Outlook for 2011-15

• The coalition government between the president, Mwai Kibaki, and the prime minister, Raila Odinga, will remain intact until the next election, in 2012.
• Mr Kibaki cannot stand for a third term and there will be fierce competition to replace him. Mr Odinga is likely to stand for the Orange Democratic Movement (ODM) and would appear to have a fair chance of victory.
• The government will remain committed to pro-market reforms, including deregulation, privatisation and trade liberalisation, but some will be delayed because of the packed legislative agenda.
• Real GDP is expected to continue to grow, from 4.5% in 2010 to 5.4% in 2011, as domestic conditions improve. Growth will peak at 5.8% in 2012 before subsiding owing to ongoing structural constraints in 2013-15.
• Inflation is expected to edge up to 5.7% in 2011, from 3.9% in 2010, as demand growth quickens. Inflation will remain in the 5.5-6% range in 2012-15.
• The current-account deficit will shrink from 5.5% of GDP in 2010 to 5% of GDP in 2011, owing mainly to a rise in GDP. The gap will narrow further in 2012-15 owing to faster growth in export earnings and services inflows

Monthly review

• The International Criminal Court( ICC) has named six prominent Kenyans as being responsible for post-election violence in 2008. The ICC pre-trial chamber may now issue summons or warrants, or decide not to proceed.
• Unless the ICC drops the case, there seems little doubt that the legal process will deliver a serious blow to the political ambitions of Uhuru Kenyatta and William Ruto, who were eyeing a bid for the presidency at the 2012 election.
• The government imposed fuel price controls in December, setting maximum mark-ups at the retail and wholesale level, in a bid to stem rising prices, but the restrictions could backfire by deterring investment in new capacity.
• Strict new controls on the sale of alcoholic beverages, including the imposition of narrow licensing hours, are pending, which could threaten the vital hospitality and tourism sectors.
• Inflation jumped to 3.8% year on year in November, the highest for six months, owing to rising food and fuel prices, although a sharp fall in telecoms tariffs following price wars is offering some relief.
• A visit by South Africa's deputy president has highlighted growing trade with Kenya. South Africa was Kenya's fourth-largest supplier in 2009 but sales slipped in 2010 owing to adverse currency movements.

Kenya's political environment will be dominated by the challenge of implementing the new constitution and the prospect of fresh elections in 2012. Kenyans approved a new constitution by a two-to-one margin on August 4th in a free and fair ballot that was not marred by violence, offering the prospect of more consensual and accountable politics in the future. The next election may therefore prove to be less divisive (than the bitterly disputed ballot in 2007) and could usher in a period of relative stability, but downside risks persist. The co-operation shown by both main parties-the Party of National Unity (PNU) of the president, Mwai Kibaki, and the Orange Democratic Movement (ODM) of the prime minister, Raila Odinga-in supporting the new constitution (despite dissenting voices on both sides) lies in stark contrast to the partisan in-fighting that has marked the grand coalition's tenure to date, but inter-party relations will remain tense. Kenya will retain a presidential system under the new constitution, but with new "checks and balances" and a clearer separation of powers. Significant changes include the devolution of power to the county level; the establishment of an upper house of parliament (the Senate) to oversee county-level affairs; the introduction of a bill of rights and a supreme court; and the abolition of the post of prime minister. The constitution also calls for a new anti-corruption agency and an independent land commission to tackle the thorny issue of land reform.

However, the referendum and the promulgation of the new constitution are not the final steps in the search for a new dispensation but simply a starting point, and there will be little change in the short term. The bulk of the provisions in the constitution, including the formation of a new-style legislature and executive, will not come into force until the next government is formed after the 2012 election. Some provisions will come in earlier and some later (the constitution lays out a timetable spanning one to five years) but in all cases enabling legislation will first need to be drafted and approved, which raises the danger of further in-fighting and delay. Moreover, parliamentary capacity will be stretched to the limit by the need to pass almost 50 pieces of constitutional legislation, as well as other pending bills. The PNU and the ODM will need to maintain their new-found spirit of co-operation in order to meet the deadlines. If legislators fail to keep pace (or prove deliberately obstructive), the new constitution allows for an early dissolution of parliament pending fresh elections. A new parliament would then be tasked with passing the necessary laws. The new constitution is not perfect, however, and there are legitimate worries about the cost of expanding the size of parliament (from 222 seats to 350) and paying for the Senate and the new counties.

