Kenya WT/TPR/S/64
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I. ECONOMIC ENVIRONMENT
(1) MAJOR FEATURES OF THE ECONOMY
1. Situated astride the Equator, on the east coast of Africa, the Republic of Kenya has a
landmass of around 582,000 square kilometres, with a coastline of about 600 kilometres along the
Indian Ocean.  In 1998, the population, heavily concentrated in the central and western regions, was
estimated at some 29.7 million (Table I.1), of which over 50% was under 15 years old.  Some 2.7million Kenyans were unemployed in 1997 and some 12.6 million were living below the absolute
poverty line in early 1999.
1  The bulk of the population (over four fifths) lives in rural areas; the
capital, Nairobi, has over 1 million inhabitants, and Mombasa, Kisumu and Nakuru have over 100,000
inhabitants.
Table I.1
Social indicators, 1992-98
1992 1993 1994 1995 1996 1997 1998a
GDP per capita (US$) 315.0 221.2 267.1 329.0 326.6 353.1 389.8
Population (million) 25.2 26.0 26.8 27.5 28.3 29.0 29.7
Growth of population (percentage change) 3.1 3.0 2.9 2.8 2.8 2.5 2.4
GDP (current prices) US$ million 7,950.5 5,751.8 7,148.5 9,046.9 9,220.3 10,578.2 11,578.5
Exchange rate Kshs/US$ 32.2 58.0 56.1 51.4 57.1 58.7 60.4
Share in real GDP at factor cost (per cent)
   Agriculture, forestry and fishing 28.4 27.4 27.4 27.4 27.3 27.0 27.0
   Mining and quarrying 0.3 0.3 0.3 0.2 0.2 0.2 0.2
   Manufacturing 13.6 13.8 13.6 13.5 13.4 13.3 13.3
   Electricity and water 1.6 1.6 1.6 1.6 1.6 1.6 1.6
   Construction 4.6 4.3 4.3 4.2 4.1 4.1 4.0
   Services 51.6 52.6 52.8 53.0 53.3 53.7 53.8
      Trade, restaurants and hotels 11.1 11.0 11.4 11.8 12.2 12.3 12.4
      Transport, storage and communication 6.1 6.1 6.1 6.1 6.0 6.0 6.0
      Finance, insurance, real estate 8.7 9.3 9.6 9.8 10.0 10.3 10.5
      Ownership and dwelling 7.9 8.1 8.0 8.0 8.0 8.1 8.2
      Other services 17.8 18.1 17.7 17.4 17.0 16.9 16.8
Share of employment (%)
   Agriculture, forestry and fishing .. .. 18.7 18.9 18.7 18.6 18.5
   Mining and quarrying .. .. 0.3 0.3 0.3 0.3 0.3
   Manufacturing .. .. 13.1 13.2 13.0 13.0 13.0
   Electricity and water .. .. 1.5 1.5 1.4 1.4 1.4
   Construction .. .. 4.9 4.9 4.9 4.9 4.8
   Services .. .. 61.5 61.3 61.7 61.9 62.0
       Community, social and personal services .. .. 43.0 42.5 42.5 42.6 42.8
Exports (f.o.b.) (US$ million) 1,381.1 1,349.9 1,527.9 1,892.7 2,083.3 2,063.7 2,013.1
Imports (f.o.b.) (US$ million) 1,594.5 1,492.8 1,761.3 2,639.4 2,598.2 2,950.0 3,028.7
Merchandise trade/GDP (%) 37.4 49.4 46.0 50.1 50.8 47.4 43.5
.. Not available.
a Provisional.
Source: Central Bank of Kenya, Statistical Bulletin  (various issues) and Government of Kenya (1999b), Economic
Survey 1999 , Nairobi.
                                                     
1 Government of Kenya (1999a).WT/TPR/S/64 Trade Policy Review
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2. Kenya is a developing country, with a gross national product (GNP) per capita of US$330 in
1997.2  Despite fluctuations in agricultural output due to variable climatic conditions (droughts and
flooding), and to a slowdown in economic growth over the periods 1991-93 and 1996-98, the broad
structure of the Kenyan economy has remained relatively stable since 1990.  The stability of the
economic structure partly results from forward and backward linkages (e.g. indirect transfers and
provision of inputs) between the sectors.  Nevertheless, the internal structures of certain sectors havechanged.  Indeed, high growth in the production and export earnings from tea and horticultural crops
has more than compensated the fall in earnings from  coffee.  Moreover, the decline in international
arrivals has led to the fall in the share of tourism in services.
