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$125 million worth of Treasury Bills with interest rates rising as high as 50 to 70 percent. The commercial bank cash ratio was raised steadily to reach 20 percent by the second half of 1994. A number of weak banks and non-bank financial institu. tions were either closed or brought under statutory management.
These policy measures worked. Money supply, which grew by 28 percent in 1993 decreased substantially to an estimated 15 percent growth in the last quarter of 1994. Commercial bank interest rates followed the trends in T-Bill interest; rising as high as 35 percent in July and then declining to below 20 percent in October, 1994. In one year, the Kenya shilling appreciated from KSh 68/USD in October 1993 to KSh 35/USD in October 1994. The government continues to rely on traditional monetary policy instruments such as the cash ratio, discount rates and open market operations.
Under a tax modernization program, the government widened the tax base, lowered income taxes and introduced the use of personal identification numbers for taxrelated transactions. The government increased the range of goods and services subject to the Value Added Tax (VAT), which accounted for over 50 percent of domestic revenue in 1994. Most goods and services are subject to an 18 percent VAT. The government will lower the maximum personal income tax rate from the current 40 percent to 35 percent effective January 1995. It also reduced corporate tax from 37.5 percent to 32.5 percent in 1994.
Still in process are major government programs to privatize parastatals and reduce the size of the civil service. Fraught with difficulties and political disagreements, parastatal divestiture
has been slow-only 28 out of a possible 200 have been privatized since 1991. The big parastatals, identified as strategic, are earmarked for restructuring ("commercializing') in order to make them more cost effective and efficient. A three year program to lay off 48,000 civil service workers was started in July 1993. The program is roughly on target; 16,000 workers accepted golden handshakes and left by June 1994. 2. Foreign Exchange Policy
From 1981–1993 the Kenya shilling was pegged to the SDR. In February 1993, the government suspended the Foreign Exchange Control Act paving the way for a market determined exchange rate. Exporters may now use hard currency carnings directly to meet import requirements and remit dividends. By October 1994, foreign exchange reserves at the Central Bank had risen to a record high. The officially acknowledged figure is over $800 million, or enough to cover six months of import requirements; but analysts estimate current reserves are actually closer to $1.2 billion.
Borrowing restrictions on foreign and local firms from both domestic and off-shore sources have been eliminated. Expatriates are permitted to operate foreign currency accounts in Kenyan banks. Investors may repatriate new investment earnings without Central Bank (CBK) approval. Travelers are free to settle their bills, obtain air tickets and pay airport taxes in either Kenya shillings or foreign currency: The only remaining restrictions, limitations on foreign direct equity investment and the need for approval of capital gains repatriations, may be withdrawn in the near future. 3. Structural Policies
After many years of delay, the government took bold steps and implemented economic reform measures in the 1993–94 period under a World Bank/IMF-sponsored structural adjustment program. The key goals of this program are to reduce the budget deficit and inflation, provide market-based incentives for private sector growth, and encourage investment and exports. An immediate benchmark of accomplishment is to achieve a GDP growth rate of at least five percent. To help bring the budget deficit down to 3.0 percent of GDP from the 6.5 percent level of FY 93 94 (July 1-June 30), the government committed itself to adhere strictly to budget ceilings. To improve its performance on revenue collection, the government introduced a pre-shipment import inspection program geared toward apprehending tax evaders. Inflation has come down to 13 percent.
These measures have helped to improve the country's general investment climate. Nevertheless, there are a number of broad-based problem areas which must be ameliorated to ensure that investor confidence is restored and the declining investment trend reversed. These include: rehabilitation of the deteriorating physical infrastructure, jump starting the prodigious privatization and parastatal reform process, streamlining the civil service and making it more “user friendly,” continuing to curb corruption, and augmenting political stability.
In the beginning stages of the current Structural Adjustment Program (SAP), January 1993-April 1994, the government went through a turbulent economic period marked by sharp increases in prices and interest rates, and depreciation of the
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Kenya shilling. The positive impacts of economic reform kicked in during the second half of 1994. Competition is now working to lower prices. Bazaars, once a rare event, have become far more common. Producers no longer require large inventories of raw materials. With no import licensing, firms can program production and forecast sales more accurately. Shortages of inputs and basic consumer items have become a thing of the past. The market for U.S. exports has substantially improved.
Despite these significant advances, numerous specific problems remain for businessmen in Kenya. Customs rules are detailed and rigidly implemented. This has complicated manufacturing-under-bond schemes. A strict constructionist attitude among customs officials often leads to serious delays in clearing both imports and exports. Foreign firms are excluded from some government tenders. Kenyan importers must use local insurance companies to insure imports. Insurance companies must reinsure part of their business with the local parastatal reinsurance company. All commodities imported into Kenya are subject to pre-shipment inspection, including price comparison, by a government appointed inspection firm. Trade barriers on certain products are maintained by high import duties and value-added taxes. Procurement decisions can be dictated by donor-tied aid, or influenced by corruption.