The main threat to sociopolitical stability in the medium term is the return of civil unrest on the scale witnessed after the disputed election in December 2007. The formation of a grand coalition government stemmed the crisis, but future stability will require the settlement of long-term grievances over land and other rights, plus an end to the culture of impunity. In a major step towards dealing with alleged perpetrators of post-election violence, the chief prosecutor of the International Criminal Court (ICC), Luis Moreno-Ocampo, in December revealed the names of six prominent Kenyans alleged to be key instigators, including two serving cabinet ministers and the head of the civil service. The prosecutor recommends that they be summoned to give evidence in The Hague rather than issued with arrest warrants, but the decision rests with the ICC pre-trial chamber, which will rule in early 2011. If a trial goes ahead, it will not happen until 2012, an election year, which could stoke fresh tensions and protests, but it would also serve as a timely warning to Kenya's leadership. Kenya promises to co-operate with the ICC, but some in the political establishment will continue to resist. Positive steps are being taken but the medium-term risks remain significant.

The focus will increasingly switch to the next election (in 2012) as politicians jostle for position. Mr Kibaki will be obliged to stand down after serving two five-year terms, sparking increasingly bitter competition between those seeking to take his mantle as PNU leader. Possible front-runners are the finance minister, Uhuru Kenyatta; the security minister, George Saitoti; and the vice-president, Kalonzo Musyoka-although Mr Kenyatta's prospects could be scuppered after being named by the ICC as an alleged instigator of post-election violence. The PNU, which was created as a vehicle for Mr Kibaki, will not survive in its present form and will be remoulded into a new alliance. Mr Odinga faces similar divisions within the broad-based ODM and will struggle to keep the party's factions together. A group led by William Ruto (another ICC suspect), who led the campaign against the new constitution, seems set to break away. Mr Odinga, health permitting, is likely to be the ODM's presidential candidate and has a fair chance of victory, helped by his strong support for the new constitution. However, it is too soon to pick an election winner, and further realignments in the political spectrum will take place before the ballot. The formation of a new election commission and other reforms will reduce the danger of election-related instability, but the closer the contest the higher the risk. The new president will face a considerably altered landscape because of the structural reforms envisaged by the new constitution.

Foreign policy over the forecast period will continue to be driven by economic interests, including the maintenance of close relations with key donors and the advance of regional integration, especially within the East African Community (EAC). The country will retain close ties with the US (including military co-operation) and with major donors, but relations will suffer if the government fails to implement significant reforms and tackle deep-rooted corruption. Kenya will pursue closer links with key developing countries such as China, India and South Africa. The crisis in neighbouring, lawless Somalia, which remains embroiled in a civil war, will continue to be the main source of security- and terrorism-related risk.

The main challenge facing policymakers during the early part of the forecast period will be to harness the fragile global recovery and facilitate faster economic growth without stoking macroeconomic imbalances. The medium-term focus will shift towards tackling structural constraints. The international rebound will gradually relieve financing constraints, while fiscal and monetary stimuli at home-as well as structural reforms such as deregulation and privatisation-will promote economic activity. However, the policy environment will remain vulnerable to exogenous shocks, including drought and volatile commodity prices, and to in-fighting within the political establishment, which will intensify in the run-up to the 2012 election. Kenya is poised to embark on a new, three-year IMF-backed reform programme in January 2011, supported by a US$500m extended credit facility that will focus on fiscal reforms, investment in infrastructure and implementing the new constitution. Continued IMF backing will encourage support from other donors, but corruption and weak governance will continue to strain relations with external backers and deter investment.

