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TRADE POLICY REVIEWS: FIRST PRESS RELEASE, SECRETARIAT AND GOVERNMENT SUMMARIES
Kenya: January 2000

The pursuit of structural and macroeconomic reforms as well as greater transparency and predictability of existing legislation would help Kenya's transition to an outward-oriented economy and improve its ability to attract the needed foreign investment. A new WTO report on the trade policies of Kenya says that reforms started in the early 1990s have had limited results. At the same time, issues of governance, labour unrest, power shortages and high utility costs have affected investors' confidence.

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See also:

Second press release
Chairperson’s concluding remarks


PRESS RELEASE
PRESS/TPRB/124
19 January 2000

Pursuit of structural reforms can help attract needed investment in Kenya  Back to top

The new WTO secretariat report, along with a statement from the Kenyan government, will serve as a basis for the second trade policy review of Kenya which will take place in the WTO Trade Policy Review Body on 26 and 28 January 2000.

The report notes that while the reforms Kenya is engaged in have resulted in a certain macroeconomic stability (decline in rate of inflation and decrease in fiscal deficit), real GDP growth has been slow and unemployment remains high. The importance of foreign trade for Kenya has increased but the trade balance has deteriorated. Kenya imports mainly machinery, transport equipment and oil products and the European Union remains Kenya's largest trading partner, both as a source of imports and a destination for exports.

The report states that Kenya has dismantled its quantitative restrictions and eliminated its price controls. In addition, Kenya is amending some pieces of its legislation, including on anti-dumping, countervailing and intellectual property to bring them into conformity with the WTO Agreements. Kenya now relies on the tariff as its main trade policy instrument. The report notes that while Kenya has recently rationalized its tariff structure, the conversion of all duties - such as mixed or specific duties - into ad valorem rates would enhance the transparency of Kenya's tariff regime. In the same way, limited recourse to "suspended" duties would reduce room for administrative discretionary decisions.

The report notes that, except for timber and fish, Kenya has no recourse to export duties and has never applied contingency trade remedies. The report also notes however that Kenya uses several incentive schemes to promote its exports. At the same time, the role of the State in the Kenyan economy remains important, since privatization has advanced at a slow pace.

The report says that most of Kenya's business activities are open to foreigners and that in order to attract investment, Kenya offers tax incentives to local and foreign investors in the form of tax holidays, accelerated depreciation, investment allowances, lower duties on intermediate capital goods, and gradual reduction of corporate tax rates. However, due to reduced investors' confidence, foreign investment in Kenya remains low. This, in turn, has weighed on economic growth.

Agriculture accounts for some 27% of real GDP and around 60% of earning from total merchandise, the report says. Major agricultural exports are: tea, coffee and horticultural products. Kenya's agricultural policy aims to ensure food security, defined to include self-sufficiency in main foodstuffs. Thus Government intervention in the sector persists and reforms are sometimes reversed. The report notes that the Kenyan economy is currently organized around agriculture and linkages between agriculture and other sectors are important. For instance, agro-processing industries constitute the major branch of manufacturing.

Manufacturing accounts for about 13% of Kenya's GDP. The report notes that Kenya's manufacturing sector has been sluggish in recent years and liberalization reforms have revealed its low competitiveness. The already high protection of the sector did not prevent the collapse of several firms, particularly in the textiles and clothing industry.

The services sector is the major foreign exchange earner and represents around 54% of GDP, the report notes. It is dominated by tourism, and financial and communication services. However, its relatively high-cost structure appears to have imposed a constraint on the development of other sectors of the economy that are highly dependent on basic services. State intervention remains present in most subsectors, including in the financial subsector where government-owned banks hold the major share of deposits and loans. The report adds that Kenya has one of the most developed banking systems in the region and, due to its geographical location, it has the potential to provide maritime services to its land-locked neighbours.

Notes to Editors

trade policy reviews are an exercise, mandated in the WTO agreements, in which member countries’ trade and related policies are examined and evaluated at regular intervals. Significant developments which may have an impact on the global trading system are also monitored. For each review, two documents are prepared: a policy statement by the government of the member under review, and a detailed report written independently by the WTO Secretariat. These two documents are then discussed by the WTO’s full membership in the Trade Policy Review Body (TPRB). These documents and the proceedings of the TPRB’s meetings are published shortly afterwards. Since 1995, when the WTO came into force, services and trade-related aspects of intellectual property rights have also been covered.

