Kenya’s manufacturers are worried about losing out on the benefits of the African Continental Free Trade Area (AfCFTA), due to a high cost of production that may hurt their competitiveness.
The Kenya Association of Manufacturers (KAM) has tallied local costs of production to be higher than the continental average, meaning their goods may face stiff competition in trading across Africa. Kenya’s global competitiveness index is about 55 percent, while it ranges between 35 to 60 percent in Africa, an indication of a constrained business environment.
The KAM, in their latest survey titled Implication of the African Continental Free Trade Area on Kenya’s manufactured products and its impact on Kenya’s trade, reveals that the dwindling country’s competitiveness due to a high cost of doing business, bureaucratic policy and regulatory environment could inhibit its ability to take advantage of the AfCFTA.
The study on the implementation of AfCFTA sought to inform local manufacturers on the implications and expected impact of the East African Community [EAC]-AfCFTA tariff liberalisation on Kenya’s manufacturing sector.
It also seeks to inform the industry on the country’s trade potential with other regional economic blocs and potential competitors.
According to the study, Kenya which currently trades in all 8 regional economic blocs — traded globally, with 62 percent of exports destined to international markets and 88 percent of imports from the same markets. Its biggest trading blocs are EAC, Comesa, SADC and SACU.
However, intra-African trade is still low, at 15 per cent, with an additional 40 per cent informal trade.
“There is a positive change for Kenya’s export to Africa under 90 and 100 per cent tariff liberalisation for South Africa, Eswatini, Ghana, Morocco, Togo, Côte D’Ivoire, Botswana, Namibia, Senegal and Tunisia,” the report says. “Change is negative for Kenya’s exports to Zambia, Rwanda and Madagascar.”
The report also reveals that the impact of tariff liberalisation under the AfCFTA on Kenya’s economy is estimated to grow imports by five per cent at 90 per cent tariff liberalisation, and at 11.4 per cent at full liberalisation. “There are strong value chains in agro-processing, textile and garment, footwear, mining, leather, rubber and plastic sectors,” it says.
Generally, AfCFTA tariff liberalisation impacts positively on vehicles, food and beverages, metal, vegetables and chemicals. “Analysis on AfCFTA rules of origin indicates that the current EAC rules of origin are more restrictive, particularly in more competitive sectors like food, beverages, tobacco, plastics and rubber,” the report says.
The study notes that the key challenges that restrict market entry in AfCFTA are increase in trade costs that reduce levels of competitiveness of Africa’s originating products. “Whereas the trade agreement provides the best opportunity to realise our regional, national and business goals, Kenya is yet to put in place mechanisms to ensure the country takes full advantage of the benefits it presents,” said Tobias Alando, KAM’s acting CEO.
“Kenya’s export market in Africa is expected to increase with the full implementation of AfCFTA. However, if unaddressed, challenges such as dwindling country competitiveness, lack of product competitiveness, supply chain constraints, unconducive business environment as well as institutional and infrastructural constraints shall hinder local manufacturers from reaping the benefits that come with AfCFTA.”
According to the World Bank, Kenya has a comparative advantage in services production, and it exports a higher share of services than other countries with similar levels of development. However, Kenyan manufacturers say the country needs to address gaps that will hinder them from benefiting from the AfCFTA.
“At the firm level, Kenya’s business community needs to develop export strategies for various trade agreements including EAC, Comesa and AfCFTA; implement business development programmes to penetrate and expand to new markets and develop the capacity to be able to meet the demands of the African markets,” said Alando during a webinar to discuss the report held last week.
“At the national level, we urge the Government to prioritise the conclusion of pending areas in the negotiations; work on competitiveness drivers to ensure Kenya takes advantage of the African market and fully implement the National AfCFTA Strategy.”
Kenya Revenue Authority (KRA) Deputy Commissioner, Marketing and Communications Ms Grace Wandera, said KRA had automated services to reduce time spent clearing cargo and bring down costs incurred by traders.
“We remain cognizant of the benefits that come with AfCFTA, such as job creation, movement of goods and skills transfer. This will require tariff harmonisation, capacity building on requirements to trade under the regime, simplification and automation of processes. We have also set up call centres at all border points to support traders and ensure efficient service delivery,” said Ms Wandera.
The KAM report among other things, recommends linking the fragmented production value chains to their sectors, for the purpose of attaining economies of scale. It also calls for the liberalisation of trade in services that support manufacturing activities, such as finance, transport and communication and easing the movement of persons in order to complement trade in goods.
“EAC partner States should implement EAC industrial policy strategy that identifies EAC strategic industries for development. These include agro-processing industries, iron and steel manufacturing, chemicals (fertilizer and agrochemicals and pharmaceutical sectors, with a view to diversify economic activities in order to have an edge in the AfCFTA market.”