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«GATT/1594 27 August 1993 KENYA'S BOLD TRADE LIBERALIZATION MEASURES NEED SUPPORT FROM A SUCCESSFUL URUGUAY ROUND - SAYS GATT In May 1993, in a bold ...»

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GATT/1594

27 August 1993

KENYA'S BOLD TRADE LIBERALIZATION MEASURES NEED SUPPORT FROM A

SUCCESSFUL URUGUAY ROUND - SAYS GATT

In May 1993, in a bold move, Kenya significantly liberalized its foreign exchange and import licensing

system, reversing in large measure the pattern of import control policies maintained until 1992, says the GATT Secretariat's report on Kenya's trade policies and practices. It is a major step toward removal of the anti-export bias that had resulted from previous import substitution policies and had led to distortions in the productive structure.

Themeasures should allow the transmission ofinternational price signals for a reallocationofKenyan resources to reflect its comparative advantage. But, cautions the report, "achievement of stable, sustained growth in Kenya will require macroeconomic discipline to support the recent bold trade and exchange liberalization. measures. In turn, Kenya's efforts would be supported by a strengthened, more open multilateral trading system that would result from a successful conclusion of the Uruguay Round."

The report points out that the frequent and contradictory trade policy shifts that have taken place since 1988 highlight the constraints dominating the Kenyan economy, and its dependence on foreign assistance.

"First, the relaxation of import licensing in 1989 created difficulties for a large number ofdomestic industries previously protected by quantitative restrictions on imports. In many cases, the absence of competition had resulted in low-quality standards, with the result that, as restrictions were eased, consumers turned to imports."

"Second, the introduction offoreign exchange restrictions inlate 1991 halted, ifnot reversed, earlier trade liberalization. These restrictions prevented imports of goods used as inputs in the domestic assembly MORE 93-1422 GATT/1594 Page 2/3 industries, as well as offinished products. Hence competition from imports was replaced by input shortages, which in 1992 threatened the operations of a number of import-dependent industries, notably machinery and transport equipment. The recent liberalization oftrade and foreign exchange restrictions should provide a basis for a more appropriate allocation of resources."

"Kenya is endowed with a number of important assets, including a low-cost and well-qualified labour force, a strategic regional position and a well-developed infrastructure, as well as an exceptional climate and natural beauty. In addition, the country has traditionally been open to foreign capital. Together, these factors place Kenya in a favourable position to benefit from the opening of the multilateral trading system."

Notes to Editors The GATT Secretariat's report, together with a report prepared by the Kenyan Government, will 1.

be discussed by the GATT Council on 7-8 September 1993. The TPRM enables the Council to conduct a collective evaluation ofthe full range oftrade policies and practices of each GATT member at regular periodic intervals to monitor significant trends and developments which may have an impact on the global trading system.

The reports cover developments in all aspects of Kenya's trade policies, including domestic laws 2.

and regulations; the institutional framework; trade-related developments in the monetary and financial sphere; trade practices by measure and trade policies by sector. Attached are summary extracts from these reports. Full reports are available for journalists from the GATT Secretariat on request.

A record of the Council's discussion and of the Chairman's summing-up, together with these two 3.

reports, will be published towards the end of 1993 as the complete trade policy review of Kenya and will be available from the GATT Secretariat, Centre William Rappard, 154 rue de Lausanne, 1211 Geneva 21.

Since December 1989, the following reviews have been completed: Argentina (1992), Australia 4.

(1989), Austria (1992), Bangladesh (1992), Bolivia (1993), Brazil (1992), Canada (1990 and 1992), Chile (1991), Colombia (1990), Egypt (1992), the European Communities (1991 and 1993), Finland (1992), Ghana (1992), Hong Kong (1990), Hungary (1991), Indonesia (1991), Japan (1990 and 1992), Korea, Rep. of (1992), Malaysia (1993), Mexico (1993), Morocco (1989), New Zealand (1990), Nigeria (1991), Norway (1991), the Philippines (1993), Poland (1993), Romania (1992), Singapore (1992), South Africa (1993), Sweden (1990), Switzerland (1991), Thailand (1991), the United States (1989 and 1992), and Uruguay (1992).

–  –  –

In May 1993, Kenya significantly liberalized its foreign exchange and import licensing system.

This bold move reversed in large measure the pattern of import control policies maintained until 1992.

Introduction Since independence in 1963, until recently, the Republic of Kenya achieved an increasing standard of living for its rapidly growing population, despite a sometimes difficult environment, including low levels of development in all neighbouring countries and, during the 1980s, falls in international prices for its main merchandise exports, coffee and tea.

Agriculture is the basis of the Kenyan economy, providing about 30 per cent of GDP and 80 per cent ofemployment. Falling and unstable commodity prices acted against the sector, contributing to a decline in its share of GDP. Services have increased to one-half of GDP with the development of tourism, which has driven growth in finance, retail trade and related services.





In contrast, the manufacturing sector, already relatively diversified at independence, has not increased its share of the economy. A. long-standing policy of import substitution behind high protection meant that manufacturing production essentially substituted for restricted imports of consumer products.

Consequently, export growth of manufactured products has been marginal, although Kenya retains its position as a regional manufacturing centre supplying neighbouring countries.

Between 1965 and 1980, Kenya enjoyed strong economic growth of almost 7 per cent. This was supported by high levels of external inflows, sustained in turn by a generally favourable policy towards foreign investment. In the early 1980s, growth of GDP dipped, recovering partly in the period 1985- 89;

however, in the last three years, the rate has fallen markedly, to less than one per cent in real terms in 1992.

