Since 1963, Kenya has pursued mixed economic development strategy aimed at attracting foreign direct investment while pushing for the right environment to spur investments by both locals and international investors. Over the years, trade has played a critical role in the country’s growth agenda as economic reforms focused more on strengthening private investment.
Kenya’s external trade in 1963 was buoyant going by the Economic Survey of 1964. Economic growth for 1963 was the best since 1957, as imports and exports increased substantially and reached record levels.In those early days, trade comprised mostly manufactured goods(75 percent), fuels (11 percent), food,drink and tobacco (8 percent), and miscellaneous goods at 6 percent,mostly parcel post which was not analyzed but would consist almost entirely of manufactured goods.This did not change much in the years that followed as the country’s economy took shape in a post-independence environment.
The seventies recorded a marked reduction in the rate of growth as world trade took a plunge. While it’s total value is estimated to have risen nearly 10 percent, about half of this growth was attributed to rising prices. This was mainly due to sluggishness in the economies of the major industrial countries and monetary uncertainties.
Kenya’s total value of external trade grew by nearly 16 percent in 1971, down from 18 percent in 1970.However, in contrast to 1970, the growth in trade in 1971 was largely due to a sharp rise in imports by nearly K£40 million, or 25 percent.The growth in exports was only K£2.1 million or 2 percent.
The Kenyan economy experienced considerable difficulties in the 1980s, largely as a result of further unfavourable developments in trade and the world economy coupled with political and climatic conditions. By 1982, Kenya’s GDP, in real terms,increased by 3.3 percent, indicating a slight fall in per capita income. The rate of inﬂation had increased following the adjustment of the external value of the shilling in 1981.The political climate in the early 80s and 90s had a negative impact on trade as the clamour for multi party reforms accompanied economic uncertainty.
The trade balance of K£1.213 billion was the Worst since 1990. It was K£1.302 million and K£ 1.094 billion in 1990 and 1991 respectively.
This was attributed to the foreign exchange crunch resulting from the suspension of aid to Kenya in November 1991 by international institutions such as the International Monetary Fund, the World Bank and the bilateral donor community in general.
Inadequate rainfall and the inﬂux of refugees into Kenya led to substantial imports of food to supplement domestic production, resulting in a 12 percent growth in imports.
At 0.4 percent in 1992, GDP growth rate was at its lowest since independence in 1963. Inﬂation rose to a high of 27.5 percent.
The economy remained in recession for over ﬁve years until 2003.
Among the factors that contributed to this performance were low external inﬂows to ﬁnance capital formation, poor infrastructure, low domestic credit, low output and prices of major agricultural exports and uncertainties associated with the general election in December 2002. Central Bank of Kenya data shows that from 1998 to 2013, the balance of trade averaged -28.6 billion shillings,reaching a high of -2.175.0 billion shillings in June of 1999 and a record low of -89.852 billion shillings in August of 2011.
Imports vs. exports in Kenya
Agricultural products are central to Kenya’s export industry with horticulture and tea being the most lucrative. Other export items include textiles, coffee, tobacco, iron and steel products, petroleum products, cement. The main export destinations are the UK, Netherlands,Uganda, Tanzania, United States and Pakistan.
Kenya imports mostly machinery and transportation equipment, petroleum products, motor vehicles,iron and steel, resins and plastics.
Kenya’s main import partners are India, China, UAE, South Africa, Saudi Arabia, the United States and Japan.
However, despite all the challenges of a young nation, the country is now a diversiﬁed economy with a budget of over one trillion shillings.
Kenya is considered the regional hub for trade and finance for most of East and Central Africa due to favourable business climate. Attractive assets for investors include its strategic location, a sea port and a coastline, an extensive manufacturing base, excellent resources for agriculture and tourism, a skilled Workforce, and the best business infrastructure in the region.
Principal opportunities lie in the ﬁelds of agriculture, tourism, manufacturing, information, communication and technology and services. Horticulture, and in particular ﬂoriculture, has been an outstanding success and still has massive potential for growth.
Kenya is a member of many trading blocs. The East Africa Community (EAC) and the Common Market for Eastern and Central Africa (COMESA) particularly provides prospective investors with access to a combined market of more than 400 million consumers. The proposed launch of direct ﬂights to the USA and China is expected to open up hitherto untouched new markets and trade opportunities.
Kenya boasts over 1,000 major manufacturers with over 200 multinationals in the country mainly from Britain, France, China and Germany. However, in recent times, there has been a trend of major multinational companies setting up their African headquarters in Nairobi. Nokia Siemens Networks is among the multinationals that recently relocated its African headquarters from Dubai to Nairobi with its eyes cast and the planned upgrade of regional mobile networks to 3G and 4G platforms. Swiss beverage and nutrition food giant Nestle has also opened a regional head office in Athi River to spearhead its operations in 20 Equatorial Africa region including Kenya, Uganda, Congo, Congo Brazzaville, Angola and Madagascar among others.
