KENYA

Kenya is one of the most stable countries in East Africa and has an internationally oriented economy. With consistently strong economic growth in the twelve years before the Covid crisis and a GDP of more than 100 billion US dollars (2020), Kenya has the largest economy in East Africa and is a growth engine for the region. Thanks to the ports of Mombasa and Lamu as well as the airport in Nairobi, the country is an important regional hub for trade,finance and the transport of humanitarian aid in the region. Many international companies and organisations have chosen Kenya as the seat of their (East) Africa branches.

With its capital Nairobi, Kenya has also become a centre of innovation in Africa. Nairobi’s Silicon Savannah is a domestic brand that has an enormous appeal. Google will open its first African development centre in Nairobi, following in the footsteps of Microsoft. The M-Pesa payment system, introduced in 2007, enables its more than 49 million users to pay via text messages. M-PESA enjoys high acceptance among the tech-savvy Kenyan population. Almost all households in Kenya own a mobile money account (96%). Only China boasts a higher absolute number of users of mobile payment systems. Based on this success, a professional technology sector has emerged in Kenya. The start-up scene and the mobile money market, benefit from a (digital) infrastructure that is comparably well developed: the country has a 3G and 4G network coverage of slightly more than 96%. A 5G network is in the pipeline. The huge importance of mobile phones is reflected by the fact that, according to the World Bank, there were 114 mobile phone subscriptions per 100 inhabitants in Kenya in 2020. Internet access, however, does not come up to the same level yet. Only 23% of the Kenyan population use the internet. Mobile internet penetration is growing quickly, which offers an enormous, still not fully exploited market potential.

The technology and start-up scene in Kenya has not yet managed to repeat M-Pesa’s considerable success in other areas, despite its favourable environment. A close partnership with Germany, named the most innovative economy in the world by Bloomberg in 2020, could be beneficial.

As a regional hub, Kenya has an interest in stability in the region and is therefore strongly committed to multilateralism, as exemplified by its role in the African Union‘s (AU) peace mission in Somalia, which secures one of the world’s most important trade routes in the Horn of Africa. Unlike many African countries, Kenya, as a non-permanent member of the UN Security Council, has taken a clear stance on the war in Ukraine. The Permanent Representative of Kenya to the UN, Martin Kimani, has condemned the violation of Ukrainian territorial integrity and Russia’s violation of international law. 

While Kenya’s western orientation has weakened due to the exponential growth of China’s investments, the country is nonetheless far from becoming a “vassal state“ of China. On the contrary, Kenya wisely strikes a balance between potential partners. Although China is Kenya’s largest bilateral creditor, it has been Japan that has extended most new loans to Kenya in the past two years. Also, Kenya cooperates closely with the International Monetary Fund (IMF), another indication that the country is closely integrated into existing multilateral forums.

Kenya is the only country in the East African Community (EAC) to have ratified the Economic Partnership Agreement (EPA) negotiated with the EU in 2014. The EPA is a decisive building block for Germany’s future trade relations with Africa. The Cotonou Agreement, which until recently had provided unilateral preferential access to the European market for most sub-Saharan African states including Kenya, expired on 30 November 2021. As Kenya is the only country in the EAC that is no longer part of the group of Least Developed Countries, it could not have, after expiry of the agreement, taken advantage of the European Everything But Arms initiative, under which 33 African countries are granted duty-free and quota-free access to the European market. Only a mutual agreement like the EPA continues to allow WTO-compliant, preferential access to the European market. Due to different interests of Kenya’s neighbouring countries, it is unlikely that a regional free trade system will be implemented in the near future.

In order to prevent Kenya from losing preferential access, the EU has reacted. At their summit meeting on 27 February 2021, the EAC members agreed, after talks with the EU, that the EPA can also be implemented between the EU and individual EAC countries (which was called “variable geometry“ in the summit communiqé). On 21 June 2021, Kenya and the EU initiated a strategic dialogue. During his visit to Nairobi in 2022, the EU’s top diplomat, Josep Borell called Kenya a strategic partner. And as partners, Borell said, the focus should be on solving problems jointly, which includes challenges like regional security, the fight against climate change and the fight against poverty through trade and investment. Shortly afterwards, the EU and Kenya signed an interim Economic Partnership Agreement (iEPA), which is compatible with the already existing EPA. 