3. Agriculture is among the leading sectors, co ntributing some 27% to real GDP and around
60% to earnings from merchandise exports.  The sector accounts for some 18.5% of total employmentin Kenya.  However, because of the structure of the population and the high level of unemployment,
around 80% of the population depend on agriculture for their livelihood.
3  In addition to climatic
conditions, marketing problems (mismanagement of marketing boards) and inefficient supplies of
inputs delayed the development of the sector:  it has registered poor performance since 1996.
4. Mining activities in Kenya are mostly limited to exploitation of soda ash and fluorspar.  The
contribution of the sector to Kenya's real GDP is  negligible (under 1%).  Manufacturing activities,
relatively developed and diversified in the 1960s, had fallen in the second half of the 1980s.  The
sector accounts for around 13% of real GDP.  The services sector, still dominated by tourism, and
financial and communications services, contributes some 54% to Kenya's real GDP.  The services
sector is also a major source of employment and a leading foreign exchange earner.  Difficulties in the
enforcement of existing regulations (e.g. to address tax evasion problems) and the collapse of certain
enterprises in the manufacturing sector have contributed to the rapid expansion of an informal sectorwhich was employing some 3.3 million persons in 1998.
4
5.  At the end of April 1999, Kenya's public external debt amounted to US$4.8 billion (48.1% of
GDP), of which 54.8% was owed to multilateral creditors, 40.4% to bilateral creditors, and the
balance was commercial bank loans and export credits.5  Kenya's public external debt commitments
have so far been considered manageable.
6. Structural adjustment programmes implemented by Kenya since 1993 have contributed to
reducing government intervention in economic activitie s.  However, because of the slowdown in the
implementation of the privatization programme since 1996, public enterprises still hold monopolies or
exercise rights in various areas of the economy, including in agriculture where several marketing
boards are still operating, and in the supply of basic utilities (Chapter IV(2)(iii)).   Together with
factors listed under sections (2) and (3)(iii) below, the slowdown in th e implementation of the
privatization programme has resulted in low levels of investment, which have hampered the full
exploitation of Kenya's comparative advantages in areas such as horticulture whose crops usually
meet off-season demand in Europe.
(2) EVOLUTION OF THE ECONOMY
7. In an effort to redress the macroeconomic disequilibria of the early 1990s, the Kenyan
authorities launched economic reforms in 1993.  The pursuance of the reforms, aimed at removing the
remaining bottlenecks to further growth, has focused on achieving macroeconomic stability;
                                                     
2 World Bank (1998).
3 Government of Kenya (1996a).
4 Government of Kenya (1999b).
5 Central Bank of Kenya (1999).Kenya WT/TPR/S/64
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improving public service, external and domestic competitiveness of the economy, and social aspects
of development; and reducing corruption.
8. Monetary and fiscal policies were tightened through open market operations, cash ratio
requirements, cutbacks in public expenditure (e.g. reduction of the number of civil servants), and
widening of the tax base and enhancement of tax collection.  Trade and exchange liberalization
measures were also introduced:  quantitative restrictions and foreign exchange controls weredismantled;  and the tariff structure was simplified through the reduction of the number of  ad valorem
bands from eight in 1994 to five (including the zero rate) in 1999, and the lowering of maximum ad
valorem  rates from 60% in 1992 to 25% in 1999.  However, "suspended duties" ranging up to 70% are
applied, on a discretionary basis, to certain products (Chapter III(2)(iii)(b)).
9. Price controls were also dismantled on major products, and investment incentives schemes,
public enterprises and the financial system were restructured.  Between March and May 1993, the
Kenya shilling was devalued three times, by some 20% in early March, 23% in April, and 7.7% in
May.
6  In 1994, a managed floating exchange rate regime was adopted for the Kenya shilling
(Annex I.1) and the influence of the agricultural marketing boards was reduced.
10. These reforms improved Kenya's macroeconomic performance in 1994-96.  Real GDP growth
recovered to at least 3% a year over the period (Table I.2).  Public budget balance (on a commitment
basis and including grants) improved from a deficit of 5.2% of GDP in 1993 to a surplus of 0.7% in
1995.  Inflation, as measured by changes in the consumer price index, fell from 45.9% in 1993 to
1.5% in 1995.  However, because of a shortfall in domestic supply due to drought, and of increases in
international prices and taxation of petroleum products, the rate of inflation rose to 9% in 1996.