For this review, the WTO’s Secretariat report, together with the policy statement prepared by Kenya, will be discussed by the Trade Policy Review Body on 26 and 28 January 2000. The Secretariat report covers the development of all aspects of Kenya’s trade policies, including domestic laws and regulations, the institutional framework, trade policies by measure and by sector.

Attached to this press release is a summary of the observations in the Secretariat report and parts of the government's policy statement. The Secretariat report and the government’s policy statement are available for the press in the newsroom of the WTO internet site (www.wto.org). These two documents and the minutes of the TPRB’s discussion and the Chairman’s summing up, will be published in hardback in due course and will be available from the Secretariat, Centre William Rappard, 154 rue de Lausanne, 1211 Geneva 21.

Since December 1989, the following reports have been completed: Argentina (1992 and 1999), Australia (1989, 1994 and 1998), Austria (1992), Bangladesh (1992), Benin (1997), Bolivia (1993 and 1999), Botswana (1998), Brazil (1992 and 1996), Burkina Faso (1998), Cameroon (1995), Canada (1990, 1992, 1994, 1996 and 1998), Chile (1991 and 1997), Colombia (1990 and 1996), Costa Rica (1995), Côte d’Ivoire (1995), Cyprus (1997), the Czech Republic (1996), the Dominican Republic (1996), Egypt (1992 and 1999), El Salvador (1996), the European Communities (1991, 1993, 1995 and 1997), Fiji (1997), Finland (1992), Ghana (1992), Guinea (1999), Hong Kong (1990, 1994 and 1998), Hungary (1991 and 1998), Iceland (1994), India (1993 and 1998), Indonesia (1991, 1994 and 1998), Israel (1994 and 1999), Jamaica (1998), Japan (1990, 1992, 1995 and 1998), Kenya (1993), Korea, Rep. of (1992 and 1996), Lesotho (1998), Macau (1994), Malaysia (1993 and 1997), Mali (1998), Mauritius (1995), Mexico (1993 and 1997), Morocco (1989 and 1996), New Zealand (1990 and 1996), Namibia (1998), Nicaragua (1999), Nigeria (1991 and 1998), Norway (1991 and 1996), Pakistan (1995), Papua New Guinea (1999), Paraguay (1997), Peru (1994), the Philippines (1993), Poland (1993), Romania (1992 and 1999), Senegal (1994), Singapore (1992 and 1996), Slovak Republic (1995), the Solomon Islands (1998), South Africa (1993 and 1998), Sri Lanka (1995), Swaziland (1998), Sweden (1990 and 1994), Switzerland (1991 and 1996), Thailand (1991, 1995 and 1999), Togo (1999), Trinidad and Tobago (1998), Tunisia (1994), Turkey (1994 and 1998), the United States (1989, 1992, 1994, 1996 and 1999), Uganda (1995), Uruguay (1992 and 1998), Venezuela (1996), Zambia (1996) and Zimbabwe (1994).

The Secretariat’s report: summary  Back to top

TRADE POLICY REVIEW BODY: KENYA
Report by the Secretariat – Summary Observations

The Economic Environment

In the early 1990s Kenya embarked on structural and macroeconomic reform, including in trade, to establish a more growth-conducive economic environment. The transition from import-substitution to outward-oriented policies has made some progress, but has lagged in some areas, such as privatization. Macroeconomic stabilization appears to be taking hold: the rate of inflation was at 6% in 1998, down from nearly 46% at the time of Kenya's first Trade Policy Review in 1993; and the fiscal deficit had turned from a deficit equivalent to over 5% of GDP in 1993 to a projected surplus in 1998.

Kenya has dismantled its quantitative import restrictions and price controls on major products and the tariff is now the main trade policy instrument. The tariff structure has been rationalized, as have incentive schemes. Several public enterprises have been restructured and the influence of most agricultural boards reduced. Following three devaluations of the Kenyan shilling in 1993, a managed floating exchange rate system was adopted in 1994. However, investor confidence has been affected by several elements, including issues of governance, labour unrest, power shortages and high utility costs, and adverse weather conditions that further weakened the infrastructure. The factors have contributed to a low rate of foreign direct investment, which in turn has weighed on economic growth. The growth of real GDP, which had been 4.8% in 1995, has slowed since the second half of 1996, falling to 1.8% in 1999. Unemployment has also remained high and the trade balance has deteriorated. Nevertheless, the external debt position is thought to be manageable.