The government aims to quicken the pace of structural reforms in 2011-12, including deregulation and trade liberalisation (especially within the EAC). The state also plans to dispose of full or partial stakes in up to 25 state enterprises in a range of sectors, either by selling shares to strategic partners or via flotations on the Nairobi Stock Exchange, although delays are highly likely-and sell-offs involving key infrastructure parastatals may be mothballed, at least in the short term. An overhaul of company law, insolvency law and capital markets is also planned, although some reforms may fall victim to the heavy legislative agenda and be delayed until 2013-15.

The government will maintain an expansionary fiscal policy in 2010-12, to boost economic growth, but will embrace gradual consolidation in 2013-15 to help to keep debts in check. Kenya's new budget for fiscal year 2010/11 (July-June) proposes another large deficit-equivalent to 6.8% of GDP-as the government persists with fiscal stimulus, geared mainly towards capital spending, to encourage growth. Domestic borrowing will remain the main source of financing in 2010/11 (and throughout the forecast period), although the government will launch a long-delayed debut sovereign bond-when the global financial climate improves-and seek additional concessional lending from donors. If donor funds are not forthcoming, earnings from privatisation, which are not factored into the current budget, may provide some relief. The Economist Intelligence Unit expects the government to retain a loose stance in 2011/12, to support growth and development, and to run a budget deficit of 7% of GDP. This will lift the public debt burden above 50% of GDP, although that level is not excessive in a global context. The government will thereafter embrace gradual consolidation, helped by stronger revenue growth, which will trim the budget deficit to less than 5% of GDP by the end of the forecast period.

The Central Bank of Kenya continued with its policy of monetary loosening in July 2010 by cutting the central bank rate by 75 basis points to 6%-the sixth cut in 12 months-in a bid to promote economic activity and reduce borrowing costs. The reduction came in response to the overhaul of the consumer price index (CPI) by the Kenya National Bureau of Statistics (KNBS)-including the introduction of new weightings and a new basket in February 2010-which showed that prices have not been rising as quickly as feared and that inflation is currently subdued. Lower inflation has also facilitated a decline in other key interest rates: the benchmark 91-day Treasury-bill rate slipped below 2% in July-its lowest level for several years-although this proved to be a low point in the cycle and it has since edged back above 2%. Commercial banks' lending rates have been slower to respond because of the high-cost environment and relatively weak transmission mechanisms for monetary signals, but they dipped to 14% in September and will continue to ease. We forecast that lending rates will continue to subside gently throughout the forecast period (retreating to 10.5% by 2015) as the lower-inflation environment becomes established and monetary policy becomes more sophisticated, provided that the government keeps domestic borrowing under control.

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Kenya is on course to post a more significant economic recovery in 2011-barring exogenous and political shocks-with real GDP growth accelerating from 4.5% in 2010 to 5.4%, underpinned by higher infrastructure development and rising confidence among local households and firms. Financing constraints will ease, encouraging investment, while deregulation and privatisation will facilitate business activity. The spread of banking, especially telebanking, to the unbanked will help to underpin household spending. However, infrastructure bottlenecks, skills shortages, corruption and political uncertainty will persist. We expect growth to accelerate to 5.8% in 2012 as the global recovery gains traction (led by strong commodity demand in fast-growing Asian economies) and Kenya's middle class expands, although this will exacerbate domestic structural deficiencies (especially in the transport and power networks). Moreover, key reforms could fall victim to election-related in-fighting, while corruption and weak governance will continue to inhibit private investment. Growth is likely to edge down to within the 5-5.3% range in 2013-15, as there is little prospect of Kenya eliminating infrastructural constraints or dependence on rain-fed agriculture during the forecast period, although the rate of expansion will remain relatively buoyant, barring shocks.

On the supply side, the agricultural sector will remain at the centre of the economy, although its relative importance will continue to fall over time. Industry will continue to benefit from higher regional and global demand, and from better supplies of agro-inputs and electricity, but the lingering impact of persistent structural constraints will act as a brake. The services sector accounts for 63% of GDP and will continue to be the main engine of economic growth, driven by telecommunications, banking, retail and tourism.

