The IMF has predicted that Kenya’s current account deficit will improve this year, although its exports remain vulnerable to exogenous factors. As the government looks to boost its overseas sales, it must also work to encourage its two main trading partners – the EU and the East African Community (EAC) – to finalise a planned trade agreement to ensure it maintains preferential access to European consumers.
Trade balance under pressureIn the wake of the global economic crisis, Kenya’s exports grew rapidly, rising from KSh344.9bn ($3.9bn) in 2009 to KSh409.8bn ($4.6bn) in 2010, a jump of 18.8%, according to the Kenya National Bureau of Statistics. Even amidst the slowdown in eurozone demand, overseas sales continued to increase over the following year, climbing 24.7% to hit KSh511bn ($5.8bn) in 2011. The pace of expansion has slowed since then and, in 2012, exports were relatively flat, rising by 1.3%. The first seven months of 2013 showed more of the same, with year-on-year growth of less than 1%.
Kenya’s primary export products are tea, fresh-cut flowers and coffee. Key markets include the other members of the EAC – Uganda, Tanzania, Rwanda and Burundi – as well as EU countries, such as the UK, the Netherlands, Germany and France. Sales to EAC members amounted to KSh111.5bn ($1.3bn) in 2012, while the EU stood at KSh86.5bn ($975.6m), meaning that combined they accounted for almost 40% of exports.
Trade relations with EuropeThe more modest growth in exports is unlikely to affect the country’s successful efforts to reduce its current account deficit, which has benefited from a jump in remittances along with a rise in hydroelectricity generation and crop production. Expectations are for the current account deficit to decline to 8.9% of GDP in 2012 and 2013.
Still, the slowing pace of exports has prompted the government to try to reinvigorate trade with its primary partners. The limited growth of overseas sales in 2012 and early 2013 has been attributed in part to the EU’s continued economic difficulties, and the IMF highlighted the risk to Kenya of a protracted slowdown in Europe in an April 2013 report.
The international lender’s statement comes as Kenya is trying to encourage its partners in the EAC to sign on to a proposed Economic Partnership Agreement with the EU, to avoid facing further challenges next year when the East Africa republic’s preferential tariffs are due to expire.
EPAs are a trade tool used by the EU to boost trade and encourage development in African, Caribbean or Pacific countries that are engaged in a regional economic integration process. The process of negotiating an EPA with the EAC began in 2002. In 2007, the EAC agreed to an interim EPA framework designed to buy time to negotiate the formal pact, but the member countries have yet to sign or ratify a comprehensive agreement. In July, the EU reported that trade talks in July 2013 left numerous unresolved issues on the table, including agricultural subsidies and export taxes.
Under the temporary 2007 arrangement, Kenya has benefited from the elimination of tariffs and quotas on most of its imports to Europe. However, this year the EU announced that Kenya’s tariff concessions will come to an end by October 2014, unless it ratifies the EPA. Without special trade terms, Kenya will face tariffs of up to 16% on its exports to the EU under the General System of Preference, including 8.5% tariffs on fresh-cut flowers. The higher tariffs are based on Kenya’s UN classification as a “developing country”. The other members of the EAC, meanwhile, are classified as “least-developed countries”, and so can continue to export goods to Europe with no duties or quotas under the EU’s “Everything But Arms” initiative.
Domestic producers are maintaining steady pressure on the government to sign the EPA. The Kenya Flower Council has expressed concern that stagnated flower production since 2010, with growth averaging 2% versus 10% in the 1990s, is partially due to uncertainty about trade relations with Europe. Flower exports will already face increased competition due to a new free trade agreement signed between the EU and Colombia. Higher tariffs resulting from a reversion to the General System of Preference rates could have serious consequences for the flower sector’s global competitiveness.
As such, Kenya is under much greater pressure to sign the trade pact than its East African neighbours, which have expressed reluctance to open the door to increased European imports, particularly for agriculture. However, as the Ministry of Trade has pointed out in the past, Kenya is not free to negotiate its own agreement with the EU and must negotiate all trade deals under the EAC.
Regional trade effortsMeanwhile, efforts continue apace to improve trade with the EAC countries. Among other initiatives aimed at reducing non-tariff trade barriers, a single Customs territory among Kenya, Rwanda and Uganda came into effect in September. The plan is to reduce trade barriers by centralising the clearance of goods, allowing taxes and assessments to be done only at the first port of entry and automating cargo information systems, among other changes.
The Rwandan Revenue Authority has predicted that the single Customs territory will reduce cargo trucks’ travel time from Mombasa to Kampala from 18 to five days and travel time from Mombasa to Kigali to eight days from 21 days. However, Tanzania and Burundi are not participating in the new Customs territory, pointing to the possibility of increasing fragmentation within the EAC.
