Which way for Kenya-UK trade ties after Brexit shockwave?

The wind of change blowing through Europe has enormous economic, political and social implications for major economies in Africa. The Brexit vote ushers in a period of anxiety and prolonged uncertainty about the future.

The impact of the vote is already being felt, with immediate effects on currency fluctuations, spasms in various stock exchanges across the globe, uncertainty of central bankers and wariness of African economies with ties to the UK.

With the recent strengthening of the shilling against the pound, Kenyan importers will enjoy a window of cheaper purchases from UK. However, for Kenyan exporters to the UK, the commodity value will diminish, resulting in shrinking profits. But this is likely to be short-lived as currencies are expected to stabilise once the dust settles.

The real brunt of the vote is expected to be felt during the finalisation of UK’s exit terms and a notification of the same to the European Union (EU) Secretariat.

Trade agreements currently in place between the EU and East Africa Community (EAC) may have to be renegotiated between the UK and EU separately.

Depending on the outcome of the renegotiations, benefits accruing under the current trade protocols may be strengthened, retained or lost. Any renegotiations of the deals because of Brexit may eventually lead to export or import delays and loss of revenues.

Loss of revenues

An industry likely to be hard-hit by these changes in trade deals is horticulture, which dominates the European market in cut flowers and other agricultural produce. Goods entering the EU through the UK are likely to suffer unfavourable duties, which will in turn make them more expensive.

As such, the vote is likely to have a direct impact on sales revenues. Reduced sales would further mean reduced taxable profits, and consequently, reduced tax collections.

The currency pricing from euros to pounds further complicates matters, with resulting forex gains and losses.

Another industry likely to be affected is tourism. During the recent reading of the Budget statement by the Treasury Cabinet Secretary, the Government exempted park entry fees and commissions earned by tour operators from VAT.

However, the depreciation of the pound will make it more expensive for UK tourists to travel to Kenya, denying the economy key benefits, such as foreign exchange earnings, visa revenues, domestic spending and the direct and indirect jobs created through the upkeep of the hospitality sector.

The tightening of access to EU markets for UK goods will negatively impact Kenyan tea exports as the UK has been a major re-exporter of blended Kenyan tea into the EU.

Going forward, the UK may possibly lose easy access to EU markets, which may lead to a cut in the volumes of tea the country imports from Kenya, hence negatively impacting revenues for farmers and tax collection by the Government.

EU funding

What will be interesting to see is how multinational businesses react to the vote and how this impacts their risk appetite in retaining investments in emerging markets.

It remains to be seen if they will opt to cut back on further investments as they seek clarity, diversify or pull out capital investments.

Reduction in EU funding is also likely to come down the pike. The UK is the largest contributor to the European Development Fund, which is the EU’s main instrument for providing development aid to Africa.

The EU Official Development Assistance plays an important role in supporting peace, security and general welfare in some of Africa’s weakest countries. A good example of this funding programme is the African Union Mission in Somalia (Amisom), which has played a vital role in improving the security situation in Somalia and neighbouring countries.

Reduced funding to existing EU projects will hurt already under-funded humanitarian efforts and claw back gains made in mitigating political and security risks, diminishing a country’s attractiveness to foreign investors.

It is not inconceivable that the UK may be inclined to prioritise renegotiation of trade protocols with bigger markets, such as China, India and Brazil, before countries like Kenya, thereby dragging out the period of uncertainty even further.

However, it is not all gloom as Kenya and the UK have a long history of economic ties, and the walk-away from the EU may not affect the economic relationship between the two countries, as the UK, now facing suspicion and isolation, may turn to Kenya and other African allies for bilateral business relationships.

The writers are both managers with PwC Kenya’s Tax Practice.

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