Employing an economy-wide model (DEMETRA), the analysis provides a detailed characterization of the AfCFTA impacts on the Kenyan economy in the 2021-2035 timeframe. It considers two liberalization scenarios — tariff-only liberalization and tariff&Non-Tariff Measures (NTMs) liberalization — across four liberalization schedules defined by alternative government revenue, food security and economic development objectives. To capture the responses to the AfCFTA establishment occurring outside Kenya, results from a continental-level assessment are linked to the DEMETRA model to determine changes in international markets. For the Kenyan economy, these responses are translated into shifts of product export demand and changes of import prices for domestic consumers. With the risk of government income to decline due to lower tariff revenues, the analysis is also complemented with simulations in which a change in the sales tax is introduced to obtain revenue neutrality relative to the multi-year baseline.

The study findings show that the tariff-only liberalization leads to moderate positive outcomes, encouraging trade in commodities where Kenya already has a comparative advantage, namely cash crops. Moreover, there is a decrease in the production of food crops which are substituted by their imported variety signalling an increase in import dependency in this area. The tariff&NTMs liberalization induces a more significant reduction in trade costs thus stimulating trade. Exports of cash crops continue to have the highest expansion rate followed by manufacturing products. At the same time, there is an important growth of imports in manufacturing and processed food, which determines the output of many activities in this area to reduce relative to baseline values.

At the household level, the AfCFTA determines an overall increase in welfare and food consumption. Nevertheless, some urban households have a small decline in welfare relative to the baseline during the medium term (2021-2030). Rural households aggregated at a regional level have a higher welfare increase overall with no negative impacts during the transition to 2035. The extension of the AfCFTA liberalization into the NTMs increases the average welfare gains but also increases the discrepancies between the household groups represented in this study.

With a tariff-only liberalization, government revenues are on slight declining trend relative to the baseline towards 2030 but then begin to recover. The NTMs liberalization allows for government revenues to recover more and even to surpass the baseline values in 2035. Higher trade levels and economic gains determine a net increase in revenues from tariffs and output- and income taxes. The introduction of a sales tax to compensate for government revenue loss during the transition period has limited impacts on prices, output, consumption, and trade. This is due to the requirement for only a minor increase in the tax rate. Nevertheless, it shows some marginal benefits in alleviating the adverse effects of the AfCFTA during the transition period on some urban household groups.