leavers. It will also introduce universal access to computers, promote wider use of ICT as an instrument of instruction and training in schools, lower the student/ teacher ratio by more recruitment of teachers, and provide more textbooks and teaching equipment to schools. In the health sector, the government in partnership with county governments, aims to continue to emphasise primary health care, access to clean water to households, and better management of communicable diseases. The government will continue to support efforts to make Kenya a regional health services hub, and to encourage new local and foreign investment in medical research, pharmaceutical production, and modern hospital care. The government aims at increasing the supply of modern housing units especially for the low-income segment of the market where supply lags behind demand. The government aims to ensure a rapid and efficient transition to a two-tier government under which county governments assume full responsibility of the functions assigned to them under the Constitution. Priority at the national level will be given to provision of adequate finance to match functions assigned to counties, and capacity building for policy-making and project implementation in all county governments in order to bring the full benefits of devolution to the people. The Public Finance Management Act (2012) will be implemented with the aim of exercising controls in public spending and improving the quality of public expenditure through full implementation of the IFMIS at national and county levels. GDP The following table sets out Kenya’s nominal GDP by economic sector for the periods presented. Nominal GDP by Economic Sector For the year ended 31 December 2011 2012(1) 2013(2) (US$ millions)

Agriculture and forestry Fishing Mining and quarrying Manufacturing Electricity and water supply Construction Wholesale and retail trade, repairs Hotels and restaurants Transport and communication Financial intermediation Real estate, renting and business services Public administration and defence Education Health and social work Other community, social and personal services Private households with employed persons Less: Financial services indirectly measured All industries at basic prices Taxes less subsidies on products GDP at market prices Notes: (1) Revised (2) Provisional Source: Kenya National Bureau of Statistics 38

8,523 177 249 3,437 379 1,471 3,772 594 3,586 2,269 1,584 1,792 2,074 873 1,137 155 (374) 31,695 4,128 35,823

9,734 190 274 3,681 549 1,646 4,069 655 3,814 2,064 1,701 2,165 2,190 951 1,263 176 (323) 35,356 4,632 39,563

11,144 200 260 3,920 616 1,934 4,493 655 4,004 2,132 1,809 2,966 2,940 845 1,533 198 (427) 39,223 4,781 44,004

The following table sets out each economic sector’s contribution to Kenya’s nominal GDP for the periods presented. Nominal GDP by Economic Sector For the year ended 31 December 2011 2012(1) 2013(2) (per cent. contribution)

Agriculture and forestry Fishing Mining and quarrying Manufacturing Electricity and water supply Construction Wholesale and retail trade, repairs Hotels and restaurants Transport and communication Financial intermediation Real estate, renting and business services Public administration and defence Education Health and social work Other community, social and personal services Private households with employed persons Less: Financial services indirectly measured All industries at basic prices Taxes less subsidies on products GDP at market prices

23.8 0.5 0.7 9.6 1.1 4.1 10.5 1.7 10.0 6.3 4.4 5.0 5.8 2.4 3.2 0.4 (1.0) 88.5 11.5 100.0

24.6 0.5 0.7 9.5 1.4 4.2 10.5 1.7 9.6 5.2 4.3 5.5 6.1 2.4 3.2 0.4 (0.8) 88.9 11.1 100.0

25.3 0.5 0.6 8.9 1.4 4.4 10.2 1.5 9.1 4.8 4.1 6.7 6.7 1.9 3.5 0.4 (1.0) 89.1 10.9 100.0

Notes: (1) Revised (2) Provisional Source: Kenya National Bureau of Statistics The following table sets out Kenya’s real GDP by economic sector for the periods presented. Real GDP by Economic Sector(1) For the year ended 31 December 2011 2012(2) 2013(3) (US$ millions)

Agriculture and forestry Fishing Mining and quarrying Manufacturing Electricity and water supply Construction Wholesale and retail trade, repairs Hotels and restaurants Transport and communication Financial intermediation Real estate, renting and business services Public administration and defence Education Health and social work Other community, social and personal services Private households with employed persons Less: Financial services indirectly measured All industries at basic prices Taxes less subsidies on products GDP at market prices Notes:

(1) Constant 2001 prices (2) Revised (3) Provisional Source: Kenya National Bureau of Statistics 39

3,802 69 85 1,742 381 632 1,954 244 2,248 765 951 567 1,068 387 658 53 (139) 15,467 2,642 18,109

3,918 71 88 1,778 416 655 2,105 248 2,328 806 972 576 1,113 395 671 54 (136) 16,057 2,665 18,722

4,020 74 94 1,857 439 689 2,256 236 2,460 861 1,010 602 1,164 407 691 54 (160) 16,755 2,781 19,536

The following table sets out Kenya’s real GDP growth by economic sector for the periods presented. Real GDP Growth by Economic Sector For the year ended 31 December (as a percentage of GDP) 2011 2012(1) 2013(2)

Agriculture and forestry Fishing Mining and quarrying Manufacturing Electricity and water supply Construction Wholesale and retail trade, repairs Hotels and restaurants Transport and communication Financial intermediation Real estate, renting and business services Public administration and defence Education Health and social work Other community, social and personal services Private households with employed persons Less: Financial services indirectly measured All industries at basic prices Taxes less subsidies on products GDP at market prices

1.5 3.1 7.1 3.4 (2.6) 4.3 7.3 4.9 5.0 7.8 3.6 2.5 4.8 3.5 4.6 2.0 5.2 3.9 7.8 4.4

4.2 3.4 4.1 3.2 10.3 4.8 9.0 2.6 4.7 6.5 3.3 2.7 5.4 3.4 3.2 2.0 (1.0) 5.0 2.0 4.6

2.9 5.4 7.4 4.8 5.9 5.5 7.5 (4.5) 6.0 7.2 4.3 4.7 4.9 3.3 3.2 2.0 17.5 4.7 4.7 4.7

Notes: (1) Revised (2) Provisional Source: Kenya National Bureau of Statistics Principal Sectors of the Economy Agricultural and Forestry The agricultural and forestry sector was the largest contributor to the economy in 2013. It is comprised of four subsectors: growing of crops and horticulture; farming of animals; agricultural and husbandry services; and forestry and logging. In 2011, it accounted for US$3.8 billion of real GDP and 23.8 per cent. of nominal GDP. In 2012, the sector accounted for US$3.9 billion of real GDP and 24.6 per cent. of nominal GDP. In 2013, the sector accounted for US$4.0 billion of real GDP and 25.3 per cent. of nominal GDP. The agricultural and forestry sector grew 1.5 per cent. in 2011, 4.2 per cent. in 2012 and 2.9 per cent. in 2013. The following table sets out the agricultural and forestry sector’s output and input values at current and constant prices for the periods presented. Agricultural Output and Input For the year ended 31 December, 2011 2012 2013(1) (KES millions)

PRODUCTION AT CURRENT PRICES Output at basic prices Intermediate consumption Value added at basic prices, gross PRODUCTION CONSTANT PRICES Output Intermediate consumption VALUE ADDED, GROSS Notes: (1) Provisional Source: Kenya National Bureau of Statistics 40

881,572 178,871 702,701

1,001,277 189,003 812,274

1,042,305 106,092 936,213

409,121 97,130 311,991

424,625 99,433 325,193

435,539 100,893 334,646

The following table sets out the value of marketed production in the agricultural sector for the periods indicated. Recorded Marketed Production at Current Prices For the Year Ended 31 December, 2011 2012 2013(1) (KES millions)

CEREALS Maize Wheat Others Total HORTICULTURE(2) Cut flowers Vegetables Fruits Total TEMPORARY INDUSTRIAL CROPS Sugar-cane Pyrethrum Others Total PERMANENT CROPS Coffee Tea Sisal Total Total crops LIVESTOCK AND PRODUCTS Cattle and Calves Dairy Produce Chicken and eggs Others Total Grand total

10,145.5 3,045.0 7,090.9 20,281.4

13,153.0 5,612.8 5,721.2 24,48 7.0

10,121.1 6,926.1 7,555.3 24,602.5

58,835.0 26,251.2 3,535.4 88,621.7

64,962.6 20,225.4 4,680.0 89,868.0

55,975.7 22,923.3 4,482.5 83,381.5

18,615.6 133.4 2,775.8 21,524.8

21,676.2 17.0 1,706.1 23,399.3

24,583.4 52.6 849.0 25,485.0

17,826.3 100,145.5 2,513.3 120,485.2 250,913.1

15,375.2 100,262.3 2,915.3 118,552.7 256,307.0

10,910.2 94,722.0 2,810.8 108,443.0 241,912.0

48,943.4 14,548.4 5,553.0 11,854.9 80,899.7 331,812.8

54,140.6 15,413.9 6,482.2 12,266.7 88,305.3 344,612.3

58,237.0 16,776.7 7,086.4 10,727.3 92,827.4 334,739.4

Notes: (1) Provisional (2) Data refers to fresh horticultural exports only. Source: Kenya National Bureau of Statistics The overall marketed production of the agricultural sector decreased by 2.9 per cent. from KES331,812.8 million in 2011 to KES344,612 million in 2012 and increased marginally by 0.03 per cent. to KES334,739.4 million in 2013 from 2012. Increased production during 2013 occurred in key crops like tea, wheat, vegetables, potatoes and sugar cane, while maize, beans, coffee, cut flowers and fruits recorded declines in production. Coffee marketed production decreased by 29.2 per cent. in 2013 due mostly to the decline in international coffee prices. The marketed value for tea decreased by 5.6 per cent. due to lower international prices which more than offset increased production. The value of marketed maize production decreased by 23.1 per cent. as a result of lower marketed volumes and lower prices paid to farmers for the crop. The marketed production of livestock and its products increased by 5.0 per cent. in 2013 with most of the subsectors recording growth. Under the agriculture and forestry sector, the second MTP will give top priority to increased acreage under irrigation in order to reduce the country’s dependence on rain fed agriculture. A total of 404,800 hectares will be put under irrigation during the plan’s 2013-2017 period. The construction of the High Grand Falls Dam and implementation of other irrigation projects across the country will be part of this effort. Other measures included in the second MTP include: •

improved agricultural production through mechanisation;



revival of cooperatives and farmers unions; 41



subsidies of farm inputs in order to raise productivity;



implementation of a fertiliser cost reduction strategy;



support to extension services;



establishment of greenhouses and agro processing plants at the county level;



promotion of value addition in farm products;



policies to increase exports of agricultural and livestock products;



adoption of climate-smart agriculture, such as the use of farm waste as an organic fertiliser and the use of bio-fertilisers, which do not contribute to harmful emissions;



adoption of better weather forecasting/early warning systems;



promotion of resilient food crops; and



better management of post harvest losses, including crop insurance.

Efforts will also be put in place for increased involvement of youth in income generating ventures in the Agriculture, Livestock and Fisheries sector. The flagship projects implemented are enactment of the Consolidated Agricultural Reform Bill: Out of the five Bills currently under consideration by Parliament, three Acts have been enacted and assented namely: the Agriculture, Fisheries and Food (AFFA) Act 2012, Crops Act 2012 and National Agricultural Research Act 2012. These acts had several intended consequences in multiple areas, among them: •

Fertiliser Cost Reduction Project: A total of 274,000 MT of fertiliser was procured as a price stabilisation mechanism while the feasibility study for viability of a manufacturing plant was completed.



Establishment of Disease Free Zones (“DFZ”): A road map for implementation of Kenya DFZ was developed focusing on one out of the four DFZ due to financial and other logistical challenges.



Expansion of Irrigation Coverage: The area under irrigation expanded from 119,000 to 159,000 hectares in small holders as well as large schemes namely; Bura, Hola, Kano, Bunyala, Perkerea and Mwea.

Other Programmes and Projects: The sector implemented a number of other priority programmes and projects. These other interventions were in research and development; improving delivery of extension services; strengthening producer institutions; intensification and expansion of irrigation; seed improvements; livestock development and fisheries development. Wholesale and Retail Trade, Repairs The wholesale and retail trade, repairs sector was the second largest contributor to the economy in 2013. This sector includes wholesale and retail sales (i.e., sale without transformation of any type of goods and the rendering of services incidental to the sale of these goods, including maintenance and repairs of motor vehicles and motorcycles). Wholesaling and retailing are the final steps in the distribution of goods. In 2011, the sector accounted for US$2.0 billion of real GDP and 10.5 per cent. of nominal GDP. In 2012, the sector accounted for US$2.1 billion of real GDP and 10.5 per cent. of nominal GDP. In 2013, the sector accounted for US$2.3 billion of real GDP and 10.2 per cent. of nominal GDP. The wholesale and retail trade, repairs sector grew 7.3 per cent. in 2011 and 9.0 per cent. in 2012 and 7.5 per cent. in 2013. Transport and Communication The transport and communications sector comprises road, railway, water, air and pipeline transport, as well as communications and other services incidental to transport. The transport and communications sector was the third largest contributor to the economy in 2013. In 2011, it accounted for US$3.6 billion of real GDP and 10.0 per cent. of nominal GDP. In 2012, the sector accounted for US$3.8 billion of real GDP and 9.6 per cent. of nominal GDP. In 2013, the sector accounted for US$4.0 billion of real GDP and 9.1 per cent. of nominal GDP. The transport and communications sector grew 5.0 per cent. in 2011, 4.7 per cent. in 2012 and 6.0 per cent. in 2013.

42

The following table sets out the value of output for various transport and communication subsectors for the periods presented. Transport and Communication—Value of Output For the year ended 31 December 2011(1) 2012 2013(2) (KES millions)

Road Transport Railway Transport Water Transport Air Transport Services Incidental to Transport Pipeline Transport Communications Total

386,636 6,017 28,188 100,203 60,097 15,474 110,022 706,637

402,452 5,613 29,869 108,780 60,484 17,755 115,819 740,772

415,031 5,172 29,801 116,576 60,466 18,735 127,282 773,063

Notes: (1) Revised (2) Provisional Source: Kenya National Bureau of Statistics The sector’s total output value increased from KES706.7 billion in 2011 to KES740.8 billion in 2012 and increased to KES773.1 billion in 2013, representing a growth of 4.8 per cent. and 4.36 per cent. in 2012 and 2013, respectively. The road transport subsector accounted for 53.7 per cent. of the total value of output in 2013. The output value for road transport recorded growth of 3.1 per cent. in 2013 while the value of output for water transport marginally decreased by 0.22 per cent. In 2013, the value of output for air transport registered growth of 7.1 per cent. to KES116.6 billion compared to a growth of 8.6 per cent. in 2012. The value of output of pipeline transport grew by 5.5 per cent to stand at KES18.7 billion in 2013 up from KES17.8 billion recorded in 2012. Similarly, the output value of communications sub-sector expanded by 9.9 per cent. in 2013. While the output value of the railway transport subsector decreased by 7.9 per cent. during 2012, the value of services incidental to transport dropped marginally in the same period. The following table sets out information regarding fixed and wireless connections, international call traffic and mobile connections. Telecommunications Indicators 2011(1)

Fixed Lines, CDMA, and other Wireless Capacity Wire line Connections Wireless Connections Total Wire line and Wireless Connections International outgoing traffic (minutes)(3) International incoming traffic (minutes)(3) Mobile Telephony Mobile Telephone Capacity Connections Mobile Money Transfer Service Subscribers(2)

At 31 December 2012(1) 2013(2) (in thousands)

401 188 192 380 17,651 22,195

380 75 188 263 16,383 16,522

408 57 160 217 15,736 12,232

47,677 26,981 17,396

49,977 30,433 19,319

55,077 31,309 26,016

Notes: (1) Revised (2) Provisional (3) Fixed lines (4) As at 30 June of the provided year Source: Communications Commission of Kenya The total number of fixed line subscriptions, including wireless, declined in 2011 and 2012 and increased in 2013 while the total fixed line, including wireless connections dropped to approximately 217,000. The fixed wire line connections declined from approximately 75,000 recorded in 2012 to approximately 57,000 in 2013. The fixed wire line capacity increased by 7.4 per cent. reversing the downward trend that has occurred since 2010. The increase is explained by the transformation of the fixed network infrastructure by Telkom Kenya and the entrance of Mobile Telephone Network into the market. 43

Outgoing calls for fixed international voice traffic declined to record 15.7 million minutes in 2013 compared to 16.4 million minutes in 2012, a decline of 3.5 per cent. This was due to stiff competition from voice over internet protocol service, which in comparison is more affordable. Fixed line voice incoming international traffic declined by 26.0 per cent. in 2013, partly due to competition from mobile cellular telephony and the reduction in fixed connections. Following the liberalisation of the telecommunications sector in the late 1990s, there are now many players in the sector providing satellite based broadband access. In particular, the mobile telephony providers have introduced internet access products, including mobile phone banking. Mobile phone based financial transactions commenced in March 2007 with the introduction by Safaricom of MPESA, a mobile-phone based money transfer and micro financing service. As at 30 June 2013, the average size of mobile phone based banking transactions increased from US$45.5 in March 2007 to US$78.6, while total mobile phone transactions per day reached an average of US$58.4 million (KES5.1 billion). The mobile telephony market, recorded an increased market penetration rate from 68.2 per cent. in 2011 to 74.9 per cent. in 2012 and remained the same in 2013. All mobile phone based banking products offered by banks are regulated by the Central Bank of Kenya under the Banking Act similar to other banking products. Following the enactment of the National Payment System Act in 2011, the Central Bank of Kenya is empowered to oversee all payment system platforms including mobile phone based payments. The regulations to implement the National Payment System Act are currently being finalised. Information, Communication and Technology The government recognises ICT as a foundation for economic development. Since 2008, the government, under the first MTP, has executed several significant ICT infrastructure projects. In 2009, the government, in cooperation with the government of the United Arab Emirates, completed the installation of The East African Marine Systems (TEAMS), a submarine cable that extends from Mombasa to Fujairah, United Arab Emirates and provides Kenya with high-capacity bandwidth. In 2010, the government established the National Fibre Optic Network through which all major towns in the country are now connected. In 2009, the government also established the Government Common Core Network, a network that functions as a shared and secure interoperable government-wide ICT system, integrates work processes and information flows and improves interministerial sharing of databases and exchange of information. As a result of these flagship projects, demand for internet and data services has been rising with internet subscription increasing from 6.2 million subscribers in 2011 to 8.5 million in 2012 and to 13.2 million in 2013. This has enhanced business activities and created job opportunities. In 2012, the government increased bandwidth of broadband internet capacity to government offices from 80 to 100 Megabits per second. This has improved the quality and reliability of the government’s communication system. Several ministries have developed online systems geared towards improving service delivery. These systems include: the re-engineered Integrated Financial Management Information System (an automated system used for public financial management that enhances budget planning, procurement process, financial data recording, tracking and information management), the County Revenue Collection System, application of public service jobs online, status tracking of ID and passports, public examination results and candidate selection into secondary schools, digitised education content in 12 subjects in secondary school level; online submission of tax returns, online custom declaration, electronic reporting of corruption, and a business licensing e-registry. These achievements have resulted in Kenya ranking second in Africa and 22nd out of 77 countries worldwide in the open data initiative of the Open Data Institute and World Wide Web Foundation in 2012. The government also developed and implemented the Kenya Communications (Amendment) Act, 2009 and Kenya Information and Communications Regulations, 2010, which led to improved competition and broad choices of ICT services. Multinational technology companies have expressed interest in investing in Kenya. In March 2013, Microsoft launched its 4Afrika initiative that includes working with the Kenyan government and a Kenyan Internet service provider to deliver low-cost, high-speed wireless access in the country. In November 2013, IBM inaugurated its first research facility in Africa in Nairobi. Researchers at the facility aim to focus on finding technological solutions to some of Africa’s most-pressing problems. Under the second MTP, the government aims to continue the development of the ICT infrastructure by: •

extending the National Fibre Optic Network to every county headquarters, providing connectivity to all public buildings such as hospitals, schools, police stations and other public service institutions; 44



establishing wide area networks and network operations centres to ensure that each county headquarters use a broadband network, VOIP telephony and unified communication systems;



rolling out 4G networks to provide faster internet and increase bandwidth capacity; migrating 80 per cent. of television viewers to a digital platform;



establishing national data centres and disaster recovery centres to ensure that strategic public data is stored in secure locations with minimal risk and delivered cost-effectively; and



integrating ICT in education to familiarise young Kenyans with ICT as a learning tool.

One of the major projects under the second MTP is the development of the Konza Technology City that is aimed at positioning Kenya as the ICT hub in Africa. The project will be developed in phases and the first phase will consist of the following: construction of a BPO park; a science park, residential buildings, a data centre and part of the central business district. It will also involve the construction of basic infrastructure including access roads, telecommunications, water and sewerage and electricity. The first phase is expected to be developed by 2017 and is projected to generate approximately 17,000 jobs and provide homes for approximately 30,000 residents. The project has already completed the following steps: acquired 5,000 acres of land at Malili Ranch; completed a feasibility and demand assessment study; developed the approved local physical development plan; completed the preparation of a strategic environmental and social impact assessment; established the Konza Technopolis Development Authority to lead the implementation of the project; established access roads and drilling of six boreholes; and conducted a ground breaking ceremony. The National Treasury is in the process of engaging a contractor to undertake the actual implementation of the project. The government expects that the implementation of the first phase will begin in July 2014. The development of on-site infrastructure and sales pavilion, including roads, power, sewerage and railway is estimated to cost approximately US$760,000,000 over five years, of which 10 per cent. is expected to be funded by the national budget, through public private partnerships. Manufacturing The manufacturing sector was the fourth largest contributor to the economy in 2013. In terms of employment generation, the sector is estimated to employed approximately 280,300 in 2013, an increase of 3.4 per cent. from 2012. In 2011, it accounted for US$1.7 billion of real GDP and 9.6 per cent. of nominal GDP. In 2012, the sector accounted for US$1.8 billion of real GDP and 9.2 per cent. of nominal GDP. In the 2013, the sector accounted for US$1.87 billion of real GDP and for 8.9 per cent. of nominal GDP. The manufacturing sector grew 3.4 per cent. in 2011, 3.1 per cent. in 2012 and 4.8 per cent. in 2013.

45

The following table sets out the quantum index of manufacturing production using 2009 as the base year. Quantum Index of Manufacturing Production (Base 2009 = 100) 2011 2012 2013(1)

Meat and meat products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Processing and preserving of fish . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepared and preserving of fruits and vegetables . . . . . . . . . . . . . . . . . . . . . Vegetables and animal oils and fats . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dairy products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Grain Mill Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bakery products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sugar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cocoa, Chocolate and Sugar Confectionery . . . . . . . . . . . . . . . . . . . . . . . . . Food products M.P.C. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Animal feeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total food products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beverages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tobacco products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beverages and Tobacco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Textiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wearing apparel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leather and related products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wood and products wood and cork except furniture . . . . . . . . . . . . . . . . . . . Paper and paper products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Printing and reproduction of recorded media . . . . . . . . . . . . . . . . . . . . . . . . . Refined petroleum products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chemical and Chemical Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pharmaceuticals Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rubber Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plastic Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rubber and plastics products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-metallic mineral products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic Metals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fabricated metal products except machinery and equipment . . . . . . . . . . . . Electrical Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Machinery and Equipment n.e.c . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Motor vehicles, trailers and semi-trailers . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacture of Furniture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Manufacturing M.P.C. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repair and installation of machinery and equipment . . . . . . . . . . . . . . . . . . . Total Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

103.2 115.2 115.0 99.4 151.1 112.1 107.0 89.5 99.8 114.7 111.2 106.5 104.9 110.8 105.9 110.7 92.4 142.3 103.2 108.5 101.5 114.0 116.8 129.0 72.0 117.3 112.3 119.5 124.8 125.8 126.9 83.8 108.7 104.6 111.7 106.8 112.3

107.0 91.9 114.7 106.3 186.6 120.1 98.2 90.1 113.1 115.1 115.4 110.5 104.7 116.5 106.6 105.4 81.8 138.8 98.2 108.3 98.8 91.4 116.8 160.8 82.1 126.9 121.9 125.5 128.1 139.1 125.7 74.1 126.7 102.6 110.4 106.8 112.9

106.6 75.4 128.7 110.7 194.0 129.2 101.9 109.5 108.7 130.5 125.3 120.7 102.1 100.6 101.9 112.3 85.4 139.2 99.4 114.6 101.4 47.0 118.5 180.4 100.2 120.2 118.0 133.5 149.5 162.6 116.9 75.1 130.8 116.1 111.7 110.2 115.8

Notes: (1) Provisional Source: Kenya National Bureau of Statistics During 2013, manufacturing activities were positively affected by political stability that prevailed after the March 2013 general elections which increased investor confidence, the ease in inflationary pressure, stable exchange rates and lower interest rates, which also contributed to capital accumulation, thus boosting production. There were increases in production of food products, textiles, basic metals, fabricated metals, motor vehicles, trailers and semi-trailers, furniture and non-metallic mineral products. The overall manufacturing quantum index increased by 2.6 per cent. in 2013, after registering 0.4 per cent. growth in 2012. Sectors that registered improved performance were prepared and preserving of fruits and vegetables, sugar, rubber products, basic metals and fabricated metal products (except machinery and equipment) which grew by 12.2, 21.5, 22.0, 16.7 and 16.9 per cent., respectively. However, there was a significant drop in the quantity of refined petroleum products by 48.6 per cent., a decline of 18 per cent. in the processing and preserving fish, and tobacco products of 13.6 per cent. The decline in the refined crude oil was due to a reduction in output of refined petroleum products processed at Kenya Petroleum Refineries, Ltd. due to costs of operations and lower international oil prices. Export Processing Zones (each, an “EPZ”) are specific areas set up by the government to promote, attract and facilitate investment in industrial and commercial exports. The zones enjoy incentives such as exemptions from 46

certain taxes and business regulations. During 2013, the EPZ programme reported improved performance. However, the businesses within the zones were adversely affected by the high cost of doing business in the country. Furthermore, under EAC union requirements, EPZ firms are now allowed to sell only 20 per cent. of their annual output to the EAC market. This has affected companies that were set up targeting this market. The number of enterprises operating under the EPZ declined from 82 in 2012 to 81 in 2013. During 2013, the number of gazetted zones increased to 50 from 47 in 2012, with only two zones being public while the others are owned and operated privately. There are 22 zones located in Mombasa, nine in Nairobi, three in Athi River, four in Kilifi, and one each in Voi, Kerio Valley, Thika, Isinya, Ruiru, Malindi, Eldoret, Muranga, Meru, Bomet and Nandi. The value of sales from the EPZ enterprises increased to KES49.5 billion in 2013 from KES44.3 billion in 2012. The value of exports from the EPZ increased from KES40.0 billion in 2012 to KES43.6 billion in 2013. Domestic sales accounted for 11.9 per cent. of the total sales in 2013 to stand at KES5.9 billion. During 2013, local purchases of goods and services decreased to KES7.2 billion from KES8.0 billion recorded in 2012. Financial Intermediation The financial intermediation sector recorded the third highest rate of growth in the economy during 2013. The financial intermediation sector comprises institutions that carry out banking and similar activities, insurance and pension funding and auxiliary financial activities. The financial intermediation sector grew 7.2 per cent. in 2013, compared to 6.5 per cent. in 2012. At the start of the year, credit demand was generally low due to uncertainty associated with the general election. However, with the peaceful conclusion of the March 2013 general election, the demand for credit greatly improved. Broad money supply (M3) grew by 13.3 per cent. in 2013 compared to 14.1 per cent. in 2012, which was attributed to positive increase in net foreign assets and domestic credit. In terms of employment generation, the sector is estimated to employ an average of 2.5 per cent. of the labour force in the formal sector. In 2011, the sector accounted for US$765 million of real GDP and accounted for 6.3 per cent. of nominal GDP. In 2012, the sector accounted for US$806 million of real GDP and accounted for 5.2 per cent. of nominal GDP. In the 2013, the sector accounted for US$861 million of real GDP and accounted for 4.8 per cent. of nominal GDP. Construction The construction sector is the eighth largest contributor to the economy and comprises the roads and public/private housing subsectors. In terms of employment generation, the sector is estimated to employ an average of 5.8 per cent. of the labour force in the formal sector. In 2011, it accounted for US$632 million of real GDP and 4.1 per cent. of nominal GDP. In 2012, the sector accounted for US$655 million of real GDP and 4.2 per cent. of nominal GDP. In 2013, the sector accounted for US$689 million of real GDP and 4.4 per cent. of nominal GDP. The construction sector grew 4.3 per cent. in 2011, 4.8 per cent. in 2012 and 5.5 per cent. in 2013. The following table sets out the classification of road networks by type and length as at the dates indicated. Kilometres of Road by Type and Classification As at July 1, 2009 2013(1) (in thousands of Km) Earth/ Earth/ Bitumen Gravel Bitumen Gravel

Type of Road

A—International Trunk B—National Trunk C—Primary D—Secondary E—Minor F—Special Purpose(2) Total

2.83 1.54 2.81 1.28 0.66 0.16 9.28

0.82 1.16 5.16 9.48 26.07 10.38 53.07

2.89 1.58 3.46 2.09 1.05 0.16 11.23

0.70 1.11 4.57 8.62 26.46 10.95 52.41

Notes: (1) Provisional (2) Special purpose roads include Government access, settlement, rural access, sugar, tea and wheat roads. Source: Ministry of Roads 47

Electricity and Water The electricity and water sector recorded the highest rate of growth in the economy during 2012. The electricity and water sector grew 5.9 per cent. in 2013, compared to an increase of 10.3 per cent. in 2012. The increase was mainly a result of public investment by government and private investment by independent power producers in the sector. In 2011, it accounted for US$381 million of real GDP and accounted for 1.1 per cent. of nominal GDP. In 2012, the sector accounted for US$416 million of real GDP and accounted for 1.4 per cent. of nominal GDP. In 2013, the sector accounted for US$439 million of real GDP and accounted for 1.4 per cent. of nominal GDP. The following table sets out information regarding installed capacity and generation of electricity by different producers. Installed Capacity and Generation of Electricity(1)

2011 2012 2013(5)

INSTALLED CAPACITY MW(2) Thermal CoHydro Oil Geothermal generation Total 735.0 582.7 190.6 26.0 1,534.3 769.9 610.6 199.6 26.0 1,606.1 766.6 693.2 236.5 21.5 1,717.8

GENERATION GWh(3) Thermal oil CoHydro(4) KenGen IPP EPP Total Geothermal generation Wind Total 3,217.2 903.0 1,538.8 358.7 2,800.5 1,443.7 80.9 17.6 7,559.9 4,015.9 682.5 1,208.9 309.0 2,200.4 1,515.9 104.7 14.4 7,851.3 4,435.0 598.3 1,386.2 177.2 2,161.7 1,780.9 55.6 14.7 8,447.9

Notes:

IPP: Independent Power Producers EPP: Emergency Power Producers (1) Includes generation for industrial establishment with generation capacity of over 100KVA plus emergency supply of 99 MW by contract. (2) 1 megawatt = million watts = 1,000 kilowatts. (3) 1 Gigawatt hour = 1,000,000 kilowatt hours. (4) Includes imports from Uganda and Tanzania. (5) Provisional Source: Kenya Power & Lighting Company Ltd. / Kenya Electricity Generation Company Ltd.

During 2013, total installed capacity of electricity expanded by 7.0 per cent. to 1,717.8 MW in 2013 from 1,606.1 MW in 2012. Similarly, total electricity generation expanded from 7,851.2 GWh in 2012 to 8,447.9 GWh in 2013, reflecting a growth of 7.6 per cent. Total domestic demand for electricity recorded growth of 2.2 per cent. from 6,273.6 million KWh in 2011 to 6,414.4 million KWh in 2012. The number of customers connected under the Rural Electrification Programme (REP), a government program intended to increase connectivity of rural areas to the national grid, grew by 18.5 per cent. to stand at 453,544 customers as at June 2013. The following table sets out information regarding demand and supply of electricity for the periods indicated. Electricity Supply and Demand Balance For the Year Ended December 2011 2012 2013(1) (million KWh)

DEMAND Domestic and Small Commercial Large & Medium (Commercial and Industrial) Off-peak Street Lighting Rural Electrification TOTAL DOMESTIC DEMAND Exports to Uganda & Tanzania Transmission losses(2) and unallocated demand TOTAL DEMAND = TOTAL SUPPLY of which imports from Uganda and Tanzania Net generation Notes:

(1) Provisional (2) Voltage losses in power transmission lines. Source: Kenya Power & Lighting Company Ltd. 48

2,471.4 3,440.3 37.9 17.9 306.1 6,273.6 37.3 1,248.9 7,559.8 33.9 7,525.9

2,568.5 3,409.2 36.0 20.6 380.1 6,414.4 32.7 1,404.2 7,851.2 39.1 7,812.1

2,866.1 3,585.3 32.7 17.2 426.8 6,928.1 43.7 1,476.1 8,447.9 49.0 8,398.9

The following table sets out information for demand and supply of commercial energy in terms of primary source. Production, Trade and Consumption of Energy distributed in Terms of Primary Sources1 For the Year Ended 31 December 2011 2012 2013(2) (‘000 tonnes of Oil Equivalent)

COAL AND COKE CONSUMPTION Imports of crude oil Net exports of petroleum Stock changes and balancing item TOTAL CONSUMPTION OF LIQUID FUELS HYDRO AND GEOTHERMAL ENERGY Local production of hydro power Local production of geothermal power Imports of hydro power TOTAL CONSUMPTION OF HYDRO AND GEOTHERMAL ENERGY TOTAL LOCAL ENERGY PRODUCTION TOTAL NET IMPORTS TOTAL ENERGY CONSUMPTION LOCAL PRODUCTION AS PERCENTAGE OF TOTAL PER CAPITA CONSUMPTION IN TERMS OF KILOGRAMS OF OIL EQUIVALENT

236.3 1,772.1 1,883.5 (34.0) 3,857.9

211.3 997.1 2,532.3 (102.7) 3,638.0

276.6 124.1 2.9

345.3 130.3 3.4

403.7 400.7 127.8 4,497.9 8.9 113.7

479.0 464.3 (1,320.5) 4,328.3 10.7 106.5

208.9 567.4 2,917.0 192.1 3,676.5 381.3 153.1 4.2 538.6 534.4 (2,136.5) 4,424.0 12.1 105.9

Notes: (1) Modern sector only fuel wood and charcoal are excluded. (2) Provisional Source: Kenya National Bureau of Statistics Tourism Tourism is an important contributor to the economy. In terms of employment generation, the sector is estimated to employ an average of 3.2 per cent. of the labour force in the formal sector. The following table sets out information on departing visitors by country of residence for 2012. Departing Visitors by Country of Residence Number (in thousands) per cent.