Although substantive economic reforms have been undertaken, not all bilateral donors are reassured about Kenya's progress towards political reform including progress toward general good governance, democratization, protection of human rights and elimination of corruption. Persistent ethnic violence complicates the political landscape. 4. Debt Management Policies
For the first time in its history, at the end of 1993, Kenya had accumulated debt arrears of $715 million. This prompted the government to seek a rescheduling of outstanding official debt at the Paris club in January 1994. A multilateral agree. ment was concluded under non-concessional terms which rescheduled arrears accu. mulated from December 1991–1993. Repayment is scheduled over seven years, starting with a grace year in 1994 and ballooning to 25 percent in the later years of the period. Specific bilateral agreements have been considered and granted throughout 1994. This rescheduling will help improve Kenya's capital account and has added to Kenya's international credibility. It is notable that Kenya neither asked for, nor was granted, concessional terms. Kenya did not seek a London Club rescheduling. Private arrears accumulated during the 1991–93 period (approxi. mately $70 million) were sufficiently small they could be repaid directly. Kenya could use some of its large stock of foreign exchange reserves ($800 million-$1.2 billion) to pre-pay international debt.
Kenya's stock of international debt was $6.7 billion in 1994 and annual debt payments are in the $400–500 million range. Under current conditions of an appreciating currency and large reserves, this debt is manageable. Earlier exchange controls; which provided incentives for Kenyans to keep their hard currency out of the official system, made debt management more problematical. Kenya's adherence to the IMF Article VIII, which became effective in 1994, forbids Kenya from returning to exchange controls. 5. Significant Barriers to U.S. Exports
The liberalization of import controls and foreign exchange rates are major positive steps towards removal of trade barriers. As a part of these reforms, in 1994 the gov: ernment instituted pre-shipment inspection for quality, quantity and price for all imports with F.O.B. value of more than $1,613. Inspection is done by a government appointed inspection firm which has offices at major trading points such as New York, Baltimore, Chicago, New Orleans and Houston. Goods arriving in Mombasa without pre-inspection documentation are subject to inspection at the Port, for an additional fee. This requirement has contributed to major back-ups in port operations during 1994. Importation of animals, plants, and seeds is subject to quar. antine regulations. Special labelling is required for condensed milk, paints, vas. nishes, and vegetable butter ghee. In addition, imports of prepacked paints and allied products must be sold by metric weight or metric fluid measure.
Commercial banks are required to ensure that importers have submitted Import Declaration forms, invoices, a Clean Report of Findings, and a copy of the customs entry form before releasing foreign exchange. Prior exchange approval must be obtained for imports of machinery and equipment which are regarded as part of equity capital or are purchased with borrowed funds. The Clean Report of Findings is also required by authorized banks before a shipping guarantee can be issued. All goods purchased by importers in Kenya must be insured with companies licensed duct insurance business in Kenya.
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There are barriers to trade in services, in video tapes, movies and cassettes, construction, engineering, architecture, legal representation, insurance, leasing and shipping. Films are licensed, censored and sold by a government company, the Kenya Film Corporation. Foreign companies offering services in construction, engineering and architecture may face discrimination when bidding for public projects. Kenya's draft shipping law has been the subject of official protests by the United States and the European Community for discrimination against foreign shippers.
Government procurement for ordinary supplies as well as materials and equipment for public development programs is a significant factor in Kenya's total trade. The hand of government is particularly evident in programs designed to ensure citizen control of local commerce. Because Kenya is a former British Colony, U.K. firms dominate in the procurement of government imports. Many of these are purchased through Crown Agents, a British quasi-governmental entity. Sales of major import items are frequently tied to the source country providing official development fi
Government procurement is done through tender boards. The main boards are the Central Tender Board, Ministerial Tender Boards, the Department of Defence Tender Board, and District Tender Boards. The Kenyan government supplies manuals outlining procurement practices. Goods worth over $4,000 must be purchased through open tender. Adjudication of the quotations must be made by three or more responsible officers.
In principle, the procurement regulations apply, without discrimination, to all potential bidders, regardless of nationality of supplier or origin of the product/service. Nevertheless, preferential treatment for domestic suppliers/products/services is included. Up to 10 percent preferential bias is allowed for all firms participating in Kenyan government tenders whose share capital is at least 51 percent owned by indigenous Kenyans. The government provides preference to domestic suppliers for small procurements and contracts.
