priority agenda 2021

From surviving COVID-19 to thriving: Manufacturing sector rebound for sustained job and investment growth

MANUFACTURING PRIORITY AGENDA 2021

Enhance market access

SME Development

Industrial sustainability and

resilience

1. Improving Regulatory Efficiency

2. Promote access to quality, affordable and reliable energy for manufacturing

3. Reduce transport and logistics costs

4. Sustain the fight against illicit trade

5. Address multiple county charges, fees and levies

6. Enhance cash flow for manufacturers

7. Lower the cost of imported industrial inputs

8. Incentivize prompt payment culture

9. Avail long term financing to Manufacturers

1. Enhance local market access2. Promote regional market access 3. Diversify international market access

1. Enhance market access for SMEs 2. Enhance governance 3. Enhance access to finance

1. Ensure predictable and stable industrial policies development through industry consultation

2. Ensure certainty and predictability of tax policies

3. Ensure national policy coherence for the manufacturing sector

1. Implementation of the manufacturing sector resilience and sustainability strategy

2. Ensure stable macroeconomic environment

3. Pro-industry skill development

4. Green Growth and sustainable development

5. Fight against corruption6. Fit-for-purpose public service7. Enhance digitalization in

manufacturing

Manufacturing Priority Agenda 2021, Pillars

Competitiveness and level playing field for

manufacturers in Kenya

01 03

02 04

05

Pro-industry policy and institutional

framework

iMANUFACTURING PRIORITY AGENDA (MPA) 2021

TABLE OF CONTENTS

MANUFACTURING PRIORITY AGENDA (MPA) 2021ii

List of figuresTable 1.1: Estimated growth rates of world manufacturing output in 2020 ..................................................... 1Table 1.2: Main achievements realized under 2021 MPA .................................................................................. 3Table 2.1: Kenyan exports to Africa (Ksh. Billion), 2015-2019 ............................................................................ 9Table 2.2: Kenyan imports from Africa (Ksh. Billion), 2015-2019 ....................................................................... 9Table 2.3: US-Kenya bilateral trade (value in 1,000 USD), 2017-2019 ............................................................. 10Table 2.4: Exports and Imports by broad economic category (% share), 2015-2019 ...................................... 11Table 2.5: Government revenue, 2015/16-2019/20 (Ksh. Billion) ................................................................... 12Table 2.6: Government expenditure, 2015/16-2019/20 (Ksh. Billion) ............................................................. 12Table 2.7: Distribution of domestic credit, 2015-2018 ..................................................................................... 14Table 2.8: Sectoral contribution of gross non-performing loans in December 2019 (Ksh. Million) ................ 15Table 3.1: Value of output, intermediate consumption and value added, 2015-2019 (Ksh. million) ............. 16Table 3.2: Wage employment and earnings in manufacturing sector, 2015-2019 ......................................... 17Table 3.3: Tax contribution of different economic sectors in Kenya ............................................................... 18Table 3.4: Credit advanced by commercial banks and industrial finance institutions (Ksh. million) ............... 18Table 3.5: Number of manufacturing projects approved by public financial institutions ............................... 19Table 3.6: Selected EPZ performance indicators, 2015-2019 .......................................................................... 19Table 3.7: Indicators of CIP ................................................................................................................................ 20Table 3.8: Industrial competitiveness scorecard for Kenya .............................................................................. 21Table 4.1: Time of use tariff-number of beneficiaries, savings, sales and demand ......................................... 24Table 4.2: A comparative analysis of SGR and road transport costs ............................................................... 25