Country of Residence

2011 129.1 206.1 39.1 87.4 39.7 36.1 107 644.5 113.5 25.2 138.7 34.2 35 114.1 183.3 33 15.6 10.3 50.6 109.5 21.0 22.5 1,119.5

Germany United Kingdom Switzerland Italy France Scandinavia Other Europe Total Europe USA Canada Total North America Uganda Tanzania Other Africa Total Africa India Japan Israel Other Asia Total Asia Australia and New Zealand All other Countries Total 49

2012 133.2 198.0 37.1 87.3 39.7 33.9 105.8 634.8 109.1 23.4 132.5 33.2 34.3 113.7 181.3 29.8 13.7 7.5 48.2 99.2 18.0 18.8 1,084.6

2013 135.1 196.2 34.9 90.6 36.5 38.8 106.5 638.6 101.1 23.2 124.3 36.1 30.5 116.3 182.9 20.9 11.8 7.1 45.6 85.4 12.8 15.9 1,059.9

2013 12.7 18.5 3.3 8.5 3.4 3.7 10.0 60.3 9.5 2.2 11.7 3.4 2.9 11.0 17.3 2.0 1.1 0.7 4.3 8.1 1.2 1.5 100.0

In 2011, the hotels and restaurants sector accounted for US$244 million of real GDP and 1.7 per cent. of nominal GDP. In 2012, the sector accounted for US$248 million of real GDP and 1.7 per cent. of nominal GDP. In 2013, the sector accounted for US$236 million of real GDP and 1.5 per cent. of nominal GDP. The hotels and restaurants sector grew 4.9 per cent. in 2011, 2.6 per cent. in 2012 and experienced a decline of 4.5 per cent. in 2013. The decline was primarily due to the low bookings from international visitors mainly linked to uncertainties over the country’s general elections held in March 2013. Receipts accruing to the tourism sector decreased by 1.9 per cent. to stand at KES96.0 billion in 2012 and further decreased by 2.1 in 2013 to stand at KES94.0 billion. International visitor arrivals decreased from 1,822.9 thousand in 2011 to 1,710.8 thousand in 2012 and further decreased to 1,519.6 thousand in 2013 due to a slow-down in the global economy, especially in the euro zone, coupled with negative travel advisories following security concerns. The government believes that tourism will benefit from Kenya Airways’ fleet expansion plans. The number of hotel bed-nights occupied decreased by 3.8 per cent. from approximately 6,860,800 in 2012 to approximately 6,596,700 in 2013. The number of visitors to national parks and game reserves decreased from approximately 2,492,200 in 2012 to approximately 2,337,700 in 2013. Similarly, the number of visitors to museums, snake parks and other historical sites registered a 6.5 per cent. decline to stand at approximately 770,800 in 2013. However, the number of local and international conferences held in Kenya increased by 14.6 and 8.8 per cent. in 2013, respectively. There were 11 global brand hotels under construction in Kenya in 2013 amounting to an addition of 1,469 rooms. Seven of the brands were new entrants to Kenya. In May 2014, UK, US, France and Australia issued new travel advisories in advising their citizens to avoid or reconsider travel to certain areas within Kenya following a series of fatal attacks and attempted attacks in Nairobi and Mombasa. See “Risk Factors—Kenya continues to be challenged by internal security issues.” The government has taken remedial measures in order to mitigate the effects of these advisories to the tourism sector including promotion of local tourism, exemption of value added taxes to all travel agents, reducing landing charges in Mombasa and Malindi as the main tourist destinations and providing budgetary reallocations to promote domestic tourism. In 2013, tourism accounted for 1.5 per cent. of nominal GDP. Oil On 15 January 2014, Tullow Oil plc announced oil discoveries at the Amosing-1 and Ewoi-1 exploration wells in Block 10BB onshore northern Kenya. As a result of these latest discoveries and prior discoveries at Ekales-1 and Agete-1, Tullow Oil plc updated its estimate of discovered resources in this basin to over 600 million barrels of oil. Tullow Oil plc also announced that the overall potential for the basin, which is expected to be fully assessed over the next two years through a significant programme of exploration and appraisal wells, could be in excess of one billion barrels of oil. Seeking prospects, exploring for and developing oil reserves involves a high degree of operational and financial risk. The actual costs of seeking prospects, drilling, completing and operating wells may exceed Tullow Oil plc’s budgeted costs and can increase significantly when drilling costs rise due to a tightening in the supply of various types of oil field equipment and related services. Prospects may be unsuccessful for many reasons, including geological conditions, weather, cost overruns, equipment shortages and mechanical difficulties. Exploratory wells bear a much greater risk of loss than development wells. Moreover, the successful drilling of an oil well does not necessarily result in a profit on investment. A variety of factors, both geological and market-related, can cause a well to become uneconomic or only marginally economic. Initial costs associated with identifying prospects and drilling wells require significant additional exploration and development, regulatory approval and commitments of resources prior to commercial development. Kenya stopped its licensing of new open blocks of petroleum exploration licenses to allow time for the on-going review of the legal and regulatory framework of Oil and Gas operations in the country. Parliament is debating a new licensing process under the proposed Energy Bill that would be more competitive and use bidding rounds instead of a first-come, first serve approach under the current framework. Role of the State in the Economy; Privatisation General The government is active in various sectors of the economy. State corporations as defined under the State Corporations Act (466) comprise both commercial and non-commercial entities including regulatory agencies and statutory boards, research institutions, institutions of higher learning and referral hospitals. Among commercial state corporations are corporations that have a “public goods” mandate for which the government is 50

required to meet full cost using budgetary resources approved by the National Assembly, such as the Kenya Broadcasting Corporation, Kenya Ferry Services Limited and National Cereals Produce Board. Non-commercial state corporations act as implementing agencies of the government in areas ranging from social services such as education and health, to physical infrastructure (roads, transport, energy and water) and regulatory services. They are specialised agencies that deliver public projects and programmes, including Vision 2030 flagship projects. Examples of infrastructure non-commercial state corporations through which the government implements projects are the Kenya National Highways Authority, Kenya Rural Roads Authority, Kenya Urban Roads Authority, Geothermal Development Corporation, Rural Electrification Authority and National Irrigation Board. Commercial state corporations do not, in general, depend on central government funds to meet their operations, except in cases where: (i) the corporation is required to carry out social (non-commercial) programmes/activities on behalf of the government (e.g., the National Cereals and Produce Board, Kenya Broadcasting Corporation and Kenya Ferry Services) or (ii) the corporation is unable to sustain itself on account of persistent poor performance (e.g., Pyrethrum Board of Kenya, Kenya Meat Commission and Numerical Machining Complex). Some commercial state corporations are key implementing agencies for purposes of major infrastructure projects of the government. They therefore receive central government budgetary resources for these projects (e.g., Kenya Airports Authority and Kenya Ports Authority). The government from time to time also provides guarantees on their behalf for purposes of raising funds to finance projects of national importance. To meet their recurrent and development budgetary requirements, non-commercial state corporations rely on internally-generated revenue and/or central government funding. In any given year, however, these corporations post surpluses or deficits. The corporations either retain these surpluses or remit whole, or part of it, to the central government. According to the State Corporations Act and the Public Finance Management Act, state corporations may contract commercial debts on the strength of their balance sheets with the approval of the Cabinet Secretaries of the line ministry and with the approval of the National Treasury. The line ministries refer to the ministries charged with the following functions: (i) Interior and Co-ordination of National Government; (ii) Devolution and Planning; (iii) Foreign Affairs; (iv) Defence; (v) Education, Science and Technology; (vi) The National Treasury; (vii) Health, (viii) Transport and Infrastructure; (ix) Environment, Water and Natural Resources; (x) Land, Housing and Urban Development; (xi) Information, Communication and Technology; (xii) Sports, Culture and the Arts; (xiii) Labour, Social Security and Services; (xiv) Energy and Petroleum; (xv) Agriculture, Livestock and Fisheries; (xvi) Industrialisation and Enterprise Development; (xvii) East African Affairs, Commerce and Tourism and (xviii) Mining. In accordance with the Public Finance Management Act, the government may provide guarantees to borrow provided that: (i) the proceeds of the loan will be utilised for capital expenditure; (ii) the guarantee will be approved by the National Assembly; and (iii) the loan will be accommodated within the approved national debt ceiling. The following table sets out information regarding the significant state corporations’ mandate, government ownership and summary financial information.

Name

Kenya Electricity Generating Company

Government Share Holdings

Mandate

As at and for the year ended 30 June 2013(1) Profits/ Assets Liabilities (Losses) (in KES (in KES (in KES millions) millions) millions)

Power generation and sale of electricity.

70%

188,673

114,545

5,250

To provide efficient, reliable, safe and cost effective means of transporting petroleum products from Mombasa to the hinterland and to market, process, treat, deal in petroleum products and other products and goods.

100%

60,161

3,430

8,086

Kenya Power and Lighting Company

Transmission, distribution and retail of electricity.

51%

177,158

129,758

4,479

Geothermal Development Company

To fast track development of geothermal resource which is indigenous, abundant, affordable, reliable and environmentally- friendly source of electricity.

100%

42,602

3,846

-298

Kenya Pipeline Company

51

Name

Consolidated Bank of Kenya

Government Share Holdings

Mandate

As at and for the year ended 30 June 2013(1) Profits/ Assets Liabilities (Losses) (in KES (in KES (in KES millions) millions) millions)

To provide flexible financial solutions that support customers to achieve success

51%

18,000

16,427

139

Kenya Reinsurance Corporation Limited

Mandated to provide reinsurance services for most classes of business.

60%

25,770

10,034

2,802

National Housing Corporation

To play a principal role in the implementation of the Government’s Housing Policies and Programmes and provision of affordable housing.

100%

12,299

2,832

569

To manufacture cement for infrastructure development in the East African region.

25.3%

16,134

9,043

1,775

Facilitating and providing affordable development funding and advisory services for long-term investments in Kenya’s tourism sector.

100%

3,266

179

473

To promote economic growth and industrial development through provision of affordable credit.

100%

17,134

1,112

341

To construct, operate and maintain aerodromes and other related facilities.

100%

37,928

8,897

5,304

To maintain, operate, improve and regulate all scheduled sea ports situated along Kenya’s coastline.

100%

79,950

20,427

6,594

Provide effective railway services and promote, facilitate and participate in railway networks developments

100%

53,946

2,038

680

East African Portland Cement Kenya Tourist Development Corporation Industrial and Commercial Development Corporation Kenya Airports Authority Kenya Ports Authority

Kenya Railways Corporation

Notes: (1) For the Consolidated Bank of Kenya and Kenya Reinsurance Corporation Limited figures are as at and for the year ended 31 December 2013. Source: Department of Government Investments & Public Enterprises State-Owned Financial Institutions The government owns a substantial majority of the capital stock of several financial institutions such as the Development Bank of Kenya, the National Bank of Kenya and the Consolidated Bank of Kenya, although it intends to decrease its participation in the financial system over the medium term, providing assistance only to specific sectors of the Kenyan economy. Under the parastatal reform programme, ten parastatals were transferred to the Agriculture, Fisheries and Food Authority (“AFFA”), following the enactment of the AFFA Act, No. 13 of 2013. The functions of the ten pararastals are now performed by the new AFFA and during the transition in order to enable the transfer of the functions, assets, and liabilities of those institutions their accounts have been frozen. The parastatals which were transferred to the AFFA are the following: (i) the Coconut Development Authority; (ii) The Kenya Sugar Board; (iii) The Tea Board of Kenya; (iv) Coffee Board of Kenya; (v) Horticultural Crops Development Authority; (vi) Pyrethrum Board of Kenya; (vii) Cotton Development Authority; (viii) Sisal Board of Kenya; (ix) Pests Control Products Board; and (x) Kenya Plant Health Inspectorate Service. The government is currently reviewing the parastatal sector for reforms, which could include privatisation of state owned companies.

52

Major Infrastructure Projects Expansion of Railway Transport Kenya has an existing metre gauge railway that is over 100 years old. The railway design and its current state of repair limits its capacity and delivery speed and cannot therefore meet future demand for rail transport in the country and the region. The government believes that Uganda and the Democratic Republic of the Congo need a fast and dependable means of transportation that can facilitate trade and industrial development. In view of expected local and international demand for reliable transport, the government intends to develop a standard gauge railway line between Mombasa through Nairobi to Malaba with connectivity to Kisumu, Uganda and Rwanda. With the construction of the standard gauge railway line from Mombasa to Malaba, rail transport is expected to handle 50 per cent. of the freight cargo throughput, thus easing the pressure on roads, lowering the cost of doing business, and enhancing trade and regional integration in Eastern Africa. Construction is expected to take place in three phases. Phase I, which was launched by President Kenyatta on 28 November 2013, involves the construction of a 495 kilometre line from Mombasa to Nairobi. A contractor has been selected for this phase of the project and financing agreements with the Export-Import Bank of China in the form of a US$2.0 billion commercial loan and the government of China in the form of a US$1.6 billion semiconcessional loan was signed on 11 May 2014. Phase II involves the construction of the Nairobi—Malaba— Kisumu line for which feasibility and preliminary designs are being undertaken. Phase III of the project involves the construction of the Malaba—Kampala, Uganda—Kigali, Rwanda line for which feasibility and preliminary designs are also being undertaken. The entire project is expected to be completed by 2018 at a cost of approximately US$13 billion. On February 2014, the Committee on Transport, Public Works and Housing completed a report on the Mombassa-Nairobi Standard Gauge Railway project and found that there were no improprieties under the Public Procurement and Disposal Act in the procurement process. The committee accepted an interpretation that the procurement was a government-to-government procurement and therefore did not require a competitive bid process under the Public Procurement and Disposal Act. Prior to the report, the Attorney General had issued an opinion on April 2014 that did not agree with the interpretation of the procurement as a “government-to-government” procurement. The Public Investments Committee from Parliament also completed their report on 29 April 2014 and concluded that the project had complied with the procurement laws. Development of the Lamu Port-Southern Sudan-Ethiopia Transport (LAPSSET) Corridor. The Lamu Port—Southern Sudan—Ethiopia Transport (LAPSSET) Corridor project is another major transport and infrastructure project of the government. The objective of the project is to open up northern Kenya, provide a reliable transport corridor for Ethiopia and Southern Sudan, promote trade between regions and enhance socioeconomic activity along the corridor, and open up new tourist destinations by initiating development of resort cities. The project will involve the following components: •

a standard gauge railway line;



a new road network;



an oil pipeline, crude oil pipeline and refined oil pipeline from Lamu to Juba and Ethiopia;



an oil refinery at Lamu with capacity of 120,000 barrels per day;



a modern oil terminal at Lamu port to facilitate tanker loading and offloading;



a refined petroleum products pipeline from Lamu connecting to the existing Mombasa-Kampala pipeline;



international airports at Lamu, Isiolo and Lokichoggio;



a free port at Lamu (Manda Bay) including three berths to handle container, conventional and bulk cargo vessels,



Lamu Port Management Building, Lamu Port Police Station and staff housing, as well as a dispensary and club house;



three resort cities in Lamu (at Manda Bay), Isiolo and on the shores of Lake Turkana; and



1,420km 220 KV double circuit electricity transmission line along the LAPSSET corridor.

Currently, the development of the first three berths at Lamu is undergoing design review and construction is expected to commence in the first half of 2014. Construction of roads along the Garrissa—Isiolo, 53

Isiolo—Nginyany and Kitale—Suam—Endebess are awaiting award for design studies. Mobilisation of funds are underway for the construction of the 1,800 kilometre Lamu-South Sudan and Ethiopia Railway and the Lamu, Isiolo and Lake Turkana Airports. The cost of the project is expected to reach KES1.6 trillion (US$18.1 billion) with construction expected to be completed by 2018. The government anticipates that funding for the various components will be made through a public–private partnership of government and one or more private sector companies. Improvement of Shipping and Maritime Facilities. The objective of this programme is to build port capacity of 50 million tonnes and transform Kenya into a maritime hub by facilitating trans-shipment of cargo at the port of Mombasa. In order to achieve this, the government plans to improve port efficiency, construct a second container terminal at Mombasa, provide new handling facilities at the Mombasa Port, develop Dongo Kundu Free Trade Port, and modernise ferry services to increase passenger capacity per year. The second terminal is expected to have a capacity of 1.2 million twenty foot equivalent units (“TEUs”). The construction of the second terminal is expected to be completed by 2018. The KES23.0 billion (US$267 million) project is being funded by a JPY 26.7 billion loan from the Japan International Cooperation Agency. Increasing Electricity Availability through Power Generation. The government plans to improve the energy infrastructure network and promote development and use of renewable energy sources to create a reliable, adequate and cost effective energy supply regime to support industrial take off for economic growth. One of the key projects prioritised for implementation is the development of an additional 3,085 MW of geothermal energy at Olkaria, Menengai and Silali-Bogoria. The cost of the project is expected to reach KES753.9 billion (US$8.7 billion) with construction expected to be completed by 2018. The government anticipates that funding will be made through a public–private partnership of government, development partners and one or more private sector companies. Other key projects are the development of multi-purpose dams such as the High Grand Falls dam (700 MW), the Magwagwa dam (120 MW), the Arror dam (60 MW) and the Nandi Forest dam (50 MW). The cost of the project is expected to reach KES1.4 trillion (US$16.8 billion) with construction expected to be completed by 2018. The government anticipates that funding will be made through a public–private partnership of government, development partners and one or more private sector companies. The government also plans to upgrade and expand the national power transmission and distribution network to improve supply and reliability, reduce losses and connect two million new customers by 2017. The government aims to connect 6,304 public facilities, including electrifying 2,600 main public facilities (trading centres, secondary schools, health centres and dispensaries) and other facilities such as primary schools, tea buying centres, water supply systems and places of worship, among others. Replacement of the Mombasa-Nairobi Pipeline On March 2014 the Kenyan Pipeline Company Ltd. (“KPC”) began the procurement process for the replacement of the Mombasa-Nairobi multi-product pipeline (“Line 1”). Line 1 was originally commissioned in 1978 and is approximately 449.1 km long. An in-line inspection of the pipeline was done in fiscal year 2009/2010 and the resulting report recommended replacement of the pipeline because of extensive corrosion damage and metal loss throughout the entire pipeline, making it no longer economical to repair. The new proposed pipeline will entirely replace the old pipeline, thus ensuring continued uninterrupted supply of petroleum products while construction occurs. The project is expected to be financed through KPC internally generated funds and external borrowing. The loan limit for the project is set in a range of US$400 million to US$500 million. Work is expected to commence in July 2014. Employment and Wages Total number of people employed outside small scale agriculture and pastoralist activities improved from 12.8 million in 2012 to 13.5 million in 2013, a growth of 5.8 per cent. in 2013. There were 116.8 thousand new jobs created in the formal sector in 2013. The increase is mostly due to recruitment in the devolved structures and employment of more teachers. The growth in the formal-private and informal sectors may be attributed to expansion in sectors that are labour intensive including; wholesale and retail trade, Information, Communication 54

and Technology (ICT) and construction. Wage employment in the modern sector registered growth of 5.1 per cent. in 2013 compared to 3.4 per cent. recorded in 2012. The number of self-employed and unpaid family workers engaged in the modern sector increased by 9.0 per cent. in 2013 compared to an increase of 4.2 per cent. registered in 2012. The informal sector is estimated to have created 625.9 thousand new jobs in 2013 compared to the 591.4 thousand jobs created in 2012. This constituted 84.3 per cent. of all the new jobs created in 2013. Average nominal earnings per employee went up by 13.0 per cent. in 2013, which was higher than the increase of 6.6 per cent. recorded in 2012. The real average earnings increased by 7.7 per cent. in 2013, compared to a decrease of 3.1 per cent. registered the previous year. The following table sets out certain employment data as at the dates indicated. Total Recorded Employment(1) At 31 December 2012 (in thousands)

2013(2)

2,084.1 73.8 9,958.3 12,116.2

2,155.8 76.9 10,549.4 12,782.0

2,265.7 83.8 11,175.3 13,524.8

Modern Establishments—Urban and Rural Areas Wage employees Self-employed and unpaid family workers Informal sector Total

2011

Notes: (1) Employment numbers excludes small scale farming and pastoral activities. (2) Provisional Source: Kenya National Bureau of Statistics The following table sets out wage employment in the modern sector by industry and sector for the periods presented. Wage Employment by Industry and Sector For the Year Ended 31 December 2011 2012 2013(1) (in thousands)

PRIVATE SECTOR: Agriculture, forestry and fishing Mining and quarrying . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Electricity, gas, steam and air conditioning supply . . . . . . . . Water supply; sewerage, waste management and remediation activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wholesale and retail trade; repair of motor vehicles and motorcycles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transportation and storage . . . . . . . . . . . . . . . . . . . . . . . . . . Accommodation and food service activities . . . . . . . . . . . . . Information and communication . . . . . . . . . . . . . . . . . . . . . . Financial and insurance activities . . . . . . . . . . . . . . . . . . . . . Real estate activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Professional, scientific and technical activities . . . . . . . . . . . Administrative and support service activities . . . . . . . . . . . . Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Human health and social work activities . . . . . . . . . . . . . . . Arts, entertainment and recreation . . . . . . . . . . . . . . . . . . . . Other service activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Activities of households as employers; undifferentiated goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Activities of extraterritorial organizations and bodies . . . . . Total private sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PUBLIC SECTOR: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Agriculture, forestry and fishing . . . . . . . . . . . . . . . . . . . . . . 55

289.0 8.0 245.2 1.1

295.5 8.3 245.4 1.1

303.8 8.7 254.1 1.1

1.3 88.8

1.3 98.7

1.4 112.0

189.6 56.1 64.2 78.8 48.5 3.6 55.6 4.2 100.9 68.9 3.9 27.3

197.1 58.1 67.6 83.9 51.3 3.7 56.9 4.5 106.9 73.8 4.0 28.2

211.4 59.0 72.3 90.9 56.4 3.8 59.5 4.8 112.8 80.4 4.3 29.8

104.8 1.0 1,440.8

106.3 1.0 1,493.6

109.7 1.1 1,577.3

41.4

42.2

42.9

For the Year Ended 31 December 2011 2012 2013(1) (in thousands)

Mining and quarrying . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Electricity, gas, steam and air conditioning supply . . . . . . . . Water supply; sewerage, waste management and remediation activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wholesale and retail trade; repair of motor vehicles and motorcycles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transportation and storage . . . . . . . . . . . . . . . . . . . . . . . . . . Accommodation and food service activities . . . . . . . . . . . . . Information and communication . . . . . . . . . . . . . . . . . . . . . . Financial and insurance activities . . . . . . . . . . . . . . . . . . . . . Professional, scientific and technical activities . . . . . . . . . . . Public administration and defence; compulsory social security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Human health and social work activities . . . . . . . . . . . . . . . Arts, entertainment and recreation . . . . . . . . . . . . . . . . . . . . Total public sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total wage employment . . . . . . . . . . . . . . . . . . . . . . . . . . .

0.7 25.0 10.3

0.7 25.6 13.2

0.7 26.2 13.6

6.3 17.3

7.2 17.4

8.1 18.3

0.8 16.8 1.4 1.7 9.6 5.7

0.9 17.1 1.3 1.8 10.3 5.8

1.0 17.4 1.4 1.8 10.6 5.9

206.0 269.1 29.0 2.4 643.5 2,084.3

207.4 277.9 30.9 2.4 662.1 2,155.7

217.8 288.0 32.4 2.4 688.5 2,265.8

Notes: (1) Provisional Source: Kenya National Bureau of Statistics During 2013, the share of private sector employment in the modern sector increased from 69.2 per cent. recorded in 2012 to 69.5 per cent. in 2013. Growth in employment in this sector improved from 3.7 per cent. recorded in 2012 to 5.6 per cent. in 2013. This represented an increase of approximately 83,700 workers from 2012 levels. In 2013, the leading activities providing wage employment in the private sector were agriculture, forestry and fishing, manufacturing and wholesale and retail trade and repair of motor vehicles, accounting for 19.2, 16.1 and 13.4 per cent. of the total private sector employment, respectively. The share of education, human health, and building and construction industries in the private sector employment increased slightly. The building and construction industry registered the highest growth in employment posting an increase of 13.5 per cent., followed by financial and insurance at 9.9 per cent. This is attributable to the expansion of financial and insurance services to rural areas by increasing branch networks and embracing agency banking. Human health, communications and arts, entertainment and recreation registered growth of 8.9 per cent., 8.3 per cent. and 7.5 per cent., respectively. Employment creation in the transport and storage industry registered growth of 1.5 per cent. in 2013 compared to an increase of 3.6 per cent. in 2012. Employment in the public sector registered growth of 4.0 per cent. in 2013 compared to a 2.9 per cent. growth recorded in 2012. Most economic activities in the public sector registered positive growths in employment while the rest remained at the same level as in the previous year. Though employment in water supply, sewerage and waste management and remediation activities recorded growth of 12.5 per cent. Human health and social work sector grew by 4.9 per cent. in the review period while financial and insurance activities rose by 2.9 per cent. Education services recorded growth of 3.6 per cent. in 2013, which was slightly higher than the 3.3 per cent. growth recorded in 2012. The informal sector is defined to include all small-scale activities that are semi-organised, unregulated and use low and simple technologies while employing few persons. The informal sector plays a central role in the economy as a source of employment opportunities for the youthful population and persons exiting from the formal sector of the economy. The sector also plays a vital role in the economic development of the country by increasing competition, fostering innovation, besides generating employment. The inter-linkages between the informal sector and the formal sector including government are also crucial in fostering growth in the sector. Majority of the small businesses such as retailers, hawkers and other service providers fall in this sector. The sector has also expanded to cover areas such as manufacturing and information and communications. The government expects to build on the current tax and revenue reform movement to seal tax loopholes, broaden the tax base to ensure equity in the tax system, review and modernise existing tax legislation, enhance capacity of tax administration including widening the tax brackets to include the informal sector. 56

An estimated 10.5 million persons were engaged in informal sector economic activities in 2012, an increase of 5.8 per cent. Growth in the formal-private and informal sectors was attributed to notable economic growth especially in labour intensive sectors including; wholesale and retail trade, and construction. The following table sets out informal sector employment by region for the periods presented. Informal Sector Employment by Region(1) For the Year Ended 31 December 2010 2011 2012(2) (in thousands)

Province

Nairobi Central Nyanza Western Rift Valley Eastern Coast North Eastern Total Urban Rural

2,303.5 1,475.5 1,069.7 696.1 1,756.9 819.9 1,170.7 40.3 9,332.6 3,276.0 6,056.6

2,459.8 1,567.8 1,129.2 744.5 1,865.2 862.6 1,248.8 41.9 9,919.8 3,441.0 6,478.8

2,624.4 1,667.5 1,200.5 786.4 1,971.6 898.7 1,319.8 42.3 10,511.2 3,614.8 6,896.4

Notes: (1) Estimated (2) Provisional Source: Kenya National Bureau of Statistics The following table sets out the distribution of the informal sector by industry for the periods presented. Informal Sector Employment by Activity(1) For the Year Ended 31 December 2011 2012 2013(2) (in thousands)

Manufacturing Construction Wholesale and Retail Trade, Hotels and Restaurants Transport and Communications3 Community, Social and Personal Services Others Total

1,969.7 261.3 6,007.0 308.9 967.4 449.0 9,958.3

2,044.4 282.5 6,406.5 328.7 1,029.9 457.9 10,549.9

2,238.9 292.9 6,708.3 346.1 1,086.7 502.4 11,175.3

Notes: (1) Estimated (2) Provisional (3) Includes mainly support services to transport activity. Source: Kenya National Bureau of Statistics The manufacturing and wholesale and retail trade, hotels and restaurants activities registered the highest growths of 6.8 per cent. and 9.9 per cent., respectively, in terms of employment in the informal sector in 2013. Informal sector workers in wholesale and retail trade, hotels and restaurants accounted for 60.0 per cent. of all workers in the sector. The second largest employer was manufacturing which absorbed 20.0 per cent. of the informal sector labour force. Minimum Wage The Salaries and Remuneration Commission (“SRC”) is established by the Constitution and the Salaries & Remuneration Commission Act, 2011. The mandate of the commission is to set and regularly review the remuneration and benefits of state officers, realign and restore harmony and equity in the public service remuneration structure and banding system. In performing its functions, the commission is expected to: ensure that the total public compensation bill is fiscally sustainable; ensure that the public services are able to attract and retain the skills required to execute their functions; recognise productivity and performance; and transparency and fairness. 57

SRC has set and published remuneration breakdown for state officers including the President, Deputy President, Governors, Members of Parliament and Cabinet Secretaries, among others. The government has held an active minimum wage setting policy since Kenya’s independence in 1963. Minimum wages apply to all salaried employees who are at least 18 years old and work in the formal sector. However, the minimum wages do not apply to the skilled and professional personnel employees. During 2012, a high number of professionals like teachers and doctors went on strike demanding improved work environment, higher salaries and allowances. On 1 May 2013, the government announced new statutory minimum wage rates that reflected a 14.0 per cent. increase in the wages specified in both the Regulation of Wages Agriculture Order, 2012 and the Regulation of Wages (General) Order, 2012. In 2013, the annual inflation rate was 7.2 per cent., implying, in real terms the minimum wage increase was positive. On average, the monthly basic minimum wages for the agricultural industry increased from KES5,044 in 2011 to KES5,704 in 2012 and KES6,503 in 2013, reflecting an increase of 13.1 per cent. in 2012 and 14.0 per cent. in 2013. The lowest paid category of workers, unskilled employees had their monthly wages raised from KES3,765 in 2011 to KES4,258 in 2012 and to KES4,854 in 2013. Wages for the highest paid category of workers, namely farm foreman and farm clerks was increased from KES6,792 in 2011 to KES7,681 in 2012 and to KES8,757 in 2013. The average gazetted monthly basic minimum wages in Nairobi, Mombasa and Kisumu cities increased from KES11,911 in 2011 to KES13,471 in 2012. For other municipalities, average basic minimum monthly wage increased from KES11,066 in 2011 to KES12,515 in 2012. Similarly, the wages in all other towns rose from KES9,413 to KES10,646 over the same period. The following table sets out the average monthly basic minimum wage for the agricultural sector. Gazetted Monthly Basic Minimum Wages for Agricultural Industry For the Year Ended 31 December 2011 2012 2013 (KES)

Type of Employee

Unskilled employees Stockman, Herdsman and Watchman SKILLED AND SEMI-SKILLED EMPLOYEES: House servant or cook Farm foreman Farm clerk Section foreman Farm artisan Tractor driver Combine harvester driver Lorry driver or car driver AVERAGE Source: Ministry of Labour & Human Resource Development

58

3,765 4,348

4,258 4,917

4,854 5,606

4,298 6,792 6,792 4,397 4,500 4,772 5,257 5,517 5,044

4,861 7,681 7,681 4,973 5,089 5,397 5,945 6,239 5,704

5,542 8,757 8,757 5,669 5,802 6,153 6,778 7,113 6,503

The following table sets out the average monthly basic minimum wages in urban areas for the periods presented. Gazetted Monthly Basic Minimum Wages in Urban Areas(1) Nairobi, Mombasa & Kisumu Cities Occupation

2011

2012

2013

General labourer Miner, stone cutter, turnboy, waiter, cook Night watchman Machine attendant Machinist Plywood machine operator Pattern designer Tailor, driver (medium vehicle) Dyer, crawler, tractor driver, salesman Saw doctor, caretaker (building) Cashier, driver (heavy commercial) Artisan (ungraded) Artisan Grade III Artisan Grade II Artisan Grade I AVERAGE

7,586

8,579

9,781

All Municipalities and Mavoko, Ruiru & Limuru Town Councils For the Year Ended 30 June 2011 2012 2013 (KES)

6,999

7,915

9,024

All other towns 2011

2012

2013

4,047

4,577

5,218

8,193 9,266 8,463 9,571 8,598 9,724 9,815 11,100 10,239 11,580 11,684 13,214

10,564 7,269 8,221 9,372 10,912 7,846 8,873 10,116 11,086 8,001 9,049 10,316 12,655 9,182 10,384 11,839 13,202 9,450 10,687 12,184 15,065 10,682 12,081 13,773

4,676 5,288 6,029 4,827 5,459 6,224 6,485 7,334 8,361 7,507 8,490 9,679 7,811 8,834 10,071 9,108 10,301 11,743

12,877

14,564

16,603

11,835

13,385

15,259

10,553

11,935

13,606

14,216

16,078

18,329

13,264

15,001

17,102

11,971

13,539

15,435

15,732

17,793

20,284

14,690

16,614

18,940

13,685

15,477

17,645

17,118 10,239 12,877 13,908 17,118 11,911

19,360 11,580 14,564 15,730 19,361 13,471

22,071 13,202 16,603 17,932 22,071 15,357

16,109 9,450 11,835 13,264 16,109 11,066

18,219 10,686 13,385 15,002 18,219 12,815

20,770 15,104 17,083 12,184 7,811 8,834 15,259 10,533 11,913 17,102 11,971 13539 20,770 15,104 17,083 14,267 9,413 10,646

19,474 10,071 13,581 15,435 19,474 12,136

Notes: (1) Excludes housing allowance. Source: Ministry of Labour & Human Resource Development Social Security The National Social Security Fund (“NSSF”) provides social security protection to workers in the formal and informal sectors. The number of registered employers and employees increased marginally in 2013. There were more male registered employees compared to females in 2012. The number of male and female employees registered increased marginally, during 2013. Annual contributions increased marginally and benefits increased by 2.9 per cent. during 2013. In December 2013, the National Social Security Fund Act 2013 transformed the NSSF from a provident fund which pays a limited number of lump sum benefits into a social security scheme paying retirement pension as well as additional benefits such as invalidity and funeral grants. The Act increases contribution rates by members and employers significantly from the current cap of KES400.00 to a total of 12 per cent. of a member’s pensionable earnings. The Act divides a member’s contributions into Tier I and Tier II. Tier I is based on emoluments up to the average minimum wage, while Tier II is based on emoluments above this level. Tier I contributions must be retained in NSSF whereas an employer can “opt out” of the NSSF and make Tier II contributions to another retirement benefits scheme, subject to fulfilling certain requirements. In determining pensionable earnings, the Act sets an upper limit set at the average national wage in the first year but rising to four times the average national wage in the fifth year.

