Economy

Uhuru hopes to grow economy on strong industries

EPZ

Workers at the Revital Healthcare (EPZ) Limited plant at Jomvu in Mombasa. FILE

President Uhuru Kenyatta’s promise to support Kenya’s manufacturing industry could change the country’s fiscal imbalance and accelerate growth in the medium term, analysts said.

Mr Kenyatta said his administration will implement policies to deliberately revamp the manufacturing sector — the largest employer and foreign exchange earner after agriculture — whose contribution to the economy has been declining in recent years leaving in its wake mass unemployment and large trade deficits.

The manufacturing sector’s contribution to the economy has stagnated at 10 per cent in the past six years even as the services sector – which employs relatively fewer people — continued on a steady growth path.

Aside from creating more jobs and earning foreign exchange, the manufacturing sector is critical to reversing Kenya’s negative trade balance that saw the value of imports exceed exports by Sh804 billion in 2011.

“We will support the manufacturing industry and all enterprises, both local and international, that strive to create finished goods using local labour and materials,” President Kenyatta said in his inauguration speech adding that the government would support the initiative by buying Kenyan first.

Mr Kenyatta is expected to reveal the finer details of the support his government will offer local industries and enterprise in his speech to parliamentarians on April 16.

The government remains the single biggest buyer of goods in Kenya and the president is keen on using this muscle to revive the manufacturing sector that has suffered from consumers’ greater preference for imports in the past two decades.

(Read: Kenya exports and imports imbalance must be tackled)

The list of likely beneficiaries of the new policy stance includes local manufacturers of furniture, pharmaceuticals, chemicals, and motor vehicle assemblers.

Economist Gerrishon Ikiara reckons that proper use of government tendering can have a tremendous impact on the country’s development citing the large volumes of goods and services purchased by the State.

“The government is a major consumer of various manufactured goods in Kenya, implying that the pattern of government expenditure can influence industrial development to a considerable extent,” Mr Ikiara says in his book Industrialisation in Kenya: In Search of a Strategy.

The greatest obstacle to Mr Kenyatta’s bold plan for manufacturers lies in its implementation (given the global free trade environment in which the country operates) and concerns over quality of some locally-made goods.

Former president Kibaki launched similar but piece-meal plans during his 10-year rule but the effort was largely strangled by heavy state bureaucracy.

The Kibaki government, for instance, issued a directive to all state agencies to buy only locally made furniture, potentially guaranteeing Kenyan firms the Sh2 billion that the State spends on furniture annually.

But the policy has all but failed, leaving the market for major furniture importers who continue to supply government agencies with office and domestics furniture items.

If strictly implemented, President Kenyatta’s plan could alter Kenya’s economic structure for the better, powering a resurgent manufacturing sector to create more jobs and reduce the high volume of imports that put pressure on the shilling.

Kenya’s services sector has steadily expanded in the past five years as manufacturing and agriculture stagnated or declined, setting up the country for a service sector-driven economy that needs a less workforce.

Banks, hotels, ICT, and real estate are among the sectors that have registered strong growth even as manufacturing interests decline on increased competition and high operating costs.

Kenya’s manufacturers will also get a boost from President Kenyatta’s plan to deepen trade in the East African Community that has emerged as a key market for local products.

“My administration is ... committed to regional trade and cooperation and will continue to strengthen ties through free movement of people, goods and investment, including the removal of tariff and non-tariff barriers to trade,” the president said.

The EAC market is home to some 130 million people and economies of its individual member states is projected to grow at an average of six per cent in the next five years, expanding the consumer goods market.

Kenya has been one of the biggest beneficiaries of the common market, producing and exporting a wide range of goods such as soap, hair care products, and cooking oil to its neighbours.

Deepening of cross-border trade under EAC is seen as a critical factor in attracting foreign investors in Kenya’s manufacturing sector with an eye on the regional market.

The common market promises to eliminate barriers to regional trade by removing tariff and non-tariff barriers, leaving member states to compete on the quality and pricing of their products.

Kenya’s relatively advanced infrastructure, strong skills base, and presence of a sea port has accorded it a preferred manufacturing location.

The Sh1.2 billion motor vehicle assembly plant Foton East Africa, for instance, is one of the recent major manufacturing interests in Kenya modelled around the regional play.

Kenyan industrialists however note that the new policies will need to be accompanied by lowering costs of production to increase their competitiveness against their low-cost rivals in Asia, Egypt, and South Africa.

The Kenya Association of Manufacturers estimates that local power charges are two times higher than in Egypt and South Africa, the two countries that are Kenya’s main rivals in the Common Market for Eastern and Southern Africa.

Kenya Power has already applied to raise its tariffs by double digits over the next three years, worsening the outlook for energy costs that will ultimately be reflected in consumer goods.

It also remains to be seen to what extent local industries can improve their value addition to earn more from their exports.

Kenya relies heavily on exporting low-value goods such as packaged food, personal and household cleaning products. This leaves it in a negative trading position with Western and Asian economies which export high value goods such as machinery, computers, and construction equipment.