A tough tax regime, high input prices and weak shilling are pushing out some firms to neighbouring nations.
A number of Kenyan manufacturers are making plans to shift their operations to neighbouring countries, pushed out by growing business costs as a result of high taxes and the impact of a falling shilling.
At least three bodies representing Kenya’s businesses in the private sector have raised concerns over the looming exit, warning that it will lead to job losses. They called on the government to go slow on taxes and levies, and other factors repelling investors.
Three manufacturers in the steel, cement and paper industries are reported to have relocated some of their critical operations that will see them produce from those countries and export final products to Kenya, as the new strategy that most businesses have put on the table for this year.
The Kenya Association of Manufacturers (KAM), says that even more companies have strategised to shift their core operations outside Kenya this year with plans to lay off staff or replace permanent workers with contract ones. The manufacturers, who employed more than 350,000 Kenyans by 2022, complain that more taxes and levies introduced by the government have made it tenable to operate from neighbouring countries and access the Kenyan market from out.
“Some manufacturers are also contemplating relocation as a strategic move for 2024. The possibility of moving operations to other countries, within the region, is being considered as a proactive measure to navigate potential hurdles and sustain business operations,” KAM said.
The association says government policies adopted last year, including an increase in fuel taxes and taxing of raw materials has dwindled business operations in the manufacturing sector, affecting productivity and employment. KAM chief executive Anthony Mwangi said among industries most affected by the policies are steel, cement and paper, which have been hit by the introduction of export and investment promotion levy. The levy, which was introduced in the Finance Act, 2023, taxes businesses importing clinker, steel and iron at the rate of 17.5 per cent, as those importing paper pay a 10 per cent tax.
“Most of the manufacturers in the affected industries are now opting to minimise operations here (in Kenya) and move core operations mainly production to neighbouring countries because even from out there they will still access the Kenyan market,” Mr Mwangi said.
While the association notes that the move will lead to job losses as the companies close operations in Kenya, it said it would continue to lobby for better terms.
Separately, the Kenya Private Sector Alliance (Kepsa) and Central Organisation of Trade Unions (Cotu) also raised the concerns, as they blamed taxation measures introduced since last year and the global economic developments for catalysing the exit of firms, as investors consider countries with lower, predictable regimes.
“The few investors in our manufacturing sector are already relocating because of the problems we are having. How are we going to employ our young men and women? Some investors are already relocating to Tanzania, Uganda and other neighbouring countries where they can be listened to. We must address that,” Cotu Secretary-General FRancis Atwoli pointed out this week.
The Cotu Secretary-General urged the government to consider tax waivers to attract and retain investors, with most of them exiting Kenya due to high cost of doing business. Kepsa told the Nation that fiscal policies have led to loss of Kenya’s competitiveness in the region, heightening the possibility of capital flight.
The body representing businesses in the private sector also noted that limitation of the band of businesses obligated to pay Turnover Tax from the upper limit of those earning Sh50 million to those making Sh25 million in a year, which left those earning above Sh25 million effectively obligated to pay corporation tax at the rate of 30 per cent, has also spurred the relocation of some firms.
“Kenya’s high cost of doing business and reduced competitiveness in the East Africa region creates the risk of capital flights to neighbouring countries, which is likely to adversely affect even the current jobs in the formal sector,” said Kepsa CEO, Carole Kariuki.
KAM said a survey it commissioned this month showed that only 20 per cent of manufacturers are optimistic that performance of their companies will improve this year, 40 per cent expect the situation to stay as it is and a further 40 per cent see the state of things to worsen.
“Additionally, due to the escalating labour costs, manufacturers are evaluating their workforce strategies for the upcoming year. The consideration of laying off permanent staff and employing temporary workers is being explored to manage costs and facilitate the recoupment of investments,” KAM said.
The association said the move would be for companies to “strike a balance between maintaining operational efficiency and addressing financial constraints associated with labour expenses.”
Latest Kenya National Bureau of Statistics data showed that the manufacturing sector grew by 2.7 percent in 2022, down from a 7.3 percent growth in 2021, affected by poor agricultural productivity.