59

The following table sets out details of registered employers, registered employees, annual contributions and benefits to members of the NSSF. As at and for the Year Ended 31 December 2011 2012 2013(1)

Registered Employers (in thousands) Registered Employees (in thousands) Male Female Total Annual contribution (KES millions) Annual benefits paid (KES millions)

84.2

92.1

92.1

2,720.0 945.2 3,665.2 5,990.6 2,387.1

2,954.7 1,001.2 3,955.9 6,571.1 2,765.3

2,955.0 1,001.3 3,956.3 6,571.6 2,844.6

Notes: (1) Provisional Source: National Social Security Fund The Social Protection Fund was established to facilitate access to credit and cash transfer on flexible terms in a bid to attain a meaningful and better quality of life for poor and vulnerable individuals by transferring a monthly stipend. The government increased the allocated fund for social protection for older persons from KES1.0 billion in 2011/12 to KES1.5 billion in 2012/13. The direct cash disbursement increased from KES949.5 million in 2011/12 to KES1.5 billion in 2012/13. The increase in allocation and direct cash disbursement was attributed to increased monthly cash transfers from 1,500 to 2,000 per household and the number of households from 45,000 to 49,000 in the same period. The Social Protection Fund for Orphans and Vulnerable Children (“OVC”) was started in 2004 in response to the strong need to protect and assist the highly vulnerable children and also to strengthen the capacity of the households to protect and care for OVC within their families and communities. The fund is currently directed to the poor households taking care of OVC through the department of children’s services. The funding allocated for OVC increased from KES1,081.4 million in 2012/13 to KES4,763.1 million in 2013/14. The direct cash disbursement increased from KES1,030.3 million in 2012/13 to KES4,524.9 million in 2013/14. The increased allocation and direct cash disbursements was attributed to increased capital transfers and increased number of targeted households from 44,000 in 2012 to 135,000 in 2013. The following table sets out the funds allocated to OVC through the department of children’s services. Social Protection Fund for Older Social Protection Fund for OVC Persons Direct Cash Direct Cash Allocation Disbursement Allocation Disbursement (KES millions)

2011 2012 2013 2014(1)

530.0 1,000.0 1,519.2 3,168.0

Notes: (1) Provisional Source: Department of Gender and Social Development

60

394.0 949.5 1,478.0 2,919.0

827.7 1,026.9 1,081.4 4,763.1

766.9 896.9 1,030.3 4,524.9

BALANCE OF PAYMENTS AND FOREIGN TRADE Balance of Payments The balance of payments records the value of the transactions carried out between a country’s residents and the rest of the world. The balance of payments is composed of: •



The current account, which includes: •

net exports of goods and services (the difference in value of exports minus imports);



net financial and investment income; and



net transfers; and

The capital and financial accounts, which comprise the difference between financial capital inflows and financial capital outflows.

The current account of the Kenya’s balance of payments for the past three years has been characterised by deficits, which were partially offset by capital and financial account surpluses. During this period, the current account deficit averaged 9.4 per cent. of Kenya’s nominal GDP. The current account deficits in 2011, 2012 and 2013 were primarily due to widening merchandise trade deficit that reflected increased imports of machinery and transport equipment, food imports and a large oil import bill following higher international oil prices. For 2013, the current account deficit registered 8.4 per cent. of 2013 nominal GDP compared to 9.3 per cent. of 2012 nominal GDP. The following table sets forth Kenya’s balance of payments for the periods indicated. Balance of Payments For the Year Ended 30 June 2011 2012 2013 (US$ millions)

Current Account Excluding Official Transfers Exports, f.o.b. Coffee Tea Horticulture Imports, f.o.b. Oil Other Private of which: Capital Imports1 Balance on Goods Balance on Services2 of which: foreign travel credit3 Balance on goods and services Income (net) Current transfers (net) Private (net) of which: remittances Capital and Financial Account Capital account (incl. capital transfers) Financial account4 Net Foreign Direct Investment in Kenya abroad Net other investment Official, medium and long term Inflows Project loans Commercial loans Outflows

(2,656.1) (3,343.2) (3,696.5) (2,634.4) (3,320.5) (3,906.5) 5,563.6 5,960.9 6,251.1 212.8 263.0 277.2 1,108.4 1,138.2 1,347.2 732.0 647.9 725.5 (12,738.1) (14,903.0) (15,833.0) (3,299.2) (4,192.3) (4,126.9) (9,277.0) (10,398.5) (11,515.1) (2,976.5) (3,116.8) (4,209.4) (7,174.5) (8,942.2) (9,581.9) 1,823.2 2,651.4 2,246.7 909.7 970.7 832.8 (5,351.4) (6,290.8) (7,335.2) 23.8 (144.9) (258.4) 2,671.5 3,092.5 3,897.2 2,693.2 3,115.1 3,687.1 1,232.8 1,658.1 2,130.8 2,957.2 4,150.4 3,788.6 228.5 173.4 654.0 2,728.6 3,977.0 3,134.7 694.0 830.0 1,382.6 759.2 855.7 1,422.3 (65.2) (25.7) (39.8) 1,962.9 2,186.4 1,756.2 338.1 1,128.8 204.3 583.6 1,416.9 508.5 583.6 807.0 431.8 0.0 609.8 76.7 (245.5) (288.1) (304.2) 61

For the Year Ended 30 June 2011 2012 2013 (US$ millions)

Private, medium and long term Energy financing Kenya Airways Other Short-term capital of which: public net (includes trade credit) private net of which: commercial banks Errors and omissions Overall balance Financing items Reserve assets (gross) Use of Fund credit and loans to the Fund (net) Disbursements Repayments Rescheduling/debt swap Memorandum items: Gross official reserves (end of period)

49.7 690.7 72.7 57.2 60.0 70.4 76.3 17.8 97.3 30.5 612.9 (95.0) 1,674.5 366.9 1,479.2 0.0 0.0 0.0 465.8 366.9 1,479.2 465.8 94.1 (55.6) 83.7 974.2 0.0 301.1 807.2 92.2 301.1 (807.2) (92.2) 321.9 (1,120.9) (280.6) 78.8 307.8 182.6 103.3 319.7 225.3 24.4 (11.9) (42.7) 5.4 5.9 5.9 4,120.5

5,241.4

5,522.0

Notes: (1) Excludes power generation related machinery and airplanes but includes oil-exploration related machinery and equipment. (2) Service receipts were revised retroactively upwards in September 2013 to account for 90 per cent. of classified receipts as reported by commercial banks. (3) The foreign travel credit comprises two components, recorded tourism inflows and an estimate of additional under- reported tourism receipts. (4) Historical figures include errors and omissions. (5) 2012 includes the US$600 million syndicated loan. Source: Kenyan authorities and IMF staff estimates and projections. Current Account The current account deficit increased from US$3.3 billion in 2012 to US$3.7 billion in 2013. The increase in the current account deficit was mainly due to a relatively greater increase in imports from US$14.9 billion in 2012 to US$15.8 billion in 2013 compared to the increase in exports from US$6.0 billion in 2012 to US$6.3 billion in 2013. The Euro zone sovereign debt crisis that continued in 2012 affected the shilling, making it depreciate against major currencies, which in turn contributed to the high import bill. The current account deficit increased by 10.6 per cent., or US$353.3 million, to US$3.7 billion in 2013. Based on discussions with the IMF, the government believes that the current account deficit may be overstated. This is based on several grounds. First, the deficit appears at odds with the observed 5-10 per cent. real exchange rate appreciation in the Kenyan shilling. The rise of capital goods imports associated with higher investment may be part of the explanation. If capital goods imports were excluded, the current account would have been in surplus. Second, the government believes that part of “unclassified” services reported by commercial banks are excluded from current account receipts because of possible inappropriate classification by commercial banks. These “unclassified” services have quadrupled in the last four years. Third, foreign direct investment may have been substantially underreported. A survey conducted by the Kenya National Bureau of Statistics in 2010 found that foreign direct investment underreporting was higher than 50 per cent. Considering the foregoing, the government believes that external current account net of long-term financing may be close to balance. See “Risk Factors—The statistical information published by Kenya may differ from that produced by other sources and may be unreliable”.

62

The following table sets out information on the balance of trade for the periods presented. Balance of Trade For the Year Ended 31 December, 2011 2012 2013(1) (KES millions)

EXPORTS (f.o.b.) Domestic Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Re-exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IMPORTS (c.i.f.): Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BALANCE OF TRADE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL TRADE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . COVER RATIO(2) (in percentage) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

484,507 28,097 512,604

479,706 38,141 517,847

455,689 46,598 502,287

1,283,111 1,360,408 1,403,225 17,639 14,179 10,091 1,300,749 1,374,587 1,413,316 (788,145) (856,740) (911,029) 1,813,354 1,892,434 1,915,603 39.4 37.7 35.5

Notes: (1) Provisional (2) Cover ratio is the ratio of exports to imports. Source: Kenya National Bureau of Statistics/Kenya Revenue Authority In 2013, the value of domestic exports decreased by 5.0 per cent. while the value of imports rose by 3.1 per cent. The value of re-exports increased by 22.2 per cent. There were increases in the value of petroleum products, medicament and fixed vegetable fat re-exports during 2012. The trade deficit widened by 6.3 per cent. from KES856.4 billion in 2012 to KES911.0 billion in 2013. The export/import cover ratio decreased from 39.4 per cent. in 2011 to 37.7 per cent. in 2012. International trade in services registered an increase of 19.6 per cent., from a surplus of KES173.9 billion in 2010/11 to a surplus of KES208.0 billion in 2011/12. During 2011/12, earnings from transportation improved while tourism earnings declined. Current transfer flows increased by 0.2 per cent., supported by remittances from Kenyans living outside the country. Remittances from the Kenyan diaspora are a major contributor to Kenya’s economic growth and development. From 2011 to 2012, remittance inflows to Kenya have grown. In 2012, remittances grew 34.5 per cent. from US$1.2 billion in 2011 to US$1.7 billion in 2012. In 2013, remittances grew 28.5 per cent. to US$2.1 billion. North America has remained the main source of remittances, accounting for approximately 50 per cent. of total inflows as at September 2013. However, as a share of total inflows, remittances from this region has declined slightly from an average of about 54 per cent. in 2011 to about 50 per cent. in 2013. Diaspora remittances, along with tourism, tea and horticulture are among Kenya’s leading foreign exchange earners. Directions of foreign trade Most of Kenya’s exports are destined for other African countries. In 2012, the share of the value of exports to other African countries registered 48.4 per cent. of total exports and grew by 1.2 per cent. Of total exports to Africa during 2012, exports to countries that are members of the COMESA remained the dominant destination, accounting for 70.1 per cent. of the value of total exports to Africa. The total value of exports to COMESA countries, however, decreased from US$2.1 billion in 2011 to US$2.0 billion in 2012. For the year ended 31 December 2013, exports to Uganda, Tanzania, Egypt and Rwanda represented 27.2 per cent. of total exports. The value of exports to the EAC region, which includes some members who are also members of COMESA, declined from US$1.57 billion in 2012 to US$1.45 billion in 2013 and accounted for 65.4 per cent. of the total value of exports to Africa. However, a decline was recorded in the value of total exports to Rwanda and Tanzania during 2013. Total exports to Rwanda and Tanzania decreased by 16.7 per cent. and 12.3 per cent., respectively. Exports to Uganda was the largest share of total exports to Africa in 2013, accounting for 34.2 per cent., even though exports to that country declined by 3.4 per cent. during 2013 from US$784 million in 2012 to US$757 million in 2013. 63

The region that recorded the second largest share of the value of exports during 2013 was the EU, accounting for 20.8 per cent. of total exports. The countries in the EU that received the most exports from Kenya by value were the United Kingdom and the Netherlands, with each receiving 35.6 per cent. and 31.1 per cent. of total exports to the EU, respectively. During 2013, exports to the United Kingdom decreased by 7.6 per cent. while the Netherlands increased, by 4.4 per cent. Exports to Germany and Sweden, on the other hand, increased by 25.3 per cent. and 25.7 per cent. in 2012, respectively. For year ended 31 December 2013, exports to the United Kingdom and the Netherlands represented 7.4 per cent. and 6.3 per cent. of total exports, respectively. Exports to the Far East accounted for the third largest share of the value of exports during 2012 at 12.2 per cent. Pakistan received the most exports in the region at US$278 million, or 37.7 per cent. of total exports to the Far East. Although total exports to the Far East increased by 1.2 per cent. during 2012, exports to China and Pakistan increased by 40.7 per cent. and 12.6 per cent., respectively. The increase in total exports to China is partly explained by growth in scrap metal exports during 2012. Exports to Indonesia and India declined by 28.0 per cent. and 20.0 per cent., respectively. For the ten-month year ended 31 October 2013 exports to Pakistan represented 4.7 per cent. of total exports. Exports to the Middle East accounted for the fourth largest share of the value of exports during 2012 at 8.1 per cent. and increased by 26.4 per cent. in 2012. Total exports to the United Arab Emirates increased by 42.3 per cent. from US$234 million in 2011 to US$333 million in 2012. This increase is partly explained by rises in non-monetary gold exports from KES5.8 billion in 2011 to KES13.6 billion in 2012. Total value of exports to Israel and Saudi Arabia decreased by 12.6 per cent. and 39.3 per cent., respectively, during the same period. Exports to Iran, however, decreased by 34.8 per cent. during 2012. Exports to United Arab Emirates represented 4.1 per cent. of total exports for the ten-month period ended 31 October 2013. Exports to Iran totalled US$23.0 million in 2011 and US$15.0 million in 2012. Imports from Iran totalled US$43.0 million in 2011 and US$43.0 million in 2012. The major export commodities to Iran include tea, mate, crude vegetable minerals, while imports include residual petroleum and related material. The following table sets out the value of total exports by destination for the periods presented. Value of Total Exports by Destination For the Year Ended 31 December 2011 2012 2013(1) (US$ millions)

Europe Western Europe European Union Belgium Finland France Germany Italy Netherlands Spain Sweden United Kingdom Other Total Other Western Europe Total Western Europe Eastern Europe Russia Federation Other Total Total Europe America U.S.A. Canada Other Total America 64

54 15 66 91 78 386 26 35 554 57 1,362 124 1,486

61 17 57 114 63 361 22 44 472 52 1,264 66 1,330

72 13 62 96 53 377 23 29 436 52 1,212 81 1,293

68 48 116 1,602

77 49 125 1,455

79 56 136 1,429

303 14 7 324

307 18 10 334

347 15 29 391

For the Year Ended 31 December 2011 2012 2013(1) (US$ millions)

Africa South Africa Rwanda Egypt Tanzania Uganda Burundi Other Total Africa Asia Middle East: Iran Israel Jordan Saudi Arabia United Arab Emirates Other . Total Middle East Far East China India Indonesia Japan South Korea Pakistan Singapore Other Total Far East Total Asia Australia & Oceanic Australia Other Total Australia & Oceanic All Other Countries Aircraft and Ships Stores Total Exports

33 159 275 491 893 69 990 2,911

31 188 250 535 784 62 1,064 2,913

38 156 197 469 757 65 999 2,682

23 17 3 28 234 83 387

15 24 3 39 333 76 489

32 13 3 37 291 81 458

45 110 25 27 6 247 13 263 737 1,124

63 88 18 29 12 278 4 246 737 1,226

49 110 15 31 12 280 19 273 789 1,246

11 2 12 12 41 6,026

19 3 22 14 56 6,019

31 2 33 17 22 5,820

Notes: (1) Provisional Source: Kenya National Bureau of Statistics and Kenya Revenue Authority Most of Kenya’s imports originate from Asia. During 2013, imports from the Far East and the Middle East accounted for 41.6 per cent. and 20.7 per cent. of total imports, respectively. The countries with the greatest share of Kenya’s total imports during 2012 were India and China, accounting for 14.2 per cent. and 12.2 per cent. of the total, respectively. Imports from India increased 30.0 per cent. from US$1.7 billion in 2011 to US$2.3 billion in 2012, while imports from China increased 15.0 per cent. from US$1.7 billion in 2011 to US$1.9 billion in 2012. During 2012, imports from Japan increased 10.4 per cent. and accounted for 4.6 per cent. of total imports. Imports from the United Arab Emirates decreased 25.6 per cent. during 2012, but still accounted for 10.9 per cent. of total imports. For the year ended 31 December 2013, imports from India, China and Japan represented 37.1 per cent. of total imports and combined represented an increase of 18.6 per cent. compared to the same period in 2012. For the year ended 31 December 2013, imports from United Arab Emirates and Saudi Arabia represented 11.2 per cent. of total imports and combined registered a decrease of 36.9 per cent. compared to the same period in 2013. The region with the second largest share of total imports during 2012 was the EU, accounting for 14.9 per cent. of total imports. The value of imports from Europe, however, decreased by 3.1 per cent. in 2012 compared to 2011. Imports from Finland, the Russian Federation and the Netherlands declined by 53.6 per cent., 34.4 per cent. and 22.3 per cent., respectively. Imports from Italy, on the other hand, increased by 41.8 per cent. from US$170 million in 2011 to US$241 million in 2012, mainly due to increases in the importation of edible 65

products and preparations and bituminous mixtures. The value of imports from France increased from US$233 million to US$315 million during the same period. This is partly explained by increased imports of aircraft and associated equipment; civil engineering and contractors’ plant and equipment; and measuring and controlling instruments and apparatus. Increases of 28.5 per cent. and 24.0 per cent. were also recorded for imports from Germany and Spain during the same period. Imports from Germany and France decreased by 9.9 and 24.1 per cent. for the year ended 31 December 2013 compared to the same period in 2012, respectively. Imports from the United Kingdom and Netherlands increased during the year ended 31 December 2013, increasing by 11.4 and 40.0 per cent. compared to the same period in 2012, respectively. The region with the third largest share of total imports during 2012 was Africa, accounting for 10.2 per cent. of total imports. The value of imports from Africa, however, decreased from US$1.8 billion in 2011 to US$1.6 billion recorded in 2012. This is partly explained by a decrease in the value of imports from South Africa from US$831 million in 2011 to US$720 million occasioned by the reduction in the importation of flat rolled products of iron and non-alloy steel during 2012. The value of imports from Uganda, on the other hand, increased by 45.9 per cent. primarily due to increased importation of fresh vegetables and sugars, molasses and honey. Imports from South Africa increased by 13.8 per cent. for year ended 31 December 2013 compared to the same period in 2012, with its share of total imports increasing to 4.8 per cent. of total imports from 4.5 per cent. for the same period in 2012. Additionally, Zimbabwe and Kenya have a joint permanent commission which has been instrumental in the proportion of trade between the two countries. Exports to Zimbabwe totalled US$21.0 million in 2013 and US$20.0 million in 2012. Imports from Zimbabwe totalled US$9.5 million in 2013 and US$12.3 million in 2012. Total imports from COMESA decreased by 5.7 per cent. from US$715 million in 2012 to US$675 million in 2013. The value of imports from Uganda increased by 4.6 per cent. to US$186 million in 2013 from US$178 million in 2012. Imports from United States of America increased by 46.4 per cent. from US$524 million in 2011 to US$767 million in 2012. This was occasioned by increases in the value of imports of aircraft and associated equipment, fertilisers, internal combustion engines and steam turbines. Imports from Canada more than doubled partly due to increased imports of automatic data processing machines in preparation of 2013 general elections from US$87 million in 2011 to US$155 million in 2012. For the year ended 31 December 2013, imports from the United States of America decreased by 13.2 per cent., compared with corresponding period of 2012. The following table sets out the value of total imports by country of origin for the periods presented. Value of Imports by Country of Origin For the Year Ended 31 December 2011 2012 2013(1) (US$ millions)

Europe Western Europe European Union Belgium Finland France Germany Italy Netherlands Spain Sweden United Kingdom Other Total Other Western Europe Total Western Europe

126 56 233 375 170 264 75 99 507 369 2,275 401 2,675

66

127 26 315 482 241 205 93 94 510 280 2,373 249 2,622

151 42 239 434 235 287 97 82 568 268 2,406 278 2,683

For the Year Ended 31 December, 2011 2012 2013(1) (US$ millions)

Eastern Europe Russia Federation Other Total Total Europe America U.S.A. Canada Other Total America Africa South Africa Tanzania Uganda Other Total Africa Asia Middle East: Iran Israel Jordan Saudi Arabia United Arab Emirates Other Total Middle East Far East China India Indonesia Japan South Korea Pakistan Singapore Other Total Far East Total Asia Australia & Oceanic Australia Other Total Australia & Oceanic All Other Countries Total Imports

270 51 322 2,997

177 105 282 2,903

269 184 452 3,136

524 87 320 931

767 155 464 1,387

665 76 238 979

831 184 122 641 1,778

720 167 178 570 1,636

819 135 186 572 1,713

43 75 10 629 2,340 425 3,522

43 84 14 777 1,742 643 3,303

28 109 9 480 1,360 561 2,548

1,691 1,746 511 665 310 203 362 501 5,990 9,511

1,944 2,269 642 734 262 150 151 502 6,654 9,956

2,113 2,992 522 970 284 181 225 555 7,842 10,389

27 8 35 38 15,291

53 41 94 2 15,978

144 7 151 7 16,375

Notes: (1) Provisional Source: Kenya National Bureau of Statistics and Kenya Revenue Authority Content of Foreign Trade Tea was the leading commodity foreign exchange earner in 2012, accounting for 21.1 per cent. of total domestic export earnings. Export earnings from tea, however, decreased from KES102.2 billion in 2011 to KES101.4 billion in 2012. Horticulture exports, which is the second largest export, reached KES81.1 billion in 2012, a decline of 2.6 per cent. from 2011 levels. The reduced production of tea was due to adverse conditions including frost in some of the tea growing regions and drought in the first quarter of 2012. Foreign exchange earnings from medicinal and pharmaceutical products, sugar confectionary and coffee increased by 16.8, 11.7 and 6.7 per cent., respectively, in 2012. The value of domestic exports of petroleum products, however, decreased by 47.0 per cent. from KES6.2 billion in 2010/11 to KES3.3 billion in 2011/12.

67

For the year ended 31 December 2013, Kenya exported approximately 446 thousand metric tons of tea worth KES105 million. Tea accounted for 23.0 per cent. of total domestic export earnings for the year ended 31 December 2013. Export earnings from tea increased to KES104.6 billion for the year ended 31 December 2013 from KES88.8 billion in the corresponding period of 2012. Horticulture exports reached KES89.3 billion for the year ended 31 December 2013. With respect to principal imports, petroleum products and industrial machinery had the largest share of total imports, collectively accounting for 34.2 per cent. of the total in 2013. The value of imported petroleum products increased by 6.3 per cent. to KES252.7 billion in 2013 while the value of imported industrial machinery increased by 18.8 per cent. to KES231.4 billion in 2012. Fuel, lubricants and machinery and other capital equipment accounted for 37.1 per cent. of total imports for the ten-month year ended 31 December 2013. The following table sets out the values of principal exports and imports for the periods presented. Values of Principal Exports and Imports For the Year Ended 31 December 2011 2012 2013(1) (KES millions)

Domestic Exports Fish and fish preparations Maize (raw) Meals and flours of wheat Horticulture Sugar confectionery Coffee, unroasted Tea Margarine and shortening Beer made from malt Tobacco and tobacco manufactures Hides and skins (undressed) Sisal Stone, sand and gravel Fluorspar Soda ash Metal scrap Petroleum products Animal and vegetable oils Medicinal and pharmaceutical products Essential oils Insecticides and fungicides Leather Wood manufactures n.e.s. Paper and paperboard Textile yarn Cement Iron and steel Metal containers Wire products, nails screws, nuts, etc. Footwear Articles of plastic Articles of apparel and clothing accessories All other commodities Total Imports Wheat, unmilled Rice Maize 68

4,955 169 159 83,331 5,211 20,863 102,236 2,950 2,961 18,633 108 1,212 494 3,928 12,371 1,050 6,217 14,166 7,446 13,822 1,828 7,208 193 651 851 8,898 18,165 734 1,142 3,562 9,350 22,260 107,385 484,507

5,392 57 290 81,129 5,818 22,271 101,441 2,684 3,209 16,615 504 1,184 385 3,272 9,724 2,826 3,294 12,727 8,699 13,623 801 7,036 140 474 792 8,118 15,098 715 1,649 4,148 10,278 20,676 114,637 479,706

3,362 192 145 89,339 5,401 16,328 104,648 2,245 3,636 13,709 134 1,020 389 1,714 8,997 2,498 2,652 8,156 7,068 11,172 771 8,491 159 639 885 8,292 15,560 500 1,036 3,992 10,263 24,379 97,916 455,688

31,371 12,548 11,479

29,743 14,520 6,451

30,189 14,111 2,291

For the Year Ended 31 December 2011 2012 2013(1) (KES millions)

Wheat flour Sugars, molasses and honey Textile fibres and their waste Second-hand clothing Crude petroleum Petroleum products Animal/vegetable fats and oils Organic & inorganic chemicals Medicinal & pharmaceutical products Essential oils & perfumes Chemical Fertilisers Plastics in primary & non-primary forms Paper and paperboard Iron and steel Non-ferrous metals Hand &machine tools Industrial machinery Agricultural machinery and tractors Bicycles, assembled or partly assembled Road motor vehicles All other Commodities Total

2,517 11,088 5,093 6,831 124,042 199,120 56,733 19,593 39,681 13,454 23,045 49,296 22,947 62,087 13,863 2,335 177,174 5,532 395 62,870 347,657 1,300,749

2,120 17,030 5,025 8,400 68,086 237,557 54,876 22,080 41,307 15,351 20,184 47,650 20,049 56,667 12,119 2,794 194,666 6,347 354 73,768 417,442.28 1,374,587

1,964 16,770 5,099 8,345 41,037 252,673 48,371 22,303 40,114 16,935 27,957 55,182 21,356 80,749 14,626 3,265 231,440 7,802 429 83,330 386,978.26 1,413,316

Notes: (1) Provisional Source: Kenya National Bureau of Statistics and Kenya Revenue Authority The following table sets out the quantities of principal exports and imports for the periods presented. For the Year Ended 31 December Unit of Quantity 2011 2012 2013(1)

Domestic Exports Fish and fish preparations Maize (raw) Meals and flours of wheat Horticulture Sugar confectionery Coffee, unroasted Tea Margarine and shortening Beer made from malt Tobacco and tobacco manufactures Hides and skins (undressed) Sisal Stone, sand and gravel Fluorspar Soda ash Metal scrap Petroleum products Animal and vegetable oils Medicinal and pharmaceutical products Essential oils Insecticides and fungicides Leather Wood manufactures n.e.s. Paper and paperboard Textile yarn Cement

Tonne Tonne Tonne Tonne Tonne Tonne Tonne Tonne 000 Lt. Tonne Tonne Tonne Tonne Tonne Tonne Tonne Mn. Lt. Tonne Tonne Tonne Tonne Tonne Tonne Tonne Tonne Tonne

69

15,519 1,173 4,624 363,799 33,092 37,570 385,425 20,288 59,054 40,290 2,250 12,040 45,962 116,600 592,207 4,342 89 106,420 11,446 121,919 3,301 26,485 712 9,572 2,263 708,384

17,455 548 7,488 367,985 33,188 51,713 376,996 18,532 62,638 35,259 10,200 11,066 39,138 105,753 458,811 5,465 27 99,252 13,063 120,059 1,709 22,698 608 5,063 1,859 737,496

11,712 1,236 3,076 394,387 30,159 48,890 446,033 15,924 48,166 53,093 2,832 10,010 29,632 78,002 478,822 4,478 18 70,339 12,419 94,157 1,416 26,542 468 7,313 2,046 826,941

For the Year Ended 31 December Unit of Quantity

Iron and steel Metal containers Wire products, nails screws, nuts, etc. Footwear Articles of Plastic Imports Wheat, unmilled Rice Maize Wheat flour Sugars, molasses and honey Textile fibres and their waste Second-hand clothing Crude petroleum Petroleum products Animal/vegetable fats and oils Organic & inorganic chemicals Medicinal & pharmaceutical products Essential oils & perfumes Chemical Fertilisers Plastics in primary & non-primary forms Paper and paperboard Iron and steel Non-ferrous metals Hand &machine tools Bicycles, assembled or partly assembled Road motor vehicles

Tonne Tonne Tonne ‘000’ Pairs — Tonne Tonne Tonne Tonne Tonne Tonne Tonne Tonne Mn. Lt. Tonne Tonne Tonne Tonne Tonne Tonne Tonne Tonne Tonne ‘000’ No ‘000’ No Nos.

2011

2012

2013(1)

170,143 3,262 8,356 47,288 —

150,182 3,432 10,931 51,712 55,882

155,442 2,831 9,232 52,021 48,370

1,002,710 337,446 359,232 61,850 176,174 18,182 76,533 1,772,133 2,874 553,087 240,714 16,637 33,273 522,200 317,119 278,797 792,093 45,425 9,534 143 65,987

1,044,848 399,699 324,622 54,397 267,679 19,451 82,216 997,028 3,484 591,488 241,719 16,110 50,269 425,840 342,163 263,089 778,859 42,405 11,027 134 74,111

1,033,054 409,576 93,473 30,853 276,542 18,183 101,066 567,432 3,760 636,120 256,736 17,187 46,097 688,436 377,340 279,700 1,217,865 52,588 10,682 166

Notes: (1) Provisional Source: Kenya National Bureau of Statistics and Kenya Revenue Authority The volume of coffee exports increased by 37.6 per cent. in 2012. Export quantities of wire and products, metal scrap, medicinal and pharmaceutical products, fish and fish preparations and footwear increased by 30.8, 25.9, 14.1, 12.5 and 9.4 per cent, respectively, in 2012. On the other hand, the export quantities of soda ash, iron and steel declined by 22.5 per cent. and 11.7 per cent., respectively, in 2012. Export quantities of tea declined by 2.2 per cent. in 2012 while export quantities of maize decreased by 53.3 per cent. For the year ended 31 December 2013, the volume of coffee exports reached 48,890 tonnes, compared to 51,713 tonnes during the same period in 2012. For the year ended 31 December 2013, the volume of horticulture exports reached 394,387 tonnes, compared to 367,985 tonnes during the same period in 2012. During 2012, imported quantities of sugars, molasses and honey increased by 51.9 per cent. Essential oil and perfume imports increased by 51.1 per cent. while imports of un-milled wheat increased from 1,002.7 thousand tonnes in 2011 to 1,044.8 thousand tonnes in 2012. Notable increases were recorded in the import quantities of rice, petroleum products, hand and machine tools and road motor vehicles which increased by 18.5, 21.2,15.7 and 12.3 per cent. respectively, in 2012. Quantity imports of crude petroleum decreased by 43.7 per cent. from 1,772.1 thousand tonnes in 2011 to 997.0 thousand tonnes in 2012. Similarly, the quantity of chemical fertiliser imports decreased by 18.5 per cent. to stand at 425,840 tonnes in 2012. During the review period, quantities of imported un-milled maize declined by 9.6 per cent. Imports of processed wheat, non- ferrous metals and, paper and paperboard decreased by 12.1, 6.7 and 5.6 per cent., respectively. Capital and Financial Account The capital and financial account registered a surplus of US$4.2 billion in 2012 compared to a surplus of US$3.0 billion in 2011 primarily due to increased long-term and medium-term loan disbursements. Net foreign direct investment inflows increased from US$694.0 million in 2011 to US$830.0 million in 2012, while the short-term capital account decreased from US$1.7 billion in 2011 to US$0.4 billion in 2012. The improvement in the short-term capital account was mainly due to decreased participation by foreign investors during the first half 70

of 2012. The capital and financial account decreased by 8.7 per cent., or US$361.8 million, to a surplus of US$3.8 billion in 2012/13 primarily due to increases recorded in both long and short term net capital flows. The following table sets out information on foreign investor net cash inflow activity in the equity market according to the Nairobi Securities Exchange for the periods indicated. 2011

January February March April May June July August September October November December Net Cash Inflow

1,987 622 1,552 (3,024) (3,334) (1,597) 1,173 621 535 719 31 935 220

2012 (KES millions)

(812) 795 2,651 1,771 1,099 1,639 828 1,048 3,286 2,965 4,335 2,129 21,734

2013

2,133 (3,927) 1,810 3,026.00 3,475.00 2,602.00 1,625.00 9,839.00 2,063.00 2,723.00 — — 25,369

Source: Nairobi Securities Exchange The government plans to implement the following objectives in order to increase foreign investment in Kenya: •

expand energy sources to provide reliable energy to industries at competitive rates;



improve Kenya’s investment climate by simplifying processes;



finalise commercial laws aimed at increasing efficiency in business and investment in the country;



improve investor facilitation by creating “one-stop shops” for information;



prioritise and effectively carry out the necessary institutional reforms to improve governance;



maintain and expand existing infrastructure; and



enhance internal security.

Foreign Reserves Gross international reserves increased by 11.4 per cent. from KES480.7 billion (US$5.59 billion) at 31 December 2012 to KES535.3 billion (US$6.20 billion) at 31 December 2013. The increase is primarily attributable to the purchases of foreign exchange from the domestic interbank market by the Central Bank of Kenya and the disbursement of IMF loans under the Extended Credit Facility (“ECF”). Net foreign assets of the Central Bank increased from KES283.0 billion (US$3.3 billion) at 31 December 2011 to KES390.4 billion (US$4.54 billion) at 31 December 2012, and further to KES430.6 billion (US$4.99 billion) at 31 December 2013 . The reserve position in the IMF increased from KES1.69 billion (US$0.02 billion) at 31 December 2011 to KES1.71 billion (US$0.02 billion) at 31 December 2012, and further to KES1.77 billion (US$0.02 billion) at 31 December 2013, while the Special Drawing Rights (“SDRs”) declined from KES1.4 billion (US dollar 0.02 billion) at 31 December 2011 to KES596 million (US$0.01 billion) at 31 December 2012. The decline in the SDRs is primarily due to conversion of the SDRs to the major foreign currencies by the IMF. At 31 December 2013, SDRs were at KES1.4 billion. The foreign liabilities of the Central Bank consisting of external banks’ deposits and use of fund credit increased by 29.5 per cent. to stand at KES88.5 billion (US$1.03 billion) at 31 December 2012, compared to a total of KES68.3 billion (US$0.80 billion) at 31 December 2011. The foreign liabilities of the Central Bank stood at KES102.7 (US$1.19 Billion) billion at 31 December 2013. Kenya has been pursuing with its partners in the East African Community a common currency. The benefits expected from the single currency include price harmonisation among the member countries, elimination of exchange rate risk among the member countries, economies of international reserves and overall reduction in transaction costs.

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The following table sets out the stock of international reserves held by the Central Bank of Kenya and the National Treasury as at the dates indicated.

