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Kenya emerging as intra-regional trade hub

Kenya’s huge bet on infrastructure finally appears to be paying off. Improvements in infrastructure are transforming the country into a hub for intra-regional trade in the continent. Although this is a positive development, it does not come absent its own unique set of challenges. Kenya is now faced with the sensitive task of balancing the often varied and sometimes conflicting interests of a wider set of trade partners. BUSINESS MONTHLY compiled this report.

Infrastructure development has been one of the most prominent themes in Kenya’s economy over the past few years. This is unlikely to change, at least until 2017 when most flagship infrastructure projects such as the Standard Gauge Railway (SGR) are expected to be completed.

While heavy infrastructure spending will help plug infrastructure gaps and consequently improve Kenya’s overall business environment in the long-run, it has also come with some pretty undesirable short-term implications. The most immediately visible short-term impact of higher infrastructure spending in Kenya has been the huge strain on the country’s resources. This has led to higher uptake of debt, which is currently estimated at around 50 percent of the country’s GDP—a debt level that doesn’t sit well with both the Treasury and the International Monetary Fund (IMF). Heavier infrastructure spending has also put immense pressure on the taxman to increase its tax collections.

Perhaps a more subtle, but also worth mentioning, short-term impact of heavier infrastructure spending is the widening current account deficit. The gap between Kenya’s imports and exports grew by nearly 33 percent in the year to April due to higher infrastructure-related imports, data from the Central Bank of Kenya (CBK) shows. With infrastructure projects still underway, infrastructure-related imports are likely to increase, said Treasury cabinet secretary Henry Rotich. This signals harder times for businesses. The wide current account deficit has weakened the shilling and prompted the CBK to increase lending rates in the past few months—something that could be done again if the deficit widens in future as projected.

The long-term benefits of infrastructure spending, however, justify any short-term drawbacks, signaling that Kenya is making the right move. Infrastructure gaps are one of the most notorious bottlenecks to intra-regional trade in Africa, the African Development Bank says. This explains why intra-regional trade lags considerably in Africa in comparison to other regions in the world where infrastructure is much better.

Whereas intra-regional trade accounts for just 12 percent of total African trade, it comprises 70 percent of Europe’s total trade and 55 percent of Asia’s, the United Nations (UN) states. This low level of intra-regional trade in Africa has been a constant theme in gatherings of African leaders and actually received notable attention from U.S. President Barack Obama when he addressed the African Union in Ethiopia back in July. “The biggest markets for your goods are often right next door. You don’t have to just look overseas for growth, you can look internally…it shouldn’t be harder for African countries to trade with each other than it is for you to trade with Europe and America,” he said.

Although Africa’s biggest markets are just “right next door,” as President Obama wittingly explained, getting goods next door in Africa is often the big problem. Moving goods from one African country to the other is difficult and expensive. Rail infrastructure is outdated. Roads lack, and where they exist, they are often impassable.

Paying off

The sad irony is that most African countries are not plugging infrastructure gaps with the burning sense of urgency they ought to. This is despite the widely positive impact that improving infrastructure will have on intra-regional trade. Kenya, however, is one of the few exceptions, adding to a short list that also includes Ghana.

Kenya’s bold bet on infrastructure is finally paying off. The massive infrastructure projects being pursued across the country are transforming Kenya into a hub for intra-regional trade in Africa, says Frost & Sullivan, a multinational business consulting firm. In a report focusing on infrastructure in Kenya, Frost & Sullivan contends that the focus on transport in the past half decade will help sustain higher trade volumes in the region and position the country as the regional trade hub.

“Transport infrastructure (in Kenya) has undergone major upgrades over the past five years in order to support the high trade demand in the East African region,” said Frost & Sullivan Senior Economic Consultant, Craig Parker. He also commended the fast pace which Kenya is completing its projects. “The Nairobi Southern bypass, for example, was commissioned in 2012 and is already 40 percent complete,” he observed.

The SGR in particular is expected to considerably reduce the cost and time of moving goods through Kenya to other destinations in East Africa. This is an observation that has been extensively captured in a series of reports as well as by leaders in business and politics, including none other than President Uhuru Kenyatta. In his August state visit to Uganda, President Kenyatta commented that the SGR is expected to cut the cost of moving cargo from Kenya’s Mombasa port to Kampala by 60 percent and cut the time taken from three days to just 24 hours.

Apart from the SGR, there are also a slew of road projects that will collectively make it easier and cheaper to move goods within the country and also elsewhere in the region. An estimated $5.14 billion has been dedicated to road projects investment in Kenya so far. This figure could grow even more robustly in view of the plan to build a 10,000 kilometer road network over the next three years.

Although road and rail projects account for a large percentage of overall infrastructure spending in Kenya, an even greater portion of spending will go to telecommunications and power generation in the coming years, Frost & Sullivan says. While telecommunications infrastructure is often overlooked, it is equally important as roads and rail. Kenya’s bigger emphasis on telecommunications infrastructure in the coming years is therefore a wise move.

