By Leonard Wanyama
For all the angst towards Tanzania, the real competition that Kenya faces comes from Ethiopia and Uganda. Addis Abba, in particular, has been working the advantages of its efficient centralised planning to offer government incentives that provide cheap electricity, land and favourable tax holidays to interested investors.
Most of the esteemed guests that Kenya has hosted through its economic diplomacy have also been chatting up its neighbour up North, and checking out its prospects from the corners of their eyes.
A case in point is Aliko Dangote whose hopes for the establishment of a cement plant in Kitui seem to have considerably slowed down while its Ethiopian operations are set to import cement into the Kenyan market.
This situation is such that Kenya’s Planning Principal Secretary Saitoti Torome was even quoted in The Star newspaper saying, “If not careful, [Kenya’s] market will be flooded with goods from Ethiopia….” during the launch of the Kenya Economic Report 2016 by the Kenya Institute for Public Policy Research and Analysis (KIPPRA).
Over the period of one year, from 2014-2015, the manufacturing sector’s contribution to GDP decreased slightly to 9.3 per cent from 10.4 per cent. This is on account of both internal and external issues.
Domestically, Kenya faces five main challenges. First, there has been a general decline in credit facilities to the sector. Secondly, the closure of the Kenya Petroleum Refinery in 2013 is having various adverse effects due to the importation of refined oil imports to conduct productive activities.
Thirdly, despite a drop in the cost of producing one unit of electricity to 14 cents per Kilowatt hour in 2014, it is still way higher than Ethiopia which produces one unit at 6 cents per Kilowatt hour, and China, which produces the same unit at 7 cents per Kilowatt hour.
Fourthly, the informal activities still provide a great deal of productive competition towards more established manufacturing. This is compounded by the fifth reason, which is problematic access to finance. Consequently, the many micro and small enterprises dominating the sector have difficulty in attaining transformational productivity.
Externally, Kenya has four main issues. First is growing competition from neighbouring countries. As they attain greater stability and development, countries such as Uganda are eating into the market share Kenya has dominated over the years with their contribution of their respective manufacturing sectors.
Secondly, the country’s products are facing very stiff competition from Chinese and Indian products that have made their way into the East African market.
A third reason is that the recent depreciation of the shilling has had wide repercussions for the manufacturing sector. In light of a context in which the country depends on importing close to 50 per cent of raw materials needed in the creation of its products, a loss in the shilling’s value has generally increased the cost of goods produced in the country.
Lastly, despite the cost of crude oil prices dipping worldwide on account of increased US production, such benefits could not transfer to reducing the cost of production due to the fact that the country imports refined oil products.
Contribution to growth
In terms of growth, Kenya’s manufacturing sector grew by Sh8.6 billion in real terms. However, this only accounted for 2 per cent of the Gross Domestic Product (GDP), which is considerably lower than the 5.5 per cent recorded over the year 2013-2014.
When compared to the Kenya Vision 2030 policy ambition of attaining a 10 per cent contribution to GDP, this is an extremely lacklustre performance. It also shows that Kenya is stagnating if one considers that the target for developing and emerging economies stands at 6.2 per cent. Ethiopia and Tanzania’s achievement of 10 per cent and 6 per cent respectively makes the situation look worse.
Creation of employment prospects is one of the major motivations of pursuing improvements within manufacturing. Within the new Sustainable Development Goals (SDGs), structural transformation would mean increasing the share of manufacturing in GDP by creating linkages that process agricultural products, thereby adding value to products.
This ultimately means it will result in the reduction of agricultural workers as a share of employment and changing demographics that will improve life expectancy due to more stable and profitable manufacturing jobs.
However, despite 8000 additional jobs in 2014-2015, the share in formal manufacturing jobs has been on the decline due to slow growth in the sector in comparison to other sectors particularly in the services industry.
Food, textile and apparel sub sectors expanded in the provision of employment opportunities, but it is in the textile and apparel segments that most jobs were created as recorded at 8.8 per cent – only 704 jobs. This is on account of positive ramifications of the African Growth and Opportunities Act (AGOA) that enabled an impressive growth of 22.6 per cent for textile exports to the US.