As at end of

S.D.R.s

Official Foreign Assets and Liabilities Central Bank of Kenya Central Government Foreign Total Net Gross Foreign Exchange External Use of Foreign Reserve Total Reserves Reserves of (cash + Banks’ Fund Assets of Position in Other of Central Central Monetary gold) Deposits Credit Central Bank IMF Holdings Government Authorities (KES millions)

2011 January 24,295 289,547 February 24,723 303,335 March 1,961 329,657 April 2,047 340,090 May 2,047 337,599 June 2,731 363,361 July 2,048 368,422 August 2,121 383,682 September 2,144 389,852 October 2,181 382,367 November 1,881 348,274 December 1,431 349,877

2,819 2,896 4,095 5,051 5,106 5,440 5,961 7,600 8,263 7,694 10,911 8,829

33,678 42,805 43,484 44,689 45,333 47,495 53,338 55,188 57,074 57,845 50,958 59,507

277,345 282,357 284,039 292,397 289,206 313,157 311,171 323,015 326,650 319,010 288,285 282,972

1,643 1,677 1,704 1,751 1,76 1,861 1,895 1,950 2,017 2,044 1,801 1,690

43 40 35 31 27 23 63 62 50 47 76 68

1,686 1,717 1,739 1,782 1,803 1,884 1,948 2,013 2,067 2,092 1,877 1,757

315,528 329,775 333,357 343,919 341,448 367,976 372,418 387,815 394:053 386,640 352,032 353,065

2012 January February March April May June July August September October November December

786 762 758 2,564 2,597 7,200 1,562 1,577 1,606 1,110 1,113 596

341,956 354,781 376,283 416,877 396,526 424,690 418,957 440,596 453,854 454,531 478,096 478,288

7,737 8,071 7,073 5,808 8,899 7,581 8,379 8,691 10,779 9,572 12,964 11,653

59,146 58,210 58,021 67,448 68,541 71,487 65,449 66,122 67,754 67,112 76,966 76,814

275,859 289,261 311,947 346,185 321,683 352,822 346,691 367,360 376,927 378,957 389,279 390,417

1,703 1,676 1,670 1,675 1,702 1,659 1,649 1,666 1,707 1,703 1,713 1,713

64 59 55 51 46 41 76 72 71 63 113 113

1,766 1,735 1,725 1,726 1,748 1,700 1,725 1,738 1,778 1,766 1,826 1,826

344,508 357,277 378,766 421,167 400,871 428,591 422,245 443,911 457,238 457,407 481,035 480,710

128 1,292 1,268 1,915 2,972 2,694 2,694 2,094 2,087 2,097 1,583 1,369

460,742 440,108 451,058 492,146 513,952 514,081 514,244 524,599 519,566 529,465 515,999 531,981

11,940 12,671 10,623 9,917 11,234 11,651 12,046 9,827 9,301 9,608 7,541 10,377

77,742 75,204 73,808 81,451 82,064 83,605 83,582 84,000 84,110 82,375 83,113 92,333

371,188 353,525 367,895 402,693 423,626 421,519 421,311 432,865 428,243 439,580 426,929 430,640

1,756 1,700 1,671 1,647 1,662 1,662 1,721 1,731 1,749 1,738 1,765 1,765

104 94 89 85 81 81 95 93 93 126 127 123

1,861 1,794 1,761 1,732 1,743 1,743 1,816 1,824 1,842 1,864 1,892 1,888

462,731 443,194 454,087 495,793 518,667 518,518 518,760 528,574 523,547 533,469 519,510 535,302

2013 January February March April May June July August September October November December

Source: Central Bank of Kenya Foreign Exchange Kenya follows a floating exchange regime. The Central Bank of Kenya allows the exchange rate to move in line with the fundamentals in the economy and has a policy to only intervene in the foreign exchange market if there is excess volatility in the trading level of the local currency that hampers proper functioning of the market. The Kenyan shilling has depreciated against most of the selected major trading currencies as reflected in the overall trade weighted exchange rate index, which increased by 1.0 per cent. from 109.6 in 2011 to 110.8 in 2012. The depreciation of the Kenyan shilling against the leading world currencies could be attributed to the large current account deficit occasioned by the high import bill vis-à-vis export earnings. The depreciation of the 72

Kenyan shilling could also be attributed to the global economic volatility resulting from the Euro zone sovereign debt crisis and currency speculation activities within the foreign exchange market. The Kenyan shilling weakened against the sterling pound, euro and US dollar by 6.0, 3.2 and 1.1 per cent., respectively, at 31 December 2012. However, the Kenyan shilling strengthened against the Japanese yen by 10.2 per cent. at 31 December 2012. As at 30 June 2013, the Kenyan shilling remained relatively the same against the Euro and US dollar, but strengthened against the Japanese yen. The table below sets out the foreign exchange rates for the Kenyan shilling computed as a simple average of the mean buying and selling exchange rate prevailing as at the last trading day of the year, which is presented as the simple average of the mean buying and selling exchange rate prevailing as at the last trading day of the month. Foreign Exchange Rates of Shilling for Selected Currencies

1 Euro(1) 1 US dollar 1 Pound Sterling 100 Japanese Yen

December 2011

December 2012

December 2013

110.06 85.07 131.12 111.25

113.56 86.03 139.02 99.90

119.22 86.31 142.40 82.42

Notes: (1) Countries in the Euro area included in the computation of Trade Weighted Fisher’s Ideal index are: Germany, France, Switzerland, Netherlands, Belgium and Italy. Source: Central Bank of Kenya Trade policy Exports from Kenya enjoy preferential access to world markets under a number of special access and duty reduction programmes. Kenya is signatory to a number of multilateral and bilateral trade agreements as part of its trade policy. Kenya is a member of the WTO which provides Kenya’s export products access to more than 90 per cent. of world markets at “most favoured nation” treatment. In addition, Kenya is member to several trade arrangements and beneficiary to trade-enhancing schemes that include the Africa Growth and Opportunity Act (“AGOA”), the ACP-EU Trade Agreement and the COMESA. Regional Agreements Kenya as a member of the EAC enjoys preferential tariff rates for exports and imports within the region. Member states of the EAC have signed a protocol to establish a customs union. Kenya is also a member of COMESA. The COMESA agenda is to deepen and broaden the integration process among member states through the adoption of more comprehensive trade liberation measures such as the complete elimination of tariff and non-tariff barriers to trade and elimination of customs duties. Under the ACP/Cotonou Partnership Agreement, exports from Kenya entering the EU are entitled to duty reductions and freedom from all quota restrictions. Trade preferences include duty-free entry of all industrial products as well as a wide range of agricultural products including beef, fish, dairy products, cereals, fresh and processed fruits and vegetables. Under the AGOA, Kenya qualifies for duty free access to the U.S.A. market. Kenya’s major products that qualify for export under AGOA include textiles, apparels, handicrafts, etc. Under the Generalised System of Preferences, a wide range of Kenya’s manufactured products are entitled to preferential duty treatment in the U.S.A., Japan, Canada, New Zealand, Australia, Switzerland, Norway, Sweden, Finland, Austria and other European countries. In addition, no quantitative restrictions are applicable to Kenyan exports on any of the 3,000-plus items currently eligible for GSP treatment. Bilateral Trade Agreements Kenya has signed bilateral trade agreements with several countries around the world. Some of the countries are already members of existing schemes offering market access/duty reduction preferences explained above.

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Kenya has concluded Avoidance of Double Taxation Agreements with the United Arab Emirates, United Kingdom, Germany, India, Canada, Norway, Sweden, Denmark, Zambia, France and South Africa, and is currently negotiating a number of others with various countries. Kenya has concluded Investment Promotion and Protection Agreements with France, Finland, Germany, Italy, Netherlands, Switzerland, China, Libya, Iran, Burundi and the United Kingdom, among others. Export Promotion Council The Export Promotion Council (“EPC”) through the Centre for Business Information in Kenya continued to support Kenyan exporters by consolidating, diversifying and expanding Kenya’s export products and markets. The EPC facilitated producers and exporters of goods and services through enhancing market access, value addition and dissemination of trade information. The EPC exposed the beneficiary firms to the opportunities availed through enhanced international visibility for their products and ease of transacting business. Under the trade policy facilitation, the EPC continued to advocate a trade policy environment that aids growth and development of Kenya’s export sector. This was achieved through participation and contribution in several bilateral and multilateral trade negotiations policy forums to ensure expansion of export markets for the country’s products. These fora included EAC-EU Economic Partnership Agreements, EAC/COMESA/SADC tripartite negotiations, the AGOA, the COMESA, and the EAC common market negotiations among others. The EPC within its strategy of export consolidation and diversification undertook a market research, covering broad economic and social categories in the Republic of South Sudan and the Democratic Republic of Congo to aid the economic operators in Kenya to conduct business with their counterparts in these countries. The findings of the studies identified business opportunities for expanding Kenya’s export of goods and services, and also pointed out the market entry requirements for Kenyan investors and businessmen into South Sudan and the Democratic Republic of Congo. Under market research, 27 trade statistical analyses were done on Kenya’s foreign trade to establish the direction of bilateral trade with Kenya’s trading partners by identifying potential products for development and promotion; and markets for expansion and diversification. The reports facilitated policy interventions to promote export growth. The EPC also organised and facilitated the participation of Kenya’s exhibitors in major international trade fairs and exhibitions in Tanzania, China, Zambia, Uganda, DRC, Zimbabwe, USA—Specialty Coffee Association of America (SCAR) and Mozambique. These events were aimed at consolidation and expansion of market shares as well as enabling the Kenyan exhibitors to gauge competitiveness of their products, appoint distributors, study consumer trends and identify joint venture opportunities in these markets. In the Micro Small and Medium Enterprises (“MSMEs”) Development, the EPC provided assistance to strengthen the export supply base and mainstreaming MSMEs in the export process. This was achieved through the establishment of Export Production Villages (“EPVs”) and capacity building programmes for SME exporters. The EPC facilitated the establishment of 19 EPVs and is assisting them to form co-operatives to maximise the production capacity of individual units through collective selling. In 2012, a total of 736 exporters were trained under various modules to enhance exporters’ skills and knowledge to enable them to respond effectively to opportunities in the export market. The Training Modules included basic, intermediate and advanced courses in Export Marketing, E—trade, International Commercial Terms (INCOTERMS), Export—Logistics, Documentation and Payment.

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MONETARY AND FINANCIAL SYSTEM Central Bank of Kenya The Central Bank of Kenya was established in 1966 through an Act of Parliament—the Central Bank of Kenya Act of 1966. The establishment of the bank was a direct result of the desire among the three East African states to have independent monetary and financial policies. This led to the collapse of the East Africa Currency Board (EACB) in the mid-1960s. Following the promulgation of the Constitution on 27 August 2010, the Central Bank of Kenya was established as an autonomous institution under Article 231 of the Constitution. Under this Article the Central Bank of Kenya has the responsibility of formulating monetary policy, promoting price stability, issuing currency and performing any other functions conferred on it by an Act of Parliament. The Central Bank of Kenya Act limits the Central Bank of Kenya’s lending to the government to 5 per cent. of the government’s audited revenue. The functions and powers of the Central Bank of Kenya are the following: •

to formulate and implement monetary policy directed to achieving and maintaining stability in the general level of prices;



to foster the liquidity, solvency and proper functioning of a stable market-based financial system;



subject to the above, the bank shall support the economic policy of the government, including its objectives for growth and employment;



to formulate and implement foreign exchange policy;



to hold and manage its foreign exchange reserves;



to license and supervise authorised dealers;



to formulate and implement such policies as best promote the establishment, regulation and supervision of efficient and effective payment, clearing and settlement systems;



to act as banker and adviser to, and as fiscal agent of the government; and



to issue currency notes and coins.

Under the Central Bank of Kenya Act (Cap. 491), the responsibility for determining the policy of the bank, other than the formulation of monetary policy, is given to the Board of Directors. The Board comprises 11 members consisting of the Chairperson, the Governor; the Permanent Secretary to the National Treasury or his representative who shall be a non-voting member, and eight other non-executive directors. The chairperson and directors are appointed by the President with the approval of Parliament and hold office for a period of four years but shall be eligible for re-appointment for one further term of four years. Persons eligible to be appointed to the Board must be citizens of Kenya who are knowledgeable or experienced in monetary, financial, banking and economic matters or other disciplines relevant to the functions of the bank. The Central Bank of Kenya operates from its Head Office in Nairobi and has branch offices in Mombasa, Kisumu and Eldoret. The Central Bank of Kenya also runs Currency Centres in Nyeri, Nakuru and Meru. The Bank also has a major stake in the Kenya School of Monetary Studies which is headed by an executive director answerable to the Governor of the Central Bank of Kenya.

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The following table sets out the financial position of the Central Bank of Kenya as at the dates indicated. Central Bank of Kenya Statement of Financial Position

2011

At 30 June 2012 (KES millions)

2013

368,835 2,731 409 49 30,642 — — 5,385 1,897 3,117 1,171 32,380 446,616

395,283 2,200 — 9,973 3,560 42,678 — 2,557 2,193 11,651 1,272 38,131 509,498

450,693 2,694 — 351 2,645 77,929 6 4,119 2,967 12,052 973 35,960 590,389

147,718 — 135,792 81,829 9,447 2,641 98 377,525 69,091 5,000 62,722 1,369 — 446,616

159,216 35,673 160,642 101,868 1,332 — — 458,731 50,767 5,000 35,368 8,899 1,500 509,498

183,047 41,589 191,671 118,568 2,595 — — 537,470 52,919 5,000 39,020 8,899 — 590,389

Assets

Balances due from banking institutions and gold holdings Funds held with IMF Items in the course of collection Advances to banks Loans and advances Financial assets at fair value through profit or loss Investments in securities Other assets Retirement benefit asset Property and equipment Intangible assets Due from government of Kenya Total assets Liabilities Currency in circulation Investments by banks Deposits IMF Other liabilities Dividends payable Accruals Total liabilities Equity and reserves Share Capital General reserve fund Asset revaluation reserve Proposed Dividends Total liabilities and equity Source: Central Bank of Kenya Structure and development of the Kenya Banking System Commercial banks and mortgage finance institutions

Commercial banks and mortgage finance institutions are licensed and regulated pursuant to the provisions of the Banking Act and the Regulations and Prudential Guidelines issued thereunder. They are the dominant players in the Kenyan banking system. Currently there are 43 licensed commercial banks and one mortgage finance company. Out of the 44 institutions, 31 are locally owned and 13 are foreign owned. The locally owned financial institutions comprise 3 banks with significant shareholding by the government and state corporations (Consolidated Bank of Kenya (77.8 per cent. owned by the government), Development Bank of Kenya (wholly-owned owned by the government) and National Bank of Kenya (70.6 per cent. owned by the government), 27 commercial banks and one mortgage finance institution. There has been no consolidation in the banking sector in the past five years. The current minimum capital requirement is KES1 billion (US$11.5 million) with the minimum core capital and total capital ratios to risk weighted assets at 8 per cent. and 12 per cent., respectively. Effective on 1 January 2013, banks will have until 31 December 2014 to comply with new effective minimum core capital and total capital ratios of 10.5 per cent. and 14.5 per cent., respectively. To ensure full adherence with the Basel I Accord (International Convergence of Capital Measurement and Capital Standards; Basel Committee on Banking Supervision (July 1988)), capital charges for operational and market risk became effective from 1 January 2014. Banks will now be required to set aside specific capital charges for credit, market and operational risks. 76

The Central Bank of Kenya reviews the legal and regulatory environment, on an on-going basis, to align it to the Basel Core Principles for Effective Banking Supervision. With regard to the Basel II Accord (International Convergence of Capital Measurement and Capital Standards: A Revised Framework; Basel Committee on Banking Supervision (June 2004)) and Basel III Accord (International Framework for Liquidity Risk Measurement, Standards and Monitoring; Basel Committee on Banking Supervision (December 2010)), the Central Banks of the EAC have agreed to adopt those aspects of the Accords that are relevant and applicable to the East African region given the current state of financial infrastructure. In this regard, the Central Bank of Kenya issued revised prudential and risk management guidelines in January 2013 that incorporated pertinent aspects of the Basel II Accord on supervisory review (Pillar II) and market disclosures (Pillar III) and the Basel III Accord on capital buffer and enhanced liquidity requirements. In view of the cross border nature of the Kenyan banking sector, the Central Bank of Kenya has implemented consolidated supervision and has set up supervisory colleges for three of the largest Kenyan regional banking groups. To manage the growing country risks as Kenyan banks expand their footprint in other African countries, guidelines on country risk management were issued by the Central Bank of Kenya in 2013. Other reforms to enhance financial inclusion include introduction of agency banking and expanding credit information sharing mechanism to incorporate both positive and negative information and to extend it beyond banks to incorporate deposit taking microfinance institutions. The four major risks affecting the Kenyan banking sector in order of severity are credit risk, operational risk, country risk and transfer risk. Credit risk is the current or prospective risk to earnings and capital arising from an obligor’s failure to meet the terms of any contract with the bank or if an obligor otherwise fails to perform as agreed. Credit risk in the Kenyan banking sector was enhanced in 2013 as a result of high interest rates that prevailed in 2011 and 2012 and the slowing down of economic activity in 2013 due to the general elections. Operational risk is the risk of losses resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk in the Kenyan banking sector has been elevated by the adoption of information communication technology by banks. To enhance banks’ ICT risk management, the Central Bank of Kenya issued ICT Risk Management Guidelines that took effect from January 2013. Country risk is the risk that economic, social, political conditions and events in a foreign country will adversely affect an institution’s financial condition. Transfer risk is the risk that a borrower may not be able to secure foreign exchange to service its external obligation. Country and transfer risk is increasing in the Kenyan banking system as Kenyan banks expand into the East African Community region and beyond. To mitigate this risk, the Central Bank of Kenya has issued country and transfer risk guidelines that took effect from January 2013. Microfinance Institutions The Microfinance Act, 2006 and the Microfinance Regulations issued thereunder sets out the legal, regulatory and supervisory framework for the microfinance industry in Kenya. The Microfinance Act became operational with effect from 2 May 2008. As at September 2013, there were nine deposit taking microfinance institutions. Forex Bureaus Forex bureaus were established and first licensed in January 1995 to foster competition in the foreign exchange market and to narrow the exchange rate spread in the market. As authorised dealers, forex bureaus conduct business and are regulated under the provisions of the sections 33A to 33O of the Central Bank of Kenya Act (Cap 491) and Guidelines issued thereunder. As at September 2013, there were 106 licensed forex bureaus located in various towns. Credit Reference Bureaus Credit reference bureaus complement the central role played by banks and other financial institutions in extending financial services within an economy. CRBs help lenders make faster and more accurate credit decisions. They collect, manage and disseminate customer information to lenders within a regulatory framework—the Banking (Credit Reference Bureau) Regulations, 2008 which were operationalised effective February 2, 2009. The Banking (Credit Reference Bureau) Regulations 2008, will govern licensing, operation and supervision of CRBs by the Central Bank of Kenya. As at September 2013, there were two licensed credit reference bureaus.

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Capital adequacy ratios The table below sets out the two main capital adequacy ratios (CARs) for the Kenyan banking sector. Period At 31 December 2011 2012 2013

CAR Ratio(1)(2) Core Capital (tier 1) to Risk weighted Assets Total (Regulatory) Capital to Risk weighted Assets

17.3% 18.9% 19.5% 19.4% 21.7% 22.9%

Notes: (1) The above capital adequacy ratios are based on Basel I Capital Accord standards. (2) The current minimum capital requirement is KES1 billion (US$11.5 million) with the minimum core capital and total capital ratios to risk weighted assets at 8 per cent. and 12 per cent., respectively. Banks will have until 31 December 2014 to comply with new effective minimum core capital and total capital ratios of 10.5 per cent. and 14.5 per cent., respectively. Non-performing loans The Central Bank of Kenya classifies credit exposures of commercial banks in five categories according to their performance at a given point in time. These five categories are: •

Normal: loans performing in accordance with the contractual terms and which are up to date on repayments, and expected to continue in this condition.



Watch: Loans which are generally past due by between 30 and 90 days.



Substandard: These are generally past due for more than 90 days but less than 180.



Doubtful: These are generally past due for more than 180 days but less than 360.



Loss: These are generally past due for more than 360 days.

Loans classified as sub-standard, doubtful and loss are considered as non-performing loans. The following table sets out the amount of non-performing loans in the banking sector at the dates indicated. Non-performing Loans in the Banking Sector(1) At 31 December 2011 2012 2013 (US$ millions)

Category Substandard(2) Doubtful(3) Loss(4) Total

124 372 114 610

190 345 173 708

305 401 211 917

Notes: (1) Figures converted at the prevailing exchange rate as at 30 November 2013 of US$1 to KES87. (2) Substandard loans are loans past due for more than 90 days but less than 180 days. (3) Doubtful loans are loans past due for more than 180 days but less than 360 days. (4) Loss loans are loans past due for 360 days or more. Source: Central Bank of Kenya The following table sets out the amount of loan loss reserves in the banking sector at the dates indicated. Loan Loss Reserves At 31 December 2011

At 31 December 2012 (US$ millions)

At 30 September 2013

147 323 103 573

129 269 100 498

125 313 88 526

Interest in suspense Specific provisions General provisions Gross provisions Source: Central Bank of Kenya 78

The table below sets out the amount of non-performing loans by the type of bank ownership. Non-performing Loans per Year(1) At 31 December, 2011 2012 2013 (US$ millions)

Bank Ownership Category(2) Local private Banks (28) Foreign Banks (13) Local Public Banks (3) Total

525 68 17 610

630 59 19 708

673 170 74 917

Notes: (1) Figures converted at the prevailing exchange rate as at 30 November 2013 of US$1 to KES87. (2) Banks are categorised based on the control of their shareholding. A bank with local shareholding of more than 50 per cent. is categorised as local, whereas one with foreign shareholding of more than 50 per cent. is categorised as foreign and those with more than 50 per cent. shareholding of GOK or its entities shareholding are categorised as public banks. Source: Central Bank of Kenya Gross loans of the banking sector reached KES1,330,365 million with gross NPLs of KES61,917 million in 2012. In 2013, gross loans reached KES1,578,768 million with gross NPLs of KES81,857 million. Returns on assets in 2012 were 4.6 per cent., while return on equities were 29.8 per cent. In 2013, returns on assets were 4.7 per cent., while return on equities was 29.1 per cent. Monetary policy framework The Central Bank of Kenya’s principal object is the formulation and implementation of monetary policy directed at achieving and maintaining stability in the general level of prices. The aim is to achieve stable prices (i.e., low inflation) and to sustain the value of the Kenyan shilling. Following amendments to the law, the Minister for Finance may by notice in writing to the Central Bank of Kenya set the price stability targets of the government. Monetary policy is the main tool used in the preservation of the value of the currency in an economy. It involves the control of liquidity circulating an economy to levels consistent with growth and price objectives set by the government. The volume of liquidity in circulation influences the levels of interest rates, and thus the relative value of the local currency against other currencies. It is the responsibility of the Monetary Policy Committee to formulate the monetary policy of the Central Bank of Kenya. Movements in the general price level are influenced by the amount of money in circulation, and productivity of the various economic sectors, the Central Bank of Kenya regulates the growth of the total money stock to a level that is consistent with a predetermined economic growth target as specified by the government and outlined in its Monetary Policy Statement. The Monetary Policy Committee is the organ of the Central Bank of Kenya responsible for formulating monetary policy. The membership of the MPC is as follows: •

the Governor, who is the chairman;



the Deputy Governor, who is the deputy chairman;



two members appointed by the Governor from the Central Bank of Kenya. One being a person with executive responsibility within the Central Bank of Kenya for monetary policy analysis (Director of Research Department) and the other is a person with responsibility within the Bank for monetary policy operations (External Payments and Reserves Management);



four external members who have knowledge, experience and expertise in matters relating to finance, banking, fiscal and monetary policy, who are appointed by the Minister for Finance; and



the Principal Secretary, National Treasury, or his designated alternate as representing the National Treasury. The National Treasury representative is a non-voting member of the committee.

Each external member of the Committee serves for a term of three years, which is renewable once.

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There are three major tools the Central Bank of Kenya uses to implement monetary policy: •

Open market operations: Through open market operations, the Central Bank of Kenya buys or sells securities in the secondary market in order to achieve a desired level of reserves. Alternatively, the Central Bank of Kenya injects money into the economy through buying securities in exchange for money stock. As the law of supply and demand takes effect to determine the cost of credit (interest rates) in the money market, money stock adjusts itself to the desired level. This process influences availability of money in the economy.



Discount window operations: The Central Bank of Kenya, as lender of last resort, may provide secured short-term loans to commercial banks on overnight basis at punitive rates, thus restricting banks to seek funding in the market resorting to Central Bank of Kenya funds only as a last solution. The discount rate is set by the Central Bank of Kenya to reflect the monetary policy objectives.



Reserve requirements: The Central Bank of Kenya is empowered by the law to retain a certain proportion of commercial banks’ deposits to be held as non-interest bearing reserves at the Central Bank of Kenya. An increase in reserve requirements restricts commercial banks ability to expand bank credit and the reverse is regarded as credit easing.

The Central Bank Rate (“CBR”) was the main instrument used to signal the direction of monetary policy stance and was reviewed and announced at least every month in 2012. The monetary policy operations framework focused on reduced volatility in the interbank rate in alignment with the CBR. Pricing for open market operations and discount window was referenced to the CBR for enhancement of clarity and certainty in the money market. See “Inflation and interest rates”. Under the Protocol on the Establishment of the East African Monetary Union, the exchange rate of a member state will be fixed against the single currency for the EAC. In addition, the members of the EAC will transfer the power to set monetary policy to the EAC Central Bank. The powers of the EAC Central Bank include the power to manage the monetary policy of the EAC member states, as well as to manage liquidity and stability of the financial system through open market operations, marginal lending facilities, reserve requirements and other policy instruments which may be available to the EAC Central Bank. The EAC Central Bank will be an independent body. The EAC Central Bank will set monetary policy with a view to the EAC community as a whole. Therefore, where economic events are limited to Kenya or do not affect the EAC community as a whole, any action taken by the EAC Central Bank might not be as immediate or as swift as such action would have been had the Central Bank of Kenya possessed the sole power to set monetary policy to alleviate the effects of a financial crisis in Kenya. Inflation and interest rates During the first half of 2012, the Central Bank of Kenya maintained the CBR at the December 2011 level of 18.0 per cent. The monetary policy yielded reduced inflation rates and stable exchange rates. While the inflation target for the second half of fiscal year 2011/12 was 9.0 per cent., the overall inflation rate declined from 18.9 per cent. in December 2011 to 7.7 per cent. in July 2012 and further to 3.2 per cent. in December 2012. Following the decline in inflation rate, the Central Bank of Kenya eased the monetary policy by lowering the CBR to 16.5 per cent., 13.0 per cent. and 11.0 per cent. in the months of July, September and November 2012, respectively. This downward adjustment of the CBR was aimed at providing a signal to commercial banks to lower the interest rates and therefore promote uptake of private sector credit to support economic activities. Reflecting these measures, interest rates declined with the average inter-bank rate declining from 21.75 per cent. in December 2011 to 17.18 per cent. in June 2012 and 5.89 per cent. in December 2012. The average 91-day treasury bills rate declined from 18.30 per cent. in December 2011 to 10.09 per cent. in June 2012 before settling at 8.25 per cent. in December 2012. The weighted average commercial bank lending and overdraft rates were at approximately 20.3 per cent. in January through to August 2012 but eased thereafter to stand at 17.79 per cent. in December 2012. The average deposit rate decreased from 6.99 per cent. in December 2011 to 6.80 per cent. in December 2012. Consequently, the interest rate spread narrowed to 11.35 per cent. in December 2012 compared to 13.05 per cent. in December 2011. As at 30 June 2013, the CBR stood at 8.50 per cent., while the average 91-day treasury bills rate reached 6.21 per cent. The average deposit rate was at 6.65 per cent. as at 30 June 2013.

80

The following table sets out the nominal principal interest rates as at the end of the months indicated. Principal Interest Rates

Central Bank of Kenya 91 day Treasury Bills Rate Central Bank Rate Repo rate Inter-bank rate Commercial Banks1 Average deposits Savings deposits Loan and Advances Overdraft

2011 December

June

2012 December

2013 December

18.30 18.00 17.59 21.75

10.09 18.00 17.75 17.18

8.25 11.00 6.85 5.89

6.21 8.50 7.93 7.14

9.52 8.50 7.95 8.98

6.99 1.59 20.04 20.20

7.88 1.46 20.30 20.36

6.80 1.60 18.15 17.79

6.65 1.73 16.97 16.92

6.65 1.58 16.99 16.51

June

Notes: (1) Weighted average commercial bank interest rates Source: Central Bank of Kenya The following table sets selected real interest rates for the periods indicated. Trends in Selected Real Interest Rates Year(1)

Average Interest Rate for 91-day Treasury Bills

Commercial bank savings deposits (average)

Commercial bank loans and advances (maximum)

Inter-Bank Rate

Nominal Inflation Interest Rate (in per cent.)

Real Interest(2)

2011 2012 2013

18.3 8.3 9.5

18.9 3.2 7.2

(0.6) 5.1 2.4

2011 2012 2013

1.6 1.6 1.6

18.9 3.2 7.2

(17.3) (1.6) (5.6)

2011 2012 2013

20.0 18.2 17.0

18.9 3.2 7.2

1.1 15.0 9.8

2011 2012 2013

22.1 5.8 9.0

18.9 3.2 7.2

3.2 2.6 1.8

Notes: (1) At 31 December for 2011 and 2012 data. At 31 October for 2013 data. (2) Real interest rate equals nominal rate minus inflation rate. Source: Central Bank of Kenya At the beginning of fiscal year 2010/11, the government’s overall inflation target was 5 per cent. ± 2 per cent. During the period from July to December 2010, overall inflation remained within the government’s target. Following the escalation of food and fuel prices between March and June 2011, overall inflation, however, rose above the target band. Depressed rains in the first quarter of 2011 and political crises in the Middle East and North Africa during the period resulted in significant rises in food and crude oil prices, respectively. Overall inflation rose from 14.5 per cent. in June 2011 to 19.7 per cent. in November 2011, but decreased to 18.9 per cent. in December 2011. The high inflation was attributed to persistently high food and fuel prices and exchange rate volatility during most of the period from June to November 2011. Demand driven inflationary pressures were also evident during such period as non-food and non-fuel inflation increased above target in the period. The government revised the overall inflation target for the period from January 2012 to June 2012 to 9 per cent. During the period from January to June 2012, overall inflation declined gradually towards the government’s revised target, to stand at 10.1 per cent. in June 2012. 81

Overall inflation declined to 3.2 per cent. in December 2012, reflecting an easing in food prices, stabilisation of world oil prices as well as easing demand pressure in the economy. Similarly, non-food-non-fuel inflation declined from 9.3 per cent. to 4.8 per cent. during the period. In December 2012, the government set the overall inflation target at 5 per cent. ± 2.5 per cent. Overall inflation increased to 4.9 per cent. in June 2013 as a consequence of an increase in food prices coupled with the impact of the base effect attributed to the decline in the Consumer Price Index in mid-2012. Non-food-non-fuel inflation declined from 4.8 per cent. to 3.9 per cent. during the same period. Average annual inflation decreased from 9.4 per cent. in 2012 to 5.4 per cent. in 2013. The deceleration in overall inflation reflected slowing food and fuel inflation. The following table sets the consumer price index for the periods indicated. Consumer Price Indices1 January . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . June . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . July . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annual Average CPI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average Inflation (per cent.) . . . . . . . . . . . . . . . . . . . . . . . . . . Notes: (1) Base: February 2009 = 100. Source: Kenya National Bureau of Statistics

82

2011

2012

2013

110.57 112.06 114.62 118.29 119.48 120.91 122.44 123.97 125.23 127.20 129.13 130.09 121.17 14.0

130.82 130.76 132.51 133.74 134.09 133.06 131.92 131.51 131.89 132.46 133.33 134.25 132.53 9.4

135.62 136.59 137.96 139.28 139.52 139.59 139.87 140.29 142.82 142.75 143.14 143.85 140.10 5.4

Liquidity and Credit Aggregates The following table sets out the deposit liabilities and liquid assets of commercial banks as at the end of each month indicated. Commercial Banks-Deposit Liabilities and Liquid Assets1 Deposit Liabilities Liquid Assets2 (KES millions)

2011 2012

2013

December . . . . . . . . . . . . . . . . . . . . . . . . . . . . . January . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . June . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . July . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September . . . . . . . . . . . . . . . . . . . . . . . . . . . . October . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December . . . . . . . . . . . . . . . . . . . . . . . . . . . . . January . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . June . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . July . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September . . . . . . . . . . . . . . . . . . . . . . . . . . . . October . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,451,189 1,457,364 1,468,374 1,488,194 1,491,916 1,530,022 1,554,528 1,546,678 1,595,668 1,633,502 1,656,984 1,700,128 1,675,878 1,725,558 1,722,785 1,754,879 1,766,331 1,804,138 1,805,510 1,832,581 1,831,253 1,855,401 1,840,923 1,863,166

548,300 564,765 552,948 566,408 569,176 599,907 607,662 592,778 648,495 681,391 693,253 733,512 707,019 722,631 719,414 751,174 751,685 771,198 770,895 759,702 748,808 750,282 732,785 727,300

Overall Liquidity Ratio3 (in per cent.)

37.8 38.8 37.7 38.1 38.2 39.2 39.1 38.3 40.6 41.7 41.8 43.1 42.2 41.9 41.8 42.8 42.6 42.7 42.7 41.5 40.9 40.4 39.8 39.0

Notes: (1) Deposits and liquid assets are calculated as an average of three days balances. (2) Includes notes and coins, balances at Central Bank of Kenya, net inter-bank balances in Kenya and overseas (included only if positive) and treasury bills. (3) The ratios given in this column are not consistent with figures in the other two columns because of the inclusion of certain other min or items in the denominator. Source: Central Bank of Kenya. Net foreign assets of the banking system declined by 2.0 per cent. to stand at KES363.1 billion at 30 November 2013, compared with KES370.5 billion at 30 November 2012. The decrease in net foreign assets of the banking system was reflected in decreased Net foreign assets of banks following increased loans from non-residents and other accounts payable. Over the same 12-month period, holdings by the Central Bank of Kenya grew by 15.6 per cent. from KES364.3 billion at 30 November 2012 to KES421.2 billion at 30 November 2013, reflecting an accumulation of foreign exchange reserves. During the same period, total domestic credit expanded by 14.6 per cent. compared to a 11.2 per cent. growth over a similar period in 2012. The primary contributors to foreign exchange are as follows: (a) exports (tea, coffee, horticulture produce, manufactured goods, etc.), (b) tourism, (c) international organisation/aid agencies; (d) foreign investments (foreign direct investment, portfolio investments, etc.); (e) loans and grants and (f) remittances. Remittances from workers abroad has demonstrated a growing trend in the past few years, with remittances of US$1.3 billion, US$1.2 billion and US$0.89 billion in the 12-month year ended in 2013, 2012 and 2011, respectively. Domestic credit to the private sector including other public sector (comprised of, among others, semiautonomous and autonomous government agencies (parastatals), municipalities, and local governments) expanded at a rate of 18.4 per cent. in the 12-month period ended 30 November 2013, compared to an expansion of 10.6 per cent. recorded in the previous 12-month period ended 30 November 2012. This contributed to acceleration in credit to the private sector, which grew by 20.0 per cent. in the 12-month period ended November 2013, compared with a 83

growth of 9.1 per cent. in the 12-month period ended 30 November 2012. The slowdown in net foreign assets and other domestic assets of the banking system led to a deceleration in monetary expansion with broad money supply increasing by 10.3 per cent. in the 12-month period ended November 2013, compared to an increase of 16.8 per cent. recorded in the 12-month period ended 30 November 2012. This expansion was marginally below the targeted growth of 12.0 per cent. and was in line with the monetary policy objective to reign in inflation and inflationary expectations and to maintain stability in the exchange rate. The following table sets out monetary indicators as at the dates indicated. Monetary Indicators Net Foreign Assets (KES Million)

As at 31 December

2011 2012 2013

295,203 325,992 389,179

DOMESTIC CREDIT (KES Million) 1 Private Government Total

1,162,739 1,283,873 1,595,205

311,581 368,823 411,957

1,505,129 1,702,510 2,007,163

Money2 Supply (M3) (KES Million)

Commercial Bank liquidity Ratio (per cent.)

