Why urgent steps are needed to reinvigorate Kenya’s manufacturing sector

The manufacturing sector plays a pivotal role in economic growth and wealth generation in the world. This economic growth is generated from highly productive jobs resulting in an increase in the purchasing power of citizens and an increase in export market achieved through value addition and diversification.

Vision 2030 has placed emphasis on the manufacturing sector as one of the vehicles to deliver economic sustainability by increasing Kenya’s competitiveness in the global market. One of the objectives highlighted therein is that the Country should aim to strengthen the capacity and local content of domestically manufactured goods.
Kenya’s manufacturing sector contribution to GDP has been declining in the past 10 year. In 2017, the sector contributed 8.37% to the GDP, a further decline from 9.2% in 2016.

Last year, the government announced its commitment to increase the sector’s contribution to GDP from the 15% and to create the 1.3 million jobs by 2022. This means that this is the time we took urgent steps to reinvigorate the sector.
The declaration of manufacturing as a top priority investment area for the country to drive economic growth has seen manufacturers and the government engage more towards this goal.

The achievements made thus far include:

  • The formation of the multi-agency task force has seen the fight against illicit trade become successful that some of the sectors are registering an increased market share, for instance, the food sector.
  • The ratification of the Africa Continental Trade Area that increases the market for Kenya products in the continent.
  • The development of the National Export Development and Promotion Strategy which seeks to ensure that Kenyan products are competing on a global platform.
  • Non-renewal of the stay of application in EAC for Kenyan EPZ based textiles and apparels manufacturers that allowed the EPZ firms to sell 20% of their annual production duty-free and VAT-free to the domestic market.-Kenya did
  • Local sourcing of uniforms of discipline forces from local textile and apparel firms under the Buy Kenya Build Kenya Initiative.
  • Ongoing Construction of Athi-River (Kinanie) leather park which is expected to bring a big relieve to the industry.

However, to increase the manufacturing sector contribution of GDP to 15% by 2022, a lot still needs to be done particularly on:

  • Congestion at Port: Ports act as key entryways for international trade and, therefore very vital for the movement of goods, services, and people between continents, spurring the integration of local and national economies into the global sphere.

Following the Government’s reinvigorated its war on counterfeits and illicit trade, the industry has experienced operational challenges at the port. Inputs and raw material needed for production, that would originally take 2 to 3 days to be cleared now takes up to a minimum of 14 days.

There are many reasons for this including the disconnect between agencies that are mandated to clear the goods, which translates to lengthened and duplicated procedures, and cumbersome administration processes.

  • The cost of electricity: Electricity is a key input in the manufacturing process. The country’s manufacturing sector is still grappling with the high cost of power. There is a need to reduce the cost of power to USD 0.09/kwh, in line with Budget 2018/2019. This means the removal of all taxes and levies on power bills for manufacturers.

There is also need to expedite the requirements needed for industries to benefit from the 30% rebate on electricity consumption provided for in the Finance Act 2018.
The Association welcomes the directive by the H. E. President Uhuru Kenyatta to review the electricity cost for SMEs.

The manufacturing sector contributes the second largest portion of  SMEs in the country. Such incentive will go along way in driving their competitiveness all sub-sectors of the manufacturing sector and act as a catalyst in realizing the objectives of the Manufacturing Pillar under the Big 4 Agenda.

  • Railway Development Levy (RDL) & Import Declaration Fees (IDF): Imported raw materials and inputs continue to be subjected to the Railway Development Levy (RDL) at 1.5% and Importation Declaration Fee (IDF) at 2%.

RDL & IDF increase the cost of imported raw materials and thus increases the unit cost of production and ultimately the prices at which the consumers get the products. A Waiver of the two on imported raw materials and intermediate inputs will increase competitiveness

  • Delays in payment of VAT refunds of up to 3 years is a major impediment for manufacturers.
  • The infrastructural gaps (dilapidated roads): Good roads allow for manufacturers to transport goods easily via road. There is a need to urgently maintain and repair roads across the country for ease in the transportation of raw materials and finished goods. We are seeing efforts towards the repair of roads in the industrial area, Nairobi, however, this should be done in all industrial areas in the country
  • EAC market: Despite harmonization of trade agreements and policies within the EAC, accessing these markets is still a challenge. Some partner states, for instance, refer to their standards thus locking out local manufacturers who in turn have to either find other export markets or go through the rigorous process to access those markets.

Export is key for job creation and the growth of any country’s economy.  In order to push our exports, Kenya needs to undertake coordinated action to promote exports and to secure market access for our locally produced goods and services.
The development of the export strategy is a dedicated effort by the government in enhancing our export competitiveness. Its implementation will hence play a critical role in driving the growth of our economy.
Value Addition
Currently, the African Continental Free Trade Area (AfCFTA) presents us with an opportunity to focus on value addition especially since the main reason our trade with the world is imbalanced is that we mainly export raw material.  The agreement seeks to create the world’s largest single market of 1.2 billion people and is likely to result in a continental GDP contribution of about $3.4 trillion (Sh340 trillion).

Value addition promotes the growth of backward and forward linkages, and in the process creates the much-needed productive jobs for the youth, and equally, increases the purchasing power of citizens.

Our engagements in the development of the Sector Deep Dive Report revealed that there is very high possibility of value chain integration if some sector-specific proposals are considered.

For instance, the world chocolate market is worth USD 100 Billion annually. The two largest Cocoa growing countries, Cote D’Ivoire and Ghana only earn USD 5 Billion since all the value addition is done outside those countries.

We have a similar situation with our exports of Tea, Coffee and Hides, and Skins amongst others. If we are earning X through exporting these products in raw form, we can earn at least 5X through value addition at source in Kenya. This will with no doubt attract new investment along the tea value chain and harness SMEs growth.

Africa’s regional integration will not only create an economically powerful block but will enhance competition, promote diversification of production, access to markets and benefit from an exchange in social-cultural engagements.

However, Kenya’s cost disadvantage of nearly 12% on most of the goods it manufactures, compared to competitor countries. It is absolutely vital that this cost imbalance is addressed as a matter of priority.
Mr.Sachen Qudka, Chair, Kenya Association of Manufacturers.