Kenya’s lucrative tea sector is running on contradictory policies, with players clashing on roles.

The East African Tea Trade Association (EATTA) wants some of the policies addressed through a law that will clarify roles and relationships between management agencies, growers, and factory boards, to enhance accountability.

EATTA chairperson Arthur Sewe said the clash in roles can be resolved by adopting the Draft National Tea Policy (2018) to guide on procedures.

“The government initiated a draft National Tea Policy in 2013. However, arising from delay approving it, EATTA contracted a consultant to review it, identify any gaps and suggest remedies. It should be implemented immediately,” said Mr Sewe.

“The key issues to be addressed are low productivity, insufficient development and transfer of technology, high cost of inputs, multiple taxation regime and poor governance,” he proposed this week.

Extreme weather events

Since September, Kenya’s tea production has dropped significantly due to erratic weather, according to records at the Mombasa Tea Auction.

Data from EATTA indicated, a dip in the volume of tea offered by over half a million kilogrammes in October and projected that production is likely to drop further in the coming years.

The lobby blames climate change that had affected small-scale farmers’ livelihoods. According to a Food and Agriculture Organisation report released in May, Kenya’s temperature was expected to rise by 2.5 degrees Celsius between 2000 and 2050.

A new policy, the association argues, would set guidelines on sustainable farming practices to help farmers and small- and mid-sized enterprises in the agricultural sector adapt to the change in weather patterns.

These include selection of the most suitable areas for tea growing, crop diversification in low production areas, efficient management of soil and water resources, catchment protection, soil water conservation and rainwater harvesting.

For years Kenya basked under the optimal climate for tea growing comprising tropical, red volcanic soils, sunny days and stable rainfall.

Other major tea-producers India, Sri Lanka and China also face rising temperatures and extreme weather events that affect production.

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Kenya’s National Treasury has doubled down on its efforts to swap the country’s short-term debt with longer-term issuances. 

This comes barely a week after it commenced a debt swap that will see Sh87.8 billion ($714.6 million) worth of short-term debt converted into long-term debt to ease the pressure it is experiencing from maturities. Last week, the Kenyan government floated its first switch bond since June 2020. 

Treasury Cabinet Secretary Njuguna Ndung’u said that Kenya has little wiggle room left for fresh borrowing, a situation that has been aggravated by the multiplicity of shocks to the economy, including the ongoing drought, effects of the Covid-19 pandemic and the Russia-Ukraine war.

“Right now, we don’t have headroom for accumulating debt, so in a sense, we have to go down into liability management. When you are buffeted by multiple shocks, the reaction is often to use the resources that you have or even borrow to overcome the crisis,” Prof Ndung’u said.

A fortnight ago, President William Ruto directed Treasury not to borrow from the domestic market at rates above 10 per cent. 

Awaiting growth data

Prof Ndung’u further stated that the targeted Sh300 billion ($2.4 billion) worth of budget cuts anticipated in the Ruto government’s debut Supplementary Budget have been calibrated to ensure that it does not derail the economy’s growth momentum.

According to a circular issued by the Treasury on November 7, addressed to all Cabinet secretaries and accounting officers, the Kenyan government is pursuing aggressive rationalisation of the recurrent expenditure for the current financial year. The areas earmarked for slashes include expenditure on foreign travel and training for the remaining three quarters of the current financial year.

Prof Ndung’u said Kenya might be grappling with a recession even as it awaits growth data for the third quarter of 2022 from the Kenya National Bureau of Statistics. The economy grew by 6.8 per cent and 5.2 per cent in the first and second quarters, respectively.

“The budget cuts were necessary to try and shift resources to needy areas. It is austerity measures to try and save lives. We have to look at what is essential and what is not essential. You cannot affect aggregate demand in times of recession and that is why the budget cuts were in areas that are not essential,” the CS said.

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The Kenyan government’s plan to accelerate its affordable housing agenda has suffered a setback in court after a judge quashed a law that allows members of retirement schemes to use a portion of their savings to purchase residential houses.

The court also stopped the implementation or enforcement of the amendments introduced to the Retirement Benefits Act No. 3 of 1997, which allowed the retirement benefits industry to help fill the housing gap.

Justice Anthony Ndung’u found that the amendment to the law was achieved through an irregular and flawed parliamentary process because MPs failed to allow public participation in the enactment process.

The amendment was introduced through the Tax Laws Amendment Act 2020, which came into effect on April 25, 2020, and the objective was to cure the large housing gap.

Boost home ownership

The Kenyan government’s aim in amending the law was to boost home ownership and lift the sluggish property market by enabling members of retirement schemes to purchase and own homes using their savings.

Changes to pension laws were also meant to make it easier for individuals to buy their first homes given that most Kenyan households are unable to raise the minimum house purchase deposit or afford the typical monthly mortgage payments.

To bring the amended law into force, former Treasury Cabinet Secretary Ukur Yatani published the Retirement Benefits (Mortgage Loans) (Amendment) Regulations, 2020 showing the rules and limits for accessing pension savings for home purchase. The regulations were published on September 14, 2020.

