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Govt turns to Comesa as tax threat looms in EU

Business Daily (Nairobi) | 27 September 2007

Govt Turns to Comesa As Tax Threat Looms in EU

By Allan Odhiambo

Africa’s largest trade bloc may hold the future for Kenya’s growing exports sector that is facing an uncertain future in traditional markets such as Europe, latest trade data indicates.

Though Europe has for decades been the prime outlet, especially for primary products, statistics show that its importance as a consumer of Kenya’s exports has dipped significantly.

Trade and Industry ministry data shows that since 2000, the volume and value of Kenya’s exports to the Common Market for Eastern and Southern Africa(Comesa) has surpassed that of the EU and is steadily growing.

In 2005, for instance, Kenya’s shipments to Comesa alone accounted for 34.57 per cent of total exports compared to the EU’s 24.9 per cent. This translated into Sh90 billion in earnings from Comesa compared to Sh68.4 billion from the EU.

This decline in trade with Europe is partly attributed to introduction of stringent standardisation measures as well as the climate change debate that has seen the food miles — the notion that airfreighted goods are harmful to the global environment — gain grounds in the consumer market.

Europe’s importance as Kenya’s main trading partners is expected to diminish further should the existing economic partnership agreement that Africa, Caribbean and Pacific nations signed with the European Union expire at the end of this year without replacement with a new pact.

Within the Comesa region, there are indications that exports growth is particularly strong in the Free Trade Area (FTA) where cross-border movement of goods has been harmonised under the common tariff arrangement.

More recently, trade within the FTA received a big boost with the establishment of regional standards for products such as grains to ease the flow of goods across national borders.

Richard Sindiga, the acting chief economist at the Ministry of Trade and Industry reckons that this growth has awakened Kenya to the fact that its future in the export market lies on trade with neigbours. "It is a market that is ours for the taking as long as we remain aggressive in improving the quality of our products," he said.

Manufactured and processed products such as petroleum remain Kenya’s key exports to Comesa, a development that analysts say offers the potential of pulling along products from primary sectors such as agriculture through value addition.

According to the Economic Survey 2007, value added industrial supplies exports stood at 66 per cent in 2002, but had increased to 78 per cent in 2006. Value addition for fuel and lubricants exports amounted to 99.9 per cent in 2002 but had declined marginally to 99.8 per cent in 2006.

This impressive growth in value addition of industrial products such as petroleum has improved Kenya’s penetration of the Comesa market catching the attention of planners.

Over the past four decades, growth of Kenya’s exports has been slowed down by continued reliance on primary products that are consumed by mainly in the traditional European market and American markets.

Kenya has developed two distinct market positions in its export markets. To the EU, Asia and other developed countries, Kenya is repositioning itself as a supplier of food and agricultural products, while to Comesa and other African countries, it emerging as an exporter of industrial goods.

The impact of this reliance on the export of primary products is expected to become clearer in December should the country fail to sign new Economic Partnership Agreements (EPA) with the EU.

Primary horticulture products from Kenya currently enter the EU market at zero duty thanks to preferential arrangement with the EU under the Cotonou agreement that expires on December 31 this year.

Should Africa, Carribean and Pacific countries fail to strike a new agreement Kenya’s trade with Europe would revert to a General System of Preference (GSP) in January.

Under the GSP platform, some of the products that Kenya has exporting at zero rate will attract duty ranging between 8.5 per cent and 15.7 per cent.

This is seen to bear the potential of translating into a loss of Sh114 billion in trade and investment from Europe.

Analysts say with value-addition the impact of this loss or diminished access to the Eurpoean market may be reduced by balancing it with exports to the Comesa region.

Though disparities existed in terms of growth in the two key markets, there is need to strive and consolidate the exploitation of potential on either side to maximise on returns.

" We may be looking to markets closer to home because of economies of scale, but you realise other markets abroad are also still critical to segments of the economy such as the horticultural industry.

"We also look up to other emerging markets such as Asia just to build on any advantage that may arise" Steven Smith, the chairman of the Kenya Association of Manufactures (KAM) said.

Trade and Industry Permanent Secretary David Nalo said enhancement of national production through value addition holds the key in consolidating gains in key international markets which have not been fully exploited.

"Ours is to try and maximise on opportunities available on all sides of the doesn’t matter where the chances may arise because our approach is holistic," Trade and Industry permanent secretary David Nalo said.