Cablegate: Agoa Eligibility Review - Kenya

VZCZCXYZ0003
PP RUEHWEB

DE RUEHNR #4472/01 2891348
ZNR UUUUU ZZH
P 161348Z OCT 06
FM AMEMBASSY NAIROBI
TO RUEHC/SECSTATE WASHDC PRIORITY 4959
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHRC/USDA FAS WASHDC 1346

UNCLAS NAIROBI 004472

SIPDIS

STATE FOR AF/E, AF/EPS JANET POTASH, AND AF/RSA
AGRICULTURE FOR USDA/ITP/FAS CHUCK BERTSCH
STATE PLEASE PASS USTR CONNIE HAMILTON AND WILLIAM JACKSON
STATE PASS USAID FOR AFR/EA
TREASURY FOR OREN WHYCHE-SHAW

SIPDIS

E.O. 12958: N/A
TAGS: AGOA ECON ETRD KE
SUBJECT: AGOA ELIGIBILITY REVIEW - KENYA

REFS: (A) STATE 163056 (B) 09/29/06 POTASH-FLEITMAN EMAIL

1. This message responds to ref A's request for updated information
pertaining to Kenya's continued eligibility for trade preferences
under the African Growth and Opportunity Act (AGOA).

Country: KENYA
Current AGOA Status: Eligible

Country Background Summary: Population of 33.5 million in 2005.
2005 GDP was $18.7 billion and per capita income was $461. An
estimated 57% of the population lives on less than one USD per day.
The economy experienced 5.8% growth in 2005. About 80% of the
country's workforce is employed in the agriculture and livestock
sectors. An estimated six million Kenyans are engaged in the
informal sector. The Ministry of Labor puts the unemployment rate
at over 40%. U.S. exports increased by 60.5% to $626 million, buoyed
by $279 million in Boeing jet sales; while imports of Kenyan goods
slipped 1.2% to $348 million. Kenya's overall trade deficit
ballooned 81% to $2.9 billion. Trade increased 16% to $9.3 billion.
COMESA is Kenya's biggest export market. Agriculture
(horticulture, tea, and coffee are the main exports) accounts for
25% of GDP; manufacturing about 13%. Tourism was the country's hard
currency leader, earning $647 million.

Kenya is a constitutional, multiparty democracy. The parliament is
increasingly independent and the military is apolitical.
Presidential elections and a peaceful transfer of power took place
in December 2002. Opposition leader Mwai Kibaki won the election,
becoming Kenya's third head of state in almost four decades of
independence. The Kibaki government endured a resounding defeat in
the November 21, 2005 Constitutional Referendum. Despite attempts
to revive support for constitutional reform before the anticipated
December 2007 General Elections, the reform process remains stalled.
Corruption is endemic.

Comments on Eligibility Requirements

I. Market-based Economy

A. Major Strengths Identified

Export growth. AGOA exports, mostly apparel but also including cut
flowers, nuts, pineapple, and light manufactures, fell 2.8% from
$279.9 million in 2004 to $272.1 million in 2005. In 2005, textile
and apparel exports of $267 million accounted for 98.1% of Kenya's
AGOA exports.

In the first six months of 2006, garment exports to the U.S. fell
9.5% to USD 119 million. However, June 2006 exports rose 9.8%
year-on-year to $23 million, and July 2006 exports of USD 18.8
million were only 2.1% below July 2005 exports.

The majority of Kenya's AGOA exports are produced in Export
Processing Zones (EPZs), where total investment increased by 9.8%
from $214.5 million in 2004 to $247.3 million in 2005.

Kenya's AGOA garment exports (five-pocket jeans, men's cotton
shirts, polyester nightwear, women's knit tops, chino pants, knit
bottoms, fleece jackets, children's clothes, lingerie, and
sportswear) are produced in 26 apparel factories (down from 30 in
2005) located in export processing zones (EPZs) located mostly
around Nairobi and Mombasa. The apparel factories employed 34,556
workers (99% locals) in 2005, a slight decline from 34,614 workers
in 2004. Of the total enterprises in operation in the EPZs in
December 2005, the garment sector constituted 36.8% of total
enterprises, 90% of total employment and 74.4% of total exports.

Although their number of enterprises fell from 74 to 68, the EPZs
remain a significant source of employment in the manufacturing
sector, registering a small increase from 37,723 employees in 2004
to 38,051 in 2005.

Kenya is compliant with the WTO Customs Valuation Agreement. As
part of its "Pre-shipment Verification of Conformity" policy,
adopted in September 2005, the Kenya Bureau of Standards hired two
private companies to conduct pre-shipment inspections. The same
month the Kenya Revenue Authority inaugurated a new electronic
clearing system at the Port of Mombasa.

