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TITLE:  KENYA ECONOMIC POLICY AND TRADE PRACTICES                              
DATE:  FEBRUARY 1994
AUTHOR:  U.S. DEPARTMENT OF STATE
                              
                              
                              
                              
                              KENYA

                     Key Economic Indicators
        (Millions of U.S. dollars unless otherwise noted)


                                  1991      1992      1993 /1
Income, Production,
 and Employment

Real GDP (1982 Prices) /2          3,165     2,773     1,498
Real GDP Growth (pct.)              2.2       0.4       1.0
GDP (at current prices) /2         8,278     8,562     4,603
By Sector:
  Agriculture                      2,260     2,226     1,197
  Electricity and Water               91        86        46
  Manufacturing                    1,118     1,164       626
  Building and Construction          267       265       142
  Financial Services                 679       745       401
  Trade, Restaurants and Hotels      902       942       506
  Government, Health,
   and Education                     828       856       460
Net Exports of Goods and
  Services                         2,214     2,108     1,061
Real Per Capita GDP (1982 prices)    132       123        55
Labor Force (000's)               10,500    11,100    11,800
Unemployment Rate /3                n/a       n/a       n/a


Money and Prices
(annual percentage growth)

Money Supply (M2)                  19.7      34.6      26.0
Base Interest Rate /4              22.0      25.0      27.0
Personal Saving Rate               14.5      15.5      20.0
CPI (1986 prices)                  19.6      27.5      41.0
Exchange Rate (avg. Ksh/$) /5
  Official                         27.7      32.0      58.8
  Parallel (inter-bank)            35.0      45.0      65.0


Balance of Payments and Trade

Total Exports (FOB)                1,062     1,033       633
  Exports to U.S.                     41        58        53
Total Imports (CIF)                2,104     2,011     1,208
  Imports from U.S.                  104       116       104
Aid from U.S.                         51.6      30.8      20.2
External Public Debt               6,100     5,600     6,300
Debt Service Payments (paid)        n/a        265       436
Gold and FOREX Reserves              302       255       150
Trade Balance /5                  -1,042      -978      -575
  Balance with the U.S.             - 63       -58       -51



Notes:

1/  1993 Figures are estimates based on Jan.-Sept. 1993 data.
2/  GDP at factor cost.
3/  The Kenyan government does not publish unemployment figures
    but in 1993 it is likely to be in the range of 35-40
    percent.
4/  Figures are actual, average annual interest rates, not
    changes in them.
5/  The official exchange rate is used in conversion.  As of
    October, 1993 the official rate was aligned to the
    inter-bank rate.


1.  General Policy Framework

    Kenya's mixed economy has an active private sector and a
large inefficient public sector.  The primary basis of the
economy is agriculture.  Agriculture contributes a declining 26
percent of gross domestic product (GDP), and provides 75
percent of total employment and 55 percent of export earnings. 
The main foreign-exchange earners are coffee, tea and tourism. 
The industrial sector, which accounts for 14 percent of GDP, is
dominated by import-substituting industries, most of whose
products are not competitive beyond markets in the neighboring
countries.

    In 1992, GDP grew by a poor 0.4 percent, compared to 4.2
percent in 1990 and 2.2 percent in 1991.  A drought in 1992
caused agricultural output to decline by a record 4.2 percent,
causing significant shortfalls in food production.  As a
result, Kenya increased imports of cereals and sugar in 1992
and again in 1993 to supplement domestic production.  Inflation
grew rapidly, reaching 100-percent (at an annualized rate) in
the month of June 1993, largely due to excessive growth in
money supply and depreciation of the local currency.

    In late 1991 the government embarked on a divestiture
program that listed 139 parastatals for privatization.  Thus
far, the government has liquidated or divested its
shareholdings in 22 inconsequential companies.  Over 100
parastatals remain on the privatization list.  The more
problematic giants such as those in maize marketing and
utilities, having been categorized as strategic, are slated for
restructuring, not privatization.

    Under a tax modernization program, the government has
widened the tax base, lowered income taxes, and introduced the
use of personal identification numbers in tax-related
transactions.  The government obtains over two-thirds of its
tax revenue from indirect taxes.  The basic Value-Added Tax
(VAT) accounts for over 50 percent of domestic revenue. 
Between 1992 and 1993, it has been expanded to cover a wide
range of goods and services.  The highest VAT rate is 40 per
cent, but most goods are taxed at a rate of 18 percent.  The
maximum rate of income tax for individuals is 40 percent.

