KENYA goods, as well as its ability to fully service its $5 billion in external debt. Throughout the 1980's Kenya enacted reforms in line with World Bank (IBRD) and International Monetary Fund (IMF) structural adjustment programs. Reforms implemented in the last few years include widening the tax base, liberalizing imports, reducing the number of items in the price control list, reducing government participation in marketing and creating duty free facilities (bonded warehouses) for firms strictly producing for export. Nevertheless, many serious impediments to greater free market development exist. The government is still heavily involved in key sectors of the economy and many costly and inefficient parastatal organizations divert scarce budgetary resources from more productive use. Government expenditure remains high at about 40 percent of GDP in 1990. In 1991 the budget deficit is estimated at above 6 percent of GDP compared to the IMF/WB performance benchmark of 2.5 percent. In 1986 the government embarked on budget rationalization measures. The fiscal policy components of this program includes making tax revenue more responsive to growth in GDP, and improving government project financing. From January 1990, the government widened the tax base by introducing a five percent tax on sales of selected agricultural produce, and replaced the sales tax with an 18 percent Value Added Tax. Corporation tax rates declined to 37.5 percent and personal income tax rates for the highest income brackets fell to 45 percent in 1991. Government revenue, although high at 23.5 percent of GDP, does not match government expenditure especially in education, health and defense. Government efforts to rationalize expenditure have largely been unsucessful due to expansion of public sector employment and slow implementation of cost sharing for some social services. Reduction in government spending has proven to be sensitive politically because of pressure to maintain "ethnic balance" in the public service, to maintain parastatal employment for political patronage and to increase benefits for the military and police force. The government's main fiscal instruments for financing the deficit are domestic borrowing, treasury bills and medium term bonds. These sources are limited by relatively underdeveloped financial and capital markets. Relying on assistance from the IBRD and IMF, the government has taken positive steps to strengthen and rejuvenate the financial sector. In 1989, in an effort to avert a banking crisis, the government assumed control over nine Kenyan-owned financial institutions, merging them into one government run bank. In 1991, the government passed a new Banking Act which will give the Central Bank wider supervisory powers over all Kenyan financial institutions. In 1990, the government established a capital markets authority aimed at developing a wider and freer capital market that will generate long term funds required for investment. The main policy instruments used to contain growth of money supply and domestic credit are minimum liquidity ratio, minimum cash and reserve ratios, interest rate regulations, KENYA as fertilizer, cereals and sugar are regulated through government-owned marketing boards. Trade barriers on certain products such as computers are maintained by high import duties and value added taxes. Procurement decisions are sometimes dictated by donor tied aid or influenced by considerations such as corruption. Donor flows have, however, fallen from a high of nearly U.S.$1 billion in 1989 to about $550 million in 1990. Throughout the 1980s the government worked closely with both the IMF and the World Bank. Kenya received a series of seven standby arrangements from the IMF in support of economic stabilization efforts and, at the same time, entered into five structural adjustment lending agreements with the Bank. These efforts have paid off as Kenya has avoided the sharp external and domestic disequilibria that have plagued many African countries. In 1987, Kenya embarked on a major stabilization and structural adjustment program supported by World Bank sectoral adjustment lending and cofinancing from other donors. As its part of the package, Kenya pledged to implement agricultural, industrial, financial, export development and parastatal structural reforms. In FY 1989/90 (July June) and 1990/91, the government received SDR 181 million Enhanced Structural Adjustment Facility (ESAF) funds from the IMF. In 1989 and 1990, the government also received U.S. $372 million from IBRD as part of World Bank's structural adjustment and project lending. Kenya's performance in 1991 has, however, sharply declined. The Bank conducted an exhaustive review of Kenya's performance in key sectors in 1991 and found government performance highly inadequate. The government budget deficit has persistently risen and is now estimated at above 6 percent of GDP as compared to the IMF/IBRD performance benchmark of 2.5 percent. In late 1991, the World Bank reduced its lending to Kenya to "core program" and project lending only in sectors where appropriate reforms were underway, i.e., education and health, with no fast disbursing balance of payments lending because of the inappropriate macroeconomic environment. In December 1991, Kenya failed the midterm review of its third annual arrangement under ESAF and the disbursement of the final $45 million (estimated) has been delayed. 