Drought-relief measures implemented by the Government contributed to the deterioration of public
budget balance to a deficit of 0.8% of GDP in 1996.  The related financing needs, the pursuance of atight monetary policy and the high level of non-pe rforming loans in commercial banks' portfolios
contributed to the maintenance of high interest rates.
7
Table I.2
Economic indicators, 1992-98(US$ million unless otherwise indicated)
1992 1993 1994 1995 1996 1997 1998a
Real GDP (% change)         0.5         0.2         3.0         4.8         4.6          2.4          1.8
Consumer prices (% change)       29.5       45.8       29.0         1.5         8.8        12.0          5.8
Treasury bill rate (90-day rates)       16.5 49.8 23.3       18.3       21.6        26.4        12.6
Discount rate (end of period) 20.5       45.5       21.5       24.5       26.9        31.3        17.6
Nominal effective exchange rate (% change) -11.6     -41.2       49.3     -21.3         3.9  -4.0a ..
Real effective exchange rate (% change)b11.7     -18.9       46.7     -18.4       12.6  0.2a ..
Government Budget   (July-June)
Current revenue and grants  2,144.7  1,737.7  1,834.4  2,643.6  2,612.9   2,602.8   3,096.5
Current expenditure  2,411.3  2,038.8  1,898.5  2,579.6  2,682.4   2,677.8   2,968.4
Government budget balance   -266.6   -301.1     -64.1       63.9     -69.5       -75.0      128.1
Table I.2 (cont'd)
                                                     
6 See GATT (1994) for details on measures implemented up to May 1993.
7 Interest rates had  increased following  outstanding public expenditure in the run-up to the 1992
multi-party elections.WT/TPR/S/64 Trade Policy Review
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1992 1993 1994 1995 1996 1997 1998a
Monetary sector (end period) (% change)
Narrow Money (M1)       35.6       27.4       12.6         3.8       13.9        15.2          3.4
M2       33.6       25.7     -23.1     100.7       23.8        16.5          2.4
M3c      26.4       23.2       26.5       17.2       15.9          9.8          3.3
Per cent of GDP (%)
Private consumption       69.7       63.1       62.4       69.3       67.9        72.6        74.5
Government consumption       16.2       14.5       15.2       14.8       16.1        16.2        16.1
Gross fixed capital formation       17.1       16.9       18.9       21.4       19.8        17.7        16.3
Exports of goods and non-factor services       27.1       40.4       37.0       32.8       32.7        28.2        24.6
Imports of goods and non-factor services       27.0       35.7       33.9       38.7       37.1        35.5        32.3
Public deficit         3.4         5.2         0.9       -0.7         0.8          0.7         -1.1
External sector
International reserves (end of period)d    182.0     475.0     625.0     458.0     860.0      788.0      783.0
In't reserves, months of merch. imports         1.2         3.5         3.7         1.8         3.6          2.9          3.0
Foreign trade indices (1982=100)
   Exports     126.0     148.0     167.0     175.0     200.0      174.0      173.0
   Imports     107.0     116.0     144.0     168.0     167.0      177.0      179.0
   Terms of trade       79.0       90.0     101.0       95.0       93.0      102.0      100.0
.. Not available.
a Estimates.
b The minus sign indicates a depreciation.
c Excludes local government deposits.
d Excluding gold.
Source: Central Bank of Kenya, Statistical Bulletin  (various issues);  Government of Kenya (1999b), Economic Survey
1999;  and International Monetary Fund, International Financial Statistics  (various issues) (real and nominal
effective exchange rate and consumer price index).
11. The high level of interest rates and the relative stability of the Kenya shilling favoured short-
term capital inflows.  Through sales of treasury bi lls, the Central Bank of Kenya (CBK) sterilized the
impact of its intervention in the foreign exchange market to contain the appreciation of the Kenya
shilling that might result from large capital inflows.   The sterilization policy fuelled the increases in
interest rates.  Resumption of economic growth, which led to higher increases in imports than exports,contributed to further deterioration of Kenya's trad e deficit in 1995 and 1996;  Kenya has run a current
account deficit since then.
