FEDERAL REPUBLIC OF KENYA

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1 FEDERAL REPUBLIC OF KENYA

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3 INTRODUCING COUNTRY PROFILE FACTS AND FINDINGS Location: The Republic of Kenya is located in East Africa. It shares borders with Ethiopia in the north, Somalia in the northeast, Tanzania in the south, Uganda in the west, and Sudan in the northwest. The capital city of Kenya is Nairobi. This is the second-largest city in Africa, after Cairo, and the largest city in Kenya itself. It is an economic centre with thriving financial, technological and service sectors. The country s population has grown rapidly in recent decades to an estimated 45.5 million. Kenya has numerous wildlife reserves with thousands of animal species. Chambers/Associations: Kenya National Chamber of Commerce and Industry (KNCCI). Kenya is a member of the East African Community (EAC) and of the Common Market for Eastern and Southern African (COMESA) trading blocs.

4 INTERNATIONAL TRADE Top five export locations Top five import locations 1. Uganda (11.9%) 1. India (18.3%) 2. United Kingdom (7.9%) 2. China (12.9%) 3. Tanzania (7.7%) 3. United Arab Emirates (8.3%) 4. Netherlands (6.8%) 4. Japan (5.9%) 5. United States of America (6.3%) 5. South Africa (5.0%) Top five exported goods Top five imported goods 1. Coffee, tea, mate and spices (18.8%) 1. Mineral fuels, oils, distillation products (21.0%) 2. Live trees, plants, bulbs, roots, cut flowers etc. (12.6%) 2. Machinery, nuclear reactors, boilers etc. (8.6%) 3. Mineral fuels, oils, distillation products (12.6%) 3. Vehicles other than railway, tramway (7.8%) 4. Edible vegetables and certain roots and tubers (4.9%) 4. Electrical, electronic equipment (6.9%) 5. Articles of apparel, accessories, knit or crochet (3.5%) 5. Aircraft, spacecraft, and parts thereof (6.7%) KENYA S OPENNESS TO FOREIGN DIRECT INVESTMENT (FDI) Government policy encourages investment that will bring foreign exchange, provide employment, promote backward and forward linkages, and transfer technology. Foreign companies are securing deals with government to work on infrastructure projects and are investing to improve Kenya s transportation network. China is the biggest foreign investor in Kenya s economy with regard to infrastructure and technological development projects. Kenya has a positive investment climate. This makes it attractive to international firms looking for a place to run their regional or African operations from. The Kenya Investment Authority (KenInvest) asks companies to undergo an optional investment registration process. This includes a health, safety and environmental impact assessment. Although usually optional, registration is mandatory if an investor wants to qualify for investment incentives. Companies that undergo the KenInvest process and hold investment certificates automatically qualify for different class work permits. The Kenyan government encourages foreign participation in the economy. It has actively promoted the development of export processing zones (EPZs) around the country. Kenya s performance is boosted by its strong trade platform, which has the sixth-largest total trade volume in the region. Kenya has managed to get rid of much of the red tape within the tax administration. For instance, it has shortened the time taken to pay taxes from over 300 hours to hours. POLITICS AND LEGAL The president, Uhuru Kenyatta was elected in Kenya obtained a new constitution in 2010 in the form of a decentralised system with two levels of government: county and national governments. Each has distinct powers, although they have to co-operate with one another. The 47 new county governments manage and develop their own affairs while promoting social, economic and political development. The decentralised political system has made the governing process more effective and has improved international

5 perceptions of Kenya. This has had a positive impact on investment and doing business in the country. Kenya s security outlook remains poor. The main threat to the country is posed by al-shabaab, a Somalia-based Islamist group. There remains a threat of terrorist attacks. Al-Shabaab claims it is attacking Kenyan civilians mainly because Kenya has a military presence in Somalia and mistreats Somalis and Kenyan Muslims in north-eastern Kenya. If Kenya does not tackle its security problems, this will continue to weigh on the country s economy and investor confidence, and it could erode support for the current administration. Corruption remains a serious problem in the country, despite market reforms. Business-government corruption is still widespread. Companies often get demands for bribes and informal payments to get things done in the country. Foreign companies find that corruption is especially a challenge when trying to enter markets and start up a business. On the positive side, the president is an advocate of tackling corruption within the Kenyan government. ECONOMICS Kenya is seen as a well-diversified, relatively developed economy with sound economic policies and strong growth prospects. The country has a strong financial sector and well-developed domestic markets. The country s economy is poised to be among the fastest growing in the region and predicts positive growth of up to 7% by A stable macroeconomic environment, a booming consumer market

