The manufacturing sector posted the slowest growth in 16 years in the first three months of 2024, spooked by high production costs and a recent barrage of tax measures, dealing a blow to prospects of generating quality jobs in the economy.
Data by the Kenya National Bureau of Standards (Kebs) show that the sector grew by 1.3 percent in the quarter to March compared to 1.7 percent a year prior - the slowest pace since the same quarter of 2008 when it grew by a paltry 0.7 percent amid deadly violence and economic disruption caused by the disputed outcome of the 2007 presidential election.
“Growth in the manufacture of food products was constrained by a 6.5 percent decline in soft drink production during the quarter under review. In the manufacture of non-food products, cement production declined from 2.3 million tonnes in the same quarter of 2023 to 2.1 million tonnes in the first quarter of 2024,” KNBS stated in its GDP report for the first three months of 2024.
The poor growth performance leaves the sector-- which has the highest multiplier effect on the economy-- on the ropes despite being touted as a key pillar of the Kenya Kwanza administration, which sees industry driving the next phase of Kenya’s economic transformation.
The slump in manufacturing puts a damper on the government's ambitions of raising the sector’s contribution to GDP to 20 percent by 2030 as productivity falls. Local manufacturers, who are members of the Kenya Association of Manufacturers (KAM), have set the same target under their ‘20by30’ agenda.
The share of manufacturing to Kenya’s GDP stood at 7.6 percent in 2023 in contrast to a high of 10 percent in 2014. The sector also contributed just 9,700 of the 848,100 new jobs created in the economy in 2023 or 1.14 percent.
Industrialists cite a recent wave of punitive tax measures and high costs of production for the dismal performance in the sector.
For example, the export and promotion levy introduced through the Finance Act, 2023 set a tax of 17.5 percent of the customs value of imported cement clinkers and other manufacturing-related products such as bars and rods, impacting the cost of finished products from local manufacturers.
Only Bamburi Cement, Mombasa Cement, and Simba Cement manufacture clinker locally, according to KAM, highlighting constrained productivity by other cement makers on higher input costs.
“Because of that constrained production, the capacity to manufacture cement has gone down while the cost of a bag of cement has risen from lows of Sh560 to upwards of Sh850 in some places. This has impacted other sectors such as construction and real estate,” noted KAM CEO Anthony Mwangi.
The new taxes have exacerbated the struggles of a sector already bogged down by high production costs, including that of imports and electricity.
Costly energy is being blamed on inefficiencies in generation, transmission, and distribution. Mr Mwangi said manufacturing has been shaken on both the demand and supply side, inhibiting gains for sector expected to carry the multiplier effect in the economy, including job creation.
“We operate in an ecosystem and just looking at the overall economic environment, you look at interest rates going up, so has the cost of living which has hit the demand for manufactured products by consumers. On the supply side, we face high input costs including energy, taxes, and regulatory levies paid to entities such as Kebs [Kenya Bureau of Standards] and Nema [National Environment Management Authority] alongside the cost and tenure of credit. Everywhere you turn, costs come at you,” he added.
The problems bedevilling manufacturing, according to KAM, include trade in counterfeit products, transport and storage issues, and weak access to credit financing.
Under its Bottom-Up Economic Transformation Agenda (BETA), President William Ruto identified key value chains, including leather, textiles, dairy, edible oils, building and construction materials, as important in efforts to boost manufacturing’s share of GDP.
Key allocations to the sector in the fiscal year ended June 30 included Sh4.7 billion for the establishment of county-integrated agro-industrial parks and Sh550 million for the completion of the Naivasha Special Economic Zone (SEZ) and the construction of Dongo Kundu SEZ.
A further Sh2.8 billion was set aside for the development of the Athi River Textile Hub and Sh3 billion for six EPZ flagship hubs. In January, the government revealed it would be putting up 30 additional county aggregation and industrial parks, lifting the number from an initial 18.
The push for new manufacturing infrastructure has come against the continued erosion of existing factories as industrial areas now face encroachment from entertainment spots after the barrage of residential houses.
KAM, while acknowledging the drag on activity from the recent anti-tax protests in the country, sees the opportunity to overhaul government policies in the face of public discourse, resetting manufacturing back to the growth path.
“For me, I think this is a Eureka moment. The government has the opportunity to re-yoke the economy. They have had ideas, but the ideas have not been good enough. It’s time to walk the talk. As an industry, we have had proposals to the government and this is the time to implement them,” Mr Mwangi said.
