Afriwise Blog

East Africa: Business is Looking up Amidst COVID 19

Written by Bowmans | 6/10/2021

Since 2020, there have been unprecedented changes in the way people do business, not only in Africa but globally. Eighteen months later, we reflect briefly on how this has impacted Tanzania, Kenya and Uganda, and provide you with insights on the next chapter for these regions.

 

Tanzania

 

Tanzania reached an important milestone in July 2020, when it formally graduated from low-income country to lower-middle-income country status. Tanzania’s achievement reflects sustained macroeconomic stability that has supported growth, in addition to the country’s rich natural endowments and strategic geographic position.

 

In the political context, Tanzania has had to go through a sudden change in regime after the passing away of the late President John Magufuli in March 2021. The then Vice President, Samia Suluhu Hassan was sworn in as President of the United Republic of Tanzania with Dr. Philip Mpango, the former Minister of Finance, as the Vice President. The country has seen a change from a regime with a nationalistic economic agenda which strained the regulatory environment for foreign businesses. The challenges in Tanzania as reported under the 2020 World Bank Ease of Doing Business Report were tax administration, opening and closing businesses and trading across borders. The new regime is, however, committed to a liberal economy with a key priority of attracting foreign investments and building the relationship between the private sector and government.

 

To enhance and win back foreign investment, President Hassan intends to adopt a new Investment Policy and Investment Promotion legislation, and changes in the tax and labour laws to support a dynamic labor market. It is believed that this will improve the ease of doing business in Tanzania which ranked 141 out of 190 economies on the 2020 World Bank Ease of Doing Business Report under the previous regime. Further, Tanzania is set to improve the ease of doing business by prioritizing the implementation of the Business Environment Improvement Blueprint (Blueprint) under the new regime. The Blueprint identifies, among other things, numerous permits, licenses, and procedures to eliminate.

 

Tanzania continues to welcome foreign direct investment while pursuing its industrialization and development agenda and remains one of the most preferred destinations for foreign investment in Africa. The 2021 World Investment Report records a global drop in FDI of -35% to USD 1 trillion in 2020 from USD 1.5 trillion in 2019 due to the COVID-19 pandemic, and almost -20% below the 2009 trough after the global financial crisis. However, FDI to Tanzania sightly increased to USD 1.0 billion in 2021 from USD 991 million in 2019. The 2021 World Investment Report notes that the approval of the $3.5 billion East African Crude Oil Pipeline project, which will result in the construction of a 1,400 km pipeline from Uganda to the Tanga seaport in Tanzania, augurs well for investment to both countries.

 

Further, Tanzania has framework agreements on investment and offers various fiscal and non-fiscal incentives and access to investment promotion agencies such as the Tanzania Investment Centre which is a one-stop center for investors, providing services such as permits, licenses, visas, and land. The key investment sectors include the mining sector, the oil and gas industry, as well as the primary agricultural products sector (coffee, cashew nuts and tobacco).

 

Whilst President Hassan has taken a business-as-usual approach like the former regime, her government has emphasized on taking a more scientific and rational approach towards the COVID-19 pandemic with the first vaccination rollout in July 2021.

 

The government has also, through the Bank of Tanzania, taken various steps to shield the economy from the effects of COVID-19 pandemic. Some of these steps include reduction of interest rates on loans and deposits by banks. Banks have also been encouraged to restructure loans to their customers by reducing interest rates, instalment amounts and extension of the return period and to also issue moratoriums to the extent of giving relief to their customers.

 

That said, Tanzania’s economy performed better than many regional peers during the COVID-19 pandemic, but still suffered significant losses due to a decline in tourism and related services. According to the African Development Bank , the economic outlook for Tanzania is positive, with real GDP projected to grow 4.1% in 2021 and 5.8% in 2022, from a slowed growth of 2.1% in 2020 from 6.8% in 2019 due to improved performance of the tourism sector and the reopening of trade corridors.

 

Tanzania achieves average scores in global rankings in governance matters. One sign of progress is that citizens are beginning to demand more insight from the government and have some influence over government policy. Citizens, parliament, media, and civil society are increasingly demanding that the government acts responsibly, and that it be accountable to the population. Tanzania has also recently seen improvements in budget transparency and people’s access to information. However, the government is constantly challenged on issues of effectiveness and rule of law, and the fight against corruption continues to be one of Tanzania’s major challenges.

 

Tanzania remains a desirable location for investment for its many resources and opportunities now coupled with a regime which has this as its main priority. The country is soon to see many procedural and legislative changes to support investment in the country and promote the ease of doing business for both the foreign and local investor and still maintain political stability. Having performed better than its peers, and rising to middle-income status during the pandemic, Tanzania’s sustained economic growth makes it a strategic investment destination to potential investors. In terms of the current focus on investment, we see significant activity in the mining, construction, and tourism sectors. The mining sector which has a high contribution to Tanzania’s GDP has recently attracted significant investment into existing and new mining projects. The construction industry is growing rapidly seeing the ongoing major development projects in the country and the governments’ drive to industrialization.  The tourism sector, being one of the sectors that was most heavily affected by the COVID 19 pandemic, is on a good recovery path with a strong backing from the government. In this regard, the President has embarked on a countrywide tour dubbed the ‘Royal Tour’ to showcase different tourism, investments, arts, and cultural attractions available in the country. Other potential sectors for growth include telecommunications and, ICT, and agriculture.

 

Kenya

 

Kenya has one of the fastest-growing economies in East and Central Africa. Further, the country has a more stable political system compared to the wider Africa. Prior to the effect of the pandemic, the Kenyan GDP grew at an annual average of approximately 5.7% from 2015 to 2019. 