Advances/ Deposits Ratio (per cent.)

1,514,152 1,727,324 1,957,492

37.8 42.2 40.3

79 79 82

Source: Central Bank of Kenya The following table sets out monetary aggregates as at the dates indicated. Monetary Aggregates

As at 31 December

Money1

2011 2012 2013

(M1)

622,731 710,744 788,319

Quasi-Money Broad Money Supply Banks Others2 M2 M3 (KES millions)

613,279 737,083 844,526

18,089 22,272 —

1,253,958 1,469,037 1,632,845

1,514,152 1,727,324 1,957,492

Overall Liquidity L

1,876,142 2,129,475 2,484,480

Notes: (1) Currency outside banks plus all demand deposits except those of central government, local government, commercial banks, non-residents and foreign currency denominated deposits. (2) Following the conversions and mergers there are no operational non-bank financial institutions. Source: Central Bank of Kenya Narrow money supply (M1) grew by 14.9 per cent. from KES691.4 billion at 30 November 2012 to KES794.3 billion at 30 November 2013, while broad money supply (M2) increased by 10.9 per cent. to KES1.6 trillion. The overall liquidity expanded by 14.4 per cent. in the 12-month period ended 30 November 2013 compared to 16.3 per cent. expansion recorded in the 12-month period ended 30 November 2012. Securities Markets Kenya has one stock exchange, the Nairobi Securities Exchange, which was established in 1954. The Capital Markets Authority of Kenya is the government regulator charged with licensing and regulating the capital markets in Kenya. It also approves public offers and listings of securities traded at the Nairobi Securities Exchange. The Capital Markets Authority was set up in 1989 through an Act Parliament (Cap 485A, Laws of Kenya). As of 31 October 2013, each of the government of Kenya and the CMA Investor Compensation Fund hold a 5.1 per cent. interest in the Nairobi Securities Exchange, with 22 other shareholders each holding a 4.08 per cent. interest in the shares of the exchange. Two per cent. remains unissued and has been earmarked for the employee share ownership scheme The total number of shares traded in 2012 decreased by 3.5 per cent. from 5.7 billion in December 2011 (KES79 billion) US$929 million to stand at 5.5 billion in December 2012 (KES86 billion) US$1,000 million. Market capitalisation increased by 46.5 per cent. to stand at KES1,272.0 billion (US$14,79 billion) in December 2012, up from KES868.0 billion (US$10.20 billion) in December 2011. The total number of deals on the stock exchange in 2012 decreased by 3.8 per cent. to 342,235 from a high of 355,738 in 2011. Total bond turnover increased by 26.7 per cent. to KES565 billion (US$6.6 billion) in 2012, up from KES446 billion (US$5.2 billion) in 2011. Total net foreign portfolio inflow improved in 2012, with total inflow rising to KES9.4 billion 84

(US$61 million) in the fourth quarter, up from KES5.2 billion (US$109 million) registered in the preceding quarter, an 82 per cent. improvement. The number of investment banks decreased from 11 in 2011 to ten in 2012, while stockbrokers, fund managers and custodians increased by seven, two and one, respectively, to stand at 12, 21 and 15, respectively. The following table sets out information on various capital markets indicators for the periods indicated. For the Year Ended 31 December, 2010 2011 2012

Equities: Total No. of Shares (millions) Total No. of Deals Total Value of Shares (US$ billions) NSE 20 Share Index (Base Jan1966=100) Market Capitalisation (US$ billions) Fixed Income Securities Market: Total Bond Turnover (US$ billions)

85

7,546 127,379 0.31 4,433 13.72

5,721 355,738 0.93 3,205 10.20

5,464 342,235 1.0 4,133 14.79

5.9

5.2

6.6

PUBLIC FINANCE Budget Process The Constitution provides that all revenue raised by the national government must be shared equitably among the national and county governments. For every financial year, the equitable share of the revenue raised nationally that is allocated to the county governments shall not be less than fifteen per cent. (15%) of all the revenue collected by the national government . This amount is calculated on the basis of the most recent audited accounts of revenue received, as approved by the National Assembly . County governments may however be given additional allocations from the national government’s share of the revenue either conditionally or unconditionally. At least two months before the end of each financial year, a Division of Revenue Bill is introduced in Parliament to divide revenue raised nationally between the national government and the county governments. Similarly, a County Allocation of Revenue Bill is introduced in Parliament that divides among the counties the revenue allocated to the county governments. Both these bills must be passed by the National Assembly and the Senate. However, the National Assembly has power under the Constitution to amend or veto the County Allocation of Revenue Bill that has been passed by the Senate by a resolution supported by two thirds of the members of the National Assembly. The Division of Revenue Bill and the County Allocation of Revenue Bill are submitted to parliament by 28 February in each financial year. The revenue allocated to the national government must be dealt with through a process involving the introduction of budget estimates (proposals as to how the money should be spent) and then the annual Appropriation Bill (which authorises the executive to spend). Three separate sets of “budget estimates” are submitted to the National Assembly. They are: •

the expenditure of the national government prepared by the National Treasury and submitted by the Cabinet Secretary for Finance;



the expenditure by the parliamentary service submitted by the Parliamentary Service Commission; and



the expenditure by the judiciary submitted by the Chief Registrar of the judiciary.

The budget estimates prepared by the National Treasury incorporates estimates of the projects and programs provided for in the MTP. The Constitution does not require estimates for the parliamentary service or the judiciary to be considered by the National Treasury before they are submitted to Parliament. Before the National Assembly considers the estimates of revenue and expenditure, a committee of the National Assembly discusses and reviews the estimates and makes recommendations to the National Assembly. In discussing and reviewing the estimates, the committee must seek representations from the public and the recommendations shall be taken into account when the committee makes its recommendations to the National Assembly. When the estimates of the national government expenditure and the estimates of expenditure for the Judiciary and the Parliament have been approved by the National Assembly, they are included in an Appropriation Bill which is introduced into the National Assembly to authorise withdrawal from the Consolidated Fund of the money needed for the expenditure and appropriation of that money for purposes mentioned in the Appropriation Bill. The budget estimates and Appropriation Bill are submitted to the National Assembly by 30 April in each financial year. On the basis of the Division of Revenue Bill passed by Parliament, each county government prepares and adopts its own budget and appropriation bill based on the revenue they raise themselves as well as their share of the revenue raised nationally that is divided among the counties in a special County Allocation of Revenue Act.

86

In line with the Constitution, Section 15 of the Public Financial Management Act, 2012, sets out fiscal responsibility principles to ensure prudency and transparency in the management of public resources. The law provides that: •

over the medium term, a minimum of thirty per cent. (30%) of the national budget shall be allocated to development expenditure;



the national government’s expenditure on wages and benefits for its public officers must not exceed a percentage (as prescribed by regulation) of total national government revenue;



over the medium term, the national government’s borrowings should be used only for the purpose of financing development expenditure and not for recurrent expenditure;



the public debt should be maintained at a sustainable level;



fiscal risks should be managed prudently; and



a reasonable degree of predictability with respect to the level of tax rates and tax bases should be maintained, taking into account any tax reforms that may be made in the future.

In order to control the flow of cash between treasury and spending units and reduce the procedural bottlenecks encountered in the actual execution of budgets, the Public Finance Management Act (2012) provides for the establishment of single treasury accounts for each of the national government and county governments through which payments of money should be made. While county governments have a greater involvement in the budget process now than they had prior to the adoption of the Constitution as a result of devolution, the Constitution also provides the basis for a coherent public financial management legal framework. Under the Constitution, the Controller of Budget shall oversee the implementation of the budgets of the national and county governments by authorising withdrawals from public funds. In addition, the Public Finance Management Act (2012) also provides that the County Fiscal Strategy Paper must align with the national objectives in the Budget Policy Statement. The County Fiscal Strategy Paper contains the broad strategic priorities and policy goals that will guide the county government in preparing its budget for the coming financial year and over the medium term. In addition, intergovernmental fora, which facilitate closer cooperation between the national and county governments such as the Intergovernmental Budget and Economic Council, the Intergovernmental Relations Summit and the Council of County Governors have been established. The Intergovernmental Budget and Economic Council is a forum for consultation on economic and financial matters. Moreover, the national government, in accordance with the requirements of the Constitution, has been supporting county governments by building their capacity in the management of public finances. The government is also working closely with the Salaries and Remuneration Commission, which is mandated to set salaries in the public sector, to devise a policy that will govern wage issues. Revenues and Expenditures In 2011/12, the fiscal deficit increased to 5.2 per cent. of GDP from 4.3 per cent. of GDP in 2010/11. The increase in the fiscal deficit as a percentage of GDP was primarily driven by increased government expenditures. In 2012/13, the government’s fiscal deficit stood at 6.3 per cent. of GDP. The deficit increased from the 5.2 per cent. of GDP recorded in 2011/12 primarily due to lower growth in Government revenues compared to growth in expenditures. The actual deficit in 2012/2013 was KES67.4 billion, or 29.0 per cent., less than the target deficit included in the budget for this fiscal year. This was mainly the result of a reduction of KES186.2 billion, or 16.7 per cent., in actual government expenditures, partially offset by reduced actual revenues and grants of KES121.3 billion, or 14.0 per cent., when compared to the target government expenditures and revenues, respectively, included in the budget for this year.

87

The following tables sets forth the fiscal accounts of the government for the periods indicated. 2010/2011 Actual Target

A. TOTAL REVENUE AND GRANTS 686,309 730,149 1.Revenue Ordinary revenue 667,540 686,422 Import duty 46,072 48,392 Excise duty 80,567 86,774 Income tax 258,651 247,330 VAT 171,881 172,561 Investment Revenue 11,086 13,900 Others 40,967 36,931 Appropriation-in-Aid 58,316 80,534 2.Grants 18,769 43,727 Programme Grants Cash 7,468 13,634 Appropriation-in-Aid 11,301 30,093 B. TOTAL EXPENDITURE AND NET LENDING 811,849 918,053 1. Recurrent Expenditure 592,427 611,646 Domestic Interest 69,209 67,193 Foreign Interest due 6,989 6,989 Pensions etc 25,724 28,797 Wages & Salaries 198,549 202,340 O & M/Others 291,956 306,327 Transitional Transfer to County Governments 0 0 Judicial Service Commission 2. Development and Net Lending 219,422 306,407 3. CCF 0 0 C. DEFICIT EXCL. GRANT (Commitment basis) (144,309) (231,631) D. DEFICIT INCLUDING GRANTS (Commitment basis) (125,540) (187,904) E. ADJUSTMENT TO CASH BASIS 6,768 (595)

2011/2012 2012/2013 Actual Target Actual Target (KES millions)

2013/14 Actual Target

763,453

846,744

868,167

989,465

466,852

524,560

748,167 51,712 78,884 312,463 183,386 14,132 50,156 57,434 15,286

804,500 56,595 81,763 311,465 193,825 13,582 67,664 79,606 42,244 1,132 12,733 28,379

847,217 57,650 85,502 373,422 184,581 15,264 63,017 67,781 20,950 5,826 5,188 9,936

915,282 61,484 91,810 370,600 216,000 19,120 64,640 91,628 74,183 18,913 13,886 41,384

445,129 47,493 48,050 210,699 110,723 4,515 23,648 14,289 7,434 2,591 2,357 2,486

455,555 50,456 54,304 216,566 106,845 5,262 22,122 33,684 35,321 1,604 5,767 27,950

7,765 7,521

947,777 1,082,930 1,117,018 1,303,233 647,120 697,527 818,103 882,373 82,339 77,692 110,184 108,132 8,880 8,880 11,051 11,620 26,052 32,562 26,996 31,625 224,568 229,374 274,407 292,239 305,281 349,021 385,682 428,974 0

300,657 0

0

385,403 0

9,783

298,915

9,783

420,360 500

549,790 685,023 343,485 358,629 60,097 57,965 5,020 5,020 13,978 20,167 131,605 136,729, 132,785 138,748 66,542

97,119

6,714

6,053

119,316 0

215,656 2,500

(199,610) (278,430) (269,801) (387,951) (87,372) (195,784) (184,324) (236,186) (248,851) (313,768) (79,938) (160,463) 12,582 1,954 16,814 13,861 (1,595) 0

F. DEFICIT INCLUDING GRANTS (cash basis) (118,772) (188,499) (171,742) (234,232) (232,458) (299,907) (78,343) (160,463) G. FINANCING 118,772 188,499 171,742 234,232 232,458 299,907 78,343 160,463 1.Net Foreign Financing 28,390 62,905 98,524 172,279 62,681 134,907 10,952 77,331 Disbursements 0 82,882 70,735 144,970 79,559 161,354 23,846 93,798 World bank Counterpart Refinancing 0 3,000 Project Cash Loans 0 27,010 19,342 39,485 23,569 43,405 12,519 23,565 Loans AIA 55,872 51,393 102,485 55,990 111,318 11,327 70,233 Repayments due (current) 0 (20,461) (25,375) (25,375) (23,994) (26,931) (16,008) (16,467) Rescheduling/Debt Swap 0 484 484 484 484 484 of which principal — — — — — — of which interest — — — — — — Change in arrears (current) — — 1,422 — 3,114 0 Repayments (arrears) — — — — — — Commercial Financing — — 51,258 52,200 6,632 6,632 2. Domestic financing 90,382 125,594 73,218 61,953 169,777 165,000 67,368 82,528 MEMO ITEM Nominal GDP ESTIMATE 2,787,300 2,787,301 3,306,310 3,306,310 3,662,558 3,662,559 4,164,600 4,164,600

Source: National Treasury

88

Ordinary revenue increased from KES667.5 billion in 20120/11 to KES748.2 billion in 2011/12. The increase in ordinary revenues was primarily due to increased revenues from income tax and value added tax (“VAT”). Ordinary revenue increased to KES847.2 billion in 2012/13 primarily due to increased income tax revenues. Tax revenues decreased from 19.9 per cent. of GDP in 2010/11 to 19.3 per cent. of GDP in 2011/12, primarily due to higher growth in GDP as compared to growth in tax revenues. In absolute terms, tax revenues in 2011/12 recorded an increase of 12.4 per cent., compared to an increase of 19.4 per cent. in 2010/11. During 2011/12, the increase in tax revenues in absolute terms was primarily due to increasing income tax by KES60.9 billion, income taxes increased by 20.8 per cent. in 2011/12. Revenues from VAT increased by 6.7 per cent. in 2011/12 compared to 2010/11. The growth in VAT was due to growth in GDP. Non-tax revenues increased 10.3 per cent. in 2011/12 as compared with 2012/11, primarily due to higher increase in investment revenues. Tax revenues in 2012/13 recorded an increase of 11.9 per cent., compared with an increase of 12.4 per cent., in 2011/12. During 2012/13, most categories of tax receipts increased. Income taxes increased 19.5 per cent. in 2012/13. There was marginal growth in VAT in 2012/13 due to increase in VAT as the VAT Act was being reviewed. Overall non-tax revenues grew by 20.2 per cent. in 2012/13 as compared to 10.3 per cent. increase in 2011/12. Actual revenue in 2012/2013 was KES121.3 billion, or 14.0 per cent., less than the target revenue included in the budget for this fiscal year. This was mainly the result of a reduction of KES68.1 billion, or 8.0 per cent., in actual ordinary revenue, which in part was due mainly to less than budgeted VAT and Appropriation-in-Aid revenues, and a reduction of KES53.2 billion, or 254 per cent., in actual revenue from grants, when compared to their respective targets included in the budget for this year. The following table sets forth information regarding the composition of fiscal revenues as a percentage of total revenues and grants, for the periods indicated. 2010/2011 Actual Target

1.Revenue Ordinary revenue Import duty Excise duty Income tax VAT Investment Revenue Others Appropriation-in-Aid 2.Grants Programme Grants Cash Appropriation-in-Aid

97.3% 6.7% 11.7% 37.7% 25.0% 1.6% 6.0% 8.5% 2.7% 0.0% 1.1% 1.6%

94.0% 6.6% 11.9% 33.9% 23.6% 1.9% 5.1% 11.0% 6.0% 0.0% 1.9% 4.1%

2011/2012 Actual Target

2012/2013 Actual Target

98.0% 95.0% 97.6% 92.5% 6.8% 6.7% 6.6% 6.2% 10.3% 9.7% 9.8% 9.3% 40.9% 36.8% 43.0% 37.5% 24.0% 22.9% 21.3% 21.8% 1.9% 1.6% 1.8% 1.9% 6.6% 8.0% 7.3% 6.5% 7.5% 9.4% 7.8% 9.3% 2.0% 5.0% 2.4% 7.5% 0.0% 0.1% 0.7% 1.9% 1.0% 1.5% 0.6% 1.4% 1.0% 3.4% 1.1% 4.2%

Source: National Treasury The impact of informal sector on tax revenues is minimal. The overall aim of Kenya’s tax policy is to move more to expenditure-based taxes that cover all sectors including the informal sector. The only tax that the informal sector may not pay is income tax that is about 10 per cent. of GDP. The potential for this tax with respect to the informal sector is very low given the turnover of an average informal sector business unit. In addition, the administration and enforcement costs are very high and do not justify enhanced focus on the informal sector. The Kenya Revenue Authority has been intensifying efforts to educate taxpayers in the informal sector and accustom them to paying income taxes, especially small and medium enterprises. Kenya Revenue Authority has now prioritised the real estate sector as a potential source of revenues. Kenya is also working with development partners to develop a fiscal framework for management of natural resources wealth as another potential source of revenues. These efforts, together with increased use of technology, is expected to help improve administration and compliance and tax revenue performance. The recent review of the VAT Act has simplified administration and compliance and is expected to result in increased revenue. The focus now of the government is on other taxes including excise and income taxes. Kenya Revenue Authority is also implementing and new customs management system and integration of these with the KESWS is expected to bring more transparency, accountability and higher revenues. 89

Out of the total expenditure for 2011/12, recurrent expenditure was KES647.1 billion, or 68.3 per cent. of total expenditure, compared to KES592.4 billion, or 73.0 per cent. of total expenditure in 2010/11. Development expenditure increased to KES300.7 billion, or 31.7 per cent. of total expenditure in 2011/12, compared to KES219.4 billion, or 27.0 per cent. of total expenditure in 2010/11. The three largest components of expenditures in 2011/12 are expenditures for the Teachers Service Commission at 11.6 per cent. of total expenditures, expenditures for the Ministry of Roads at 8.9 per cent. of total expenditures and expenditures for the Ministry of Defence at 6.7 per cent. of total expenditures. Expenditures for the Teachers Service Commission is composed primarily of payments for salaries. Expenditures for the Ministry of Roads entail payments for construction of roads and personal emoluments. Expenditures for the Ministry of Defence entail payments for salaries, operations and maintenance. Total expenditure for 2012/2013 amounted to KES1,117.0 billion, against a target of KES1,303.2 billion. The shortfall of KES186.2 billion was attributable to lower absorption recorded in both recurrent and development expenditures by the line ministries. Recurrent expenditure for 2012/2013 amounted to KES818.1 billion, or 73.2 per cent. of total expenditure, against a target of KES882.4 billion, with underperformance recorded in pensions, wages and salaries, and operations and maintenance, which accounted for 3.3 per cent., 33.5 per cent. and 47.1 per cent. of total recurrent expenditure. Development expenditure also lagged behind only recording KES298.9 billion or 71.1 per cent. of the budgeted amount of KES420.3 billion. This is mainly attributed to delays in the procurement process. Actual foreign interest payments for 2012/2013 amounted to KES11.1 billion, compared to KES8.9 billion for 2011/12. The domestic interest payment totalled KES110.2 billion for 2012/2013, which was higher than the KES82.3 billion paid for 2011/2012, mainly due to higher domestic borrowing. Total cumulative ministerial and other public agencies expenditure was KES917.1 billion for 2012/2013 against a target of KES1,139.6 billion. Recurrent expenditure was KES660.1 billion for 2012/2013 against a target of KES721.7 billion, while development expenditure was KES257.0 billion for 2012/2013 against a target of KES417.9 billion. The percentage of total expenditures to target was 80.5 per cent. as at the end of 2012/2013. As at the end of June 2013, expenditures by the ministries of Education; Higher Education, Science and Technology; Medical Services and Public Health and Sanitation accounted for 41.4 per cent. of total recurrent expenditure. 53.4 per cent. of actual development expenditure was taken up by the ministries of Agriculture, Roads, Water and Irrigation, and Public Health and Sanitation, this is in line with the government’s priority of spending on infrastructure projects and social programmes. Analysis of the development outlay indicates that by the end of June 2013, the Ministry of Roads accounted for the largest actual share of the total development expenditures at 21.6 per cent., followed by Ministries of Energy, Water and Irrigation, Planning and National Development & Vision 2030, and Agriculture which accounted for, 13.9 per cent., 8.1 per cent. and 7.4 per cent., respectively. In total, these ministries accounted for 55 per cent. of actual expenditures. The following table sets forth information regarding the composition of fiscal expenditures as a percentage of total expenditures and net lending, for the periods indicated. 2010/2011 Actual Target

1. Recurrent Expenditure Domestic Interest Foreign Interest due Pensions etc Wages & Salaries Operations and Maintenance/Others1 Transitional Transfer to County Governments 2. Development and Net Lending 3. CCF

73.0% 8.5% 0.9% 3.2% 24.5% 36.0% 0.0% 27.0% 0.0%

66.6% 7.3% 0.8% 3.1% 22.0% 33.4% 0.0% 33.4% 0.0%

2011/2012 Actual Target

68.3% 8.7% 0.9% 2.7% 23.7% 32.2% 0.0% 31.7% 0.0%

64.4% 7.2% 0.8% 3.0% 21.2% 32.2% 0.0% 35.6% 0.0%

2012/2013 Actual Target

73.2% 9.9% 1.0% 2.4% 24.6% 34.5% 0.9% 26.8% 0.0%

67.7% 8.3% 0.9% 2.4% 22.4% 32.9% 0.8% 32.3% 0.0%

Notes: (1) Other expenditures consist of personal emoluments, utilities for use of goods and services, current and capital transfers which includes subscriptions. Source: National Treasury 90

The following table sets forth information regarding the composition of ministerial expenditures as a percentage of total expenditures, for the periods indicated. 2010/2011 2011/2012 2012/2013 Recur. Devel. Total % of Total Recur. Devel. Total % of Total Recur. Devel. Total % of Total (KES millions) (KES millions) (KES millions) Ministry of State for Provincial Administration & Internal Security Ministry of Foreign Affairs Office of the VicePresident and Ministry of Home Affairs Ministry of State for Planning, National Development & V2030 Office of the Deputy Prime Minister and Ministry of Finance Ministry of State for Defence Ministry of Agriculture Ministry of Medical Services Office of the Deputy Prime Minister and Ministry of Local Government Ministry of Roads Ministry of Water and Irrigation Judicial Department Ministry of Energy Ministry of Education Ministry of Higher Education, Science and Technology National Security Intelligence Service The Teachers Service Commission Ministry of Public Health and Sanitation Independent Electoral and Boundaries Commission Parliamentary Service Commission Other1 Total

44,905

5.76%

52,661

7,889

0.97%

8,353

1,553 13,690

1.69%

11,581

2,141 15,692 17,833

7,758

12,137

1,887 46,792 131

2,467 55,128

5.7%

64,322

8,661

0.9%

9,648

782 12,363

1.3%

11,960

2.20%

2,600 24,576 27,176

308

3,839 68,161 232

6.0%

9,880

0.9%

1,070 13,030

1.1%

2.8%

2,520 18,923 21,443

1.9%

22,776

9,661 32,437

4.00%

17,379 20,886 38,265

4.0%

21,507 13,908 35,415

3.1%

50,283 7,750

— 50,283 7,279 15,029

6.19% 1.85%

64,537 7,988

— 64,537 8,445 16,433

6.7% 1.7%

77,485 — 77,485 8,232 10,602 18,834

6.8% 1.7%

22,984

1,534 24,518

3.02%

27,938

1,788 29,726

3.1%

43,366

4,587 47,953

4.2%

13,423 4,161 17,584 24,365 47,650 72,015

2.17% 8.87%

18,209 3,184 21,393 26,015 59,677 85,692

2.2% 8.9%

19,455 5,000 24,455 30,292 55,576 85,868

2.1% 7.5%

3,552 19,238 22,790 2,924 554 3,478 2,020 26,229 28,249 133,792 5,965 139,757

2.81% 0.43% 3.48% 17.21%

3,806 23,528 27,334 6,137 1,174 7,311 2,244 40,034 42,278 31,630 4,187 35,817

2.8% 0.8% 4.4% 3.7%

3,963 20,725 24,688 10,025 2,004 12,029 2,046 35,604 37,650 39,918 6,338 46,256

2.2% 1.1% 3.3% 4.1%

3.94%

25,620 10,652 36,272

3.8%

34,278

3.7%

1.31%

14,798

1.5%

13,749

25,628 10,616 —

9,560



6,334 31,962 — —

10,616 —

6,018 15,578





— — — 71,894 44,641 116,535 468,535 198,527 667,062

0.00% 111,876

1.92%

0.00%



14,798

— 111,876

12,272 12,776 25,048







0.00% — — — 14.4% 81,175 51,929 133,104 82.16% 526,819 266,393 793,212

7,790 42,068 13,749

1.2%

— 139,570

12.2%

2.6%

16,337 14,855 31,192

2.7%

0.0%

25,158

25,158

2.2%

0.0% 11,642 1,710 13,352 13.9% 74,613 54,240 128,853 82.5% 660,086 257,003 917,089

1.2% 11.3% 80.5%

11.6% 139,570





Notes: (1) Other includes more than 50 ministries and government agencies, none of which represents more than 1.0 per cent. total government expenditures for 2012/2013. These agencies include, among others, the Ministry of State for Special Programmes, Ministry of Gender and Children, Ministry of Transport, Ministry of Environment and Mineral Resources, Ministry of State for Immigration and Registration of Persons, Ministry of Regional Development Authorities, Ministry of Public Works, Ministry of Lands, Ministry of Industrialisation, Ministry of Housing, Cabinet Office, Ministry of Fisheries Development, Ministry of Justice, Office of the Prime Minister, etc. Source: National Treasury

91

2014 Budget The 2014 budget law was approved by Parliament on 24 October 2013. The key objectives outlined in 2013/14 budget include the following: •

accelerating growth by improving productivity and competitiveness, and opening up the economy to investment and trade opportunities to boost exports;



support for small and medium enterprises through targeted financial support, skills development, and access to market through a revamped public procurement system so as to expand business and to reduce joblessness among the Kenyan youth;



sustaining investment programmes with the highest impact to growth, covering roads, railways, pipelines, ports, and energy;



creating a business climate that encourages innovation, investment and growth;



improving the quality of education and training through leveraging on ICT, starting with the primary level;



modernising the police force to effectively and efficiently respond to crime;



boosting food security by investing in agriculture including opening up at least one million acres of new land through irrigation in order to end food insecurity;



maintaining macroeconomic stability by keeping inflation low, and striving for a stable and competitive exchange rate, while enhancing capacity to respond to external shocks;



sealing leakages in revenue collection system and extending the tax base, while ensuring efficiency in public expenditure;



supporting devolution through capacity building to effectively deliver public services and ensuring county governments receive adequate resources to fund their functions; and



investing in Kenya’s greatest capital resource, its people, and provision of what the Constitution demands, progressive social protection for every Kenyan.

These strategic interventions are expected to help create one million jobs per year and thereby lift at least ten million Kenyans out of poverty, as well as expand social protection coverage to all vulnerable members of the Kenyan society. The budget is in effect intended to take care of the poor and the vulnerable, the youth and women as well as businesses and investments the basis for achieving these development objectives. The total revenue estimates for fiscal year 2013/14 is KES1.0 trillion, comprising of KES961.3 billion of ordinary revenue and KES67.0 billion of appropriations-in aid. The total revenue estimate represents an increase of 7.5 per cent. over the budget estimates for 2012/13. As a percentage of GDP, budgeted revenues are estimated at 24.7 per cent. in 2013/14. The revenues target is premised on projected economic growth, but takes into account the challenges experienced in the past two years with collection of VAT. Scaling up the on-going reforms in tax policy and administrative measures, to seal out loopholes and ensure sustainability in domestic resource mobilisation, are part of the key assumptions supporting the revenue projection. In addition, new tax measures, including the introduction of the railway development levy on all imports, are expected to contribute to the growth in revenues in 2013/14. The 2013/14 budget includes external grants from development partners’ amounting to KES67.4 billion. Total expenditure in the 2013/14 budget is estimated to amount to KES1.4 trillion, which is expected to result in an overall fiscal deficit of KES329.7 billion (7.9 per cent. of GDP). The deficit is expected to be financed by net foreign financing of KES223.0 billion, which includes redemptions amounting to KES88.6 billion, and KES106.7 billion net borrowing from domestic market. The recurrent expenditures comprises KES110.2 billion for domestic interest payments, KES11.2 billion for foreign interest payments and KES38.2 billion for civil servants’ pensions. Gross development expenditures for 2013/14 is estimated at KES447.9 billion.

92

The following table sets out the budget allocation by sector for the 2013/14 budget as provided in the Budget Review and Outlook Paper published in September 2013.

Sectors

2013/14 Recurrent Expenditure Allocations

2013/2014 Development Expenditure Allocations (KES millions)

245.83 27.53 15.02 73.86 111.26 84.72 10.89

30.42 189.00 38.32 99.60 14.89 — 9.65

276.24 216.53 53.34 173.45 126.15 84.72 20.54

13.20 20.32 7.94 610.58

43.93 15.89 4.99 446.69

57.13 36.22 12.93 1,057.27

Education Energy, infrastructure and IT Agriculture, rural and urban development Public administration and international relations Governance, justice law and order National security Social protection, culture and recreation Environment protection, water and natural resources Health services General economic and commercial affairs Totals

Total Allocation

Preliminary Results for First Six Months of 2013/14 Ordinary revenues (inclusive of the railway levy) grew by 24.0 per cent. in the first six months of 2013/14 compared to the same period in 2012/13. Excluding the levy, ordinary revenues grew by 21.1 per cent. As at 31 December 2013, total revenue amounted to KES460.6 billion, against a target of KES489.6 billion, resulting in an underperformance of KES28.6 billion. The underperformance was in respect of KES10.4 billion in ordinary revenue (inclusive of railway levy) and KES18.2 billion in Appropriations–in–Aid (“A-I-A”). The underperformance in ordinary revenue was mainly reflected in excise and income taxes while the shortfall in A-i-A partly reflects underreporting by line ministries. Expenditure execution lagged behind in the first six months of 2013/14 because of lower absorption of funds from external sources. Total expenditure (based on disbursement) amounted to KES572.2 billion against a target of KES685.0 billion. This reflected an overall under-spending of KES112.8 billion, of which KES30.6 billion was in respect of lower than projected disbursements to the counties, while KES105.0 billion was in respect of development expenditure and net lending. Development expenditures financed with domestic resources were below target by KES13.7 million, and those financed with foreign resources were below target by KES90.3 billion. Recurrent expenditures were above target by KES25.3 billion. 1 July to 31 December for 2012/13 Actual

TOTAL REVENUE AND GRANTS TOTAL REVENUE Ordinary revenue (Incl. RDL) Import Duty Excise Duty Income tax VAT Other Revenue Railway Levy Ministerial AIA GRANTS TOTAL EXPENDITURE AND NET LENDING Recurrent Expenditure Interest Payments Pensions & Other CFS Ministerial Recurrent o/w Wages and Salaries Development Domestically Financed (Gross) Foreign Financed

387.9 381.6 359.1 28.2 40.5 168.4 87.6 34.4 0.0 22.5 6.3 510.5 385.4 59.1 14.4 312.0 131.1 125.1 95.6 28.2 93

1 July to 31 December for 2013/14 Target Preliminary Deviation (KES millions)

524.6 489.2 455.6 34.3 54.3 216.6 106.8 37.1 6.5 33.7 35.3 685.0 368.0 63.0 21.9 283.1 135.0 217.4 96.8 119.4

469.0 460.6 445.1 34.5 48.1 210.7 110.7 31.1 10.1 15.5 8.4 574.2 394.9 65.1 15.5 314.3 136.5 112.8 83.1 29.4

(55.6) (28.6) (10.4) 0.2 (6.3) (5.9) 3.9 (5.9) 3.5 (18.2) (27.0) (110.8) 26.9 2.1 (6.4) 31.2 1.5 (104.7) (13.7) (89.9)

1 July to 31 December for 2012/13 Actual

Net Lending Contingency Fund County Transfer BALANCE INCLUSIVE OF GRANTS TOTAL FINANCING NET FOREIGN FINANCING NET DOMESTIC FINANCING Discrepancy

1.2 0.0 0.0 (122.5) 123.6 11.0 112.6 1.0

1 July to 31 December for 2013/14 Target Preliminary Deviation (KES millions)

1.2 2.5 97.1 (160.5) 160.5 77.3 83.1 0.0

0.2 0.0 66.5 (105.2) 74.6 7.2 67.4 (30.7)

(1.0) (2.5) (30.6) 55.2 (85.9) (70.1) (15.7) (30.7)

Source: National Treasury 2014/15 Budget On 14 February 2014, the National Treasury presented to Parliament the Budget Policy Statement, a document that states the government’s plans for raising and spending money in the coming fiscal year 2014/15 and the main priorities on which it will spend its resources. Consistent with the second MTP, the government announced in the Budget Policy Statement that it plans to (i) create a business environment conductive to encourage innovation, investment, growth and expansion of economic and employment opportunities; (ii) invest in agricultural transformation and food security to expand food supply, reduce food prices, support expansion of agro-processing industries and spur export growth; (iii) invest in first class transport and logistics hub and scale investments in other key infrastructure products, including roads, energy and water to reduce cost of doing business and improve competitiveness; (iv) invest in quality and accessible healthcare services and education as well as social safety net to reduce the burden on households and to enhance the nation’s prospects for long term growth and development; and (v) further entrench devolution for the delivery of better government services and enhanced rural economic development. On 28 April 2014 the Cabinet approved the budget estimates for the 2014/15 budget. The budget estimates includes allocations, among others, of KES116.7 billion for on-going and new road projects, KES19.4 billion for the Standard Gauge Rail project, KES3.5 billion for the urban commuter rail system, KES1.3 billion for enhancing security to the Jomo Kenyatta International Airport and KES43.6 billion to energy related initiatives. The 2014/2015 budget assumes: •

economic growth of 5.8 per cent. for 2014 and 6.4 per cent. for 2015;



inflation will remain in the upper limit target of 7.5 per cent. in 2014;



the net-public debt to GDP ratio will decline from 52.1 per cent. at the end of June 2014 to 49.8 per cent. in 2016/2017; and



ordinary revenue to be up to 25.5 per cent. of GDP in 2014/15.

