Manufacturing performance could have been better in 2014

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BY PHYLLIS WAKIAGA

A contracting manufacturing sector does not bode well for the economy and according to the latest economic survey 2015, this is what happened to the industrial sector last year. Growth in the sector was down by 2.2 per cent from 2014.

This growth was supported by animal feeds, tobacco products, pharmaceutical products, furniture, fabricated metals and other non metallic mineral products while the shutdown of the refinery took its toll on us.

For a long time now the country has been running on one engine only, that of domestic consumption. Our biggest export market is the EAC and total trade increased in 2014 which is an improvement. Our exports to the EAC in 2014 recovered somewhat from the drop that was witnessed in 2013 to a total 162,456,423 though not in equal measure to 2012 when we had exports totalling to 165,803,523.

A two-year moving average analysis of exports to EAC partner states shows that our exports to Burundi have consistently increased over a period of 5 years, while our exports to Tanzania, Rwanda and Uganda have been decreasing. We are increasingly importing from Uganda which is now our biggest import market in the region.

A positive blip in all this data is that the sector as a whole delivered on its promise to create more jobs. Formal employment increased by 2.9 per cent creating 8,000 new jobs, informal employment created 112,200 new jobs, compensation to employees was up by 11.2 per cent and our imports of industrial machinery increased pointing to increased CAPEX investments. It is also a sign that we are building more local capacity.

The EPZ also delivered on its promised and the values of apparel and textiles increased by 24.2 percent. Too bad the wage increase announced this year might take a swipe at this gain. Imports of iron and steel reduced from Sh80,749 million to Sh75,526 million due to the increased tariffs on finished products which are manufactured locally. The decrease shows that more local products were purchased rather than imported.

The economic picture painted by this information shows that the growth potential of the industrial sector is hampered by the constraints that we are constantly talking about such as expensive electricity, an unequal playing field in the EAC, competition from fake and substandard goods, a lack of proper market access for our products and poor uptake of locally manufactured goods. Industries still require markets for their products.

Kenya’s electricity tariffs which now stand at an average of US¢ 15/kWh for industrial consumers still remain high in this region in comparison to our neighbours. This has led to Kenya’s industrial sector remaining uncompetitive. An investor seeking cheaper energy cost is more likely to move their investment to neighbouring countries and sell manufactured goods to Kenya. There is therefore need to relook at the electricity tariff structure with the broader view of deliberately bring the prices down.

Electricity tariffs in Ethiopia, Egypt and Uganda currently stand at US¢ 4/kWh, US¢ 6/kWh and US¢ 12/kWh respectively while Tanzania had their tariff reviewed to US¢ 14/kWh. South Africa’s tariff is US¢ 9/kWh.

Granted the government has done a lot to work on the energy situation in the country in the past year. With a major component of the energy mix being from renewable sources, the cost of energy in Kenya has since dropped from US¢ 18.7/kWh to the current US¢ 15/KWh However, we must not rest on our laurels. Investors are comfortable with stable tariff regime where they can have steady forecasts for business revenues. Tariff prices should therefore be stable and predictable.

Specific sector issues which hamper our market access and erode our competitiveness should be tackled by the government. The import duty on paper and paperboard products which went up from 10 per cent to 25 percent in 2014 has been a big blow to the paper sector. The pharmaceutical sector still managed to perform well despite the VAT ACT 2013 which exempted pharmaceutical products so that the manufacturer is was unable to claim back input VAT in 2014. The exemption favours importers of medicines.

We need to leverage on old policies in addition to new policies that support more value addition in this country. The proper development of our manufacturing SMEs sector needs to be a key development factor and especially the development of our agro processing sector. A drive to grow SMEs through a procurement policy targeting women and the youth is a step in the right director but are these groups endowed with the proper skills to identify opportunities in the manufacturing sector?

Our quest for competitiveness is still encumbered by real challenges which we cannot sweep under the carpet. Let us work to ensure steady growth in the sector by supporting manufacturing.

(The writer is the CEO-designate of Kenya Association of Manufacturers and can be reached on [email protected])

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