Pensioners were allowed to use up to Sh7 million ($57,000) or a maximum of 40 percent of their retirement savings to buy a home from an institution or real estate investors.

An institution was defined in the regulations to include banks, mortgage or financial institutions, building societies, microfinance institutions, the National Housing Corporation, institutions approved by the Retirement Benefits Authority or any other entity offering a residential house for sale.

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At least 4.2 million Kenyans who failed to pay Ksh30 billion ($246 million) they borrowed from banks, microfinance and mortgage finance companies digitally have been handed relief, after the Central Bank of Kenya (CBK) rolled out a framework to slash the burden by half.

The CBK on Monday said the credit repair framework, to be undertaken by commercial and microfinance banks, and mortgage finance companies until the end of May 2023, will see the lenders forego at least Ksh15 billion ($123m) the borrowers owe them as they discount the loans by 50 percent.

“Through the framework, the institutions will provide a discount of at least 50 percent of the non-performing digital loans outstanding as at end of October 2022, and update the borrowers credit standing from non-performing to performing.

“The institution will then enter into a repayment plan with the borrowers for a period of up to May 31, 2023, for the balance of the loan. Upon expiry of the framework, the credit standing of the borrowers with respect to these loans will depend on their repayment performance during the six-month period,” the CBK stated.

The CBK said the objective of the framework is to improve the credit standing of mobile phones digital borrowers who had been reported to Credit Reference Bureaus (CRBs), for failing to service loans they borrowed using mobile phones.

It covers all loans with a repayment period of 30 days and below that were listed as non-performing by end of October 2022.

“It is anticipated that the framework will enable over 4.2 million mobile phone digital borrowers, adversely listed with CRBs, to repair their credit standing. The total value is approximately Ksh30 billion, equivalent to 0.8 percent of the gross banking sector loan portfolio of Ksh3.6 trillion ($29 billion) at end of October 2022,” the financial services sector regulator stated.

The CBK said most of the affected borrowers were individuals and small businesses that were heavily impacted by the Covid-19 pandemic, which increased their inability to pay after they lost jobs and businesses.

“The adverse effects of the pandemic continue to linger for the covered borrowers. Accordingly, the framework is expected to enable this segment of borrowers to access credit and other financial services as they rebuild their lives and livelihoods,” the CBK stated.

The framework will expire on May 31, 2023, and meanwhile, the lenders have been asked to contact the borrowers and provide them with further details of the framework.

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Kenya failed to meet KSh84.6 billion ($695.4 million) debt repayment obligations in the year to June due to a cash crunch and instead carried over the payments to the current fiscal year.

The public debt rose to KSh8.6 trillion ($70.7 billion) adding more burden on service costs, with more than KSh945 billion ($7.8 billion) used to pay domestic and external lenders in the 2021/22 financial year.

In its latest review of the progress on implementing projects under its 38-month credit scheme, the International Monetary Fund (IMF) said Kenya failed to pay 0.7 per cent of the country’s GDP to external creditors.

The IMF did not make public the identity of the creditors.

“A constrained borrowing environment meant that planned external commercial financing did not materialise. Lack of funds contributed to 0.7 per cent of GDP in unpaid obligations that were carried over to the 2022/23 financial year,” IMF stated.

Kenya’s GDP was Sh12.0982 trillion by 2021, according to the Central Bank of Kenya.

Debt pressures high

The IMF said while Kenya grew its tax revenue and cut budget deficits, the country’s debt pressures remained high.

The lender added that a mix of factors, including huge amounts spent on subsidising fuel, high inflation and disruptions in global supply chains drained Kenya’s efforts on growing revenue and cutting the budget deficit.

“Significant unbudgeted spending in the early months of this fiscal year, much of it for fuel subsidies, posed an additional challenge. There has been progress on fiscal adjustment needed to address debt vulnerabilities though pressure remains elevated,” the lender said.

The government cut the budget deficit from 8.2 per cent of the GDP to 6.2 per cent, during the year, while Kenya Revenue Authority (KRA) grew taxes from 12.6 to 13.7 per cent of GDP, crossing the Sh2 trillion mark for the first time.

External financing needs

Announcing a planned release of KSh52.7 billion ($4.3 billion) in lending to Kenya under the Extended Fund Facility (EFF) and Extended Credit Facility (ECF) in the coming weeks, the IMF said nearly half of the money would be prioritised to cover external financing needs due to the ongoing drought.

“Upon completion of the Executive Board review, Kenya will have access to SDR 336.54 million (equivalent to about $433 million), bringing the total IMF financial support under these arrangements to about $1,548 million,” a statement by IMF heads of the delegation to Kenya Mary Goodman and Tobias Rasmussen read.

“This latter amount includes proposed augmentation of access of SDR162.84 million to cover external financing needs resulting from drought and challenging global financing conditions.”

The IMF says the new government must continue with measures to grow revenue further while controlling spending in a bid to cut budget deficits.