On 12 June 2014, the Cabinet Secretary for the National Treasury will deliver the Budget Statement for the fiscal year 2014/15 to the National Assembly.

94

PUBLIC DEBT Overview Government debt comprises external and domestic debt. Domestic debt is reported on a gross basis and excludes government deposits in commercial banks, Central Bank of Kenya and Treasury advances to parastatals. It consists of government securities and loans and advances from the banking system. All domestic debt is in local currency; there is no foreign currency domestic debt. External debt consists of public and publicly guaranteed debt from outside the country contracted in foreign currency. Total stock of central government debt stood at US$18.0 billion as at the end of June 2012, representing a 22.4 per cent. increase from US$14.7 billion in 2011. The proportion of central government’s external debt to total debt decreased from 52.8 per cent. in 2011 to 49.4 per cent. in 2012, mainly due to continued efforts by the central government to limit foreign borrowing in favour of domestic borrowing that comes with lower costs and risks. Total stock of central government debt stood at US$24.0 billion as at the end of December 2013. The following table sets out a summary of central government debt disaggregated into foreign and domestic debt as at the dates indicated. Stocks External Internal Total

As at 30 June, 2011 2012 2013(1) As at 31 December 2013

— — — —

— — — —

— — — —

Central Government Public Debt Other Debt (US$ millions) External Internal Total External

7,765.6 6,952.2 8,893.9 9,124.3 9,808.0 12,214.4 10,181.6 13,778.09

Total Internal

14,717.8 7,765.6 6,952.2 18,018.2 8,893.9 9,124.3 22,022.4 9,808.0 12,214.4 23,959.7 10,181.6 13,778.09

Total

14,717.8 18,018.2 22,022.4 23,959.7

Notes: (1) Provisional Source: National Treasury/Central Bank of Kenya The following table sets out a summary of central government debt disaggregated into fixed rate debt and floating rate debt as at the dates indicated. As at 30 June 2011 As at 30 June 2012 As at 30 June 2013 Amount Amount Amount (KES million) Percentage (KES million) Percentage (KES million) Percentage

Floating rate debt

29,742.2

2%

16,228.0

1%

As at 31 December 2013 Amount (KES million) Percentage

56,823.5

3%

59,144.7

3%

97%

2,052,407.5

97%

100% 2,111,552.17

100%

Fixed rate debt

1,457,367.8

98% 1,606,573.0

99% 1,837,293.5

Total

1,487,110.0

100% 1,622,801.0

100% 1,894,117.0

Source: National Treasury/Central Bank of Kenya Total multilateral debt rose by 12.0 per cent. to stand at US$5.5 billion at 30 June 2012 while total bilateral debt increased from US$2.9 billion at 30 June 2011 to US$2.9 billion at 30 June 2012. Although the government exerted efforts to restrict borrowing to sources that attract low interest rates as well as long-term repayment period, the depreciation of the Kenyan shilling contributed to the overall increase in external debt. External debt from most bilateral lenders decreased in 2011/12, except that from the People’s Republic of China which recorded the highest increase during 2011/12. The stock of debt from the IMF increased from US$529.5 million at 30 June 2011 to US$909.6 million at 30 June 2012 as a result of the continued disbursement of the ECF. Total multilateral debt rose by 9.5 per cent. to stand at US$6.5 billion at 31 December 2013 compared with US$6.0 billion at 30 June 2013 while total bilateral debt increased by 10.1 per cent. from US$3.0 billion at 30 June 2013 to US$3.3 billion at 31 December 2013. As at 31 December 2013, approximately 6.0 per cent. of external debt is floating-rate debt.

95

The following table sets out the total public and publicly guaranteed debt by source as at the dates indicated. Total Public and Publicly Guaranteed Debt by Source

EXTERNAL DEBT: Lending Countries: Germany Japan France USA Netherlands Denmark Finland China Belgium Austria Canada Italy UK Other Total Lending Countries International Organisations: IDA/IFAD EEC/EIB IMF ADF/AfDB Others Total International Organisations Commercial Banks Export Credit Total External

2011

At 30 June 2012 2013(1) (US$ millions)

At 31 December 2013(1)

296.8 1,244.60 449 65.7 33.5 35.4 1.5 361.1 100.6 22.5 14.2 48.8 25.9 160.08 2,859.50

295.4 1,275.10 435.8 61 34.7 24.7 1.2 466.8 87.4 15.6 17.6 34.8 23 150.3 2,923.40

291.2 1,009.10 551.1 56 30.2 23.1 1.1 734 88.4 11.9 16.2 24.8 20.1 138.4 2,995.60

305.1 956.8 683.6 53.4 32.5 23.5 1.1 940.6 87.9 10.1 15.4 19.9 20.3 150.3 3,300.3

3,552.80 139.1 529.5 585.8 98.9 4,906.10 — 278.7 8,044.30

3,532.00 129.8 909.6 811.1 112.8 5,495.30 600(4) 175.8 9,194.50

3,867.40 183.3 857.8 938.6 103.4 5,950.50 685.1 176.8 9,808.00

4,143.2 187.7 966.0 1,115.7 105.9 6,518.5 685.3 182.6 10,686.7

(KES millions)

INTERNAL DEBT: Treasury Bills(2) Treasury Bonds Non Interest bearing debt Others (includes stocks)(3) Less government deposits & on-lending Total Internal (net) Total debt

126,605.00 132,047.00 267,693.00 307,262.00 595,661.00 686,950.90 744,174.00 816,289.00 31,663.00 29,998.76 28,889.00 28,889.00 10,293.00 9,833.00 9,800.00 36,743.00 (139,470.00) (90,260.29) (161,435.00) (244,599.00) 624,752.00 768,569.26 889,121.00 944,584.00 1,322,598.28 1,517,729.68 1,732,683.00 1,866,953.00

Notes: (1) Provisional (2) Excludes repo bills. (3) Others consist of Central Bank of Kenya overdraft to the government of Kenya, cleared items awaiting transfer to PMG, commercial bank advances and tax reserve certificates. (4) Standard Bank Plc, one of the Managers for the offering of the Notes, is a lender for the US$600 million syndicated loan recorded in 2011/12 that matures in August 2014. The use of proceeds for the offering of the Notes includes the repayment of such syndicated loan. See “Use of Proceeds”. Source: National Treasury/Central Bank of Kenya At 31 December 2013, approximately US$505.1 million of the indebtedness of the non-financial public sector was guaranteed by the central government.

96

The table below sets out information on publicly guaranteed debt of the non-financial public sector at the dates indicated. Publicly Guaranteed Debt Year Loan

Agency

Contracted

Creditor

1985 1989 1990 1990 1990 1995 1997 2004 2007 2010 2007 2008

USA Japan Canada Japan Japan Japan Japan Japan Japan Japan Japan IDA

City Council of Nairobi Kenya Broadcasting Corporation Telkom Kenya Ltd Tana and Athi River Development Authority East African Portland Cement KenGen Ltd

Kenya Ports Authority Kenya Railways Total

Loan Balance 2011

At At 30 June, 31 December, 2012 2013 2013 (US dollar millions)

3.40 2.59 1.70 74.80 72.17 45.74 4.50 4.36 4.10 32.83 30.04 20.82 40.81 37.34 25.88 73.91 70.64 51.65 69.27 66.97 49.63 131.01 134.83 106.81 36.03 50.37 42.68 — 0.62 0.49 0.01 54.76 111.71 45.00 45.62 45.00 511.58 570.30 506.20

1.28 39.56 4.00 18.24 22.67 46.71 45.21 100.78 40.33 0.46 140.87 45.00 505.11

Source: National Treasury Net external debt servicing charges rose from US$353.9 million in 2010/11 to US$409.0 million in 2011/12 while net internal debt servicing charges decreased by 5.4 per cent. to stand at US$1.7 billion in 2011/12. This may be attributed to longer maturity of treasury bonds that constitute the larger component of internal debt. Interest and loan receipts grew by 23.1 per cent from US$368.7 million in 2010/11 to US$427.5 million in 2011/12. Net external debt servicing charges rose to US$422.5 million in 2012/13, while net internal debt servicing charges decreased by 23.0 per cent. to stand at US$1.3 billion in 2012/13. The following table sets out a summary of central government debt service as at the dates indicated. Year Ended 30 June

External

2011 2012 2013(2)

Interest and Loan Repayment Receipts (US$ millions) External Internal Total

Annual Debt Servicing Charges1 Internal

Total

353.93 1,764.10 2,118.03 408.96 1,664.84 2,073.81 422.50 1,281.06 1,703.56

— — —

14.75 18.50 22.87

Net Servicing Charges External

14.75 353.93 18.50 408.96 22.87 422.50

Internal

Total

1,749.35 2,103.28 1,646.35 2,055.31 1258.19 1,680.69

Notes: (1) Annual debt servicing charges = central government and guaranteed debt redemption + interest. (2) Provisional Source: National Treasury The following table sets out the central government debt service over the periods indicated. 2012/13

Domestic interest External interest Total interest External Principal Repayment Total Debt Service

110,184 11,051 121,235 23,993 145,228

2013/14 2014/15 (KES millions)

112,645 13,780 126,425 80,791 207,216

113,040 10,227 123,267 28,815 152,082

2016/17

106,296 11,444 117,740 35,280 153,020

Source: National Treasury Relations with the IMF The IMF approved a three-year Extended Credit Facility (“ECF”) arrangement for Kenya on 31 January 2011 in an amount equivalent to SDR 325.68 million (US$508.7 million). The program is aimed at protecting Kenya’s external position, while allowing a gradual fiscal adjustment. The program is designed to help rebuild Kenya’s 97

international reserves by supporting the conditions for sustainable growth while preserving macroeconomic stability and help address balance of payments financing needs and provide a reserve cushion to help Kenya deal with adverse shocks. On 9 December 2011, the IMF approved an augmentation of the ECF arrangement in an amount equivalent to SDR 488.52 million (approximately US$748.4 million). On 2 December 2013, the IMF announced that it had completed its sixth review of Kenya’s economic program supported by the ECF and approved the immediate disbursement of an amount equivalent to SDR 71.921 million (approximately US$110.2 million), which will bring total disbursements to the full arrangement amount of SDR 488.52 million. The Article 4 Mission is tentatively scheduled for June 2014, but is still subject to confirmation. The government has not made any additional request for IMF support. Debt Record History of Debt Restructuring Paris Club. Kenya has approached the Paris Club of creditors three times since 1990 to seek debt relief and a rescheduling of its external debt. The first debt rescheduling agreement was reached in January 1994 and granted debt relief with respect to US$535 million of indebtedness to bilateral creditors on non-concessional terms with an eight-year repayment period, including a one-year grace period. The amount covered by the first rescheduling agreement has been fully repaid. While the first rescheduling agreement was “flow” rescheduling, which limited the rescheduling to the debt servicing (principal plus interest) falling due within a specified period (consolidation period), the second rescheduling agreement received “stock” treatment, which takes into account the entire outstanding stock (principal plus accumulated arrears) and reprofiles it over an extended period of time. The second debt rescheduling agreement was signed in November 2000 and granted debt relief with respect to US$301 million of indebtedness to bilateral creditors, with maturities due from 1 July 2000 to 30 June 2001 (including the debt service payments in arrears as of July 1, 2000). As part of this rescheduling, Kenya received an extension of repayment of Official Development Assistance (“ODA”) of 20 years and an extension of repayment of non-ODA credits of 18 years, with a three-year grace period. The third rescheduling agreement was signed in January 2004. Approximately US$353 million of debt owed to bilateral creditors was rescheduled and the Republic received an extension of repayment of ODA credits of 20 years, with a ten-year grace period, and an extension of repayment of non-ODA credits of 15 years, with a five-year grace period. The total stock of bilateral debt eligible under the agreement covered maturities falling due from 1 January 2004 to 31 December 2006 (including the debt service payments in arrears as of 31 December 2003). London Club. Kenya has also received debt relief from the London Club creditors. In 1998, the London Club creditors rescheduled Kenya’s debts amounting to US$70 million over ten years, including a three year grace period, at prevailing market interest rates. In 2003-04, approximately US$23 million of debt owed to London Club creditors was rescheduled over two years at prevailing market interest rates. Bilateral Debts. Kenya has also received bilateral debt cancellations from Finland, Netherlands and China in various past years. In 2006, Kenya entered into a debt-for-development swap agreement with the Italian government amounting to US$44 million. The Tables below summarises the current status of the rescheduled debts A.

Paris Club

Rescheduling year

Amount rescheduled (US dollar million)

Outstanding amount, end 31 December 2013 (US dollar million)

1994 2000 2004

535 301 353

Nil 208 346

70 23

Nil Nil

B.

London Club 1998 2003

98

TERMS AND CONDITIONS OF THE NOTES The following is the text of the Terms and Conditions of the Notes which, upon issue, will represent the terms and conditions applicable to all Notes, and, subject to completion and amendment, will be endorsed on each Certificate and will be attached and (subject to the provisions thereof) apply to each Global Note: The US$ per cent. Notes due (the “Notes”, which expression shall in these Conditions, unless the context otherwise requires, include any further notes issued pursuant to Condition 15 and forming a single series with the Notes) of the Republic of Kenya (the “Issuer”) are issued subject to and with the benefit of a Fiscal Agency Agreement dated 2014 (such agreement as amended and/or supplemented and/or restated from time to time, the “Agency Agreement”) made between the Issuer, Citigroup Global Markets Deutschland AG as registrar (the “Registrar”), Citibank, N.A., London Branch as fiscal agent and principal paying agent (the “Fiscal Agent”), Citibank, N.A., London Branch as transfer agent (the “Transfer Agent”) and the other initial paying agents named in the Agency Agreement (together with the Fiscal Agent, the “Paying Agents”) and the other agents named in it (together with the Fiscal Agent, the Registrar, the Transfer Agent and the other Paying Agents, the “Agents”). The Notes also have the benefit of a Deed of Covenant dated 2014 (the “Deed of Covenant”) executed by the Issuer relating to the Notes. The statements in these Conditions include summaries of, and are subject to, the detailed provisions of and definitions in the Agency Agreement. Copies of the Agency Agreement and the Deed of Covenant are available for inspection during normal business hours by the holders of the Notes (the “Noteholders”) at the Specified Office (as defined in the Agency Agreement) of each of the Paying Agents. The Noteholders are entitled to the benefit of, are bound by, and are deemed to have notice of, all the provisions of the Agency Agreement applicable to them. References in these Conditions to the Fiscal Agent, the Registrar, the Paying Agents and the Agents shall include any successor appointed under the Agency Agreement. 1

Form, Denomination and Title (a) Form and Denomination: The Notes are issued in registered form in denominations of US$200,000 and integral multiples of US$1,000 in excess thereof (each, an “Authorised Denomination”). A registered note certificate (each, a “Certificate”) will be issued to each Noteholder in respect of its registered holding of Notes. Each Certificate will be numbered serially with an identifying number which will be recorded on the relevant Certificate and in the register of Noteholders (the “Register”) which the Issuer will procure to be kept by the Registrar in accordance with the provisions of the Agency Agreement. (b) Title: Title to the Notes passes only by registration in the Register. The holder of any Note will (except as otherwise required by law) be treated as its absolute owner for all purposes (whether or not it is overdue and regardless of any notice of ownership, trust or any interest or any writing on, or the theft or loss of, the Certificate issued in respect of it) and no person will be liable for so treating the holder. In these Conditions “Noteholder”, and in relation to a Note, “holder” means the person in whose name a Note is registered in the Register (or, in the case of a joint holding, the first named thereof).

2

Transfers of Notes and Issue of Certificates (a) Transfers: Subject to Condition 2(d) and Condition 2(e), a Note may be transferred by depositing the Certificate issued in respect of that Note, with the form of transfer on the back duly completed and signed, at the Specified Office of the Registrar or any of the Transfer Agents together with such evidence as the Registrar or Transfer Agent may require to prove the title of the transferor and the authority of the individuals who have executed the form of transfer; provided however, that a Note may not be transferred unless the principal amount of the Notes transferred and (where not all of the Notes held by a Noteholder are being transferred) the principal amount of the Notes not transferred, are Authorised Denominations. (b) Delivery of new Certificates: Each new Certificate to be issued upon transfer or exchange of Notes will, within five business days of receipt by the Registrar or the Transfer Agent of the duly completed form of transfer endorsed on the relevant Certificate, be mailed by uninsured mail at the risk of the holder entitled to the Note to the address specified in the form of transfer. For the purposes of this Condition 2(b), “business day” shall mean a day on which banks are open for business in the city in which the Specified Office of the Registrar or the Transfer Agent with whom a Certificate is deposited in connection with a transfer is located. 99

Where some but not all of the Notes in respect of which a Certificate is issued are to be transferred a new Certificate in respect of the Notes not so transferred will, within five business days of receipt by the Registrar or the Transfer Agent of the original Certificate, be mailed by uninsured mail at the risk of the holder of the Notes not so transferred to the address of such holder appearing on the Register or as specified in the form of transfer. (c) Formalities free of charge: Registration of transfer of Notes will be effected without charge by or on behalf of the Issuer, the Registrar or any Transfer Agent but upon payment (or the giving of such indemnity as the Registrar or any Agent may reasonably require) in respect of any tax or other governmental charges which may be imposed in relation to such transfer. (d) Closed Periods: No Noteholder may require the transfer of a Note to be registered during the period of 15 calendar days ending on (and including) the due date for any payment of principal or interest on that Note. (e) Regulations: All transfers of Notes and entries on the Register will be made subject to the detailed regulations concerning transfer of Notes scheduled to the Agency Agreement. The regulations may be changed by the Issuer with the prior written approval of the Registrar. A copy of the current regulations will be mailed (free of charge) by the Registrar to any Noteholder upon request. 3

Status The Notes constitute direct, unconditional, unsubordinated and (subject to the provisions of Condition 4) unsecured obligations of the Issuer and rank, and will rank, pari passu and without any preference among themselves, and at least pari passu with all other present and future unsubordinated and (subject as provided in Condition 4) unsecured obligations of the Issuer, save only for such obligations as may be preferred by mandatory provisions of applicable law. The Notes are backed by the full faith and credit of the Issuer.

4

Negative Pledge (a) Negative Pledge: So long as any Note remains outstanding (as defined in the Agency Agreement) the Issuer will not, save for the exceptions set out below in Condition 4(c) create, incur, assume or permit to subsist any Security upon the whole or any part of its present or future assets or revenues to secure (i) any of its Public External Indebtedness, (ii) any Guarantees in respect of Public External Indebtedness or (iii) the Public External Indebtedness of any other person, without at the same time or prior thereto securing the Notes equally and rateably therewith or providing such other arrangement (whether or not comprising Security) as shall be approved by an Extraordinary Resolution of Noteholders or by a Written Resolution (as defined in Condition 13(a)). For the avoidance of doubt, any such approval shall not constitute a Reserved Matter (as defined in Condition 13(a)). (b) Interpretation: In these Conditions: (i)

“Guarantee” means any obligation of a person to pay the Indebtedness of another person including, without limitation: an obligation to pay or purchase such Indebtedness, an obligation to lend money or to purchase or subscribe shares or other securities or to purchase assets or services in order to provide funds for the payment of such Indebtedness, an indemnity against the consequences of a default in the payment of such Indebtedness or any other agreement to be responsible for such Indebtedness;

(ii) “Extraordinary Resolution” means a resolution passed at a meeting of Noteholders (whether originally convened or resumed following an adjournment) duly convened and held in accordance with Schedule 6 (Provisions for Meetings of the Noteholders) to the Agency Agreement by a majority of not less than three quarters of the votes cast; (iii) “Indebtedness” means any obligation (whether present or future) for the payment or repayment of money which has been borrowed or raised (including money raised by acceptances and leasing); (iv) “person” means any individual, company, corporation, firm, partnership, joint venture, association, organisation, trust or other juridical entity, state or agency of a state or other entity, whether or not having a separate legal personality; (v) “Public External Indebtedness” means any Indebtedness which (i) is expressed, denominated or payable, or at the option of the relevant creditor may be payable, in any currency other than the lawful currency from time to time of the Republic of Kenya, and (ii) is in the form of, or is 100

represented by, bonds, notes or other securities with a stated maturity of more than one year from the date of issue which are, or are capable of being, quoted, listed or ordinarily purchased or sold, dealt in or traded on any stock exchange, automated trading system, over-the-counter or other securities market; and (vi) “Security” means any mortgage, pledge, lien, hypothecation, security interest or other charge or encumbrance including, without limitation, anything analogous to the foregoing under the laws of any jurisdiction. (c) Exceptions: The following exceptions apply to the Issuer’s obligations under Condition 4(a): (i)

any Security upon property to secure Public External Indebtedness of the Issuer or any Guarantee by the Issuer of Public External Indebtedness of any other person incurred for the purpose of financing the acquisition or construction of such property and any renewal and extension of such Security which is limited to the original property covered thereby and which (in either case) secures any renewal or extension of the original secured financing;

(ii) any Security securing Public External Indebtedness of the Issuer or any Guarantee by the Issuer of Public External Indebtedness of any other person incurred for the purpose of financing all or part of the costs of the acquisition, construction or development of a project; provided that (A) the holders of such Public External Indebtedness or Guarantee expressly agree to limit their recourse to the assets and revenues of such project or the proceeds of insurance thereon as the principal source of repayments of such Public External Indebtedness and (B) the property over which such Security is granted consists solely of such assets and revenues; and (iii) any Security securing the Public External Indebtedness of the Issuer or any Guarantee by the Issuer of Public External Indebtedness of any other person which was in existence on 2014. 5

Interest (a) Interest Rate and Interest Payment Dates: The Notes bear interest from and including 2014 (the “Issue Date”) to but excluding the Maturity Date (as defined in Condition 7(a)) at the rate of per cent. per annum (the “Rate of Interest”), payable semi-annually in arrear on and in each year (each, an “Interest Payment Date”), subject as provided in Condition 6(d). Each period beginning on (and including) the Issue Date or any Interest Payment Date and ending on (but excluding) the next Interest Payment Date is herein called, an “Interest Period”. (b) Interest Accrual: Each Note will cease to bear interest from and including its due date for redemption unless, upon surrender of the Certificate representing such Note, payment of the principal in respect of the Note is improperly withheld or refused or unless default is otherwise made in respect of payment. In such event, interest will continue to accrue (both before and after judgment) until whichever is the earlier of: (i)

the date on which all amounts due in respect of such Note up to that date have been received by or on behalf of the relevant Noteholder; and

(ii) the day seven days after the date on which the full amount of the moneys payable in respect of such Notes has been received by the Fiscal Agent and notice to that effect has been given to the Noteholders in accordance with Condition 12 (except to the extent that there is any subsequent default in payment to the relevant Noteholders). (c) Calculation of Interest: The amount of interest payable in respect of each Note for any Interest Period shall be calculated by applying the Rate of Interest to the principal amount of such Note, dividing the product by two and rounding the resulting figure to the nearest cent (half a cent being rounded upwards). If interest is required to be calculated for any period other than an Interest Period, it will be calculated on the basis of a year of 360 days consisting of 12 months of 30 days each and, in the case of an incomplete month, the actual number of days elapsed. 6

Payments (a) Payments in respect of Notes: Payment of principal and interest will be made by transfer to the registered account of the Noteholder or by a cheque in US dollars drawn on a bank that processes payments in US dollars mailed to the registered address of the Noteholder if it does not have a registered account. Payment of principal will only be made against surrender of the relevant Certificate 101

at the Specified Office of any of the Paying Agents. Interest on Notes due on an Interest Payment Date will be paid to the Noteholder shown on the Register at the close of business on the date (the “record date”) being the fifteenth day before the due date for the payment of interest. For the purposes of this Condition 6(a), a Noteholder’s “registered account” means the US dollar account maintained by or on its behalf with a bank that processes payments in US dollars, details of which appear on the Register at the close of business, in the case of principal, on the second Business Day (as defined below) before the due date for payment and, in the case of interest, on the relevant record date, and a Noteholder’s “registered address” means its address appearing on the Register at that time. (b) Payments subject to Applicable Laws: Payments in respect of principal and interest on Notes are subject in all cases to any fiscal or other laws and regulations applicable in the place of payment, but without prejudice to the provisions of Condition 8. (c) No commissions: No commissions or expenses shall be charged to the Noteholders in respect of any payments made in accordance with this Condition 6. (d) Payment on Business Days: Where payment is to be made by transfer to a registered account, payment instructions (for value the due date or, if that is not a Business Day, for value the first following day which is a Business Day) will be initiated and, where payment is to be made by cheque, the cheque will be mailed, on the due date for payment or, in the case of a payment of principal, if later, on the Business Day on which the relevant Certificate is surrendered at the Specified Office of an Agent. If any date for payment in respect of a Note is not a Business Day, the Noteholder shall not be entitled to payment until the next following Business Day. Noteholders will not be entitled to any interest or other payment for any delay after the due date in receiving the amount due if the due date is not a Business Day, if the Noteholder is late in surrendering its Certificate (if required to do so) or if a cheque mailed in accordance with this Condition 6(d) arrives after the due date for payment. In this Condition 6, “Business Day” means a day (other than a Saturday or Sunday) on which commercial banks are open for general business in London, New York City and, in the case of surrender of a Certificate, in the place in which the Certificate is surrendered. (e) Partial Payments: If the amount of principal or interest which is due on the Notes is not paid in full, the Registrar will annotate the Register with a record of the amount of principal or interest in fact paid. (f)

Agents: The names of the initial Agents and their initial Specified Offices are set out in the Agency Agreement. The Issuer reserves the right at any time to vary or terminate the appointment of any Agent and to appoint additional or other Agents; provided that, there will at all times be: (i) a Fiscal Agent, (ii) a Registrar, (iii) a Transfer Agent, (iv) a Paying Agent in a Member State of the EU (if any) that is not obliged to withhold or deduct tax pursuant to European Council Directive 2003/48/EC or any other directive implementing the conclusions of the ECOFIN Council Meeting of 26-27 November 2000 on the taxation of savings income or any law implementing or complying with, or introduced in order to conform to, such Directive and (v) such other agents as may be required by any stock exchange on which the Notes may be listed. Notice of any termination or appointment and of any changes in Specified Offices will be given to the Noteholders promptly by the Issuer in accordance with Condition 12. In acting under the Agency Agreement and in connection with the Notes, the Agents act solely as agents of the Issuer and do not assume any obligations towards or relationship of agency or trust for or with any of the Noteholders.

7

Redemption and Purchase (a) Redemption at Maturity: Unless previously purchased and cancelled as provided below, the Issuer will redeem the Notes at their principal amount on (the “Maturity Date”). (b) Purchases and Cancellation: The Issuer may at any time purchase Notes in the open market or otherwise at any price and for any consideration. All Notes so purchased may be cancelled or resold. Any Notes so purchased, while held by or on behalf of the Issuer, shall not entitle the Noteholder to vote at any meeting of Noteholders and shall not be deemed outstanding for the purpose of such meetings. Any Notes cancelled shall not be reissued. 102

8

Taxation (a) Payment without Withholding: All payments in respect of the Notes by or on behalf of the Issuer shall be made without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature (“Taxes”) imposed or levied by or on behalf of the Relevant Jurisdiction, unless the withholding or deduction of the Taxes is required by law. In that event, the Issuer will pay such additional amounts as may be necessary in order that the net amounts received by the Noteholders after the withholding or deduction shall equal the respective amounts which would have been receivable in respect of the Notes in the absence of the withholding or deduction, except that no additional amounts shall be payable in relation to any payment in respect of any Note: (i)

held by or on behalf of a Noteholder who is liable to the Taxes in respect of such Note by reason of his having some connection with the Relevant Jurisdiction other than the mere holding of the Note; or

(ii) in respect of which the Certificate representing it is surrendered for payment more than 30 days after the Relevant Date (as defined below), except to the extent that the relevant Noteholder would have been entitled to such additional amounts on surrendering the Certificate representing such Note for payment on the last day of such period of 30 days assuming, whether or not such is in fact the case, that day to have been a Business Day (as defined in Condition 6); or (iii) where such withholding or deduction is imposed on a payment to an individual and is required to be made pursuant to European Council Directive 2003/48/EC or any other Directive implementing the conclusions of the ECOFIN Council Meeting of 26-27 November 2000 on the taxation of savings income or any law implementing or complying with, or introduced in order to conform to, such Directive; or (iv) held by or on behalf of a Noteholder who would have been able to avoid such withholding or deduction by arranging to receive the relevant payment through another Paying Agent in a Member State of the EU. (b) Interpretation: In these Conditions: (i)

“Relevant Date” in respect of any Note means the date on which the payment first becomes due but, if the full amount of the money payable has not been received by the Fiscal Agent on or before the due date, it means the date on which, the full amount of the money having been so received, notice to that effect has been duly given to the Noteholders by the Issuer in accordance with Condition 12; and

(ii) “Relevant Jurisdiction” means the Republic of Kenya or any political subdivision or any authority thereof or therein having power to tax in respect of payments in respect of the Notes. (c) Additional Amounts: Any reference in these Conditions to any amounts in respect of the Notes shall be deemed also to refer to any additional amounts which may be payable under this Condition 8. 9

Prescription Claims against the Issuer for payment in respect of the Notes will be prescribed and become void unless made within six years (in the case of principal) and five years (in the case of interest) from the Relevant Date (as defined in Condition 8).

10

Events of Default (a) Events of Default: If any of the following events (“Events of Default”) shall have occurred and be continuing: (i)

Non-payment: (A) the Issuer fails to pay any principal on any of the Notes when due and payable and such failure continues for a period of 15 business days; or (B) the Issuer fails to pay any interest on any of the Notes or any amount due under Condition 8 when due and payable, and such failure continues for a period of 30 days; or

(ii) Breach of Other Obligations: the Issuer does not perform or comply with any one or more of its other obligations in the Notes, the Agency Agreement or the Deed of Covenant, which default is incapable of remedy or is not remedied within 45 days following the service by any Noteholder on the Issuer of notice requiring the same to be remedied; or 103

(iii) Cross-default: (A) the acceleration of the maturity (other than by optional or mandatory prepayment or redemption) of any External Indebtedness of the Issuer, or (B) any default in the payment of principal of any External Indebtedness of the Issuer shall occur when and as the same shall become due and payable if such default shall continue beyond the initial grace period, if any, applicable thereto or (C) any default in the payment when due and called upon (after the expiry of any originally applicable grace period) of any Guarantee of the Issuer in respect of any External Indebtedness of any other person; provided that, the aggregate amount of the relevant External Indebtedness in respect of which one or more of the events mentioned in this paragraph (iii) have occurred equals or exceeds US$25,000,000 or its equivalent; or (iv) Moratorium: a moratorium on the payment of principal of, or interest on, the External Indebtedness of the Issuer shall be declared by the Issuer; or (v) IMF Membership: the Issuer shall cease to be a member of the International Monetary Fund (“IMF”) or shall cease to be eligible to use the general resources of the IMF; or (vi) Validity: (A) the validity of the Notes shall be contested by the Issuer, or (B) the Issuer shall deny any of its obligations under the Notes (whether by a general suspension of payments or a moratorium on the payment of debt or otherwise) or (C) it shall be or become unlawful for the Issuer to perform or comply with all or any of its obligations set out in the Notes, including, without limitation, the payment of interest on the Notes, as a result of any change in law or regulation in the Republic of Kenya or any ruling of any court in the Republic of Kenya whose decision is final and unappealable or for any reason such obligations cease to be in full force and effect; or (vii) Consents: if any authorisation, consent of, or filing or registration with, any governmental authority necessary for the performance of any payment obligation of the Issuer under the Notes, when due, ceases to be in full force and effect or remain valid and subsisting, then the holders of at least 25 per cent. in aggregate principal amount of the outstanding Notes may, by notice in writing to the Issuer (with a copy to the Fiscal Agent), declare all the Notes to be immediately due and payable, whereupon they shall become immediately due and payable at their principal amount together with accrued interest without further action or formality. Notice of any such declaration shall promptly be given to all other Noteholders by the Issuer. If the Issuer receives notice in writing from holders of at least 50 per cent. in aggregate principal amount of the outstanding Notes to the effect that the Event of Default or Events of Default giving rise to any above mentioned declaration of acceleration is or are cured following any such declaration and that such holders wish the relevant declaration to be withdrawn, the Issuer shall give notice thereof to the Noteholders (with a copy to the Fiscal Agent), whereupon the relevant declaration shall be withdrawn and shall have no further effect but without prejudice to any rights or obligations which may have arisen before the Issuer gives such notice (whether pursuant to these Conditions or otherwise). No such withdrawal shall affect any other or any subsequent Event of Default or any right of any Noteholder in relation thereto. In this Condition 10, “External Indebtedness” means Indebtedness expressed or denominated or payable or which, at the option of the relevant creditor, may be payable in a currency other than the lawful currency from time to time of the Republic of Kenya. 11

Replacement of Certificates If any Certificate is lost, stolen, mutilated, defaced or destroyed it may be replaced at the Specified Office of the Registrar upon payment by the claimant of the expenses incurred in connection with the replacement and on such terms as to evidence and indemnity as the Issuer may reasonably require. Mutilated or defaced Certificates must be surrendered before replacements will be issued.