The structure of Kenya's economy has remained fairly stable since the last Review. Agriculture remains the largest sector of the Kenyan economy, after services. The agricultural sector accounts for some 27% of real GDP and around 60% of earnings from total merchandise exports; some 80% of the population depend on agriculture for their livelihood. A wide variety of crops is grown in Kenya; these include maize, rice, wheat, tea – the leading export crop (one third of the value of agricultural exports), – coffee, horticultural products, sugar cane, and fibres. Kenya is the world's leading supplier of tea, pyrethrum, and bixa. Kenya's herd of livestock is also diversified. Fishing activities mostly take place in Lake Victoria. Adverse weather conditions, organizational problems, weaknesses of infrastructure, and the lack of financing have hampered the further development of Kenyan agriculture.

Agri-processing industries constitute the major branch of manufacturing. The sector accounts for about 13% of Kenya's GDP but with a relatively high cost structure its performance has been sluggish in recent years. The mining and quarrying sector is still underdeveloped. Mineral products account for some 10% of total merchandise exports in value, of which soda ash, the principal product, contributes more than half. The services sector (excluding construction and electricity), still dominated by tourism, and financial and communications services, represents around 54% of GDP; it is also a major source of employment. Kenya is a net exporter of services (the major foreign exchange earner).

An upward trend in the ratio of merchandise trade to GDP has meant that the importance of foreign trade has increased for the Kenyan economy. Kenya's main imports include machinery and transport equipment from Europe and Asia, and crude oil and petroleum products from the Middle East. Imports of agri-foodstuffs fluctuate with domestic harvests. The European Union (EU) remains Kenya's largest trading partner (both as a source of imports and a destination for exports). However, South Africa has increased its share in Kenyan imports, following its reintegration into the global economy. The share of Kenya's exports to the other East African Co-operation countries (Uganda and Tanzania) nearly doubled between 1993 and 1998, making this trading block the largest destination for Kenyan products after the EU.

Institutional Framework

Kenya's trade policy objectives include moving towards a more open trade regime, strengthening and increasing overseas market access for Kenyan products, especially processed goods, and further integration into the world economy. These policy objectives have been pursued through unilateral liberalization, and regional and bilateral trade negotiations, in particular within the African region, as well as through its participation in the multilateral trading system. Kenya is a member of the Common Market for Eastern and Southern Africa (COMESA), the East African Co-operation (EAC), the Organization of African Unity (OAU), and the Inter Governmental Authority on Development (IGAD).

Trade policy formulation is the responsibility of several Ministries, which constitute the Cabinet's Economic Sub-committee, and the Central Bank. However, recommendations can be made by two inter-ministerial and consultative committees, which include the private sector. No independent bodies review and assess trade policies in Kenya. Trade policy is implemented mainly by the Ministry of Tourism, Trade and Industry.

Kenya is a founding member of the WTO; it accords at least MFN treatment to all its trading partners. Provisions of the WTO Agreements cannot be invoked before national courts. Kenya is not a signatory to the plurilateral agreements on Government Procurement and Trade in Civil Aircraft. Kenya is amending some pieces of its legislation, including on anti-dumping, countervailing and intellectual property, to bring them into conformity with the WTO Agreements.

Kenya encourages foreign investment and grants national treatment to foreign investors. Most business activities are open to foreigners, except those related to matters of security or health. In order to attract investment, Kenya offers tax incentives to local and foreign investors in the form of tax holidays, accelerated depreciation, investment allowances, lower duties on intermediate capital goods, and gradual reduction of corporate tax rates. Despite these incentives, Kenya has been unable to attract much investment, due to reasons noted earlier. Wide discretionary powers in the administration of laws and regulations highlight the need to ensure full compliance with the rule of law and to address governance issues. The Government has taken, and continues to take, steps to address these problems.

