As Kenya marks the Africa Industrialisation Day today, the focus will be on its credentials to revamp its limping manufacturing sector to capitalise on new opportunities on a wider seamless market for the continent.
President Uhuru Kenyatta’s plan to create in the upwards of 800,000 new decent jobs for Kenya’s growing skilled youth by enacting policies, which support modernisation existing and development of new factories is yet to gain traction.
The manufacturing pillar under the Big Four socio-economic transformation plan is to create an additional 1,000 small and medium-sized (SMEs) factories in targeted sub-sectors such as agro-processing, leather, textiles and fish-processing.
Statistics and recent surveys, however, paint a picture of struggling manufacturers, with their contribution to gross domestic product (GDP) — national wealth — shrinking and recording the lowest growth in jobs among key sectors of the economy.
As a low middle-income country with sights on joining the league of highly-industrialised middle-income nations in just more than a decade, Kenya should be witnessing the movement of labour from low productivity sectors such as farming to the manufacturing sector.
Growth in new job opportunities in the sector has largely been flat, with an addition of 4,200 new jobs in the first full year of Mr Kenyatta’s Big Four agenda, the Kenya National Bureau of Statistics (KNBS) data indicates.
The President’s target is based on the sector overcoming its struggles to contribute 15 percent share to the national wealth (GDP) from the decades-low levels posted in recent years.
The sector’s share of the GDP has steadily dropped from 10.7 per cent in 2013, to 10.0 in 2014, 9.4 per cent in 2015 and 9.3 per cent in 2016, 8.0 per cent in 2017 and 7.7 per cent last year, KNBS says in Economic Survey 2019.
The sector’s reduced contribution to the GDP is a result of sluggish growth in activities over the years.
This could impact on Kenya’s chances of tapping new opportunities under a new continental free-trade zone — which aims to eventually unite Africa’s 1.27 billion people and its $3.4 trillion nominal GDP.
Manufacturing sector growth in 2018 rebounded to a provisional 4.2 percent after slowing down steadily from 5.6 percent in 2013, 2.5 per cent (2014), 3.6 per cent (2015), 3.1 per cent in 2016 and 0.5 percent in 2017.
“What we have is premature industrialisation because it (manufacturing) is plateauing even before we reach our productivity (level) as it were,” Kwame Owino, chief executive at Institute of Economic Affairs (IEA), a think tank, told a forum in Nairobi on November 14.
“Having agriculture which was 25 percent (of GDP) a few years ago, but is now 33 percent, is such a serious problem.”
The contribution of agriculture and related activities, which are a key source of raw materials to industries, to GDP, has risen from 27.5 percent in 2014 to 30.2 percent (2015), 31.1 percent (2016) and 34.8 percent in 2017, before slowing slightly to 34.2 percent, official data shows.
Structural changes in the Kenyan economy that has seen the share of manufacturing to the GDP shrink in favour of services have resulted in total revenue (corporation, VAT, excise and import duty) fall behind financial services sector for the first time.
The Kenya Revenue Authority (KRA) statistics show tax receipts from the financial services sector, dominated by risk-averse banks, stood at Sh165.84 billion in the fiscal year ended June 2019, leapfrogging manufacturing’s Sh164.30 billion.
“We can’t talk about a tax base if we don’t have decent jobs,” said Rose Ngugi, executive director at Kenya Institute for Public Policy Research and Analysis (Kippra), the state-run think-tank.
An analysis by Kippra, published earlier in the year, showed firms in formal manufacturing generated a paltry 30,000 job opportunities in the four-year period through 2016, accounting for 8.87 percent of the 338,000 decent jobs projected for the sector under the second Medium Term Plan (MTP II) of the Vision 2030, Kenya’s long-term development blueprint.
Kippra researchers Vincent Okara and Brian Obiero, in a discussion paper titled ‘Labour Demand in Kenya: Sectoral Analysis’, largely blamed high operating costs, rising informal industries and inadequate funding for curtailing growth in the sector.
