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New rating poses threat to Kenya’s trade terms

New rating poses threat to Kenya’s trade terms

Written by Michael Omondi

24-July-2007: Kenya’s terms of trade in the international market may change for the worse following its recent removal from the list of the world’s Least Developed Countries, it has emerged.

With the UN report coming ahead of the expected arrival of an international rating agency Standard and Poors, consensus at Treasury is that the country looks set to emerge with a better rating compared with the B+ it got last year.

But at the Ministry of Trade and Industry, there are fears that the move, coupled with a better rating might weaken the country’s position as its seeks to negotiate for better trading terms on the global platform.

Kenya’s dilemma lies in the fact that its upgrading comes at a time when Africa is bracing for a new trade regime that is to come into effect next year upon the expiry of the Lome Convention.

The situation is exceptionally critical for Kenya because negotiations for new Economic Partnership Agreement that should produce a successor to the Lome agreement has stalled even as the expiry date fast approaches.

Should that date come before a new deal is reached, most of Sub-Saharan Africa is expected to fall back on everything-but-guns clause that allows Highly Indebted Poor Countries free access to the key European market leaving Kenya on its own.

In addition, Kenya, which is a signatory to WTO, will be required to open its economy, mainly the service sector, to foreign players.

Already, top officials at the Ministry of Trade are engaged in a flurry of negotiations with the EU for an extension of the current trade terms on grounds that the local economy is not ready for the new dispensation.

For instance, horticultural exports that now access the Norwegian market duty free may be required to pay duty of up to 250 per cent come January 2008- in tandem with other flower exporting countries such as Israel and Netherlands.

The same is expected to cut across the range of our export products ranging from coffee to tea and vegetables to finished industrial products.

Besides, Kenya will find its difficult to guard its share of the global market against inroads by heavily subsidized competitors. EU member countries dole out wide ranging subsidies to their farmers - a feat that Kenya is said to be unable to achieve under the current state of the economy.

“These heavy subsidies amounting to Sh350 billion in 2003 will make export from developing countries not able to compete with locally produced goods”, Mr Edward Owango a negotiation officer from the Ministry of Agriculture noted in an earlier interview.

Though Kenya recently struck a deal with WTO to continue offering export subsidies until 2015, experts have poured cold water on the deal arguing little will be enjoyed from the extension since the country lacks the capacity to offer any subsidies.

Already, a string of players in the horticulture sector have began to tone down their operations in Kenya as they shift to what they term as “friendly countries” that will continue to enjoy preferential trade pacts with EU countries.

HomeGrown has already sold parts of its Kenyan unit to Finlay citing difficult market conditions with indications that other players are set to follow suit with their likely destination being Ethiopia.

The move is set to trigger job losses as well as deny the country the much needed foreign exchange earnings, from the sector that raked in Sh100 billion last year (The combine earnings of coffee, flower and tea exports).

Experts have raised the red flag, arguing that the upgrade of the country’s economic status will make it difficult for state officials to convince their EU counterparts that the country is not in a sound footing to compete in the increasingly competitive global market.

“The new found status will definitely complicate matters for Kenya as the assumption is that Kenya is far much ahead of its neighbours Tanzania and Uganda,” says John Akoten, a researcher at Institute of Policy Analysis and Research (IPAR)- a policy think tank.

He added that EU are now more likely than ever not to cede much ground in the negotiations on the strength that Kenya can match competition even after paying duty and opening its local market to foreign players.

Provisions of quotas and duty free export to EU have been granted to struggling economies that continue to lie in the least developing countries bracket, from which Kenya has just exited.

Kenya is in East and South African (ESA) trading block together with Mauritius, Uganda, Sudan, Mozambique, Zimbabwe and Zambia.

And having witnessed a recent surge in the rate of growth in their economies, Mauritius and Kenya will have to play under the EPA rules once they come on board in January, while the rest will continue to enjoy the duty free access to the EU market.

The UN verdict, however, did not come as surprise. Over the last four years the economy has been on the up, with growth hitting 6.1 per cent last year compared to 2.8 per cent in 2008 and is expected to perform better this year.

The robust growth has been attributed to increased activity in the tourism, agriculture as well as wholesale and retail sectors that have maintained double digit growth.

And the fraction of Kenyans living in the poverty bracket has dropped to 46 per cent down from 56 per cent over the period as gains of the economic boom trickle down to households.

The improved economic performance is what Finance minister Amos Kimunya is counting on to get a favourable rating from Standard and Poors having dished a B+ rating a year ago, which is said to be enjoyed by the best performing economies in Africa.

A better rating will place the country on a safe ground to raise money in the international market to fund its widening expenditure book and help plug the huge budget deficit.

While reading the Budget last month, Mr Kimunya announced plans to float a bond on the world market to raise $150 million (Sh10.5 billion), a first in the country’s history.

 source: Business Daily Africa