Trade Policy Instruments

Tariffs have become Kenya's main trade policy instrument. Since the previous Review in 1993, Kenya has reduced the overall level of protection of its economy. It has dismantled most non-tariff restrictions, except for moral, health, security, and environmental reasons, or under international conventions to which it is a signatory. The tariff structure has been simplified through the reduction of the number of bands from eight in 1994 to five (0, 5%, 10%, 15%, and 25%), and the lowering of maximum ad valorem rates from 60% in 1992 to 25% in 1999. Mixed duties apply to around 10% of all tariff lines and specific duties to 30 lines at the eight-digit level of the Harmonized System (HS); virtually the same products, including mainly agricultural and petroleum products, are subject to mixed or specific duties as at the time of the previous Review. The conversion of these duties into ad valorem rates would reduce the complexity and enhance the transparency of the tariff.

In addition to tariffs, "suspended" (stand-by) duties ranging up to 70% increase to 95% the maximum ad valorem import duties on wheat flour, meslin flour, and certain types of sugar. The suspended duties replaced variable duties on food and currently apply to some 17% of all tariff lines at the HS eight-digit level, in agriculture and manufacturing. The maximum suspended duty of 70% also applies to maize, rice, and milk. The simple average rate of Kenya's non-specific import duties (inclusive of applied suspended duties) is 18%. Some 3.7% of all tariff lines are duty free while 38% carry rates higher than 15%; except paper, paperboard, cards, and office stationery, rates higher than 35% apply to agricultural products and their transformations. An import declaration fee (IDF) of 2.75% is collected on all imports – including those not subject to the preshipment inspection that is required for all imports worth at least US$5,000. The inclusion of the fee raises to 20.75% the average rate of import duties. In the aggregate, the positive escalation of Kenya's tariff (highly pronounced on products such as textiles, wearing apparel, leather, and metallic, rubber, petroleum, and chemical products) means that the effective protection provided to most industries is higher than the nominal rate. A value-added tax of 15% and excise duties ranging up to 135% (the excise duties are mixed or specific on certain products) are levied both on imports and locally produced goods.

Some 15% of Kenya's tariff lines are bound at ceiling rates ranging from 18% on pharmaceutical goods to 100% on all agricultural products. "Other duties and charges" on all these products are bound at a zero rate, notwithstanding the imposition of the IDF on all imports and a fee of 1% on agricultural imports. The predictability of Kenya's tariff regime could be enhanced by an increase in the coverage of its tariff bindings and the narrowing of the gap between bound and applied rates.

Except for timber and fish, Kenya has abolished export duties and taxes on all products. In August 1993, Kenya abolished export subsidies granted under the Export Compensation Scheme. Three main incentive schemes, i.e. the Export Processing Zone, the Manufacturing Under Bond and the Duty Remission Schemes, are currently available to export-oriented companies. The Minister of Finance may, on a discretionary basis, remit duties payable on imports; import duties are remitted on specified inputs or those used by specified firms, mainly certain state-owned companies. However, certain agricultural products and food are subject to special export licences for self-sufficiency purposes. The sluggishness in the implementation of the parastatal reform programme since 1996 has meant that several state-owned companies still hold monopolies or exercise exclusive rights in various areas of Kenya's economy.

Kenya has never applied contingency trade remedies (anti-dumping, countervailing and safeguard measures). Awareness of the non-compliance of Kenya's legislation on anti-dumping and countervailing measures, and on intellectual property, with the relevant WTO Agreements has led to the ongoing amendment process. Kenya has no specific legislation on safeguard measures. It retained the right to use the transitional safeguard mechanism of Article 6.1 of the WTO Agreement on Textiles and Clothing but it has not so far notified the lists of products it was to integrate into the GATT during Phases I and II. Kenya is to base its customs valuation method on the transaction value as from January 2000, i.e. at the end of the transition period allowed to developing countries under Article 20 of the WTO Agreement on the Implementation of Article VII of GATT 1994.

Exemption from compliance with a compulsory standard may be granted by the Minister of Industrial Development on a discretionary basis. Except for goods and services not available in Kenya and for purchases under projects funded by foreign institutions, most public procurement is made through Kenyan-based firms. Kenya is drafting its legislation on government procurement.

Counterfeiting in Kenya affects mainly computer programs, sound recordings and video cassettes.

