Trade between East African member countries is up from 7 per cent in 2019 to 12 per cent in 2023. But who is benefiting from this regional market growth?
Clearly not Kenya, because it seems like every single day we are waking up to news of local and international companies shutting down operations and, or exiting the country.
Just this week, a report by Bloomberg reported that 60 per cent of companies in Kenya have halted their expansion plans due to unpredictable tax policies and that compared to neighboring countries, electricity in Kenya costs 70 per cent higher. What is happening to our manufacturing sector? And how will entrepreneurs like Cecilia survive?
The manufacturing sector’s contribution to GDP dropped from 11 per cent in 2011 to close to 8 per cent in 2022. This is inconsistent with the vision to move the sector towards a 20 per cent contribution to GDP by 2030. In real terms the closure of these companies has meant thousands of job losses in the market, an increase in imports — even on things such as toothpicks — and a loss of revenue for the government.
In previous columns, we followed Cecilia’s journey as a manufacturer as she explored the opportunity within a green industry (bamboo) to save and revive her own business. We have unpacked green industrialization as an avenue to spur economic growth in a more equitable and just way, with the opportunity to tackle both poverty and climate change.
Unpredictable regulations
But the question remains, if the market in the East African region is growing and barriers to trade have been reduced, why isn’t Kenya’s business environment thriving? We must also ask ourselves, what will it take to create and support an enabling environment for the sector to thrive? At first glance the picture is not clear, but analysing a few key elements brings the reality to light.
The first element of concern is government policies. Many manufacturers cite confusing and unpredictable regulations and licensing requirements in the sector as major reasons for slowing down or completely leaving the market. In one example a local entrepreneur struggled for seven years to obtain an operating license citing her refusal to take shortcuts. Despite fulfilling all the prescribed requirements, they paid the heavy price of severe delays to their business investment. With this level of inconvenience it is practically impossible to get excited about starting any business.
A second element that seems to frustrate companies trying to do business in Kenya is the operating environment and regulatory agencies. I was surprised to learn that there are a number of regulatory agencies with the authority to impose taxes, cess or permit fees at will! They literally have the mandate to arbitrarily shut down factories, and in some cases without a court order.
When factories are shut down this way, it leaves manufacturers facing deep financial losses and a feeling that they are under attack. Unpredictability is also introduced in manufacturing through a yearly Finance Act which often results in the increase of taxation or in the cost of production.
This would inevitably result in companies halting expansion plans as they await the government to announce the next budgeting cycles. After sometime, one can not blame companies for shutting operations and moving them to neighbouring states for example Rwanda, Tanzania and Burundi. This now seems like a regular occurrence.
A third important factor often pointed to by manufacturers for giving up on the Kenyan market is the cost of production. This is especially true for the cost of electricity. Kenya has one of the highest prices for electricity in Africa, standing at roughly 25 shillings per kilowatt-hour compared to Tanzania where electricity prices are roughly three times lower. Three times! It seems predictable therefore that just this week we heard that Tanzania has surpassed Kenya in the level of regional trade of goods and services.
So why is Kenya’s electricity so expensive you might ask? Well, a huge chunk of the cost of electricity is due to high taxes which end up making it uncompetitive for manufacturers compared to imports.
But here is the truth - If we are to succeed in the green industrialisation movement and benefit from the drive to localise manufacturing in Africa as part of addressing the climate crisis, Kenya will have to systematically evaluate our economic environment, incentive structures, the true ease of doing business, production costs and, most importantly, address corruption.
It’s appalling that manufacturers keep reporting of corrupt demands and practices, including active racketeering from local politicians who prioritise personal gain over community benefits.
If Cecilia finds herself trapped in this bureaucratic limbo, waiting endlessly for licenses or approvals, unsure about what taxes await her around the corner, or facing daily harassment over vague compliance issues, she would be forced to close her business or relocate.
This pervasive political influence significantly hampers the licensing process. It is this need for integrity, convenience, & innovation, and a clear commitment by our government to practice what it preaches that will ultimately allow Kenya to reclaim its leadership in regional trade.
Wanjira Mathai is the MD for Africa & Global Partnerships at the World Resources Institute and Chair of the Wangari Maathai Foundation.