Part of the reason why Kenya has emerged as an economic giant in Africa, despite lacking hydrocarbons (although the country will soon enter this league) like other bigwigs such as Nigeria is the fast pace of ICT development. Mobile banking and mobile money transfer have made payments much easier, which has in turn helped grow trade volumes in the country. Future investments in telecommunications will help compound these benefits and spread them to other areas, particularly at the borders and ports.

Technology has greatly helped to reduce the time it takes to clear goods at the ports and borders. One stop border posts, which depend on IT infrastructure to achieve convergence of information and reduce border crossing time, have already come on board. The $5.8 million Taveta-Holili one stop border post, which serves as a pilot project for the program, started operations on June 3. “We hope to reduce time taken to cross the border by 30 percent within one year. This translates to reduced cost of goods to consumers,” said Trade Mark East Africa program manager Daniel Muturi. Studies indicate that an overnight stay at the border costs around $200 per truck. Eliminating the need for overnight stays will therefore considerably reduce transportation costs and help spur more trade across the region.

The initiative to reduce the time spent at border crossings between Kenya and other markets in the region was made possible in no small part by help from the U.S. “Along with our international partners, including the multi-donor Trade Mark East Africa initiative, the United States has helped reduce the time and cost of moving goods across EAC borders by building one-stop border posts and making investments to upgrade ports,” said Ambassador Michael Froman, the United States Trade Representative, at the signing of the U.S-EAC Cooperation Agreement earlier in the year. The U.S’s commitment to reduce the time it takes for goods and people to cross African borders dates to as far back as 2009.

The U.S. is, however, not the only international partner that has been instrumental in reducing trade barriers in Kenya and elsewhere in Africa. China, long viewed as an emerging threat to U.S.’s economic might, has also invested heavily in Africa, particularly in infrastructure. The SGR was in fact funded to a tune of 90 percent by China’s Export-Import bank.

U.S. and China’s bet on Kenya definitely comes at a price. Kenya will need to reciprocate in terms of favorable terms for business and trade. Meanwhile, however, the reduction of trade barriers in the country—as a result of Chinese and American involvement—has inadvertently made the regional market more accessible to Kenya. Therefore as Kenya increases trades with U.S. and China, it will also be in a position to grow trade flows in the East African region and elsewhere in the continent due to lower trade lower barriers. Although this is positive, it also has its challenges.

First, there is the obvious challenge of being neutral in the face of competing U.S. and Chinese interests. Second, and perhaps more challenging, will be the task of balancing existing interests with new demands that increased regional trade will create.

Balancing interests

Trade has historically been the one of the most important issues that brings nations together. And this has not changed; nor will it change anytime soon. This explains why China’s economic incursions in Africa have been accompanied by an increasingly positive stance by African countries toward China. But trade also has the potential to reconfigure a nation’s relationship with existing partners. This has been seen throughout Africa where the U.S., Africa’s traditional trade partner, has been increasingly uneasy about China’s growing influence.

Here in Kenya, where a report on the Guardian states that Nairobi is U.S.’s second-most important embassy after Moscow, China has gained a foothold after funding the SGR and other equally important projects. Kenya has, however, been keen to defuse any potential conflict of interests, with President Kenyatta expressly saying that Kenya is neither aligned to East or West, but to progress. China and the U.S. have, on the other hand, not been so diplomatic. The U.S. has on several occasions accused China of using infrastructure as a bargaining chip to siphon natural resources out of Africa, while China, though less vocal, has called the U.S. out on its interference in local politics.

The uneasiness between the U.S. and China over either’s engagement with Africa is a clear demonstration of how trade interests often clash. For Kenya, this signals challenging times ahead. Both the U.S. and China are not only increasing their engagement with Kenya, but the East African nation is also transitioning into the focal point of intra-African trade. This means that trade, though still strongly influenced by the West and East, will take on a stronger African dimension in future.

This reconfiguration of Kenya’s trade relations, particularly the deeper involvement of more African countries, will require the country to carefully balance the interests of a wider set of trade partners; and this is anything but easy. It is difficult to get countries to agree on tariffs and even harder when one country wants to protect local industries from imports as is too often the case in Africa. Even here in the East Africa Community (EAC), where the trade bloc has been identified by the African Development Bank as the most ambitious and integration savvy economic bloc in Africa, trade negotiations have never been easy.

Kenya, for instance, recently struck a deal to allow cheaper Ugandan sugar into the country. But this was only after a long delay and a sustained and earnest appeal from Uganda, revealing the grueling nature of trade negotiations even between the friendliest of nations where the political will exists in abundance.

Yet for intra-regional trade to take off and Kenya to further cement its emerging position as the region’s trade hub, more negotiations, specifically on liberalization of tariffs, will need to take place. Liberalization of tariffs will see intra-African trade more than double to 30 percent, says Professor Calestous Juma of the Practice of International Development at Harvard Kennedy School.

Therefore as Kenya models itself into a regional trade hub, it will need to prepare for the hard task that comes with hammering out trade deals. It will also have to prepare for the even harder task of balancing the often clashing interests of a wider set of trade partners, who will now not only be limited to the traditional partners that the country has had before, but other African countries whose trade levels with Kenya are currently small but set to rise.