Sectoral Trade Policy Developments

The Kenyan economy is currently organized around agriculture, which provides inputs to certain sectors (mainly manufacturing) and contributes to the development of others (manufacturing and services). Kenya's agricultural policy aims to ensure food security, defined to include self-sufficiency in main foodstuffs. To this end, Kenya has frequently changed its foreign trade regime for agricultural products and its agricultural reforms have often been reversed. Almost all the marketing boards – there is at least one board for each major crop – are still in operation, albeit with relatively limited powers. Producer prices are still set and floor prices maintained by the boards for certain crops (e.g. rice, maize, pyrethrum, bixa, cashew nuts, and milk) because of their dominant position or under their statutory powers. The liberalization of marketing functions, while producer prices for certain crops are still set at low levels by boards, has encouraged exports of unprocessed commodities.

The liberalization reforms have revealed the weaknesses of the intersectoral linkages and the lack of external competitiveness of Kenya's manufacturing sector. Indeed, the already high protection of the sector, enhanced by the rationalization of the tariff structure and of incentive schemes aimed at promoting exports of local products after transformation, did not prevent the collapse of several firms, particularly in the textiles and clothing industry, which enjoys high tariff protection. A two-phase industrialization strategy was formulated in 1997 with a view to further increasing the value-added content of Kenya's exports of primary products (Phase I ending in 2006) and promoting more capital-intensive industries (Phase II ending in 2020). The mining sector is subject to little tariff protection but remains dominated by state-owned companies and is relatively undeveloped.

The services sector has not performed well in recent years; its relatively high-cost structure appears to have imposed a constraint on the development of other sectors of the economy that are highly dependent on basic services, such as transportation, telecommunications, and financial services. State intervention remains present in most subsectors including in the financial subsector where government-owned banks hold the major share of deposits and loans. Reforms in the sector are yet to fully take hold. Additional efforts to create an efficient services sector would appear essential for the further development of the country and to support its new outward-oriented growth strategy. Under the General Agreement on Trade in Services (GATS), Kenya made commitments in telecommunications, financial services, tourism and travel-related services, and transport services. Kenya is a net exporter of services, mainly tourism; however, it would seem to have potential to export other services, such as financial and transportation services. Kenya has one of the most developed banking systems in the region and, due to its geographical location, it has the potential to provide maritime services to its land-locked neighbours.

Trade Policies and Trading Partners

Kenya's commitments to WTO principles are integral to its economic policies. In addition to its participation in the multilateral trading system, Kenya has also pursued preferential trade agreements as a means of increasing trade flows.

Kenya is engaged in reforms that have resulted in a certain macroeconomic stability. The monetary and fiscal components of the reforms, combined with the adoption of a managed floating exchange rate system, have shown signs of success. Reform efforts have also been made in the area of trade. Nevertheless, structural reform has been somewhat hesitant, lengthening the transition state in which Kenya has been for nearly a decade.

Kenya intends to actively pursue its trade liberalization and structural reforms to consolidate the re-orientation of its economy and complete its transition to an outward-oriented economy. These measures should facilitate the efficient allocation of resources reflecting Kenya's comparative advantages. Improvement of the low level of its multilateral commitments, the transparency and predictability of existing legislation, as well as its enforcement, would create confidence in the irreversibility of its reforms and render them more credible, thus improving Kenya's ability to attract the needed foreign investment and enhancing the country's adherence to WTO principles.

Government report  Back to top

TRADE POLICY REVIEW BODY: KENYA
Report by the Government - Part V to VII

I. KENYA'S TRADE POLICY

1. Kenya's general trade policy objectives are articulated in the sessional paper No 1 of 1986 on economic management for renewed growth.

2. Trade policies in Kenya have evolved over time, changing from an inward looking import substitution policy regime to the existing one whose primary objective is the promotion of exports of consumer and intermediate goods, while at the same time laying the base for eventual production of capital goods for both domestic and export markets. This is expected to lead to higher earnings of foreign exchange, which in turn will help to reduce the balance of payments deficit and the unemployment problems.

3. The Government has put into place various incentives such as:

the duty and VAT remission;

manufacturing under bond scheme;

export processing zones;

the pursuance of a flexible and realistic exchange rate that promotes exports. Currently, the export compensation scheme has been abolished since 1993.