12. In July 1997, concerns about governance issues led to the suspension of funding from the
International Monetary Fund (IMF) under the Enhanced Structural Adjustment Facility arrangement
concluded in April 1996.  Investor confidence was undermined by a number of factors, includinggovernance issues;  power shortages;  high interest rates and utility costs;  further deterioration, by El-
Niño  rains, of an already weakened infrastructure;  security concerns;  labour unrest;  rapid expansion
of the informal sector;  and the approach of the 1997 general elections.  The resulting decline in
foreign financing increased demand for domestic credits.  With a tight monetary policy and shortfalls
in foreign financing, domestic funding for public deficit fuelled upward pressures on interest rates.
Gross domestic saving was around 14% of Kenya's GDP in 1997.
13. The lack of investment accelerated the slowdown in economic growth that started in the
second half of 1996.  In consequence, since 1997, real GDP has grown at rates lower than theKenya WT/TPR/S/64
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population growth rate of 2.4% (Table I.2).  Salary increases, the 1997 general elections expenses,
and relief operations following El-Niño  rains maintained the public budget balance in deficit in 1997.
However, the sustained disciplined monetary policy contributed to containing fluctuations of the
exchange rate, and reducing inflation from 12% in 1997 to 5.8% in 1998.
14. The tightening of fiscal policy in 1998 helped to improve the public deficit.  The related
decline in government borrowing from local banks, together with the tight monetary policy and theslowdown in lending to the private sector, increased the liquidity of the banking system:  the liquidity
ratio of banks was 38%, well above the 1998 minimum requirement of 20%.
8  Moreover, the gradual
reduction of the mandatory cash ratio from 15% to 12% between July and December 1998 also played
its part.  As a result, interest rates, especially treasury bill rates and the average interbank borrowing
rate fell.  However, risk-averse positions adopted by commercial banks in response to difficulties inrecovering  non-performing loans (through the judiciary) and to turbulences in the banking system
9
have contributed to the maintenance of high lending rates:  the minimum base lending rate was 15%,with interest rates on certain categories of loans exceeding 26% in December 1998.
10
(3) TRADE PERFORMANCE AND FOREIGN INVESTMENT
15. Kenya's merchandise trade deficits have for years been sustained by net services exports and
capital inflows.  Kenya's economy is becoming incr easingly dependent on foreign trade.  As a result
of trade reforms implemented since 1993, the share of merchandise trade to GDP increased from
37.4% in 1992 to over 50% during the period 1993-96;  it has declined since then in line with the
slowdown in economic growth.  Merchandise imports  have generally grown faster than exports,
contributing to a downward trend in the ratio of import coverage by exports since 1993 (Chart I.1).
16. Food imports soared in 1997 due to adverse weather conditions (drought followed by El-Niño
rains);  together with the importation of two aircraft by Kenya Airways, this led to the largest tradedeficit since 1991.  Declining net exports of servic es and a slowdown in l ong-term capital inflows due
to weak investor confidence have contributed to the further weakening of the balance of payments
(Table I.3):  gross official reserves declined from 3.6 months of merchandise imports in 1996 to 3
months in 1998.
                                                     
8 Government of Kenya (1999b).
9 The turbulences, with placement of five banks under CBK statutory management in 1998, were due
to, inter alia,  poor lending practices, mismanagement, and frau d.  See Chapter IV(5)(ii)(a) for actions being
taken to stabilize the banking system.
10 Central Bank of Kenya (1998a).WT/TPR/S/64 Trade Policy Review
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0.00.10.20.30.40.50.60.70.80.91.0
1990 1991 1992 1993 1994 1995 1996 1997 1998Chart I.1
Import covera ge by exportsa, 1990-98
Ratio of exports to imports.
Estimates.
