Why Kenya has lost its most precious market, Uganda

Kenya National Bureau of Statistics (KNBS) data last week showed Kenya’s exports to Uganda had declined by a massive 20 per cent in the first 10 months of 2016.

The Leading Economic Indicators report has raised fears that the country is losing its grip on its biggest market for locally produced products. In 2015, Kenya’s exports to Uganda were valued at Sh68.6 billion, up from Sh60.7 billion in 2014.

And while Kenya’s total exports between January and October 2015 were worth Sh52.2 billion, this dropped in the 10 months to October last year to Sh41.8 billion.

The decline is an indicator of the changing face of trade relations between Kenya and Uganda. Evidence of this shift can be seen in Nairobi’s city centre.

Amid the beehive of commercial activity in downtown Nairobi, one type of business stands out: the large number of shops selling brand new shoes, handbags and clothes.

Kampala industrialising

Demand from shoppers for this merchandise is so popular that most stores occupy the space that two or three stalls would.

These products are made in China, and like most Chinese goods, they are cheap. However, most of these items are not flown or shipped into Kenya from China – they are flown directly from China to Uganda’s city of Entebbe. From there, they are brought into Kenya.

This was unheard of a few years ago when a ship carrying merchandise from the Asian country would dock at the port of Mombasa. Ugandan traders would then make their purchases, or wait to buy them from Kenyan businesses.

But things are changing, and growth in the value of exports to Uganda, which is landlocked, has been slowing.

Economists have attributed this slide to a number of factors, including the fact that Kampala has been industrialising, weaning itself off Kenya’s products.

Kenyan exports to Uganda, which comprise 9.4 per cent of the latter’s import bill, include refined petroleum, coat flat-rolled iron, packaged medicaments, confectionery sugar, cement, palm oil, cars, delivery trucks, plastic lids and beer.

China, whose imports constitute 12 per cent of Uganda’s import bill, similarly exports refined petroleum, packaged medicaments, coat flat-rolled iron, cement, large construction vehicles and broadcasting equipment.

And in the competition to export a similar set of products, China has been edging Kenya out.

In a recent report on Kenya, the World Bank noted that: “Exports to Tanzania and Uganda are quite similar to China’s, compared to both countries’ exports to the United States or the UK. The greater overlap in East Africa suggests that Chinese goods will likely displace Kenyan exports.”

Last year, Kenya’s steel manufacturers decried what they termed as cheap steel products flooding the local market as the global price of the alloy tumbled to its lowest levels in 10 years. This cheap steel took away local firms’ competitive advantage, forcing some of them to close shop and lay off thousands.

And to add salt to injury, the cheap steel products also snatched manufacturers’ key East African market. With the tumbling prices of steel in the global market, Uganda, Rwanda and Burundi opted to import directly from China, bypassing Kenya.

Scholastica Odhiambo, an economics lecturer at Maseno University, agrees that China has slowly been displacing Kenyan products from the Ugandan market.

“Uganda is not importing as much as it used to through Mombasa, and planes from China are now landing in Entebbe,” she said.

Economists add that Uganda has recently been moving towards self-sufficiency, making its own products rather than buying them from Kenya.

Gerishon Ikiara, an economics lecturer at the University of Nairobi, noted Kenya’s exports to Uganda are reducing because the latter is now manufacturing the products Kenya previously sold it.

Dr Odhiambo said these products include processed food, cooking fat and refined oil.

“Remember that now we are even importing sugar, yet sugar was one of our exports to [Uganda],” she said.

The economic disruption that followed Kenya’s post-election violence in 2008 also shook East African economies after it affected about 200 million people in Uganda, South Sudan, Rwanda, Burundi and eastern Congo who rely on the Mombasa port for imports and exports.

Minimal disruption

At the time, about 80 per cent of Ugandan goods passed through Mombasa. Following the violence, the Uganda Manufacturers Association said food prices went up about 15 per cent, and inflation rose to 6.5 per cent in January from 5.1 per cent in December 2007. Ugandan traders have since claimed losses of about Sh4 billion.

And despite years of minimal disruption at the port, Kenya is fighting to keep its leadership as a preferred route in the region, especially in the importation of petroleum products.

Rwanda prefers to use Tanzania, which it says has cleaner fuel and a bigger axle load limit, offering better economies of scale. This saw exports to Rwanda drop 7.5 per cent, according to KNBS data.

This was the third-largest decline after a 7.8 per cent dip in exports to the United Kingdom in the year to October 2016.

However, exports to Tanzania increased 2.5 per cent, while the US became the second-largest destination for Kenyan products after exports increased by 6.7 per cent.

Other markets that recorded growth were Egypt, Pakistan and the United Arab Emirates.

dakure@standardmedia.co.ke