12

Notices All notices to the Noteholders will be valid if mailed to them at their respective addresses in the Register at the time of publication of such notice by pre-paid first class mail (or any other manner approved by the Registrar (or the Fiscal Agent on its behalf), which may be by electronic transmission) and for so long as the Notes are listed on the Irish Stock Exchange and the rules of the Irish Stock Exchange so require, shall be sent to the Companies Announcement Office of the Irish Stock Exchange. Any such notice shall be deemed to have been given on the fourth week day (being a day other than a Saturday or Sunday) after being so mailed. 104

13

Meetings of Noteholders and Modification (a) Meetings of Noteholders: The Agency Agreement contains provisions for convening meetings of the Noteholders to consider any matter affecting their interests, including the modification or abrogation by Extraordinary Resolution of any of these Conditions or any of the provisions of the Agency Agreement. Such a meeting may be convened by the Issuer and shall be convened by the Issuer upon the request in writing of Noteholders holding not less than 10 per cent. of the aggregate principal amount of the Notes for the time being outstanding (as defined in the Agency Agreement). The quorum at any meeting for passing an Extraordinary Resolution will be one or more persons present holding or representing more than 50 per cent. in principal amount of the Notes for the time being outstanding, or at any adjourned meeting one or more persons present whatever the principal amount of the Notes held or represented by him or them, except that at any meeting the business of which includes the modification or abrogation of certain of these Conditions or certain of the provisions of the Agency Agreement (including any proposal to change any date fixed for payment of principal or interest in respect of the Notes, to reduce the amount of principal or interest payable on any date in respect of the Notes, to alter the method of calculating the amount of any payment in respect of the Notes or the date for any such payment, to change the currency of payments under the Notes or to change the quorum requirements relating to meetings or the majority required to pass an Extraordinary Resolution (each, a “Reserved Matter”)) the necessary quorum for passing an Extraordinary Resolution will be one or more persons present holding or representing not less than two thirds, or at any adjourned meeting not less than one third, of the principal amount of the Notes for the time being outstanding. An Extraordinary Resolution passed at any meeting of the Noteholders will be binding on all Noteholders, whether or not they are present at the meeting. In addition, the Agency Agreement contains provisions relating to Written Resolutions. A “Written Resolution” is a resolution in writing signed by or on behalf of the holders of at least 75 per cent. of the aggregate principal amount of the outstanding Notes, in the case of a Reserved Matter, or 66 2⁄ 3 per cent. of the aggregate principal amount of the outstanding Notes, in the case of a matter other than a Reserved Matter. Any Written Resolution may be contained in one document or several documents in the same form, each signed by or on behalf of one or more Noteholders. Any Written Resolution shall be binding on all of the Noteholders, whether or not signed by them. (b) Modification: The Fiscal Agent may agree, without the consent of the Noteholders, to any modification of any of the provisions of the Agency Agreement either (i) for the purpose of curing any ambiguity or of curing, correcting or supplementing any manifest or proven error or any other defective provision contained herein or therein or (ii) in any other manner which could not reasonably be expected to be prejudicial to the interests of the Noteholders, as determined in the sole opinion of the Issuer. Any modification shall be binding on the Noteholders and shall be notified by the Issuer to the Noteholders as soon as practicable thereafter in accordance with Condition 12.

14

Noteholders’ Committee (a) Appointment: The Noteholders may, by a resolution passed at a meeting of Noteholders duly convened and held in accordance with the Agency Agreement by a majority of at least 50 per cent. in aggregate principal amount of the Notes then outstanding, or by notice in writing to the Issuer (with a copy to the Fiscal Agent) signed by or on behalf of the holders of at least 50 per cent. in aggregate principal amount of the Notes then outstanding (as defined in the Agency Agreement), appoint any person or persons as a committee to represent the interests of the Noteholders if any of the following events has occurred: (i)

an Event of Default;

(ii) any event or circumstance which could, with the giving of notice, lapse of time, the issuing of a certificate and/or fulfilment of any other requirement provided for in Condition 10 become an Event of Default; (iii) any public announcement by the Issuer, to the effect that the Issuer is seeking or intends to seek a restructuring of the Notes (whether by amendment, exchange offer or otherwise); or (iv) with the agreement of the Issuer, at a time when the Issuer has reasonably reached the conclusion that its debt may no longer be sustainable while the Notes are outstanding; provided however, that no such appointment shall be effective if the holders of more than 25 per cent. of the aggregate principal amount of the outstanding Notes have either (A) objected to such 105

appointment by notice in writing to the Issuer (with a copy to the Fiscal Agent) during a specified period following notice of the appointment being given (if such notice of appointment is made by notice in writing to the Issuer) where such specified period shall be either 30 days or such other longer or shorter period as the committee may, acting in good faith, determine to be appropriate in the circumstances or (B) voted against such resolution at a meeting of Noteholders duly convened and held in accordance with the Agency Agreement. Such committee shall, if appointed by notice in writing to the Issuer, give notice of its appointment to all Noteholders in accordance with Condition 12 as soon as practicable after the notice is delivered to the Issuer. In appointing a person or persons as a committee to represent the interests of the Noteholders, the Noteholders may instruct a representative or representatives of the committee to form a committee with any person or persons appointed for similar purposes by other affected series of debt securities. (b) Powers: Such committee in its discretion may, among other things, (i) engage legal advisers and financial advisers to assist it in representing the interests of the Noteholders, (ii) adopt such rules as it considers appropriate regarding its proceedings, (iii) enter into discussions with the Issuer and/or other creditors of the Issuer, (iv) designate one or more members of the committee to act as the main point(s) of contact with the Issuer and provide all relevant contact details to the Issuer, (v) determine whether or not there is an actual or potential conflict of interest between the interests of the Noteholders then outstanding and the interests of the holders of debt securities of any one or more other series issued by the Issuer and (vi) upon making a determination of the absence of any actual or potential conflict of interest between the interests of the Noteholders then outstanding and the interests of the holders of debt securities of any one or more other series issued by the Issuer, agree to transact business at a combined meeting of the committee and such other person or persons as may have been duly appointed as representatives of the holders of securities of each such other series. Except to the extent provided in this Condition 14(b), such committee shall not have the ability to exercise any powers or discretions which the Noteholders could themselves exercise. 15

Further Issues The Issuer may from time to time, without the consent of the Noteholders, create and issue further notes having the same terms and conditions as the Notes in all respects (or in all respects except for the first payment of interest) so as to form a single series with the Notes, provided that either (i) such additional notes, for purposes of U.S. federal income taxation (regardless of whether any holders of such notes are subject to the U.S. federal income tax laws), are not treated as issued with original issue discount (or are issued with a de minimis amount of original issue discount as defined in U.S. Treasury Regulation 1.1273-1(d)), or (ii) such additional securities are issued in a “qualified reopening” for U.S. federal income tax purposes.

16

Governing Law, Arbitration and Enforcement (a) Governing Law: The Fiscal Agency Agreement and the Notes (including any non-contractual obligations arising from or in connection with them) are governed by, and will be construed in accordance with, English law. (b) Arbitration: Any dispute arising out of or in connection with the Notes (including any dispute as to (i) the existence of the Notes, (ii) the validity or termination of the Notes, (iii) any non-contractual obligation arising out of or in connection with the Notes, (iv) the consequences of the nullity of the Notes or (v) this Condition 16(b)) (each, a “Dispute”) shall be referred to and finally resolved by arbitration under the Arbitration Rules of the London Court of International Arbitration (the “LCIA”) (the “Rules”) as at present in force and as modified by this Condition 16(b), which Rules, as so modified, are deemed incorporated by reference into this Condition 16(b). The number of arbitrators shall be three, one of whom shall be appointed by the claimant(s), one by the respondent(s) and the third of whom, who shall act as chairman, shall be nominated by the two party-nominated arbitrators, provided that if the claimant(s) or respondents(s) fail to nominate an arbitrator within the time limits specified by the Rules or the party-nominated arbitrators fail to nominate a chairman within 30 days of the nomination of the second party-nominated arbitrator, such arbitrator shall be appointed promptly by the LCIA. The seat of Arbitration shall be London, England and the language of the arbitration shall be English. The parties exclude the jurisdiction of the courts under Sections 45 and 69 of the Arbitration Act 1996. (c) Appointment of Process Agent: The Issuer has appointed the High Commissioner of the Republic of Kenya in London, presently located at 45 Portland Place, London W1B 1AS as its agent for service of 106

process in relation to any proceedings (“Proceedings”) before the English courts permitted by the Rules in connection with any arbitral proceedings pursuant to Condition 16(b), or in connection with the enforcement of any arbitral award rendered pursuant to Condition 16(b) and hereby undertakes that, in the event of the High Commissioner of the Republic of Kenya ceasing so to act or ceasing to be located in England, it will appoint another person as its agent for service of process in England for such purposes as soon as reasonably practicable thereafter. Nothing in these Conditions shall affect the right to serve Proceedings in any other manner permitted by law. (d) Consent to Enforcement and Waiver of Immunity: Except as provided below in this Condition 16(d), to the extent the Issuer may in any jurisdiction claim for itself or its assets or revenues immunity from suit, arbitral award, judgment, execution, attachment (whether in aid of execution, before judgment or otherwise) or other legal process in respect of (i) any arbitration proceedings to resolve a Dispute under Condition 16(b) or (ii) any Proceedings, and to the extent that such immunity (whether or not claimed) may be attributed in any such jurisdiction to the Issuer or its assets or revenues, the Issuer agrees not to claim and irrevocably waives such immunity to the full extent permitted by the laws of such jurisdiction (and consents generally for the purposes of the State Immunity Act 1978 to the giving of any relief or the issue of any process in connection with any such proceedings). The Issuer does not hereby waive such immunity from execution or attachment in respect of (a) property, including any bank account, used by a diplomatic or consular mission of the Issuer or its special missions or delegations to international organisations, (b) property of a military character or in use for military purposes and in each case under the control of a military authority or defence agency of the Issuer or (c) property located in the Republic of Kenya. 17

Rights of Third Parties No rights are conferred on any person under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of the Notes, but this does not affect any right or remedy of any person which exists or is available apart from that Act.

18

Currency Indemnity If any sum due from the Issuer in respect of the Notes or any arbitration award or any order or judgment given or made in relation thereto has to be converted from the currency (the “First Currency”) in which the same is payable under these Conditions or such award, order or judgment into another currency (the “Second Currency”) for the purpose of (i) making or filing a claim or proof against the Issuer, (ii) obtaining an award, order or judgment in any arbitral tribunal or court or (iii) enforcing any award, order or judgment given or made in relation to the Notes, the Issuer shall indemnify each Noteholder, on the written demand of such Noteholder addressed to the Issuer and delivered to the Issuer or to the Specified Office of the Fiscal Agent, against any loss suffered as a result of any discrepancy between (x) the rate of exchange used for such purpose to convert the sum in question from the First Currency into the Second Currency and (y) the rate or rates of exchange at which such Noteholder may in the ordinary course of business purchase the First Currency with the Second Currency upon receipt of a sum paid to it in satisfaction, in whole or in part, of any such award, order, judgment, claim or proof. This indemnity constitutes a separate and independent obligation of the Issuer and shall give rise to a separate and independent cause of action.

107

THE GLOBAL NOTES The Global Notes contain the following provisions which apply to the Notes in respect of which they are issued whilst they are represented by the Global Notes, some of which modify the effect of the Terms and Conditions of the Notes. Terms defined in the Terms and Conditions of the Notes have the same meaning in paragraphs 1 to 6 below. 1

Accountholders For so long as any of the Notes are represented by one or more Global Notes, each person (other than another clearing system) who is for the time being shown in the records of DTC or Euroclear or Clearstream, Luxembourg (as the case may be) as the holder of a particular aggregate principal amount of such Notes (each an “Accountholder”) (in which regard any certificate or other document issued by DTC or Euroclear or Clearstream, Luxembourg (as the case may be) as to the aggregate principal amount of such Notes standing to the account of any person shall be conclusive and binding for all purposes) shall be treated as the holder of such aggregate principal amount of such Notes (and the expression “Noteholders” and references to “holding of Notes” and to “holder of Notes” shall be construed accordingly) for all purposes other than with respect to payments on such Notes, the right to which shall be vested, as against Kenya, solely in the nominee for the relevant clearing system (the “Relevant Nominee”) in accordance with and subject to the terms of the Global Notes. Each Accountholder must look solely to DTC or Euroclear or Clearstream, Luxembourg, as the case may be, for its share of each payment made to the Relevant Nominee.

2

Cancellation Cancellation of any Note following its purchase by Kenya will be effected by reduction in the aggregate principal amount of the Notes in the register of Noteholders.

3

Payments Payments of principal and interest in respect of Notes represented by a Global Note will be made, in the case of payment of principal, against presentation and surrender of such Global Note to or to the order of the Fiscal Agent, or such other Agent as shall have been notified to the holders of one or more Global Note for such purpose. All payments in respect of the Notes represented by a Global Note will be made to, or to the order of, the person whose name is entered on the Register at the close of business on the Clearing System Business Day immediately prior to the date for payment, where Clearing System Business Day means Monday to Friday inclusive except 25 December and 1 January. Holders of book-entry interests in the Notes held through DTC will receive, to the extent received by the Fiscal Agent, all distributions of amounts with respect to book-entry interests in such Notes from the Fiscal Agent through DTC. Distributions in the United States will be subject to relevant U.S. tax laws and regulations. A record of each payment made will be entered in the register of Noteholders by or on behalf of the Fiscal Agent and shall be prima facie evidence that payment has been made.

4

Notices So long as the Notes are represented by a Global Note and such Global Note is held on behalf of a clearing system, notices to Noteholders may be given by delivery of the relevant notice to that clearing system for communication by it to entitled Accountholders in substitution for notification as required by Condition 12 (Notices) as set forth herein. See “Terms and Conditions of the Notes”. Any such notice shall be deemed to have been given to the Noteholders on the day after the day on which such notice is delivered to DTC. Whilst any of the Notes held by a Noteholder are represented by a Global Note, notices to be given by such Noteholder may be given by such Noteholder (where applicable) through DTC and otherwise in such manner as the Fiscal Agent and DTC may approve for this purpose. The Issuer shall also ensure that notices are duly given or published in a manner which complies with the rules and regulations of any stock exchange or other relevant authority on which the Notes are for the time being listed. Any notice shall be deemed to have been given on the day after being so mailed or on the date of publication or, if so published more than once or on different dates, on the date of the first publication. 108

5

Registration of Title Registration of title to Notes in a name other than that of the Relevant Nominee will not be permitted unless DTC notifies Kenya that it is unwilling or unable to continue as a clearing system in connection with a Global Note or DTC ceases to be a clearing agency registered under the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”) and in each case a successor clearing system is not appointed by Kenya within 90 days after receiving such notice from DTC or becoming aware that DTC is no longer so registered. In these circumstances, title to a Note may be transferred into the names of holders notified by the Relevant Nominee in accordance with the Conditions, except that Certificates in respect of Notes so transferred may not be available until 21 days after the request for transfer is duly made. The Registrar will not register title to the Notes in a name other than that of the Relevant Nominee for a period of 15 calendar days preceding the due date for any payment of principal, or interest in respect of the Notes.

6

Transfers Transfers of book-entry interests in the notes will be effected through the records of Euroclear, Clearstream, Luxembourg and DTC and their respective participants in accordance with the rules and procedures of Euroclear, Clearstream, Luxembourg and DTC and their respective direct and indirect participants, as more fully described under “Clearing and Settlement Arrangements”.

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CLEARING AND SETTLEMENT ARRANGEMENTS Kenya has obtained the information in this section from sources it believes to be reliable, including from DTC, Euroclear and Clearstream, Luxembourg. Kenya takes no responsibility, however, for the accuracy of this information. Although DTC, Euroclear and Clearstream, Luxembourg have agreed to the following procedures in order to facilitate transfers of interests in the Unrestricted Global Note and in the Restricted Global Note among participants of DTC, Euroclear and Clearstream, Luxembourg, they are under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. Neither Kenya nor the Fiscal Agent will have any responsibility for the performance by DTC, Euroclear or Clearstream, Luxembourg or their respective participants or indirect participants of their respective obligations under the rules and procedures governing their operations. DTC DTC is a limited-purpose trust company organised under the New York Banking Law, a “banking organisation” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code and a “clearing agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities for its participating organisations (“DTC Participants”) and to facilitate the clearance and settlement of securities transactions between DTC Participants through electronic book-entry changes in accounts of its DTC Participants, thereby eliminating the need for physical movement of certificates. DTC Participants include securities brokers and dealers, brokers, banks, trust companies and clearing corporations and may include certain other organisations, Indirect access to the DTC system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly (“Indirect DTC Participants”). Because DTC can only act on behalf of DTC Participants, who in turn act on behalf of Indirect DTC Participants and certain banks, the ability of a person having a beneficial interest in a note to pledge such interest to persons or entities that do not participate in the DTC system, or otherwise take actions in respect of such interest, may be affected by the lack of a physical certificate of such interest. The Rules applicable to DTC and its Participants are on file with the U.S. Securities and Exchange Commission. Euroclear and Clearstream, Luxembourg Euroclear and Clearstream, Luxembourg hold securities for participating organisations, and facilitate the clearance and settlement of securities transactions between their respective participants, through electronic bookentry changes in accounts of such participants. Euroclear and Clearstream, Luxembourg provide to their participants, among other things, services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. Euroclear and Clearstream, Luxembourg interface with domestic securities markets. Euroclear and Clearstream, Luxembourg participants are recognised financial institutions such as underwriters, securities brokers and dealers, banks, trust companies and certain other organisations and include the Managers. Indirect access to Euroclear or Clearstream, Luxembourg is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodian relationship with a Euroclear or Clearstream, Luxembourg participant, either directly or indirectly. Book-Entry Ownership Euroclear and Clearstream, Luxembourg The Unrestricted Global Note will have an ISIN and a Common Code and will be registered in the name of a nominee for, and deposited with a common depositary on behalf of Euroclear and Clearstream, Luxembourg. The address of Euroclear is 1 Boulevard du Roi Albert II. B1210 Brussels, Belgium, and the address of Clearstream, Luxembourg is 42 Avenue J.F. Kennedy. L-l855, Luxembourg. DTC The Restricted Global Note will have a CUSIP number and will be deposited with a custodian (the “Custodian”) for and registered in the name of Cede & Co., as nominee of DTC. The Custodian and DTC will electronically record the principal amount of the Notes held within the DTC system. The address of the DTC is 55 Water Street, New York, New York 10041, USA. 110

Relationship of Participants with Clearing Systems Each of the persons shown in the records of Euroclear, Clearstream, Luxembourg or DTC as the holder of a Note evidenced by a Global Note must look solely to Euroclear, Clearstream, Luxembourg or DTC (as the case may be) for his share of each payment made by Kenya to the holder of such Global Note and in relation to all other rights arising under the Global Note, subject to and in accordance with the respective rules and procedures of Euroclear, Clearstream, Luxembourg or DTC (as the case may be). Kenya expects that, upon receipt of any payment in respect of Notes evidenced by a Global Note, the common depositary by whom such Global Note is held, or nominee in whose name it is registered, will immediately credit the relevant participants’ or account holders’ accounts in the relevant clearing system with payments in amounts proportionate to their respective beneficial interests in the principal amount of the relevant Global Note as shown on the records of the relevant clearing system or its nominee. Kenya also expects that payments by direct participants in any clearing system to owners of beneficial interests in any Global Note held through such direct participants in any clearing system will be governed by standing instructions and customary practices. Save as aforesaid, such persons shall have no claim directly against Kenya in respect of payments due on the Notes for so long as the Notes are evidenced by such Global Note and the obligations of Kenya will be discharged by payment to the registered holder of such Global Note in respect of each amount so paid. None of Kenya, the Fiscal Agent or any agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of ownership interests in any Global Note or for maintaining, supervising or reviewing any records relating to such ownership interests. Settlement and Transfer of Notes Subject to the rules and procedures of each applicable clearing system, purchases of Notes held within a clearing system must be made by or through direct participants, which will receive a credit for such Notes on the clearing system’s records. The ownership interest of each actual purchaser of each such Note (the “Beneficial Owner”) will in turn be recorded on the direct and indirect participants’ records. Beneficial Owners will not receive written confirmation from any clearing system of their purchase, but Beneficial Owners are expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the direct or indirect participant through which such Beneficial Owner entered into the transaction. Transfers of ownership interests in Notes held within the clearing system will be effected by entries made on the books of participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in such Notes, unless and until interests in any Global Note held within a clearing system are exchanged for interests evidenced by a definitive note certificate. No clearing system has knowledge of the actual Beneficial Owners of the Notes held within such clearing system and their records will reflect only the identity of the direct participants to whose accounts such Notes are credited, which may or may not be the Beneficial Owners. The participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by the clearing systems to direct participants, by direct participants to indirect participants, and by direct participants and indirect participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. The laws of some jurisdictions may require that certain persons take physical delivery in definitive form of securities. Consequently, the ability to transfer interests in a Global Note to such persons may be limited. Because DTC can only act on behalf of DTC Participants, who in turn act on behalf of Indirect DTC Participants, the ability of a person having an interest in a Restricted Global Note to pledge such interest to persons or entities that do not participate in DTC, or otherwise take actions in respect of such interest, may be affected by a lack of physical certificate in respect of such interest. Investors that hold their interests in the Notes through DTC will follow the settlement practices applicable to global bond issues. Investors’ securities custody accounts will be credited with their holdings against payment in same-day funds on the settlement date. Investors that hold their interests in the Notes through Clearstream, Luxembourg or Euroclear accounts will follow the settlement procedures applicable to conventional Eurobonds in registered form. The interests will be credited to the securities custody accounts on the settlement date against payment in same-day funds. Secondary Market Trading Since the purchaser determines the place of delivery, it is important to establish at the time of trade where both the purchaser’s and seller’s accounts are located to ensure that settlement can be made on the desire value date. 111

Trading between DTC Participants Secondary market trading between DTC Participants will be settled using the procedures applicable to global bond issues in same-day funds. Trading between Euroclear and/or Clearstream, Luxembourg participants Secondary market trading between Euroclear participants and/or Clearstream, Luxembourg participants will be settled using the procedures applicable to conventional Eurobonds in same-day funds. Trading between DTC seller and Euroclear or Clearstream, Luxembourg purchaser When Notes are to be transferred from the account of a DTC Participant to the account of a Clearstream, Luxembourg or Euroclear participant, the purchaser will send instructions to Clearstream, Luxembourg or Euroclear through a Clearstream, Luxembourg or Euroclear participant, as the case may be, at least one business day prior to settlement. Clearstream, Luxembourg or the Euroclear operator will instruct its respective depositary to receive the Notes against payment. Payment will include interest accrued on such beneficial interest on the Note from and including the last interest payment date to and excluding the settlement date. Payment will then be made by the depositary to the DTC Participant’s account against delivery of Notes. After settlement has been completed, the Notes will be credited to the respective clearing system, and by the clearing system, in accordance with its usual procedures, to the Clearstream, Luxembourg or Euroclear participant’s account. The securities credit will appear the next day (European time) and the cash debit will be back-valued to, and the interest on the Note will accrue from, the value date (which would be the preceding day when settlement occurred in New York). If settlement is not completed on the intended value date (i.e., the trade fails), the Clearstream, Luxembourg or Euroclear cash debit will be valued instead as of the actual settlement date. Euroclear and Clearstream, Luxembourg participants will need to make available to the respective clearing system the funds necessary to process same-day funds settlement. The most direct means of doing so is to preposition funds for settlement, either from cash on-hand or existing lines of credit. Under this approach, participants may take on credit exposure to the Euroclear operator or Clearstream, Luxembourg until the interests in the Note are credited to their accounts one day later. As an alternative, if Clearstream, Luxembourg or Euroclear has extended a line of credit to a Clearstream, Luxembourg or Euroclear participant, as the case may be, such participant may elect not to pre-position funds and may allow that credit line to be drawn upon to finance settlement. Under this procedure, Clearstream, Luxembourg participants or Euroclear participants purchasing interests in a Note would incur overdraft charges for one day, assuming they cleared the overdraft when the interest in the Note were credited to their accounts. However, interest on the Note would accrue from the value date. Therefore, in many cases, the investment income on the interest in the Note would accrue from the value date. Therefore, in many cases, the investment income on the interest in the Note earned during that one-day period may substantially reduce or offset the amount of such overdraft charges, although this result will depend on each participant’s particular cost of funds. Since the settlement is taking place during New York business hours, DTC Participants can employ their usual procedures for transferring interests in the Global Notes to the respective depositaries of Clearstream, Luxembourg or Euroclear for the benefit of Clearstream, Luxembourg participants or Euroclear participants. The sale proceeds will be available to the DTC seller on the settlement date. Thus, to the DTC Participants, a crossmarket sale transaction will settle no differently than a trade between two DTC Participants. Trading between Clearstream, Luxembourg or Euroclear Seller and DTC purchaser Due to time zones differences in their favour, Clearstream, Luxembourg and Euroclear participants may employ their customary procedures for transactions in which interests in a Note are to be transferred by their respective clearing system, through its respective depositary, to a DTC Participant, as the case may be, at least one business day prior to settlement. In these cases, Clearstream, Luxembourg or Euroclear will instruct its respective depositary to deliver the interest in the Note to the DTC Participant’s account against payment. Payment will include interest accrued on such beneficial interest in the Note from and including the interest payment date to and excluding the settlement date. The payment will then be reflected in the account of the Clearstream, Luxembourg participant or Euroclear participant the following day, and receipt of the cash proceeds in the Clearstream, Luxembourg or Euroclear participant’s account would be back-valued at the value date (which would be the preceding day, when settlement occurred in New York). Should the Clearstream, Luxembourg or Euroclear participant have a line of credit in its respective clearing system and elect to be in debit in anticipation 112

of receipt of the sale proceeds in its account, the back-valuation will extinguish any overdraft charges occurred over that one-day period. If settlement is not completed on the intended value date (i.e., the trade fails), receipt of the cash proceeds in the Clearstream, Luxembourg or Euroclear participant’s account would instead be valued as of the actual settlement date. Finally, day traders that use Clearstream, Luxembourg or Euroclear to purchase interests in a Note from DTC Participants for delivery to Clearstream, Luxembourg participants or Euroclear participants should note that these trades will automatically fail on the sale side unless affirmative action is taken. At least three techniques should be readily available to eliminate this potential problem: •

borrowing through Clearstream, Luxembourg or Euroclear for one day (until the purchase side of the day trade is reflected in their Clearstream, Luxembourg or Euroclear accounts) in accordance with the clearing system’s customary procedures;



borrowing the interests in the United States from a DTC Participant no later than one day prior to settlement, which would give the interests sufficient time to be reflected in their Clearstream, Luxembourg or Euroclear account in order to settle the sale side of the trade; or



staggering the value date for the buy and sell sides of the trade so that the value date for the purchase from the DTC Participant is at least one day prior to the value date for the sale to the Clearstream, Luxembourg participant or Euroclear participant.

113

TRANSFER RESTRICTIONS Because of the following restrictions, purchasers are advised to consult legal counsel prior to making any offer, resale, pledge or other transfer of the Notes offered hereby. The Notes have not been registered under the Securities Act, and may not be offered or sold in the United States or to, or for the account or benefit of, U.S. Persons (as defined in Regulation S under the Securities Act) except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. Accordingly, the Notes are being offered and sold (1) in the United States only to QIBs within the meaning of Rule 144A under the Securities Act and (2) outside the United States in offshore transactions pursuant to Regulation S under the Securities Act. Terms used herein that are defined in Rule 144A or Regulation S under the Securities Act are used herein as defined therein, as applicable. 1

Transfer Restrictions On or prior to the 40th day after the Closing Date, a beneficial interest in the Unrestricted Global Note may be transferred to a person who wishes to take delivery of such beneficial interest through a Restricted Global Note only upon receipt by the Registrar of a written certification from the transferor (in the form scheduled to the Agency Agreement) to the effect that such transfer is being made to a person whom the transferor reasonably believes is a QIB, in a transaction meeting the requirements of Rule 144A and in accordance with any applicable securities laws of any state of the United States or any other jurisdiction. After such 40th day, such certification requirements will no longer apply to such transfers, but such transfers will continue to be subject to the transfer restrictions contained in the legend appearing on the face of such Note, as set out below. The Restricted Global Note will bear a legend substantially identical to that set out below and neither a Restricted Global Note nor any beneficial interest in the Restricted Global Note may be transferred except in compliance with the transfer restrictions set forth in such legend. A beneficial interest in the Restricted Global Note may be transferred to a person who wishes to take delivery of such beneficial interest through the Unrestricted Global Note only upon receipt by the Registrar of a written certification from the transferor (in the form scheduled to the Agency Agreement) to the effect that such transfer is being made in accordance with Regulation S or Rule 144 (if available) under the Securities Act. Any beneficial interest in either the Restricted Global Note or the Unrestricted Global Note that is transferred to a person who takes delivery in the form of a beneficial interest in the other Global Note will, upon transfer, cease to be a beneficial interest in such Global Note and become a beneficial interest in the other Global Note and, accordingly, will thereafter be subject to all transfer restrictions and other procedures applicable to a beneficial interest in such other Global Note for so long as such person retains such an interest. Kenya is a foreign government as defined in Rule 405 under the Securities Act and is eligible to register securities on Schedule B of the Securities Act. Therefore Kenya is not subject to the information provision requirements of Rule 144A(d)(4)(i) under the Securities Act.

2

Restricted Notes Each prospective purchaser of Notes in reliance on Rule 144A (a “144A Offeree”), by accepting delivery of this Prospectus, will be deemed to have represented, agreed and acknowledged as follows:

such 144A Offeree acknowledges that this Prospectus is personal to such 144A Offeree and does not constitute an offer to any other person or to the public generally to subscribe for or otherwise acquire Notes. Distribution of this Prospectus, or disclosure of any of its contents to any person other than such 144A Offeree and those persons, if any, retained to advise such 144A Offeree with respect thereto and other persons meeting the requirements of Rule 144A or Regulation S is unauthorised, and any disclosure of any of its contents, without the prior written consent of Kenya, is prohibited; and such 144A Offeree agrees to make no photocopies of this Prospectus or any documents referred to herein. Each purchaser of Restricted Notes within the United States, by accepting delivery of this Prospectus, will be deemed to have represented, agreed and acknowledged as follows: the purchaser (i) is a QIB, (ii) is acquiring the Notes for its own account or for the account of a QIB and (iii) is aware that the sale of the Notes to it is being made in reliance on Rule 144A. If it is acquiring any Notes for the 114

account of one or more QIBs, it represents that it has sole investment discretion with respect to each such account and that it has full power to make the herein acknowledgments, representations and agreements on behalf of each such account; the purchaser understands that such Restricted Notes are being offered only in a transaction not involving any public offering in the United States within the meaning of the Securities Act, such Restricted Notes have not been and will not be registered under the Securities Act or any other applicable State securities laws, the purchaser acknowledges that such Restricted Note is a “restricted security” (as defined in Rule 144(a)(3) under the Securities Act) and that (i) if in the future the purchaser decides to offer, resell, pledge or otherwise transfer such Restricted Notes, such Restricted Notes may be offered, sold, pledged or otherwise transferred only (A) in the United States to a person that the seller reasonably believes is a QIB purchasing for its own account in a transaction meeting the requirements of Rule 144A whom the seller has notified, in each case, that the offer, resale, pledge or other transfer is being made in reliance on Rule 144A, (B) in an offshore transaction in accordance with Rule 903 or Rule 904 of Regulation S, (C) pursuant to an exemption from registration under the Securities Act provided by Rule 144 thereunder (if available) but only upon delivery to Kenya of an opinion of counsel in form and scope satisfactory to Kenya or (D) to Kenya; in each case in accordance with any applicable securities laws of any state of the United States, and (ii) no representation can be made as to the availability at any time of the exemption provided by Rule 144 for the resale of the Notes; the purchaser agrees that it will deliver to each person to whom it transfers Notes notice of any restriction on transfer of such Notes; the purchaser understands that the Restricted Notes offered hereby will bear a legend to the following effect, unless Kenya determines otherwise in accordance with applicable law: THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR WITH ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE OR OTHER JURISDICTION OF THE UNITED STATES AND MAY NOT BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1) IN ACCORDANCE WITH RULE 144A UNDER THE SECURITIES ACT TO A PERSON THAT THE HOLDER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER WHOM THE HOLDER HAS INFORMED, IN EACH CASE, THAT THE REOFFER, RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (2) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, (3) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE) BUT ONLY UPON DELIVERY TO KENYA OF AN OPINION OF COUNSEL IN FORM AND SCOPE SATISFACTORY TO KENYA, OR (4) TO KENYA, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAW OF ANY STATE OF THE UNITED STATES. NO REPRESENTATION CAN BE MADE AS TO THE AVAILABILITY OF THE EXEMPTION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT FOR RESALE OF THIS NOTE. THIS NOTE AND RELATED DOCUMENTATION MAY BE AMENDED OR SUPPLEMENTED FROM TIME TO TIME TO MODIFY THE RESTRICTIONS ON AND PROCEDURES FOR RESALES AND OTHER TRANSFERS OF THIS NOTE TO REFLECT ANY CHANGE IN APPLICABLE LAW OR REGULATION (OR THE INTERPRETATION THEREOF) OR IN PRACTICES RELATING TO THE RESALE OR TRANSFERS OF RESTRICTED SECURITIES GENERALLY. BY ACCEPTANCE OF THIS NOTE, THE HOLDER HEREOF SHALL BE DEEMED TO HAVE AGREED TO ANY SUCH AMENDMENT OR SUPPLEMENT. the purchaser understands that Notes offered in reliance on Rule 144A will be represented by a Restricted Global Note. Before any interest in a Note represented by a Restricted Global Note may be offered, sold, pledged or otherwise transferred to a person who takes delivery in the form of an interest in an Unrestricted Global Note, it will be required to provide the Registrar with a written certification (in the form provided in the Agency Agreement) as to compliance with applicable securities laws; and the purchaser understands that Kenya, the Registrar and the Managers and their affiliates and others will rely upon the truth and accuracy of the foregoing acknowledgements, representations and agreements. 115

For so long as the Notes are held in global form, Noteholders may not require transfers to be registered during the period beginning on the third business day before the due date for any payment of principal or interest in respect of such Notes. Prospective purchasers are hereby notified that sellers of the Notes may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A. 3

Unrestricted Notes Each purchaser of Notes outside the United States pursuant to Regulation S and each subsequent purchaser of such Notes in resales prior to the expiration of the distribution compliance period (within the meaning of Regulation S), by accepting delivery of this Prospectus and the Notes, will be deemed to have represented, agreed and acknowledged that: (a) It is, or at the time Notes are purchased will be, the beneficial owner of such Notes and (i) it is not a U.S. person and it is located outside the United States (within the meaning of Regulation S) and (ii) it is not an affiliate of Kenya or a person acting on behalf of such an affiliate.