Structural, governance reforms

“It will also be important to move ahead with structural and governance reforms. This includes completing efforts to publish beneficial ownership information for awarded government contracts, which will be a major step towards greater transparency and accountability,” the statement said.

“Reform of financially-troubled state-owned enterprises – including Kenya Airways and Kenya Power – will also be key.”

President William Ruto’s initial measures to do away with fuel subsidies and reinstate variable cost adjustments in electricity prices led to a rise in fuel and power prices.

Kenya’s treasury in the quarter that ended June tapped KSh40.87 billion ($336 million) from the dollar reserves the CBK received from the IMF in form of special drawing rights in August last year.

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The Kenya Airline Pilots Association has called off their strike notice following an earlier ruling Tuesday by the Employment and Labour Relations Court which ordered the pilots to resume work.

In a statement Tuesday night, Kalpa withdrew their strike notice and urged their members to resume duty on Wednesday, November 9, 2022, at 6 am.

“Members are also urged to report to the Executive Council any incident of victimisation or disciplinary action that may be taken contrary to the court’s orders,” Kalpa said.

The pilots association said they regretted the disruption and inconvenience to KQ guests and urged their members to immediately restore normalcy to operations.

Kalpa launched the strike at Nairobi’s Jomo Kenyatta International Airport on Saturday, defying a court order issued last week against the industrial action.

Return unconditionally

Labour Relations Court judge Anna Mwaure on Tuesday ordered “the Kenya Airways pilots to resume their duties as pilots by 6am on November 9, 2022, unconditionally”.

Kenya Airways later welcomed the court’s decision.

“We thank the court for the expeditious ruling that now allows KQ to resume its normal operations. We commit to complying with the court’s directions,” said a statement by Allan Kilavuka, the Group Managing Director and CEO of Kenya Airways.

Transport Cabinet Secretary Kipchumba Murkomen had also during the day also welcomed the court order.

He urged the airline not to victimise any pilot who took part in the strike.

“The past 4 days have been difficult for Kenya’s aviation industry due to the strike by the Kenya Airline Pilot Association (Kalpa). We convey our sincere apologies to travellers and cargo customers affected by the strike,” he said in a statement to newsrooms.

“I also urge the management of Kenya Airways to obey the court order barring the victimisation of any of the pilots who participated in the strike,” Mr Murkomen said.

He said a prolonged strike would have not only forced the closure of the airline which was losing over Sh300 million a day but also negatively impacted over 18,000 lives that depend on the airline.

“In the past 3 days, this strike has disrupted travel plans for over 12,000 customers across KQ network, forced the cancellation of over 300 flights and affected 3,500 other employees who were not part of it,” Murkomen said adding that the national government is committed to the well-being of the airline.

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The standard gauge railway (SGR) contract signed by Kenya gives sweeping powers to its Chinese lenders, including requiring arbitration of any dispute to be held in Beijing, documents released by the government after years of secrecy have shown.

In the contract, which helped retired President Uhuru Kenyatta build what was Kenya’s most expensive infrastructure project, Kenya was bound to keep the details of the deal under lock and key, the reason why authorities, including the former Head of State, refused to make the contract public even after a court order.

The contract was Sunday made public by Transport and Infrastructure Cabinet Secretary, Kipchumba Murkomen, ending years of speculation on what the country signed.

But while Mr Murkomen shared the contract, which he said will be tabled in Parliament, details of the collateral Kenya put up—reported by the media, led by the Nation, as being the Port of Mombasa and other assets of the Kenya Port Authority—were missing.

In the documents shared by Mr Murkomen, China was to lend Kenya $1.6 billion at 2 percent interest per annum, with a 0.25 percent commitment fee.

Taxpayers paid a management fee of $4 million 30 days after the signing of the contract.

The SGR deal, the contract shows, is a 20-year loan with a seven-year grace period. Kenya was to repay the amount in 156 months (13 years), and was to dedicate 42.06 per cent of the proceeds from the railway to repay the loan.

For the Nairobi -Naivasha route, Kenya inked a $1.2 billion in a 20-year loan facility.

Kenya was required to pay $137.59 million as insurance fees.

The contract also confirms fears that Kenya had been bound to seek resolution—in case of a dispute—only in China, which experts have said gives the Asian nation a big advantage.

“If no settlement is reached through friendly consultation, each party shall have a right to submit a dispute to the China International Economic and Trade Arbitration Committee for arbitration …” the contract states.

In the deal, Kenya was bound to establish an inland container depot in Nairobi “and its mandatory customs clearance” as well as a Railway Development Fund, that China had said should be established “to be applied in priority to make repayment of loans in relation to the project”.

The contract also demanded that Kenya first approaches China to purchase any goods from the proceeds of SGR, before going to any other market.

Also read: Samia’s basket of goodies from China

The deal, which was signed by former Treasury Cabinet Secretary Henry Rotich and Li Ruogu, the President of the Export and Import (Exim) Bank of China, also precludes Kenya from sharing its details.

