Kenya’s trade competitiveness took a slight hit in the recent Stanbic Bank Africa Trade Barometer (SB ATB) report for 2024, moving down from fifth to sixth place among the ten major AfCFTA signatory nations, which collectively represent 66% of Africa’s GDP. This shift reflects the compounded effects of inflationary pressures, fiscal policy changes, and recent social unrest—factors that have introduced hurdles to trade and cross-border business in Kenya.
The report examines critical areas affecting trade performance, including access to finance, infrastructure, government support, and business confidence. Kenya’s drop in ranking has been attributed primarily to inflationary pressures and infrastructure challenges, both of which were exacerbated by fiscal reforms and social disruptions, including the Finance Bill protests in June 2024. These challenges underscore the complex landscape Kenyan businesses navigate in cross-border trade and hint at the areas where strategic policy interventions could help bolster Kenya’s trade appeal in the region.
Economic Context: The Impact of Fiscal Policy and Inflation
Paul Mungai, Head of Trade & Africa China Banking at Stanbic Bank Kenya, acknowledged Kenya’s challenges in trade competitiveness but emphasized the country’s potential for growth. “While Kenya has faced some challenges in trade competitiveness, especially related to inflation and infrastructure, the thriving services sector demonstrates our capacity for growth,” Mungai stated, stressing that addressing barriers like finance access and trade infrastructure could help Kenya regain its competitive edge.
In recent years, Kenya has contended with inflationary pressures, largely driven by rising costs of fuel and essential commodities. This inflation has affected both consumer purchasing power and business operating costs, creating a challenging environment for companies operating within and beyond Kenya’s borders. While inflation has stabilized somewhat due to government intervention, high-interest rates and a fluctuating Kenyan shilling have impacted businesses’ ability to access affordable credit and manage cross-border trade costs effectively.
Business Confidence: Steady but Delicate Balance
Kenya’s business confidence index, as per the SB ATB report, held steady at 55 points—mirroring last year’s score and reflecting a delicate equilibrium between positive and negative sentiments. On the positive side, optimism stemmed from Kenya’s recent GDP growth, the stability of key sectors, and a successful Eurobond buyback, which restored some confidence among investors. Conversely, skepticism is fueled by contentious tax proposals in the June 2024 Finance Bill, which spurred protests and raised concerns over potential declines in trade activity and tourism.
The SB ATB report illustrates that while there is a resilient optimism among Kenyan businesses, it is tempered by caution over fiscal policies and the government’s approach to implementing economic reforms. These concerns are especially pronounced among small to medium-sized enterprises (SMEs), which have fewer resources to buffer against policy shifts and economic fluctuations than larger corporations.
Government Support for Trade: A Notable Decline
A particularly stark finding in the report is the sharp drop in Kenya’s government support index for trade, from 57 to 45. This metric reflects business sentiments around the government’s facilitation of cross-border trade. Many businesses, especially SMEs, have voiced concerns over diminishing support, particularly in terms of tax relief and ease of customs processes, which remain crucial for smooth cross-border operations.
Larger firms, however, reported a slightly more positive outlook on government support. These companies are better positioned to leverage resources, navigate complex regulatory landscapes, and build relationships with trade bodies to gain a competitive advantage. For smaller businesses, however, these obstacles are harder to overcome, often resulting in higher costs and reduced access to regional markets. Addressing these concerns may be key to leveling the playing field and fostering a more inclusive trade environment.
Credit Access: Tightening Conditions and Rising Costs
Access to credit remains another major challenge for Kenyan businesses, as indicated by a drop in the access to finance index from 49 to 45 in the SB ATB report. With interest rates climbing, borrowing has become more expensive, pushing many businesses to explore alternative financing methods. Supplier credit arrangements, for example, have gained popularity, allowing businesses to defer payments and maintain liquidity. However, these solutions are often temporary, and the high cost of borrowing continues to inhibit growth potential, especially for SMEs.
