East Africa: Key Sectors and Business Environment in 2011

Jul 17, 2011 | Written by Nwakego Linda Eyisi

Agriculture is the largest sector for all countries in the EAC. Total sector contribution is about one third of total GDP for every country in the region. Agriculture, and related industries, is also a major foreign exchange earner and employer of labor.  Countries in this region are major producers of tea, coffee, flowers, cotton, and tobacco. Agriculture remains the major revenue earner for this region despite major oil discoveries (Uganda) and massive expansion in commodity (gold) prices.

Despite the size and productivity of this sector, research and development is poor, farming is at a subsistence level, and credit is not easily available to agribusiness due to perceived high risk caused by poor infrastructure. These are areas of opportunity for investors. Further development of the agricultural value chain is key to boosting revenue earnings for countries in the region.

High Growth Sectors

Mining, agriculture, construction, finance, retail, and telecom are the fastest growing sectors in the region. Growing consumer demand and the need for new infrastructure are the main drivers of growth in construction. As an economy grows a country needs new ports, roads, rail, power plants, and other infrastructure. Consumers need new homes and businesses will build new offices and factories. The majority of monies raised from sale of bonds on the international market will go to the construction sector.

Growing appetite for commodities like gold due to quantitative easing and the push for greater exports from countries in North America and the Eurozone as a way out of their debt crises is driving demand for metals.

Abundance of these metals in Africa is not the major reason for growth, but the improvement in the rule of law, greater transparency, and economic reforms.

Economic growth and reforms in the last decade has meant that East Africans have a growing middle class. Demand for cars, electronics, and other consumer durables are up. The retail sector is still in an expansionary phase, competition is not strong and demand exceeds supply for these products and profits can be staggering. Consumers in Africa have little or no debt and are living in a part of the world where incomes will increase going forward.

The success of mobile telephony in Africa is no longer hidden and is one of the best things to happen to the continent in the last decade. The advent of cell phones has increased productivity and has coincided with a period of good growth. Telephone penetration rates across the continent is still low (40%) and there is still a lot of room for suppliers to make money. Airtel the latest entrant to the market is testament to this fact.

As economies in the region continue on the growth path, demand for mobile phones will continue to expand – it is crucial infrastructure for businesses and individuals. Major players in the region include MTN, Safaricom, and Airtel.

The finance sector is crucial to the growth of economies in the region. For an economy to expand, banks must lend to the real sector. The finance sector is still underweight in its contribution to GDP in the region. Bank lending to the real sector is grossly inadequate and stock exchanges in the region are not liquid enough to raise capital required for expansion.

Business Environment

Apart from Rwanda, which is considered a top reformer globally, every other country in the region deteriorated in the rankings, according to the World Bank Doing Business Report for 2010. This means that the business environment is still difficult, that infrastructure is poor, government is corrupt, and the rule of law is still not as effective as it should be.

However, the business and regulatory environment in the region has greatly improved in the last decade. It is expected that this trend will continue as countries in the region are eager to attract greater foreign direct investment needed to push past growth to development.

The following table highlights key indicators for countries in East Africa.

Country	GDP (USD billions )	Real Growth Rate (%)	Inflation (CPI)	Fastest Growing Sector(s)	Budget Deficit (%)	Debt- to- GDP Ratio (%)	Business Environment
Kenya	65	5	4.1	Agriculture,  manufacturing	-6.8	26.1	Dropped
Uganda	42	5.1	7.3	Telecom, financial services, construction	-2.5	15.5	Dropped
Tanzania	62	6.8	8.9	Agriculture, mining & quarrying, manufacturing, construction	-7.8	30.3	Dropped
Burundi	3.3	3.9	7.1	Agricultural industries, mining, construction	-4.5	30.2	Dropped
Rwanda	12	7.4	2.3	Agriculture, construction, telecoms	-1.9	23.3	Improved

Featured image is Mount Kilimanjaro seen from Moshi town in Tanzania. Image owned by Tanzania Tourist Board.

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