Practice often differs from government regulations. Tenders have not infrequently been awarded to uncompetitive firms in which government officials have a significant interest. Medical tenders are a frequent case in point. The incidence of corruption, particularly at lower levels, has increased in the last year to compensate for the closure of key "political banks” which were previously the major conduits for illgotten gains. This trend affects the allocation of government tenders for construction and procurement. Prosecution of corrupt officials above the lowest level has been rare, but may be on the increase. Recent charges levied against the Goldenberg/Exchange Bank operation are a sign of progress. Corruption involving contract awards is a particular problem for U.S. companies who are disadvantaged when competing with non-U.S, firms less constricted in their ability to provide "incentives" prohib. ited under U.S. laws.
Kenyan law does not permit manufacturers to distribute their own products. Additionally they are required to submit data and information about their distributors. The Monopolies, Prices and Trade Restriction Practices Act sets a legal framework for dealing with restrictive and predatory practices which might inhibit competitive markets, and controls mergers, takeovers of enterprises, and monopolies. This Act was most recently cited by the government as a warning to oil companies against collusion in the newly liberalized petroleum market. 6. Export Subsidy and Tax Policies
In April 1993, the Kenyan government scrapped an export compensation scheme which officially paid up to 20 percent of value to manufacturers whose products had less than 70 percent import content. This scheme was a major tool used by the Goldenberg gold diamond company (now under investigation) to extract even higher payments of 35 percent from the government for questionable, if documented, exports. At the same time, another controversial Pre-Export Financing scheme was eliminated. In their place, the government enacted a duty/value added tax remission facility which allows exporters to purchase tax-free inputs locally. This facility is designed to be less "corruptible” but is also less lucrative for exporters.
The government grants a one-time 85 percent investment allowance tax deduction for the cost of industrial buildings, fixed plant, and machinery for investments outside Nairobi and Mombasa. Thirty-five percent deduction is allowed for investments within these cities. This provision reduces income taxes due during the start-up phase of a project.
Exporters to the Preferential Trade Area (PTA) regional market (19 countries of eastern and southern Africa) receive tax advantages and have the option to trade in local currencies. The market has a total population of 190 million and a GDP of $50 billion. The aim of the PTA is to eventually establish a common market with no barriers across member countries' borders. Kenya is also a signatory of major international trade agreements such as the United Nations Conference on Trade and Development (UNCTAD), the Lome Convention and the GATT (soon to be the World Trade Organization). As such, Kenya is subject to various requirements agreed to under these umbrellas.
The government has two major export institutions—the Export Processing Zones Authority and the Export Promotion Programs Olice which coordinate export promotion activities. There is one private Export Processing Zone (EPZ) which caters to over eleven companies. This zone, the Sameer Industrial Park, is a subsidiary of Firestone East Africa. Two government sponsored EP2s, one in Mombasa and another near Nairobi, are nearing completion.
The government has progressively reduced the corporate tax rate from 45 percent in the 1980s to the current 35 percent. Withholding tax (ranging from 12.5 percent to 30 percent) is imposed on royalties, interest, dividends, and management fees. Kenya's tax treaties normally follow the Organization for Economic Cooperation and Development (OECD) model for the prevention of double taxation. There is no tax treaty with the United States. 7. Protection of U.S. Intellectual Property
Kenya is a member of the Paris Union International Convention for the Protection of Industrial Property (Patents and Trademarks), together with the United States and 80 other countries. Businesses and individuals from signatory states are entitled to protection under this convention, including national treatment and property rights” recognition of patents. Although a unified system for the registration of trade marks and patents for Anglophone Africa was signed in 1976, implementation has been stagnant due to the lack of cooperation among the signatory states. Another mechanism to protect patents, trademarks, and copyrights is embodied in the African Intellectual Property Organization. Its enforcement and cooperation procedures remain untested.
Kenya also is a member of the African Regional Industrial Property Organization. The government of Kenya accepts binding international arbitration of investment disputes between foreign investors and the state.
In 1990, the Kenyan government established an Industrial Property Office (KIPO) for granting industrial property rights, screening technology transfer agreements and licenses, and providing patenting information to the public. Models for patents and utilities and industrial design certificates are available through this office. It also acts as a receiving office for international applications. An independent national patent law to replace pre-independence British procedures was also enacted in 1990.
In March 1994, KIPO issued the first patent certificate under the Kenya Industrial Property Act to three Kenyan scientists for their work in the development of a tick resistance vaccine, Novel Tick Resistance Antigenic Indicators (TRAI). In its fourth year of operation, ĶIPO has received 127 patent applications and 38 industrial designs which are being processed. Ninety-three of the patent applications are foreign and 34 are local. Fifteen of the 38 industrial design applications are local.
Protection of copyrights is not particularly extensive or efficient in Kenya. The Copyright Act of 1989 provides for protection from audio copyright infringement. Video copyright infringements are not covered by the law, and are widespread.
