Bad business climate and cheap imports killing EA economic dream
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
Vehicle assembly line in Mombasa. The region’s manufacturing sector is not expanding fast to offer millions of jobs.