Bharti Airtel plans to invest about Kshs 12 billion on its network in Kenya, including the construction of its headquarters in Nairobi while US beverage giant Pepsi Co, which stopped bottling in Kenya under competitive pressure in the 1970s, is putting up a Kshs 2.4 billion plant off Thika road. Coca-Cola has responded with a Sh5 billion investment plan and reorganized its African operations to make Nairobi its headquarters responsible for 39 countries.
As the country celebrates its golden jubilee, this is one of the visible indicators Kenya has come of age as a hub for business, trade and ﬁnance
Kenya’s present business climate
Kenya’s economy is much stronger compared to other countries in East Africa and that attracts companies looking for an investment—friendly base to exploit opportunities in local and regional markets. The mandate of the Kenya Investment Authority is to liaise with other government departments and agencies on behalf of investors. The government is focused on improving the business and investment climate. Kenya has simplified a total of 379 licenses, abolished 315 others and retained 294 through the Business Regulatory Reform Unit, which was set up to restructure the licensing regime.
Kenya is lucky to have discovered oil after establishing a diversiﬁed economy, which has strong manufacturing, services and agribusiness industries potential. The government has identiﬁed six sectors including manufacturing, agriculture and agro-processing, tourism, business process outsourcing (BPO), ﬁnance,wholesale and retail as the key drivers of growth in the next two decades under the Vision 2030 development blueprint. There is huge potentialto grow tourist numbers from the current 1.5 million per year to about three million in the next three years.
The other area with huge potential is the extractive sector. Since the discovery of oil, there is growing interest from explorers. Mining is also active especially after the start of a big titanium mining project in Kwale, and the discovery of coal in eastern Kenya. Mining has achieved new status, prompting the development of relevant laws and environment to support investment. The Government is likely to consider more incentives for big investors who can bring in technology and create jobs.
Kenya’s Vision 2030 flagship projects are also getting a lot of interest from the world over due to their huge potential. The new constitution led to the devolved government with 47 counties which are identifying the investment potential in their regions.
International and regional treaties
While Kenya is a sovereign state, it is also governed by various international treaties. To this end, Kenya is signatory to various agreements aimed at enhancing trade amongst member states coupled with a number of tax treaties and investment promotion and protection agreements. Exports from Kenya enjoy a number of preferential access to world markets under a number of special access and duty reduction programmes.
The East African Community Treaty
The East African Community (EAC) brings together Burundi, Kenya,Rwanda, Uganda and the United Republic of Tanzania.
Together, the ﬁve nations have a combined GDP of over Kshs 8.6 trillion ($107 billion) and cover an area of 1.82 million square kilometres with a population of more than 133 million people who share history, language, culture and infrastructure.
These advantages provide the partner states with a unique framework for regional co-operation and integration. The broad purpose of the community is to further cooperate in the political, economic and social ﬁelds, among others. The concrete objectives are to establish a customs union, a common market, a monetary union and, eventually, a political federation.
East African Business Council (EABC)
The East African Business Council(EABC) is the apex body of business associations from the ﬁve East African countries. Originally comprising members from Kenya, Tanzania and Uganda, its membership was expanded after 2007 to include private sector members from Burundi and Rwanda.
Currently, EABC has 54 associations and 102 corporate members.
Amongst the associations are all the national private sector apex bodies; four manufacturers’ associations; ﬁve chambers of commerce, three employer associations; two Women associations, two bankers’ associations and the Confederation of Informal Sector Associations of East Africa. Given that the secretariat is based in Arusha, EABC’s structure includes National Focal Points (NFPs)which are currently the national private sector apex bodies.
EABC provides a regional platform through which the business community can present their concerns at the EAC policy level, with the overall aim of creating a more conducive business environment through targeted policy reforms. Additionally, EABC also Work towards promoting private sector’s regional and global competitiveness in trade and investment through addressing challenges experienced by members at organizational and ﬁrm level; and through provision of tailored market intelligence. EABC’s key stakeholders are primarily the EAC secretariat,the business community, national policy makers, EAC organs and institutions and other key national and regional organisations working towards enhancing private sector participation in the EAC and global integration.
The Common Market for Eastern and Southern Africa (COMESA)
The Common Market for Eastern and Southern Africa (COMESA is a free trade area with 20 member states stretching from Libya to Zimbabwe. COMESA, formed in December 1994, replaced the Preferential Trade Area which had existed since 1981.
