The area that now comprises Kenya came under British domination in the 1890s, though it was not declared an official Crown colony until 1920. Under British hegemony (complete domination), a racially stratified economy was created, with European settlers controlling a large segment of the fertile land and managing nascent industries, while the African indigenous population worked as laborers on cash-crop plantations and in factories. Indians, occupying a status somewhere between the Europeans and Africans, formed a petty-capitalist class of artisans, clerks, and merchants. By and large, the colonial economy was characterized by settler control of farming lands (settler-economy), with tea and coffee acting as the major export crops designated for sale in European markets abroad.
Following the emergence of various nationalist movements throughout the 1950s, in addition to a series of rebellions (the Mau Mau) against British rule, Kenya was granted independence in December 1963. Under the subsequent rule of the Kenya African National Union (KANU), headed by President Jomo Kenyatta, Kenya experienced significant economic growth throughout the 1960s. Although KANU, a self-proclaimed African socialist party, pursued various socialistic policies— including government control of agricultural marketing boards, state ownership of certain industries, and import-substitution —the economy under Kenyatta was more or less mixed.
In 1980, a growing balance of payments deficit caused by declining terms of trade (international prices for agricultural commodities greatly outweighed by prices for capital goods ) and high international oil prices, compelled Kenya to borrow heavily from the World Bank. The latter issued a second large-scale loan to Kenya in 1982, with both the first and second loans being subjected to numerous conditionalities (requirements). Such conditionalities centered on increasing the role of the private sector in the economy while concomitantly decreasing the role of the government. In particular, the conditionalities—collectively labeled Structural Adjustment Packages (SAPs)—emphasized trade liberalization and gradual dissolution of government marketing boards that controlled purchasing and selling of agricultural commodities.
Kenya's slow progress towards implementing agricultural conditionalities, in addition to the widespread use of public resources by government and parastatal officials for private gain (corruption), prompted many bilateral donors and the major international financial institutions to severely criticize KANU throughout the early 1990s. Inefficient and corrupt parastatals were singled out as being particularly draining to the country's treasury, and thus a major factor behind deficit and debt problems. Economic performance in the 1990s declined severely, and the average annual GDP growth rate, which stood at 6.5 percent between 1960 to 1980, fell to 2 percent between 1990 to 1999. In August 1993, inflation temporarily reached a record high of 100 percent. Five years later, in 1998, the unemployment rate soared to 50 percent.
Both the IMF and the World Bank suspended structural adjustment programs in 1997, as a result of KANU's failure to implement governance conditionalities designed primarily to curb corruption and promote sound economic policy. In July 2000, however, Kenya signed a long-awaited 3-year Poverty Reduction and Growth Facility (PRGF) with the IMF, a development that is expected to normalize relations with the World Bank and various bilateral donors. The PRGF, a direct relative of the SAPs, sets out some of the most detailed conditions ever agreed to by a national government.
The Kenyan economy continues to be dominated by agriculture, with tea, coffee, horticultural products, and petroleum products acting as the country's major exports. Export partners, in turn, include Uganda, Tanzania, the UK, Egypt, and Germany. Tourism is the second largest contributor to foreign exchange, while agriculture is the first. Kenya's major imports include machinery and transportation equipment, petroleum products, and iron and steel, most of which are imported from the UK, the United Arab Emirates, the United States, Japan, Germany, and India. Due, in large part, to the uneven terms of trade between Kenya's agricultural exports and higher value-added imports, the country runs a significant balance of trade deficit. This means that Kenya must borrow heavily to finance imports, hence the various SAPs. In 1998, Kenya's total external debt stood at US$7 billion. In addition to commercial loans, the country also receives large amounts of economic aid from various international organizations and bilateral donors. In 1997, for instance, Kenya received a total of US$457 million in aid.