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Inflation-as measured by the revamped CPI-climbed to 3.8% year on year in November (from a revised 3.2% in October, a multi-year low) owing to rising food and fuel prices. Inflation was subdued throughout most of 2010 as better rainfall kept food and electricity prices in check and because of deep cuts in telecoms tariffs, but these dampening factors will fade. The new CPI, introduced in February, increases the number of categories and goods and employs new weightings based on the latest household spending data. This will give a more accurate measure of inflation, but the KNBS has not yet aligned past data with the new format, making comparisons difficult. The new CPI basket cuts the weighting for food from 50% to 36%, which will tend to reduce price volatility in future. However, food price inflation climbed to 6.7% in November, driven by global trends, and will add to price pressure in the coming months. Inflation, after averaging about 3.9% in 2010, will climb to 5.7% in 2011 as demand growth quickens and food and fuel prices rise. We expect inflation to move within a 5.5-6% range in 2012-15, spurred by faster GDP growth, higher electricity prices and wage increases, although the revision of the CPI, prudent monetary policies, efficiency gains and more stable global commodity prices will help to keep inflation within tolerable bounds. The weather-and, hence, farm production-will remain a key variable.

The Kenya shilling lost ground in mid-year, falling to KSh81.4:US$1 in July, because of worries about the euro-zone debt crisis, but has since recovered, helped by the peaceful outcome of the constitutional referendum and positive sentiment towards emerging markets, to average KSh80.5:US$1 in November, 7.6% weaker year on year but slightly stronger than in October. The shilling will continue to find support from relatively healthy levels of foreign-exchange reserves, robust growth in tea and tourism receipts and continued backing from donors. We expect the shilling to average KSh79.22:U$1 in 2010, before resuming a path of gradual depreciation, sliding to KSh81.5:US$1 in 2011 and KSh83.5:US$1 in 2012, owing to the current-account deficit and higher inflation than in key trading partners. The currency will find some stability in 2013-15, around the KSh85-86:US$1 mark, helped by a stronger trade performance, although more rapid depreciation is likely if political or economic confidence slips.

Exports and imports rebounded in 2010 as both external and internal demand recovered, leading to a wider trade deficit. This outweighed an increase in the invisible surplus (driven by growth in tourism, regional services and remittances) and pushed the current-account deficit wider, to an estimated 5.5% of GDP, although the gap will narrow again during the forecast period. Trade activity will continue to quicken in 2011 and imports will outpace exports as faster GDP growth sucks in consumer and capital goods, while prices for key export commodities such as tea will decline. The higher trade deficit will be accompanied by a further rise in the invisible surplus and (helped by a growing economy) a decline in the current-account deficit to 5% of GDP. Thereafter, we expect the current-account deficit to continue falling steadily, to 4.5% of GDP in 2012 and 3.3% of GDP in 2013-and to remain within the 2-3% of GDP range in 2014-15, owing to stronger invisible inflows, especially from tourism and regional services. Imports will remain on an upward path, but regional integration and strong Asian demand will boost exports and help to contain the trade deficit. The current-account deficit, although declining towards the end of the period, will leave Kenya dependent on external inflows-either debt or investment-to fill the gap.

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On December 15th Luis Moreno-Ocampo, the chief prosecutor of the International Criminal Court (ICC), named six prominent Kenyans allegedly responsible for facilitating the devastating post-election violence that erupted in early 2008, leaving some 1,200 people dead and 350,000 displaced. The naming of the six could increase tensions--and affect the outcome of the next presidential poll. The six--charged with crimes against humanity are:

• Uhuru Kenyatta (the finance minister and deputy prime minister, and the son of Kenya's first president, Jomo Kenyatta);
• William Ruto (a former higher education minister and a key politician in the Rift Valley);
• Henry Kosgey (the industrialisation minister);
• Francis Muthaura (the head of the civil service);
• Mohammed Hussein Ali (a former police chief); and
• Joshua arap Sang (a radio broadcaster).

The figures represent the wide range of institutions deemed responsible for the violence, including politicians from both the Party of National Unity and the Orange Democratic Movement, government officials, the security forces and parts of the media. The list is by no means exhaustive, but following a nine-month probe Mr Moreno-Ocampo believes that he has identified the worst offenders and cites specific instances of their involvement. The prosecutor found no evidence to implicate the president, Mwai Kibaki, or the prime minister, Raila Odinga.

