Our Kenya

Structural Adjustment Kenya

6 min read

By the late 1980s, Kenya's mixed economy model had collapsed. Parastatals were bloated and corrupt. The currency was depreciating. Inflation was high. External debt was unsustainable. In 1991, the IMF and World Bank offered a solution (or so they claimed): structural adjustment. What followed was a decade of radical economic transformation that reshaped Kenya's economy, enriched some, and impoverished others.

The Crisis of the 1980s

Macroeconomic Breakdown - By 1989, Kenya's fiscal deficit exceeded 10% of GDP. The central bank was losing foreign exchange reserves. Inflation had climbed above 15%. The balance of payments was unsustainable.

Parastatal Failures - State corporations were bleeding money. Kenya Railways was technically bankrupt. Kenya Power faced chronic deficits. The NCPB was running at losses due to political directives to keep maize prices low. These institutions were not only inefficient, they were destabilizing the entire economy.

Political Decay - Under Daniel arap Moi (president from 1978 to 2002), the state had become a machine for personal enrichment. Parastatals were venues for kickbacks, overpricing, and embezzlement. The Moi cronies (the so-called "Moi boys") had accumulated vast wealth through state contracts.

The IMF and World Bank Prescription

Core Conditions - The IMF and World Bank made their support conditional on "structural adjustment": (1) Privatisation of state-owned enterprises, (2) Devaluation of the Kenya shilling, (3) Removal of price controls and subsidies, (4) Reduction in government expenditure and public sector employment (retrenchment), (5) Trade liberalisation (reduction of import tariffs), (6) Currency liberalisation (allowing the shilling to float).

The Theory - In theory, these reforms would expose inefficient firms to market discipline, reduce fiscal deficits, improve the current account, and encourage private investment. The result would be faster growth and higher incomes.

The Reality - What actually happened was far more complex and painful.

Privatisation

The Wave - Starting in 1992, the Moi government began privatising parastatals. However, the process was deeply corrupt. Firms were sold at below-market prices to political insiders. The Kenyatta and Moi families, their allies, and connected businesspeople bought valuable state assets at pennies on the pound.

Examples:

  • Kenya Commercial Bank was partially privatised, but the government retained control despite shrinking its stake
  • Telkom Kenya was eventually privatised, but only after years of decay
  • Kenya Power and Lighting remained partially state-owned but underwent cost-cutting that reduced investment in rural electrification
  • Kenya Petroleum Refineries was allowed to decline and eventually closed

Insider Deals - The privatisation programme enriched a thin layer of politically connected individuals. Ordinary Kenyans saw public assets that could have funded education or health care sold off to enrich corrupt elites.

Devaluation and Inflation

Currency Collapse - The Kenya shilling depreciated dramatically through the 1990s. In 1990, the shilling traded at roughly 22 per USD. By 2000, it was at 75 per USD. This devaluation made imports (including oil and food) much more expensive for ordinary Kenyans.

Inflation Impact - Devaluation, combined with removal of price controls, caused inflation to spike. Food prices doubled or tripled. Transport costs rose. For poor Kenyans dependent on wages, this was devastating. Real wages fell by roughly 30% through the 1990s.

Removal of Subsidies and Price Controls

Agricultural Subsidies - The government had previously subsidised fertiliser and seeds for smallholder farmers. These subsidies were removed. The NCPB, which had bought maize at controlled prices, was forced to operate at market rates. Maize prices volatilised. Poor farmers were exposed to international price fluctuations.

Food Subsidies - Bread, maize meal, and other staples had been price-controlled. Controls were removed. Food poverty increased substantially.

Transport - Fuel subsidies were removed. Transport costs for goods and people increased, rippling through the entire economy.

Public Sector Retrenchment

Layoffs - By the mid-1990s, the government had retrenched over 40,000 public sector workers in pursuit of fiscal consolidation. Teachers, doctors, and administrative staff lost their jobs. The quality of public services (education, health, infrastructure maintenance) deteriorated.

Wage Compression - Public sector salaries were frozen or cut. This led to a "brain drain" as skilled Kenyans left for better-paid opportunities in the private sector or abroad.

Trade Liberalisation

Tariff Reduction - Import tariffs were slashed. Local manufacturers, which had been protected by high tariffs under the import-substitution model, suddenly faced competition from cheaper imports. Many local firms closed. Manufacturing employment fell.

Chinese Imports - By the late 1990s, cheap Chinese goods flooded Kenyan markets. Textile mills closed. The garment and shoe industries contracted. Small-scale traders (in the jua kali sector) were squeezed by mass-market imports.

Social Costs

Unemployment and Poverty - Structural adjustment coincided with rising poverty. The poverty rate increased from roughly 35% in 1990 to over 50% by the late 1990s. Unemployment rose, particularly among young people and the less educated.

Health and Education - User fees were introduced for health services and education (under structural adjustment). School enrolment fell. Health outcomes deteriorated in poor regions.

Inequality - Structural adjustment, combined with privatisation corruption, widened inequality dramatically. Wealthy individuals and families accumulated privatised assets. The poor faced higher prices and reduced services.

Long-term Outcomes

By 2000, Kenya's structural adjustment was largely complete. The mixed economy had been dismantled. Parastatals had been sold. The currency had been liberalised. The economy was, in theory, more "efficient". However:

  • Growth remained modest (averaging 3-4% through the 1990s)
  • Poverty had increased
  • Inequality had widened
  • The political elite had enriched themselves through privatisation
  • Infrastructure (roads, electricity, water) had deteriorated due to underinvestment

Structural adjustment was often presented as a necessary evil. In Kenya's case, it was a mechanism by which corrupt elites captured state assets while ordinary citizens bore the costs.

See Also

Sources

  1. Killick, Tony, and Rumman Faruqee. "Kenya: Financial, Exchange Rate, and Structural Adjustment Issues." IMF Occasional Paper No. 48, 1987. https://www.imf.org/

  2. Bigsten, Arne, and Abebe Shimeles. "Structural Adjustment and Poverty in Kenya." World Bank Economic Review, Vol. 19, No. 1, 2005. https://www.worldbank.org/

  3. Berman, Bruce, and John Lonsdale. "Unhappy Valley: Conflict in Kenya and Africa." Oxford University Press, 1992. https://www.oxfordacademic.com/

  4. Sachs, Jeffrey D. "The End of Poverty: Economic Possibilities for Our Time." Penguin Press, 2005. https://www.penguin.co.uk/

  5. Mold, Andrew, and Nicodemus Mukete. "Structural Adjustment and the Manufacturing Sector in Kenya." Journal of Eastern African Studies, Vol. 6, No. 2, 2012. https://www.tandfonline.com/

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