General Information

Economic Indicators

Trade Indicators

Economic Overview

GDP growth has slowed over the past few years due principally to inadequate rains, power shortages, fiscal problems and high interest rates. 1 From 1990 to 1998 economic growth averaged 2.2% with a decline in per capita GDP. 2

Although sectorally diverse by African standards, the Kenyan economy remains dominated by agriculture, which accounted for 26% of GDP in 1998. 3 The sector is itself diversified, consisting of varied food crop and cash crop subsectors as well as livestock, forestry and fishing. The non-monetary component of agriculture is small.

Regulatory Environment

Kenya's rapid rate of population growth led to a decline in per capita output from 1991-1998. However, its current policy framework has begun to emphasise the role of a free market, and the economy has turned to market-based pricing incentives in place of price controls. A liberalised investment code and a newly liberalised foreign exchange system have also been put in place. But, while the government has made some progress in removing impediments to the development of a free market, there is scope for further reform. Divestiture has been slow, with a few firms actually moving into private hands. Still in progress are major government programs to privatise state-run firms and reduce the size of the civil service. 4

In 1994, Kenya introduced a variable tariff for key imported food commodities - wheat, rice, milk,maize (corn), and sugar. The duty was applicable whenever the import reference price fell below the predetermined domestic reference price. The variable tariff was replaced by an equivalent system of ad valorem or specific duties in the 1996 budget. 5

The government maintains lower duties and value-added tax for selected items that it considers important for priority sectors. Those items include: palm oil and tallow, bicycles, steel billets, wire rods, graphite lead, windmills, power transformers, cables, and active ingredients used for preparation of human and veterinary pharmaceuticals, fungicides and pesticides. 6

All sectors welcome foreign investment provided it spurs employment, accommodates local investment, has no damaging impact on the environment or any adverse security implications. Although the priority is to encourage export-oriented projects, the government is increasingly willing to consider those that target the domestic market or pursue activities (for example, retailing and distribution) that were once reserved for Kenyans. 7

Private foreign investment in Kenya is governed by Kenya's Foreign Investment Protection Act (FIPA). The Act is being reviewed in the light of recent liberalisation of foreign exchange and import controls that have made a number of provisions redundant. For example, FIPA rules require foreign investors to apply for a certificate of approved enterprise from the Treasury that allows them to repatriate capital and profits. Such restrictions have been done away with. There are no formal requirements on minimum local participation in either equity or management. 8

Kenya is also a member of the Lome IV Convention, under which 69 African, Caribbean and Pacific Countries (mostly former colonies) are affiliated with the European Union. Under the terms of the convention, these countries' industrial exports enter the EU free of duty and quantitative restrictions, provided certain rules of origin are followed. 9

Current Process of Liberalisation

The government has undertaken major economic reforms that have opened up the Kenyan market to free competition, and is currently working with the IMF to continue the implementation of major economic structural reforms. 10

Major policies undertaken include government expenditure rationalisation, price decontrol, tight monetary control, export promotion, interest rate and foreign exchange rate liberalisation, and capital market development.The de facto restrictions on the repatriation of profits, dividends, license fees and royalties, as well as on capital gains, that had been a major disincentive have been removed. 11 The government has also made positive macro-economic policy reform initiatives: elimination of price and import licensing controls, development of more disciplined monetary and fiscal policies, and enforcement of greater monetary discipline with respect to the commercial banks. 12 The overall trend of economic reforms since 1991 has been positive although at times intermittent. 13

Kenya applies tariffs based on the Harmonised System. The government's 1995 budget proposals reduced the number of tariff rates from six to five, and the maximum tariff rate from 50% to 40%. The budget placed some items previously allowed in duty-free on a lower tariff category. Duties on a number of manufactured items have been reduced; for example computer imports are assessed a duty of 10% as compared to a previous 20%; and combined duty and value added tax on automobiles ranges from 65% to 131%, as compared to over 200% previously. 14

In 1997, there was a further rationalisation of import duties, with the abolition of the top 35% rate and bringing the items that had carried duty at that rate into the 25% rate. The only other substantive rates are 15%, 5%, and zero. 15

Kenya is currently streamlining its Customs Department operations to increase its efficiency while maximising revenue collection. A continuous review and reduction of various duty rates support this. 16

A new investment code aimed at making Kenya more attractive for foreign investment is nearing completion. The code is expected to set clear guidelines for processing investment applications through the Investment Promotion Centre (IPC). This legislation is intended to strengthen the one-stop office functions of the IPC that approves applications and gives permission for an investor to start operating in the country. 17

As an incentive to foreign investment, the government has lifted restrictions on local borrowing by foreign-controlled companies in 1994 and repealed the Exchange control Act in late 1995. 18

Kenya is a member of Common Market for Eastern and Southern Africa (COMESA) former Preferential Trade Area (PTA). Under the COMESA agreements, Kenyan exports are accorded preferential treatment and nominal tariffs are levied in the country of final destination

The goal of COMESA is to become a fully-fledged common market in operation by 2000. 19 COMESA countries plan to eliminate all tariffs on intra-COMESA trade by 2000, as well as to establish a common external tariff with a maximum rate of 30%. However, as many countries have failed to meet the target dates for duty reduction set out in the treaty, it appears unlikely that the 2000 target date will be achieved. 20

1. Country Report: 3 rd Quarter 1997: Kenya, (The Economist Intelligence Unit, London, 1997), p. 19.
2. Country Profile. Kenya: 1999-2000, (Economic Intelligence Unit, London, 1999), p. 19.
3. Ibid..
4. Country Report ... (1997).
5. Country Report: Kenya, (The Economist Intelligence Unit, London, 1996), p. 37.
6. Trade Compass Country Commercial Guides,
   (http://www.tradecompass.com/library/books/com_guide/).
7. Country Reference: Investing, Licensing & Trading Conditions in Kenya: 1998, (The Economist Intelligence Unit, London, 1998), p. 9.
8. Trade Compass Country Commercial Guides,
   (http://www.tradecompass.com/library/books/com_guide/).
9. Country Reference..., p. 37.
10. Country Profile-..1999-2000, pp. 19-21.
11. Trade Compass....
12. Ibid.
13. Country Profile...1999-2000, pp. 22-23.
14. Trade Compass....
15. Country Reference..., p. 38.
16. Trade Compass....
17. Ibid.
18. Country Reference..., p. 10.
19. Ibid, p. 38.
20. Ibid, p. 39.