The names were published during the prosecutor's presentation to the ICC's pre-trial chamber in The Hague, which must now decide whether to proceed with legal action and, if so, how the proceedings should be tailored: a decision is expected in early 2011. Mr Moreno-Ocampo recommends that the named persons be summoned to The Hague to give evidence, as opposed to being issued with arrest warrants, which means that they will not be detained and will be considered innocent until proven otherwise. Under this scenario, the suspects are likely to keep their jobs in government pending a full trial, which is unlikely to take place until 2012. However, the ICC can choose to ignore the prosecutor's advice, and should the suspects be summoned but refuse to attend-or if further instances of witness intimidation are uncovered-arrest warrants will probably follow and Kenya will be legally obliged to co-operate. The identity of some of the suspects, such as Mr Ruto, was not a surprise. Others, however-such as Mr Muthaura, who is a close presidential ally and a key figure in the government administration-were unexpected.

Unless the ICC drops the case there seems little doubt that the legal process will deliver a serious blow to the political ambitions of Mr Kenyatta and Mr Ruto, who were both eyeing a bid for the presidency at the 2012 election. Even if they are found to be innocent, the verdict may not be delivered until after the poll (currently due in August 2012). For this reason, the two men's supporters accuse the ICC of being politically motivated, but the political fall-out is simply a by-product of the ICC's actions, not the prime motivation. There is a risk of fresh violence now that the names have been revealed, but the prosecutor's recommendation for summonses, rather than warrants, may help to contain tensions. The political elite is nervous but ordinary Kenyans appear to support the legal process, with 85% backing the ICC, according to a recent local opinion poll. The naming of suspects and a possible trial could be cathartic, bringing Kenya's culture of impunity closer to an end. It would also make it harder for Kenya to continue resisting the establishment of a special local tribunal to deal with numerous lower-level offenders.

The Economist Intelligence Unit's 2010 democracy index ranks Kenya 101st out of 167 countries, putting it among the 33 countries considered to be "hybrid regimes." Kenya lies in the bottom third of this group, behind other Africa regimes such as Zambia, Tanzania, Senegal, Uganda and Mozambique. Kenya's score slipped a little compared with 2008 but its ranking improved marginally, illustrating the wider retreat of democracy during the period, both globally and regionally. Although Kenya scores moderately on most indicators, the poor level of institutional transparency impairs its score for the electoral process and pluralism. Pervasive corruption and low government capacity mute the government's ability to function and implement policy. Kenya's best scores are in the political culture and civil liberties categories, reflecting public willingness-and public ability-to take part in democratic debate. Kenya's score on political participation gains from high electoral turnouts but is undermined by the significance of ethnic allegiances in Kenyan politics and the disproportionate power wielded by dominant tribes.

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A powerful president and a weak democracy

The preponderance of power locked up in the presidency is unhealthy for democracy, pushing down the country's score for government functioning and the electoral process. The president dominates the political scene, circumventing the independence of the courts and preventing the legislature from acting as an effective check. The weak legislature and ineffective courts narrow the avenues for public pressure on the president's political agenda and cut short the enforcement of citizens' rights. Widespread fraud in the end-2007 election, followed by serious civil unrest, dealt a harsh blow to the public's confidence in democracy, although the subsequent formation of a grand coalition and its survival to date (despite bouts of serious in-fighting) reversed the slide into anarchy. Interparty agreement on a new constitution, approved in a referendum in August 2010 by a large margin, offers hope of more consensual and pluralistic politics in future. However, implementation remains a difficult challenge given the raft of new legislation needed. The new constitution aims to curb the president's powers and devolve authority to the county level-but endemic corruption, low government effectiveness and ethnic tensions will continue to impede Kenya's advance to a fuller democracy.

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Democracy index 2010: Democracy in retreat, a free white paper containing the full index and detailed methodology, can be downloaded from www.eiu.com/DemocracyIndex2010.

