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Country Commercial Guides for FY 2000: Kenya Report prepared by U.S. Embassy Nairobi, released July 1999 Note*

CHAPTER I:   EXECUTIVE SUMMARY

This Country Commercial Guide (CCG) presents a comprehensive look at Kenya's commercial environment, and includes economic, political and market analysis. The CCG's were established by recommendation of the Trade Promotion Coordinating Committee (TPCC), a multi-agency task force, to consolidate various reporting documents prepared for the U.S. business community. Country Commercial Guides are prepared annually at U.S. Embassies through the combined efforts of several U.S. government agencies.

1.   OVERVIEW

Kenya, with a gross domestic product (GDP) approaching $10 billion, is the most developed economy in East Africa. However, with an estimated population of 30 million people (almost half of whom are under the age of 15), the country's GDP per capita is less than $300. Kenya enjoys an extensive, if deteriorating, infrastructure, a generally well-educated population and a strong entrepreneurial tradition. Mombasa is the best and most important deep-water port in the region, despite deteriorating equipment and problems with inefficiency and corruption. Kenya's financial and manufacturing industries, while still small, are the most sophisticated in East Africa. Agriculture is the largest employer in Kenya and the country exports tea, coffee, cut flowers and vegetables. Tea exports, Kenya's largest single foreign exchange earner, netted the country $520 million in 1998. Tourism is the country's second leading foreign exchange earner. Some 672,000 tourists visited the country in 1998. Coffee has been relegated from first to third place because of a slump in production resulting, initially, from low world prices, and currently from mismanagement of local marketing.

Kenya got on the road to economic and political reform in 1992, in response to internal pressure for change as well as initiatives by the World Bank, IMF, and other multilateral and bilateral donors. In that year, Kenya introduced multiparty democracy, which began a still on-going process of political reform and economic liberalization. In the mid-1990's the Government of Kenya undertook economic reforms after a serious drop in economic growth. Reforms included lifting price and foreign exchange controls, reducing tariffs and removing other trade barriers, adopting sound fiscal and monetary policies, and beginning a program of parastatal privatization.

Today, despite Kenya's assets and the government's economic reforms the government has adopted, the economy continues to struggle. After increasing by 2.3 percent in 1997, real GDP growth dropped to 1.8 percent in 1998 and is expected to reach only 1.4 percent in 1999. With population increasing annually by 2.6 percent, Kenya's per capita GDP, already one of the lowest in the world, is falling. Whereas the average annual inflation rate was 11.2 percent in 1997, in 1998 it fell to 6.6 percent and is estimated to have been about 6.4 percent in 1999. Kenya continues to run a current account deficit, which has been offset by donor assistance and private investment.

Two key sectors of Kenya's economy, agriculture and tourism, struggled in 1998 and 1999 because of bad weather and security problems. Kenya's main imports are industrial supplies, machinery and capital equipment, transport equipment, and petroleum products. The country's 1999 imports were valued at $3.20 billion, while exports were valued at $1.99 billion. Kenya's mineral resources are small.

Kenya's key economic challenge in the next few years is to increase its real GDP growth rate. High and sustained economic growth is essential if Kenya is to address its high unemployment rate and widespread poverty. Achieving high growth will, however, depend on improved economic governance. In July 1997, governance problems led the IMF to allow its first-year Enhanced Structural Adjustment Facility (ESAF) arrangement for Kenya to lapse. For similar reasons, the World Bank let its Structural Adjustment Credit (SAC) expire on June 30, 1998. On the positive side, the government initiated an Economic Recovery Strategy in September 1999 that contained commendable pronouncements. Key elements of the strategy include improving public sector management, enhancing accountability and integrity, promoting the rule of law, and increasing the participation of the private sector in public affairs. The question is whether the government will be able to implement the reform proposals contained in the strategy.

Kenya has been politically stable since independence in 1963. Relations with the United States have been friendly. In 1992 the country adopted a multiparty system with a vibrant parliamentary opposition. In recent years, the press has enjoyed considerable freedom, but periodic intimidation and harassment of independent papers occurs. Popular pressure for political reforms, which expressed itself in 1997 through periodic street demonstrations and clashes, continues and the GOK is responding positively but cautiously. The government adopted a package of significant political reforms prior to the December 1997 general election, and in early 1999 began a process of constitutional reform.

2.   COMMERCIAL ENVIRONMENT

In 1998, U.S. exports to Kenya totaled $199 million, while imports totaled $98.5 million, resulting in a U.S. trade surplus of $100.5 million. This surplus was a decrease of $11 million over 1997. Principal U.S. exports include wheat, aircraft, fertilizer, soybean oil, and aircraft parts. Although Kenya is open and hospitable to trade and investment from the U.S., its traditional ties to formal colonial power the United Kingdom, its almost exclusive use of British business laws and practices, a relatively less-developed market, and its distance from the U.S. are all factors which have served to limit direct U.S. business relationships with the country. Many U.S. firms, though, market in Kenya via their European affiliates, a practice that distorts U.S. market share in Kenya in real terms. Almost 100 American companies are represented in Kenya. The stock of U.S. foreign direct investment in Kenya in 1997 was $190 million, an increase of over 33 percent from the 1996 level.

Kenya's official debt has been rescheduled in the Paris Club. Foreign exchange reserves greatly improved from a few days of imports at the end of 1992 to approximately three months' cover at the end of 1998, and remained at or near that level in 1999. Kenya is repaying its debt, although it is sometimes late in making payments. Importer interest in buying from the U.S. is increasing as the country's economy liberalizes and diversifies.

3.   MAJOR BUSINESS OPPORTUNITIES

Investment opportunities exist in the tourism, agriculture, manufacturing and other sectors. Specific areas of interest to U.S. business include ecotourism, power generation equipment, telecommunications equipment, agricultural inputs, and food processing and packaging equipment. Kenya's liberalized economy and the country's constitutional guarantee of investment protection provide incentives to invest, as do tax and investment incentives such as investment allowance, duty remission, and tax exemptions in the country's export processing zones. U.S. firms are encouraged to consider using Kenya as a base to access and penetrate the larger combined east and central African market.

4.   EMBASSY ASSISTANCE

The U.S. and Foreign Commercial Service (CS), with a regional operation based in Nairobi, along with the Foreign Agricultural Service (FAS), Economic and Political sections of the Embassy, stand ready to assist U.S. businesses in their efforts to penetrate this relatively dynamic and regional market hub.