KENYA: TRIST Brief. Prepared by Anneke Hamilton

Transcription

1 KENYA: TRIST Brief Prepared by Anneke Hamilton Overview Kenya is one of East Africa s main trade and finance centers. The agriculture sector plays an important role in the economy, employing over 75% of the population and producing some of the country s most important exports such as tea, horticulture and coffee. 1 However, the services sector accounts for almost 60% of GDP with tourism and transport being the main foreign exchange earners for Kenya. 2 Major export markets for Nigeria are Uganda, the United Kingdom, the United States and the Netherlands. Products such as machinery, transportation equipment, motor vehicles and petroleum products are mainly imported from key partner countries: United Arab Emirates, India, China and Saudi Arabia. 3 Trade Regime Since the 1980s, Kenya s trade regime has undergone a series of progressive liberalization resulting in lower average tariff rates. In particular, a marked reduction in average import tariffs resulted from the adoption of the EAC common external tariff (CET) in 2005, where the simple average fell from 16.8% in 2004 to 12.9% under the CET. Kenya is a member of the East African Community (EAC) under which it implemented the EAC Common External Tariff (CET) and benefits from tariff preferences on its exports to EAC member states. 4 Kenya is also a member of the Common Market for Eastern and Southern Africa (COMESA), where it is a signatory to the. Kenya enjoys preferences under the United States Africa Growth and Opportunity Act (AGOA), is a signatory to the United States Trade and Investment Framework Agreement (TIFA) and also benefits from the Generalized System of Preferences (GSP) with several industrialized countries. As a member of the EAC, Kenya entered into an Interim Economic Partnership Agreement (EPA) with the European Union (EU) which replaces the trade section of the expired ACP-EU Cotonou Agreement. A comprehensive EPA is still being negotiated which will cover a wider range of trade areas. 5 6 Current Challenges Kenya s trade regime has been hampered by ongoing political instability and violence which followed the December 2007 election results. 7 It also faces other challenges such as supply side constraints as well as the procedural and revenue effects of implementing its various trade agreements, namely the EPA, the EAC FTA and the. 1 World Trade Organization (WTO) Trade Policy Review Body Trade Policy Review-East African Community Members-Report by the Secretariat. September 20. WTO, Geneva. Available at: 2 World Trade Organization Trade Policy Review Body Trade Policy Review-East African Community Members-Report by the Secretariat. 3 World Bank Kenya: Trade Brief. April. World Bank, Washington, D.C. Available at: 4 The EAC CET is due to be reviewed in World Bank Kenya: Trade Brief. April. World Bank, Washington, D.C. 6 World Trade Organization Trade Policy Review Body Trade Policy Review-East African Community Members-Report by the Secretariat. 7 World Bank Kenya: Trade Brief. April. World Bank, Washington, D.C.

2 KENYA: Description of the Data in TRIST The Kenya TRIST contains data on the value of imports and collected trade revenue for the year This data is recorded at the eight-digit level of the HS 2002 classification (HS2). Kenya imported KES671,338,552,138 8 worth of goods from 156 import partners, distributed across 4,363 tariff lines. The top ten trading partners were: Other Countries n.e.s., India, UAE, China, Japan, South Africa, UK, USA, Germany and Indonesia (See Figure 1). Trade Taxes The Kenya TRIST contains revenue data on: statutory tariff, collected tariff, excise tax and value-added tax (VAT). VAT accounts for the majority of Kenya s trade revenue (KES54,089,156,824), representing 45.6% of overall trade tax revenue. Average rates for statutory tariffs and VAT are similar at 12.6% (simple) and 7.3% (weighted). Collected tariff rates have averages of 11.0% (simple) and 4.4% (weighted). The average rates for excise tax were 1.7% (simple) and 5.0% (weighted) (See Table 1). Table 1. Trade Revenue for Kenya (2008) Statutory Tariff Collected Tariff Excise Tax VAT Total Value KES48,974,763,940 KES29,591,826,871 KES35,065,629,324 KES54,089,156,824 Share Of Total % 29.5% 45.6% Simple Average 12.6% 11.0% 1.7% 12.6% Weighted Average 7.3% 4.4% 5.0% 7.3% Source: TRIST Data Aggregation Tool Kenya, Trade taxes in Kenya are calculated as follows: Tariff - T% of CIF Import Value Excise Tax - EXT% of [CIF Import Value+ Collected Tariff] Value Added Tax - VAT% of [CIF Import Value + Collected Tariff + Excise] Inconsistencies in Data Data contained in the TRIST model identifies Other Countries n.e.s. as the top import partner for Kenya, however, no further breakdown is available for the countries included in this category. 8 Value expressed in Kenyan Shilling.

