**Given how important sugar prices are for household welfare, it is worth considering reforms in the sector to drive price decreases.** As we will see in the next sections, policies that aim at shielding the domestic sugar industry from competition keep Kenyan sugar prices considerably above world prices, with substantial welfare effects as a consequence.. The sugar crisis of 2011 is a case in point. In light of these findings, it is worth reflecting on longterm policy action that will allow for a better balance between the profits of domestic sugar producers and the costs to Kenyan households. Restrictive trade policies are not only depriving families of welfare gains but also disrupting incentives for increased efficiency in the domestic sugar industry.

**This section gives an overview of the sugar market in Kenya, analyzes the sugar crisis of 2011 in particular and examines the impact that price changes in sugar have on the welfare of Kenyan consumers.** We show that even a modest price decrease of 20 percent (far smaller than the current difference between Kenyan and world sugar prices), would have a significant impact on real incomes, particularly among the poor.

# **2.1 Government intervention and market structure of the sugar industry**

**Kenya’s sugar market is insulated from international competition by trade barriers.** Kenya’s sugar industry has long been highly protected and even liberalization within the Common Market for Eastern and Southern Africa (COMESA) has been restricted. Historical import tariffs have been at the higher of an _ad valorem_ rate of 100 percent or a specific duty of $200/MT, where they remain today.  It is indicative of the limited capacity of the domestic sugar industry that there were still significant imports through the 1990s despite such barriers to trade – imports averaged 26 percent of domestic production from 1993 to 2000<sup>11</sup> .  Starting in January 2001, Kenya’s market was opened to foreign competition within the COMESA Free Trade Area (FTA), dropping the tariff to zero for member states<sup>12</sup> . However, as cheaper imports from COMESA ‘flooded’ into the Kenyan market, the government responded quickly with the addition of a quota on COMESA imports in February 2002.  This ‘safeguard’ measure was subsequently extended (multiple times) until 2008 (with varying quota size); after which the COMESA out-of-quota tariff was to fall progressively (70 percent, 30 percent, 10 percent) to 0 percent in 2012 while the quota simultaneously increased<sup>13</sup> .  However, further extension was granted to keep the out-of-quota rate at 10 percent through 2014. Kenya has recently been granted another extension of the current quota of 350,000 metric tons through 2015<sup>14</sup> .

> 11 Author calculations from ISO (2000) data as quoted in the Structural Aspects of the Sugar Industrial in East and Southern Africa available at <u>http://www.iuf.org/sugarworkers/wp-content/uploads/2012/07/Africa-2002-BasicStructure.pdf. Some of this import volume is likely accounted for by industrial refined sugar, which Kenya does</u> not produce, and which have removed in all of our own calculations.

> 12 See Structural Aspects of the Sugar Industrial in East and Southern Africa (2002) 13 See KSB (2010)

> 14 See FAS (2014)

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