Kenya’s standing as East Africa’s trade giant is under threat from neighbouring nations with fresh data showing the growth rate of its exports to the region has been declining over the past eight years.

A new report commissioned by the Ministry of East African Community shows that Kenya’s exports compared with those of other EAC member states have been growing at a slower rate over the past five years, although the volumes remain higher.

It was expected that, with the implementation of the EAC Customs Union in 2005, Kenya would dominate regional trade by diversifying its exports to the EAC market, given its comparative advantage, especially in the manufacturing sector. But, this has not been the case.

Even though Kenya is the region’s largest economy and has aggressively seized opportunities in the integration project, statistics show it is about to reach its maximum trade potential in the region after failing to diversify its exports.

The study, which polled 50 firms doing business across the region, shows Kenya’s EAC partners Uganda, Tanzania, Rwanda and Burundi are cashing in on the country’s lengthy licensing and customs procedures, red tape, corruption and sluggish commercial dispute settlements to sharpen their competitiveness in regional trade.

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The study shows that Kenya’s contribution to total intra-EAC exports declined from 78.3 per cent in 2005 to 57.2 per cent in 2010, although its contribution to total intra-EAC trade increased from 7.5 per cent in 2005 to 16.7 per cent in 2010 on the back of increased imports.

Comparatively, Tanzania and Uganda’s contributions to total intra-EAC trade increased sharply from 6.6 and 4.2 per cent in 2005 to 20.67 and 19.2 per cent respectively in 2010, taking up the share that Kenya lost. On imports, however, Tanzania and Uganda have lost ground.

Tanzania’s contribution to intra-EAC imports declined from 22.4 per cent in 2005 to 18.9 in 2010 while Uganda’s dipped from 70.1 per cent in 2005 to 36.9 per cent in 2010.

“Despite the entry of Burundi and Rwanda into the Customs Union, Kenya has not properly utilised the opportunities available in these two countries and Uganda seems to have taken good advantage of this,” said the November 2012 survey, dubbed Study on the Impact of the EAC CU on the Kenyan economy.

“This confirms that intra-EAC trade potential is attributed more to proximity, cultural affinity and income per capita because Uganda more than Kenya is closer to Burundi and Rwanda,” said the report.

But some business executives are blaming the falling trade figures on non-tariff barriers (NTBs) imposed by the other EAC countries on Kenyan goods.

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“Countries like Tanzania have become very harsh on what is sold within their borders, to the extent that they reject even the packaging of some goods that were earlier allowed into the market but which they now say are substandard goods,” said Vimal Shah, chief executive officer of regional edible oils producer Bidco. “This gives them an edge since local companies can now produce similar products,” he added.

While the five EAC partner states had in principle agreed to remove NTBs by December 2012, in the absence of a legally binding framework, this largely depended on the willingness of the different countries.

So far, businesses continue to incur huge costs arising from weighbridges, roadblocks, poor infrastructure, unnecessary delays at border posts, and lack of harmonised import and export standards, procedures and documentation.

The Kenyan study shows that the Customs Union has not enabled the country to fully tap the regional market except in Uganda.

Kenya has over the past two years targeted export of professional services to other EAC states, riding on increased demand for professional services in a region of 127 million people and a combined GDP of $73 billion.

A recent survey by the World Bank and Kenya’s Export Promotion Council found that demand for professional services such as banking, insurance, legal services, accounting, architecture, ICT and engineering has been rising with the advancement of the integration project, offering Kenya — the country with the most advanced human resource base — a chance to boost its exports.

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The recent gas and oil finds in East Africa, ongoing infrastructure projects and the rising number of foreign investors eyeing the mergers and acquisitions market has created fresh opportunities in project finance, venture capitalism, business formation and due diligence investigation that require professional support, which provide new opportunities for Kenya.

Economists and business executives have however warned the if the decline in the growth rate of Kenyan exports to the region continues, it will have to look elsewhere for export markets.

“The export potential to Uganda is reaching its limit while South Africa is out-competing Kenya in Tanzania, with trade agreements under the Southern African Development Community (Sadc),” said Fred Miencha, the lead researcher of the survey.

But still the study showed Kenya’s export diversification is way higher than its neighbours, but below that of trade rivals outside the EAC, especially South Africa.

This means Kenya’s bid to grow its markets beyond the region will face stiff competition from countries like Japan, Singapore and South Africa that have more diversified products than Kenya.

Kenya is especially likely to face rivalry from South Africa with the tripartite agreement joining EAC, Sadc and Comesa. The tripartite agreement will provide easy access to South African exports while complicating Kenya’s competitiveness in the region.

“Delays in the implementation and harmonisation of the Common External Tariff (CET) where goods exported from all the member states are taxed equally and lack of a fully-fledged Common Market Protocol that will allow free movement of goods and services in the region are the main factors hurting Kenya’s trade.

Again, the country’s cost of production is relatively higher due to expensive energy and labour. Kenyan companies have set up shop in other EAC countries to produce the same products at a lower cost, leading to the reduction of the country’s exports of the same goods,” said Patrick Obath, chairman of the Kenya Private Sector Alliance.

Among the Kenyan goods whose exports have declined are vegetable oil and oil products, alcoholic drinks, coffee, tea, beverages, spirits and vinegar, tobacco and manufactured tobacco substitutes.