High energy costs, unpredictable taxes cut private sector efficiency

Unpredictable tax regimes, high energy costs, and a lack of tax policies have been cited as major issues that negatively impact Kenya’s trade and industry sectors.

Also, the introduction of multiple levies including the import and export levies have had a significant impact on the sector.

This emerged during a four-day consultative meeting between the Ministry of Trade and Industry and stakeholders from the private sector.

At the event, the private sector was lauded for its pivotal role in promoting the trade and industry sector.

Speaking at the event, Cabinet Secretary Salim Mvurya said high-cost power and unpredictable tax regimes are negatively impacting the manufacturing sector, whose contribution to the gross domestic product (GDP) has declined by about half, from 15 per cent to 7.6 per cent.

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“Costs and procedures for domestic trade remain burdensome, and export performance in manufacturing is struggling, and consumer protection and fair trade still show significant gaps across sectors,” he said.

Despite direct foreign and domestic investments increasing, the CS said there have been constraints in the investment climate, and the business environment with a keen focus on entry barriers.

Other constraints, he said include; “uncoordinated facilitation and cost of doing business in the country”.

According to the 2023 Foreign Investment Survey by the Kenya National Bureau of Statistics, the country’s direct foreign investment (FDI) increased from Sh1.07 trillion at the end of 2020 to Sh1.19 trillion at the end of 2022. 

This accounted for more than half of the stock of foreign liabilities across the period under review with the United Kingdom and the Netherlands being the leading sources of foreign direct investment. In the report, net inflows of foreign liabilities increased from Sh59 billion in 2020 to Sh229.9 billion in 2021 but declined to Sh57.1 billion in 2022.

In 2021, FDI inflows to inflows into transportation and storage sector increased five-fold - from Sh1.2 billion in 2020 to Sh6 billion in 2021.

On the contrary, FDI inflows to mining and quarrying, wholesale and retail trade, manufacturing, and finance and insurance activities declined by 87.3, 27.1, 14.0 and 22.5 per cent, respectively.

According to the survey, the decrease in FDI inflows was influenced by factors such as the global economic downturn worsened by the Covid-19 pandemic, which affected global investment patterns.

At the culmination of the meeting that intended to get information on issues affecting investments, trade and industry, it emerged that the ministry sought to attract, derisk and incentivise private investments.

“We also requested information on harmonisation of taxes within the manufacturing sector, to eliminate distortion and provide a stable taxation structure,” Mvurya said.

“We have issues to do with taxation, lack of tax policy certainty and stability. Also, we received issues to do with multiple levies, fees and charges by governments and multiplicity of charges and levies, and introduction of import and export levies as well as delays in VAT refunds.”

External trade

Principal Secretary for Industry Dr Juma Mukhwana said they are looking forward to responding to issues that emerged during the event, including investment, internal and external trade, manufacturing and industry, energy and taxation.

“We are looking to create a country that is manufacturing for Africa and for the world,” he noted. The PS noted available opportunities with Kenya’s ports and skilled workforce hence a lot of potential.

According to Dr Mukhwana, despite their being investment and trade opportunities, all available market access opportunities will not work if all the sectors are not in tandem. To ensure export opportunities are maximised, Mukhwana called for more investment in manufacturing. “Our manufacturing has been structured, not in a very friendly manner when compared to other countries,” he said.

“The way we have structured our industry, we cannot compete globally; when you have major factories doing everything and not providing opportunities for anybody else below it, you outcompete, pushing the small factories out, hence cannot create a globally competitive environment,” he said.

Kenya Association of Manufacturers’ acting chief executive Tobias Alando also raised concerns about the predictability of policies in the country and the tax regime.

Vice Chair of Trade and Industry at Kepsa Wamboi Mbarire called for the need to strengthen domestic trade.

“Part of our competitiveness is to look at our attitudes and structure our manufacturing to benefit everyone. You cannot have a manufacturing sector that is not equitable. We need a manufacturing sector that outsources, cutting down on costs and focus on the core business,” Mukhwana said.

He said that farmers are not getting the true value of their produce, impacting the manufacturing sector’s competitiveness, as production costs are high.

In the 2024 Economic Survey, credit advanced to enterprises in the manufacturing sector increased from Sh527.6 billion as at December 2022 to Sh637.5 billion as at December 2023.

In the review period, the total amount of manufacturing credit approved by industrial financial institutions also grew from Sh1.7 billion in 2022 to Sh1.9 billion in 2023.

The Export Processing Zones (EPZ) Programme recorded a growth in cumulative value of investments at 8.7 per cent to Sh146.4 billion in 2023 from Sh134.7 billion in 2022. The total value of sales decreased from Sh116.3 billion in 2022 to Sh111.4 billion in 2023, while local purchases increased by 6.6 per cent during the same period.

In 2023, there was a 13.1 per cent increase in the value of output from 3,168.6 billion in 2022 to 3,583.3 billion in 2023. The value added for the sector grew by 10.0 per cent in 2023 due to the increase in intermediate consumption from 2,124.4 billion in 2022 to 2,434.4 billion in the year under review.

With regards to big manufacturers not collaborating with small factories, CS Mvurya said that they have a subcontracting policy that will allow big manufacturers to work with medium-level businesses.

“We also have a window to derisk micro and small enterprises, where they can access funding for their businesses,” Salim Mvurya.

“SME development has become a priority, we initiated subcontracting between bigger companies and smaller companies,” Alando said subcontracting with SMEs has been happening however not in a bigger level.