Unrelenting tax increases and higher import costs on raw materials from a combination of a weak shilling and dollar scarcity have dragged down the pace of growth in manufacturing to a six-year low as the sector battled a flood of imported goods during the Moses Kuria tenure at the Trade and Industry ministry.
The latest data from the Kenya National Bureau of Statistics (KNBS) show the sector expanded by a marginal 1.5 percent in the second quarter, the lowest rate since 2017 save for the contraction arising from the Covid-19 pandemic in 2020.
KNBS data show a sharp decline in the manufacturing of food products such as sugar and soft drinks while in the non-food subsector, the production of assembled vehicles declined by 22.5 percent in the quarter.
Kenya opened its doors to imports of processed food in a bid to fight inflation through a policy driven by Mr Kuria, as Trade minister, putting his ministry on a warpath with a section of manufacturers.
He has since been moved to the Public Service docket.
The KNBS data show that the volumes of processed food items, including rice, animal and vegetable oils, went up by up to 150 percent, pushing up the food import bill by Sh27.2 billion to Sh94.4 billion.
On the top line, the Kenyan economy expanded by 5.4 percent in the second quarter to June, growing at a faster pace than the 5.2 percent posted at the same time last year.
This was largely supported by a turnaround in the output of the agriculture sector, which expanded by 7.7 percent, the fastest pace since 2020, from a contraction of 2.4 percent in 2022.
Manufacturing is now one of the black spots holding the country from hitting its 10 percent growth target in line with Vision 2030.
Read: Inflation stays high despite improved food production
The Kenya Association of Manufacturers (KAM) Head of Policy, Research and Advocacy, Job Wanjohi, said the operating environment has generally been hostile to the manufacturing sector due to over taxation and policy uncertainty.
“For instance, Kenya is taxing raw materials, intermediate inputs and packaging materials, which puts her at a competitive disadvantage when compared to other EAC partner states. Tax costs on raw materials increased from 13 percent to 64 percent for Kenya. KAM has received feedback from manufacturers that they have not only lost their domestic market but also export market as increased taxation outbids them from securing contracts,” he said.
Manufacturers’ costs have taken a hit from the continued weakening of the Kenyan shilling against the US dollar, raising the cost of ordering raw materials.
The rising cost of electricity, which contributes to an estimated 20 percent of all production costs, has also weighed down the sector’s output.
“Part of manufacturing, especially in textile, requires importing cotton and textile fabrics and this has been impacted by the high dollar costs and the scarcity of dollars. Consumers are also suffering indirectly from the same factors. As a result, manufacturing in this country has not grown as expected,” MSME Alliance of Kenya chairman Ben Mutahi told the Business Daily on Thursday.
Manufacturing took an additional hit during the quarter from disruptions occasioned by protests linked to the outcome of the August 2022 General Election.
KAM estimated the impact of the disruptions at Sh2.86 billion a day based on the sector’s nominal contribution to GDP at about Sh1 trillion as per the 2023 Economic Survey.
Manufacturing’s sliding output is despite the sector being a key pillar of the Kenya Kwanza administration’s economic agenda.
The new administration set a target of raising the contribution of the sector to 15 percent of GDP by 2022, creating one million new jobs in the process and increasing foreign direct inflows to the sector by five-fold.
It has likewise put manufacturing as a centrepiece to its legacy, setting an ambitious plan to increase the sector’s contribution to 20 percent of GDP by 2030.
While noting the sector’s decline, the Treasury, in the 2023 Budget Policy Statement noted the government would adopt a value chain approach to addressing the bottlenecks impeding growth for the industry.
Value chains identified in the strategy include leather and leather products, building and construction materials, garments and textiles, dairy products, edible and crop oils and the tea sub-sector.
According to KAM, policy uncertainty especially on taxation has led manufacturers to stop investments as some are locked out of credit from financial institutions while some are uncertain about the investment environment.
Sticky VAT refund arrears which presently stand in excess of Sh10 billion have also choked manufacturers, impacting cash flows and working capital. This has forced manufacturers to incur costs related to interest on loans and forex conversion.
KAM has asked the government to improve the operating environment through collaborations with the private sector.
“We call on the government to work with the private sector to create a business environment characterised by a taxation regime, legal and regulatory structures that are hospitable to private investment,” Mr Wanjohi added.
Also read: Export-import gap narrows first time since Covid-19
Last year, the manufacturing sector had shown signs of a rebound after its share of GDP improved to 7.8 percent of GDP from 7.4 percent in 2021. BY BUSINESS DAILY