Why manufacturing sector faces low growth prospects

High tax regime, poorly designed regulations and their ineffective implementation have stifled innovation, growth, job creation and investments in the country, manufacturers say.

The situation has made it hard for the manufacturing sector to contribute 15 per cent of the gross domestic product by 2022, as per the Big Four agenda. 

However, Kenya Association of Manufacturers (KAM) observes that a few strides were made in 2019 compared to 2018, making this year slightly better than the previous one in a sector currently witnessing dwindling fortunes.

KAM states that President Uhuru Kenyatta’s assent to the Finance Act last month introduced favourable policy and taxation measures for revenue generation in the financial year 2019/20.

With it came tax and policy changes including reduction of the withholding VAT from 6 per cent to 2 per cent to reduce  arising refunds. 

Increased Railway Development Levy from 1.5 per cent to 2 per cent on all imported goods except raw materials and intermediate goods. 

Import Declaration Fees for raw materials and intermediate products imported by approved manufacturers was also reduced from 2 per cent to 1.5 per cent.

However, they also agree that regulations meant to create the right environment for people and businesses to thrive pulled back the bandwagon.

Regulatory agencies are critical in creating a conducive investment environment and also support implementation and enforcement of specific laws to which KAM said the economy is in dire need of a massive boost for enabling business environment which increases productivity, jobs and wages, and equal distribution of resources through growth and investments.

“Poorly designed regulation and ineffective implementation of regulation can stifle innovation, growth, job creation and investments,” said KAM.

In a media response, the private sector lobby told Business Hub, that despite being a key pillar in the Big Four agenda, the manufacturing sector remains plagued with numerous regulations and taxation concerns which still need to be sorted out.

Real challenge

“The cost and reliability of electricity and its provision presents a real challenge to the sector. Industry relies heavily on electricity for production. High power costs increase the cost of doing business,” it added.

This year though, the government committed to developing measures for reducing the cost of electricity to a single digit level, to spur the sector’s growth.

One such initiative is the energy rebate programme that portends a possible reduction in the government’s income tax from the industries.

Non-payment of bills, also stymied growth in the sector calling for prompt settlement, as a critical tool in business’ performance and operations since it ensures flow of cash and smooth operations within business entities.

“Delayed payments have continued to hurt the industry, especially small and medium enterprises (SMEs) due to financial lock-in,” said KAM chief executive officer Phyllis Wakiaga.

Preference of imported goods over local ones, she said, was another issue that  limited manufacturers’ access to local markets. Said she: “Local manufacturers are ‘crowded out’ hampering their access to domestic and regional markets.”

Wakiaga said since inadequate skills also hampers labour productivity, it is high time that the country developed and implemented industry-led skills policies that will ensure that human skills development connects effectively to labour market needs.