Once a giant, manufacturing now trails financial sector in Kenya GDP share

Nyayo Pioneer Car

The Nyayo Pioneer 1, a car that was manufactured in Kenya in a project initiated in 1986 by retired late President Daniel Moi at the Numerical Machining Complex (NMC) workshop in Nairobi on March 2, 2021.

Photo credit: Lucy Wanjiru | Nation Media Group

In the 1980s, manufacturing in Kenya was such a big deal that the government of Daniel arap Moi dared to join the league of automakers by commissioning the building of its own vehicle.

The plan flopped because the contraption that was the Nyayo Pioneer Car could barely move for a kilometre, but the car-making dream showed the zeal the Moi administration had for local manufacturing.

At the time, the contribution of manufacturing to the country’s total output, or the gross domestic product (GDP), was at around 10.5 percent, second only to agriculture.

The financial sector —which was lumped together with real estate and business services— contributed 6.2 percent of GDP.

Nyayo Pioneer Car

February 27, 1990: President Daniel Toroitich arap Moi launches the first three Kenyan-made cars named Nyayo Pioneer 1, 2 and 3. He announced plans for their mass production and said land had been set aside for the construction of a factory and assembly line. The president drove one of the saloons to the delight of mammoth crowd at the Moi International Sports Centre Complex Kasarani where the ceremony was held. The cars, whose speedometres was up to 160 kph, had a cruising speed of 120 kph. 

Photo credit: File | Nation Media Group

Fast forward to 2023 and the financial and insurance sector’s share of GDP has overtaken that of manufacturing to become the fourth largest industry behind agriculture, transport and real estate, the latest annual economic survey by the Kenya National Bureau of Statistics (KNBS) shows.

Last year, the financial and insurance sector contributed 7.8 percent of GDP compared to manufacturing's 7.5 percent, signalling a faster growth in the banking and insurance activities compared to manufacturing.

However, the contribution of the manufacturing sector to GDP declined from 10.4 per cent in 2007 to 7.7 percent in 2022 against a target of 15 percent under the Uhuru Kenyatta administration’s Big Four Agenda.

On its part, the service sector, including transport, real estate and trading, has experienced a faster growth in the same period. 

While banking activities have picked up through financial technology and regional expansion by some of the country's largest lenders, the manufacturing sector has been beset by high costs of production, the proliferation of counterfeits, low technology adoption and recurring drought, the government says in its fourth medium-term plan (MTP IV).

There are also punitive tax measures that have been implemented in different subsectors, said Christopher Kandie, the Vice Chair of the manufacturing committee at the Kenya National Chamber of Commerce and Industry ((KNCCI).

“The conversion costs which include labour and electricity have also been steadily going up. It has also been reported that some multinationals are finding it more profitable to import finished products from their operating units in other countries thus reducing the growth of the sector,” said Mr Kandie.

A difficult operating environment has seen a number of prominent manufacturers exit the country. They include confectionary maker Cadbury Kenya which relocated to Egypt in 2014, where they said the cost of labour and power is relatively lower.

Earlier in 2007, personal care giant Reckitt Benckiser stopped direct manufacturing in Kenya because of “costs and economy of scale issues.”

Colgate-Palmolive, an oral and personal care company, also shut its plant in 2006 consigning close to 50 permanent employees and casuals to unemployment.

Factories in Kenya, like many others around the world, have struggled to compete against those in China, lately the primary source of Kenya's manufactured items including those made of iron and steel, plastic, and textile.

It is not just the Kenyan market which has been swamped by Chinese manufactured goods, China-made goods have also flooded the neighbouring countries which for long had relied on Kenya for products made of iron and steel as well as plastics.

One of the manufacturing giants was the textile and apparel whose fortunes have tanked.

In the 1990s, thanks to an import substitution promotion through tariffs and import quotas, the textile sub-sector employed around 30 percent of the labour force in the national manufacturing sector.

Import substitution promotion was also supported by foreign exchange allocation measures. The exchange rate was also overvalued to contain the cost of importing raw materials and credit and interest rates were also implicitly subsidised for imported raw materials, writes Dr Jacob Omolo, an Economics lecturer at Kenyatta University.

Imports of second-hand clothes, known as mitumba, have also been blamed for the underperformance of the textile sector.

Nonetheless, the successive regimes, from the late Mwai Kibaki to Uhuru Kenyatta and William Ruto, have staked their hopes of reviving the manufacturing sector on the textile.

Former National Treasury Cabinet Secretary Henry Rotich, after unveiling the Big Four Agenda in the 2018 Budget Policy under the Kenyatta government, launched an assault against mitumba and even hinted that Kenya would stop the flow of used clothes into the country.

“Our textile and footwear sectors are closing down due to unfair competition from cheap imports,” said Mr Rotich in his Budget Speech in June 2018.

Starting July 2018, Mr Rotich announced that all imported clothes including mitumba would be slapped with a higher import duty of $5 (Sh500) per unit or 35 percent, whichever was higher.

He said the tax was aimed at encouraging local production and creating jobs for the youth in the sector.

Imported new clothes from countries such as China have also been targeted by the higher tariff which is aimed at encouraging local production.

Imported spirits also attract a higher tariff as a means of encouraging local production of alcoholic beverages. 

The Ruto administration, in the fourth Medium Term Plan, attributes the decline to the high cost of production, competition from counterfeit goods, low technology adoption and recurring drought.

But, the government believes there is progress in the revival of the manufacturing sector.

“The sector facilitated export-oriented investment by developing Athi River textile hub; modernising Rivatex Textile Factory; and initiating the establishment of Special Economic Zones in Dongo Kundu and

Naivasha. The share contribution of manufacturing to GDP in Kenya in comparison to lower middle-income and upper middle-income countries between 2007 and 2022,” reads the MTP IV. 

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