Note on methodology

There is no consensus on how to measure democracy. Free and fair elections, and satisfying other aspects of political freedom, are clearly essential. However, the Economist Intelligence Unit's index is based on the view that measures of democracy that concentrate on the state of political freedom and civil liberties leave out some crucial features that determine the quality and substance of democracy. Thus, the index also includes measures of political participation, political culture and functioning of government, which are often ignored by other measures.

Our index of democracy covers 167 countries and territories. The index is based on the ratings for 60 indicators grouped in five categories: electoral process and pluralism; civil liberties; the functioning of government; political participation; and political culture. The five categories are interrelated and form a coherent conceptual whole. Each category has a rating on a 0-10 scale, and the overall index of democracy is the simple average of the five category indices.

The category indices are based on the sum of the indicator scores in the category, converted to a 0-10 scale. Adjustments to the category scores are made if countries fall short in the following critical areas for democracy:

• whether national elections are free and fair;
• the security of voters;
• the influence of foreign powers on government; and
• the ability of the civil service to implement policy.

The index values are used to place countries within one of four types of regime:

• Full democracy-scores of 8-10
• Flawed democracy-scores of 6-7.9
• Hybrid regime-scores of 4-5.9
• Authoritarian regime-scores below 4.

The government introduced fuel price controls in mid-December, ostensibly to keep a lid on rising fuel prices. Although consumers could see some short-term benefits, the interference is unwarranted and could impair investment to the detriment of longer-term supply. The controls, under consideration for over a year, impose a maximum profit at both the wholesale (KSh6/litre-7.5 US cents/litre) and the retail (KSh3/litre) level above a fixed base price, which will be recalculated on a monthly basis by the energy regulatory commission based on international trends. The new rules, detailed in the Energy (Petroleum Pricing) Regulations 2010, apply to all fuels and all parts of the supply chain, and impose hefty penalties for firms that fail to comply.

However, the restrictions have sparked inevitable anger from the fuel supply industry, which claims not have to been consulted and points out that prices are relatively high in Kenya because of major deficiencies in vital infrastructure. This includes the oil refinery in Mombasa (50% owned by the state and 50% by India's Essar) and the fuel pipeline network (run by the parastatal Kenya Pipeline Company), which are both operating well below capacity and are in urgent need of fresh investment. A lack of pipeline capacity in particular necessitates the use of costly road transport. Moreover, although the controls are ostensibly based on South Africa's model, Kenya's version is much stricter, covers diesel as well as petrol and does not have an independent agency determining base levels and mark-ups. Marketers also think that the government's price formula is flawed because it fails to include all costs (especially investment in storage depots and other infrastructure) and underrates transport tariffs. Given that margins in the sector are already small, the price controls will deter investment in retailing and distribution, to the detriment of longer-term supply.

Although a small group of players dominates the sector-Total Kenya, Kenol Kobil, Shell Kenya and OiLibya control 75% of the market-there is no real evidence for cartels or other anti-competitive practices. Analysis of the data for the past 12 months shows that the rise in local fuel prices can largely be accounted for by the rise in global fuel prices and the depreciation of the Kenya shilling vis-à-vis the US dollar. In the year to September, for example, the average weighted petrol price in Nairobi was 18% higher than a year earlier (at KSh92.9/litre) but the shilling depreciated by 7% during the period while import prices (from the UAE, Kenya's main supplier) rose by 10%. The Nairobi fuel price rise in US-dollar terms (of 10%) in September was exactly the same as the increase in import costs, showing that the margins were unchanged. Local fuel prices have since climbed higher, to nearer KSh100/litre in early December, but this is explained by a new surge in global prices, which rose above US$90/barrel for the first time in over a year. Under the new regime, however, the Nairobi petrol price will be capped at KSh95/litre until the next review in January-but the formula is based on crude oil prices in October, which are already out of date. Marketers will be unable to respond to short-term crude oil price shifts, which is another serious flaw in the model.