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7 and its positive impact on consumer spending, continued investment in infrastructure, an improved business environment, the current lower oil prices, exports and regional integration should help sustain the growth momentum. Various factors such as security concerns, drought and waning tourism have been weighing on the Kenyan economy. The worsening in the tea crop outlook (the country s most valuable export commodity) and the slump in tourism have had a negative impact on the shilling exchange rate. Many tourist facilities in Kenya s coastal areas have closed down. This has had a negative impact on employment as well as on other industries such as agriculture, transport and manufacturing that supply goods and services for tourist consumption. (In Q1 2015, the country s accommodation and food services sub-sector shrank for the fifth quarter in a row.) The Kenyan Shilling will keep depreciating for now. The weakening in the shilling is mainly driven by external forces such as the strength of the US dollar, an expected US monetary tightening, slower growth in China and uncertainties in the eurozone. Kenya is a major net importer of oil and should therefore benefit from lower oil prices. At the same time, once the country starts producing oil, probably around 2017, the lower oil prices could reduce export earnings. Export diversification, mostly into automobile manufacturing, can also limit the trade deficit and boost the trade account. Kenya has a dominant position in the East African Community (EAC), Africa s most progressive trade bloc. This will allow the country to take advantage of the region s positive growth prospects and build its economy. More regional integration and better infrastructure will ensure that local companies can expand more easily into other regions. It is expected that Kenya will consolidate its position as East Africa s largest economy and take advantage of the region s overall positive growth prospects. The EAC trade bloc has a combined population of over 150 million and a nominal GDP of over US$100 billion, so it holds huge potential. There are investment opportunities across the board. Many sectors in the country attract investment and FDI from various sources such as the US, Europe, key Asian countries, and South Africa. The energy sector, banking, real estate, retail, consumer goods manufacturing, vehicle assembly, and tourism are attracting some investment, but foreign investment will mainly be driven by ongoing oil exploration and the development of the oil sector. The objective is to continue with regional integration into the East African Community (EAC) and the construction of infrastructure projects. Investments in the transport and energy networks, together with reforms such as deregulation and privatisation, should in time break down the structural constraints and help establish a regional transportation hub. There are also investment opportunities in renewable energy, particularly solar, wind, and geothermal power. Kenya is planning to add at least nine solar power plants over the next few years through public-private partnerships (PPPs). The objective is to triple the country s generating capacity to MW by 2030 so as to make the country less reliant on hydropower. Kenya offers what could be lucrative opportunities for investment in the services sector. This is especially true for tourism, banking, telecommunications, transport, wholesale and retail trade, and business process outsourcing.

8 The Kenya-based investment company Centum was due to open the largest shopping mall in East Africa in October This development was expected to get much interest from foreign investors. Centum has said that 43% of the lettable space will be taken up by international retailers, which is a key differentiating factor of the project. National Development Plan (Kenya Vision 2030) and structural reforms: The objective of Kenya s economic development programme is to help transform the country into a newly industrialised, middle-income country providing a high quality of life to all its citizens by 2030 in a clean and secure environment. The Vision is based on three key pillars an economic, social and political pillar. The economic vision is to improve the prosperity of all regions of the country and all Kenyans by achieving a 10% gross domestic product growth rate per annum from The medium-term plan targets six priority sectors: tourism; agriculture, livestock and fisheries; wholesale and retail trade; manufacturing; IT-enabled services; financial services; and oil and gas. The social pillar s objective is investing in the people of Kenya in order to improve the quality of life for all Kenyans. This will be done through a cross-section of human and social welfare projects and programmes. The goal of the political pillar is to move to the future as one nation. KENYA S ECONOMIC ACTIVITY IN PERSPECTIVE A statistical rebasing of Kenya s GDP was released by the Kenya National Bureau of Statistics on 30 September This rebasing shows that the Kenyan economy is 25% larger and growing faster, than thought before. The rebasing now classifies Kenya as a lower-middle-income country under the World Bank s classification. Kenya s gross national income now stands at US$ ECONOMIC GROWTH: CURRENT VS OUTLOOK According to figures from the Kenya National Bureau of Statistics, all the sectors of the economy showed positive growth rates in Q1 2015, except for the accommodation/ hotel and restaurant services sector. In Q1 2015, the Kenyan economy grew by an estimated 4.9% overall, compared to 4.7% in the same quarter in The accommodation/hotel Economic Intelligence Unit (EIU) (1) Economic growth (%) (f) 2016 (f) 2017 (f) 2018 (f) 2019 (f) Agriculture Industry Services BMI Research The World Bank Inflation (%) EIU (year on year) BMI Research (Year on year, average) BMI Research (End of period) Central Bank policy rate ( f ): forecasted Sources: (1) EIU: Country Report, 16 September 2015; (2) BMI Research: Kenya Country Risk Report Q4 2015, 1 October 2015; World Bank