“The Borrower shall keep all the terms and conditions hereunder in connections with this Agreement strictly confidential. Without the prior written consent of the Lender, the Borrower shall not disclose any information hereunder or in connection with this Agreement to any third party unless required by applicable law,” the deal reads.

During his vetting in Parliament, Mr Murkomen had promised to make the SGR contract public, saying Kenyans had the right to know what the government signed on their behalf.

‘Never seen’

“I have spoken to everybody whom I thought was a person of influence in government and privy to the SGR contract but they have said they have never seen the SGR agreement. I don’t want to name those I spoke to, but once I get into the office, I will look for it,” Mr Murkomen said.

Following exclusive reporting by the Nation on the SGR contract in 2020, especially on the collateral Kenya put up, the Chinese Foreign Ministry Spokesperson Hua Chunying said: “We have checked with the relevant Chinese financial institution and found that the allegation that Kenyan side used the Mombasa Port as a collateral in its payment agreement with the Chinese financial institution for the Mombasa-Nairobi Railway is not true.”

Since President Kenyatta promised on live television to make public the SGR contract in 2019, the government has been playing hide and seek with Kenyans on the matter, with the country left in the dark on just what it signed and what the Chinese were guaranteed in the process.

In January this year, the government, following a court order, cited a non-disclosure agreement with the Chinese lenders for its refusal to make the contract public. It argued that the contract contains non-disclosure clauses and its release would endanger national security and injure relations with China.

Also read: Hard times for Kenya SGR as port operations return to Mombasa

Then Transport Principal Secretary Dr Joseph Njoroge said in January 2022 court documents that agreements entered between Kenya and Chinese contractors over the construction of the SGR have non-disclosure clauses.

In the case, activists Khelef Khalifa and Ms Wanjiru Gikonyo sought to have all contracts, agreements and studies related to the construction and operations of the SGR made public. They argued that keeping the documents confidential violates the law and discourages transparency in governance.

In May, Justice John Mativo ruled that public officers have a constitutional duty to make information available to Kenyans saying that any restriction on access to information from the government must have a genuine purpose and demonstrable effect of protecting a legitimate national security interest.

“It is clear that the respondents’ attempt to hide behind the provisions of sections 3(6) & (7) of the Official Secrets Act flies in the face of Article 35, section 29 of the Access to Information Act and falls to be rejected,” ruled Justice Mativo.

The judge argued that there are no two systems of law regulating access to information held by public bodies.

Most expensive projects

Mr Khelefa and Ms Gikonyo had, in the case, argued that documents related to the SGR project and its financing have never been made public despite being one of the most expensive projects undertaken by the government.

“SGR is the largest capital-intensive infrastructure project ever constructed in the country, but despite this extraordinary expenditure of public funds, the project has been undertaken with controversy and secrecy from its inception,” they argued.

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Troubled Kenya Airways is facing an operational crisis as pilots down tools protesting poor working conditions. This is amid plans by the airline to raise frequency of flights and return to old routes over the festive season to take advantage of rising traveller numbers.

The Kenya Airline Pilots Association (Kalpa) said effective 6am November 5, there would be no Kenya Airways aircraft flown by its members departing from the Jomo Kenyatta International Airport.

The association is protesting a decision to suspend contributions to the provident fund, which they claim is a contractual agreement between the airline and all employees. The pilots said KQ has unilaterally stopped both the employees’ and the employers’ contribution since 2020 and has failed to resume the retirement benefits scheme.

Pre-Covid numbers

The strike now stands in the way of KQ’s plan to recover by 2023 its pre-Covid numbers of over five million passengers, recorded in 2019, through more flights and new routes.

This week, Kenya Airways increased the number of flights for the London route throughout winter, seeking to recoup numbers lost during the Covid-19 restrictions. It now flies to London 11 times a week up from five times.

“The increased flight frequencies will cater to this route’s increased demand and provide KQ customers with increased flight options in the upcoming winter season,” the airline said.

KQ also introduced direct Mombasa-Dubai flights during the festive season, targeting to reap from the traditional high demand.

“KQ will operate daily flights with two on Wednesday, Thursday, Saturday and Sunday (morning and evening). Flights are open for booking via KQ’s website, travel agents and online travel agents.”

Left with no option

But Kalpa, which represents about 400 pilots, said the Kenya Airways management had left them with no option but to withdraw labour over unresolved grievances.

“We hoped that the management of the airline would soften its hard stance and engage in a negotiation on the issues raised. However … Kenya Airways management has not made any meaningful attempt to engage,” Kalpa’s General Secretary and Chief Executive Captain Murithi Nyaga said in a statement on Friday.

Kalpa had issued a 14-day strike notice on October 19.

Board decision

Now the carrier’s management will need to first handle the strike by its pilots.

KQ management issued a statement on Friday night saying the strike will cost the airline $2.47 million a day, terming the move by the pilots as unfortunate.

KQ Chairman Michael Joseph said the airline has been working with the Ministry of Labour and the Central Organisation of Trade Unions (Cotu) to resolve grievances raised by Kalpa.

