Why Kenya and Ethiopia want to trade with each other

Kenya President Uhuru Kenyatta (right) and Ethiopian Prime Minister Hailemariam Dessalegn make a joint press statement at State House, Nairobi on April 24, 2013.

A high-powered delegation of Kenyan businessmen and government officials is currently in Ethiopia as the two countries look to ramp up trade ties that have over the years remained week despite sharing a sizeable border.

The 40 traders representing some 30 companies will during the July 29-31 visit will meet Ethiopia prime minister Hailemariam Desalgn as well as scout for investment opportunities in the populous country of 85 million.

Under the Kenya Association of Manufacturers, it is the largest delegation yet of Kenyans to its northern neighbour and the first in seven years. The visit comes nine months after PM Hailemariam visited Kenya where a Special Status Agreement (SSA) was signed between the two countries.

They are looking to expand bilateral trade that is currently worth only $50 billion and which is heavily tilted in favour of Kenya, and a huge market of some 125 million people.

Ms Betty Maina, the chief executive of KAM said that while the two countries are good friends and neighbours, they still do not have strong commercial relations in part due to poor transport linkages but also because of the absence of structured trade engagement.

"SSA had a framework for trade and investment agreement that is supposed to facilitate people to trade here," said Ms Maina, adding that Kenyan banks may be able to set up correspondent banks in Ethiopia, and Kenyan goods may be able to come in through the borders.

The two countries are currently strengthening road links to facilitate cross-border trade.

Tightly regulated

According to KAM, the agreement had given an allowance for Kenyan banks to set up correspondent banking and representative institutions, which explains why Kenya Commercial Bank (KCB), Commercial Bank of Africa (CBA), and Stanbic Bank were present in the delegation.

Banking is one of the most regulated areas in Ethiopia, especially for foreign investors.

The SSA is broad, covering better trade facilitation, infrastructure and joint investment.

However, Ms Maina said that the key things in increasing bilateral trade are improving infrastructure and a better understanding of business cultures.

"Because of history, there have been a lot of Ethiopian investors in Kenya and as such Kenyans are looking for reciprocal process where establishment of Kenyan investment is done," she said.

A Kenyan embassy official who spoke on condition of anonymity said the next step will be an Ethiopian business delegation visiting Kenya, and the establishment of a mechanism to help implement the SSA, which could facilitate settlement of trade disputes.

The official also said in line with this there is an upcoming trade agreement that will be concluded between the two sides in order to boost trade relations.

Differences

However the meeting also underscored differences between the two sides on how much each country is able or wants to trade openly with the other.

An official at the Addis Ababa Chamber of Commerce and Sectoral Association (AACSA) said manufacturing contributes about 26 per cent of GDP in Kenya as compared to Ethiopia’s 11 per cent, and the former tend to have multinational corporation backing, which is a major plus for Kenyan businesses.

"Ethiopia signing up to a Free Trade Agreement (FTA) within the Common Market for East and Southern Africa (Comesa) with zero tariff will bring more pressure on Ethiopia’s nascent manufacturing sector, and as such is unwise to sign it now," said the official.

Ms Maina however said Ethiopia is a large market and it makes more sense to set up business in Ethiopia and sell, but its rigidities have to be relaxed with concluding FTAs, which unless done will continue to make it difficult to sell to Ethiopia.

Ayalewe Zegeye, the president of AACSA, said that there already some positive trends which can boost trade including the lack of visa requirements, but both sides need to change perceptions.

"Ethiopia is not thought as part of East Africa when many Kenyans used to talk about east African countries in my education and work encounters and as such both countries, can only truly benefit if there is a change of attitude in this regard," he said.

Short-term pain

"Kenya’s long experience with western companies means it can act as a conduit for them to come to Ethiopia and establish business," he said, but added that the country has to be careful to identify its competitive advantage, and be prepared to learn from other countries' experience by opening up its untapped market even if there is to be short term pain.

He further said Kenya’s expertise and experience in tourism and hospitality is needed in Ethiopia so as to take advantage of untapped tourism potential and to bring Kenya's management and marketing style.

But Mr Ayalewe said he is opposed to opening up retail, because Ethiopia is still a largely agrarian society, and as such the opening up to foreign companies would endanger small and medium-sized enterprises.

Some Kenyan firms had asked in the meetings whether there is a possibility of them setting up shop in Ethiopia to compete with local firms.

Ms Phyillis Kandie, Kenya's Cabinet Secretary for Tourism, Trade and the EAC said another hurdle to trade between the two countries is understanding the operations of the prospective customs authorities.

This would help quicken goods clearances and safety.

"We need to deal with the delay in remission of money to the suppliers for goods or services delivered and being a member of Comesa we need to adhere to the agreed duties chargeable as per approved rates," said Ms Kandie.

Work permits

She said that the joint fight against the sale of counterfeit goods should be tightened, while the issuance of work permits to investors from both countries should also be fast-tracked.

"Ethiopia’s GDP is about $35 billion and Kenya’s $32 billion, and together we have a combined population of 125 million, which could be a boon for both countries on a win -win economic situation," said Ms Kandie.

Ethiopia's state minister of Industry Sisay Gemechu said that since his country has abundant and cheap raw materials and labour for manufacturing, Kenyan investors could invest in leather, textile and agro-processing, making their use of capital and expertise and adding value to the products.

However, he said, if this opportunities are to be harnessed the infrastructure problem has to be solved, and projects such as the Addis Ababa-Mombasa which is work in progress.

Oil demands

Ethiopia and Kenya together with South Sudan are also developing a major infrastructure project, LAPPSET, which involves the construction of a railway and highways running from the proposed port of Lamu in Kenya, to Ethiopia and South Sudan.

The project is estimated to cost $23 billion and once finished in 2017 will also create an oil refinery and pipeline at Lamu port, to meet the oil demands of the three countries.

According to data from the Ethiopian Revenue and Customs Authority (ERCA) in 2012, Ethiopia exported $11.1 million worth of exports to Kenya while it imported more than $36 million worth of goods.

Kenya exports mainly light manufacturing goods like soap, cleansing, and polishing preparations, insecticides, household equipment, perfumery, aluminium and acid.

Ethiopia's exports to its neighbours are mainly unprocessed and semi-processed agricultural products like vegetables, spices, vegetables, ginger, cereals, textile yarns and dry beans.

Ethiopia opened an embassy in Kenya in 1961, two years before independence, while Kenya responded in 1967 by opening its embassy in Addis Ababa.
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