Kenya has a market-based economy and is generally considered the economic, commercial, and logistics hub of East Africa. With the strongest industrial base in East Africa, Kenya has been successful in attracting private equity capital. More U.S. companies are investing in Kenya and setting up local and regional operations to take advantage of Kenya’s strategic location, comprehensive air routes, and status as a regional financial center.
- An additional attraction for U.S. companies is the strength of Kenya's human resources. Kenya’s population is estimated at 45.01 million. Its urban areas, particularly Nairobi, are noted for their large number of well-educated English-speaking, and multi-lingual professionals, and for their strong entrepreneurial tradition. Kenya is also a very “young” country with almost 70 percent of the population under the age of 35.
- At the same time, businesses operating in Kenya face a number of challenges associated with corruption, unemployment, ethnic tensions, land titles, insecurity, and poverty. With an unofficial estimate of 40 percent unemployment, 43.4 percent of Kenya’s people still live below the poverty line, and the country's GDP per capita is approximately USD 1,800.
- 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 and widespread poverty. Kenya achieved 5.4 percent growth in 2014, and an optimistic Government of Kenya (GoK) is projecting 6 percent growth in 2014. Inflation fell to 7.2 percent in 2014 and further down to 5.7 percent in 2013.
- Achieving high growth, however, will depend on improved economic governance and greater economic reform. The general elections held under Kenya’s new constitution in 2013 have ushered in a new devolved governance system. However, global economic reversals and continuing underemployment for Kenya’s highly-educated youth, and potential ethnic conflicts substantially increase political risk.
- According to the Kenya National Bureau of Statistics 2014 report, Kenya’s volume of trade fell by 2.2 percent in 2013. Domestic exports grew by 4.110% percent in 2014, while imports grew by 12.43% percent mainly due to purchases of petroleum products, capital goods, food products and chemical fertilizers, which accounted for 58.4 percent of the total import bill. Kenya’s current account deficit grew from USD 4.783 billion in
2013 to nearly USD 5.01 billion in 2014.
- The agricultural sector is the largest employer in Kenya, contributing 25.3 percent 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 2014, Kenya registered 444.8 million kilograms of local production and 499.9 million kilograms of exports.
- The information communications technology (ICT) is one of the fastest growing business sectors in Kenya, and Internet access rates are some of the highest in sub- Saharan Africa. Kenya is a regional leader in terms of value-added mobile services, most notably Safaricom's M-Pesa mobile banking service, which has brought about a revolution in access to ﬁnancial services for Kenyan citizens.
- The recent security concerns over terrorism and crime are impacting negatively on economic growth especially in the tourism sector. This could have strong repercussions for Kenya given that its tourism industry—one of the most successful in the world—is the third largest industry in Kenya after agriculture and horticulture. Tourism is a socio- economic driver, and one of the largest contributors to Kenya’s current account. In 2013, the United Kingdom led in foreign passenger arrivals, followed by the United
States and Italy.
- Kenya's financial and manufacturing industries, while relatively modest, are the most sophisticated in East Africa. Although Kenya’s mineral resources are limited, the country has a potentially important source of high-value mineral commodities such as titanium. The larger East African region is now one of the fastest emerging oil and gas frontier regions in the world, with Kenya expected to become an oil producer in the near future.
- Kenya enjoys an extensive, but uneven, infrastructure. Nairobi is the 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. As a result of these deficiencies, the Port of Mombasa has been earmarked for major expansion and re-habilitation.
- The peaceful elections of April 2013 resulted in a new federal administration with 19 ministries instead of 34, and 47 new county governments which are similar to the way U.S. states compete on global capital markets to attract new trade and investment. Kenya also now has two houses of parliament as well as a Senate, and the country is receiving increased attention from the international investment, political and business communities.
- In 2013, Kenya’s Private Partnerships (PPP) Act came into effect to increase the nation’s ability to attract enhanced private sector participation in infrastructure projects in order to address the government’s funding gap for infrastructure needs. The PPP Act provides a uniform legal framework for the participation of the private sector in the financing, building, and operating infrastructure services and facilities through concessions or other contractual arrangements with the government of Kenya.