“The board has unanimously come to the opinion that none of the grievances advanced by Kalpa merits an industrial strike and firmly holds that all CBAs (collective bargaining agreements) must align with the need to restructure the airline’s operations towards profitability and efficiency,” said Joseph, suggesting KQ’s financial situation comes first when it negotiates with pilots or staff.

‘Action is unnecessary’

“We wish to reiterate that industrial action is unnecessary at this point as it will delay and disrupt the financial and operational recovery and cause reputational damage to Kenya Airways.

“The board underlines its full support and confidence in [CEO] Mr [Allan] Kilavuka and the management in handling the matters at hand and the company.”

On Wednesday, a Kenyan Labour Court had suspended the strike notice issued earlier, even though pilots insisted they would down tools if their grievances were unmet.

The national carrier has been struggling with losses over the years.

Recently it defaulted on its aircraft purchase loans worth $841.6 million from the American Exim Bank.

The Kenyan government had guaranteed $525 million and has since offered to pay the amount. KQ disputed the figure this week, even though the National Treasury had listed it in its report.

Loan default

The airline has been focused on restructuring its fleet, including selling aircrafts and sub-leasing to other airlines in an attempt to return to profitability.

Data from the airline shows that the national carrier’s fleet size reduced in the last nine months to 41 aircrafts from 43 in December 31, 2021.

Hoteliers have lauded the decision to begin flying from the Moi International Airport to Dubai during the tourism high peak period , saying it will boost the sector.

The hoteliers have been calling for an open-skies policy to allow international airlines to land at the Coast region’s largest airport.

“The announcement of KQ’s direct flights from Mombasa to Dubai from 1 December 2022 is a welcome change and brings us a step closer to the open skies policy that all tourism stakeholders are strongly advocating for,” said Kenya Tourism Board director Bobby Kamani.

“The tourism fraternity looks forward to the resumption of flights to Mombasa by Turkish Airlines, Lufthansa and the introduction of FlyDubai, to continue the momentum,” Kamani added saying their would be value from the open-skies policy.

“It is not just for tourism by way of lower air fares but for the economy as a whole with lower freight costs and an increased interest by international investors to invest in Kenya as they see the country being more accessible than ever before.”

Mohammed Hersi, the chairman of the Diani Hospitality Owners Association, lauded Kenya Airways for resuming the Mombasa-Dubai direct flights.

“The Dubai-Mombasa four times a week flight is progressive,” Hersi said.

“We can’t wait for the following – London-Mombasa even three times a week is good enough, Amsterdam-Mombasa, Milan-Mombasa to serve Malindi and Watamu and Paris-Mombasa flights.”

Players want the airline to also begin direct flights between Mombasa and Mumbai in India and Mombasa and Johannesburg.

KQ is yet to launch to the Italian cities of Milan and Rome, previously planned for June this year, due to reduced passenger demand as a result of slower than expected recovery from the pandemic.

Tourist boom

Some airlines that have asked for licences to fly directly to Mombasa include KLM, Qatar, Turkish, Fly Dubai and Emirates. Ethiopian and Uganda Airlines already fly into Mombasa directly

“If these airlines fly to Mombasa, we will have traffic to fill our beds and further create employment,” said Kenya Coast Tourism Association chairman Victor Shitakha.

In 2021, KLM announced direct flights from Amsterdam to Mombasa. But the plans were ‘halted’ after the airline failed to get rights to fly directly to the destination.

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Kenya Airways has defaulted on a $841.6 million loan from the American Exim Bank for purchase of aircraft, the National Treasury has said.

In its latest Annual Debt Management Report (2021/2022 fiscal year) that the loss-making national carrier secured the loan with a security from the national government but failed to repay.

Of the 841.6 million, the government guaranteed $525 million.

“Kenya Airways defaulted on both the guaranteed portion of the loan amount as well as the non-guaranteed portion,” the National Treasury says.

“The National Government is in the process of novating the debt to be finalised during 2022/2023 fiscal year.”

Original contract extinguished

Novation is the process by which an original contract is extinguished and replaced with another, under which a third party takes up rights and obligations duplicating those of one of the parties to the original contract. This means that the original party transfers both the benefits and burdens under the contract.

KQ’s loan from the Exim Bank of USA was meant to purchase seven aircraft and one engine.

“The Covid-19 pandemic containment measures adversely affected the airline business globally including KQ. Government intervention included, among other financial support, the settlement of the guaranteed debt extended to KQ,” National Treasury’s director in charge of debt management, Dr Haron Sirma told The EastAfrican.

KQ chief executive Allan Kilavuka however disputed the Treasury figure when reached by The EastAfrican.

“The value you quote for the US Exim facility is not correct; $485 million is what relates to the US Exim guaranteed debt. I don’t have the context… maybe they have included other guarantees, not just the US Exim facility,” he said.

Negotiated moratoria

He said that due to Covid-19, when it reduced operations, KQ negotiated moratoria.

