Afreximbank’s plan for Kenya regional office hit by tax war

A view of Nairobi skyline. The city contributes about 60 per cent of Kenya’s GDP. PHOTO | SALATON NJAU
A view of the Nairobi skyline. PHOTO | SALATON NJAU 

Kenya risks losing out to Ethiopia in the race to host the Sh3 billion regional headquarters of the African Export-Import Bank (Afreximbank) due to a diplomatic row, the Business Daily has learned.

At the centre of the row is the Kenya government’s refusal to grant the multilateral lender and its staff diplomatic status, a condition Ethiopia is said to have agreed to, making its capital Addis Ababa a formidable contender against Nairobi.

Afreximbank has indicated that it will move to Addis if Kenya does not grant it diplomatic status by end of September.  

“A decision has been made by the board of African Export Bank that if Kenya does not complete the legal formalities of establishing the Branch in Nairobi by 30 September, 2016, then the branch will be located in another country, possibly Ethiopia,” Afreximbank says in correspondence with Kenyan authorities.

The decision follows a two-year wait for communication from the Kenyan Ministry of Foreign Affairs and International Trade which Afreximbank says has not been forthcoming and has stalled any plans to roll out its programmes.

The Kenyan government is said to be particularly uncomfortable with several clauses in a draft agreement touching on taxation and diplomatic privileges that Afreximbank seeks as preconditions to locating its regional headquarters in Nairobi.

The Treasury told the Business Daily that it had resolved all the outstanding issues even as Afreximbank maintained the stalemate continues.

“There was a misunderstanding by Foreign Affairs on the legal status of Afreximbank. Now that has been sorted out and approvals will be completed shortly,” Treasury secretary Henry Rotich said in an interview.

Sources at the bank, however, said that while progress had been made on aspects of the draft agreement touching on the diplomatic clauses, the tax exemption agreements remained unresolved.

Correspondence between the bank and State officials show that Afreximbank wants its employees and operations to be accorded diplomatic immunity and tax exemptions in line with the privileges accorded other multilateral institutions.

The bank, which currently has a balance sheet of Sh1.1 trillion ($11billion), was founded on May 8, 1993 with the signing of an agreement between African states and supporting international organisations.

Regional office in Nairobi

Kenya, whose stake in the bank stands at less than two per cent, completed ratification of the agreement in 1998.  In November last year the Cabinet under the stewardship of President Uhuru Kenyatta approved the establishment of the bank’s regional office in Nairobi.

The bank had planned to set up its Nairobi base by close of 2015 but differences over the privileges have caused a delay of more than seven months.
Afreximbank argues that the privileges it is seeking are not unique to Kenya but have been granted by host governments in Abuja (Nigeria), Harare (Zimbabwe), Abidjan (Cote d’Ivoire), Tunis (Tunisia) and Egypt (Cairo), which is its headquarters.

The bank’s demand for special privileges is also supported by the fact that similar multilateral institutions and diplomatic missions in Nairobi enjoy the same.
The list of multilateral financial institutions that the Kenyan government has granted the special status includes the African Development Bank Group (AfDB), the Preferential Trade Area (PTA) Bank, Shelter Afrique, the World Bank, and the Africa Trade Insurance Agency (ATI).

“There is no valid reason to deny African Export-Import Bank — a multilateral financial institution — the same terms others have been given. That would amount to inconsistent policy,” Afreximbank argues in a letter to the Foreign Affairs ministry seen.

Foreign Affairs secretary Amina Mohammed and her principal secretary, Monica Juma, did not reply to questions on the matter or grant interviews despite numerous requests.

Afreximbank statute seeks to finance and promote intra - and extra-African trade. The establishment of the bank’s regional headquarters in Nairobi was seen to represent a big mark of confidence in East Africa’s largest economy but that has now come under serious threat in the wake of the diplomatic row.

The financial institution has in the past decade become a significant player in Kenya’s economy, having financed big-ticket deals amounting to nearly Sh30 billion.

In 2014, for instance, Afreximbank financed national carrier Kenya Airways’ expansion — helping it acquire new airplanes at a cost of $2 billion (Sh200 billion).

This year it loaned the Kenya government Sh2 billion ($200 million) to help save the troubled airline, which has been struggling under the weight of massive debt.

The bank has also lent power distributor Kenya Power Sh1.5 billion ($150 million) in support of the rural electrification programme that seeks to supply electricity to primary schools in readiness for President Kenyatta’s laptops project.

Afreximbank has also lent billions of shillings to private financial institutions in Kenya, including Sh2 billion ($200 million) to National Bank of Kenya for on-lending to Kenyan exporters and Sh500 million ($50 million) to NIC Bank, which supports importers with letters of credit.

The location of the bank’s regional headquarters in Nairobi was not only expected to create new quality jobs but also generate business opportunities to Kenyan suppliers through its operations.

“With the branch office in Nairobi meetings will take place in Nairobi giving business to hoteliers and boosting tourism earnings,” the bank has argued.
Afreximbank finances value addition and was expected to make a big impact on Kenya’s quest to process its export commodities that are now being exported raw.

The Bank also finances local content in Kenya’s extractive sector and its planned base in Nairobi was seen as potentially benefitial to local entrepreneurs in the oil and gas and mining sectors.

“The bank has plans to finance world-class medical centres in Kenya so that Kenyans do not have to go to India, Europe and elsewhere hence saving Kenya foreign exchange. Further, other Africans will come to Kenya for medical treatment earning Kenya foreign currency,” Afreximbank says in correspondence with Kenyan authorities.