In the wake of numerous reports that the Government of Kenya is
losing $400 million in potential tax revenue, the GOK is now making
greater efforts to enforce its WTO-compliant copyright and
industrial property right laws.
In January 2006 Kenya established a "Public Procurement Oversight
Authority," as called for the November 2005 Public Procurement and
Disposal Act, to minimize graft by closing loopholes in the
government procurement of goods and services. To further ensure
transparency, in early October 2006 the Parliament tabled a bill,
the "Supplies Practitioners Management Act," to address loopholes
left by the Public Procurement and Disposal Act. It stipulates that
all supplies and procurement officers would only be licensed after
undergoing training and passing relevant examinations.

With the enactment of the Privatization Act of 2005, which outlines
how parastatals are to be divested, the government moved swiftly in
2006 to begin offloading its shares in the Kenya Electricity
Generating Company Limited, the Mumias Sugar Company, Kenya
Reinsurance, Telekom Kenya (the public fixed-line telephone
monopoly), and Safaricom (the national cellular network). The Kenya
Port Authority also plans to privatize many operations in the Port
of Mombasa. The law establishes a "Privatization Commission" to
ensure divestiture is undertaken in a transparent and accountable
manner.

In November 2005 Kenya's investment promotion laws were revised to
provide for the establishment of the Kenya Investment Authority.

With the passage of the Cotton Amendment Act in July 2006 and the
authorization of a "Cotton Development Authority," the government
began revitalization of the domestic cotton industry.

The Nairobi Stock Exchange instituted electronic trading in early
September 2006, helping spur a bull market.

In mid-September 2006, Standard and Poor's issued Kenya's first
independent credit rating, giving Kenya a long-term foreign currency
sovereign rating of B plus; a long-term local currency sovereign
credit rating BB minus; and short-term foreign and local sovereign
credit ratings of B.

Kenya is an important contributor to TRIPs, and the Attorney
General's office is now committed to enforcing the Copyright Act of
2001. Parliament is to consider an Anti-Counterfeit Goods Act in
late 2006.

In October 2005, the High Court for the first time ruled in favor of
the plaintiff in a copyright infringement case (Alternative Media
Limited vs. Safaricom Limited).

The Ministry of Trade and Industry announced on October 3, 2006 that
meat from Kenya had been re-approved for sale on the global market.
In connection with the resumption of meat sales (processed sheep and
goat) and livestock exports (including Kenyan camels), principally
to the Egypt and the Arab Gulf states, the government reopened the
Kenya Meat Commission abattoir in late September 2006.

B. Major Issues/Problems Identified

Overall inflation in 2005 was 10.35%, down from 11.6% in 2004. The
drop was attributed mainly to the government's and Central Bank's
implementation of tighter monetary policy. After some ups and
downs, overall inflation rose to 12.1% in September 2006. 2006
overall inflation is expected to reach 12% largely due to increases
in the costs of fuel, power, transport, and food. However, the
Central Bank uses the underlying inflation rate, which omits the
volatile categories of food, energy and transportation, to manage
money supply and control inflation. The CBK target is 5%. The
underlying rate rose from 3.5% in 2004 to 5.4% in 2005, but fell
steadily to 4% in September 2006.

Corruption and transparency remain serious problems, especially
involving public procurement. The approval of the Public
Procurement and Disposal of Assets Bill 2005, is a positive
development. The law establishes an autonomous Public Procurement
Authority to improve the efficiency and transparency of public
procurement, if aggressively implemented.

Kenyan textile and apparel manufacturers acknowledge they will be
unable to stay in business without an extension of the third-country
fabric provision. They candidly admit that there is no local or
even regional vertically integrated supply chain to support the
industry. Kenya's cotton industry is simply unable to satisfy
current demand.

In the past five years, about 40 investors have pulled out of Kenya,
while 106 companies have closed down, according to the Federation of
Kenya Employers (FKE). In the wake of the conclusion of the
Multi-Fiber Arrangement, seven garment factories have closed,
resulting in the loss of over 10,000 jobs.

Cut flower exports to Europe in the last year fell 15% compared to
the previous year, with 28 small flower farms having closed over the
past four years owing to prolonged drought conditions, poor roads in
the main growing zone of Naivasha, the high cost and unreliability
of electricity, high freight costs, and insecurity.

After producing 3.2 billion kilos of tea in 2005, production in 2006
is down 10%. But a steep rise in prices meant that tea earnings
grew by nearly 7% the first eight months of 2006 to over $400
million. Exports to Egypt account for 26% of sales.