3 KENYA: Simulation Scenarios and Results 9 In this section, various tariff liberalization scenarios are simulated using the Kenya TRIST. Scenario 1: Economic Partnership Agreement with the EU This scenario illustrates the impact of complete tariff liberalization under the EPA on Kenya s trade revenue. 10 Tariff revenue is projected to fall over the short-term by more than 20% leading to an overall reduction in trade revenue by 5.8%. Imports are estimated to marginally increase by 0.4% while the average collected tariff rate falls from 4.4% to 3.4%. Table 2. Revenue Implications of an EPA with the EU % Change in Imports 0.4% % Change in Tariff Revenue -21.5% % Change in Total Revenue -5.8% Old Collected Tariff Rate 4.4% New Collected Tariff Rate 3.4% Scenario 2: EPA with Exclusion List Under the EPA, Kenya is allowed to exempt up to 20% of its EU imports from tariff liberalization. 11 Scenario 2 considers two cases of an EPA where some products are excluded from liberalization. Scenario 2a assumes that the exclusion list is defined to include the most revenue sensitive products, 12 while Scenario 2b, uses the Official EPA Exclusions List for EAC member states. 13 Table 3. Revenue Implications of an EPA with an Exclusion List Scenario 2a: EPA with 80% Sensitive List 2a but lower than those reported for Scenario 1. Scenario 2b: EPA with Official EAC Exclusion List Total Number of Tariff Lines 4,363 4,363 Number of Excluded Product Lines 1,597 1, % Change in Imports 0.1% 0.3% % Change in Tariff Revenue -5.7% -17.8% % Change in Total Revenue -1.5% -4.8% Old Collected Tariff Rate 4.4% 4.4% New Collected Tariff Rate 4.2% 3.6% The results for Scenario 2a indicate a reduction in tariff revenue of 5.7% and a fall of 1.5% in total trade revenue. These revenue losses are substantially lower than those projected under Scenario 1 (the EPA without an exclusion list). Scenario 2b projects higher revenue losses than those reported for Scenario 9 All scenarios use the current trade policy (existing applied tariff rates and revenue) as the starting point for simulations, unless otherwise specified. The default elasticities used in all simulations are as follows: exporter substitution = 1.5 and demand = 0.5, unless otherwise specified. 10 Kenya has signed an Interim EPA Agreement with the EU, a complete EPA agreement is still to be negotiated and signed. A core component of the EPA is the reciprocal elimination of import tariffs. 11 The GATT requirement that preferential trade arrangements must lead to the gradual removal of tariffs and non-tariff barriers on substantially all trade has been interpreted by the EC Commission to mean that ACP countries are allowed to exempt up to 20% of their imports from tariff reduction. 12 We identify the most revenue sensitive products using the detailed results of Scenario 1. See the TRIST Training Manual for steps on how to create an exclusion list of the most revenue sensitive goods. 13 The official EPA Exclusion List for EAC states is available at: 14 In total there are 1,390 lines on the Official EAC Exclusion List. However, only 1,075 lines correspond to Kenya s 2008 Tariff Lines.