Kenya is not a low-cost economy. In fact, the cost of skilled, educated labor is high by developing world standards. A very large portion of the young population under the age of 35 is relatively unskilled, and subsists in an employment environment that offers few opportunities. Even so, Kenya’s skilled, educated labor pool 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 underdeveloped and a key obstacle to economic development. Investment over the next decade in roads, government efficiency, transparency and reliability, competition regulation, and the judicial system will determine if Kenya gains or losses ground when 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. There is hope that Kenya’s government will promote price competition to improve market efficiency; however, there are concerns that this is not an immediate priority. Without regulatory action, it is very unlikely that competitors will choose to pursue additional market share.
- The government has been unable to provide a secure environment for businesses and families, particularly in urban settings. Property crime and violence are major concerns and have become another unavoidable cost of doing business for companies in Kenya.
- In 2013, Transparency International, which monitors perceptions on corruption, ranked Kenya 136 out of 177 countries (a rank of #1 is the best rating). Claims of corrupt dealings, particularly in land purchases and large government contracts persist. Additionally, Kenya’s public contracting law is not an effective tool to limit government officials from steering contracts to those who offer bribes.
- Legal recourse is slow and expensive. Popular perception assumes 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 in pursuit of their own vested interest is unfortunately not uncommon in Kenya. Despite what the law states, a politician acting in his own interest or on behalf of a friend or business partner, could 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.
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 American Chamber of Commerce (AmCham) in Kenya has an IPR committee of rights holders, who are very engaged along with the U.S. State Department in combating counterfeiting in Kenya.
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, land sale scams, and perceived historical injustices, which Kenya’s young democracy has so far been unable to resolve.
Shipment times from the U.S. average eight weeks, and customs irregularities are not unusual. If market size warrants the need, U.S. firms should consider warehousing in Kenya for prompt supply and customer service.
In July 2013, the Customs Department of the Kenya Revenue Authority (KRA) imposed a 1.5% Railroad Development Levy (RDL) on all shipments arriving in Kenya. The levy is applied on goods arriving by air, ship, rail or truck. The RDL will be used to fund the construction of a standard gauge railway network under construction and is charged at a rate of 1.5% on the customs value of goods which is paid by the importer.
In September 2013, Kenya’s Value Added Tax Act of 2013 (VAT) took effect. The new VAT Act was introduced as a measure to increase government revenue by expanding the tax base, restricting exemptions to a short list of products primarily within basic commodities, and adhering to a flat tax rate of 16%.
For U.S. companies operating in Kenya, it should be noted that the VAT and RDL are applied on a non-discriminatory basis and reflect policy decisions of the Kenyan government within their domestic competence. It is unlikely that the Kenya government will be willing to introduce new exemptions for either of these measures.
Despite the many challenges that Kenya presents, there are a good number of opportunities locally and regionally. In fact, with the stabilization of the Kenyan Shilling (Ksh), trading between Ksh 84-87 to the dollar, US exports increased by over 14 percent in 2013.
The Country Commercial Guide provides more information on best prospects for U.S. companies looking to do business in Kenya, and by extension East Africa using Kenya as a hub or gateway.
Market Entry Strategy
A traditional entry strategy is to first appoint an agent or distributor, and then to enter and register as a US Company after sales have grown sufficiently. Kenya is one of the key logistical conduits into the East Africa Community (EAC) regional market consisting of Kenya, Tanzania, Uganda, Rwanda, and Burundi. Many foreign companies operating here do business under their own name to manage penetration into the larger, regional market.
Companies that create jobs and implement strong Corporate Social Responsibility (CSR), education and training programs are appreciated. Capacity building to create employment is needed to support Kenya’s economic development goals and to reduce political instability.
Kenya enjoys relative advantages over many of its neighbors, but commercial, political and legal risks are important factors that must be managed. When negotiating an agent or distributor agreement with a potential Kenyan partner, there are many considerations to take into account.
The Commercial Service in Nairobi provides a variety of services to assist U.S. firms with market entry. Please refer to Services for U.S. Companies for further information.
To access the 2015 Kenya Country Commercial Guide, click here
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