Kenya’s competitiveness in the export market has eroded in the last decade, stifled by a lack of entry by more productive companies and specialisation in commodities that have low demand growth.
The competitiveness erosion has particularly affected the agriculture and manufacturing sectors, with the latter identified as key in transforming Kenya into an industrialised, middle-income country by 2030.
The International Monetary Fund (IMF), in an analysis of the non-price competitiveness of the Kenyan economy, says that the country’s ability to grow its exports is also hampered by barriers to entry.
This is most prevalent in sectors with a high concentration of State-owned enterprises, corruption, poor access to finance, and non-tariff barriers in trading partners.
“The lack of dynamism in the exports sector seems to be the main explanatory factor for the loss of competitiveness as well as specialisation in products with low demand growth and subject to competition from producers from relatively low-income countries,” says the IMF.
“The Kenya Association of Manufacturers (KAM) pointed out that export growth has been driven primarily by existing products in existing markets with little new product or market discovery. As such, Kenya may be able to improve export performance and competitiveness by facilitating more dynamism in the export sector.”
The problem of stagnating exports has become more glaring in recent years due to the widening trade deficit, which has come about due to rapid growth in imports.
This yawning gap also points to a manufacturing sector that is unable to keep up with the changing demands of consumers, limited product differentiation and a pricing problem where locally manufactured goods remain uncompetitive due to factors such as high energy and labour costs, and high taxes.
Exports of goods and services to gross domestic product (GDP) declined steadily from a high of almost 20 percent in 2011 to about 11 percent in 2019, the IMF said.
Kenya’s exports were valued at Sh643.7 billion in 2020, representing a jump of 86 percent from Sh344.9 billion in 2010. Over the same period, the value of imports jumped by 108 percent, from Sh788.1 billion in 2010 to Sh1.64 trillion in 2020.
This saw the trade deficit widen to Sh999.9 billion in 2020, from Sh443.1 billion in 2010.
While the country has endeavoured to put in place enablers and trade-specific policies to help attract investment and encourage local production of exportable goods, these efforts have been seen to flag somewhat in the last few years, allowing peer and competing economies to steal a march on Kenya in the fight for international markets.
“While the productive capacities index for Kenya has increased in the last decade, its growth has decelerated in recent years. On the other hand, the productive capacities index of its peers, including Ethiopia, Georgia, Rwanda, and South Africa, has continued to rise at a faster pace,” said the IMF.
These countries have also been able to outcompete Kenya due to their agility in easing entry, where for instance an investor is facilitated to get their licences more easily and with less red tape.
This helps build the dynamism of their export sector by bringing in more competition, which eventually yields better productivity.
Many of the problems bedevilling Kenya’s export sector are home-grown however and can be resolved by simple structural or policy reforms.
Uncertainty with the country’s tax regime has cropped up often as a factor driving investment elsewhere.
According to KAM, Kenya’s manufacturing sector suffers from unfair and unpredictable tax policies, rendering it unable to attract the investment needed to remain competitive against external markets.
Some of these unpredictable tax changes often touch on Value Added Tax (VAT) on inputs and excise duty.
Here, the government has often found itself caught between a rock and a hard place, trying to balance between raising revenue performance and enabling competitiveness for local producers.
It has been under pressure from the IMF to cut the fiscal deficit and in turn ease dependence debt by reducing tax leakages, yet at the same time manufacturers are keen for tax incentives and rebates on costs such as energy to allow them to compete against their peers in countries such as Egypt and Ethiopia.
The widespread informality of the Kenyan economy has also not helped with improving productivity, given the struggles informal enterprises face in accessing credit, physical infrastructure and government services.
The cost of corruption has also stifled the competitiveness of Kenyan companies, the IMF notes. It is a major deterrent to potential investors and a major impediment for existing and new businesses.
In the agriculture sector, a failure to add value to primary products has meant that their scope of growth in value has remained limited, while the problem is compounded by the fact that many lower-income countries are able to get into the agriculture commodities export market.
The market shares of produce such as coffee, fruits and vegetables have not increased by much in the past decade.
“On the other hand, tea and cut flowers have registered relatively strong export market share growth. However, these are low-value primary products and could explain the decline in the overall agriculture sector,” said the IMF.
There are, nonetheless, positives for Kenya’s export market prospects. The country has done well in capital and services exports, especially to the East Africa Community (EAC) bloc.
The financial services sector has particularly done well, with local commercial banks and insurers expanding their footprint in the region and opening up new markets such as DR Congo.
Down the road, this is expected to open up these markets to Kenyan goods, by making it easier for their traders to transact with Kenyan producers.
Kenya has also entrenched its position as a major source of direct foreign investment for neighbouring countries. The country is also increasing its exports of services such as logistics, technology, and digital services to the region, riding on its competitive advantage in these areas.
Massive investment in transport, communication and energy infrastructure is also bound to pay dividends down the road by reducing the cost of doing business in the country, and in turn, boosting the cost competitiveness of locally manufactured goods.
The country has in the last two decades spent tens of billions of shillings every year on infrastructure, with new roads opening up access to previously hard to reach countries such as Ethiopia and South Sudan.
Billions have also been poured into renewable energy, although the cost of power is yet to come down to levels that are competitive against other African manufacturing hubs.