    In 1993 the government implemented tight fiscal and
monetary policy measures to stabilize the economy.  After the
multi-party elections held in December 1992, the government 
embarked on measures to mop up excess liquidity.  The
government relied heavily on the sale of Treasury bills and
doubled the cash ratio.  Starting in March 1993, the government
has offered weekly sales of five billion shillings worth of
Treasury bills at high rates ranging from 50 to 70 percent. 
This short-term austerity measure created a severe credit
squeeze for investors as lending rates shot up to 35 percent. 
To further limit credit, the Central Bank raised the cash ratio
maintained by banks from six percent in 1992 to twelve percent
by end of October 1993.  By end of September, the inflation
rate was over 40 percent while growth in money supply had come
down to 26 percent.


2.  Exchange Rate Policy

    From 1981 the local currency (Kenya shilling) has been
pegged to the SDR.  The Central Bank depreciated the Kenya
shilling by 22 percent against the dollar in 1992 and by 85
percent in the first nine months of 1993.  During this period
the bank liberalized the foreign exchange regime, allowing a
free market rate to be determined by commercial banks in
addition to the official rate.  Exporters were allowed to open
foreign exchange accounts and to retain up to 50 percent of
their earnings to pay obligations abroad.

    In October, 1993 the bank aligned its official exchange
rate with the parallel inter-bank commercial rate.  Kenya now
has a floating official rate.  Shilling payments to exporters
are the same for the 50 percent they sell to the government and
the other half they are allowed to retain in the commercial
market.


3.  Structural Policies

    After many years of delay, the government embarked on
economic reform measures in 1992-93 period under a World
Bank/IMF-sponsored structural adjustment program.  The key
elements of this program include reducing the budget deficit
and inflation, providing market-based incentives to private
sector growth, privatizing or restructuring state-owned
enterprises, and encouraging investment and exports in order to
achieve a five-percent rate of growth in GDP.

    Encouraged by Kenya's progress in the economic front, the
World Bank released the second tranche of the export
development credit in May 1993.  In his June 1993 budget
speech, the new Finance Minister Musalia Mudavadi unveiled an
ambitious budget that promised quick results on the alarming
inflation rate and increased growth in GDP.  In November 1993,
the IMF praised Kenyan Government efforts to bring the economy
back on track and was ready to establish a new program of
assistance.  The Kenyan Government is optimistic that it will
qualify for disbursement of $65 million Enhanced Structural
Adjustment Facility (ESAF) money.

    Major policies undertaken include government expenditure
rationalization, price decontrol, export promotion, interest
rate and foreign exchange rate liberalization, and capital
market development.  A number of weak financial institutions 
were brought under statutory management while disciplinary
action was taken against politically-favored banks.  Unsecured
advances from the Central Bank were prohibited.  Preshipment
export financing and export compensation facilities were
abolished, effectively eliminating a major source of
corruption.  The government abolished import licensing and has
partially liberalized marketing of most items, including sugar,
wheat and maize.

    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, which includes in part good
governance, democratization, protection of human rights and
elimination of corruption.  Persistent ethnic violence
complicates the political landscape.


4.  Debt Management Policies

    Over the past two years, Kenya has accumulated large debt
arrears by neglecting external debt repayment.  The average
annual debt service bill is $580 million.  Debt arrears, a
relatively new phenomenon for Kenya, reached $713 million
dollars at the end of September 1993.  The debt service ratio
is about 35 percent of total exports of goods and services. 
Lack of foreign exchange reserves has been a major economic
constraint.

    Kenya's balance of payments situation remained poor in 1993
owing to inadequate foreign exchange to finance imports, the
high cost of imports, and the depressed state of the economy. 
Tourism earnings stagnated due to sporadic violence in tourist
regions.  The capital account performed poorly and, for the
first time in history, capital outflows exceeded inflows in
1992.  The net outflow was $171 million.  This severely drained
the country's foreign exchange reserves and the Kenyan
government defaulted on external debt repayments.  Although
foreign exchange reserves rose from $190 million in March 1993
to $260 million in October 1993, the government deficit is
above six percent of GDP.  Few steps have been taken to curb
losses in the big parastatals.


5.  Significant Barriers to U.S. Exports

    The liberalization of import controls and foreign exchange
rates and controls are major positive steps towards removal of
trade barriers.  These actions coincide with a trend in Kenya
over the past two years during which Kenya consistently lowered
tariffs and reduced licensing requirements.

    In June 1992 the government introduced a variable tariff
for key imported food commodities, including wheat, rice, milk
powder, maize and sugar.  This variable duty is used to raise
the price of imports to a predetermined floor price when the
world price is lower than the domestic price.

