Kenya’s foreign investments, excluding those from EAC member countries, declined to $374.6 million in 2023 from $710.21 million during a difficult period characterised by a depreciating currency, high interests, rising inflation, dollar shortage and negative returns from the Nairobi Securities Exchange.
East African Community Secretariat disclosures show that the 47.2 percent drop coincided with number of projects implemented by foreign investors declining by 43 percent to 146 from 209 in the period.
According to EAC’s Trade and Investment Report (2023), Kenya’s main source of investments in terms of the value of the projects included the United Kingdom, which had the highest at $110.85 million from 13 projects, followed by China ($90.56 million), and the Netherlands ($35.77 million).
Indian investors had the highest number of projects in the country — 18 — while Chinese investments created the most jobs, 2,966.
There were significant joint venture investments (16) contributing seven percent of the total foreign direct investment (FDI) value $26.28 million.
The modes of entry of foreign investors in Kenya have been mainly joint venture, greenfield investments, mergers and acquisitions, equity and non-equity, and wholly owned subsidiaries.
The manufacturing sector continued to lead in employment, offering 3,442 of the 7,059 jobs created. The sector also led in terms of the value of investments at $126.82 million, followed by finance, insurance, real estate and business services with $62.90 million, and community, social and personal services with $62.30 million investments.
“Economic growth was also bolstered by strategic investments in infrastructure (roads, water ways, major ports and airports). FinTech start-ups in Kenya also played a pivotal role in promoting financial inclusion in the country and improving access to credit with a strong focus on mobile banking, digital lending and cutting-edge payment solutions,” the report reads.
Kenya’s economy grew by 5.6 percent in 2023 from 4.9 percent in 2022.
“Despite the internal and external environment challenges Kenya faces, its strategic investment initiatives, diversified economy, and emerging sectors offer substantial opportunities for foreign investors looking to tap into one of Africa’s most dynamic markets,” notes the report.
“Kenya has been proactive in improving its investment climate, supported by legal and regulatory reforms. The government has undertaken several initiatives to enhance infrastructure, including the expansion of the Standard Gauge Railway and upgrade of major ports and airports.”
However, there are concerns amongst the investing fraternity over the unpredictability of the taxation policy.
The National Treasury through the Finance Act (2023) implemented a raft of severe taxation measures targeting salaried workers, small traders, online businesses and companies seeking to raise Ksh200 billion in additional revenues.
The Act doubled the value added tax (VAT) on petroleum products (excluding LPG) to 16 percent, effectively significantly increasing transport costs, which had a knock-on effect on production of goods, exacerbating inflationary pressure in the economy.
It reduced the turnover tax (TOT) threshold from Ksh50 million to Ksh25 million and increased the tax rate from one percent to three percent, effectively increasing the businesses that must pay TOT and adversely impacting the operations of small traders such as kiosk operators.
The government also introduced the controversial housing levy of 1.5 percent of the employee’s gross salary payable by both employers and employees and introduced two new pay-as-you-earn (PAYE) tax bands.
The top rate increased from 30 percent to 32.5 percent for income between Ksh500,000 to Ksh800,000, and to 35 percent for income exceeding Ksh800,000.
This year (2024) the government was forced to withdraw the Finance Bill 2024 that had lined additional punitive tax measures following country wide protests by the youth, popularly referred to as Generation Z (Gen Z).
According to the EAC report, information and communication technology (ICT) remains a promising area for FDI development in Kenya, with the reversal of the equity participation in the National ICT Policy that initially allowed at least 30 percent equity ownership by a Kenyan providing opportunities for increased investments in ICT sector.
“Further, increased presence of major global tech companies in Kenya such Oracle, Microsoft, Cisco, IBM among others provides an increased appetite for investments in the sector. The other sector with the greatest potential is the service sector that has driven the country’s economic transformation,” the report reads.
Kenya is seeking to position itself as one of the foremost destinations for private energy investment and is a regional leader in clean energy development, having harnessed its natural potential for geothermal energy where more than 80 percent of its on-grid electricity derives from renewable sources.
The report notes that the petroleum and energy sectors have significant potential for growth, especially considering that several offshore gas fields fall within Kenya’s maritime territories.