Kenya is the most developed economy in Eastern Africa. With a nominal 2010 gross domestic product (GDP) of USD 32.417 billion, it is also the economic, commercial, and logistical hub of the entire region. Kenya’s estimated population is 39.08 million.
Kenya enjoys an extensive (if uneven) infrastructure, a large portion of the population that is extraordinarily well educated, English-speaking, and multi-lingual, and a strong entrepreneurial tradition. It is also a very young country with almost 70% of Kenya’s population under the age of 35. An estimated 50% of the population lives below the poverty line, and the country's per capita GDP is approximately USD 888.
Kenya’s key economic challenge is to increase its real GDP growth rate. Sustained, significant economic growth is essential if Kenya is to address its high unemployment rate (officially about 10.5%, unofficially in excess of 40%) and widespread poverty. Achieving high growth, however, will depend on improved economic governance and greater economic reform.
Kenya's strengths include its human resources, natural assets, and strategic location. After experiencing 7.1 percent growth in 2007, the economy slowed to 1.6 percent growth in 2008 due to political unrest following a disputed Presidential election. The economy in 2009 grew at 2.6 percent while growth in 2010 hit 5 percent. The average annual inflation rate was 16.2 percent in 2008 and dropped to 9.2 percent in 2009. Kenya changed its methodology for calculating inflation rates to a geometric system in 2009, which has resulted in much lower inflation rates. As recently as October 2009, 3.8 million Kenyans required emergency food aid and another 6.1 million were food insecure. Due to strong long and short rainy seasons in 2009/2010, these numbers have improved dramatically. Unfortunately, any recurrence of drought would precipitate another food security crisis in Kenya as irrigation systems are almost non-existent. The peaceful and historic 2010 referendum, which approved a new constitution, breathes hope into Kenya's future prospects.
The country continues to face challenges associated with corruption, unemployment, tribal tensions, land titles, insecurity, and poverty.
In May 2003, the government enacted two anti-corruption laws, partially satisfying requirements for the resumption of IMF and World Bank programs. In August 2005, Parliament passed a Privatization Act and a Public Procurement and Disposal Act. In 2004, the government established the Kenya Anti-Corruption Commission (KACC), moved forward with the implementation of the Anti-Corruption and Economic Crimes Act, and launched full implementation of the Code of Ethics Act for Public Servants in 2004. In 2007, the Supplies Practitioners Management Act was enacted to complement the Public Procurement and Disposal Act. In 2009, the director of KACC, the primary corruption investigatory unit, was reappointed irregularly by President Kibaki. After a storm of protest from Parliament, the director of KACC lost his re-appointment vote. This historic vote was the first time that Parliament had overruled the President. In 2010, the KACC Board selected PLO Lumumba as director of KACC. Lumumba has taken a strong stance against corruption and is re-opening some of the older cases.
The average annual inflation rate was 10.2 percent in November 2009 and dropped to 4.0 percent in November 2010. Those at the bottom of the pay scale suffer more from high inflation due to much higher unit costs for commodities (such as detergent and fuel) that they usually purchase in very small quantities. Increases in overall inflation are usually due to the impact of dry weather conditions on food production, higher fuel and power costs, and the depreciation of Kenya’s currency, which hovers around Kshs. 80 shillings to USD 1 dollar. Kenya continues to run a current account deficit, which has been offset to some degree by donor assistance and private investment.
Nairobi is the undisputed transportation hub of Eastern and Central Africa and the largest city between Cairo and Johannesburg. The Port of Mombasa is the most important deep-water port in the region, supplying the shipping needs of more than a dozen countries despite stubborn deficiencies in equipment, inefficiency, and corruption.
Kenya's financial and manufacturing industries, while relatively modest, are the most sophisticated in Eastern Africa. Its tourism industry, one of the most successful in the world, continued to expand until early 2008 when the growth was disrupted by the disputed presidential election but the industry has managed to catch up, and is now the third largest industry in Kenya after agriculture and horticulture. While Kenya’s mineral resources are limited, it is a potentially important source of valuable materials such as titanium, and some oil exploration is taking place off the Indian Ocean coast.