4. Debt Management Policies Kenya's debt service ratio is about 28 percent of total export earnings. Export earnings depend largely on receipts from tourism, coffee and tea. The debt service burden, while onerous, is not yet completely out of control. The Kenya government guaranteed commercial borrowing by parastatals has been an issue with the International Monetary Fund (IMF). 1991-1992 the IMF would like to see the ceilings lowered. Trade barriers exist in the form of import licensing, duties and sales taxes. Due to limited foreign exchange availability, the Kenyan licensing system classifies import items into three broad categories. The first category comprises high priority capital goods, raw materials and For KENYA The intermediate inputs which can be identified easily. In principle, license requests for category 1 goods are approved automatically and demand is controlled by tariff rates. second category contains goods subject to special import authorization such as fertilizers, cattle, live poultry, live fish, powdered milk, cheese, wheat, rice, maize, cereal flours, nuts, refined sugar, spices, petroleum products, selected motor vehicles and tractors. These are subject to special authorization of a designated government agency. The third category has three schedules A, B and C. Schedule A lists technical items of unique high priority such as engineering components, spare parts, precision instruments, chemicals, and special plastic, glass and metal products. Approval is usually delayed because the items are handled on a case by case basis. Schedule B lists semi-essential goods, mainly consumer goods. Licensing depends on the foreign exchange reserve position. Schedule C lists lower priority items which the government considers undesirable. Approval for such items is normally difficult to obtain. Importation of used clothing intended for sale is banned. The Government maintains lower duties and sales taxes for selected items which it considers important in priority sectors. Such items include palm oil and tallow; bicycles; steel billets; wire rods; graphite lead; windmills; power transformers; cables; and active ingredients used for the preparation of drugs including veterinary drugs, fungicides and pesticides. But items such as computers and other electronic equipment have very high duty and sales tax. There are barriers to trade in services in audio and visual works, construction, engineering, architecture, insurance, leasing, shipping and foreign travel. Audio and visual works are licensed, censored, and sold by the government company, Kenya Film Corporation. Foreign companies offering services in construction, engineering and architecture often face discrimination in bidding for public projects. Local firms get 10 percent preference on quotations for tenders, and small projects are reserved for local companies. Kenyan buyers of foreign goods are forbidden from insuring imports abroad. Kenyan exchange control laws represent major impediments to international leasing. Import licensing restrictions make it difficult to import equipment for leasing if the equipment is available locally. There are strict restrictions in foreign exchange approval for travel outside Kenya. Kenya's draft shipping law has been the subject of official protests by the United States and the European Community for discrimination against foreign shipping. Most commodities imported into Kenya are subject to preshipment inspection for quality and quantity as well as for price comparison. All foreign exporters have to obtain "Clean Report of Findings" from a government appointed inspection firm which has offices in major trading points such as New York, Baltimore, Chicago, New Orleans and Houston. Importation of animals, plants, and seeds is subject to quarantine regulations. Importation is allowed only at designated ports of entry. Special labelling is required for condensed milk, paints, varnishes, vegetable and butter ghee. In addition, imports of prepacked paints and allied products must be sold by metric weight or metric fluid measure. KENYA The importance of governmental action in the import sector has increased. Government procurement for ordinary supplies as well as materials and equipment for public development programs is a significant factor in Kenya's total trade. Government action is also evident in programs designed to ensure citizen control of local commerce. Because Kenya is an ex-British Colony, U.K. firms dominate in the procurement of government imports. Many government imports are purchased through Crown Agents, a British quasi-governmental organization. Sales of major government import requirements are frequently tied to source country provision of official development finance. Most Kenyan government departments obtain goods and services locally through a central tender board. Under the Foreign Investment Protection Act (FIPA), preference for investment is given to investors whose firms