Economy
Manufacturers cut 6,800 jobs despite tax incentives
Tuesday February 28 2023
Workers make garments at Rivatex East Africa Limited in Eldoret. FILE PHOTO | NMG
Manufacturing firms in Kenya have failed to create decent jobs despite years of receiving incentives as part of a government agenda of increasing the sector’s contribution to economic output.
For more than five years, former President Uhuru Kenyatta’s administration slapped higher import duties on iron and steel, vegetable oils, paper and paper products, timber and furniture, textile and footwear, in what was aimed at helping the manufacturing sector generate over 800,000 decent jobs by end of 2022.
However, an analysis done by the Business Daily shows that since 2018, and despite the state protection, these sub-sectors have barely generated new jobs.
Instead, official data shows that the number of decent jobs created by the manufacturing sector between 2017 and 2021—just around the time when these protectionist policies were implemented—fell by 6,884.
Wage employment in the manufacturing sector dropped from 343,719 in 2017 to 336,835 two years ago, despite some of the players being shielded from the competition as part of the Jubilee administration’s objective of increasing the contribution of the sector to 15 percent of Kenya’s total output or gross domestic product (GDP) from nine per cent in 2017.
Read: How employers can cheer up staff with tax incentives
The number of wage employees engaged in the preparation and spinning of textile fibres, weaving of textiles, finishing of textiles and manufacturing of articles of paper and paperboard fell by 1,421, 452,229 and 353 respectively.
Regular workers engaged in the manufacture of iron and steel also fell by 21 while those manufacturing knitted and crocheted fabrics dropped by 28 in the review period.
However, beginning in the Financial Year 2018/19, the then Treasury Cabinet Secretary (CS) Henry Rotich increased import duty on finished iron and steel from the 25 percent levied by the other five East African Community (EAC) member states to 35 percent, noting that the industry was facing stiff competition from “imported subsidized iron and steel products.”
Mr Rotich, in his budget speech, noted that Kenya had sufficient capacity to produce some paper and paper products which require protection.
“To protect manufacturers of these products, I have increased the rate of import duty from 25 percent to 35 percent on some paper and paper board produced in the region,” said Rotich.
The Government had targeted Sh126 billion ($1 billion) in new investments in the iron and steel sector by end of last year.
Mr Rotich noted that the textile and footwear firms are closing down due to increased unfair competition from cheap imported textiles and footwear as well as second-hand clothes and shoes, which he slapped a specific rate of import duty of $5 per unit or 35 percent whichever is higher.
This, said the then CS, was to “encourage local production and create jobs for our youth in the sector.”
Imports of timber and furniture would also become expensive to consumers after the government introduced a specific rate of duty of $110 per tonne on particle board, $120 per tonne on medium-density fiberboard, $230 per M3 on plywood and $200 per tonne on block boards, or an advalorem duty of 35 percent whichever is higher.
Tobias Alando, the chief operating officer at the Kenya Association of Manufacturers (KAM) said that while the enhanced import duty was a good idea, other factors such as the high cost of electricity and labour, high taxation as well as market access also had to be addressed.
Mr Alando noted that the cost of electricity in Kenya, while always available, is expensive compared to its neighbouring countries such as Ethiopia and Uganda.
“High cost of electricity is one of the factors that impacted negatively to the growth of the manufacturing sector,” said Mr Alando.
An unpredictable policy that has seen the Government erratically introduce new measures, such as higher contributions of NSSF, has also negatively impacted the sector’s growth.
“We are also competing for markets with other countries. If you protect me by introducing higher tariffs but then I don’t have the market to sell my products, it does not help,” said Mr Alando.
Dr Samuel Nyandemo, an economics lecturer at the University of Nairobi, said that protecting industries does not necessarily lead to positive results, adding that lack of competition leads to inefficiency.
Additionally, the erosion of purchasing power also has affected the bottom line of these companies.
“Market demand for such products has also shrunk,” added Dr Nyandemo.
Most of these companies—especially those manufacturing textiles under the export processing zones (EPZ)—also benefited from various tax waivers, with the taxman losing billions in revenues on corporate income tax, value-added tax (VAT) and excise duty.
Nonetheless, consumers have continued to pay more for cheap imported clothes and shoes, cookers, gas cylinders, steel wool and stoves as the Government imposed high import duty on these products, which it insists the country had the potential to manufacture.
Read: How Kenya can use tax incentives to spur innovation
Sugar manufacturers, who still enjoy immunity from the sweetener imported from the COMESA region, are the most affected having shed 1,971 jobs from 15,891 five years ago, with an increasing number of millers being declared bankrupt.
This comes at a time when the Trade CS Moses Kuria has differed with the KAM over the decision by the State to allow duty-free importation of edible oil into the country.
Mr Kuria has alleged that some of the local manufacturers are instead importers of finished goods and that they do very little value addition.
In the Financial Year 2018/19, the then Treasury CS introduced various tax measures aimed at protecting a select sector that the government reckoned had huge potential.
The plan was to increase the contribution of the manufacturing sector to the GDP to 15 percent by 2022 by adding between $2 to $3 billion to the country’s total output.
