Kenya: Selected Issues and Statistical Appendix

This Selected Issues paper and Statistical Appendix addresses the question of how to interpret recent developments in the Kenyan consumer price index (CPI) properly to assess the current inflation pressure and extract signals about possible future CPI inflation trends. The paper discusses why Kenya’s exports have performed poorly over the past five years in spite of a more liberalized trade and exchange rate regime. The analysis shows that Kenya faces both price and nonprice constraints on export performance.


This Selected Issues paper and Statistical Appendix addresses the question of how to interpret recent developments in the Kenyan consumer price index (CPI) properly to assess the current inflation pressure and extract signals about possible future CPI inflation trends. The paper discusses why Kenya’s exports have performed poorly over the past five years in spite of a more liberalized trade and exchange rate regime. The analysis shows that Kenya faces both price and nonprice constraints on export performance.

IV. Trade and Regional Integration Policies in Kenya40

A. Introduction

106. Over the past two years, Kenya has made strides in establishing a more open and transparent trade regime. The recently launched tariff reform aims at streamlining Kenya’s tariff structure, while paving the way toward greater integration with Kenya’s regional trading partners. This section describes Kenya’s current trade regime, including recent developments, and the direction and composition of trade, discusses its involvement in regional free trade areas, and illustrates some of the potential obstacles to further regional integration. If Kenya is to fully realize the benefits from a more open and regionally integrated trade regime, it will be important to continue pursuing the tariff reform, while also dismantling the nontariff barriers that still exist.

B. The Current Trade Regime

107. Kenya’s trade regime is moderately restrictive—it is rated 6 on the IMF’s 10-point trade restrictiveness index, with 10 being the most restrictive. It currently has eight tariff bands (0, 3, 5,15,20,25, 30, and 35 percent); in addition, sugar is taxed at 100 percent. The simple (unweighted) average tariff rate is 16.6 percent, while the tariff item-weighted rate is 17.3 percent.41 In addition, an import declaration form (IDF) fee of 2.75 percent is collected on all imports irrespective of their source. Moreover, some nontariff barriers (NTBs) exist, mainly in the form of special licenses required for the export of minerals and precious stones and state trading in strategic agricultural commodities. Kenya has removed, however, the requirement for licenses for the export of agricultural products.

108. Kenya is a member of the World Trade Organization (WTO) and is party to the Regional Integration Facilitation Forum (RIFF) (formerly known as the Cross-Border Initiative), the Common Market for Eastern and Southern Africa (COMESA),42 and the East African Community (EAC).43 Kenya also benefits from the U.S. African Growth and Opportunity Act (AGOA) 44 which allows qualifying countries to export certain products duty free to the United States. Kenya has seen a substantial increase in textile and apparel exports to the United States on account of AGO A, and there remains scope for further gains.

C. Recent Pace of Trade Liberalization

109. Kenya’s trade regime has been fundamentally reformed over the past ten years. The authorities, in addition to introducing reforms in Kenya’s exchange and payments regime, have abolished import licensing (except for a short negative list of goods prohibited for health, security, or environmental reasons), reduced the number of tariff bands and the top and average ad valorem tariff rate, and removed suspended duties (except on petroleum products). The most recent changes, which took effect under the 2001/02 (July-June) fiscal program, continued the process of trade liberalization.

110. A comprehensive tariff reform strategy, which aims to improve Kenya’s external competitive position and facilitate duty collection through a simpler and more uniform tariff structure, was formulated in mid-2001. The tariff reform aims to reduce the top tariff rate in stages over the next four years from 40 percent at end-June 2001 to 25 percent with a view to ultimately adopting the common external tariff of COMESA and the EAC. The number of tariff bands will gradually be reduced from nine at end-2000 to four by 2004.

111. The first phase of the reform was incorporated into the 2001/02 budget. The main features of this new structure are (i) a reduction of the tariff rate from 40 percent to 35 percent; (ii) a reduction in the duty on some raw materials from 2.5 percent to 0 percent; (hi) a reduction in the duty on some raw materials and capital goods from 5 percent to 3 percent; and (iv) the elimination of import exemptions for university lecturers and civil servants. These changes have led to a reduction in the number of tariff bands from nine to eight (the elimination of the 40 percent and 2.5 percent bands was offset in part by the introduction of the 3 percent band). However, the duty rates on some products, including food products and fabrics, were increased as these items were shifted from 25 percent or 30 percent tariff bands into the new top band of 35 percent.