Nine of the member states formed a free trade area in 2000 (Djibouti, Egypt, Kenya, Madagascar, Malawi, Mauritius, Sudan, Zambia and Zimbabwe), with Rwanda and Burundi joining the FTA in 2004 and the Comoros and Libya in 2006.
Through Kenya’s steadfast implementation of COMESA integration programmes, COMESA has since become Kenya’s leading export destination, accounting for about 40 percent of total exports. Most Kenyan exports to COMESA consist of manufactured goods as opposed to primary products, thus enhancing diversiﬁcation of Kenya’s manufacturing base. Dominating exports are petroleum products, sacks and bags,medicaments, tea and food products.
Trade within COMESA FTA is regulated by the COMESA Rules of Origin, which are used to distinguish between goods that are produced Within member states and are entitled to preferential tariff treatment from those that are considered to have been produced outside the COMESA region that attract full import duties.
A product qualifies under the Rules of Origin if it is wholly produced by member states or has undergone substantial transformation in that member state. Goods that meet these requirements are issued with a COMESA Certiﬁcate of Origin by respective revenue authorities.
Some beneﬁts of the Free Trade Area include:
- Increased trade among member states
- A wider market
- Wider variety in goods trade
- Increased share of manufactured and semi—manufactured goods in the intra—COMESA trade
Multilateral Trade system (MTS)
The World Trade Organisation (WTO) is the only international organisation dealing with the global rules of trade between nations. The overriding objective of the WTO is to ensure that trade ﬂows smoothly, freely and predictably. Kenya has been a member of the WTO since its inception in January 1995.
ACP/Cotonou Partnership Agreement
Exports from Kenya entering the European Union are entitled to duty reductions and freedom from quota restrictions. Trade preferences include duty—free entry of all industrial products as well as a wide range of agricultural products including beef,ﬁsh, dairy products, cereals, fresh and processed fruits and vegetables.
African Growth and Opportunity Act (AGOA)
Kenya qualiﬁes for duty-free access to the United States of America (USA) market under the African Growth and Opportunity Act enacted by USA. Kenya’s major products that qualify for export under AGOA include textiles, apparels, handicrafts, etc.
Generalised System of Preferences(GSP)
Under the Generalised System of Preferences, a wide range of Kenyan – made products are entitled to preferential duty treatment in the USA, Japan, Canada, New Zealand, Australia, Switzerland, Norway,Sweden, Finland, Austria, and other European countries. In addition, no quantitative restrictions are applicable to Kenyan exports on any of the 3, 000 plus items currently eligible for GSP treatment.
Investment Protection Guarantee
The Constitution of Kenya guarantees protection of life and private property. The Foreign Investment Protection Act guarantees against expropriation of private property by the Government. Kenya is a signatory to and member of the Multilateral Investment Guarantee Agency(MIGA), an affiliate of the World Bank that guarantees investors against loss of investment to political problems in host countries.
Kenya is also signatory to Inter-national Centre for Settlement of Investment Disputes, which is a channel for settling disputes between foreign investors and host governments.
Bilateral Trade Agreements
Kenya has signed bilateral trade agreements with several countries globally. Some of the countries are already members of existing schemes offering market access duty reduction preferences as above.
Other Key Trade incentives In Kenya
(a) Capital Investment Allowances
Additional tax incentives offered to resident companies take the form of capital allowances offered to those investing in capital projects. These are offered on a reducing balance basis and include.
i. Investment Allowance Based on Location
This is provided as follows:
- Qualifying investment exceeding Kshs 200 million (outside Nairobi,or the Municipalities of Mombasa or Kisumu) 150 percent
- Other qualifying investment 100 percent
ii. Investment Deduction
This incentive is granted to encourage development in manufacturing. It is granted once at 100 percent in the ﬁrst year of use, to any person who incurs capital expenditure on construction of a new building and installation therein of new or old manufacturing machinery. It is also offered for the construction of a hotel that is certiﬁed to be an industrial building.
iii. Industrial Building Allowance(I.B.A)
IBA is granted on capital expenditure incurred on the construction of an industrial building. A rate of 2.5 percent per annum is applied to the qualifying cost of the construction of an industrial building and 4 percent per annum is applied on the qualifying cost of a hotel building.
iv. Farm works Deduction
This is granted at the rate of 33.33 percent per annum for three years to the owner or tenant of any agricultural land who incurs capital expenditure on the construction of farm works. Farm Works mean labour quarters, farm house and any other immovable building necessary for the proper operation of the farm such as fences, dips, drains, dams, water and electrical supply Works etc.
v. Shipping investment Deduction
This is granted at the rate of 40 percent on capital expenditure and only one such deduction can be allowed in respect of the same ship. To qualify, the purchase must be that of a new, unused power-driven ship of more than 495 tonnes or on the purchase and subsequent reﬁtting for the purpose of shipping business of a used power—driven ship of more than 495 tonnes.
vi. Mining Allowance
This is granted to a person who incurs capital expenditure on searching for, discovery, testing and Winning access to minerals; expenses incurred in obtaining acquisition rights over deposits; expenses related to purchase of machinery and buildings together with the development,general administration and management prior to commencement of production.
