Doing Business in Kenya: 2012 Country Commercial Guide for US
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Doing Business in Kenya: 2012 Country Commercial Guide for U.S. Companies INTERNATIONAL COPYRIGHT, U.S. & FOREIGN COMMERCIAL SERVICE AND U.S. DEPARTMENT OF STATE, 2012. ALL RIGHTS RESERVED OUTSIDE OF THE UNITED STATES. • Chapter 1: Doing Business In Kenya • Chapter 2: Political and Economic Environment • Chapter 3: Selling U.S. Products and Services • Chapter 4: Leading Sectors for U.S. Export and Investment • Chapter 5: Trade Regulations, Customs and Standards • Chapter 6: Investment Climate • Chapter 7: Trade and Project Financing • Chapter 8: Business Travel • Chapter 9: Contacts, Market Research and Trade Events • Chapter 10: Guide to Our Services Return to table of contents Chapter 1: Doing Business In Kenya • Market Overview • Market Challenges • Market Opportunities • Market Entry Strategy Market Overview Return to top • Kenya is the most developed economy in Eastern Africa. With a nominal 2011 gross domestic product (GDP) of USD 35.8 billion, it is also the economic, commercial, and logistical hub of the entire region. Kenya’s population is estimated at 41 million with a large number of well-educated English-speaking, and multi-lingual professionals, and a strong entrepreneurial tradition. It is also a very ‘young’ country with almost 70% of the population under the age of 35. An estimated 50% of Kenya’s people live below the poverty line, and the country's GDP per capita is approximately USD 888. • Kenya's strengths include its human resources, natural assets, and strategic location. After experiencing 7.1 percent GDP growth in 2007, the economy slowed to 1.6 percent growth in 2008, the result of political unrest following a highly contested Presidential election. • In 2009, the economy grew at 2.6 percent and further improved to 5.6 percent in 2010. At 4.5-5.0 percent, 2011 growth was somewhat lower than earlier projections of 5-6 percent growth, due to high inflation, drought, and a weak shilling, which caused prices of imported goods to skyrocket. A five percent growth has been projected for 2012. • The average annual inflation rate was 16.2 percent in 2008, dropped to 9.2 percent in 2009 and fell further in 2010 to 4.1 percent; Kenya adjusted its methodology for calculating inflation rates to a geometric system in 2009, resulting in a much lower, yet more accurate rate. High inflation reemerged in 2011, however, hitting a year- on-year high of 19.72 percent in November 2011 before falling slightly to 18.93 percent in December 2011. Average inflation for 2011 was 14 percent. Increases in overall inflation were due to the negative impact of dry weather on food production, higher fuel and power costs, and the depreciation of Kenya’s currency, the Kenyan Shilling, which hovers around 80 shillings to one US dollar. Like most developing economies, individuals at the bottom of the wage scale are more affected by high inflation due to considerably higher per unit costs for commodities (e.g. detergent and fuel), particularly since these items are usually purchased in very small quantities. • Kenya continues to run a current account deficit, which has been offset to some degree by donor assistance and private investment. • 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 percent, unofficially in excess of 40 percent) and widespread poverty. Achieving high growth, however, will depend on improved economic governance and greater economic reform. The first general elections under Kenya’s new constitution are expected in March 2013 and will usher in a new devolved governance system; however, global economic reversals and continuing underemployment for Kenya’s highly-educated youth, and potential tribal conflicts substantially increase political risk. • In 2008, a steep drop in GDP following the violent national protests provoked by political turmoil during a disputed presidential election was further compounded within months with the onset of the global financial crisis and ensuing recession. The downward trend continued in 2009. While the economy has made a modest recovery since 2010, 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. • The country continues to face challenges associated with corruption, unemployment, tribal tensions, land titles, insecurity, and poverty. In 2011, 3.75 million Kenyans required emergency food aid and another 5 million were food insecure. Unfortunately, the recurrence of drought precipitated another food security crisis, since irrigation systems in Kenya are almost non-existent. Although, the peaceful and historic 2010 government referendum, resulted in a new constitution, and instilled hope in Kenya's future political and trading prospects, the implementation has been slow and problematic, mainly as a result of vested political interests. In response to the spike in global food prices in 2007-2008, President Obama pledged $3.5 billion to help poor countries fight hunger by investing in agricultural development. The U.S. Government’s Feed the Future Initiative utilizes innovation, research, and development to improve agricultural productivity, link farmers to local and regional markets, enhance nutrition, and build safety nets. These investments will increase the supply of food where it is needed and help vulnerable people withstand price shocks better. • 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 percent stand at 399 million kilograms while exports grew by 40% to stand at 441 million kilograms valued at US$1.2billion, overtaking horticulture as the leading export earner. However, in 2011, as a result of a dry spell in the early part of the year, both local tea production and exports fell by five percent to register 377 million kilograms of local production and 421 million kilograms of exports. • Kenya enjoys an extensive (if uneven) infrastructure. 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. As a result of these deficiencies, the Port of Mombasa has been earmarked for major expansion and re- habilitation. Additional opportunities in the infrastructure sector are outlined in Chapter 4. • Kenya's financial and manufacturing industries, while relatively modest, are the most sophisticated in Eastern Africa. The 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. The industry bounced back, however, 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 high-value mineral commodities such as titanium, and oil, where recent exploration off of the Indian Ocean coast began. In March 2012, oil was discovered in Turkana by the British oil company Tullow. U.S. oil companies have also entered the market with plans to begin exploration in late 2012/early 2013. • 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 increased to USD 11.64 billion over the same period. However, export growth still outpaces that of imports, and 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 2011 tourism grew by 32 percent over 2010, earning the country revenues of Kshs. 98 billion. 1.26 million tourists visited Kenya in 2011, -- representing a 15.4 percent increase over the 2010 visit numbers. Tourism is a socio-economic driver, and one of the largest contributors to Kenya’s current account. The United Kingdom led foreign passenger arrivals, followed by the United States and Italy. With the passage of a new constitution in late August 2010, Kenya has received increased attention from the international investment and trade communities. With Vision 2030, a 20 year development program in place, and partial implementation of a new political reform agenda, Kenya is increasingly regarded as a stable place to invest and trade with the rest of East Africa. Market Challenges Return to top • 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 (i.e. 35 and under) is relatively unskilled, and subsists in an employment environment that offers few opportunities. However, 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 rudimentary 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.