There are conflicting trade policy interests in Kenya. On the one hand, influential groups protect their vested interests through tariffs and non-tariff trade barriers. Moreover, in the shadow of the Covid pandemic, arguments against a further opening of the market are becoming more and more popular, which could also make progress in the African Continental Free Trade Area (AfCFTA) more difficult. Also, Kenya is negotiating bilateral free trade agreements with the US and the UK. It is not clear whether these are compatible with the EAC-EPA, and if so, in what form.

On the other hand, there is certainly interest in more trade with Germany and Europe, especially in the export-oriented agricultural industry, but also in the very engaged start-up scene, which depends on Western investors.

There is great potential, especially in the agricultural industry. There is demand for modern agricultural technology and innovative farming methods. So far, however, there have only been large-scale purchases in Europe of products that do not compete with subsidised European products, in particular cut flowers, coffee and tea. Due to the global transport restrictions resulting from the Covid pandemic, Kenya’s agricultural exports completely collapsed for a while. It is still unclear whether the original structures can be restored. However, this process can also be used for export diversification.

In addition to numerous start-ups, there are also many small light industry companies in Kenya that could be integrated into the value chains of German industry due to a relatively good infrastructure. However, Kenya’s potential can only be fully exploited if free trade rules were achieved, at least on the regional level. Any further integration within the African Continental Free Trade Area (AfCFTA) would further strengthen Kenya’s importance as an attractive place for investment and technology.

Germany should continue to make the case for trade agreements with African countries at the European level. The iEPA should be strengthened. It is the answer to both the continuing stonewalling by the other EAC member countries and to Kenya’s negotiations with the US and the UK, which are quite advanced, and which could, if they are concluded first, lead to tariff-related competitive disadvantages for European and German businesses. 

There should be constructive and sustained support for the implementation of the AfCFTA, which officially came into force on 1 January 2021. A speedy implementation would be a blessing for Kenya as well as for German companies that could serve the entire continent from their base in Kenya.. It is not likely to happen, though, due to the conflicting interests of the elites of many African countries (including Kenya). In the case of successful implementation, Germany should actively lobby for starting negotiations for a comprehensive EU-AU agreement.

What is required is radical rethinking of the EU’s common agricultural policy. Duty and quota- free access to the European market for Kenya and other Sub-Saharan African countries is of little value if competition is distorted by subsidising European producers. Kenya would have great potential as a supplier, particularly in milk and meat production, as well as for fruit and vegetable varieties that are also produced in Europe.

In the agricultural sector, investment in the mechanisation and intensification of conventional and organic agriculture should be promoted, rather than continuing to consolidate the small-scale and subsistence-oriented structures. Germany, with its strengths in agriculture, the food industry and agricultural machinery, could benefit at all stages of the value chain.

In the technology sector, despite impressive developments, Kenya still has to resolve major issues. It is true that Kenya got a very good rating in the 2020 Doing Business Report of the World Bank in the category “Getting Credit“ and that the favourable credit situation is the reason for the positive economic outlook of the Economist Intelligence Unit. However, Kenya did poorly in the categories “Starting a business“, “Registering Property“ and “Trading Across Borders“. This chokes off innovation and trade opportunities. Additional access to capital could be created via German and European development banks, which also provide longer-term financing. Corruption at all levels of government remains the central inhibitor to innovation and investment. German foreign and development policy must develop a long-term approach to systematically work against these practices.

In addition, structures for the exchange of knowledge between Germany and Kenya should be created, such as the German-East African University of Applied Sciences that has not been given the green light yet although both sides have signed a joint declaration of intent. Germany’s capacity for innovation would also benefit enormously from this exchange with the young Kenyan population.

Dr. Jan Cernicky is policy advisor for International Trade and Economy in the Analysis and Consulting Department and headed the KAS Office in Kenya until August 2020.