Central Bank of Ken ya, Statistical Bulletin (various issues ).a
b
Source :b
Table I.3
Balance of payments, 1992-97(US$ million)
1992 1993 1994 1995 1996 1997
A. Current account balance       -97.7        99.2      103.9     -400.9       -74.0     -377.3
Merchandise trade balance     -590.5     -307.2     -280.2     -764.1     -529.6     -912.8
   Exports   1,004.0   1,185.6   1,481.1   1,875.3   2,039.0   2,008.7
   Imports   1,594.5   1,492.8   1,761.3   2,639.4   2,568.6   2,921.5
Services balance      564.6      554.2      476.6      189.2      115.7      104.7
   Exports   1,146.6   1,140.5   1,163.3   1,091.8      999.3      985.7
       Travel      442.4      421.5      501.3      486.0      448.1      385.4
       Freight and transportation      349.6      341.1      293.7      362.0      361.7      375.7
       Other services      354.6      377.9      368.4      243.8      189.5      224.6
   Imports     582.1     586.3     686.7     902.5     883.6     881.1
       Travel       28.6       47.9     113.8     144.8     167.1     194.4
       Freight and transportation     359.7     355.9     381.7     537.8     515.9     442.9
       Other services     193.7     182.5     191.1     219.9     200.6     243.8
Investment income - international     -354.3     -388.9     -362.7     -324.9     -220.8     200.9
   Exports          1.7          3.3        20.9        25.6        21.4        23.0
   Imports     356.0     392.2     383.6     350.5     242.2     223.9
Unrequited transfers - government      214.2        93.9      122.9        90.6      128.0        98.5
Unrequited transfers - private        68.3      147.1      147.2      408.2      432.7      533.3
Table I.3 (cont'd)Kenya WT/TPR/S/64
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1992 1993 1994 1995 1996 1997
B. Capital and financial  account balance      102.4     -102.3     -107.1      391.3      181.8      248.2
Government long-term       -64.8      152.7     -113.3         -5.7          5.0     -115.6
   Credit       -64.8      152.7     -113.3      346.1      369.1      203.4
   Debit  ..  ..  ..     351.8     364.2     319.0
Private long-term       -15.3         -8.8       -43.0         -8.0         -5.9         -7.2
   Credit       -12.1         -8.8       -43.0        50.2        39.3        62.7
   Debit         3.2         0.0         0.1       58.2       45.1       69.8
Government corporations       -82.0       -98.8     -102.0       -57.2       -63.4       73.2
   Credit       -82.0       -98.8     -102.0        58.9        24.6        17.0
   Debit  ..  ..  ..     116.1       88.0       90.3
Short-term         -4.3      295.5      245.7      318.8      653.4      558.7
   Credit         -4.3      295.5      245.7      318.8      653.4      602.9
   Debit  ..  ..  ..  ..  ..       44.2
Change in official gross reservesa    -149.1     -797.4     -160.1      163.5     -378.7       -32.7
Use of fund credit        25.9      204.5        16.6       -36.4       -41.8       -63.1
Change in other liabilities      392.0      150.1        49.0        16.4        13.3       -18.7
Errors and omissions         -4.8          3.1          3.2          9.5     -107.9      129.1
.. Not available.
a Including Commercial Banks' foreign assets.
Source: Central Bank of Kenya, Statistical Bulletin (various issues).
(i) Trade in goods
17. Kenyan exports are dominated by agricultural commodities, particularly tea, coffee,
pyrethrum, and horticultural products (flowers, fruit and vegetables).  Therefore, fluctuations in
climatic conditions and in world prices of these commodities strongly affect Kenya's export earnings.
However, because of the stable structure of the economy, the share of agricultural products in totalmerchandise exports has stabilized at around 60% since 1993, of which tea accounted for nearly 30%
in 1998 (Chart I.2).  The slight upward trend in expo rts of "other agricultural products" is attributable
to the performance of horticulture, which was less affected by droughts due to irrigation.  Other
exports include mainly soda ash, petroleum products, cement, clothing, and leather products.  The fall
in exports of processed products reflects the weakening of the international competitiveness ofKenya's manufacturing sector.WT/TPR/S/64 Trade Policy Review
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0102030405060708090100
1993 1994 1995 1996 1997 1998
0102030405060708090100
1993 1994 1995 1996 1997 1998Chart I.2
Breakdown of trade, by main commodity, 1993-98
(a)  ExportsPer cent
(b) Imports
Source :  UNSD , Comtrade database (SITC Rev.1 ); 1998 based on data provided b y the Government of Ken ya.Chemicals
FuelsOther
Other manufactures Machiner y and trans port e quip.Agricultural  products Other semi-manufacturesManufactures Tea Minin gCoffee green, 
roasted, etc.Other agricultural
productsKenya WT/TPR/S/64
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18. The bulk of Kenyan imports consists of manufactured products (machinery and transport
equipment), fuels, and agri-foodstuffs (depending on domestic harvests).  The decline in merchandise
imports in 1993, despite implementation of trade liberalization measures, was attributable mostly to
devaluations of the Kenya shilling and a downturn in economic activities.  The subsequent relative
stability of the Kenya shilling11 and good economic performance contributed to increases in
merchandise imports in 1994 and 1995.  In 1997, the effect of drought outstripped downwardpressures exerted on imports by the slowdown in economic growth.  As a result, imports of agri-
foodstuffs soared;  they accounted for some 17% of total imports in 1997, against 12% a year earlier,
contributing to a sharp growth of total imports.
