MFA: Strategic opportunities for foreign exporters
Kenya is experiencing a serious economic shock due to the global pandemic. More than 3 million jobs are at real risk, due to the devastating effect on the two main sectors of the economy, i.e. flower export and tourism. Kenya supplied one third of all roses sold in the EU. Cut flowers were Kenya’s second largest export item after tea and contribute about 1% of the country’s GDP. The industry was also one of the largest sources of employment in the country. Revenues from tourism were another major source of foreign exchange earnings, along with tea and flowers, the industry also employed more than million people.
The aforementioned economic shocks naturally have a negative effect on state finances, the state of which was already considered unsustainable before the pandemic itself. Debt levels also exceed the IMF’s recommended threshold of 50% of GDP for countries with economic development on the level of Kenya.
The debt is financed more than 50% through the financial markets, in USD. All this creates possible assumptions that Kenya might not be able to repay its international financial obligations due to the shortfall on the income side, the possible weakening of the currency and the reduced interest of the financial markets to refinance loans.
The negative impact of the pandemic on public finances was reflected in the revision of the budget deficit for the period 2020/21, which is significantly higher than the original assumptions (from 4.9% of GDP to 7.5% of GDP). In reality, however, an even larger deficit is expected, amounting to at least 9% of GDP due to the decline in GDP (compared to growth in the original projections of the state treasury).
The amount of the deficit reflects a sharp drop in income and slightly higher expenses aimed at mitigating the effects of the pandemic. Tax revenues suffered from reduced business activity and job losses, as well as tax relief measures.
The government has allocated KSh 40 billion (0.4% of GDP) to funds to strengthen capacities to fight the epidemic, i.e. for surveillance, laboratory services, isolation units or food for families in social need. To strengthen the economy, funds were set aside from these funds to speed up the payment of the state’s existing obligations within the framework of maintaining the liquidity of the corporate sector.
KSh 5billion (0.54% of GDP) was allocated to directly strengthen the economy. Under the slogan “Build Kenya, Buy Kenya”, the government declares that the vast majority of the funds will be used to boost employment (for example, the creation of 200,000 jobs for the youth, where this involves rough manual labor such as excavation work) or the purchase of equipment from Kenyan manufacturers ( for example 25 thousand wooden school blackboards).
The government further reduced the top income tax rates and corporate tax rates for resident companies to 25% (from 30%) and reduced value added tax to 14% (from 16%). The tax breaks are temporary – growth is expected once the economy recovers.
Although the announced economic plan is primarily focused on creating jobs and opportunities for supplies from domestic companies, some measures should also offer possible opportunities for Czech companies.
The potential for defense industry supplies arises from the threat of terrorist attacks by Somalia’s Al Shabaab. For this reason, even in the post-covid period, the government will pay close attention to financial resources for equipping the army and the police. The Ministry of Defense will be allocated KSh 115.48 billion for the current fiscal year, i.e. a similar amount as in the previous two years (KSh 121 billion and 116 billion, respectively), despite the negative impact of the covid-19 pandemic on the Kenyan economy.
However, within the framework of the budget, the amount for strategic expenses will be fundamentally increased. Thus, despite the effects of the crisis, Kenya is sticking to its five-year plan for the technical modernization of the army’s equipment and remains, as in the last five years, the regional leader both in the size of the budget and in the growth dynamics of expenditures.
Development is also expected in the case of the police. The Vision 2030 development program envisages increasing the number of police forces so that Kenya approaches the 1:450 limit (one police officer per 450 inhabitants recommended by the UN). Increasing the number of police officers presents an opportunity for defense industry suppliers. This offers the possibility of supplying police equipment and equipment, or repairing and modernizing police helicopters.
Healthcare and pharmaceutical industry
According to allcountrylist, healthcare was a government priority even before the outbreak of the pandemic. As part of the economic measures adopted by the government, the priority position of the sector for the following period was confirmed. In addition to the Kenya Health Policy (2014-2030), which defines the long-term intention to achieve universal coverage of basic health services that would meet the standard of a middle-income country. The intention to achieve universal health care was also confirmed as part of measures to combat the consequences of the crisis. Thanks to the increase in expenses, the number of insured persons is to increase from the current 16 million to 25 million insured persons.
Increased spending on healthcare represents an opportunity for Czech suppliers, given that most healthcare equipment is imported to Kenya. Projects in the health sector are also financially supported by the World Bank. In addition to public healthcare, there are also opportunities in the field of supply for private hospitals.
The unmet demand for private health services reaches USD 100 million (10,000 Kenyans travel abroad for healthcare annually, spending an average of USD 10,000 on foreign care). In the post-covid period, it can be expected that the demand for cheaper services provided by domestic private healthcare facilities will increase at the expense of more expensive foreign services.
Agricultural and food industry
Agriculture employs 75% of the workforce and contributes a full 30% to GDP (this share, unlike other countries in the East African region, has even increased by 5% over the last 5 years). The export of tea, coffee and fresh flowers forms, together with tourism, the pillars of the Kenyan economy. The importance of the sector to the Kenyan economy will not change even in the post-covid period. There is also a relatively advanced agro-industry in the country.
As part of the economic recovery program for the Kenyan economy from the consequences of the global pandemic, Kenyan agriculture will receive extensive financial support in the 2020-2021 fiscal year. The Ministry of Finance proposed to release KSh 5billion (USD 528 million) in funds for the agriculture sector over the next twelve months to support the economic activity of agricultural enterprises.
Mechanization and new technologies for agricultural primary production in Kenya present additional opportunities. In addition, agriculture still faces a number of problems and the country is still unable to provide enough food for the Kenyan population, so agricultural commodities have to be imported into the country. This was also evident during the pandemic, when, due to poor storage, most of the strategic stocks of corn spoiled and were not suitable for feeding even domestic animals. The situation surrounding fodder storage, which also manifested itself during the covid-19 crisis, is not an isolated phenomenon in Kenya.
Every year, farmers lack fodder due to the fact that Kenyan farmers do not use fodder ensiling methods during the rainy season. In addition, the problem of food shortage is linked to insufficient irrigation. Only 2% of agricultural land is irrigated, which is low even for sub-Saharan Africa (the average is 6%). Government spending on agricultural development should fundamentally increase from the current 2% to at least double the average level of other sub-Saharan African countries. The supply of agricultural technologies thus represents opportunities for Czech suppliers.