Kenyan tea offers green shoots amid coronavirus woes

Covid-19 is testing the Kenyan economy, and the projections are grim but the country’s sizeable tea industry has seen little of the disruption caused by Covid-19 to other sectors

By

Border closures and plummeting demand have put a strain on Kenya’s key export sectors, but the country’s sizeable tea industry has seen little of the disruption caused by Covid-19 to other sectors. Tom Collins reports.

Covid-19 is testing the Kenyan economy, and the projections are grim.  The Central Bank of Kenya (CBK) has cut this year’s growth projection from 6.2% to 3.4%, while the IMF projects growth of just 1%.

A nationwide dawn-to-dusk curfew and a ban on all movement in and out of Nairobi, Mombasa, Kwale and Kilifi – the four areas worst hit by coronavirus – means that many of the country’s businesses are working below optimal capacity and some are at risk of bankruptcy.

Border closures and plummeting demand have put a strain on key export sectors, threatening the country’s foreign exchange reserves if global lockdowns continue. The CBK has eased banking regulations to encourage domestic lenders to support struggling sectors, yet the industry is struggling under the weight of loan defaults and most banks are exercising caution during this difficult period.

A government economic stimulus package comprising tax relief and VAT reductions is a welcome relief for many in the private sector, yet others would like support to go much further.

Lacking the firepower to comprehensively support the economy, the Kenyan authorities are seeking combined support of over $1bn from multilateral lenders. The World Bank has approved an initial $50m to support the country’s response to Covid-19 – in March, Patrick Njoroge, the central bank governor, told a news conference that the government is seeking a further $750m and $350m from the IMF.

If the outbreak of Covid-19 continues in Kenya as projected, the government may seek further support from last-resort lenders.

Private sector bears the brunt

The three sectors most affected by Covid-19 are aviation, horticulture and tourism, says Carole Karuga, CEO of the Kenyan Private Sector Alliance (KEPSA).

Kenya Airways (KQ), which has returned to government ownership in the face of mounting debts, is suffering from the grounding of flights due to widespread travel bans intended to stem the spread of the deadly virus.

It has already furloughed most of its workers, cut all salaries by as much as 80% and approached the government for a bailout of an undisclosed sum. The disruption to air cargo has decimated Kenya’s export-led flower sector, which in 2017 accounted for 11% of all exports at a value of $688m. Amid scenes of British and Dutch vendors throwing flowers into dustbins, the beginning of the pandemic saw orders slashed in half, but demand is beginning to recover as European countries mull easing lockdown restrictions and Holland heads towards Mother’s Day in early May, which customarily sparks large orders.  

The Kenya Flower Council says demand for horticultural produce now stands at 3,500 tonnes per week, but the available cargo capacity is only 1,300 tonnes due to the logistics block. Many producers are appealing to KQ to lower cargo prices in order to meet recovering demand.

“We are looking at how to make sure we don’t lose our key markets for fresh produce and floriculture because the freight prices are high,” says Karuga.

Manufacturing, which accounts for approximately 10% of GDP, has been similarly affected by supply chain issues. According to a survey by the Kenyan Association of Manufacturers (KAM), 87% of domestic producers said they are exposed to a shortage of raw materials due to reduced supply from China, and 23% have already downsized.

Companies which rely on inputs from abroad to create finished products will likely have capacity reduced during the current period, including food and beverages, textile and apparel, plastics and rubber and construction materials. 

“As a result, the industry is facing increasing idle capacity for production,” says the association’s CEO Phyllis Wakiaga. “The government is making massive losses in terms of taxes as production capacity decreases.”

Green shoots

Yet not all areas of the economy have been negatively impacted. Kenya’s sizeable tea industry has seen little of the disruption caused by Covid-19 to other sectors.

Kenya is the world’s second top tea exporter after China. Most of its produce is shipped to Pakistan, Egypt, the UAE and the UK.

From the western highland counties of Kericho and Bomet, the tea is transported by truck to the port of Mombasa where it is auctioned and loaded onto freight containers destined for the Arabian Sea. Due to its designation as an essential service, the tea industry is excluded from the nationwide dawn-to-dusk curfew and the ban on all movement into the four areas worst hit by coronavirus.

The only change has been for companies to send fewer representatives to the auction houses in Mombasa, says Felix Adara, logistics planner at Korara Highlands Tea, which was set up last April to capitalise on the thriving market. Exports were relatively unchanged from January to February and are expected to continue that way into March and April, he says.

A drop in demand from Kenya’s key markets is deemed unlikely, and seaborne shipping has been impacted less than air freight. Although the virus is not yet prevalent in Kenya’s highlands, any impact of the disease on the ability of tea pickers to work could hamper harvesting. 

Another sector that has surged on the back of Covid-19 is telecoms. Safaricom, Kenya’s biggest network operator, has reported a 40% surge in traffic as well-off customers turn to online movies and social media to endure the lockdown.

“We have recorded double-digit growth in data volumes, demonstrating that more Kenyans are working, studying and connecting with loved ones from home,” says Peter Ndegwa, the new CEO.

Buffer zone

Some provisions have been put in place to support ailing sectors and businesses. The government stimulus package includes 100% tax relief for persons earning less than $240 a month, the reduction of VAT from 16% to 14% and the reduction of corporation tax from 30% to 25%.

Yet while large businesses have the firepower to weather the storm, the package falls short of providing comprehensive relief for the most vulnerable citizens and SMEs. Many of Kenya’s poorest citizens who live in slums and work in the informal sector, do not pay taxes and will not benefit from relief. Most have limited savings and depend on daily income to buy food. 

While NGOs have stepped in to provide food and sanitation, the government has been slow to provide direct cash transfers or income supplements. Many small businesses – especially restaurants and bars – risk going bankrupt without support or the easing of restrictions. The CBK has reduced the cash reserve ratio from 5.25% to 4.25% to grant commercial lenders additional liquidity to lend in the market. Yet similar to lending patterns before the crisis, banks could pursue less risky investments like government bonds.

“I think they will lend but in a more cautious way and not in the way the central bank would like,” says George Bodo, banking analyst and director at Callstreet Research and Analytics.

Non-performing loans are likely to increase by as much as 2%, Bodo predicts. Kenya’s two largest commercial banks, Equity Bank and KCB, are significantly exposed to SMEs and “will come under a lot of pressure,” while on the corporate side, tier one banks are exposed to horticulture, tourism and aviation

Covid-19 is causing serious problems to Kenya’s economy, but is mostly confined to specific sectors and vulnerable segments of society. That could all change if Kenya witnesses a serious spike in cases and an accelerated outbreak in the country’s tightly-packed urban slums.

“Our main objective currently is to prevent a pandemic that would involve mass hospitalisation,” says Simon Kigondu, secretary general of the Kenyan Medical Association. “This would definitely overwhelm the health system and the entire country as it is currently.” 

Related articles

Coronavirus changes everything for Africa

Coronavirus shuts down Africa’s tourist industry

Global solidarity collapses over access to coronavirus testing kits and vaccines, says Africa CDC director

Nigeria braces as oil shock and Covid-19 wreak havoc

Southern Africa’s agricultural producers fear export losses from Covid-19

Want to continue reading? Subscribe today.

You've read all your free articles for this month! Subscribe now to enjoy full access to our content.

Digital Monthly

£8.00 / month

Receive full unlimited access to our articles, opinions, podcasts and more.

Digital Yearly

£70.00 / year

Our best value offer - save £26 and gain access to all of our digital content for an entire year!