Kenya's Economy; Driven by Services With Merchandise Exports Declining

While telecommunications, construction and transport sectors continued to drive Kenya's economy in 2009, merchandise exports have shrunk over the years and the Port of Mombasa has been identified as one stumbling block to Kenya's continued economic growth.  

This is according to the 2010 Kenya Country Report by the World Bank which finds that Kenya's growth rate was 2.5% in 2009 with higher projections of 4.0% foreseen in 2010. Even tourist arrivals registered a 18.9 percent growth in the first quarter of this year showing positive signs for this sector. Nonetheless, for the third consecutive year, Kenya's growth will continue to lag behind its EAC neighbours, as shown below.  

     The Report finds that overall, services grew by 4.2% and increased share of GDP from 50 % in 2000 to 55% of GDP in 2009. Agriculture contracted by 2.4%,and the role of agriculture in the economy  declined from 32% in 2000 to 26% in 2009, due in part to drought. Meanwhile, industry grew at 3.9% in 2009 due to the construction sub sector. 

This mixed performance is in part structural and in addition, Kenya remains sensitive to climatic conditions.  For instance, the 2009 weak performance in manufacturing was caused by the spillover effects from the drought which caused higher electricity costs, power outages and reduced water supply. The drought had spill-over effects in all sectors and clearly increased efforts in key infrastructure services will be necessary, to sustain increased growth.

Kenya’s economy is currently more dependant on domestic consumption than exports, and Kenya’s highest value exports, especially horticulture and tourism remain heavily dependant on Europe. This high degree of export concentration makes Kenya vulnerable to external shocks and points to the need to further diversify export markets. 

Surprisingly, Kenya has an export strategy, which was approved by Cabinet in 2004.  See previous post here on the weaknesses of export-led strategies. 

While exports of goods have been unimpressive, services exports increased from 8% in 2000 to 12% of GDP in 2009.  The strength of the domestic sector and the weakness in exports has created a large and growing current account deficit which reached 5.5% of GDP by end 2009. This current account deficit was financed mainly by increasing short term financial inflows including investment. 

                              One lesson learnt- so to speak- is that Kenya has not yet developed a targeted and strategic industrial policy. This is despite having several national policy documents such as the Vision 2030, the Private Sector Development Strategy, the Master Plan for Kenya’s Industrial Development, and the recently drafted National Trade Policy. 

Reforming Port Services in Africa

There are approximately 90 maritime ports in Africa which include coastal ports and those located on inland lakes and rivers. The top 10 ports in Sub Saharan Africa account for nearly three-quarters of the cargo transported to and from the region. Among the region’s largest and/or most active ports are Abidjan, Côte d’Ivoire, and Tema, Ghana, in West Africa; Dar es Salaam, Tanzania, and Mombasa, Kenya, in East Africa; and Durban, South Africa, and Maputo, Mozambique, in southern Africa.  Together, these six ports account for almost one-half of containerized cargo transiting SSA.  Among the region’s coastal ports, the South African Port of Durban is the largest in terms of annual throughput, and the next largest port is Mombasa, Kenya.

Nonetheless, the capacity of even the largest SSA ports to handle a rising volume of containerized cargo remains insufficient.   Firstly, by international standards, most SSA ports are small, even when compared with other ports in the developing world.  Secondly,  the physical infrastructure of most SSA ports is inadequate in part due to historical factors since many SSA ports were developed to accommodate the transport of specific types of raw materials.

Despite the relatively small size of the SSA maritime market, several ports have undergone recent reforms and are attracting new investment. Reforms are aimed primarily at improving the operational efficiency of ports, which historically have been hampered by inadequate infrastructure, poor management, and a lack of financial resources. Reform has largely been achieved through public-private partnerships, in which a private-sector entity is granted a concession to operate a port while the port remains under state ownership. In many cases, the private-sector entity also invests in port infrastructure and equipment. By 2000, 70 percent of SSA ports had some form of private-sector participation.  

Private Sector Management of Ports in SSA

Although most SSA ports are state owned, the majority of shipping firms serving the region’s ports are private-sector entities. While private-sector management of SSA ports, as well as investment in physical infrastructure, has led to modest improvements in port productivity, problems remain. In particular, the region’s maritime operations continue to be adversely affected by burdensome customs procedures, inadequate access to land transport networks and governance. 

