Between 1974 and 1990, however, Kenya's economic performance declined. Inappropriate agricultural policies, inadequate credit, and poor international terms of trade contributed to the decline in agriculture. Kenya's inward-looking policy of import substitution and rising oil prices made Kenya's manufacturing sector uncompetitive. The government began a massive intrusion in the private sector. Lack of export incentives, tight import controls, and foreign exchange controls made the domestic environment for investment even less attractive.

From 1991 to 1993, Kenya had its worst economic performance since independence. Growth in GDP stagnated, and agricultural production shrank at an annual rate of 3.9%. Inflation reached a record 100% in August 1993, and the government's budget deficit was over 10% of GDP. As a result of these combined problems, bilateral and multilateral donors suspended program aid to Kenya in 1991.

In 1993, the Government of Kenya began a major program of economic reform and liberalization. A new minister of finance and a new governor of the central bank undertook a series of economic measures with the assistance of the World Bank and the International Monetary Fund (IMF). As part of this program, the government eliminated price controls and import licensing, removed foreign exchange controls, privatized a range of publicly owned companies, reduced the number of civil servants, and introduced conservative fiscal and monetary policies. From 1994-96, Kenya's real GDP growth rate averaged just over 4% a year.

In 1997, however, the economy entered a period of slowing or stagnant growth, due in part to adverse weather conditions and reduced economic activity prior to general elections in December 1997. In 2000, GDP growth was negative, but improved slightly in 2001 as rainfall returned closer to normal levels. Economic growth continued to improve slightly in 2002 and reached 1.4% in 2003; it was 4.3% in 2004 and 5.8% in 2005.

In July 1997, the Government of Kenya refused to meet commitments made earlier to the IMF on governance reforms. As a result, the IMF suspended lending for 3 years, and the World Bank also put a $90-million structural adjustment credit on hold. Although many economic reforms put in place in 1993-94 remained, Kenya needs further reforms, particularly in governance, in order to increase GDP growth and combat the poverty that afflicts more than 57% of its population.

The Government of Kenya took some positive steps on reform, including the 1999 establishment of the Kenyan Anti-Corruption Authority, and measures to improve the transparency of government procurements and reduce the government payroll. In July 2000, the IMF signed a $150 million Poverty Reduction and Growth Facility (PRGF), and the World Bank followed suit shortly after with a $157 million Economic and Public Sector Reform credit. The Anti-Corruption Authority was declared unconstitutional in December 2000, and other parts of the reform effort faltered in 2001. The IMF and World Bank again suspended their programs. Various efforts to restart the program through mid-2002 were unsuccessful.

Under the leadership of President Kibaki, who took over on December 30, 2002, the Government of Kenya began an ambitious economic reform program and has resumed its cooperation with the World Bank and the IMF. The new National Rainbow Coalition (NARC) government enacted the Anti-Corruption and Economic Crimes Act and Public Officers Ethics Act in May 2003 aimed at fighting graft in public offices. Other reforms especially in the judiciary, public procurement etc., have led to the unlocking of donor aid and a renewed hope at economic revival. In November 2003, following the adoption of key anti-corruption laws and other reforms by the new government, donors reengaged as the IMF approved a three-year $250 million Poverty Reduction and Growth Facility and donors committed $4.2 billion in support over 4 years. The renewal of donor involvement has provided a much-needed boost to investor confidence.

However, the governmentís ability to stimulate economic demand through fiscal and monetary policy remains fairly limited while the pace at which the government is pursuing reforms in other key areas remains slow. The Privatization Bill is yet to be enacted and civil service reform has been limited despite the governmentís assertion that reforms would be undertaken. The main challenges include building consensus within the loosely bound NARC government, taking candid action on corruption, enacting anti-terrorism and money laundering laws, bridging budget deficits, rehabilitating and building infrastructure, maintaining sound macroeconomic policies, and addressing structural reforms needed to reverse slow economic growth.

Nairobi continues to be the primary communication and financial hub of East Africa. It enjoys the region's best transportation linkages, communications infrastructure, and trained personnel, although these advantages are less prominent than in past years. A wide range of foreign firms maintain regional branch or representative offices in the city. In March 1996, the Presidents of Kenya, Tanzania, and Uganda re-established the East African Cooperation (EAC). The EAC's objectives include harmonizing tariffs and customs regimes, free movement of people, and improving regional infrastructures. In March 2004, the three East African countries signed a Customs Union Agreement.