(1) Agriculture

4. Self-sufficiency and expansion of exports are main objectives of the Government in the agricultural sector. With these objectives, the Government has evolved a comprehensive policy framework to meet its stated priorities covering production, pricing and marketing (i.e. domestic and export trade). For staple foodstuffs, the Government has embarked on creating an enabling environment through gradual liberalization of the marketing system.

B. Manufacturing Industry

5. After independence, Kenya relied on the import substitution of consumer goods, but due to lack of incentives to foster the production of capital and intermediate goods, a greater demand for foreign exchange for import substitution was needed compared to other sectors. The import substitution policy was biased towards protection of domestic industries at the expense of their competitiveness, which in turn enabled manufacturers to make profits even in cases of under utilized capacities. Kenyan manufacturers thus became inward oriented and failed to venture into international markets. The Government then had to change from this policy of import substitution to export promotion in order to acquire more foreign exchange resources, and increase employment and productivity.

6. To encourage investment, the Government of Kenya has resorted to price liberalization. The Government published the Restrictive Trade Policies, Monopolies and Price Control Act (1988) to guard against exploitation of smaller firms by larger enterprises. Import licensing has now been scrapped except for few items that form the negative list. This list was enacted under the Import, Export and Essential Supplies Act, for reasons of public health, wildlife and environment protection, state and public security, or to meet required sanitary, phytosanitary and environmental standards.

C. Trade Policy Implementation

7. Trade policy implementation in Kenya is carried out mainly by the Ministry of Tourism, Trade and Industry, the Customs and Excise Department of Kenya Revenue Authority, as well as Central Bank of Kenya. There are also a number of government departments or agencies, which play a role in the implementation of trade laws in Kenya. The Government, in its revitalization programme, is committed to a policy of broad-based liberalization, as well as price liberalization to encourage investment

D. Multilateral, Regional or Preferential Trading Agreements

8. Kenya's external trade policies are designed to create an environment conducive to promoting its products in international markets, especially those of the developed countries of Europe, America and Japan without prejudice to the promotion of intra-African trade. Trade policies are formulated with the view to speeding up Kenya's industrialization process, and in such away to make access to foreign markets easier for Kenyan products. In pursuing these objectives, Kenya has entered into Multilateral, regional, bilateral and preferential trade arrangements as detailed below. Kenya is a signatory to the Lomé convention, and a member of the African Economic Community, Common Market for Eastern and Southern Africa (COMESA), East African Community (EAC) and Inter-governmental authority on Development (IGAD).

E. Bilateral Trade Agreements

9. Kenya has bilateral trade agreements with the following countries: Argentine, Bangladesh, Bulgaria, China, the former Czech and Slovak Republic, Djibouti, Egypt, Ethiopia, India, Iran, Lesotho, Nigeria, Pakistan, Poland, Romania, Rwanda, Republic of Korea, Sudan, Tanzania, Thailand, the former USSR, the former Yugoslavia, Zambia and Zimbabwe.

10. Under these agreements, Kenya and its contracting partners accord each other the MFN treatment in all matters with respect to their mutual trade relations. These agreements have been used as instruments for promoting trade and improving economic relations between Kenya and these countries.

II. KENYA'S EXTERNAL TRADE RELATIONS

11. External trade plays a vital role in the Kenya's economic development. Key indicators of international trade and balance of payments show a poor performance in 1998 compared to the previous year. The balance of trade worsened owing to a marginal growth in imports while exports almost stagnated.

12. The volume of trade grew by only 2.5 per cent in 1998 to stand at Kenya pound 15,948.5 million compared to 13.5 per cent and 8.5 per cent growth registered in 1996 and 1997 respectively. The slackened growth of exports and imports volume reflects the slow growth of the economy.

(2) Exports

13. Kenya's export earnings, continues to be generated mainly from exports of primary agricultural products including coffee, tea and horticulture. Food and beverages contributed 57.4 per cent of the total export earnings, while non-food industrial supplies made up 18.3 per cent in 1998 compared to 22.4 per cent in 1997. Exports of fuel and lubricants contributed 9.1 per cent of total export earnings. Export earnings from food and beverages slightly increased by 6.8% from Kenya pound 3,072.9 million in 1997 to Kenya pound 3,283.3 million in 1998, mainly due to substantial increase in exports of primary food and beverages for household consumption, especially tea, beans and mussels frozen.

