Export trade big casualty after exit vote - Daily Nation

Export trade big casualty after exit vote

Saturday June 25 2016

A worker tends to flowers at a farm in Naivasha on February 10, 2015. Kenya mainly exports tea, coffee and horticultural products to the UK. PHOTO | NATION MEDIA GROUP

A worker tends to flowers at a farm in Naivasha on February 10, 2015. Kenya mainly exports tea, coffee and horticultural products to the UK. PHOTO | NATION MEDIA GROUP 

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British Prime Minister David Cameron’s planned visit to Kenya could be one of the casualties of his country’s vote to exit the European Union.

The trip was due next month but it now hangs in the balance after Mr Cameron resigned and will only lead a transition government until his successor is named within three months.

On Friday, President Uhuru Kenyatta’s spokesman Manoah Esipisu said the Foreign Affairs ministry officials were assessing the effect of the decision on Kenya.

“This is democracy and the British people have made a decision,’’ he said.

There are other economic consequences for Kenya following the vote and they include hits on the European Union’s financial assistance and exports, especially of flowers.

But importers of British goods will have a reason to smile as they will be cheaper as the sterling pound weakens.

Britain has been among the top four contributors of funds to the EU budget. In 2015, it paid £12.9 billion (Sh1.8 trillion) or more than half of the Kenyan budget).

Its exit means some of the programmes the EU has been assisting, which include the Kenya Defence Force’s incursion in Somalia will be affected.

Britain, as a member of the European Union, was part of a deal with East African Community (EAC) member states in 2014, to allow flower exporters duty and quota-free privileges in their country.

Kenya as a member of the EAC has been a beneficiary of the deals called EPAs (Economic Partnership Agreements).

Kenya now faces lengthy renegotiations of these trade deals with European countries.

One of the immediate effects was a weakening of the British pound and the Euro against the dollar globally and against the shilling locally, which will have a bearing on cost of exports and imports to and from Europe.

As the British pound weakened to the dollar by its largest margin in 30 years, it leaves Kenyan importers of British goods with a reason to smile as the imports will become cheaper, while exporters of goods such as horticulture and tea will be net losers as they will earn less from their sales.

Treasury Cabinet Secretary Henry Rotich downplayed the short term effects of the Brexit, although the government will no doubt be preparing for possible renegotiation of the the EPAs with the EU to reflect the new status of the UK.

“We do not anticipate any adverse impact on the economy in the short term. Of course the weakening of the sterling pound means there are impacts on the flow of goods between us and the UK. We expect both positives and negatives and our job is to monitor and take appropriate action on both the direct and indirect impacts,” said Mr Rotich.

“The country has sufficient resources that we can use to stabilise the economy in case of adverse effects reaching us. We have a buildup of exchange reserves and the caution facility from the IMF to safeguard against any possible shocks,” he said.

The shilling was exchanging at an average of 101.25 to the dollar on Friday, little changed from the 101.30 rate seen on Thursday. The shilling was, however, significantly stronger to the pound, exchanging at 136 units against 147 the previous session.

Centrl Bank of Kenya (CBK) issued a statement saying that it stands ready to intervene in the money and foreign exchange markets to ensure their smooth operation.

Traders said that the regulator had entered the market briefly in the morning with some dollar sales, even as the US currency traded cautiously as banks held on to the dollar in anticipation of its strengthening.

Kenya mainly exports tea, coffee and horticultural products to the UK, estimated to hold about 27 per cent of the fresh produce and 56 per cent of the black tea market in the UK.

On the other hand, the country imports motor vehicles, printed materials, machinery, medicine and chemicals from Britain.

It is, however, not a straightforward case for traders, who also have to contend with the expected strengthening of the US dollar as investors flee the European currencies.

Flower exporters, who are paid in pounds and euros for their exports to Europe, say that the exchange gains they stand to make are likely to be taken up by higher costs since they buy their inputs using dollars.

“We are likely to see a gain on one hand and a loss on the other. Our sales are mainly in euros and pounds which are devaluing, but our cost of doing business may go up because we import in dollars. In terms of the trade agreements, our hope is that they will continue to speak in one language even as they split,” said Kenya Flower Council CEO Jane Ngigi.

It will take at least two years for the UK to complete its separation from the EU, which should offer countries like Kenya enough time to agree new deals should it be necessary.

“Tariffs facing Kenyan exports to the UK will become clearer in the two years of exit negotiations between the UK and EU. Although most of Kenya’s international trade had shifted to regional neighbours like Uganda and Rwanda, tourism could be hit hard as it will become costlier for British tourists to tour Kenya with the weaker pound,” said Michael Chege, economist and University of Nairobi don.

The UK is also one of the largest foreign investors in Kenya, with the Kenya High Commission in the London saying that there are over 100 British investment companies based in Kenya, valued at more than £2 billion (Sh270 billion). Among them are Barclays Bank, Standard Chartered Bank, GlaxoSmithKline, Actis, BAT, De La Rue and Unilever.

After the vote results were announced on Friday, the Kenyan Shilling gained 7.4 per cent value against the Sterling Pound, trading at Sh138 per pound against Sh149 the previous day.

“The immediate news (from the financial markets) is not very positive. There is an element of surprise and this this is reflected in the market reactions,” Ms Razia Khan, Chief Economist for Africa at the Standard Chartered Bank told NTV on phone.

“We shouldn’t forget that a lot of those currencies had actually rallied during the run-up to the referendum.”

“The result was always going to be very close but there is the fact of people having been taken unawares by the situation. That may well be because the expectation was that the runup to the referendum, the ‘remain’ camp was stronger.”

On the regional level, Prof David Kikaya who teaches International Relations at the USIU-Africa argued EAC will not be affected much because the countries trade among themselves.

“Yes, trade has been declining, but in comparative terms, it still remains substantial. There is no way a country like Uganda is going to opt to trade elsewhere other than with us.”

The margin of the ‘‘Leave’’ victory was a reflection of what opinion polls had predicted: close. But with a loss of 48 per cent against 52 per cent, Mr Cameron announced he would resign within the next 90 days.

Reports by Aggrey Mutambo, Charles Mwaniki and Brian Ngugi