112. These steps led to a reduction of the average unweighted tariff from 18 percent to 16.6 percent which, when contrasted with the 24 bands and the maximum tariff rate of 170 percent in fiscal-year 1987/88, shows significant progress. However, prior to the 1999/2000 setback,45 the number of tariff bands had been reduced to four, with a simple average tariff rate of 11.3 percent and a maximum rate of 25 percent. The average import duty rate has remained below 20 percent in most years, and has come down recently (Table 11). The low average import duty rate in 2001 likely reflects the impact of the COMESA free trade area on import duty collection.

Table 11.

Kenya: Average Effective Import Duty Rates, 1995-2001 1/

(In percent)

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Sources: Kenyan authorities; and Fund staff estimates.

Average effective duty rate based on imports, c.i.f.

Imports for 2001 are estimates.

113. Kenya is also committed to further restricting the scope of import duty exemptions and, as noted above, has discontinued some major exemptions to the public sector. It has not yet addressed the issue of exemptions for parliamentarians and the executive, however.

D. Direction and Composition of Trade

114. When discussing trade policies, and regional integration policies in particular, it is important to understand the direction and composition of trade for the country in question. The evolution of the direction and composition of trade can provide insights into potential gains from trade, as well as the possibility of trade diversion. Although the regional integration initiatives in which Kenya has become involved are relatively recent, understanding the direction and composition of trade over the past five years still provides a useful benchmark against which to assess future trade patterns.

115. There does not seem to be an indication of large shifts in the destination of Kenya’s exports of goods. In the early part of the 1990s, Kenya’s main trading partner was Europe. By 1995, the main destination for its export of goods was Africa, with that continent accounting for nearly 50 percent of total exports of goods (Table 12). Over the period 1995–2000, the shares of exports of goods destined for Western Europe and Africa remained relatively constant, while the shares to Asia and the Middle East rose somewhat.

Table 12.

Kenya: Destination of Exports of Goods, 1995–2000

(Share of total, in percent)

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Sources: Kenyan authorities; and Fund staff estimates.

116. The evolution of the origin of Kenya’s imports of goods, however, shows much more variation over the past five years. In 1995, Western Europe provided most of Kenya’s imports of goods, with over 40 percent of total imports of goods, while Asia provided 27 percent and the Middle East only 13 percent (Table 13). Since 1995, Western Europe’s share of total imports has declined steadily, falling from 42 percent in 1995 to 32 percent by 2000; meanwhile, Asia’s share dropped from 27 percent in 1995 to 21 percent in 2000. Conversely, the Middle East’s share rose from 13 percent in 1995 to nearly 18 percent in 1998 and 16 percent in 1999.46 Imports from Eastern Europe, although only a small share of total imports of goods, also climbed steadily over the period. Although these few trends can be picked out from the data, swings in import shares from the United States and Canada and the rest of Africa make it difficult to determine whether there have been permanent shifts in the origin of imports of goods. It is clear, however, that imports from Western Europe are declining.

Table 13.

Kenya: Origin of Imports of Goods, 1995–2000

(Share of total, in percent)

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Sources: Kenyan authorities; and Fund staff estimates.

117. A casual reading of this data could suggest that regional integration policies in Africa may be trade diverting for Kenya. Over time, however, regionalism could be trade creating as suppliers respond to changing incentives and member countries pursue structural reforms. However, in order to fully determine the effects of trade liberalization and regional integration in Kenya, a much more detailed and thorough analysis of the data is needed. In addition, as the major shifts in trade and regional policy have taken place only very recently, a longer time series of data would be needed to properly make such an assessment.

118. The composition of Kenyan exports has changed considerably over the past five years. Kenya has seen a rise in the share of tea, horticulture, and oil products in total exports, while coffee exports, in particular, have declined. Structural constraints, along with various price constraints, have impeded further development of the export industry in Kenya and have particularly hurt the coffee and manufacturing sectors. A detailed discussion of the evolution of Kenyan exports is presented in Section in of this paper.

119. The composition of imports has also changed quite dramatically since 1995. Consumer goods as a share of total imports increased between 1995 and 1999 (Table 14).47 Intermediate goods maintained a roughly constant share, while imports of capital goods fell over the same period. This move away from investment-related (capital) imports toward consumer goods is consistent with the sluggish economic growth observed over the period. In the subcategory of intermediate goods, there has been a clear shift over the period away from primary and processed intermediate goods toward fuels and lubricants. This shift could be indicative of both stagnation in the manufacturing sector and problems in Kenya’s energy sector. Imports of fuels and lubricants could be used as substitutes for electricity, as there is little or no excess capacity in the energy sector.

Table 14.

Kenya: Composition of Imports, 1995–2000

(Share of total, in percent)

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Sources: Kenyan authorities; and Fund staff estimates.