“The airline is yet to get back to full operations and has requested GOK (Government of Kenya) to support on the guaranteed loan to avert the possibility of the loan going into default.”

Treasury says it will closely monitor contingent liabilities arising from state-owned enterprises, as they pose major fiscal risks to the economy.

KQ is 48.9 per cent owned by the government and a group of 10 local banks which own 38.1 per cent of the shares.

Other shareholders include KLM Royal Dutch Airline (7.8 percent), employees (2.4 percent) and other shareholders at 2.8 per cent.

Push for restructuring

The government has been pushing for the restructuring of the airline on the back of state bailout plan.

Under the plan the airline is required to reduce its network, operate a smaller fleet and possibly reduce its workforce further.

As a result the airline has focused on restructuring its fleet including selling planes and sub-leasing to other airlines in an attempt to return to profitability.

Data from the airline shows that the national carrier’s fleet size narrowed in the last nine months to 41 aircraft from 43 in December 31 2021 after two leased aircraft (Embraer 190) were returned to the lessor following the expiry of their leases.

Of the 41 aircraft, 18 are owned/financed by the airline itself while 23 are on lease arrangement.

Its fleet size dropped to 39 in the year 2017 from a high of 52 in 2015, before rising to 43 in 2021.

Renegotiating lease contracts

The airline is renegotiating aircraft lease contracts with the lessors as part of a string of austerity measures to reduce operating costs.

Other measures rescue measures include engagement with principal shareholders (government) for financial support, engagement with key suppliers and financiers for moratoria, freeze on non-critical spending and implementation of temporary salary cuts for staff.

KQ has also increased focus on cargo business and has already converted two passenger aircraft to cargo freighters.

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Kenyan banks are teetering on the brink of another crisis triggered by the deteriorating economic environment and the persistent Russia-Ukraine military conflict after demonstrating strong recovery from the economic fallout effects of the Covid-19 pandemic.

The lenders, who were handed a severe blow by the Covid-19 pandemic, started 2022 on a strong footing, posting double-digit profit growth in the six months to June 30, with majority announcing resumption of dividend payment to shareholders.

The lenders’ growth in profitability was largely buoyed by increased revenues from banking transactions (non-interest income) and interest income from heavy investments in government securities.

On average the industry’s gross earnings rose 9.3 percent to Ksh62.6 billion ($517.35 million) from Ksh57.3 billion ($473.55 million) in the period, according to data from the central bank.

However, the impressive performance came under a weakening economy whose growth in the second quarter (April-June) of the year fell to 5.2 per cent compared to 11 per cent in the same period last year.

Risks in the economy

The industry lobby Kenya Bankers Association (KBA) said risks in the economy – including skyrocketing inflation, weakening currency, falling forex reserves and falling revenue collections – could filter into the banking sector dampening prospects for the entire year.

Kenya inflation for September rose to 9.2 per cent from 8.5 percent in August fuelled by fuel and food prices.

Meanwhile the shilling has plunged to a record low of Ksh121 against the US dollar, exacerbating imported inflation and pushing the cost of servicing foreign debts beyond the roof.

Revenue targets

The Kenya Revenue Authority has a failed to meet its prorated revenue targets three months into the 2022/2023 fiscal year largely due to the deteriorating business environment and inflationary pressures that have forced consumers to cut on spending.

Cumulatively, the taxman has collected Ksh465.2 billion ($3.84 billion), or 22.5 percent of the original estimates of Ksh2.07 trillion ($17.1 billion) and 89.8 percent of the prorated estimates of Ksh518 billion ($4.28 billion).

President William Ruto’s administration ascended to power on the platform of economic recovery and empowerment of the economically disadvantaged majority.

The president has ordered expenditure cuts of up to Ksh300 billion ($2.47 billion) and austerity measures to ride the economic tsunami.

Concessional borrowing

Last week, National Treasury Cabinet Secretary nominee Njuguna Ndung’u told a vetting panel that he would resort to concessional borrowing to pay off expensive domestic debts in an attempt to improve the country’s finances.

American rating agency Fitch in September said Kenyan lenders face rising asset-quality risks from weaker global and domestic conditions, but expected them to deliver strong returns in 2022.

“Kenyan banks’ sector outlook is negative, mirroring the negative outlook on Kenya’s sovereign rating. Operating conditions have worsened due to high inflation, risks to growth from global shocks and the harsh domestic drought,” the agency said

The asset quality of the lenders has deteriorated, with non-performing loans ratio at 14.7 percent during the six months to June 30, much weaker than the regional average.

“We anticipate continued asset-quality pressures, mainly from the small and medium-sized enterprises (SMEs) and retail loan books, which is likely to push up credit costs and increase risks to the banks’ performance,” said Fitch.

Higher rates

In September, the central bank increased the benchmark lending rate to 8.25 percent from 7.5 percent signalling a regime of higher interest rates as the regulator attempted to fight inflation compounded by the government’s move to abolish subsidies on food and fuel.