9 and restaurant services sector has been under pressure due to security concerns and perceived health risks such as Ebola. This is due to the country s geopolitical location and connectivity with West Africa. Tourism is expected to remain under pressure. In 2015, economic activity will be held back by dry weather, security concerns and higher interest rates. Agricultural output will be down again due to dry weather and not enough rainfall during the main wet season, while tourism will continue to suffer from security concerns and negative travel advisories in some important European markets. Going forward, economic growth prospects are bullish. The expected growth is still nowhere near the 10% envisaged in Vision Key drivers for economic growth are expected to be an improved business environment, more public and private investment, increased construction activities, more private consumption, an improvement in the manufacturing sector s performance, and exports and regional integration. THE STRUCTURE OF THE ECONOMY: The agriculture sector provides livelihoods through subsistence farming to a large proportion of the population. It is the largest employer and an important foreign currency earner (tea, coffee and horticulture together make up a Agriculture, 29% Industry, 19.8% Sources: KPMG Kenya Economics Snapshot, Quarter Services, 51.2% significant part of Kenya s total exports). Agriculture also plays an important role in increasing food security. The mining and quarrying sector contributes little to the Kenyan economy less than one per cent of GDP. Still, new discoveries could lead to sustained investment, growth and development. Kenya has deposits of gold, limestone, mineral sands, soda ash, salt, rubies, and fluorspar. Yet the lack of infrastructure and limited energy supply in areas with usable mineral resources make things difficult for mining companies. The mining sector thus remains underdeveloped, and only small amounts of minerals and metals are exported. The discovery of rare-earth deposits off the coast of Kenya, worth about US$62.4 billion, could place the country in the top five countries worldwide with such deposits. Investors in mining should know of the 2014 Mining Bill that is before parliament. The Bill has a number of practices, policies and conditions that strongly discourage foreign investment in the sector The industrial sector is driven by strong public investment in infrastructure that has boosted the construction and energy sectors. Manufacturing, food and consumer goods processing have become important sub-sectors. The capacity of Kenyan garment factories has grown markedly in recent years due to FDI from Asia and the Middle East, as well as support from the export development zones. There is no local upstream industry, though, so manufacturers have to import fabrics, meaning there are longer lead times. Other challenges include the high labour costs and the unreliable energy supply that forces factories to use very expensive generators. The construction sector has made a strong contribution in recent years with growth estimated at 13.1% in 2014 compared to 5.8% in the preceding year. This is due to the government s infrastructure investment programme and the massive investment in megaprojects involving road, rail

10 and ports infrastructure, energy-related infrastructure and supportive infrastructure. There has also been huge investment in the development of residential and commercial properties, primarily office space. The growth in Kenya s population was a key driver of the increased demand for housing, especially in urban areas. The construction boom has been beneficial to the commercial banking sector, with loans and advances to construction and real estate sectors growing by 13.6% and 32.4% respectively in Any contractor who wants to work in the construction industry in Kenya must register with the National Construction Authority (NCA). OPPORTUNITIES FOR THE CONSTRUCTION INDUSTRY In March 2012, the Lamu Port South Sudan Ethiopia Transport and Economic Development (LAPSSET) infrastructure development project was announced. The project includes the construction of infrastructure across many areas, including transport, energy/power, water supply and treatment, the oil industry, healthcare, education, telecommunications, retail, and hotels and tourism. The Power Africa project, which was launched by Barack Obama in 2013, aims to help provide electricity to two thirds of the 800 million people in sub-saharan Africa without electricity. It will also add ten gigawatts of electricity generation capacity through co-operation between US government agencies and the private sector. In the information and communication technology (ICT) domain, the biggest construction opportunity is the IT business hub Konza City. Also known as Africa s Silicon Savannah, Konza City is valued at US$14.5 billion. Economic activity in Kenya is dominated by the services sector, including banking, a well-developed retail sector, a relatively sophisticated and growing telecommunications sector, and a developed tourism sector. The wholesale and retail sector has been sustained by the increasing urbanisation in the country; a growing middle class; and the changing lifestyle of Kenyans with their demand for shopping. All of this has resulted in the construction of more malls in Kenya and outside the country s boundaries The ICT sector is one of the fastest-growing sectors in Kenya. There has been continued growth in mobile voice, mobile data/internet and mobile money transfer services. At the end of 2014, penetration of mobile (82.6% vs 76.9% at the end of 2013), internet (64.3% vs 52.3% at the end of 2013) and fixed and wireless broadband (9.9% in 2014 compared to 5.9% in 2013) showed there was still opportunity for growth and for companies to enter the market. Government has been investing more in the telecommunications industry to help make Kenya a hub of telecommunications innovation. There is also more focus on generating policy and legislation to support the growth of the ICT sector. The development of the country s oil sector has the potential to take the economy onto a higher growth trajectory. Factors that could limit the effects of lower oil prices on domestic oil investment include: The onshore nature of the country s oil resources it is much less expensive to both explore and drill onshore than offshore; and Less exploration activity globally. This will increase competition among oilfield services and infrastructure companies as they try to get business from the few regions that are still involved in oil-related activities. The most positive signs of investment sentiment come from

11 the companies that are driving the oil sector in Kenya at the moment Tullow Oil and Africa Oil. They still plan to drill six basin openers in Kenya in 2015, and more than a dozen other wells, including exploration wildcats and appraisals, are expected to be drilled this year. But despite the many positives, there are still significant risks to the development of Kenya s oil sector. SOCIAL Kenya has a very diverse, young population that includes most of the major ethnic, racial and linguistic groups found in Africa. A growing population, estimated at 45.5 million in 2014 (and estimated to reach 58.1 million in 2024), will be a key driver of economic growth in the country. Market analysts believe that the working-age population will grow even faster, making it difficult for the country to provide jobs for the booming workforce. This can pose a significant threat to political stability. Kenya boasts a larger, more highly skilled, specialised and educated workforce that ranks amongst the best in Africa. Development challenges include poverty and inequality. The country s economy is also vulnerable to internal and external shocks. This will have a detrimental effect on the already big unemployment problem. The challenge will be to ensure that most Kenyans benefit from the anticipated higher growth as poverty rates and inequality have remained high. TECHNOLOGY Kenya plans to become Africa s ICT hub by In 2013, the Kenyan government s ICT Authority launched a national ICT master plan Connected Kenya This plan aims to ensure that Kenya becomes Africa s most respected knowledge economy globally. The idea is to spur the development of 500 tier-one technology companies, the formation of 20 global innovations and the creation of new jobs by To become Africa s ICT hub, Kenya will have to develop Konza Technology City at a cost of some US$14.5 billion to ensure the country provides the facilities investors need as they come into the country; strengthen education in ICT so that the required

