RESTRICTEDWORLD  TRADE
ORGANIZATIONWT/TPR/S/64
3 January 2000
(00-0001)
Trade Policy Review Body
TRADE POLICY REVIEW
KENYA
Report by the Secretariat
This report, prepared for the  Trade Policy Review of Kenya, has been drawn up
by the WTO Secretariat on its own responsibility.  The Secretariat has, as
required by the Agreement establishing the Trade Policy Review Mechanism
(Annex 3 of the Marrakesh Agreement Establishing the World Trade
Organization), sought clarification from the Government of Kenya on its trade
policies and practices.
Document WT/TPR/G/64 contains the policy statement submitted by the
Government of Kenya
Note: This report is subject to restricted circulation and press embargo until the end of the meeting
of the Trade Policy Review Body on Kenya.Kenya WT/TPR/S/64
Page iii
CONTENTS
Page
SUMMARY OBSERVATIONS vii
(1) T HE ECONOMIC ENVIRONMENT vii
(2) I NSTITUTIONAL FRAMEWORK viii
(3) T RADE POLICY INSTRUMENTS viii
(4) S ECTORAL TRADE POLICY DEVELOPMENTS x
(5) T RADE POLICIES AND TRADING PARTNERS x
I. ECONOMIC ENVIRONMENT 1
(1) MAJOR FEATURES OF THE ECONOMY 1
(2) EVOLUTION OF THE ECONOMY 2
(3) TRADE PERFORMANCE AND FOREIGN INVESTMENT 5
(i) Trade in goods 7(ii) Trade in services 11(iii) Foreign investment 11
(4)
OUTLOOK 11
Annex I.1: Foreign exchange regime 13
II. TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES 14
(1) T RADE POLICY 14
(i) Trade policy objectives 14(ii) Institutional and legal framework 14(iii) Trade policy formulation and implementation 15
(iv) Trade laws and regulations 16
(2) T
RADE AGREEMENTS AND ARRANGEMENTS 17
(i) World Trade Organization 17(ii) Regional agreements 20(iii) Bilateral agreements 23
(iv) Other 24
(3) F
OREIGN INVESTMENT REGIME 24
(i) Regulatory framework 24(ii) Investment incentives and promotion 26
III. TRADE POLICIES AND PRACTICES BY MEASURE 28
(1) O
VERVIEW 27
(2) M EASURES DIRECTLY AFFECTING IMPORTS 27
(i) Registration and documentation 27(ii) Customs procedures 28(iii) Tariffs, other levies and charges 29(iv) Import prohibitions and licensing 36(v) Trade sanctions 37
(vi) Contingency trade remedies 37
(vii) Rules of origin 38(viii) Local-content schemes 38(ix) Standards and other technical requirements 38WT/TPR/S/64 Trade Policy Review
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Page
(x) Government procurement 41
(xi) Other measures 42
(3) M EASURES DIRECTLY AFFECTING EXPORTS 42
(i) Registration and documentation 42
(ii) Export taxes, charges, and levies 42(iii) Export prohibitions, licensing, and other restrictions 43(iv) Export subsidies 43(v) Duty and tax concessions 43
(vi) Export finance, promotion and assistance 45
(vii) Other provisions 45
(4) M
EASURES AFFECTING PRODUCTION AND TRADE 45
(i) Subsidies and other concessions 45(ii) Assistance to adjustment, research and development 46(iii) Competition policy 46
(iv) Protection of intellectual property rights 48
IV. TRADE POLICIES BY SECTOR 5 0
(1) INTRODUCTION 50
(2) A GRICULTURE 52
(i) Main features 52(ii) Policy objectives and instruments 53(iii) Policy by type of product 55
(3) M
INING AND QUARRYING 66
(4) M ANUFACTURING 68
(5) S ERVICES 72
(i) Overview 72(ii) Financial services 73(iii) Telecommunications 76(iv) Transport 78(v) Tourism 82
REFERENCES 87
APPENDIX TABLES 91Kenya WT/TPR/S/64
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CHARTS
Page
I. ECONOMIC ENVIRONMENT
I.1 Import coverage by exports, 1990-98 6
I.2 Breakdown of trade, by main commodity, 1993-98 8I.3 Breakdown of trade, by region, 1993-98 10
III. TRADE POLICIES AND PRACTICES BY MEASUREIII.1 MFN tariff distribution by sector, 1999 31IV. TRADE POLICIES BY SECTOR
IV.1 Average Kenyan tariffs by ISIC classification, 1999 51
IV.2 Recorded marketed production at current prices, 1994-98 52IV.3 Domestic coverage of maize consumption, 1970-97 56IV.4 Mineral exports, 1998 67IV.5 Soda ash and fluorspar export prices, 1994-98 68IV.6 Value added in the manufacturing sector (at current prices), 1992-96 69
TABLES
I. ECONOMIC ENVIRONMENT
I.1 Social indicators, 1992-98 1
I.2 Economic indicators, 1992-98 3
I.3 Balance of payments, 1992-97 6
II. TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES
II.1 Main trade-related laws in Kenya 16
II.2 Status of selected notification requirements to the WTO, 1999 18
III. TRADE POLICIES AND PRACTICES BY MEASURE
III.1 Products subject to specific duties, September 1999 30
III.2 Products subject to excise duties, September 1999 33III.3 State-owned companies (SOCs), September 1999 47
IV. TRADE POLICIES BY SECTORIV.1 Agricultural output and inputs, 1994-98 53
IV.2 Production and average yield of tea and coffee by type of grower, 1993-98 57
IV.3 Exports of fresh horticultural produce, 1994-98 59IV.4 Production and consumption of sugar, 1994-98 61IV.5 Production and sale of livestock and dairy products, 1994-98 62WT/TPR/S/64 Trade Policy Review
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Page
IV.6 Fish production by water body, 1994-97 63
IV.7 Exports of fish and fish products, 1994-98 63IV.8 Forest products, 1994-98 64IV.9 Mineral production, 1994-98 66
IV.10 Criteria for phases one and two of Kenya's industrialization strategy 70
IV.11 The industrialization strategy, 1997-2006 71IV.12 Telecommunication services in Kenya, 1990-98 77IV.13 Railway traffic, 1994-98 79IV.14 Commercial traffic at Jomo Kenyatta and Moi International airports, 1994-98 82
IV.15 Tourism in Kenya, 1994-98 82
IV.16 Visitors by country of residence and purpose of visit, 1997 and 1998 83IV.17 Licence fees for hotels and restaurants 84IV.18 Regulated tourist enterprises 85
APPENDIX TABLES
III. TRADE POLICIES AND PRACTICES BY MEASURE
AIII.1 MFN tariff statistics by HS 2-digit heading, 1999 91
AIII.2 MFN tariff escalation, by ISIC 2-digit heading, 1999 95
AIII.3 Products subject to prohibition or licensing, September 1999 97
IV. TRADE POLICIES BY SECTOR
AIV.1 Summary of Kenya's specific commitments in services 100Kenya WT/TPR/S/64
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SUMMARY OBSERVATIONS
(1) T HE ECONOMIC ENVIRONMENT
1. In the early 1990s Kenya embarked on
structural and macroeconomic reform,
including in trade, to establish a more growth-
conducive economic environment.  Thetransition 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 inflationwas 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.