As a result several lenders such as Standard Chartered Bank Kenya, Housing Finance, Stanbic bank (Kenya) and NCBA Group have notified customers that their cost of loans will rise from October.

According to Fitch the rising rates and yields on government securities could be positive for the lenders’ pre-impairment operating profit, which will provide a large buffer for likely higher credit costs.

According to the central bank, the total lending increased by only 3.3 percent in the first half of the year to Ksh3.5 trillion compared to Ksh3.4 trillion in the same period last year, attributable to an increase in credit granted for working capital and loans granted to individual borrowers, analysts at Cytonn Investments Ltd said.

Fitch-rated Kenyan banks remain constrained by Kenya’s sovereign rating (B+/Negative), reflecting the concentration of their activities in the country and high sovereign-related exposure.

The large banks continue to build on their domestic franchise strengths through regional expansion in pursuit of diversification.

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Electricity consumption in Kenya fell last month as users began feeling the pinch of higher energy prices on discontinued subsidies and a weakening shilling.

Data from the Energy and Petroleum Regulatory Authority (Epra) shows power use declined to 1.099 billion kilowatt-hours (kWh) in September from 1.11 billion units that were consumed in August after power prices were increased for the first time in 10 months.

Electricity use is one of the major barometers of how the economy is performing, with lower uptake signalling reduced economic activities such as manufacturing.

“Total units generated and purchased (G) including hydros, excluding exports in September 2022 (was) 1,099,340,544kWh,” said Epra Director-General Daniel Kiptoo in a gazette notice on Friday.

Fuel cost component

The drop in power consumption comes after EPRA increased the fuel cost component of the power bill by 46.6 percent leading to a sharp jump in prices.

The energy regulator raised the fuel cost charge (FCC) to Ksh6.79 ($0.056) per kilowatt-hour (kWh) of electricity up from Ksh4.63 ($0.038).

Epra also nearly doubled the Foreign Exchange Fluctuation Adjustment (Ferfa) to Ksh1.36 ($0.011) up from 73 cents ($0.006) to cater for the weakening of the Kenyan shilling against the greenback.

This was the first time Epra has adjusted the rates since December.

The new prices came after the government ended its subsidy on electricity.

Further, consumers are also paying more for electricity this month after Epra raised the FCC for the second month in a row thus higher bills.

Epra has increased the FCC to Ksh7.09 ($0.058) per kilowatt-hour (kWh) up from Sh6.79 last month.

The latest rise in the fuel component of electricity brings that cost element close to its record high in a month of Ksh9.03 ($0.075) per kWh that was set in June 2012.

Epra has also raised Ferfa by 8.8 per cent to Ksh1.48 ($0.012) per unit up from Ksh1.36 ($0.011) per unit last month after the Kenyan shilling continued to weaken further against the US dollar.

“Pursuant to Clause 1 of Part III of the Schedule of Tariffs 2018, notice is given that all prices for electrical energy specified in part II of the said Schedule will be liable to a fuel energy cost charge of plus 709 Kenya cents per kWh for all meter readings to be taken in October 2022,” said Mr Kiptoo in the notice.

Drop in cost of fuel

Higher power prices come despite a significant drop in the cost of fuel as the government moves to recover the money that had been used on the electricity subsidy since December.

The landed cost of petrol dropped by 10.6 per cent per cubic metre between August and September.

Meanwhile, the landed cost of diesel fell by 6.87 per cent while that of kerosene dropped by 1.82 per cent.

The higher power prices will further push up inflation, which hit a 63-month high of 9.2 per cent in September.

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Kenya will buy power from Ethiopia at 6.5 US cents per kilowatt for the next five years before it can be allowed to renegotiate.

Ethiopian Electric Power (ECC) has revealed a clause in the power purchase agreement that says Kenya Power can only seek a review of the tariff after that period.

Kenya signed a 25-year deal with the Horn of Africa’s nation to start importing electricity from next month in a bid to edge out the expensive power from the national grid and ensure buffers to meet peak demand.

The clause allowing tariff renegotiation is a key plank for the State-owned utility to get cheap energy that will then be passed on to consumers in the form of lower bills.

“Ethiopia would sale this electric power at a price of 6.5 US cents per one-kilo watt for the coming five years having the room of negotiation table concerning tariff adjustment which was requested by Ethiopian Electric Power after five years,” reads a communique by ECC. This means that the earliest the talks to review can happen is 2027.

Read: Ethiopia to become Kenya Power’s second biggest source of electricity 

High tariffs charged by independent power producers have squeezed Kenya Power’s ability to lower the cost of electricity.

Kenya Power was unable to effect a second cut of 15 percent on power charges following failure to broker a deal with power producers to lower the wholesale tariffs.

The first cut of 15 percent was gazetted at the start of this year and allowed homes and businesses to enjoy lower bills before it was reversed last month.

Kenya Power buys the bulk of electricity from Kenya Electricity Generating Company (KenGen) at Sh5.3 per kilowatt-hour but other IPPs have priced their power as high as Sh195 for the same unit.