    The 1993 budget reduced the number of tariff rates from
nine to six and the maximum tariff rate from 60 percent to 40
percent.  Some items which were previously duty-free were
placed in the bottom band.  Duties on a number of manufactured
items have been reduced.  Computer imports are assessed a duty
of 25 percent.  The combined duty and VAT for automobiles
ranges from 65 to 131 percent.

    The government maintains lower duties and sales taxes for
selected items which it considers important for 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.

    There are barriers to trade in services in video tapes,
movies and cassettes, construction, engineering, architecture,
legal representation, insurance, leasing, shipping, and foreign
travel.  Films 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. 
Kenyan buyers of foreign goods are forbidden from insuring
imports abroad.  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 a
"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 oil and ghee.  In
addition, imports of pre-packed paints and allied products must
be sold by metric weight or metric fluid measure.

    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 a former 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 import
items are frequently tied to the source country providing
official development finance.

    Government procurement practices:  Government procurement
is done through tender boards.  The main boards are the Central
Tender Board, Ministerial Tender Boards, the Department of
Defense Tender Board, and District Tender Boards.  The Kenyan
Government has a supplies manual 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.

    The procurement regulations apply to all potential bidders
regardless of nationality of supplier or origin of the
product/service without discrimination.  The regulations
provide for preferential treatment for domestic suppliers,
products, and services.  Up to 10 percent preferential bias is
allowed for all firms participating in Kenyan government
tenders having 51 percent or more share capital held by
indigenous Kenyans.  The government provides preference to
domestic suppliers for small procurements and contracts.

    Practice often differs from government regulations. 
Tenders can be awarded to uncompetitive firms when government
officials have interests.  Such cases are common for medical
tenders.  The incidence of corruption at all levels has
increased in Kenya in recent years and affects import license
allocation and distribution rights as well as procurement. 
Prosecution of corrupt officials above the lowest level is
rare.  Corrupt contract awards are 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" prohibited under U.S. laws.

    Kenyan law does not permit manufacturers to distribute
their own products.  They are also required to supply
information about their distributors.  The Monopolies, Prices
and Trade Restriction Practices Act sets a legal framework for
dealing with restrictive and predatory practices preventing
competitive markets, and controls monopolies, mergers, and
takeovers of enterprises.

    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 up to the amount of their
equity capital.


6.  Export Subsidies Policies

    In early 1993, the Kenyan government scrapped an export
compensation scheme which reimbursed manufacturers whose
products had less than 70 percent import content.  In its place
the government enacted a duty/value added tax remission
facility which allows exporters to purchase tax-free material
inputs locally.  The government has plans to 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 ten percent for those within these towns.  This
has the overall effect of reducing income taxes in the start-up
phase of a project.

    Exporters to the regional market covering 18 countries
which are members of the Preferential Trade Area (PTA) Treaty
receive advantages.  Restrictive rules of origin prohibiting
foreign firms from participating in the PTA market have been 
eliminated.  Kenya is a member of the United Nations Conference
on Trade and Development, a contracting party to the General
Agreement on Tariffs and Trade and a signatory of the Lome
Convention.  Kenya has not signed the GATT/MTN agreements
negotiated in the Tokyo Round.

    A privately-owned export processing zone (EPZ) has been
established in Nairobi while government-sponsored EPZ's are
being constructed in both Nairobi and Mombasa.  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 two-year
old private sector EPZ has 13 operating firms with five others
approved to commence operations.  In June 1993, the government
allowed providers of export-related services to participate in
the EPZ.

    There are 21 firms operating through the Manufacturing
Under Bond Scheme.  Although it was implemented in 1988, not
many investors have been enthusiastic due to the bureaucracy
involved in exporting.  The government in conjunction with
donors has set up two schemes which provide grant assistance to
exporters seeking new markets.

    Kenya has progressively reduced the corporate tax rate from
45 percent in the 1980's to the current 35.0 percent. 
Withholding tax (ranging from 12.5 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 model for the prevention of double
taxation of income.  There is no tax treaty with the United
States.


7.  Protection of U.S. Intellectual Property

    Kenya is a member of the World Intellectual Property
Organization and party to the Paris Convention for the
Protection of Industrial Property, and the Universal Copyright,
Geneva Phonogram and Brussels Satellite Conventions.  Despite
these agreements, pirated books, records, videos, and to a
limited extent, computer software, find their way into Kenyan
stores.  Government inspection and existing Kenyan laws are
inadequate.  For example, the only manufacturer of records and
cassettes in Kenya, Polygram Records Ltd., estimates the total
cassette market at 2.5 million per year, of which 90 percent is
pirated.  Most videotapes in Kenya are also pirated.