2. 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 mostagricultural 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 severalelements, 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 offoreign 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 alsoremained high and the trade balance has
deteriorated.  Nevertheless, the external debt
position is thought to be manageable.
3. 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.  Theagricultural sector accounts for some 27% of
real GDP and around 60% of earnings fromtotal 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, horticulturalproducts, 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 weatherconditions, organizational problems,
weaknesses of infrastructure, and the lack of
financing have hampered the further
development of Kenyan agriculture.
4. 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 invalue, 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).
5. 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 andpetroleum 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 doubledWT/TPR/S/64 Trade Policy Review
Page viii
between 1993 and 1998, making this trading
block the largest destination for Kenyan
products after the EU.
(2) I NSTITUTIONAL FRAMEWORK
6. Kenya's trade policy objectives
include moving towards a more open traderegime, 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 unilateralliberalization, 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 Easternand Southern Africa (COMESA), the East
African Co-operation (EAC), the Organization
of African Unity (OAU), and the Inter
Governmental Authority on Development
(IGAD).
7. Trade policy formulation is the
responsibility of several Ministries, whichconstitute 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 independentbodies review and assess trade policies in
Kenya.  Trade policy is implemented mainly by
the Ministry of Tourism, Trade and Industry.
8. Kenya is a founding member of the
WTO;  it accords at least MFN treatment to allits 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.
9. Kenya encourages foreign investment
and grants national treatment to foreigninvestors.  Most business activities are open toforeigners, 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 intermediatecapital 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 oflaws 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.
(3) T
RADE POLICY INSTRUMENTS
10. 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, andenvironmental 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%), andthe 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 wouldreduce the complexity and enhance the
transparency of the tariff.
11. 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 replacedvariable duties on food and currently apply to
some 17% of all tariff lines at the HS eight-
digit level, in agriculture and manufacturing.Kenya WT/TPR/S/64
Page ix
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 positiveescalation 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 exciseduties ranging up to 135% (the excise duties
are mixed or specific on certain products) are
levied both on imports and locally produced
goods.
12. 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 ofthe 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 boundand applied rates.
13. 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, theManufacturing Under Bond and the Duty
Remission Schemes, are currently available to
export-oriented companies.  The Minister of
Finance may, on a discretionary basis, remitduties 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.  Thesluggishness 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.
14. 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 onintellectual 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 thelists 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 todeveloping countries under Article 20 of the
WTO Agreement on the Implementation of
Article VII of GATT 1994.
15. Exemption from compliance with a
compulsory standard may be granted by theMinister 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 madethrough Kenyan-based firms.  Kenya is
drafting its legislation on government
procurement.
16. Counterfeiting in Kenya affects mainly
computer programs, sound recordings and
video cassettes.WT/TPR/S/64 Trade Policy Review
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(4) S ECTORAL TRADE POLICY
 DEVELOPMENTS
17. The Kenyan economy is currently
organized around agriculture, which provides
inputs to certain sectors (mainly
manufacturing) and contributes to thedevelopment 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 traderegime 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 limitedpowers.  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 certaincrops are still set at low levels by boards, has
encouraged exports of unprocessed
commodities.
18. The liberalization reforms have
revealed the weaknesses of the intersectorallinkages 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 schemesaimed 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-phaseindustrialization 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 tariffprotection but remains dominated by state-
owned companies and is relatively
undeveloped.19. 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 inthe 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 growthstrategy.  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 toexport 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 toits land-locked neighbours.
(5) T
RADE POLICIES AND TRADING
PARTNERS
20. Kenya's commitments to WTO
principles are integral to its economicpolicies.  In addition to its participation in the
multilateral trading system, Kenya has also
pursued preferential trade agreements as a
means of increasing trade flows.
21. 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 beensomewhat hesitant, lengthening the transition
state in which Kenya has been for nearly a
decade.Kenya WT/TPR/S/64
Page xi
22. 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 resourcesreflecting Kenya's comparative advantages.
Improvement of the low level of itsmultilateral 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 neededforeign investment and enhancing the
country's adherence to WTO principles.