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Kenya at a crossroads on trade deal with EU

The late Tanzanian President Julius Nyerere once quipped that a country does not have permanent friends or enemies, only permanent interests.

This was on display last month when Tanzania’s Parliament blocked the signing of the Economic Partnership Agreement (EPA) with Europe.

On the face of it, Tanzanian and Ugandan governments have plausible arguments for rejecting the EPA in its current form.

The agreement specifies that Europe will keep its market open for the region’s exports in exchange for gradual liberalisation of 82.6 per cent of the signatories’ market over 25 years. Understandably, countries like Tanzania and Uganda are opposed to opening their markets for four reasons.

Everything but arms

First, they are still eligible to continue exporting everything except arms under an agreement signed between Europe and the world’s least-developed countries. Unfortunately for Kenya, it was classified out of this category after it rebased its economy.

Second, under the East African Community (EAC) Common External Tariff, the sale of intermediate goods attracts a 10 per cent charge; finished products attract 25 per cent. Signing of the EPA would result in the automatic loss of this revenue from imports.

Third, the liberalisation of its market would make it that much more difficult for Tanzania’s nascent industrialisation programme, financed by the Chinese, to succeed.

Fourth, neither Tanzania nor Uganda has a developed horticultural sector. This means their exports into the European market are not much to write home about and their signing of EPA would have been doing Kenya a favour. This is something Tanzania has been consistently loath to do over the years.

This brings into question Kenyan policymakers’ decision to tie the fate of EPA negotiations to the whims of neighbours whose interests are not consistent with their own country’s. The policymakers did this when they agreed to negotiate as a region — ostensibly, to respect the EAC customs union.

It is now clear that despite Kenyan and Rwandan ministers appending their signatures, the deal is off unless the European Union makes an exception and decides to honour the agreement despite Kampala and Dar-es-Salaam pulling out. The country has no option but to go back to the drawing board.

For starters, the Ministry of Agriculture must revise its hands-off approach to the country’s horticultural sector. It may consider doing this by instituting an audit of the companies in the business.

This would give it a more informed idea of what the sector needs to continue earning the considerable foreign exchange it does, despite the headwinds it will face after Europe imposes taxes on imports.

Export compensation

Analysts say a case could be made for introducing some form of export compensation equivalent to the new taxes the sector would be paying in Europe. A well-structured and administered programme would put the country at par with the majority of its global competitors who subsidise their exporters with abandon. Europe itself is on record as spending billions of euros to subsidise its farmers.

But this compensation should not only be temporary, but also predicated on the companies’ ability to whip their operations into shape and take on the rest of the world. The export companies will do this by moving into higher-value crops and adding value where they can.

The rapid growth of avocado exports by an encouraging 34 per cent over the first three quarters of 2016 following the introduction of controlled atmosphere containers could be a harbinger of things to come.

The audit would also shine a light on companies that are behaving badly. These include those that are not only failing to pay their workers, but also refusing to remit statutory deductions — monies they have already taken out of their employees’ meagre salaries.

There is reason to believe that some of these firms do not pay their taxes either, and should therefore be weeded out of the sector. Period.