II. Political Reforms/Rule of Law/Anti-Corruption

A. Major Strengths Identified

Progress toward political pluralism came with the democratic
elections that ushered in the Kibaki government in December 2002.

The 2002 general election represented a significant step forward in
Kenyans' ability to change their government peacefully. Civil
society and public groups continue to consolidate gains in freedom
of expression and promotion of social and political initiatives.

The Attorney General proposed a new draft constitution in August
2005. Civil society groups and churches played an important role in
the public debate on the draft's merits. In a November 21, 2005
public referendum, the electorate overwhelmingly rejected the draft
constitution. The referendum was peaceful and professionally
administered.

The Kenya Anti-Corruption Commission became fully operational and
sufficiently funded in 2005.

In April 2003, Parliament passed two key anti-corruption laws, the
Anti-Corruption and Economic Crimes Act and the Public Officers
Ethics Act.

On October 2, 2006, Kenya's Anti-Corruption Commission recommended
that four former ministers should be prosecuted for their role in
the "Anglo Leasing Scandal," which surfaced in April 2004 when MPs
demanded to know why the government overpaid a tender for
forgery-proof passports to a fictitious firm. Three former
permanent secretaries were also were also accused of playing key
roles in the scandal, which involved members of both the Moi and
Kibaki regimes. The other five facing prosecution are a former
senior finance secretary and four other government officials.

B. Major Issues/Problems Identified

Freedom House's Freedom in the World index ranks Kenya "Partly Free"
(3.3).

According to Transparency International's 2005 Corruption
Perceptions Index, Kenya is one of the most corrupt countries in the
world (ranked 145 out of 158 countries surveyed).

The judiciary remains subject to executive branch influence and
allegations of corruption. Slow courts, degraded infrastructure,
high crime, high power costs, and corruption are deterrents to
investment.

The Attorney General lacks the capacity to handle the volume of
files referred to his office, and insufficient prosecutorial
capabilities.

Most police who perpetuate abuses are neither investigated nor
punished.

To date, there have been no prosecutions of senior government
officials, despite strong indications of high-level graft.

The constitutional review process remains stalled despite attempts
to revive it prior to the 2007 General Election. Debate continues
over whether there should be minimal or comprehensive constitutional
reforms enacted before the election.

III. Poverty Reduction

A. Major Strengths Identified

The IMF and Kenya remain at an impasse on completing the second
review for the three-year, USD 252.75 million Poverty Reduction and
Growth Facility (PRGF) agreement they signed on November 21, 2003.
The May 2006 IMF mission focused on three areas: macroeconomic
issues, structural issues and governance. The IMF has not been able
to conclude its review due to a lack of progress in its governance
issues, but the program could be extended a year, leaving time for a
third review in November 2007.

AGOA-related growth created over 38,000 jobs in 2005. Indirect
effects on employment are fairly significant.

In January 2003, the Kibaki government implemented a policy of free
public primary education that has increased enrollment from 5.9
million children in 2003 to 7.6 million in 2005.

Government is initiating new policies to improve informal
settlements and provide more low cost housing.

B. Major Issues/Problems Identified

The Kenyan government has rhetorically vowed to stamp out graft and
push ahead with economic liberalization, but entrenched private
interests and political in-fighting threaten the agenda. Corruption
on a grand scale continues to alarm the public and turn away
potential donors and investors.

Relations with major international donors are dependent on the
government's commitment to its economic and governance reforms and
its anti-corruption agenda.

Recurring drought conditions in much of the country have created
significant food shortages for approximately 3.5 million people.

The end of the Multi-Fiber Agreement in January 2005 saw China
subsequently taking market share from Kenya. Kenyan AGOA exporters
had to cut their profit margins to remain competitive. Garment
exports to the U.S. under AGOA are likely to decline if Kenyan
producers do not enhance their global competitiveness or seek niche
markets.

Business performance and new private investment will be negatively
impacted by a myriad of problems ranging from over-regulation,
corruption, dilapidated infrastructure; high energy costs,
electricity tariffs, and security concerns.

Educational capacity is lacking, both for managing the growth in
primary education and for meeting the growing demand for affordable
secondary and post-secondary school.

Access to adequate health care, including sufficient, affordable
supplies of anti-retroviral drugs for HIV/AIDS sufferers remains
unattainable for most Kenyans, over half of whom live on less than
one dollar per day.

IV. Workers' Rights/Child Labor/Human Rights

A. Major Strengths Identified

Forced labor is illegal. Legislation protects workers' rights. The
rights to organize and bargain collectively are well established.
The Task Force on Labor Law Reform has drafted new labor laws that
will ensure compliance with ILO core-labor standards and ensure
better enforcement of occupational health and safety standards.
The Government is supportive of reforms to ensure labor rights are
respected and worker safety enhanced in Export Processing Zones.
Formal-sector employment of children is illegal. Ratified ILO
Convention 182 on worst forms of child labor. The Child Labor
Division in Ministry of Labor began another "Time Bound Program for
the Elimination of the Worst Forms of Child Labor" in April 2005.
Local human rights NGOs are active and tolerated and foreign NGOs
operate freely.