12 talent is always available in the country; and market and strengthen brand awareness. Kenya is indeed seen as being well placed to become Africa s leading technology hub, as the country has guaranteed government support, a young, tech-savvy population, and further innovation on the horizon. Kenya has pioneered a mobile technology economy that points to future trends in the rest of the world. As a leader in mobile technology, Kenya has 36.1 million mobile subscribers. This gives the country a 83.9% penetration rate, according to the Fourth Quarter Sector Statistics Report for the Financial Year 2014/2015 (April June 2015) issued by the country s communications authority. In Kenya, the Internet is increasingly used for basic services such as banking, healthcare and education. In 2013, the sector contributed 12.1% to the country s GDP of US$44 billion. The country s mobile money transfer service is showing steady growth, and new services and apps continue to be added to provide ways for mobile payments. According to a study by the Kenya Bankers Association 71% of rural Kenyans and 51% of urban residents use their mobile phones for banking and financial services. It is anticipated that increased Internet penetration and smartphone uptake will continue to be main drivers of increased data and mobile money transfer use. ENVIRONMENT Environmental issues in Kenya are deforestation, soil erosion, desertification, water supply and sanitation in the country (water shortages and degraded water quality), flooding, poaching, and domestic and industrial pollution. The country is vulnerable to droughts due to its dependence on rain-fed agriculture. Weather-related shocks hold major risks for food supply and security and could cause a surge in demand for food imports, which would damage Kenya s external position. OPERATIONAL RISKS/BARRIERS TO DOING BUSINESS The growth and development across Africa have attracted foreign investment and many multi-national companies to the continent. Yet it has to be said that doing business or operating in African countries holds many risks. The following are some of the potential risks facing investors operating in Kenya: The country has an unstable domestic security situation, including high levels of crime, the threat of terrorism and an entrenched culture of corruption. Businesses in the country are hindered by inefficient bureaucracy and high levels of taxes. The country s transport infrastructure and logistics systems are weak for it to become a regional trade and transport hub. This includes customs, goods clearance and weighbridge processes. Kenya s large pool of highly qualified and specialised workers poses less risk to businesses in terms of labour supply issues. The high costs of employment in the country, powerful unions, and even serious health issues hold risks to businesses, though. The inconsistent administration of work permit applications makes it difficult to employ expatriates in the country. The Kenyan government requires that foreign employees must be either key senior managers and/or personnel with special skills that are not available locally. Businesses have to prove that they cannot source the necessary skills in the country.

13 Foreign investors also have to sign an agreement with the government that they will train locals and phase out expatriates. The minimum foreign investment for Government of Kenya investment incentives and an investment certificate is US$ This will deter foreign small and medium enterprise investment, especially in the services sector, which is normally not as capital-intensive as other sectors. Kenya s legal and judiciary environment burdens businesses with costly and off-putting bureaucracy and red tape around all basic business procedures, which may incur costs and discourage investors. Kenya has some of the highest waiting times for opening (30 days) and closing (4.5 years) a business and for registering a property (72 days). It also requires businesses to follow many time-consuming and sometimes costly processes. These are major obstacles to investment in the country. For example, the time it takes to close a business poses a risk to businesses that want to relocate or close down. In Kenya, the most expensive procedure is when applying for a business permit KES The time it takes to register a property can also greatly increase costs in terms of working time lost in simply setting up a business. Law enforcement in the country is severely hampered by corruption and a lack of capacity in government institutions such as the police, the judiciary, and the customs office. The country does not adequately protect intellectual property (IP), including copyrights, patents and trademarks. Businesses must know that although laws covering IP protection are well established, enforcement is patchy and difficult because of a lack of capacity in anticounterfeit forces. Many of the country s oil fields are remote and will require significant infrastructure outlays, including the construction of an oil pipeline towards the coast. This could deter oil companies from developing the Kenyan oil industry. A 5% Potential investors in the construction industry should know that it takes an average of 125 days to get a construction permitt. Foreign investors may also face risks around land ownership. In Kenya, getting title to land is a cumbersome and often corrupt process. Foreigners may not buy or lease agricultural land unless they get presidential approval. Only Kenyan citizens or companies with majority Kenyan ownership may buy other types of land. Foreign investors are limited to 99-year leases, which increases costs and the risk of expropriation.

14 capital gains tax effective from 1 January 2015 could also dampen investor interest somewhat. This is especially true for the emerging oil and gas industry, as it will be significantly higher for transactions in this sector. SOURCES BMI Research BMI Research, Operational Risk Report (Trade and Investment Section) CIA World Fact Book Communications Authority of Kenya ( Economic Intelligence Unit (EIU) Gov.UK Overseas Business Risk: Kenya Kenya National Bureau of Statistics KPMG Transparency International, Corruption Perceptions Index 2014 US Department of State Who Owns Whom Wikipedia World Bank ( (Kenya Investment Guide)

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