“Given that MSMEs (micro-, small- and medium-sized enterprises) form a good proportion of firms in the manufacturing sector, there are some challenges they face that are related to technological issues,” Dr Ngugi said on November 14.
“In addition to the cost of energy and finance, Kenya is facing significant competition from the region because we have decided not to move from low-level technology activities.
“You are producing a product and selling it to Uganda, which has now decided they are now going to produce that product on their own. Do we then come back and move to the middle- and high- level technology such that we can build our niche?”
Latest trade statistics show Kenya has this year slipped into trade deficit with Africa for the first time since the authorities started keeping such data publicly earlier in 1999.
For example, total sales by Kenyan companies and traders to other African countries stood at Sh145.88 billion against imports of Sh150.13 billion between January-August, translating to a deficit of Sh4.25 billion.
The manufacturers blame high electricity charges compared to countries such as Ethiopia and South Africa as well as multiple levies and fees such Import declaration fee and railway development levy and delays in value-added tax (VAT) refunds for piling up costs.
“Our cost imbalance (with regional competitors) at the moment is 13.3 percent, but hopefully it will decrease with some of the concessions in the budget,” Sachen Gudka, chairman of Kenya Association of Manufacturers (KAM) said in an interview.
“If Kenya is to industrialise and be a manufacturing powerhouse in the region, we need to have value-addition and having the right tariffs across the value chain.”
About 54 percent of the nearly 100 factories surveyed in Nairobi, Kiambu and Machakos cited the cost of energy as a damper to optimal business operations, while 43 percent cited high taxes and cheap imports (40 percent).
Mr Gudka says manufacturers have in recent years faced cash flow challenges due to delayed payments by the government.
He said factories are owed about Sh125 billion in accumulated VAT refunds, comprising Sh100 billion in exports-related withholding VAT — which they couldn’t claim due to a legal hurdle and Sh25 billion in zero-rated supplies.
KRA confirmed accumulated zero-rated VAT claims amounted to Sh26.2 billion but did not disclose how much has accumulated in withholding VAT credits.
“The late payment culture has taken such a deep root in our country that’s not just limited to government. It has also permeated to large and medium corporates, the SMEs and, surprisingly, even the civil society,” said Kiprono Kittony, immediate former chairperson of the Kenya National Chamber of Commerce and Industry.
“In Kenya, we have become a country where people pay when they want to pay. We need to have a legislative intervention to see that payments are done on time, and this will help manufacturers and importers to increase their productivity.”
Key segments such as pharmaceuticals could help Kenya grow its footprint in Africa.
Data, however, shows the country’s drug stores heavily rely on imports.
The latest KNBS data shows medicinal and pharmaceutical imports amounted to Sh59.43 billion in 2018 from Sh55.62 billion the year before. In the first six months of 2019, the country spent Sh31.83 billion on pharmaceutical products.
This means the deficit stood at Sh48.98 billion in 2018 and Sh44.67 billion the year before.
In the first six months of 2019, the country has spent Sh31.83 billion on pharmaceutical products against Sh5.19 billion in exports.
“Somebody asked me why is it that even at the pharmaceutical level, we have to buy Panadol from India? Why is it that we are not able to produce it in the country? (The answer is) low-level technology,” Dr Ngugi said.
The Energy ministry introduced night-time tariffs from December 1, 2017, halving power cost for large factories operating and producing between 10pm and 6am over and above their daytime optimal capacity.
Starting this financial year, factories in profit situation will also claim a third of their total cost of power to be deducted from corporation tax paid to the KRA, meaning only profitable firms will benefit. The power rebates rules stipulate that all manufacturers will get a 20 percent refund on their power costs, with the remainder 10 percent dependent on annual turnover, power consumption and capital expenditure.
Low energy costs, Mr Gudka said, would boost local production of some of the commodities, which are largely ordered from abroad.
“The biggest cost input cost for them is power, which takes up close to 25 percent,” he said.
“You need to make power competitive for us to have import substitution and for us to be competitive especially now when we are entering the African Continental Free Trade Area.”