E. Regional Issues

COMESA and the EAC

120. Kenya is one of the nine48 founding members of the free trade area (FTA) in the COMESA region launched in October 2000, in which goods are traded on a duty-free basis. Other reciprocating COMESA member countries receive a 60-90 percent preferential tariff. Kenya expects to join the customs union within COMESA by 2004. Membership in the COMESA customs union will include adoption of a common external tariff.

121. As noted above, Kenya is also a member of the EAC, whose primary goal is the creation of a customs union to encourage trade and investment among its members. Negotiations are under way for the establishment of a customs union within the EAC, which will also coincide with the adoption of a common external tariff. The establishment of a common external tariff will need to include the harmonization of customs exemptions and export support regimes. Discussions on the elimination of intra-EAC suspended duties49 and internal tariffs are under way, as is the process of coordinating monetary and fiscal policies is among the EAC member states (although this process is still in its early stages). The ministers for finance and planning of each of the three member countries hold pre- and post-budget consultations annually, and the three countries read their budgets on the same day. Also, the Monetary Affairs Committee, comprising the three governors of the partner states’ central banks, meets annually to harmonize their monetary policies and banking regulations. Discussions were recently concluded for the creation of an East African Court and an East African Legislative Assembly. Table 15 provides a comparison of the trade regime of the three EAC member countries.

Table 15.

Features of Trade Regimes of Kenya, Tanzania, and Uganda

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For Kenya, the alternative minimum duty rates are set as floor rates based on the lowest expected prices

122. Membership in both the EAC and COMESA has made it difficult for Kenya to develop a coherent regional strategy. Initially, the EAC was seen as a “fast track” to a more open trade regime, while further integration with other COMESA members was envisaged over a longer period. Over time, however, integration within COMESA sped up, and the two trade blocs are now on approximately the same path to adoption of a customs union and a common external tariff. Both regional trading blocs propose the adoption of a common external tariff and the formation of a customs union by 2004. The modalities of membership in both customs unions are unclear at this stage, especially since Tanzania is member of the EAC, but not COMESA, and Uganda is a member of COMESA, but not of the FTA. The Kenyan authorities expect that an understanding will be reached between EAC and COMESA members regarding the common external tariff.

Other aspects of regional integration

123. Through their actions over the past ten years, the authorities have displayed significant resolve in tackling the distortions in Kenya’s trade regime. As a member of COMESA, the EAC, and the RIFF, the Kenyan authorities are committed to undertaking further trade reforms over the medium term.

124. Although progress was made in trade liberalization, other measures aimed at enhancing the flow of trade and investment have been lagging in Kenya. An area where progress has been slow is the reform and harmonization of investment regulations and judicial and legal frameworks (including registration procedures of enterprises). Moreover, there are lags in the development of efficient, harmonized, and integrated financial systems, as well as in the reformation of labor markets. Finally, adoption of harmonized and efficient domestic tax systems in the region (especially in the EAC) should be given priority to avoid wasteful tax competition.

125. An important focus of the EAC and COMESA is on enhancing investment flows between its member countries. It is also an area where coordination among member countries is crucial. Kenya currently imposes restrictions on foreign ownership of firms listed in the stock exchange.50 Discussions have begun to ease these restrictions for investors in the EAC. The Capital Markets Development Committee (CMDC), comprising chief executives of the three partner states’ capital markets regulatory agencies and stock exchanges, meets annually to coordinate the harmonization of their regulatory frameworks. The three partner states have set June 2003 as the deadline for countries to achieve full capital account convertibility.

126. Under COMESA, several initiatives have been launched to support the efforts to increase trade and investment in the region. The Regional Trade Facilitation Project (RTFP) aims to reduce poverty through private sector-led growth by improving access to financing for investment and trade. The RTFP attempts to insure imports to, and exports from, the region against political risk. The implementing agency of the RTFP is the African Trade Insurance Agency, which is headquartered in Nairobi, Kenya. Thus far, seven countries—Burundi, Kenya, Malawi, Rwanda, Tanzania, Uganda, and Zambia—are participating. Other proposals include (i) establishing a cross-border payments system to reduce transactions costs and provide for better access to foreign currency; (ii) creating a fund to cushion COMESA members from losses incurred due to trade liberalization by redistributing the gains from regional integration; and (iii) developing a harmonized and integrated telecommunications system to reduce the costs of doing cross-border business.