This is granted at the rate of 40 percent in the ﬁrst year and 10 percent from the second to the seventh year.
(b) Export Processing Zones (EPZs)
- Ten – year corporate income tax holiday and a 25 percent corporation tax rate for a further 10 years thereafter (except for EPZ commercial enterprises)
- Ten-year Withholding tax holiday on dividends and other remittances to non – resident parties (except for EPZ commercial licence enterprises)
- Perpetual exemption from VAT and customs import duty on inputs.
- 100 percent investment deduction on new investment in EPZ buildings and machinery, applicable over 20 years.
- Exemption from any quotas or other restrictions or prohibitions on imports or exports with the exception of trade in firearms and military equipment.
(c) Special Economic Zones
Kenya’s Cabinet approved a memorandum establishing the Special Economic Zones. This is in line with international best practices, where countries that embraced the concept of EPZ as an economic programme geared towards export— oriented processing, have been moving to SEZ programmes.
- SEZs are anchored on Vision 2030, envisaging establishment of free trade zones, business process outsourcing and free ports.
- Other activities include establishment of agricultural parks, industrial parks, science and technology parks for the development and production of information technology software and hardware products, tourism and recreation parks, business incubators etc.
- Through SEZs, line ministries are spearheading the first free trade zone corridor, stretching from Nairobi to Mombasa.
Other than agricultural land, foreigners are allowed to own land. Allfarmlands must be owned by Kenyancitizens or by corporations whoseentire shareholders are Kenyancitizens. The President of Kenya can,however, grant agricultural land toa foreign agro—processing companythat needs land to grow a proportionof its basic agricultural input.
The Trade Union Act and the TradeDispute Act regulate employer/ employee relations in Kenya.
The trade union movement isstrong with an estimated 40 percentof the labour force in the modernsector belonging to various tradeunions. The Central Organisation ofTrade Unions (COTU) is the nationalumbrella body governing about 30unions. Kenya also has industrialcourts that sit daily to hear and settleindustrial disputes.
Countries with Bilateral Agreements with Kenya
- Congo (DRC)
- South Korea
Agreements Under Negotiations
- Czech Republic
Kenya Investment Authority
The Investment Promotion Act 2004 constituted a powerful body, the Kenya Investment Authority, whose mandate is to promote and facilitate investment.
An investor may obtain an Investment Certiﬁcate from the KIA provided the investment capital is at least $500,000 and that the investment and the activities related to it are beneﬁcial to Kenya. Beneﬁcial activities are determined by such criteria as creating employment, skills upgrading, transfer of technology, foreign exchange and tax revenue generation, among others.
An Investment Certiﬁcate grants the investor such beneﬁts as entitlement to all licenses required for operation and Work permits for three members of management or technical staff and three shareholders or partners valid for two years each.
Obtaining the Investment Certiﬁcate at KIA’s “one-stop” is beneﬁcial because Kenya has a rather extensive licensing requirement. Trademarks are regulated by the Trade and Service Marks Act, and patents are administered by the Kenya Industrial Property Institute (KIPI). The duration of trademarks is seven years from the date of ﬁling and renewable every 14 years. Kenya is an active member of World Intellectual Property Organisation with several recognized IP lawyers.
Ownership in locally incorporated companies
There are no restrictions on the percentage of equity that foreign nationals may hold in a locally incorporated company, although the Government encourages foreign firms to form joint ventures with Kenyan companies or entrepreneurs.
Foreign ownership of equity in insurance, telecommunications and companies listed on the Nairobi Stock Exchange is, however, restricted to 66.7 percent, 70 percent and 75 percent respectively. Foreign equity in companies involved in ﬁshing activities is restricted to 49 percent of the voting shares under the Fisheries Act. Investors manufacturing and dealing in ﬁrearms and explosives require special licenses which are subject to security vetting. Kenyan laws prohibit manufacture of, and dealing in, narcotic drugs and psychotropic substances.
Both private and public companies may allot shares for considerations other than cash as long as the registrar of companies is informed of such allotments.
Work Permits in Kenya
Investors are allowed to have expatriate staff in senior management, orwhere locals with speciﬁc skills arenot available. Work permits are validfor a maximum of two years andcan be renewed by the ImmigrationDepartment.