Study from KIPPRA shows that Kenya will suffer from the AfCFTA implementation

A study conducted by the Kenya Institute for Public Policy Research and Analysis (KIPPRA) in 2023 by using an economic modelling tool which has been published only today, shows that the tariff liberalization programme established by the African Continental Free Trade Agreement (AfCFTA) will lead to a substantial decline in tariff revenue for Kenya, with an average potential loss of KSH 22.53 billion (about 178 million USD), much more of the advantages that the agreement will give to the country. A premise is necessary. Economic modelling tools, even the most rigorous ones, look today like slot machines, where after you put the money in and pull down the lever, the win is never sure (for the simple reason that mathematical formulas cannot encompass all the variables that can determine an economic result, with their infinite combinations). However, the alarm raised by the study is quite is worring. The good news is that Kenyan exports are expected to expand particularly in countries with which it has no trade agreements in place, differently from imports, that will increase marginally, only of about 0.1 per cent.

This growth will be particularly important for manufacturing dairy products and growing crops. This means the potential for economic growth and broader market access is high. However, there is unfortunetely also a bad news. According to the study, the low growth of imports that is expected as a consequence of the AfCFTA implementation, will cause a modest increase in domestic tax revenues, in particular those generated by the Value Added Tax (VAT) and excise duties. In fact, one of the main argument in favor of the AfCFTA is usually that this agreement will cause an increase of the imports volumes in African countries (die to the stimulation of intra-African trade), with an growth of the revenue collection in the form of indirect taxes different from customs duties, which are not liberalized by the AfCFTA. This was the conclusion for instance in a recent study conducted by the Overseas Development Institute (ODI) to evaluate the impact of the AfCFTA on Rwanda. In the case of Kenya this growth, according to KIPPRA, will not be sufficient to compensate the losses caused by the AfCFTA tariff cuts. The study however does not consider the positive trade balance that the increased economic activity will generate in the country in terms of higher consumption rates because of the lower import prices, additional investments that the growth of economic activity implies, and growth of collection of direct taxes on the higher revenues earned by exporters due to the growth of their trade volumes.

The document therefore concludes that based on its findings, policy makers should develop strategic measures for revenue diversification to mitigate this loss. Among them, it proposes VAT and income taxes increases (that considering the current protests on the cost of living crisis in the country, are not exactly a wise solution), improvement of efforts to combat tax evasion, and expansion of the tax base. This latter measure is particularly interesting. Unfortunately, the study does not indicate how this objective can be realized. It would have been interesting to propose for instance some measure to promote the transition of the informal sector (that in Kenya is particularly large) into the formal economy, but without penalizing it through unreasonable taxes. Other recommendations is to develop tailored interventions to protect sensitive sectors in the country, and in particular to support industries that would be adversely affected by increased competition. Examples are the provision of incentives for innovation, research and development, and value addition, which can enhance the competitiveness of vulnerable sectors. This seems a very good advice. The adoption of measures aimed at strengthening domestic industries is also indicated as vital for the country to fully realize the AfCFTA's benefits. It worth to be noted that a previous impact assessment of the AfCFTA for Kenya was made in 2019 by TradeMark Africa which, however, gave a more optimist forecast.