A steep drop in GDP following violent national protests provoked by apparent manipulation of a Presidential ballot at the end of 2007 was followed within months by the onset of a global recession. As disastrous as 2008 was, 2009 continued the downward trend followed by a modest recovery in 2010 with GDP growth around 4% and forecast for 2011 at 5%. However, to achieve its goals of becoming a globally competitive middle-income country by 2030, Kenya will need substantial foreign direct investment (FDI) in order to achieve double digit economic growth. Household finances are more precarious, employment is suffering; however, remittances and agricultural exports are on the rise.
The agricultural sector is the largest employer in Kenya, contributing 23.4% of GDP. The country’s major exports are tea, coffee, cut flowers, and vegetables. Kenya is the world’s leading exporter of black tea and one of Kenya’s top foreign exchange earners. In 2010, favorable weather conditions and a stable foreign exchange rate boosted production and export earnings to record levels as the best year ever. 2010 tea production figures grew by 27% to stand at 399 million kgs while exports grew by 40% to stand at 441 million kgs valued at US$1.2billion, overtaking horticulture as the leading export earner.
While exports grew by 11.5 percent from USD 4.45 billion in October 2009 to USD 4.96 billion in October 2010, Kenya’s import bill over the same period increased to USD 11.64 billion. With export growth outpacing that of imports, merchandise trade deficits have trended downward year on year. The increase in value of merchandise imports was largely reflected in machinery and transport equipment, manufactured goods, chemicals and petroleum products.
In 2010 tourism grew by 15.0 per cent over the previous year and surpassed the 2007 record by 4.5 percent. Over 1 million tourists visited Kenya in 2010 earning the country an estimated Ksh. 73.68 billion representing a 18.0 per cent increase over the 2009 revenues, making tourism not only a socio-economic driver but one of the largest categories of international trade. In terms of foreign travel arrivals, the United Kingdom led with 174,051 followed by the United States at 107,842 with Italy and Germany taking third and fourth positions respectively at 87,694 and 63,011.
Economic growth was slow with a 2.6 percent growth in 2009 and a 4 percent growth in 2010. Political stability remains elusive, with the two sides of the coalition government fast losing public support. Several fairly sensational corruption scandals, attributed popularly to both coalition partners, contrast sharply with much increased hardship for the average citizen. While Kenya is not historically a bastion of political stability, global economic reversals and continuing underemployment for Kenya’s highly-educated youth substantially increase the risk of a return to political confrontation.
Kenya is not a low cost economy. The cost of skilled, educated labor is high by developing world standards. A very large portion of the young population is relatively unskilled and subsists in an environment offering few opportunities. Skilled, educated labor is relatively abundant in comparison with neighboring countries. While Kenya’s physical infrastructure is also superior in many cases to that of its neighbors, it remains rudimentary and a key obstacle to economic development. Investment over the next decade in roads, bureaucratic efficiency and reliability, competition regulation and the judicial system will determine if Kenya gains or losses ground compared with its neighbors.
Despite the price sensitivity of consumers and companies, there is little price competition in Kenya compared with many other fast-developing countries. This is both an opportunity and a challenge for a new investor or trader. It remains to be seen if Kenya’s government will promote price competition to improve market efficiency. Absent regulatory action, it is very unlikely that competitors will choose to pursue market share by improving efficiency to lower costs, and thereby prices. There are too many opportunities for high margin new ventures.
The government has been unable to provide a secure environment for businesses and families, especially in urban settings. Property crime and violence are major concerns in the cities and another normally avoidable cost for companies.
Transparency International, which ranked Kenya 142 of 158 countries for two years in succession (2004 and 2005), ranked Kenya number 150 of 180 countries surveyed in 2008. Problems exist particularly in land purchases and large government contracts, with relatively few problems company-to-company. The U.S. Embassy in Nairobi is aware of only two occasions over the last six years in which a U.S. company won a competitive tender from the Kenyan government. The first was to install an electrified fence at a wildlife preserve, while the second was to provide a civil engineer advisor to the Ministry of Roads for one year. Kenya’s public contracting law is not an effective tool to limit government officials from steering contracts to those who bribe.