KenGen accounts for 70 percent of the electricity supplied to Kenya Power with the 21 IPPs supplying the balance.

The room to renegotiate lower tariffs is key to Kenya Power’s efforts of providing cheaper electricity and easing pressure on homes besides offering investors attractive rates in a bid to make local products more competitive.

Electricity prices jumped 15.7 percent last month reversing the January cuts of equivalent value that were gazetted by the former administration of President Uhuru Kenyatta.

The jump pushed a kilowatt hour to Sh25.3 for domestic consumers who use more than 100 units a month.

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Kenya’s Central Bank has started negotiations with telecommunication firms with a view to separating mobile money activities from other businesses to enhance governance and minimise shocks on bank-related transactions.

The regulator said Tuesday that it has engaged Payment Service Providers (PSPs) to ensure that the activities under CBK’s supervision are appropriately ring-fenced from other business lines.

“This will allow the PSPs to protect their CBK-regulated activities from shocks emanating from the other business activities, strengthen governance, enhance resilience, and focus on improving its services to customers,” said CBK in a statement Tuesday.

According to CBK, separation of mobile money business from other businesses by telcos will facilitate realisation of a secure, fast, efficient and collaborative payment system that supports financial inclusion and innovations that benefit Kenyans.

The vision is enshrined in the National Payments Strategy (2022-2025).

The CBK statement comes after Airtel Networks Kenya Ltd (ANKL) completed the separation of its mobile money business from the telecommunications business.

This was effected by a separation and transfer of the mobile money business to the new entity Airtel Money Kenya Limited (AMKL), a journey that started in 2019.

“CBK welcomes this milestone,” the Bank said.

The completion of this restructuring enables AMKL to ring-fence its operations and focus exclusively on its mobile money business.

“Significantly, this sets the foundation for AMKL to enhance governance over its mobile money business, strengthen its operations, and offer better services to its customers,” according to CBK.

CBK licensed AMKL as a Payment Service Provider (PSP) in line with the National Payment System Act 2011 on January 21, 2022, and also granted a transition period to complete the transfer.

Both AMKL and ANKL are incorporated in Kenya as separate subsidiaries of Airtel Africa Plc (Airtel Africa).

Airtel Africa, which is listed on the London Stock Exchange (LSE), is headquartered in Dubai, United Arab Emirates, and has operations in 14 African countries.

In July this year, Airtel Africa sold 25.77 percent stake in its local mobile money business as part of a continental deal that saw the telco raise $550 million from four institutional investors.

As a result, the multinational’s interest in Airtel Money Kenya Ltd dropped to 74.23 percent in the year ended March from 100 percent a year earlier.

Similar changes in ownership of the mobile business were also witnessed in markets such as Rwanda, Tanzania and Zambia.

Airtel Money Kenya is now run and regulated by the Central Bank of Kenya as a stand-alone business.

Safaricom is also facing mounting pressure to spin off its lucrative M-Pesa business but the telco is reluctant, arguing that the service benefits from the existing synergies with other offerings including voice, data and SMS.

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Motoki Takahashi, the adviser at JICA, spoke to Vincent Owino about Kenya’s priorities for economic reforms.

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Kenya has a new administration. What should be the government’s economic policy priorities to speed up economic growth and development?

President William Ruto should emphasise the importance of small and medium-sized enterprises (SMEs) development, and formalisation of the informal sector. These will be the key drivers of economic progress. The new administration should prioritise the development of manufacturing SMEs. They should also protect the intellectual property rights of SMEs, to foster innovation and safeguard the welfare of innovators. Security and infrastructure should also be high on the agenda. Without these, SMEs cannot thrive. The new leadership should also endeavour to protect the rights of the labourers.

Are these the pillars that fostered Japan’s rapid economic growth and development?

Yes. History indicates that Japan did not progress when labour movements faced difficulties and oppression from the government. But the workers fought for their rights and that fostered development. I hope that the Kenyan government will not suppress labour unions. They should be given a space to protect themselves and fight for their rights. Only then can there be real development. Besides that, financing for small businesses and innovations is important to foster growth. This should be done by the public and private sectors.

Public debt is a major problem in Kenya. What can be done about it?

It is justifiable to ask the government to slow down on borrowing externally because the world’s interest rate is rising, making it expensive to finance their outstanding debt. The infrastructural development experienced because of the borrowing in the past 10 years is good, but the big issue is in paying back. Management is important and the country should be careful what composition its public debt is. It’s advisable for Kenya to take more concessional loans from international financial institutions and developed countries, which charge low interest rates, as opposed to loans from emerging powers whose interest rates are relatively high.

The IMF has advised Kenya against subsidies. What do you think should be the policy on subsidies?

Subsidizing production is a better idea than consumption subsidies that Kenya has done in the past. A production subsidy is an investment in the future. For example, feeding school children is a subsidy and it is an investment in the future. The leadership should resist pressure to subsidize consumption, because this mostly only helps the rich.

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