Trade and industrial policies introduced during the 1970s provided industry with considerable assistance, mostly in the form of border controls, exclusive production rights granted to joint ventures between the Government and foreign corporations, and financial support to public or quasi-public companies. Import controls were most stringent on consumer products, rendering the economy progressively dependent on intermediate imported inputs.

These policies weighed increasingly on the economy, introduced an anti-export bias and led to growing distortions in the productive structure. They were assisted by large external borrowing, which eased foreign exchange constraints. Kenya's external debt grew eightfold during the 1970s, to reach nearly 50 per cent MORE GATT/1594 Page 5 of GDP in 1980. It doubled again during the next decade to over 80 per cent of GDP in 1990. Debt service increased from a fifth to a third of exports of goods and services.

The imbalances evident in the early 1980s precipitated balance-of-payments difficulties, which led the authorities to temporarily restrain monetary and fiscal policy, while tightening trade policies further.

The crisis led to falling growth or absolute decline in many sectors of the economy. Agriculture was furtherhurt by a severe drought in 1984. Stabilization was, in this period, undertaken mainly through import contraction, without effective economic restructuring. The public sector continued to absorb a large share of aggregate resources; expansive monetary and fiscal policies were not effectively brought under control and trade policy became more restrictive in order to palliate persistent domestic imbalances.

Growth picked up in the second half of the 1980s, encouraged by a coffee boom in 1986 and increasing external inflows, channelled intobothprivate and public investment inmanufacturing and services, notably commerce and financial and business services. In contrast, agriculture grew relatively slowly, partly as a result of falling sectoral terms of trade and their impact on production incentives.

Kenya adopted a number of stabilization and adjustment programmes in the second halfofthe 1980s, with the aim of moving the economy towards greater stability and growth. Reforms in the agricultural sector opened opportunities for private production and marketing, and reduced the privileges of statutory marketing boards, while certain producer prices were decontrolled. Nevertheless, the price of a number of essential products remained regulated, and some worrying policy reverses were observed in late 1992 when the authorities reestablished the government monopoly on the movement ofmaize, the country's staple food. Reforms also led to a notable decrease in assistance to. the sector, as most input subsidies were phased out; in this context increasing prices for fertilizers translated into a decline in their use.

Policy changes in industry after 1989 included moves to open Kenya's trade régime to imports of manufactured products, and measures to promote exports. Quantitative restrictions were progressively replaced by tariffs, which have been subsequently reduced. Unfortunately, unfavourable economic developments in 1991 and 1992 led the authorities to reverse the tarification process with the introduction of widespread and stringent foreign exchange restrictions, critically affecting most industrial sectors.

In 1990, the economy was adversely affected by the Gulf war and its impact on tourism, regional trade and energy prices. In 1991, per capita incomes declined for the first time since 1984. Kenya was more than ever dependent on foreign assistance, a large share of which was suspended at the end of 1991 pending economic and political reforms. A drought at that time caused a fall in maize production in 1992.

Furthermore, dramatic political developments in neighbouring countries brought a large number of refugees to Kenya, and caused regional food shortages.

In 1992, the balance ofpayments worsened. External debt service arrears exceeded SDR100 million, twice their level at the end of 1990. The situation did not improve in the run-up to the elections which took place in December 1992. Money supply increased rapidly and despite cuts in public sector investment, the budget deficit remained substantial.

MOREGATT/1594Page 6

Kenya in World Trade Kenya's dependence on merchandise trade has been eroded during the last 15 years. In 1990, its share of GDP, in nominal terms, was close to 35 per cent, compared to over 55 per cent in 1974. The share of exports in GDP fluctuated around 20 per cent until the late 1970s, before falling back to less than 15 per cent as declining commodity prices had a dampening effect on export revenues. The share of imports also fell from over 25 per cent of GDP during the 1970s to about 20 per cent in 1990.

Agricultural products accounted for half of export revenues in 1990, down from two-thirds in 1988.

The basket of agricultural exports changed during the 1980s; exports of coffee and tea (and mate) declined, while those of horticultural products and fish grew fairly rapidly. Kenya is one of the five largest exporters of cut flowers, and a leading exporter of fresh fruit and vegetables. This performance partly reflects liberal policies towards foreign investment, production and trade in these sectors.

Exports of manufactures are small in value, but diversified. Refined petroleum and food products account for a large part of the total. The latter have benefitted from the expansion ofthe horticultural sector;

preserved fruits and vegetables are a sizeable element in Kenya's exports of manufactured products. Other expanding export sectors include textile and leather products, chemicals, metal products and simple machinery.

Developed countries purchased slightly above 40 per cent of Kenya's exports in 1990, down from 60 per cent in 1988, reflecting unfavourable international prices for Kenya's primary commodity exports.

Exports to European countries fell from 53 to 38 per cent during 1988-90, and declined further in 1991.

Japan remains a limited outlet for Kenyan products while the United States and Canada jointly accounted for 3 per cent of total exports in 1990, down from 7 per cent in 1985.

While Kenya's farm-based exports are shipped mostly to European countries, over 90 per cent of its manufactured exports are destined to neighbouring African countries, which provided nearly 40 per cent of export revenue in 1990, up from 25 per cent in 1988. Such exports include refined petroleum, cement, chemicals, metals and machinery, in which Kenya is a strong regional competitor, due to lower transport costs and an established infrastructure. Kenya has been the principal beneficiary of the Preferential Trade Area, whichprovides lower duties and payment clearing facilities to certain Kenyanproducts inneighbouring markets. PTA countries absorbed a third of total exports in 1990, up from 25 per cent in 1988; in 1991, Uganda overtook the United Kingdom as Kenya's largest export market.



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