How Kenya can be Africa powerhouse via exports pipeline

The Kenya Kwanza government's inaugural Budget and subsequent Finance Act, of 2023 have elicited sharp reactions.

Amid the frenetic commentary, there have been several developments in the recent past that point towards a positive future for the Kenyan economy in the export of goods and services.

According to the Central Bank of Kenya (CBK), Kenya achieved a goods trade surplus with Africa of about Sh38 billion for the January–March 2023 period.

Compared to the corresponding period in 2022, this was an increase of 11 percent while reducing its imports by 18 percent.

The consistent, and growing, trade surplus with Africa is a rarity given that Kenya persistently suffers from trade deficits with the rest of the world economy.

The financial services industry has reported year-on-year growth and record profits in the new markets of Rwanda and the Democratic Republic of Congo (DRC).

It is notable that Rwanda and DRC were responsible for 31 percent and 30 percent of the total profits respectively.

Based on these encouraging statistics, there is adequate reason to believe that a comprehensive regulatory framework and appropriate tax incentives would lead to the explosion of growth in Kenya’s exported goods and services.

Encouragingly, the Finance Act 2023 provides certain incentives that should boost the export of Kenya’s goods and services.

Firstly, the SEZ and EPZ Acts have been amended to improve the market accessibility of goods produced from these preferential tax regimes.

For example, the new changes will see EPZ products that use EAC inputs become more competitive to the wider EAC region.

The enhancement of the SEZ and EPZ legislative regime offers tantalising possibilities in an expanded EAC bloc.

The admission of the DRC into the East African Community (EAC) as the seventh member expands the market size of the EAC and offers a valuable link between the Indian and Atlantic oceans.

The Finance Act has also introduced additional incentives for the pharmaceutical sector. Services, both imported and locally procured, that are supplied to manufacturers of human vaccines will be exempt from VAT.

This will however apply to manufacturers with Sh10 billion capital investment or more.

Secondly, goods imported by manufacturers of human vaccines will be exempt from IDF of 2.5 percent and RDL of 1.5 percent.

Further, they will also be subject to a preferential corporate tax rate of 10 percent.

These incentives are meant to increase investment in the pharmaceutical sector in Kenya which, according to the EAC Regional Pharmaceutical Manufacturing Plan of Action 2017-2027, has the fastest-growing pharmaceutical market in the region with an estimated annual growth rate of 15 percent.

In totality, these incentives can push Kenya to be the continental hub for pharmaceutical manufacturers. It’s not a stretch to imagine that similar to the EAC, the African Continental Free Trade Area (AfCFTA) would have a similar positive effect on trade between Kenya and other non-EAC countries on the continent.

The time may be ripe for Kenya to pivot towards an export-oriented economy due to the new tax measures in addition to other factors.

Ikiara is a senior tax adviser with KPMG Advisory Services Limited.