The price caps follow other forms of government interference in the fuel sector, including the order in mid-2010 that the parastatal National Oil Company of Kenya (NOCK) be handed responsibility for importing 30% of the country's fuel needs. This is intended to improve security of supply and bring down prices, as NOCK is undercutting its rivals, but the parastatal does not face the same commercial pressures as private firms and is distorting the market. In addition, the government has disappointed Essar by not approving a long-sought increase in processing fees at the refinery, which may deter Essar from undertaking planned investment. Coming on top of the renationalisation of Kenya Power and Lighting (December 2010, Economic policy), this shows that the government is becoming more active in the energy sector. However, although there is no doubt that high fuel and power costs are bad for business, the government's bid for more control could backfire.

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In a further example of government interference in the economy, Kenya is poised to impose stiff new regulations governing the sale and consumption of alcoholic beverages that could also be highly damaging for the vital hospitality and tourism sectors. The alcoholic drinks and control act-passed by parliament in November and now awaiting gazettement-limits sales to a 2pm-11pm window on weekends and a 5pm-11pm window on weekdays, and says that licensed premises must not be within 300 metres of a school, among other restrictions. Restaurants, bars and hotels warn of major job losses and a decline in social activity, but the government has so far ignored their lobbying. Establishments have a nine-month grace period to comply but some outlets are already applying the new laws and consumers are uncertain. One good aspect of the new bill is the drive to both legalise and control "traditional" liquors, such as changaa (which often causes illness and death) but, apart from this, the new measures are draconian. The controls are partly an attempt to appease Christian churches, who called for a "no" vote on the new constitution before suffering a bruising defeat, but the government's new-found moral zeal risks damaging the economy.

Inflation, after reaching a multi-year low of 3.2% year on year in October, is now rising again, and jumped to 3.8% in November, under pressure from food and fuel prices. Prices, on a month-on-month basis, jumped by 0.8% in November, the fastest rise for almost a year. Food prices, which have a 36% weighting in the new consumer price index (CPI; introduced in February 2010), are the main inflationary driver. They rose by 6.7% year on year (and 1.4% month on month) in November owing to global trends and erratic weather: beef, milk, rice and bread all posted significant increases. Although the food weighting has been reduced from 50% under the old CPI, to reflect shifts in household spending patterns, it is still the biggest component by a large margin. Transport prices (with an 8.7% weighting) are also climbing in line with fuel prices, and rose by 5% in November (and by 0.8% month on month).

Costlier fuel is also feeding through into housing and utility prices (with an 18.3% weighting), which rose by 2.6% in November, the fastest for five months. Higher fuel prices will continue to feed through the entire price system. The government is hoping that new fuel price caps will help, but the benefits could be temporary at best (if they deter investment). On the plus side, inflation is being held in check by the sharp fall in telecoms tariffs (down by 24.4% in November) following price wars in the sector as operators battle for market share. Inflation remains comfortably below the government's 5% target-and averaged about 3.9% in 2010-but is heading higher and is likely to breach the target in 2011, albeit by a small margin, depending on world markets and the local weather.

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The growing importance of trade and investment relations between Kenya and South Africa came into focus in November during the visit of South Africa's deputy president, Kgalema Motlanthe, accompanied by a large ministerial and business delegation. The two sides signed a double tax avoidance treaty (which will encourage investment) and an agreement on co-operation in agriculture-and held talks in other areas, including tourism and wildlife-as well as making preparations for the formal launch of a joint trade commission in February 2011 (which builds on an initial co-operation agreement concluded in 2008). A separate Kenya-South Africa business summit took place on the sidelines. Mr Motlanthe's three-day tour was the highest-level South African visit since the end of apartheid in 1994 and paves the way for the planned arrival of South Africa's president, Jacob Zuma, in 2011. The talks also covered the push for a single African trade bloc comprising the Common Market for Eastern and Southern Africa (Comesa), the East African Community (EAC; to which Kenya belongs) and the Southern African Development Community (SADC; which includes South Africa), although progress is likely to be slow.

