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Internal tax reform and production restraint seen as key to halting Kenyan tea price declines

25 July 2014

In the face of declining earnings at the Mombasa tea auctions (which in June 2014 reached levels 17% below those prevailing in June 2013), Kenyan tea traders have called on the government to “urgently address the issues of taxation to promote exports”, while tea packers have called on the government to increase the import duty on value-added teas from 25 to 100%.

In early June 2014, following a meeting with tea industry stakeholders, the Kenyan president “directed the Treasury to look into [value-added tax] and import duty levied on tea, which he said [were] hindering the growth of the sector”. Under the current regime, tea purchased outside the auction system is subject to 16% VAT. Stakeholders consider that this is discouraging local processing, and argue that abolishing VAT on purchases outside the auction arrangements could encourage local processors to invest in meeting the “growing demand for speciality teas in niche markets like Japan, Germany, US and France”.

The current poor prices for tea are attributed to overproduction, with reduced demand on traditional export markets. Analysts have highlighted that in 2009, the secretary-general of the FAO Intergovernmental Group on Tea warned producers “not to overreact to the current high prices by planting more crops”, as there was a risk of oversupplying the market.

Kenyan press sources reported that “although the first quarter of 2014 registered a four per cent production drop against the same period in 2013, increased rainfall in the second quarter is threatening to reduce this small deficit, and probably surpass the production of 2013.” Tea farmers, meanwhile, have called on the Kenya Tea Development Agency (KTDA) to cancel contracts for bulk import of fertilisers, which would only serve to boost production and exacerbate price declines.

Editorial comment

While Kenya only accounts for 8% of world production, it accounts for around a quarter of exports. (East Africa as a whole supplies 11% of world production and 31% of global exports.) Kenya is thus a major player on global markets. In 2013, 2 years of declining tea production were brought to an end, with production reaching 410 million kg. Export volumes in 2013 increased by 15% compared to 2012 levels, reaching 494.4 million kg, the highest level in a decade. However, the high production coincided with reduced purchases from Egypt, as a result of the country’s political unrest. Egypt in the past accounted for 20% of Kenya’s exports. Average prices fell by over 13%, from US$3.09/kg in 2012 to US$2.68/kg in 2013, with total export earnings only increasing by 1.9%.

The trend of elevated export volumes continued into 2014, with export volumes in the first 5 months of 2014 reaching 207 million kg, compared to 204 million kg in 2013. This led tea auction prices to slip still further, falling to US$1.86 in June 2014, and has not only affected farmers, but has also seen major tea traders posting pre-tax profit warnings.

In addition to the VAT review that has been announced, the Kenyan government is considering setting up a price stabilisation fund in partnership with the private sector, improving the transparency of the operation of the Mombasa tea auction and the implementation of an electronic tea auction through a public–private sector partnership. However, the issue of financing will need to be addressed across the sector, given the very high and volatile bank interest rates that prevail in Kenya. 


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