F. Potential Obstacles

127. One possible source of difficulty in achieving the trade reform objectives is the perceived potential uneven distribution of liberalization benefits across countries, particularly in the EAC subregion. With a relatively developed manufacturing base in the region, some trading partners have suggested that Kenya could stand to gain disproportionately from regional trade reforms, and this has been a source of tension and delay in reforms.51 Accordingly, moves toward further liberalization should be accompanied, where feasible, by a detailed analysis of the regional impact of proposed reforms and by suggestions on how to make the reform process as equitable as possible.

128. Kenya’s membership in COMESA has not been without difficulties. In particular, Kenya views the trade of agricultural commodities (sugar and maize) as a key constraint on its realization of the benefits of COMESA. In the past, Kenya maintained high duties on strategic commodities for the purpose of safeguarding its domestic industries. This protection was removed under the COMESA FT A, and Kenya has seen an increase of sugar and maize imports, which has led to claims of dumping and of a failure on the part of other COMESA to meet rules-of-origin standards. Recently, Kenya and Egypt became embroiled in a trade dispute over verification procedures under the rules-of-origin clause of COMESA, resulting in Egypt imposing punitive tariffs on imports of Kenyan tea. The tariffs were especially distressing since Kenya largely exports tea to Egypt. The dispute was quickly resolved, although more such disputes may be likely and could be very damaging to Kenya’s export industries.

129. The loss of revenue already being realized because of Kenya’s membership in the COMESA FTA has raised awareness in the country of the fiscal implications of trade liberalization. Moreover, large multinational companies that have been headquartered in Kenya are considering moving to other COMESA countries because of their lower productions costs, and possibly lower corporate profit taxes.

130. On the domestic front, support for further trade reforms (and, in particular, further integration with COMESA) is hampered by the perception that these reforms have fostered unfair competition. Weaknesses in the domestic import-competing industries’ capability to adjust and absorb trade shocks and in the export industries’ capability to benefit from new market opportunities have also undermined domestic support. There is resistance to further trade reform and regional integration among some interest groups in Kenya, as imports are perceived to have adversely affected certain local industries, resulting in the closure of many of them. The recent trade dispute with Egypt is a prime example of the perceived unfair trading practices, as are the problems in the sugar and maize industries. Factors other than trade liberalization, including high interest rates, other high costs of doing business, and poor infrastructure, have been the primary causes of Kenya’s relatively poor competitive position, however.

G. Conclusion

131. Kenya’s achievements in liberalizing its trade and exchange regime over the past ten years are considerable. The progress made in simplifying the tariff structure and increasing regional integration over the past two years has been commendable. The formation of a comprehensive tariff reform strategy has been a major first step toward rationalization of Kenya’s trade regime and has signaled its commitment to further pursuing trade liberalization and, ultimately, adopting the common external tariff under COMESA and the EAC. Additional streamlining of the tariff system, removal of the remaining duty exemptions and nontariff barriers, and enhanced coordination with partner countries will be important if Kenya is to achieve the full benefits of its membership in COMESA and the EAC.


Prepared by Julie Kozack.


The tariff item-weighted duty rate is the average of the eight tariff bands weighted by the shares of tariff items for each band. This differs from the average effective duty rate, which is the ratio of import duty collected to imports.


The members of COMESA are Angola, Burundi, Comoros, the Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Namibia, Rwanda, Seychelles, Swaziland, Sudan, Zambia, and Zimbabwe.


The EAC comprises Kenya, Tanzania, and Uganda. It was created by elevating the agreement that established the East African Cooperation into a treaty establishing the East African Community. The EAC was officially launched by the three heads of state in January 2001.


Kenya was declared AGOA eligible on October 2, 2000 and was declared eligible for the apparel provision under AGOA, which allows for duty-free and quota-free benefits for a number of apparel and textile products, on January 18, 2001.


In 1999/2000 Kenya introduced suspended duties on many products and increased import duties on agricultural products.


Imports from the Middle East shot up in 2000, likely reflecting the high petroleum prices, combined with the effects of the drought-related energy shortages.


In 2000, the share of consumer goods decreased while that of capital goods increased. This movement is likely related to the severe drought in that year, which required large imports of energy-related equipment. It is not expected that 2000 will represent a turning point in the composition of imports.


The other participating countries are Djibouti, Egypt, Madagascar, Malawi, Mauritius, Sudan, Zambia, and Zimbabwe.


Kenya applies suspended duties on petroleum products, while Tanzania applies suspended duties on about 20 products. Uganda does not maintain any suspended duties; however, it does apply special “excise taxes” of about 10 percent on imported goods alone.


The restriction imposes a maximum of 40 percent ownership for foreign corporate investors and 5 percent for foreign individual investors.


The perception of unequal distribution across countries arises primarily because Kenya’s exports to the other EAC members are larger than its imports from these countries.