South Africa was Kenya's third most important import supplier in 2009, with sales hitting KSh70bn (US$875m)-up by 51% from a year earlier-to account for 9% of total imports. Kenyan purchases include consumer goods, coal, steel, textiles and maize (which accounted for one-third of total shipments by value in 2009). Kenya is pressing for a reduction in South African tariffs on tea and soda ash, both key exports, and for an easing of health rules governing livestock and avocados, in order to trim the trade gap. However, imports from South Africa declined sharply in the first half of 2010, by 19% to KSh28.7bn, a 6.5% share, owing to reduced maize needs (following better weather) and the sharp appreciation of the South African rand against the shilling during 2010: the exchange rate of KSh11.5:R1 in November was 16% weaker than a year earlier, which has reduced the appeal of South African goods.

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Please see graphic below

Please see graphic below

Please see graphic below

Land area

569,259 sq km

Population

38.6m (2010 national census)

Main towns

Population in '000, 2010 census

Nairobi (capital) 3,100

Nakuru 1,603

Mombasa 939

Kisumu 968

Climate

Tropical

Weather in Nairobi (altitude 1,820 metres)

Hottest month, February, 13-28°C; coldest month, July, 11-23°C; driest month, August, 24 mm average rainfall; wettest month, April, 266 mm average rainfall

Languages

English, Kiswahili and more than 40 local ethnic languages

Religion

Christian (80%), Muslim (10%), other (10%)

Measures

Metric system

Currency

Kenya shilling (KSh) = 100 cents; average exchange rates in 2009: KSh77.35:US$1; KSh82.55:¥100

Fiscal year

July 1st-June 30th

Time

3 hours ahead of GMT

Public holidays

January 1st; Good Friday; Easter Monday; May 1st; June 1st; Eid ul Fitr; Christmas holiday, December 25th-26th

Official name

Republic of Kenya

Form of state

Unitary republic

Legal system

Based on English common law and the 1963 constitution; new draft constitutions were published in 2002 and 2005 (the latter was rejected in a referendum)

National legislature

Unicameral National Assembly of 210 elected members plus 12 nominated members, the attorney-general and the speaker; a multiparty system was introduced in December 1991

National elections

December 2007; next presidential and legislative elections are to be held in December 2012

Head of state

President, directly elected by simple majority and at least 25% of the vote in five of Kenya's eight provinces

National government

The president and his cabinet, comprising a grand coalition between the Party of National Unity (PNU) and the Orange Democratic Movement (ODM), and allied parties

Political parties in parliament

Orange Democratic Movement (ODM), Party of National Unity (PNU), ODM-Kenya (ODM-K), Kenya African National Union (KANU), Safina, National Rainbow Coalition-Kenya (NARC-Kenya), National Rainbow Coalition (NARC), Democratic Party, Forum for the Restoration of Democracy-Kenya (Ford-Kenya), New Ford-Kenya, Ford-People, Ford-Asili, Sisi Kwa Sisi, Mazingira

President & commander-in-chief: Emilio Mwai Kibaki (PNU)

Vice-president & home affairs: Kalonzo Musyoka (ODM-K)

Prime minister: Raila Odinga (ODM)

Deputy prime minister & finance: Uhuru Kenyatta (PNU)

Deputy prime minister & local government: Musalia Mudavadi (ODM)

Key ministers

Agriculture: Sally Kosgei (ODM)

Co-operative development: Joseph Nyaga (ODM)

Defence: Yusuf Mohamed Haji (PNU)

Education: Sam Ongeri (PNU)

Energy: Kiraitu Murungi (PNU)

Environment & mineral resources: John Michuki (PNU)

Foreign affairs: George Saitoti (PNU); acting

Higher education, science & technology: Hellen Sambili (ODM); acting

Information & communication: Samuel Lesuron Poghisio (PNU)

Internal security: George Saitoti (PNU)

Justice & constitutional affairs: Mutula Kilonzo (PNU)

Labour: John Munyes (PNU)

Land: James Orengo (ODM)

Medical services: Anyang Nyong'o (ODM)

Planning, national development & Vision 2030: Wycliffe Ambetsa Oparanya (ODM)

Roads: Franklin Bett (ODM)

Tourism: Najib Balala (ODM)

Trade: Chirau Ali Mwakwere (PNU)

Transport: Amos Kimunya (PNU)

Water & irrigation: Charity Ngilu (ODM)

Central Bank governor

Njuguna Ndung'u