Kenya’s people and private companies cannot rely on the judicial system to apply the law equitably, based solely on the merits of a case and the law that applies. Legal recourse is slow and expensive. Popular wisdom supposes that government decisions are often more closely related to the personal incentives affecting judges and bureaucrats than the letter of the law. While there are many honorable and honest judges and civil servants, on balance there is considerable cynicism about the objectivity of executive and judicial branch decisions. This is especially damaging to companies who refuse to pay bribes.
Use of the police and courts by political leaders to abuse others’ rights is unfortunately not uncommon in Kenya. Despite whatever the law may say, a politician (acting in his own interest or on behalf of a friend or business partner) can readily deny others support from the police or recourse to the legal system. Foreigners in Kenya should recognize that (they have much less local political clout than virtually any Kenyan citizen would have.
Whereas it is often possible in countries with a strong rule of law tradition, such as Germany or the UK, to evaluate the reliability of a company based on audited financial statements and official credit ratings, this is not true in the developing world. Several US investors recently provided short-term debt to a Kenyan borrower based on an “A” credit rating and several years’ solid financial statements. The borrower nevertheless fled the country with almost $100 million, a small portion of which belonged to the US creditors.
Widespread violations of intellectual property rights (IPR) for videos, music, software, and consumer goods continue to cause major problems for some U.S. firms. The uncontrolled entry of counterfeit and substandard goods has caused deaths and injured consumers, and severely damaged the brand names, sales and viability of many consumer packaged goods companies, both in Kenya and neighboring countries.
Title to land is uncertain, reducing the borrowing capacity of families and businesses and constraining Kenya’s ability to broaden its capital base. Land reform is a divisive and emotional issue, complicated by tribal traditions and perceived historical injustices, which Kenya’s young democracy has been unable to resolve to date.
In mid-June 2007, the government unexpectedly reduced the threshold for foreign ownership of companies listed with the Nairobi Stock Exchange from 75 to 60 percent. Listed companies with foreign ownership above 60 percent constituted, as of late November 2007, a market capitalization of KSh 268.9 billion (just over USD 4 billion) or a third of the total capitalization of KSh 804 billion (about USD 12.5 billion).
Shipment times from the U.S. average eight weeks, and customs irregularities are not unusual. If market size warrants, U.S. firms should consider warehousing in Kenya for prompt supply and customer service.
On September 29, 2005 the Kenya Bureau of Standards (KEBS) implemented a Pre-shipment Verification of Conformity to standards program (PVoC). This is a conformity assessment and verification procedure applied to specific “Import Regulated Products” from exporting countries to ensure their compliance with the applicable Kenyan Technical Regulations and Mandatory Standards or approved equivalents (international standards and national standards). In March 2009, KEBS added the requirement for an import standards mark (ISM) on a broad range of products. Compliance with these requirements in many cases has been problematic, time-consuming, and expensive (see next item).
The Government of Kenya (GOK) now requires that all consignments of regulated products entering Kenya must obtain a Certificate of Conformity (CoC) issued by one of two firms appointed by KEBS to enact the PVoC program: SGS (Société Générale de Surveillance S.A.) or Intertek. Exporting countries must now certify that goods comply with Kenya Bureau of Standards requirements prior to shipment. The issued certificate is a mandatory customs clearance document in Kenya; consignments of regulated products arriving at Kenyan Customs Points of Entry without this document will be subject to delays and possibly denial of admission into Kenya. In late November 2007 KEBS announced it would waive the CoC requirement on bulk agricultural commodities inspected and certified by USG inspection agencies such as the U.S. Department of Agriculture Federal Grain Inspection Service (FGIS) and Animal and Plant Health Inspection Service (APHIS).
The demand for telephone receivers and cellular telephones is expected to continue growing at a high rate following the removal of all duties for these product categories. Growth in Kenya’s mobile telephony sector since 1998 has been phenomenal (from just over 10,000 subscribers to about 20 million in 2010), and will continue to provide demand for telecommunication technologies including 3G modems. Best sales prospects include computers, data terminals, modems, payphone terminals, routers, broadband equipment, and VSAT equipment. Fiber cable will also be in demand as fiber backbone spreads throughout the country. ADSL equipment will be required when homeowners and apartment dwellers install Internet services in existing buildings.