19. Kenya exports its products mainly to Africa (in particular petroleum products and food to
neighbouring markets) and to Europe (tea, coffee and horticultural products).  Merchandise importsoriginate mainly from Europe (machinery and transp ort equipment), the Middle East (crude oil and
petroleum products) and Asia (transport equipment).
20. Since 1995, Africa has overtaken Europe as the leading destination for Kenyan exports
(Chart I.3).  The European Union remains the larges t market for Kenya's exports, followed by the East
African Co-operation (EAC).
12  As a result of the ongoing economic integration process in Eastern
and Southern Africa, the share of Kenya's exports to EAC countries increased from some 15% in 1993
to 27% in 1998:  this increase partly reflected the decline in the share of exports to other destinations
such as the Middle East.  Uganda has been the single largest market for Kenya's exports since 1995,
followed by Tanzania and the United Kingdom.  Over all, Kenyan exports to Asia (mainly tea, hides
and skins, wattle extract, macadamia nuts, and coffee) have not been affected by the Asian financial
crisis (Chart I.3).
21. The EU remains the leading source of Kenya's im ports.  However, following its reintegration
into the global economy, South Africa's share in Kenyan imports increased:  South Africa was the
single largest source of imports in 1997, followed closely by the United Kingdom.  The share of the
EU in Kenya's imports declined from nearly 42% in 1993 to 32.5% in 1998.  The Middle East and
South Africa took most of the declining share of the EU in Kenya's imports:  their shares increased
from 3.2% and 3.5% to 18.7% and 7.1% (11.4% in 1997), respectively.  The increase in the share ofthe Middle East resulted from the rise in impor ts of refined petroleum products following their
liberalization by Kenya (Chapter IV(4)).
                                                     
11 The managed floating exchange rate system adopted by the end of 1994 contributed to the Kenya
shilling remaining relatively stable.
12 The EAC has three members:  Kenya, Tanzania and Uganda.  They are all also members of the
Common Market for Eastern and Southern Africa (COMESA).WT/TPR/S/64 Trade Policy Review
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0102030405060708090100
1993 1994 1995 1996 1997 1998
0102030405060708090100
1993 1994 1995 1996 1997 1998Chart I.3
Breakdown of trade, by region, 1993-98
(a)  ExportsPer cent
(b) Imports
Source :  UNSD , Comtrade database (SITC Rev.1 ); 1998 based on data provided b y the Government of Ken ya.East AsiaMiddle East
Other South Africa EU15America South AsiaEAC countries (Uganda and Tanzania) EU15Other Africa Asia America Other
Other AfricaKenya WT/TPR/S/64
Page 11
(ii) Trade in services
22. Kenya is a net exporter of services; tourism contributes the largest part of services earnings.
However, net receipts from trade in services have been declining since 1992 – they fell by more than
80% between 1992 and 1997 (Table I.3) – owing both to declining earnings from services exports and
increases in services payments abroad.  The decl ine in export earnings reflects mainly the fall in
international arrivals due to increased competition from other countries in the region as destinationsfor tourists, the deterioration of Kenya's infrastructure, security concerns, and ineffective marketing
strategies.  The fall in interest payments on external debt had not been offset by increasing payments
relating to travel, freight and transportation.
13
(iii) Foreign investment
23. In addition to the factors that have undermined investor confidence (section (2) above), the
suspension of funding under the IMF's Enhanced Structural Adjustment Facility arrangement in July
1997, the slowdown in economic growth since the second half of 1996, the implementation of the
privatization programme, and the instability in some banking institutions explain the evolution of
foreign direct investment (FDI) into Kenya in recent years.
24. The evolution of FDI has been somewhat erra tic over the past decade, with a general
downward trend.  FDI in Kenya was some US$20 million in 1997, up from US$13 million in 1996:  a
delay in payments related to the sale of 26% of Kenya Airways to Royal Dutch Airlines (KLM) in
1996 might have contributed to this increase.  In fact, FDI inflows to Kenya averaged US$10 million
per year  over the period  1992-97,  against an  annual average of US$35 million over the period
1986-91.  In the early 1990s, FDI in Kenya had dropped to the level of the early 1980s;  Kenya
received only US$2 million of FDI in 1993.  FDI increased in 1994 with the economic recovery, and
reached US$33 million in 1995.  A downward trend in FDI has been recorded since then.
