Service sector is potential growth point for East African economies

Friday April 28 2017

By Benard Kisamba

In October 2015, Kenyan retail outlet Uchumi announced that it was abandoning its ventures in Uganda and Tanzania over what it called unsustainable operational costs. The presence in those two countries accounted for 25 per cent of the company’s overall operational costs while representing only 4.5 per cent of business operations.
The bosses in Nairobi decided to cut their losses and focus on strengthening the company’s position at home. It was a blatant admission of failure.
Uchumi’s misfortune, however, was an exception not the norm. In general, the Kenyan service sector has enjoyed a period of massive growth, dragging the rest of the economy along.
Despite evidence to the contrary, many African economists still dismiss the service sector as a tiny section of the economy with limited potential to provide jobs or spur competition. They instead encourage us to embrace agriculture and manufacturing.
Kenya, on the other hand, has chosen to invest in the service sector and the results are very positive. According to The World Bank, in 2015/2016, the service sector grew at a rate of 5.2 per cent ahead of manufacturing (3.6) and agriculture (2.5). The overall GDP growth rate for the year was 5.3 per cent. That left the service sector as the number one foreign exchange earner.
The Kenyan government understands the great potential. It is aggressively supporting high-tech upstarts in a bid to make Nairobi the Silicon Valley of Africa. In my opinion, they have already succeeded. Tech giants like Google, Intel and Microsoft have sites in Nairobi while the city also hosts the IBM Innovation Centre (the company’s first research lab on the continent). Construction of a new techno-city at Konza (60 km from Nairobi) is already underway.
Whereas tourism remains the rock upon which the service sector hinges, Kenyans have also found a passion for banking and they are doing it profitably. Their banks have branched into the region and are commanding a respectable market share.
According to results posted this month, Diamond Trust Bank Tanzania (a subsidiary of DTB Kenya) made a respectable TShs31b in pre-tax profits last year. The year before, those profits stood at TShs27.3b. All of this shows that there is massive potential for growth in Tanzania’s banking sector.
And the DTB success story is just one among many. KCB, which operates in all East African states (with 250 branches) is promising a 14 per cent surge in profits for the first half of this year.
Equity bank is also performing quite well and has spread its tentacles all over the region – including South Sudan.
The retreat of Uchumi left other Kenyan enterprises flying the flag in the Tanzanian and Ugandan markets, with remarkable success. These Kenyan regional success stories expose the deplorable absence of Ugandan, Tanzanian (besides Azam) or Rwandan companies doing well in the region. Should we blame it on a lack of ambition, comfortable market access at home or lack of capacity?
We need to realise that the more the private sector grows, the more liable they are to pay more taxes (repatriated profits are also taxable). As such the government stands to benefit. Money earned from outside the primary economy also boosts foreign exchange reserves. Profits made from elsewhere can be a source of capitalisation for local expansion. This improves access to customers, enables better service provision and leads to job growth.
Cross-border business will also improve people to people contact and thereby strengthen regional integration. It will also provide competition which increases innovation and service quality.
We should welcome Kenyan businesses but we need to challenge our own investors to look beyond borders for investment opportunities.
Government can help by offering low interest capital and diplomatic manoeuvering. When these businesses take off regionally and start making profits, then it can recoup its investment, tax accordingly, and impose higher cash reserve requirements. It can also lean on them to diversify their investment in the economy. In the end everybody wins.
The outlook in other regional economies needs to change. They need to look beyond agriculture and manufacturing. We need to realise that a big hotel can employ as many people as a juice factory. A successful bank that brings in profits earned from other countries can contribute as much in foreign exchange as a sisal – exporting business.
As other governments push manufacturing and commercial agriculture as priority areas, I suggest that we take a look at what Kenyans are doing. If it has worked for them, it can certainly work for us too.

Mr Kisamba is a Ugandan living in Dar es Salaam, Tanzania.