Three fiber optic cables (Seacom, Eassy, Teams) landed in Kenya 2009, with another one (LION2 by France Telcom) expected in the first half of 2010. Internet access, which previously has been limited to satellite transmission, will see very rapid growth in available bandwidth. Hardware and software solutions that enable competitors to undercut historically high Internet costs could precipitate a shakeout among current ISPs. Kenyan industry hopes to become competitive in business process outsourcing (BPO) based on dramatically lower Internet access cost.
Although installed power generation capacity is relatively small by first-world standards, Kenya is the leading electricity generator in Eastern Africa; however, access to electricity in Kenya is only about 16 percent, with much of rural Kenya without any electrical power whatsoever. Both the national generator, KenGen, and the state-owned distributor, Kenya Power and Light Company (KPLC), are developing plans to attract private capital to fund expansion. U.S. sales to KenGen have been hindered by the company’s focus on price over value and reliability. KPLC contracts are typically awarded based on tied funding from the EU and Japan. The transmission network typically requires significant investment to reduce system losses and expand national coverage. Best prospects for U.S. exporters include drilling rigs and associated equipment to tap geothermal sources, electric and electrical cables, transformers, electric meters, electric poles, and switchgear.
In Kenya, the primary markets for material handling equipment are in the mining, farming and manufacturing sectors. Opportunities include the planned development of the Lamu Port in the Coast Province, new processing plants, and expansion of existing ones. In Kenya’s economic growth blueprint, Vision 2030, there is emphasis on value addition for coffee and tea exports, which should translate into demand for processing and packing equipment. Industrial activities such as coal and titanium mining are bound to increase the demand for material handling machinery.
In road and housing construction, important opportunities exist for U.S. exporters in the supply of new and used construction equipment (light and heavy earth-moving equipment, loaders, crawlers, tippers, excavators, compactors, graders, and quarry mining equipment), low-cost road maintenance options, and low cost housing construction technology and know-how.
The Kenyan market preference for desktop computer systems is largely skewed towards Duo Core systems, with 2GB-4GB of RAM, a 2.0 GHz or faster processor, 120 to 160 GB hard drive, onboard modem, USB keyboard and mouse, media card reader, DVD writer, and 17” LCD monitor. Full multimedia (“FMM”) is desired in the local market. Import and excise duties for digital processing machines (comprising at least a central processing unit and an input and output unit, HTS code: 8471.41.00) and peripherals were effectively zero-rated (16% VAT removed) in June 2006 and is still in force.
A traditional entry strategy is to first appoint an agent or stocking distributor, and then to enter and register as a U.S. investor after sales have grown sufficiently. Kenya is one of the key logistical conduits into East Africa and a regional financial hub. Many foreign companies operating here have already taken the second step and do business under their own name to manage penetration of the larger, regional market.
Despite the relative advantages Kenya enjoys over many of its neighbors, they are few compared to countries in other parts of the world. In other words, commercial, political and legal risks are important competitive factors, which must be well managed. When negotiating an agent or distributor agreement with a Kenyan counter-party, there are many dimensions to take into account. The U.S. Commercial Service in Kenya (CS Kenya) strongly recommends that U.S. firms analyze the short-term incentives of a proposed agreement from the counter-party’s perspective, and to assume that recourse under Kenyan law is either impractical or impossibly expensive. For example, agreement on what law governs a contract, the timing of payments and credit terms can form the foundation for negotiations on delivery quantities, price, shared marketing expense or training.
U.S. firms are encouraged to maintain close communication with distributors and customers to exchange information and ideas on market trends, opportunities, and strategies. The principles of customary business courtesy, especially replying promptly to requests for price quotations and orders, are a prerequisite for exporting success. Friendship and mutual trust are highly valued. There is no substitute for face-to-face contact, and the use of first names at an early stage of a business relationship is acceptable. Kenyan buyers appreciate quality and service, and will pay a premium if convinced of a product's overall superiority and the reliability of customer service. U.S. exporters should allow for additional shipping time to Kenya and ensure that Kenyan buyers are continuously updated on changes in shipping schedules and routing. It is much better to quote a later delivery date that can be guaranteed, than an earlier one that is not completely certain.