    In 1990, the Kenyan government implemented industrial
property legislation and established an Industrial Property
Office for granting industrial property rights, screening
technology transfer agreements and licenses, and providing
patenting information to the public.  The office provides
patents and utility models, and industrial design
certificates.  It also acts as a receiving office for
international applications.

    Although Kenyan laws regarding copyright are not extensive,
the Copyright Act of 1989 provides for protection from audio
copyright infringement.  Video copyright infringement 
is not covered by the law, and is 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.   Right of Association

    Except for central government civil servants and university
academic staff, all workers are free to join unions of their
choice.  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, however, this changed
as workers experienced a large rise in the cost of living. 
Blaming the government, COTU's leaders called for an
across-the-board 100 percent wage increase and dismissal of
Kenyan Vice-President George Saitoti.  The call culminated in a
Labor Day ceremonies walkout by the Minister for Labor, arrest
of the COTU secretary-general and his senior associates on
Labor Day, 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 officers.  These new 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 by early November 1993, but no international group
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 illegal several strikes, notably the KNUT strike
averted at the last minute in July 1993, even after labor had
given the required notice.  The other key strikes were 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' slowdown in November.  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, although
the new COTU leadership threatened to withdraw from the ICFTU
over the cutoff in aid.  COTU affiliates are free to establish
linkages to international trade secretariats of their choice.

    b.   Right to Organize and Bargain collectively

    While not having the force of law, the 1962 Industrial
Relations Charter gives workers the right to engage in
legitimate trade union organizational activities.  Both the
Trade Disputes Act and the Charter authorize collective
bargaining between unions and employers.

    Wages and conditions of employment are established in the
context of negotiations between unions and management. 
Government wage policy guidelines limit increases to 75 percent
of the annual rate of inflation.  In 1993, COTU called for
removal of wage guidelines.  Collective bargaining agreements
must be registered with the Industrial Court.  In 1993, about
1,875 agreements in total were on file with the Court, covering
approximately 1 million union and non-union workers.  Although
the Export Promotion Zone Authority has decided that local
labor laws, including the right to organize and bargain
collectively, will apply in EPZ's, in practice it has granted
many exemptions.

    c.   Prohibition of Forced or Compulsory Labor

    The Constitution proscribes slavery, servitude, and forced
labor.  Under the Chief's Authority Act, a local authority can
require people to perform community service in an emergency,
but there were no known instances of this practice in 1993. 
People so employed must be paid the prevailing wage.  The
International Labor Organization's (ILO) Committee of Experts
has determined that this act contravenes ILO Conventions 29 and
105 concerning forced labor.

    d.   Minimum Age for Employment of children

    The Employment Act of 1976 proscribes the employment of
children under age 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 the 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 under-employment, the employment of children
in the formal wage sector in violation of the Employment Act is
not a significant problem.

    e.   Acceptable Conditions of Work

    In 1993, minimum unskilled worker salaries averaged less
than $20 per month.  The normal week, by law, is limited to 52
hours, except for nighttime employees (60 hours) and
agricultural workers (excluded).  Non-agricultural workers
receive one rest day in a week minimum, 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 can not exceed 144 hours.  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. 
Inspectors in 1992-3 conducted 16,132 inspections due to an
ILO-funded project.  This altered the previous practice of
responding only to worker complaints.  "Whistle blowers" are 
not protected, however.  Kenya's worker compensation
regulations do not yet comply with provisions of ILO Convention
No.17.

    f.   Rights in Sectors with U.S. Investment

    Worker rights in sectors with U.S. investment do not differ
from other sectors of the economy.





         Extent of U.S. Investment in Selected Industries

              U.S. Direct Investment Position Abroad
                on an Historical Cost Basis - 1992
                    (millions of U.S. dollars)

Category                                    Amount

Petroleum                                                22
Total Manufacturing                                      29
    Food & Kindred Products                     4
    Chemicals and Allied Products              12
    Metals, Primary & Fabricated                5
    Machinery, except Electrical                0
    Electric & Electronic Equipment             2
    Transportation Equipment                    D
    Other Manufacturing                         D
Wholesale Trade                                           1
Banking                                                   D
Finance and Insurance                                     D
Services                                                  9
Other Industries                                          0

TOTAL ALL INDUSTRIES                                     88


(D)-Suppressed to avoid disclosing data of individual companies

Source:  U.S. Department of Commerce, Bureau of Economic
Analysis.

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