It understands that such Notes have not been and will not be registered under the Securities Act and it will not offer, sell, pledge or otherwise transfer such Notes except (i) to Kenya, (ii) in accordance with Rule 144A under the Securities Act to a person that it reasonably believes is a QIB purchasing for its own account or the account of a QIB whom it has notified, in each case, that the offer, resale, pledge or other transfer is being made in reliance on Rule 144A, (iii) in an offshore transaction in accordance with Rule 903 or Rule 904 of Regulation S, or (iv) pursuant to an exemption from registration under the Securities Act provided by Rule 144 thereunder (if available) but only upon delivery to Kenya of an opinion of counsel in form and scope satisfactory to Kenya in each case in accordance with any applicable securities laws of any State of the United States. It understands that Kenya, the Registrar, the Managers and their affiliates, and others will rely upon the truth and accuracy of the foregoing acknowledgments, representations and agreements. It understands that the Notes offered in reliance on Regulation S will be represented by the Unrestricted Global Note. Prior to the expiration of the distribution compliance period (within the meaning of Regulation S), before any interest in the Unrestricted Global Note may be offered, sold, pledged or otherwise transferred to a person who takes delivery in the form of an interest in the Restricted Global Note, it will be required to provide the Registrar with a written certification (in the form provided in the Agency Agreement) as to compliance with applicable securities laws. None of Kenya, the Managers or any person representing any such entity has made any representation to it with respect to any such entity or the offering or sale of any Notes, other than the information in this Prospectus. It understands that the Notes, while represented by the Unrestricted Global Note or if issued in exchange for an interest in the Unrestricted Global Note or for Note Certificates, will bear a legend to the following effect: THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, (THE “SECURITIES ACT”). THIS NOTE MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

116

TAXATION The following is a general description of certain tax considerations relating to the Notes. It does not purport to be a complete analysis of all tax considerations relating to the Notes. Prospective purchasers of Notes should consult their tax advisers as to the consequences under the tax laws of the country of which they are resident for tax purposes and the tax laws of the Republic of Kenya of acquiring, holding and disposing of Notes and receiving payments of interest, principal and/or other amounts under the Notes. This summary is based upon the law in effect on the date of this Prospectus and is subject to any change in law that may take effect after such date. The Republic of Kenya Income Tax in Kenya is charged under the provisions of the Income Tax Act (Chapter 470, Laws of Kenya) (“ITA”). Pursuant to section 3 of the ITA, income tax is chargeable on all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya. Interest payable on the Notes has been exempted from income tax under section 13(2) of the ITA by virtue of the Gazette Notice 56/2014 dated 22 May 2014 (the “Exemption”). The Exemption came into effect upon publication in the Kenya Gazette but must be laid before Parliament in accordance with the Statutory Instruments Act, 2013. When tabled, the Exemption stands referred to the Committee on Delegated Legislation (the “Commitee”), which must scrutinise the Exemption in accordance with the principles of good governance and the rule of law. If the Committee is not satisfied that the Exemption complies with the law, it has the power to refer the matter to Parliament, which in turn, may modify or revoke the Exemption. There are no time limits specified for the consideration of the Exemption by the Committee or any subsequent action by Parliament. If this Exemption is modified or revoked by Parliament or otherwise ceases to be in force for any reason, interest income earned on the Notes by a person, whether resident or non-resident, could become subject to income tax in Kenya. In such circumstances, the Government would be obliged to deduct withholding tax at the rate then prevailing. The current rate applicable to interest income is fifteen per cent. (15%) of the gross amount payable. Under the terms and conditions of the Notes, the Issuer is required to pay additional amounts so that the Noteholders will receive the full net amount which they would otherwise have received had there been no deduction of income tax. United Kingdom Taxation The comments in this part are based on current United Kingdom tax law as applied in England and Wales and HM Revenue & Customs practice (which may not be binding on HM Revenue & Customs) They assume that interest on the Notes does not have a United Kingdom source and, in particular, that the Issuer is not United Kingdom resident or acting through a permanent establishment in the United Kingdom in relation to the Notes. These comments are only a summary of certain United Kingdom taxation issues. In particular, they do not address the United Kingdom taxation position of Noteholders who are resident in, or have some other taxing connection with, the United Kingdom who may be liable to United Kingdom taxation on income or gains which accrue to them in respect of the Notes. Withholding Payments of interest on the Notes by the Issuer may be made without withholding or deduction for or on account of United Kingdom income tax. United Kingdom Stamp Duty and Stamp Duty Reserve Tax No United Kingdom stamp duty or stamp duty reserve tax should be payable on the issue or transfer of a Note. United States Federal Income Taxation TO ENSURE COMPLIANCE WITH TREASURY DEPARTMENT CIRCULAR 230, HOLDERS ARE HEREBY NOTIFIED THAT: ANY U.S. FEDERAL TAXATION DISCUSSION IN THIS PROSPECTUS IS NOT INTENDED OR WRITTEN TO BE RELIED UPON, AND CANNOT BE RELIED UPON, BY ANY TAXPAYER FOR PURPOSES OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON SUCH TAXPAYER UNDER THE INTERNAL REVENUE CODE. ANY SUCH TAX DISCUSSION WAS 117

WRITTEN IN CONNECTION WITH THE PROMOTION OR MARKETING (WITHIN THE MEANING OF CIRCULAR 230) BY THE ISSUER OF THE NOTES TO BE ISSUED OR SOLD PURSUANT TO THIS PROSPECTUS. EACH TAXPAYER SHOULD SEEK ADVICE BASED ON THE TAXPAYER’S PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISER. Generally The following is a summary of certain U.S. federal income tax consequences to original purchasers of the Notes of the purchase, ownership and disposition of the Notes by a U.S. Holder (as defined below). This summary is based upon tax laws of the United States, including the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations thereunder, published rulings and court decisions, all as of the date hereof and all subject to change at any time, possibly with retroactive effect. No assurances can be given that any changes in these laws or authorities will not affect the accuracy of the discussions set forth in this summary. This summary does not purport to discuss all aspects of U.S. federal income taxation that may be relevant to, or the actual tax effect that any of the matters described herein will have on, the acquisition, ownership or disposition of Notes by a particular investor in light of that investor’s individual circumstances, such as investors whose functional currency is not the U.S. dollar or certain types of investors subject to special tax rules (e.g., financial institutions, insurance companies, dealers in securities or currencies, investors liable for the alternative minimum tax or the net investment income tax, individual retirement accounts and other tax-deferred accounts, certain securities and currency traders, regulated investment companies, pension plans, and tax-exempt organisations and investors that hold the Notes as a position in a “straddle,” “conversion,” “hedging,” “integrated” or “constructive sale” transaction for U.S. federal income tax purposes). In addition, this summary does not discuss any non-U.S., state, or local tax considerations. This summary only applies to investors that hold Notes as “capital assets” (generally, property held for investment) within the meaning of the U.S. Internal Revenue Code of 1986, as amended (the “Code”). For purposes of this summary, the term “U.S. Holder” means a beneficial owner of a Note who, for U.S. federal income tax purposes, is an individual citizen or resident of the United States, a corporation created or organised in or under the laws of the United States, any state of the United States or the District of Columbia, an estate whose income is subject to U.S. federal income tax regardless of its source or a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more “United States persons,” as defined for U.S. federal income tax purposes, have the authority to control all substantial decisions of the trust or the trust has in effect a valid election to be treated as a United States person. If a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) holds the Notes, the tax treatment of a partner in such partnership will generally depend upon the status of the partner and the activities of the partnership. Prospective purchasers that are entities treated as partnerships for U.S. federal income tax purposes should consult their tax advisers concerning the U.S. federal income tax consequences to their partners of the acquisition, ownership and disposition of Notes by the partnership. As used herein, the term “non-U.S. Holder” means a beneficial owner of a Note that is not a U.S. Holder for U.S. federal income tax purposes. THE SUMMARY OF U.S. FEDERAL INCOME TAX CONSEQUENCES SET OUT BELOW IS FOR GENERAL INFORMATION ONLY. ALL PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX ADVISERS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF ACQUIRING, OWNING, AND DISPOSING OF THE NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL, NON-U.S. AND OTHER TAX LAWS AND POSSIBLE CHANGES IN TAX LAW. U.S. Holders Payments of Interest and Additional Amounts We expect, and the remainder of this summary assumes, that the Notes will be issued at par or at a discount that is de minimis for U.S. federal income tax purposes. Accordingly, payments of interest on a Note generally will be taxable to a U.S. Holder as ordinary income at the time they are received or accrued, depending on the U.S. Holder’s regular method of tax accounting. In addition to interest on a Note, if withholding taxes are imposed on payments of interest, the Issuer may be required to pay additional amounts to U.S. Holders so that 118

U.S. holders receive the same amounts they would have received had no withholding taxes been imposed. If taxes are withheld from a payment of interest on the Notes, a U.S. Holder will be required to include the amount of any such tax withheld as ordinary income, even though such holder did not in fact receive it, as well as any additional amounts paid in respect of such tax withheld. Subject to certain limitations, a U.S. Holder generally will be entitled to a credit against its U.S. federal income tax liability, or a deduction in computing its U.S. federal taxable income, for Kenyan income taxes withheld by the Issuer. For purposes of the foreign tax credit limitation, foreign source income is classified in one of two “baskets”, and the credit for foreign taxes on income in any basket is limited to U.S. federal income tax allocable to that income. Interest (and any additional amounts paid) on the Notes will constitute income from sources outside the United States. Under the foreign tax credit rules, that interest generally will be classified as “passive category income” (or, in certain cases, as “general category income”), which may be relevant in computing the foreign tax credit allowable to a U.S. Holder under the U.S. federal income tax laws. In certain circumstances a U.S. Holder may be unable to claim foreign tax credits (and may instead be allowed deductions) for taxes imposed on a payment of interest if the U.S. Holder has not held the Notes for at least 16 days during the 31-day period beginning on the date that is 15 days before the date on which the right to receive the payment arises. Prospective purchasers should consult their tax advisers concerning the foreign tax credit implications of the payment of these Kenyan taxes. Sale, Exchange, Retirement or Other Taxable Disposition of a Note A U.S. Holder generally will recognise gain or loss upon the sale, exchange, retirement or other taxable disposition of a Note (including payments as a result of an acceleration) in an amount equal to the difference between the amount realised upon that sale, exchange, retirement or other taxable disposition (other than amounts representing accrued and unpaid interest not previously included in income, which will be taxable as interest income) and the U.S. Holder’s adjusted tax basis in the Note. The amount realised is the sum of cash plus the fair market value of any property received upon the sale, exchange, retirement or other taxable disposition of a Note. A U.S. Holder’s adjusted tax basis in a Note generally will equal the U.S. Holder’s initial investment in the Note. Gain or loss on the sale, exchange, retirement or other taxable disposition of a Note generally will be capital gain or loss, and will be long-term capital gain or loss if the Note is held by the U.S. Holder for more than one year. The ability of a U.S. Holder to offset capital losses against ordinary income is limited. Any capital gain or loss recognised on sale, exchange, retirement or other taxable disposition of a Note generally will be treated as income or loss from sources within the United States for foreign tax credit limitation purposes. Therefore, U.S. Holders may not be able to claim a credit for any Kenyan tax imposed upon a sale, exchange, retirement or other taxable disposition of a Note unless (subject to special limits) such holder has other income from foreign sources and certain other requirements are met. Prospective purchasers should consult their tax advisers as to the foreign tax credit implications of the sale, exchange, retirement or other taxable disposition of Notes. Medicare Tax A U.S. Holder that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from such tax, will be subject to a 3.8 per cent. tax on the lesser of (i) the U.S. Holder’s “net investment income” (or, in the case of an estate or trust, the “undistributed net investment income”) for the relevant taxable year and (ii) the excess of the U.S. Holder’s modified adjusted gross income for the taxable year (or, in the case of an estate or trust, the U.S. Holder’s adjusted gross income for the taxable year) over a certain threshold (which in the case of individuals will be between US$125,000 and US$250,000, depending on the individual’s circumstances). A U.S. Holder’s net investment income generally will include its interest income and its net gains from the disposition of a Note, unless such interest income or net gains are derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain passive or trading activities). Information with Respect to Foreign Financial Assets U.S. taxpayers that own “specified foreign financial assets,” including debt of foreign entities, with an aggregate value in excess of $50,000 on the last day of the taxable year, or $75,000 at any time during the taxable year generally will be required to file information reports with respect to such assets with their U.S. federal income tax returns. Depending on the holder’s circumstances, higher threshold amounts may apply. “Specified foreign financial assets” include any financial accounts maintained by foreign financial institutions, as well as any of the following, but only if they are not held in accounts maintained by certain financial institutions: (i) stocks and securities issued by non-U.S. persons, (ii) financial instruments and contracts held for investment that have 119

non-U.S. issuers or counterparties and (iii) interests in non-U.S. entities. The Notes may be treated as specified foreign financial assets and U.S. Holders may be subject to this information reporting regime. Failure to file information reports may subject U.S. Holders to penalties. U.S. Holders should consult their own tax advisors regarding your obligation to file information reports with respect to the Notes. Non-U.S. Holders Payments of Interest and Additional Amounts Subject to the discussion below of backup withholding, payments of interest and any additional amounts on the Notes generally are not subject to U.S. federal income tax, including withholding tax, if paid to a “non-U.S. Holder”, as defined above, unless the interest is effectively connected with such non-U.S. Holder’s conduct of a trade or business within the United States (or, if an income tax treaty applies, the interest is attributable to a permanent establishment or fixed place of business maintained by such non-U.S. Holder within the United States). In that case, the non-U.S. Holder generally will be subject to U.S. federal income tax in respect of such interest in the same manner as a U.S. Holder, as described above. A non-U.S. Holder that is a corporation may, in certain circumstances, also be subject to an additional “branch profits tax” in respect of any such effectively connected interest income currently imposed at a 30 per cent. rate (or, if attributable to a permanent establishment maintained by such non-U.S. Holder within the United States, a lower rate under an applicable tax treaty). Sale, Exchange, Retirement or Other Taxable Disposition of a Note Subject to the discussion below of backup withholding, a non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax on any gain realised on the sale, exchange, retirement or other taxable disposition of a Note unless: (1) the gain is effectively connected with the conduct by such non-U.S. Holder of a trade or business within the United States (or, if an income tax treaty applies, the gain is attributable to a permanent establishment or fixed base in the United States.), or (2) such non-U.S. Holder is a non-resident alien individual, who is present in the United States for 183 or more days in the taxable year of the disposition and certain other conditions are met. Non-U.S. Holders who are described under (1) above generally will be subject to U.S. federal income tax on such gain in the same manner as a U.S. Holder and, if the non-U.S. Holder is a foreign corporation, such holder may also be subject to the branch profits tax as described above. Non-U.S. Holders described under (2) above generally will be subject to a flat 30 per cent. tax on the gain derived from the sale, exchange, retirement or other taxable disposition of Notes, which may be offset by certain U.S. capital losses (notwithstanding the fact that such holder is not considered a U.S. resident for U.S. federal income tax purposes). Any amount attributable to accrued but unpaid interest on the Notes generally will be treated in the same manner as payments of interest, as described above under “—Payments of Interest and Additional Amounts.” Backup Withholding and Information Reporting In general, information reporting requirements will apply to payments of principal and interest and any additional amounts on the Notes to non-corporate U.S. Holders if such payments are made within the United States or by or through a custodian or nominee that is a “U.S. Controlled Person,” as defined below. Backup withholding will apply to such payments if a U.S. Holder fails to provide an accurate taxpayer identification number or, certification of exempt status or, in the case of interest payments and the accrual of interest, fails to certify that it is not subject to backup withholding or is notified by the IRS that it has failed to report all interest and dividends required to be shown on its U.S. federal income tax returns. Non-U.S. Holders are generally exempt from these withholding and reporting requirements (assuming that the gain or income is otherwise exempt from U.S. federal income tax), but such non-U.S. Holders may be required to comply with certification and identification procedures in order to prove their exemption. If a non-U.S. Holder holds a Note through a foreign partnership, these certification procedures would generally be applied to such holder as a partner. The payment of proceeds of a sale or redemption of Notes effected at the U.S. office of a broker generally will be subject to the information reporting and backup withholding rules, unless such non-U.S. Holder establishes an exemption. In addition, the information reporting rules will apply to payments of proceeds of a sale or redemption effected at a non-U.S. office of a broker that is a U.S. Controlled Person, as defined below, unless the broker has documentary evidence that the holder or beneficial owner is not a U.S. Holder (and has no actual knowledge or reason to know to the contrary) or the holder or beneficial owner otherwise establishes an exemption. 120

As used herein, the term “U.S. Controlled Person” means: •

a “United States person;”



a controlled foreign corporation for U.S. federal income tax purposes;



a non-U.S. person 50 per cent. or more of whose gross income is derived for tax purposes from the conduct of a U.S. trade or business for a specified three-year period; or



a non-U.S. partnership in which United States persons hold more than 50 per cent. of the income or capital interests or which is engaged in the conduct of a U.S. trade or business.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a holder of a Note generally will be allowed as a refund or a credit against the holder’s U.S. federal income tax liability as long as the holder provides the required information to the IRS in a timely manner. EU Directive on the Taxation of Savings Income Under the Savings Directive, EU Member States are required, from 1 July 2005, to provide to the tax authorities of another EU Member State details of payments of interest (or similar income) paid by a person established within its jurisdiction to (or for the benefit of) an individual resident, or certain types of entity established, in that other EU Member State. However, for a transitional period, Luxembourg and Austria will (unless during that period they elect otherwise) instead operate a withholding system in relation to such payments. The current rate of withholding under the Directive is 35 per cent. The transitional period is to terminate at the end of the first full fiscal year following agreement by certain non-EU countries to exchange information procedures relating to interest and other similar income. The Luxembourg government has announced its intention to elect out of the withholding system in favour of automatic exchange of information with effect from 1 January 2015. The Council of the European Union has adopted the Amending Directive which will, when implemented, amend and broaden the scope of the requirements of the Savings Directive described above. The Amending Directive will expand the range of payments covered by the Savings Directive, in particular to include additional types of income payable on securities, and the circumstances in which payments must be reported or paid subject to withholding. For example, payments made to (or for the benefit of) (i) an entity or legal arrangement effectively managed in an EU Member State that is not subject to effective taxation, or (ii) a person, entity or legal arrangement established or effectively managed outside of the EU (and outside any third country or territory that has adopted similar measures to the Savings Directive) which indirectly benefit an individual resident in an EU Member State, may fall within the scope of the Savings Directive, as amended. The Amending Directive requires EU Member States to adopt national legislation necessary to comply with it by 1 January 2016, which legislation must apply from 1 January 2017. A number of non-EU countries and certain dependent or associated territories of certain EU Member States have adopted similar measures to the Savings Directive. The Proposed Financial Transactions Tax (“FTT”) The European Commission has published a proposal for a Directive for a common FTT in Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia (the “participating Member States”). The proposed FTT has very broad scope and could, if introduced in the form proposed by the European Commission, apply to certain dealings in the Notes (including secondary market transactions) in certain circumstances. Under the current European Commission proposal the FTT could apply in certain circumstances to persons both within and outside of the participating Member States. Generally, it would apply to certain dealings in the Notes where at least one party is a financial institution, and at least one party is established in a participating Member State. A financial institution may be, or be deemed to be, “established” in a participating Member State in a broad range of circumstances, including (a) by transacting with a person established in a participating Member State or (b) where the financial instrument which is subject to the dealings is issued in a participating Member State. Notwithstanding the European Commission proposals, a statement made by the participating Member States (other than Slovenia) indicates that a progressive implementation of the FTT is being considered, and that the FTT may initially apply only to transactions involving shares and certain derivatives, with implementation occurring by 1 January 2016. However, full details are not available. 121

The proposed FTT remains subject to negotiation between the participating Member States and the timing remains unclear. Additional EU Member States may decide to participate. Prospective holders of the Notes are advised to seek their own professional advice in relation to the FTT.

122

PLAN OF DISTRIBUTION Each of the managers named in the table (the “Managers”) has, pursuant to a Subscription Agreement (the “Subscription Agreement”) dated 2014 severally (but not jointly) agreed to subscribe or procure subscribers for the principal amount of Notes set out opposite its name in the table below at the issue price of per cent. of the principal amount of Notes, less a management and underwriting commission. Managers

Principal Amount

Barclays Bank PLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J.P. Morgan Securities plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . QNB Capital LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Standard Bank Plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dyer & Blair Investment Bank Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total:

$

$

Kenya has agreed to indemnify the Managers against certain liabilities (including liabilities under the Securities Act) incurred in connection with the issue of the Notes. The Subscription Agreement may be terminated in certain circumstances prior to payment of the net subscription money in respect of the Notes to Kenya. To the extent that the Joint Lead Managers intend to effect any sales of the Notes in the United States, they will do so through their respective selling agents, or through one or more U.S. registered broker-dealers or as otherwise permitted by applicable U.S. law. Standard Bank Plc, one of the Managers for the offering of the Notes, is a lender for the US$600 million syndicated loan recorded in 2011/12 that matures in August 2014. United States The Notes have not been and will not be registered under the Securities Act and may not be offered or sold within the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. Accordingly, the Managers have agreed, severally (but not jointly), to offer the Notes for resale in the United States initially only (1) to persons they reasonably believe to be QIBs purchasing for their own account or for the account of a QIB in reliance on Rule 144A, or (2) outside the United States in offshore transactions in reliance on Regulation S. Terms used in this paragraph have the respective meanings given to them by Regulation S. In addition, until 40 days after the commencement of the offering, an offer or sale of Notes within the United States by any dealer (whether or not participating in the offering) may violate the registration requirements of the Securities Act if such offer or sale is made otherwise than in accordance with Rule 144A under the Securities Act. Each Manager has represented and agreed severally (but not jointly), that, except as permitted by the Subscription Agreement, it has not offered and sold, and will not offer and sell, the Notes by means of any general solicitation or advertising in the United States or otherwise in any manner involving a public offering within the meaning of Section 4(a)(2) of the Securities Act. Accordingly, neither such Manager nor its affiliates, nor any persons acting on its or their behalf, have engaged or will engage in any directed selling efforts (as defined in Regulation S) with respect to the Notes, and such Manager, its affiliates and any persons acting on its or their behalf have complied and will comply with the offering restrictions requirement of Regulations S. United Kingdom Each Manager has represented and agreed, that: (a) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the United Kingdom Financial Services and Markets Act 2000 (“FSMA”)) received by it in connection with the issue or sale of any Notes in circumstances in which Section 21(1) of the FSMA does not apply to Kenya; and (b) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom. 123

Dubai International Financial Centre Each Manager has represented and agreed that it has not offered and will not offer the Notes to any person in the Dubai International Financial Centre unless such offer is (i) an “Exempt Offer” in accordance with the Offered Securities Rules of the DFSA and (ii) made only to persons who meet the Professional Client criteria set out in Rule 2.3.2 of the DFSA Conduct of Business Module. Republic of Italy The offering of the Notes has not been registered with the Commissione Nazionale per le Società e la Borsa (“CONSOB”) pursuant to Italian securities legislation and, accordingly, each Manager represents and warrants that, save as set out below, it has not offered or sold, and will not offer or sell, any Notes in the Republic of Italy in a solicitation to the public and that sales of the Notes in the Republic of Italy shall be effected in accordance with all Italian securities, tax and exchange control and other applicable laws and regulation. Accordingly, each Manager represents and agrees that it will not offer, sell or deliver any Notes or distribute copies of the Prospectus and any other document relating to the Notes in the Republic of Italy except: (a) to “Professional Investors”, as defined in Article 31.2 of CONSOB Regulation No. 11522 of 1 July 1998, as amended (“Regulation No. 11522”), pursuant to Article 30.2 and 100 of Legislative Decree No. 58 of 24 February 1998, as amended (“Decree No. 58”); (b) that it may offer, sell or deliver Notes or distribute copies of any Prospectus relating to such Notes in a solicitation to the public in the period commencing on the date of publication of such Prospectus, provided that such Prospectus has been approved in accordance with the European Directive 2003/71/ EC, as implemented in Italy under Decree No. 58 and CONSOB Regulation No. 11971 of 14 May 1999, as amended (“Regulation No. 11971”), and ending on the date which is 12 months after the date of publication of such Prospectus; and (c) in any other circumstances where an express exemption from compliance with the solicitation restrictions applies, as provided under Decree No. 58 or Regulation No. 11971. Any such offer, sale or delivery of the Notes or distribution of copies of this Prospectus or any other document relating to the Notes in the Republic of Italy must be: (a) made by investment firms, banks or financial intermediaries permitted to conduct such activities in the Republic of Italy in accordance with Legislative Decree No. 385 of 1 September 1993 as amended (the “Banking Act”), Decree No. 58, Regulation No. 11522 and any other applicable laws and regulations; (b) in compliance with Article 129 of the Banking Act and the implementing guidelines of the Bank of Italy, as amended, pursuant to which the Bank of Italy may request information on the offering or issue of securities in Italy or by Italian persons outside of Italy; and (c) in compliance with any other applicable notification requirement or limitation which may be imposed by CONSOB or the Bank of Italy. Hong Kong Each Manager represents and agrees that: (a) it has not offered or sold and will not offer or sell in Hong Kong, by means of any document, the Notes other than (i) to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571) and any rules made under that Ordinance; or (ii) in other circumstances which do not result in the document being a “Prospectus” as defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of that Ordinance; and (b) it has not issued or had in its possession for the purposes of issue, and will not issue or have in its possession for the purposes of issue (in each case whether in Hong Kong or elsewhere), any advertisement, invitation or document relating to the Notes, which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to the Notes which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance.

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Singapore The Prospectus has not been registered as a Prospectus with the Monetary Authority of Singapore. Accordingly, each Manager represents, warrants and agrees that the Prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the Notes may not be circulated or distributed, nor may the Notes be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), (ii) to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. Where the Notes are subscribed or purchased under Section 275 by a relevant person which is: (a) a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or (b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an individual who is an accredited investor, securities (as defined in Section 239(1) of the SFA) of that corporation or the beneficiaries’ rights and interest in that trust (howsoever described) shall not be transferable for six months after that corporation or that trust has acquired the Notes under Section 275 except: (i)

to an institutional investor or to a relevant person defined in Section 275(2) of the SFA, or to any person arising from an offer referred to in Section 275(1A) or Section 276(4)(i)(B) of the SFA;

(ii) where no consideration is or will be given for the transfer; (iii) where the transfer is by operation of law; (iv) as specified in Section 276(7) of the SFA; or (v) as specified in Regulation 32 of the Securities and Futures (Offer of Investments) (Shares and Debentures) Regulations 2005 of Singapore. Republic of Kenya This Prospectus and the initial offering of Notes has not been and will not be approved by the Capital Markets Authority in Kenya and the Notes will not be listed on the Nairobi Securities Exchange when they are issued. The Notes may not be issued, offered or sold in Kenya. South Africa Each Manager represents and agrees that: (a) it has not offered and will not offer for sale or, subscription, and will not sell or transfer, whether directly or indirectly, within the Republic of South Africa, any Notes to any person, company or other juristic person resident in the Republic of South Africa except in accordance with: (i) all South African Reserve Bank Exchange Control Regulations or with the approval of the South African Reserve Bank (where applicable); (ii) the Companies Act, 1973 (as amended); (iii) the Banks Act, 1990, and the regulations promulgated in terms thereof (including but not limited to the Commercial Paper Regulations); (iv) the Financial Advisory and Intermediary Services Act, 2002; and (v) in circumstances which would not constitute an offer to the public within the meaning of the South African Companies Act, 1973 (as amended); and (b) it shall not offer any Notes for subscription or sell any Notes to any single addressee for an amount of less than Rl,000,000. State of Qatar (excluding the Qatar Financial Centre) Each Manager represents and agrees that it has not offered or sold, and will not offer or sell, directly or indirectly, any Notes in the State of Qatar, except (i) in compliance with all applicable laws and regulations of the State of Qatar and (ii) through persons or corporate entities authorised and licensed to provide investment 125

advice and/or engage in brokerage activity and/or trade in respect of foreign securities in the State of Qatar. The Prospectus has not been reviewed or approved beforehand by the Qatar Central Bank or the Qatar Financial Markets Authority and is only intended for specific recipients in compliance with the foregoing. Switzerland The Prospectus is not intended to constitute an offer or solicitation to purchase or invest in the Notes described therein. The Notes may not be publicly offered, sold or advertised, directly or indirectly, in, into or from Switzerland and will not be listed on the SIX Swiss Exchange or on any other exchange or regulated trading facility in Switzerland. Neither the Prospectus nor any offering or marketing material relating to the Notes constitutes a prospectus as such term is understood pursuant to article 652a or article 1156 of the Swiss Code of Obligations or a listing prospectus within the meaning of the listing rules of the SIX Swiss Exchange or any other regulated facility in Switzerland or a simplified prospectus or a prospectus as such term is defined in the Swiss Collective Investment Scheme Act, and neither the Prospectus nor any other offering or marketing material relating to the Notes may be publicly distributed or otherwise made publicly available in Switzerland. Neither the Prospectus nor any other offering or marketing material relating to the offering, the Issuer or the Notes has been or will be filed with or approved by any Swiss regulatory authority. The Notes are not subject to the supervision by any Swiss regulatory authority, e.g., Swiss Financial Markets Supervisory Authority FINMA, and investors in the Notes will not benefit from protection or supervision by such authority. United Arab Emirates (excluding the Dubai International Financial Centre) Each Manager represents and agrees that the Notes have not been and will not be offered, sold or publicly promoted or advertised by it in the United Arab Emirates other than in compliance with any laws applicable in the United Arab Emirates governing the issue, offering and sale of securities. General No action has been taken by Kenya or any of the Managers that would, or is intended to, permit a public offer of the Notes in any country or jurisdiction where any such action for that purpose is required. Accordingly, each Manager has undertaken that it will not, directly or indirectly, offer or sell any Notes or distribute or publish any offering circular, Prospectus, form of application, advertisement or other document or information in any country or jurisdiction except under circumstances that will, to the best of its knowledge and belief, result in compliance with any applicable laws and regulations and all offers and sales of Notes by it will be made on the same terms.

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GENERAL INFORMATION Contact Information The address of the Republic of Kenya, acting through the National Treasury is: The National Treasury, Harambee Avenue, Nairobi, GPO 00100. The telephone number of Kenya is +254 20 225 2299. Listing Application has been made to the Irish Stock Exchange for the Notes to be admitted to the Official List and trading on the Main Securities Market. The listing of the Notes is expected to be granted on or around the Issue Date. The total expenses related to the admission to trading of the Notes are expected to be approximately US$ . Arthur Cox Listing Services Limited is acting solely in its capacity as listing agent for the Issuer in relation to the Notes and is not itself seeking admission of the Notes to the Official List of the Irish Stock Exchange or to trading on the Main Securities Market of the Irish Stock Exchange. In addition, the Issuer intends to make an application, after the Notes are issued, for the Notes to be listed on the Fixed Income Securities Market Segment of the Nairobi Securities Exchange. However, the Notes will not be traded on the Fixed Income Securities Market Segment of the Nairobi Securities Exchange, unless appropriate protocols are put in place after the Notes are issued. Indication of Yield Based upon a re-offer price of per cent. of the principal amount of the Notes, the yield of the Notes is per cent., on an annual basis. The yield is calculated at the Issue Date. It is not an indication of future yield. Authorisations Kenya has obtained all necessary consents, approvals and authorisations in connection with the issue and performance of its obligations under the Notes. The government’s power to borrow has been duly exercised in accordance with the PFMA. Documents on Display For so long as any Notes shall be outstanding, physical copies of: (i) Kenya’s budget for the current fiscal year, (ii) the Agency Agreement and (iii) the Deed of Covenant may be inspected during normal business hours at the specified offices of the Fiscal Agent. Clearing Systems The Notes have been accepted for clearance through Euroclear, Clearstream, Luxembourg and DTC. The Unrestricted Global Note has been accepted for clearance through Euroclear and Clearstream, Luxembourg under the Common Code No. and the ISIN . The Restricted Global Note has been accepted for clearance through DTC. The CUSIP number for the Restricted Global Note is 374422 AB9, the Common Code No. is , and the ISIN is . The address of Euroclear is 1 Boulevard du Roi Albert II, B. 1210 Brussels, Belgium, the address of Clearstream, Luxembourg is Avenue J.F. Kennedy, L-1855, Luxembourg and the address of DTC is 55 Water Street, New York, NY, 10041, USA. Litigation Save as disclosed on pages 31 under the heading Legal Proceedings, Kenya is not involved in, and has not been involved for 12 months prior to the date of this Prospectus in, any governmental, legal or arbitration proceedings which may have or have had in the recent past a significant effect on its financial position nor, so far as Kenya is aware, is any such proceeding pending or threatened. Material Change Since the end of the last fiscal year in 30 June 2013, there has been no significant change in Kenya’s (a) tax and budgetary systems, (b) gross public debt or the maturity structure or currency of its outstanding debt and debt 127

payment record (c) foreign trade and balance of payment figures (d) foreign exchange reserves including any potential encumbrances to such foreign exchange reserves as forward contracts or derivatives (e) financial position and resources including liquid deposits available in domestic currency and (f) income and expenditure figures. Interest of Natural and Legal Persons So far as the Issuer is aware, no person involved in the offer or the Notes has an interest material to the offer. Managers transacting with the Issuer Certain of the Managers and their affiliates have engaged, and may in the future engage in investment banking and/or commercial banking transactions with, and may perform services to, the Issuer and its affiliates in the ordinary course of business. See “Plan of Distribution” for more information.

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ISSUER Republic of Kenya, acting through the National Treasury The National Treasury Harambee Avenue Nairobi Republic of Kenya P.O. Box 30007 GPO 00100

JOINT LEAD MANAGERS AND JOINT BOOKRUNNERS Barclays Bank PLC J.P. Morgan Securities plc QNB Capital LLC Standard Bank Plc 5 The North Colonnade 25 Bank Street QNB Al Mathaf Tower—14th Floor 20 Gresham Street Canary Wharf Canary Wharf Old Museum Area London EC2V 7JE London E14 4BB London E14 5JP PO Box 1000 United Kingdom United Kingdom United Kingdom Doha Qatar

CO-MANAGER Dyer & Blair 10th Floor, Pension Towers P.O. Box 45396 Loita Street, Nairobi Kenya

FISCAL, TRANSFER AND PAYING AGENT

REGISTRAR

Citibank, N.A., London Branch Citigroup Centre Canada Square London E14 5LB United Kingdom

Citigroup Global Markets Deutschland AG Frankfurter Welle Reuterweg 16 Frankfurt am Main Germany

LEGAL ADVISERS To Kenya as to English law and U.S. law Arnold and Porter (UK) LLP 25 Old Broad Street London, EC2N 1HQ United Kingdom

Arnold and Porter LLP 399 Park Avenue New York, New York 10022 United States

To Kenya as to Kenyan law Anjarwalla & Khanna ALN House, Eldama Ravine Gardens, Off Eldama Ravine Road, Westlands Nairobi, Kenya

To the Managers as to English and U.S. law

To the Managers as to Kenyan law

Linklaters LLP One Silk Street London EC2Y 8HQ United Kingdom

Kaplan & Stratton 9th Floor, Williamson House, P.O. Box 40111 Fourth Ngong Ave, Nairobi, Kenya

LISTING AGENT Arthur Cox Listing Services Limited Earlsfort Centre Earlsfort Terrace Dublin 2 Ireland

Printed by RR Donnelley 656248