4 Scenario 3: This scenario hypothesizes a with all nineteen (19) COMESA member states, 15 effectively setting all tariffs on imports from COMESA countries to zero, while tariffs on imports from other countries remain unchanged. This scenario was first run using the default elasticities (Scenario 3a). 16 The results of the model suggest a small fall in tariff revenue of less than 1% and an overall reduction in total revenue by approximately 0.2%. Almost no change is projected for imports and the import weighted collected tariff rate is not expected to change. Scenario 3b uses higher values for the elasticities in the model, 17 however, almost no change is evidenced in this scenario when compared to the results of Scenario 3a. Table 4. Revenue Implications of a Scenario 3a: (Default elasticities) Scenario 3b: (High elasticities) % Change in Imports 0.0% 0.0% % Change in Tariff Revenue -0.6% -0.6% % Change in Total Revenue -0.2% -0.2% Old Collected Tariff Rate 4.4% 4.4% New Collected Tariff Rate 4.4% 4.4% 15 In reality, only eleven (11) COMESA members are part of the : Burundi, Djibouti, Egypt, Kenya, Madagascar, Malawi, Mauritius, Rwanda, Sudan, Zambia and Zimbabwe. 16 The default elasticities are as follows: exporter substitution = 1.5 and demand = The higher elasticities used are: exporter substitution = 5 and demand = 1.

5 Table 5. KENYA: Revenue Implications of Various Trade Scenarios (KES) 18 Imports Scenario 1 Scenario 2a Scenario 2b Scenario 3a Scenario 3b FULL EPA EPA with 80% Sensitive List EPA with Official EAC Exclusion List (Default Elasticities) (High Elasticities) Imports pre 671,338,552, ,338,552, ,338,552, ,338,552, ,338,552,138 Imports post 674,007,052, ,103,345, ,541,049, ,420,624, ,516,733,229 Change in imports 2,668,500, ,793,585 2,202,497,376 82,072, ,181,090 % change in imports 0.4% 0.1% 0.3% 0.0% 0.0% Tariff Revenue Tariff revenue pre 29,591,826,871 29,591,826,871 29,591,826,871 29,591,826,871 29,591,826,871 Tariff revenue post 23,238,373,296 27,917,364,814 24,328,412,721 29,414,741,213 29,401,263,958 Change in tariff revenue -6,353,453,575-1,674,462,057-5,263,414, ,085, ,562,914 % change in tariff revenue -21.5% -5.7% -17.8% -0.6% -0.6% Total Tax Revenue on Imports Total revenue pre 118,746,613, ,746,613, ,746,613, ,746,613, ,746,613,019 Total revenue post 111,820,571, ,975,897, ,026,062, ,557,045, ,560,237,120 Change in Total revenue -6,926,041,909-1,770,715,934-5,720,550, ,567, ,375,899 % change in Total revenue -5.8% -1.5% -4.8% -0.2% -0.2% Total Tax Revenues on Import and Domestic Production Total tax revenue pre 118,746,613, ,746,613, ,746,613, ,746,613, ,746,613,019 Total tax revenue post 111,820,571, ,975,897, ,026,062, ,557,045, ,560,237,120 Change in total tax revenue -6,926,041,909-1,770,715,934-5,720,550, ,567, ,375,899 % change in total tax revenue -5.8% -1.5% -4.8% -0.2% -0.2% Collected Tariff Rate Collected applied tariff rate pre 4.4% 4.4% 4.4% 4.4% 4.4% Collected applied tariff rate post 3.4% 4.2% 3.6% 4.4% 4.4% % change in collected applied tariff rate -21.8% -5.8% -18.1% -0.6% -0.7% 18 Values expressed in Kenyan Shilling.

6 References World Bank Kenya: Trade Brief. April. World Bank, Washington, D.C. Available at: World Bank Kenya: Country Brief. March. World Bank, Washington, D.C. Available at: World Trade Organization (WTO) Trade Policy Review Body Trade Policy Review-East African Community Members-Report by the Secretariat. September 20. WTO, Geneva. Available at: