Bad busi­ness cli­mate and cheap im­ports killing EA eco­nomic dream

The East African - - BUSINESS -

By NJIRAINI MUCHIRA

PLANS BY EAST African coun­tries to an­chor eco­nomic growth in the man­u­fac­tur­ing sec­tor are in­creas­ingly be­com­ing un­fea­si­ble as ex­ist­ing man­u­fac­tur­ers grap­ple with fi­nanc­ing chal­lenges and ris­ing com­pe­ti­tion from cheap im­ports.

Across the re­gion, gov­ern­ments have iden­ti­fied the man­u­fac­tur­ing sec­tor as the cog that will ac­cel­er­ate eco­nomic growth, cre­ate em­ploy­ment and al­le­vi­ate poverty.

In Kenya, man­u­fac­tur­ing is on the Ju­bilee ad­min­is­tra­tion’s top development agenda, form­ing one of the Big Four sec­tors that the gov­ern­ment has iden­ti­fied to drive growth. Man­u­fac­tur­ing is ex­pected to con­trib­ute 15 per cent of gross do­mes­tic prod­uct in 2015, up from 8.4 per cent cur­rently.

But the ris­ing cost of pro­duc­tion — par­tic­u­larly en­ergy and trans­port — com­pe­ti­tion from im­ports from China, de­clin­ing pur­chas­ing power, ris­ing labour costs, un­favourable poli­cies in­clud­ing tax hikes and coun­ter­feits have placed hur­dles in the development path of this sec­tor.

Re­cently, re­gional ce­ment maker ARM Ce­ment Ltd joined a grow­ing list of man­u­fac­tur­ers that have folded while oth­ers strug­gle to sur­vive. ARM was placed un­der re­ceiver­ship due to mas­sive debt, and its shares sus­pended from trad­ing at the Nairobi Se­cu­ri­ties Ex­change. ARM joined Unga Group, whose shares were tem­po­rar­ily sus­pended to fa­cil­i­tate takeover talks by US firm Seaboard.

Other listed man­u­fac­tur­ers like Bam­buri Ce­ment, East African Port­land Ce­ment Com­pany, Unga Group, Bri­tish Amer­i­can Tobacco and East Africa Brew­eries Ltd have ei­ther posted de­clin­ing prof­its or sunk into loss mak­ing.

“High and mul­ti­ple tax­a­tion, an un­pre­dictable and un­sta­ble pol­icy en­vi­ron­ment, the high costs of en­ergy, the scarcity of the nec­es­sary tech­ni­cal skills and the high cost of labour have ham­pered busi­ness growth and ex­pan­sion of in­dus­try,” said Phyl­lis Waki­aga, the chief ex­ec­u­tive of the Kenya As­so­ci­a­tion of Man­u­fac­turer.

The fact that the man­u­fac­tur­ing sec­tor, whose con­tri­bu­tion to GDP de­clined to 8.4 per cent in 2017 from 9.2 per cent in 2016, is in cri­sis is ev­i­dent in Cen­tral Bank of Kenya data that shows that the sec­tor is lead­ing in loan de­fault as up­take of new credit re­mains flat.

CBK sta­tis­tics for the first quar­ter of this year show that non-per­form­ing loans in the sec­tor in­creased to $455.3 mil­lion in March from $390.3 mil­lion in De­cem­ber 2017.

“The man­u­fac­tur­ing sec­tor reg­is­tered the high­est in­crease in NPLS due to a slow­down in busi­ness, which led to de­lay in loan re­pay­ments,” said the quar­terly eco­nomic re­view.

It is not only in Kenya where the sec­tor is in dis­tress. In Uganda, mount­ing chal­lenges have forced in­dus­tries to down­scale their op­er­a­tions,so much so that the sec­tor is op­er­at­ing at only 54 per cent of in­stalled ca­pac­ity, ac­cord­ing to the Uganda As­so­ci­a­tion of Man­u­fac­tur­ers.

In Tan­za­nia, notable chal­lenges such as ris­ing pro­duc­tion costs, lim­ited in­fra­struc­ture and high tax bur­dens have seen the sec­tor’s con­tri­bu­tion to GDP de­cline from 7.6 per cent in 2011 to 4.9 per cent last year.

“Re­cent years have been chal­leng­ing for do­mes­tic man­u­fac­tur­ers, as an in­creas­ing tax bur­den and a sag­ging macroe­co­nomic out­look have weighed on growth of the sec­tor in Tan­za­nia,” said a re­port by Ox­ford Busi­ness Group, a global re­search and con­sul­tancy firm.

No­tably, the re­gion does not have a strong man­u­fac­tur­ing sec­tor con­sid­er­ing that the food and bev­er­age in­dus­tries dom­i­nate, ac­count­ing for more than 40 per cent of to­tal out­put.

Other categories of man­u­fac­tur­ing in­clude tex­tiles and ap­par­els, chem­i­cals, fur­ni­ture, rub­ber and plas­tics, non-metal­lic min­er­als, fab­ri­cated met­als, ba­sic met­als and pa­per.

This state of af­fairs has been brought about by the fact that although East Africa is en­dowed with vast re­sources, the level of value ad­di­tion has re­mained de­press­ingly low de­spite grad­u­ally in­creas­ing from $2.5 bil­lion in 2010 to $6.5 bil­lion in 2016, ac­cord­ing to KAM.

The ba­sic struc­ture of the sec­tor has meant that about 80 per cent of the prod­ucts are con­sumed

Pic­ture: File

Ve­hi­cle as­sem­bly line in Mom­basa. The re­gion’s man­u­fac­tur­ing sec­tor is not ex­pand­ing fast to of­fer mil­lions of jobs.

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