The Children's Act of 2001 prohibits all forms of child labor that
would prevent children under the age of 16 from going to school or
that is exploitative and hazardous. The Children's Act also
prohibits child sexual exploitation. The Constitution prohibits
slavery, servitude, and forced labor. The Department of Children's
Services (Office of the Vice President and the Ministry of Home
Affairs) is responsible for the administration of all laws regarding
children, particularly awareness raising regarding children's rights
and the management of rehabilitation institutions.

Labor courts provide some remedy to workplace safety and health
problems and the new labor laws will allow appeal to the higher
court.

In last decade, trends in labor conditions have been generally
positive.

Government has ratified seven of the fundamental ILO conventions
including 182 on the worst forms of child labor. The Government of
Kenya ratified ILO Convention 138 on April 9, 1979 and ILO
Convention 182 on May 7, 2001.

The Industrial Relations Charter, executed by the government, COTU,
and the Federation of Kenya Employers, gives workers the right to
engage in legitimate trade union organizational activities. Both the
Trade Disputes Act and the Charter authorize collective bargaining
between unions and employers, and wages and conditions of employment
were established in negotiations between unions and management. The
government permits wage increases of up to 100% and renegotiation of
collective agreements.

On July 14, 2006, Kenya adopted the Sexual Offenses Act, which
criminalizes rape, defilement of a minor, child pornography, sex
tourism, and sexual harassment.

B. Major Issues/Problems Identified

Despite the government's general respect for the human rights of its
citizens and its attempts to institute reforms to address
deficiencies, serious problems remain, particularly with regard to
abuses by the police service. Some elements of the security forces
continued to commit abuses, including extra-judicial killings and
the torture and beating of detainees. Prison conditions remained
extremely sub-standard. Lengthy pre-trial detention is a problem,
and the judiciary was subject to executive branch influence.

The government arrested and prosecuted a number of police officers
for abuses; however, most police who committed abuses were neither
investigated nor punished.

Although abuse by the police service was the most serious problem
affecting the general population, the most publicized affront to
respect for human rights in Kenya was the March 2, 2006 government
raid on the Standard Media House.

The Ministry of Labor's inspection and enforcement functions are
weak. The ILO has urged repeal of provisions of labor laws that
contravene ILO conventions on forced labor and was critical of
legislation not in conformity with ILO convention governing freedom
of association. New labor laws that have been drafted but are not
yet enacted will solve this problem, bringing all domestic laws into
compliance with ILO conventions.

Workers have been fired for participating in trade union activities,
especially in export processing zones.

Child labor remains a serious problem in the informal and
agricultural sectors.

There are no laws in Kenya prohibiting human trafficking, but
various laws can be used to prosecute trafficking-related offenses.
There have been reports that persons were trafficked to, from, and
within the country. Investigatory research and anti-trafficking
advocacy are beginning to emerge in Kenya. NGOs submitted a draft
law against trafficking in persons to the Government, which says it
will complete and submit to Parliament.

The law allows employers in ailing industries to dismiss workers
regardless of the provisions of their collective bargaining
agreements.

V. International Terrorism/U.S. National Security

A. Major Strengths Identified

Kenya is an active supporter in the global coalition against
terrorism.

Kenya is a key player and cooperates closely with USG, in promoting
peace and regional stability in neighboring Sudan and Somalia.

Kenyan forces are frequent participants in UN peacekeeping
operations.

Kenya is a leading participant in U.S. African Contingency
Operations and Training Assistance (ACOTA) peacekeeping training
program.

B. Major Issues/Problems Identified:
Terrorists and their supporters likely reside in Kenya as well as in
neighboring Somalia.

U.S. Travel Warning for Kenya was reissued (with a more
travel-friendly text) on August 1, 2006.

Counter-terrorism legislation which was shelved in 2004 is currently
being redrafted. The Government is likely to submit a bill against
money laundering to Parliament in late 2006.

The acquittal and release in June 2005 of seven terrorist suspects
implicated in the November 28, 2002 attack on the Paradise Hotel in
Kikambala and attempted downing of an El Al jetliner carrying 200
passengers reveal legislative and prosecutorial weaknesses. One
suspect was rearrested and charged with being in possession of
dangerous weapons. He was eventually convicted and sentenced to
eight years imprisonment.

Ranneberger

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