Kenya Faces Revenue Loss As Africa Implements Free Trade
According to a report by Kenya’s Institute for Public Policy Research and Analysis, once the African Continental Free Trade Area (AfCFTA) takes effect, Kenya could lose some of its revenue.
While the initiative has immense potential for Kenya and Africa as a whole, it is not without its complications. Some measures however, could mitigate the loss.
The report titled “The Implications of the African Continental Free Trade Area (AfCFTA): Evidence from Partial Equilibrium Model on Kenya,” details the key benefits of the implementation of AfCFTA in Kenya.
However, it mentions a key set back for Kenya in the form of revenue loss. “Tariff liberalization leads to a substantial decline in tariff revenue for Kenya, with an average potential loss of Ksh 22.53 billion.
Additionally, there is a marginal increase of around 0.1 per cent in imports from African nations in sectors such as manufacturing dairy products and growing crops. At the same time, exports will expand within the region, particularly in countries where Kenya lacked functional trade agreements,” the report reads.
The report also details that despite the potential loss, a few key measures could mitigate the loss, including placing a heavy focus on the country’s industries.
“Tailored interventions are needed to protect sensitive sectors. Strengthening domestic industries is vital for the country to fully realize the AfCFTA’s benefits. Ongoing monitoring of trade dynamics within AfCFTA is crucial for adapting to evolving conditions and optimizing opportunities.,” the report reveals.
On March 21, 2018, African leaders signed the Africa Continental Free Trade Area (AfCFTA), an essential step toward continental integration. The pact, which covers 55 nations allows for the most extensive global trade liberalization in commodities and services (World Bank, 2020). In a nutshell, it is intended to be the largest free trade area in the world.
The initiative has the potential to reduce or completely remove barriers on trade within Africa, liberalizing at least 90% of products by 2030 and an additional 7% by the end of 2035. Thus the revenue loss a country like Kenya could endure, given its reliance on taxed goods.
The World Bank reported that AfCFTA could lift 30 million Africans out of extreme poverty, increase income by US$ 450 million, increase intracontinental exports by 81% (with manufacturing increasing by 62%), and protect the continent from external shocks.
Kenya exported 35% of its products to fellow African countries, while the remaining 65% was shipped to the international market, between 2011 to 2020.
The member states of the East Africa Community, Tanzania and Uganda in particular, make up 28% of total exports; the remainder of Africa, led by Egypt, a COMESA member where Kenya is a member of the regional market, accounts for 7%. During the period under review, said exports went to the United States of America, Pakistan, United Arab Emirates, The Netherlands, and the United Kingdom.
China is the largest market for imports in Kenya, accounting for 18.2% of total imports between 2011 and 2020. India comes in second with 13.2%, the UAE with 8.4%, and Japan with 5.3%. Only three of the top 24 import markets; Tanzania, Egypt, and Uganda performed a little over inadequate for Kenya’s imports, accounting for just 4.7% of total imports.