 

Whilst the Kenyan market and economic environment have been challenging in the last eighteen months, there is hope on the horizon. The Kenyan government provided a number of short-term reliefs to businesses and individuals to assist in coping with the economic environment during the peak of the pandemic. Our tourism and hospitality sector took a blow during these unprecedented times. There were supply chain challenges that affected our manufacturing and other key sectors.

 

With Kenya’s high debt burden, economic recovery is crucial. A key component of its recovery is the successful roll-out of the vaccination programme vis a vis the easing of covid related restrictions. In the last few months we have seen the reopening of hotels, restaurants and an improvement in travel due to the global review of travel restrictions, this together with other measures will help the services industry to participate in the country’s GDP growth. That coupled with the rising demand from the recovering global economy provides a base case for the rise in demand for agricultural as well as industrial activity in the Kenyan economy. There is an expectation in the local economy for private consumption to strengthen, supported by a recovery in wages and household incomes, and strong remittances. The World Bank projects a 4.5 % increase in GDP for the year. In addition to a boost in economic activity, the government’s plan for fiscal consolidation by growing ordinary review and reducing expenditure shall contribute to a healthier debt to GDP ratio.

 

Separately as the vaccination process is rolled out in the country, the government has also been focusing on completing its digitization agendas as well as amending and enacting laws to ensure the ease of doing business in Kenya. The key opportunities in Kenya remain in e-commerce, fintech and ICT, agriculture, healthcare, financial services and manufacturing sectors.

 

The key challenges that remain in Kenya is corruption, the high cost of land and energy and the uncertainty around the upcoming election. Kenyans are set to vote for a new regime in August 2022, which may bring about a change in the strategy and focus of the incoming government which may influence how business will be conducted in Kenya. 

 

Despite all of this, Kenya remains a popular destination for foreign investment, an attribute of the resilience of the nation. There are signals of recovery, albeit a slow recovery and there are opportunities for individuals and businesses alike to start, grow and expand their businesses. From our desk, here in Nairobi, we have seen a number of investors (including DFI’s, institutional investors as well as private equity players) being very active in the region. We have seen activity in regulated sectors such as insurance and financial services as well an avid interest in tech driven business in either e-commerce or fintech based sectors. There has also been a rise in start – ups, seed and early stage investments.

 

Uganda

 

It has been eight months since Uganda went into a general election amidst the ravaging COVID-19 pandemic. The hotly contested election saw the incumbent President Yoweri Museveni clinch a sixth consecutive term with his main challenger – a 38 year old singer turned politician confined at home by a phalanx of soldiers. The election and its aftermath come at a challenging time for Uganda’s economy which has outperformed many of its neighbors in several areas under the current leadership but must now bounce back from the COVID-19 related slump in 2020 and recently in 2021 induced by the total lockdowns.

 

As of the financial year ended 2020, Uganda’s real gross domestic product grew at 2.9%, less than half the 6.8% recorded for the financial year ended 2019. This stark decline can be attributed to the stalled economic activity due to a domestic lockdown that lasted four months in 2020, border closures for all but essential cargo and the spillover effects of disruptions to the global demand and supply chains. This resulted in a sharp contraction in public investment and deceleration in private consumption which hit the industrial and service sectors hard especially the informal sector.

 

More recently, Uganda just exited a total lockdown of 42 days which lapsed on 31 July 2021. A lot like the prior lockdown, the just concluded lockdown has exacerbated the conditions with a huge slowdown in economic growth.

 

But not all is gloom in Uganda, as with every cloud there is a silver lining with every down-turn. Whereas the COVID-19 pandemic and the subsequent lockdown have dealt some tough hands to a cross-section of the market, the same has provided an opportunity for new growth opportunities in what we call the new normal and the market continues to display its dynamism.

 

The headline Stanbic Purchasing Managers’ Index (PMI) which is essentially an index of the prevailing direction of economic trends in the manufacturing and service sectors – prior to the 42-day lockdown, all the 5 broad sectors covered by the survey recorded growth since October 2020, a few months after the initial lockdown. The index is calculated as a weighted average of New Orders (30%); Output (25%); Employment (20%); Suppliers’ Delivery Time (15%) and Stock of Purchases (10%). Any readings above 50.0 signal an improvement in the business condition while readings below 50.0 show deterioration.

 

The PMI has seen a gradual increase over 53.9 since February of this year up until the 42-day lockdown. The positive movement of the PMI signals an increase in orders, employment and purchasing activity and according to the report, firms remain optimistic regarding the 12-month outlook for output with companies expecting further improvements in new and existing business in the coming months. It is expected that this trend shall go hand in hand with the continued easing of the restrictive measures introduced by the lockdown. As we saw last October after the first lockdown, there are signs that the economy will make a recovery as evidenced by the PMI and the growth and rise in business activities of the private sector.

 

The key opportunities in Uganda are in the manufacturing, e-commerce and ICT, healthcare, financial services, gig economy and business outsourcing sectors.

 

The key challenges in Uganda are the impact of increased public debt on doing business in Uganda, lack of specialized skills and inefficient government services.

 

Despite the seemingly grim economic environment with the country still handling COVID-19 pandemic and the government grappling with rolling out vaccines to its population, there is a positive outlook towards economic revival from all industry and sector players and the population which is fertile ground for doing business in Uganda. From our desk, here in Kampala we have seen a remarkable number of companies setting up in the past six (6) months in the mobile financial services and the currently regulated payments sector. We have also seen activity in the highly regulated sectors of banking and oil and gas. We have also noted increased interest from various private equity players looking to make a play in the Uganda market.

 

 

 

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Read the original publication at Bowmans