A. Imports

14. In 1998, there was a general increase in the values of most import categories, although imports of non-food industrial supplies fell by 11.7% in 1998, compared to a 22.9% increase in 1997. This was mainly due to the liberalization of trade, through the removal of import licensing, quantitative import restrictions and foreign exchange controls.

B. Balance of Trade

15. One effect of the aforementioned measures has been that the increase in the value of imports has not been matched by a corresponding increase in export earnings, and the balance of trade has deteriorated.

16. In should, however, be noted that even though liberalization has increased the volume of imports, exports have also grown but at a lower rate than imports.

C. Direction of Trade

17. African Countries continued to be the major destination of Kenya's exports followed by the European Union (EU). In 1998, the market share of total exports to African countries and European Union (EU) stood at 47.3% and 30.0%, respectively.

18. The share of total exports to the European Union (EU) reduced by 2.6% points while of that African countries increased by 1.3% points. Exports to the Far East and Middle East accounted for 12.8% and 4.0% of total exports, respectively.

19. Exports to all European Union countries except United Kingdom decreased by 7.5% in 1998, while exports to Middle East, and Far East and Australia increased by 24.3% and 26.9% respectively. Exports to Uganda and Tanzania jointly stood at Kenya pound 1,779.1 million, equivalent to 29.4% of total exports.

III. INVESTMENT POLICY

20. The government investment policy is outlined in various sessional papers and national development plans, the most notable ones being sessional paper 1 of 1986 on economic management for renewed growth and sessional paper no. 1 of 1994 on recovery and sustainable development which emphasizes on the increased role of the private sector in economic growth. The Government has undertaken key economic reforms with a view to promote both domestic and foreign investment. These include abolishing export and import licensing, rationalizing and reducing import tariffs, liberalization of foreign exchange and price controls and partial liberalization of the capital markets among other measures.

(3) Investment Promotion Centre (IPC)

21. Investment Promotion Centre is a public funded institution, which was established in 1992 as a one-stop shop geared to promote investment in the country. IPC processes all applications for new investments and forwards recommendations to the Ministry of Finance and Planning for approval by the Minister. A General Authority license is issued within one month with prior approval from the relevant authority in charge of issuing the license.

22. The Foreign Investments Protection Act (FIPA) (Cap518) guarantees repatriation of capital, after tax profits and remittance of dividends and interests accruing from investing in the country. The constitution also provides guarantee against expropriation of private property unless for security or public interest and when this happens fair and prompt compensation is paid.

A. Major Investment Incentives

23. While the Government policy is to formulate and implement measures in favour of private sector investment, the following represent a summary of current incentive :

investment allowance - is provided as an incentive for investment in the manufacturing and hotel sectors the rate of 60% countrywide;

depreciation - liberal rates are allowed for depreciation of assets based on value as follows:

buildings and hotels

machinery e.g. tractors and aircrafts;

loss carried forward - business enterprises that suffer losses can carry forward such losses to be offset against future taxable profits;

duty remission facility - material imported for use in manufacture for export or for the production of raw materials for use in export oriented manufacture or for the production of duty free items for sale domestically are eligible for duty remissions. Applications for this facility may be made to the Export Promotion Programme Office in the Ministry of Finance and Planning.

B. Manufacturing Under Bond (MUB)

24. To encourage manufacturing in Kenya for world markets, the Government has established an in-bond programme open to both local and foreign investors. IPC and Ministry of Finance and Planning (Department of Customs and Excise) administer the program. Enterprises operating under the programme are offered the following incentives:

exemption from duty and VAT on imported plant, machinery and equipment, raw material and other imported inputs; and

100% investment allowance on plant machinery equipment and buildings.

C. Export Processing Zones Authority (EPZA)

25. Export Processing Zones are coordinated by the Export Processing Zones Authority (EPZA). A number of EPZs have already been established. Enterprises operating in export processing zones in Kenya enjoy the following benefits:

10 years tax holiday and a float 25% tax for the next 10 years;

exemption from all withholding taxes on dividends and other payments to non-residents during the first 10 years;

exemption from import duties on machinery raw materials and intermediate inputs;

no restriction on management or technical arrangement;

exemption from stamp duty; and

exemption from VAT and operate on one license only.