are expected to earn or save foreign exchange, increase the country's technical knowledge, increase employment in the country, utilize local resources, and are not based in Nairobi or Mombasa. Foreign investors are required to sign an agreement with the government of Kenya stating training arrangements for phasing out expatriates. Expatriate work permits are increasingly difficult to renew or acquire. Government approval for ventures in agriculture, distributive trade, and small scale enterprises has become more difficult to obtain as the government seeks to indigenize these sectors. Utilities are not open to foreign investment. In early 1989, the government enacted antitrust legislation entitled "The Monopolies, Prices and Trade Restriction Practices Act." The Act created a legal framework for dealing with restrictive and predatory practices that prevent the establishment of competitive markets; reducing concentration of economic power; and controlling monopolies, mergers, and takeovers of enterprises. The Act repealed the existing Price Control Act and incorporated some of its provisions in new, cost-geared price legislation. Foreign investors have limited access to domestic credit markets and are encouraged to seek credit from outside sources. All foreign firms are permitted to borrow locally up to the amounts required to pay customs duty on imported capital equipment. Foreign investors are also permitted limited credit from local financial institutions based on their amount of equity capital. The Government allows a limited number of bonded warehouses for investors producing for export. Such investors may import inputs duty free and make local purchases free of sales tax. The manufacturing under bond scheme, which was started in 1988, has 10 operational firms out of 41 firms which have received licenses. Some firms have shied away from the scheme because of lengthy and costly bureaucratic processes in import procurement. A one year old private sector export processing zone in Nairobi remains unattractive owing to inadequate government incentives. The Government is also making arrangements for establishment of export processing zones in Nairobi and Mombasa. Price controls and restrictions in distributive trade are KENYA key disincentives to foreign investment in Kenya. In the last two years, the Government has reduced the number of items under price control and streamlined the system by which it reviews applications for price increases for those items still on the list. In addition, the government has promised to further liberalize price legislation. In June 1989 and 1990, the government reduced corporate taxes to 42.5 percent. Withholding tax ranging from 12.5 percent to 30 percent is imposed on payments such as royalties, interest, dividends, and management fees. Kenya's tax treaties normally follow the Organization for Economic Cooperation and Development model for the prevention of double taxation of income. There is no tax treaty with the United States. The government does not have any significant investment performance requirements. Recent policy statements, however, indicate that the government may soon institute export performance requirements. Investors who are potential or successful exporters may obtain special concessions over and above the generally available incentives. Under FIPA, foreign investors are permitted to repatriate dividends, interest on loan capital, and the value of their original equity investment plus any reinvested profits. Due to the current foreign exchange crisis, delays of up to two years have been experienced in dividend remittances. Permission is not normally given for immediate repatriation of capital gains, which must be placed in blocked accounts or invested in government securities at below market rates for five years before they can be repatriated. Loan capital, which can be denominated in local currency or in the currency in which it was brought in, is repatriable. It has become increasingly difficult to obtain exchange control approval for registering royalty, technology, and management agreements. 6. Export Subsidies Policies The government of Kenya operates an export compensation scheme for locally manufactured products with less than 70 percent import content. Investors receive 20 percent compensation above their export earnings after earnings have been received. Petroleum products, chemicals, electric power and certain agricultural products are ineligible. For most products, eligibility is not automatic. Exporters have to seek approval from the Ministry of Commerce. The Government has stated that it will establish a green channel to simplify and speed up current lengthy procedures for import licensing and foreign exchange allocation. The government grants a one time 50 percent investment allowance tax deduction from the cost of industrial buildings, fixed plant, and machinery for investments outside Nairobi and Mombasa, and 10 percent for those within these towns. This has an overall effect of reducing income taxes in the startup phase of a project. Exporters to the regional market covering 18 countries which are members of the Preferential Trade Area (PTA) Treaty |