25. As a percentage of gross fixed capital formation, inward FDI to Kenya declined from an
annual average of 2.2% over 1986-91 to some 0.7% over 1992-96;  however it stabilized at around
7.5% of GDP over the decade to 1996.  FDI inward stock increased from US$626 million in 1990 to
US$742 million in 1997.  Outward FDI stock more than quintupled over the period 1980-97 (from
US$18 million in 1980 to US$104 million in 1997).14
26. The European Union, notably the United Kingdom, Netherlands, Belgium and Italy, and
South Africa are the major sources of FDI into Keny a.  The bulk of FDI in Kenya is in banking,
tourism, horticulture, chemicals, and energy.
(4) OUTLOOK
27. The Eighth National Development Plan provides for the pursuance of the structural reforms
launched in 1993, with a view to transforming Kenya to a newly industrialized country by the year
2020.15  Under the Plan, the annual growth of supply of broad money is not to exceed 11%;  the public
deficit is to be entirely eliminated by 2001 (the end of the Plan period);  economic infrastructure and
efficiency in the delivery of public services are to be improved;  Kenya's human capital and
technological capacity will be upgraded;  efficiency and capacity utilization in agriculture,manufacturing and trade are to be increased;  and security and investor confidence restored.
                                                     
13 Payments relating to freight and transportation rose  in line with increases in merchandise imports,
mainly in 1995 and 1996.
14 UNCTAD (1998).
15 Government of Kenya (1996a).WT/TPR/S/64 Trade Policy Review
Page 12
28. On the basis of the above-mentioned policies, and subject to resumption of economic
programmes with development partners, and to favourable weather conditions and world prices for
Kenya's principal export crops, the economy is projected to grow at an average of 5.9% a year over
the Plan period.  The industrial sector is to be th e engine of the growth:  the share of the primary
sector in Kenya's GDP is projected to fall and that of services to broadly remain constant.
29. The pursuance of disciplined policies is to contribute to lowering inflation below 5% a year,
reducing interest rates and stabilizing the Kenya sh illing exchange rate.  The reforms are expected to
contribute to increasing investment to 25-30% of GDP (up from less than 20% in recent years).
Employment in the formal and informal sectors is expected to grow at 4.1% and 6.5% per year,
respectively, leading to a fall in unemployment to 12.8% of the labour force by the year 2001.16
30. Most of the basic assumptions of the Plan ar e still to be met.  Economic programmes with
development partners have not so far resumed. With the recurrence of drought, the trade deficit is
forecast to worsen in 1999. However, according to th e authorities, the early establishment of customs
unions under COMESA and EAC will enhance the li kelihood of the above projections and may offset
negative effects of climatic conditions and of delayed resumption of economic programmes with
development partners by increasing market access for Kenyan products.
                                                     
16 The level of unemployment was estimated at 18.5% of total labour force in 1994.Kenya WT/TPR/S/64
Page 13
Annex I.1:  Foreign exchange regime
The Kenya shilling has been made convertible for all external transactions, including goods,
services, transfers, and capital movements.  Under the managed floating system, adopted by Kenya at
the end of 1994, the exchange rate is market-determined, with the U.S. dollar as the principal
intervention currency.  Kenya accepted the obligations of Article VIII, Sections 2, 3, and 4 of theAgreement of the International Monetary Fund on 30 June 1994.
17
With the repeal of the Exchange Control Act on 27 December 1995, all exchange controls
were abolished.  However, prior approval from the Central Bank of Kenya is still required for the
issuance of money market instruments by non-reside nts;  the sale or issuance by non-residents of
derivatives and other negotiable instruments and non-securitized claims;  and the sale or issuance of
such instruments abroad by residents.
The issuance of securities by non-residents and their sale or issuance abroad by residents
require prior approval from the Capital Markets Authority.  The purchase of real estate by non-residents requires government approval.  A ceiling of 40% of shares of primary or secondary issues
applies to purchases (in aggregate) of capital market securities by non-residents and to collective
investment securities;  the ceiling is 5% for an individual investor.
Foreign exchange is provided to importers by authorized banks against a copy of the import
declaration, a final invoice, an original clean report of findings from a nominated preshipment
inspection agency, and a copy of the customs entry.  All exporters are permitted full retention of theirforeign exchange earnings.
                                                     
17 IMF (1998).