Is Kenya losing its economic power to EAC neighbours?

While fielding questions during his four-day visit to China, President William Ruto sought to explain why Kenyan traders consider local goods expensive compared to neighbouring markets.

“The difference between us and our neighbours is that Kenya is in the middle-income category. Our neighbours, Tanzania, Uganda and the rest, are the least developed countries,” he explained in a video that was seen online.

In the session, Kenyans raised concerns about how the business environment is suffocating industrialisation, and that the focus has now moved to Tanzania and Uganda. Kenyan traders are now buying goods from these two countries to ship them to China.

“We are categorised higher than them, so while they export duty-free, Kenya exports with duty,” he explained, adding that Kenya and China will be signing an Economic Partnership Framework so that agreements can be reached to level the playing field.

The debate that the business environment is favourable across the border has been climaxing in the recent past that even manufacturers say they would prefer to shift their base to other EAC States.

Yet the government has vehemently denied that such is the case back home, defending taxes that it says are relevant for infrastructural development to make Kenya an attractive destination for investment. When numbers are put into context, however, Kenya is slowly losing its charm against its peers despite its size off the economy.

For example, while Kenya’s gross domestic product (GDP) grew by 4.7 per cent in 2024, Tanzania’s grew by 5.7 per cent. Tanzania’s economy is projected to grow by six per cent in 2025, according to the International Monetary Fund (IMF), while Kenya’s GDP will grow by 4.8 per cent.

Uganda, which is Kenya’s largest trading partner will grow by 7.5 per cent but this figure is speculated to end up as a double digit due to oil and gas exploration. “In Uganda, actually, they are looking into revising the growth number for next year close to nine per cent because of the significant foreign direct investment (FDI) that has come into the country in the last 12 months,” said Stanbic Holdings Group Chief Executive Patrick Mweheire during the release of the firm’s 2024 financial statements in March.

Previously, Kenya’s economy was projected to grow by 5.2 per cent in 2025 which later dropped to 5.0 per cent.

“But even with revising Kenya’s economic growth down, those numbers are still incredibly competitive when you look at the rest of the region,” he added.

According to the IMF, Uganda’s GDP is expected to grow by 10.8 per cent in the 2025-2026 financial year, courtesy of oil production. Uganda is reported to have just signed a Sh520 billion ($4 billion) deal with the United Arab Emirates (UAE) firm ALPHA MBM Investments to build a refinery.

More so, the East African Crude Oil Pipeline (Eacop) that seeks to connect Uganda and Tanzania from Kabaale in western Uganda to Tanga in Tanzania is gaining momentum after closing its first tranche of financing in March 2025.

The pipeline will have the capacity to transport 246,000 barrels of crude oil per day. “The successful closing of this first tranche of external financing represents a significant milestone for Eacop and its shareholders, TotalEnergies, Uganda National Oil Company, Tanzania Petroleum Development Corporation and China National Offshore Oil Corporation,” reads a statement from Eacop on the financing dated March 26, 2025.

Of the three markets, Kenya has the largest economy in absolute numbers at Sh14.05 trillion according to the World Bank, followed by Tanzania’s Sh10.23 trillion and Uganda’s Sh6.34 trillion.

Manufacturers such as Bidco Africa chairperson Vimal Shah have not been shy to speak their minds of the difficulties Kenyan businesses go through locally. He has direct comparison considering his edible oil business also has a footing in Uganda.

He noted at a recent sit down with government players that it is becoming cheaper for manufacturers to import raw materials compared to buying locally.

“We are not sure if we want to be a trading or a manufacturing nation. If that is the agenda, then let us decide here, let us take all manufacturing to Tanzania or Uganda,” he said.

Mr Shah’s sentiments have been condensed in the Kenya Association of Manufacturers (KAM) Manufacturing Priority Agenda 2025, where the players speak of how the country’s tax regime is suffocating their businesses.

Principal Secretary in the State Department for Industry Juma Mukhwana, speaking during the launch of the Route to Market Strategy 2025-2027 drafted by KAM recently, attempted to undo the narrative that Kenya is not a conducive environment for investors.

He said this narrative is attached to industries that are being rendered obsolete, which he said is normal during the industrialisation process.

“If we are not attracting new investments, we are not going to be competitive. To my knowledge, in any one given year, some industries will die because technology has changed or the owner has died,” he said.

“But every day in this country, we have at least two to three industries being opened. From where I sit, we are actually opening more than we are closing.”

He said the claim that Tanzania and Uganda have a favourable tax regime is not true, arguing that all countries within the East African Community (EAC) are in the same tax band, the common external tariff (CET).

“If you look at our taxation, it is the EAC CET. Quite often when I go to different places, I am told… you know your taxation…but it is the EAC CET,” he said.

This CET dictates that raw materials are levied at zero per cent, intermediate products at 10 per cent, importing what the region has in insufficient quantities at 25 per cent and 35 per cent when a business imports what is not in the region.

“Except for one or two little things that we agree with KAM, that is our taxation structure. I think it is not possible to say that our taxation is different from what Tanzania or Uganda is doing,” he said. The PS said the government has worked to open up the market and make Kenya favourable for investment, which should inform businesses that they now face competition from other markets.

“When we are opening up the market, remember, we are opening up for competition from South Africa, Egypt but we still want to use the same methods that we were using 10 years ago. We will not survive,” said the PS.

According to the Kenya National Bureau of Statistics 2023 Economic Survey, Uganda has remained Kenya’s single leading trading partner, accounting for 11.1 per cent of total exports.

“Total exports to Uganda increased from Sh91.7 billion in 2021 to Sh97.2 billion in 2022, largely driven by the increase in exports of crude palm oil,” the report says.

“Similarly, exports to Tanzania grew by 25.9 per cent to Sh57.4 billion in 2022 on account of increased exports of iron and non-alloy steel.”