As traditional financing options become more challenging to access, Kenyan businesses are increasingly turning to digital solutions, particularly mobile money, for trade transactions. The SB ATB report noted that mobile money usage for trade transactions has risen to 44%, while reliance on cash has declined by 17%. This shift is partly driven by concerns over security and currency volatility, underscoring the role of fintech and mobile banking in the future of Kenya’s trade ecosystem.
Infrastructure Challenges: Flood Damage and Logistics Constraints
Kenya’s infrastructure index in the SB ATB report saw a significant decline from 53 to 48, spotlighting ongoing challenges in the country’s logistics and transport systems. Early 2024 floods damaged infrastructure across 42 counties, resulting in losses estimated at over USD 35 million (around Ksh 4.5 billion). The state of roads, ports, and rail systems, already strained before the floods, has since become a focal point for businesses seeking improved resilience in trade logistics.
In response to these challenges, the government has invested in infrastructure improvements, including expanding major highways and modernizing port facilities. However, the pace of these developments often lags behind the needs of businesses, creating a persistent bottleneck for trade. Improved resilience in infrastructure could not only boost Kenya’s trade attractiveness but also ensure that cross-border operations remain robust in the face of future climate-related disruptions.
Trade Relations: Strengthening Regional and International Ties
Despite the challenges, Kenya’s cross-border trade remains resilient, bolstered by trade agreements with key partners like the European Union, China, and the East African Community (EAC). According to the SB ATB report, trade openness in Kenya remains high, with businesses increasingly exploring export opportunities within the EAC and Southern Africa. Trade relations with Tanzania, for instance, have deepened, providing new market avenues for Kenyan businesses. Additionally, the 2024 Forum on China-Africa Cooperation (FOCAC) summit is anticipated to further enhance trade relations with China, providing a framework for increased cooperation and investment.
This diversification of trade partnerships is essential for Kenya’s economic resilience, as it reduces dependency on any single market and offers broader avenues for growth. In particular, the EAC has proven to be a critical partner, with harmonized trade policies that facilitate smoother cross-border transactions. Strengthening these regional ties, alongside international agreements, could further position Kenya as a key player in the African trade landscape.
Key Recommendations for Enhancing Trade Competitiveness
The SB ATB report provides actionable insights into areas where Kenya can focus to improve its trade competitiveness. Key recommendations include:
- Strengthening Infrastructure: Prioritize investment in resilient infrastructure, particularly in flood-prone areas, to ensure stable and reliable trade logistics. Upgrading road networks and expanding port facilities could significantly reduce logistical bottlenecks for businesses.
- Enhancing Access to Credit: Introduce targeted financial support for SMEs, including lower interest rates and flexible financing options. This could help smaller businesses overcome the high costs of borrowing and facilitate greater involvement in cross-border trade.
- Increasing Government Support: Implement policies that enhance government backing for trade, especially for SMEs. This could involve streamlining customs procedures, providing tax relief, and fostering partnerships with trade associations to make cross-border operations more efficient.
- Promoting Digital Payment Solutions: Encourage the adoption of mobile money and digital payment platforms for trade transactions. This could help businesses reduce reliance on cash, enhance security, and navigate currency volatility more effectively.
- Building Stronger Regional Alliances: Continue to strengthen trade ties within the EAC and other regional blocs. Expanding these partnerships could provide Kenyan businesses with access to new markets, boosting the country’s overall trade competitiveness.
Kenya’s slight decline in the 2024 Stanbic Bank Africa Trade Barometer is a reminder of the complex factors that influence trade competitiveness, from inflation and fiscal policies to infrastructure and government support. However, the resilience of Kenya’s business confidence and the country’s strong trade ties offer promising avenues for growth. By addressing key barriers and fostering a more supportive environment for trade, Kenya can strengthen its position within the African market and capitalize on emerging opportunities in regional and international trade.
With strategic reforms and investments, Kenya has the potential to regain and even enhance its trade competitiveness, ensuring that its businesses remain resilient and prosperous amid evolving economic challenges. The insights provided by the SB ATB report offer a roadmap for policymakers and business leaders alike to collaborate towards a more robust and dynamic trade environment in Kenya.