Trademark protection is available from the Kenyan government for a period of seven years from the date of application. The first applicant for trademark protection is entitled to registration. 8. Worker Rights
a. The Right of Association.-Other than central government civil servants and university academic staff, all workers are free to join unions of their own choosing. At least 33 unions in Kenya represent approximately 350,000 workers, or about 20 percent of Kenya's industrialized work force. Except for the 150,000 teachers who belong to the Kenya National Union of Teachers (KNUT) and four other smaller unions registered by the government, all other unions belong to one central body, the Central Organization of Trade Unions (COTU).
Until early 1993, Kenyan labor enjoyed harmonious relations with the central government. In April 1993 this changed, as workers experienced a large rise in the cost of living. Blaming the government, COTU's leaders called for an across-theboard 100 percent wage increase and dismissal of Kenyan Vice President George Saitoti. The call culminated in a Labor Day (May 1) ceremonies walkout by the Minister for Labor, the arrest of the COTỰ secretary-general and his senior associates, a two-day national strike (which was observed in key sectors nationwide, even after the Minister had declared it illegal) and finally, a government-sponsored coup within COTU.
Without waiting the normal seven-day period to verify the so-called elections, and disregarding a legal challenge by the existing COTU officers, the Registrar of Trade Unions immediately registered the new COTU officers. These officers were allowed to occupy COTU headquarters. The issues of both the coup's legality and the act of the registrar were still in court as of November 1994, but no international group has recognized the new leadership.
In theory, the Trade Disputes Act permits workers to strike provided that 21 days have elapsed following the submission to the Minister of Labor of a written report detailing the nature of the dispute. In 1993, however, the Minister of Labor declared several strikes illegal. A case in point was the KNUT strike in July 1993, for which the required notice had been given. It was averted at the last minute. Others included the national two-day strike after Labor Day, a one-day strike called by the Islamic Party of Kenya in Mombasa, and an air traffic controllers' slow down in November, 1993. The military, police, prison guards and members of the National Youth Service are precluded by law from striking. Kenyan labor legislation is silent on the issue of national strikes.
Internationally, COTU is affiliated with both the continent wide Organization of African Trade Union Unity and the International Confederation of Free Trade Unions (ICFTU). COTU affiliates are free to establish linkages to international trade secretariats of their choice.
b. The Right to Organize and Bargain Collectively.—The 1962 Industrial Relations Charter, executed by the government, COTU and the Federation of Kenya Employers, gives workers the right to engage in legitimate trade union organizational activities. This charter does not have the force of law.
Both the Trade Disputes Act and the Charter authorize collective bargaining between unions and employers. Wages and conditions of employment are established by negotiations between unions and management. In 1994, government wage policy guidelines which limited salary increments were relaxed as was the employers' authority to declare workers redundant. Collective bargaining agreements must be reg. istered with the Industrial Court. The Export Promotion Zone Authority has deter. mined that local labor laws, including the right to organize and bargain collectively, will apply in EPZs. In practice, exemptions and conditions have been granted within the Zones, giving rise to public criticism in 1994.
c. Prohibition of Forced or Compulsory Labor.-The Constitution proscribes slavery, servitude, and forced labor. Under the Chiefs' Authority provisions, people may be required to perform community service in an emergency but there are no known recent instances of this practice. People so employed must be paid the prevailing wage. The International Labor Organization's (ILO) committee of experts has found this provision of Kenyan law in contravention of ILO conventions 29 and 105 on forced labor.
d. Minimum Age for Employment of Children.—The Employment Act of 1976 proscribes the employment of children under the age of 16 in any industrial undertaking. The law does not apply to the agricultural sector, where about 70 percent of the labor force is employed, or to children serving as apprentices under the terms of the Industrial Training Act. Ministry of Labor officers are authorized to enforce the minimum age statute. Given the high levels of adult unemployment and underemployment, the employment of children in the formal wage sector is not a significant problem.
e. Acceptable Conditions of Employment.-In 1994, minimum unskilled worker salaries averaged less than thirty dollars per month. The normal work week, by law, is limited to 52 hours, except for nighttime employees (60 hours) and agricultural workers (excluded). Non-agricultural employees receive a minimum of one rest day in a week, one month's annual leave, and sick leave. By law, total hours worked (i.e., regular time plus overtime), in any two-week period for night workers cannot exceed 144 hours; the limit is 120 hours for other workers. The Ministry of Labor is tasked with enforcing these regulations, but reported violations are few. The Factories Act of 1951 which sets forth detailed health and safety standards, was amended in 1990 to encompass the agriculture, service and government sectors. Inspection of work sites continued to improve, although “whistle blowers" are not protected. Kenya's worker compensation regulations do not yet comply with the provisions of ILO Convention No. 17.