However the primary constraints facing SSA ports—inefficient operations and lack of sufficient capacity—have yet to be fully resolved. As a result, freight rates to and from SSA remain substantially higher than in other parts of the world, reducing the region’s export competitiveness. As an example, a small container ship may potentially incur an operating cost of $43,000 for each day that it is delayed from docking at a port and to mitigate such costs, some shipping firms impose ‘vessel delay surcharges which in turn are passed on to importers.

However certain ports in the region have been successful in addressing capacity issues for containerized traffic by attracting outside investment in infrastructure and improving port management. For example, at the port of Mombasa, the Kenya Ports Authority has established dedicated berths for one of the area’s largest shipping firms and now permits cargo to be processed on a 24-hour basis. Ultimately, Mombasa and other SSA ports are increasingly serving as regional hubs or transshipment ports and are investing in infrastructure and managerial expertise to handle the growing containerized trade in the continent.  Trade in services WTO negotiations in maritime services to liberalize the sector include  three main areas: access to and use of port facilities; auxiliary services; and ocean transport. Under the WTO/W120 list of services sectors, maritime services negotiations include the following sub-sectors: 

a. Passenger transportation
b. Freight transportation
c. Rental of vessels with crew
d. Maintenance and repair of vessels
e. Pushing and towing services 

f. Supporting services for maritime transport

Inter-modal Linkages in Africa's Transport Sector

Intermodal transitions (in which freight is transferred from trucks to trains, trains to ships, or other modal combinations) is particularly time consuming and inefficient throughout Sub Saharan Africa (SSA).  In many cases, intermodal links are the main bottleneck for freight movement and for many SSA countries, the freight forwarding industry is entirely reliant on manual loading and unloading for intermodal transitions. This is in stark contrast to more developed economies.   

For example, improving intermodal links was a major factor in the export-driven development of Southeast Asian countries. Starting in the 1980s, these countries restructured their transport sectors into multimodal supply chain management sectors that took advantage of containerization and the internationalization of production.   Improvements in intermodal links in Southeast Asia were correlated with increased trade flows (especially of intermediate goods), increased integration into global production networks, and growth in domestic manufacturing sectors.

Intermodal connections can facilitate the vertical integration of commodity chains since logistics sectors typically evolve from a three-stage system of transporting commodities (from rural hinterlands to marketplaces, from marketplaces to ports, and then from ports to overseas markets) to integrated door-to-door supply chains;  a highly efficient system.  

Logistics and intermodal transitions are clearly areas where African countries need to enhance their transport sector efficiencies further.

Impact of Infrastructure Services on Sub Saharan Africa's Export Competitiveness

According to a World Bank Study poor infrastructure conditions increase production costs, economic distance (the time and cost of transporting goods) business uncertainty, and undermine Sub Saharan Africa’s (SSA) export competitiveness. Generally, roads in SSA are poorly maintained, some unpaved and truck fleets generally consist of aging, fuel-inefficient vehicles that are often overloaded and contribute to further road degradation. Poor roads and truck breakdowns result in the slow movement of goods, considerable damage to goods in transit (particularly to perishable goods), and high shipping costs relative to other areas of the world.

Rail networks in SSA are also limited and generally even less reliable than trucks, increasing the dependence on roads to transport goods. “Soft” infrastructure constraints, such as excessive check points, burdensome administrative procedures, and inefficient processing at border crossings, often cause longer delays than poor road conditions. These delays increase economic distance and often reduce product quality, particularly for perishable goods, leading to higher rejection rates, higher production costs, and lower income for producers.  

For instance,  a USITC Study titled Sub-Saharan Africa: Effects of Infrastructure Conditions on Export Competitiveness, Third Annual Report found that some SSA coffee exporters take almost 42 days to export (excluding maritime travel) due to poor roads, long distances to the ports, roadblocks and customs delays while Latin American exporters take only 14 days to export- excluding maritime travel.  This difference in competitiveness means that the SSA coffee farmers are facing a significant tariff equivalent barrier to exports when compared to Latin Americans.

Given the importance of these issues, I will be focusing on the impact of infrastructure services on Africa’s export competitiveness for the next few posts.