Kenya is faced with a possible premature decline in industrialisation owing to cheap Chinese manufactured goods and poor domestic conditions, a new World Bank report says.
Inadequate infrastructure and policy make the list of local challenges to manufacturing glitter.
Released last week, the report says that Kenya’s manufacturing growth is falling every year as consumers opt for Chinese goods which are at least 10 per cent cheaper in what could see some industries fold up.
Known as de-industrialisation, the decline is a process where a country experiences a reduction in industrial activity and is usually an indicator of a transition to a service economy.
“Because Kenya produces and trades few intermediate goods, researchers have concluded that Chinese imports could lead to a de-industrialisation,” says the report titled Deal or No Deal: Strictly Business for China in Kenya?
“Many suspect a premature decline of industry because manufacturing growth was only 3.4 per cent in 2014, down from 5.6 per cent in 2013.”
The analysis by the WB shows that in 2012, Kenya’s imports from China were 12 per cent of total imports, but by 2014, they rose to 23 per cent, indicating the growing dominance of the Far East country’s exports to Kenya.
Data from the Kenya National Bureau of Statistics (KNBS) further shows that the import basket from China has been growing at a fast pace.
In 2015, the country imported from China goods worth Sh320 billion up from Sh222 billion in 2014, a 44 per cent growth.
The bilateral trade is heavily skewed in favour of the world’s second largest economy with Kenya exporting goods worth Sh6.5 billion in 2014.
The manufacturing sector decline has been worsened by China’s taking over of the regional markets of Uganda and Tanzania which Kenya had traditionally supplied.
Kenya’s exports to Tanzania and Uganda, the Bank’s report says, are quite similar to China’s, meaning that they are easily displaced by those from China which are cheaper.
“The greater overlap in East Africa suggests that Chinese goods will likely displace Kenyan exports,” the report says.
“Between 2008 and 2014, manufacturing exports to Tanzania fell 36.1 per cent; exports to Uganda increased slightly by 4.5 per cent, but compared to previous years, the growth was slow.”
A combination of factors have been cited by the report for this slowdown, including unfriendly policies, a high cost of doing business, corruption, high labour costs, inferior technology, and underdeveloped infrastructure.
These negative factors have seen investors opt to put their money in other sectors where returns are higher.
“Manufacturing receives little investment because investors want to avoid the underdeveloped infrastructure and high cost of doing business, and have diverted funds to non-tradable sectors such as real estate and construction.”
The manufacturing sector’s contribution to the economy has been rooted at about 10 per cent of the gross domestic product (GDP) for over a decade now.
The decline is in direct contrast to the government’s ambition to raise the manufacturing sector’s contribution to 20 per cent of the GDP by 2030, according to the economic development anchor strategy, Vision 2030.
Kenya’s de-industrialisation is an indictment of the government for poor support compared to neighbouring Ethiopia that seems to be getting the industries code right and is attracting foreign direct investment (FDI) to feed its manufacturing sector.
“Between 2010 and 2013, the FDI to GDP ratio in Ethiopia was 1.39 compared to only 0.67 in Kenya, and the FDI to export ratio was 0.1 in Ethiopia and 0.03 in Kenya; it also has a lower cost of doing business, offering lower taxes, electricity, and labour costs than Kenya,” the WB report says.
A total of US $296.17 million (Sh29.7 billion) was invested in Kenya’s manufacturing sector by Chinese investors between 2003 and 2015. This is only more than half what Ethiopia received (US $545 million, Sh54.5 billion) between 2008 and 2013 — a much shorter period.
The billions of dollars invested in manufacturing in Ethiopia are creating thousands of jobs in Kenya’s neighbour.
“If Kenya wishes to attract more manufacturing FDI from China and India, it will have to work towards lowering the cost of doing business to compete with Ethiopia’s more favourable investment climate.”
The improvement of manufacturing is critical if Kenya is to raise the level of her exports with the sector seen as the weak link in raising Kenya’s trading profile with other countries.
Among the suggestions put forward to generally reverse Kenya’s poor export record are curbing inflation and real exchange rate appreciation, reducing high tariffs on manufacturing inputs, and attracting more FDI into manufacturing.
The export market will also benefit from improved efficiency at the Mombasa port with an emphasis on the period taken to clear goods and transport them inland.
A new terminal at Mombasa Port is projected to handle 450,000 twenty-foot equivalent units (TEUs) and rise to 1.2million TEUs by 2019.
The standard gauge railway (SGR) from Mombasa to Nairobi, which is expected to be complete by June next year, will also offer faster cargo evacuation.
Kenya, the report summaries, should put more emphasis on areas it has a comparative manufacturing advantage. Leatherwork and apparel are the most outstanding, the report concludes.
But it also says that while the Kenyan worker may demand less in wages, he’s not as productive as his Chinese counterpart, a weakness that should be addressed.
“Kenya must still work to improve its manufacturing sector to compete with China’s low-cost manufacturing; Kenyan producers have to upgrade their skills or specialise in areas where they have a comparative advantage.”