Ideas & Debate

What’s in 2020 Budget to spur SMEs growth and innovation?


Exhibitors at the Nation Media Group’s SMEs expo in Nairobi in February this year. FILE PHOTO | NMG

Kenyan SMEs play a critical role In the economy, constituting 98 percent of all registered businesses. They contribute 33 percent to the GDP, employ over 30 percent of Kenya’s youthful population (KNBS 2016) and account for 83.6 percent of new jobs, according to KNBS 2019 Economic survey.

Traditionally, SMEs have faced systemic challenges leading to a mortality rate of 75 percent within three years of inception due to difficulty of access to finance, access to market, lack of information, management skills, access to technology, infrastructure challenges and unsupportive policies, among others.

The government must address these challenges to reduce SMEs high mortality through interventions that require resources through the national budget process. This is heavily informed by the Budget policy statement as well forward-looking and supportive legislation.

Focusing on Kenya’s 2020 Budget policy statement I would want to examine proposed efforts to support SMEs, identify gaps and propose solutions.

The first area of focus is manufacturing, a sector the government aspires to reform and improve by encouraging investment and protection against dumping. Some of the ongoing efforts are; establishment of special economic zones and industrial parks across the country, boost cotton production through modernisation of Rivatex East Africa, tax incentives in Finance Act 2019 that is expected to promote value addition and make locally produced goods competitive in various export markets besides the launch of Kenya coast guard to boost fish production.

Whilst these efforts are commendable, they must all be aligned to the current SME realities and must be gradually implemented to ensure no one is left behind. For instance, instead of creating new special economic zones, efforts must be made to recognise and support current ones that are struggling such as Kariobangi Light Industries, Kariokor leather market, Uhuru textile market and Jogoo-Ngong Road markets in Nairobi, to name a few. More efforts must be made such as supply of basic utilities including water and electricity at a subsidised rate, product quality support by the Kenya Bureau of Standards, capacity building, availing of modern shared production equipment and capacity- building among others and only shifting these enterprises to other designated special economic zone over time as they expand.

Similarly, a low hanging fruit in the coastal region is the coconut value chain that can play a much bigger role in supporting the flower industry by supplying soil alternative which forms an important input to the flower industry but is mostly imported from Asia with very little tax hence decimating local coconut value chain players.

The same script applies for SMEs manufacturers in Kariokor leather market and Uhuru textile markets. Matters are made worse when the same government imports products that can be produced locally such as furniture and textile among others to the tune of Sh38 billion.

The second area is ICT where the government has invested in digital infrastructure as well as aided in improved acces to affordable broadband connectivity with key examples being national optic fibre backbone, Konza Technopolis complex, Konza Data Centre as well as establishment of national ICT policy and Data protection act 2019.

The country needs to build on this foundation by establishing a co-ordinated start-ups strategy and law that recognises these unique business that have the potential to catapult the economy and provide support such as tax incentives for start-ups and their support infrastructure that include incubators, investors and knowledge partners, among others.

The third area is financial sector development and reforms, with efforts such as operationalisation of the Nairobi international finanial centre, promoting the diversification of products and services within the capital markets space with key initiatives including the implementation of the derivatives market, commodities exchange market, strengthening of the capital markets infrastructure and institutions, promoting cross border trade and laying down a framework to enable State corporations and county governments raise funds through the capital markets.

Others are interest rate cap repeal and formulation of a nation policy for the insurance industry.

Government reforms in the financial sector must adopt design thinking or customer marketing philosophy— an instance where SME interventions are developed bottom up and not top bottom by designing the interventions based on actual SME demography and behaviour. For instance, the credit guarantee scheme must include other SME-startup financial players other than banks who play complementary role in the life of an SME. Similarly insurance products must be aligned to SMEs which have hazard management mechanism.

Finally, on business regulatory reforms, government efforts have been on making Kenya a secure and attractive destination for investment critical for a strong and sustained high growth, poverty reduction and the attainment of the “Big Four” plan. This has led it to pursue business regulatory reforms aimed at removing red tape thereby reducing cost of doing business while enhancing service delivery as evidenced by Kenya’s improvement on the World Bank ease of doing business ranking, attaining position 56 in 2019.

These efforts will go a long way in attracting external investment but cannot create the critical number of jobs the country needs. These efforts must to a large degree be inward- looking and must be based on the current felt SME needs, 79 percent being informal in nature. Regulatory reforms must start where these informal SMEs are, with clear framework for gradual formalisation tied with appropriate incentives.

Mr Otieno is Managing Director, Viffa Consult.