Tax and budgetary interventions should mostly target value adding industries

Perhaps the most dramatic and significant global issue today is President Trump’s unilateral tariff increases on selected imports. His stated goal is to protect American industries and jobs while correcting skewed trade imbalances. While the motivation and policy looks justified, the implementation does not appear clearly thought out, and may indeed result in unintended consequences

In Kenya we should not be apologetic about tax actions that protect our industries and agriculture. Indeed we do have a similar “Buy Kenya Build Kenya” call which I do not think has been sufficiently articulated or developed into a high level policy to guide co-ordinated capacity building in manufacturing and agriculture. It is such a policy that should advise the timing and quantum of protective import tax actions.

Currently, annual budget tax interventions appear to be piecemeal and influenced, not by a centrally monitored policy, but mainly by individual inputs from interested parties and individual industries which may have not taken into account the wider national impacts and priorities.

If you take the case of vegetable oils, the overriding policy driver should be the grassroots development of oil crops (soya, sunflower, palm oil, corn oil, and cotton seed) across Kenya to replace imported raw vegetable oil inputs. And Kenya is endowed with climates and soils to effectively produce these.

As production of these crops increases, we should then systematically raise import taxes to reduce imported raw inputs to allow uptake of produce from our farmers and processing into cooking oil for local demands and exports.

Now this is the real meaning of agricultural value addition through manufacturing.

Last week increase of import taxes on imported “finished” vegetable oils only serves to reduce market competition for local oil manufacturers, which I do not think will incrementally add many more jobs.

In 2017, imports of raw vegetable and animal oils amounted to Sh68.5 billion and this is the figure we should systematically but quickly cut down through local capacity building.

The animal feeds and vegetable oil industries are much linked as animal feeds are mostly by-products from oil processing. Incentivizing local oil crop production will equally promote the livestock sector which is currently importing most of its animal feeds inputs from the neighboring countries.

We need to conceptually divide manufacturing industries into two groups. There are those that genuinely add value to the local productive sectors ( agriculture, forestry, livestock, mining ) and those that merely assemble imported parts or process imported raw materials.

It is the first category that deserves priority on import tax protection because of its wider GDP and jobs impacts.

Last week’s tax and budgetary actions to support textiles and leather industries are correctly in the value addition category. However, the ultimate effectiveness of import tax penalties will depend on how quickly the ministries (and counties ) responsible for cotton and leather production increase output.

Otherwise we shall have penalized the consumer of second hand imports with high import taxes when we are not sufficiently ready with local alternative wear.

READ: Budget 2018: The highlights

Then there is the regrettable story of the sugar sub-sector, which is often the subject of tax “abuse” either through opportunistic exemptions or illegal imports. Sugar falls within both the agriculture and manufacturing sectors, and is a major rural employer.

The sugar sub-sector appears to have dodged all sensible actions and intentions to keep it viable. This should be an urgent agenda within the Big Four development framework because it greatly impacts food security, balance of payment, jobs, and also national budgets. .

Kenya lost most of its manufacturing and agriculture capacity in the early 1990s when the IMF prescribed trade liberalization for Kenya. We now need to catch-up, and protection from competing imports using import tax penalties will continue to be necessary.

Like in the case of the ongoing US protective trade actions, Kenya should not shy away from import tariff actions if these will help to protect our local productive capacity from unfair imports. But these tax actions should be implemented within the context of a clearly developed programme for increasing Kenya’s local productive capacity.