List of Tables

Table 1.1: Estimated growth rates of world manufacturing output in 2020 ..................................................... 1Table 1.2: Main achievements realized under 2021 MPA .................................................................................. 3Table 2.1: Kenyan exports to Africa (Ksh. Billion), 2015-2019 ............................................................................ 9Table 2.2: Kenyan imports from Africa (Ksh. Billion), 2015-2019 ....................................................................... 9Table 2.3: US-Kenya bilateral trade (value in 1,000 USD), 2017-2019 ............................................................. 10Table 2.4: Exports and Imports by broad economic category (% share), 2015-2019 ...................................... 11Table 2.5: Government revenue, 2015/16-2019/20 (Ksh. Billion) ................................................................... 12Table 2.6: Government expenditure, 2015/16-2019/20 (Ksh. Billion) ............................................................. 12Table 2.7: Distribution of domestic credit, 2015-2018 ..................................................................................... 14Table 2.8: Sectoral contribution of gross non-performing loans in December 2019 (Ksh. Million) ................ 15Table 3.1: Value of output, intermediate consumption and value added, 2015-2019 (Ksh. million) ............. 16Table 3.2: Wage employment and earnings in manufacturing sector, 2015-2019 ......................................... 17Table 3.3: Tax contribution of different economic sectors in Kenya ............................................................... 18Table 3.4: Credit advanced by commercial banks and industrial finance institutions (Ksh. million) ............... 18Table 3.5: Number of manufacturing projects approved by public financial institutions ............................... 19Table 3.6: Selected EPZ performance indicators, 2015-2019 .......................................................................... 19Table 3.7: Indicators of CIP ................................................................................................................................ 20Table 3.8: Industrial competitiveness scorecard for Kenya .............................................................................. 21Table 4.1: Time of use tariff-number of beneficiaries, savings, sales and demand ......................................... 24Table 4.2: A comparative analysis of SGR and road transport costs ............................................................... 25

iiiMANUFACTURING PRIORITY AGENDA (MPA) 2021

ABBREVIATIONS

AfCFTA Africa Continental Free Trade Area

AGOA African Growth and Opportunity Act

AU African Union

BKBK Buy Kenya Build Kenya

CBK Central Bank of Kenya

CET Common External Tariff

COMESA Common Market for Eastern and Southern Africa

CIP Competitive Industrial Performance

CPI Consumer Price Index

FTA Free Trade Area

GDP Gross Domestic Product

GOEs Government Owned Entities

IMF International Monetary Fund

KNBS Kenya National Bureau of Statistics

KRA Kenya Revenue Authority

MPA Manufacturing Priority Agenda

MSE Micro and Small Enterprises

MSME Micro, Small and Medium Enterprises

MTP Medium Term Plan

MVA Manufacturing Value Added

NPLs Non-Performing Loans

NSE Nairobi Securities Exchange

NTB Non-Tariff Barriers

SGR Standard Gauge Railway

SSA Sub Saharan Africa

TVET Technical and Vocational Education Training

UN United Nations

UNIDO United Nations Industrial Development Organization

VAT Value Added Tax

MANUFACTURING PRIORITY AGENDA (MPA) 2021iv

In 2020, the word and the feeling of normal

was overturned and redefined. We lived through a remarkable period in history. A

period that forced us to put into perspectives our human interactions, our systems, and our resilience.

As a country, we had to review our priorities and vulnerabilities especially when it comes to our economic resilience and sustainability. We tittered at the edge, glimpsing, for a moment, what a complete economic spiraling would look like. The coming together of

all stakeholders to develop structures to stabilize has brought us this far. But we are not out of the woods yet.

For Kenya to recover from the effects of Coronavirus and to realize its desired socio-economic goals, we must act on the opportunities we unearthed, especially in the manufacturing sector – which was a cornerstone to Kenya’s recovery strategy.

Unfortunately, Kenya is deindustrializing as demonstrated by the ever-decreasing share of the manufacturing sector to the Gross Domestic Product. COVID-19 is likely to accelerate this trend further, particularly due to the collapse of existing businesses.

The introduction of policy measures to cushion citizens and the economy from the pandemic came at a critical time. Sadly, where incentives are provided alongside government policies that seek to increase taxes, such as minimum tax and reduction of investment allowance deductions, the outcome is a zero-sum game for both government and local industries. Not only does it discourage investments but also reduces government revenue as production shrinks and jobs decrease.

With the government’s rollback of COVID-19 tax incentives, 2021 will have tougher economic effect as disposable income, for both businesses and consumers, shrinks. There is a need for longer-timed stimulus programs to cushion citizens and businesses further.

FOREWORD

Deindustrialization negates our efforts to create jobs, accumulate wealth, and enhance the contribution of the manufacturing sector to GDP, in the short and long term. Therefore, our intent to grow our manufacturing sector is only attainable if the country reaffirms its commitment to build, create, add value and take pride in local industries.

Competitiveness and productivity are indispensable prerequisites to achieving this. Increased productivity ensures efficient utilization of resources available to the economy, such as labour, capital and business expertise, to produce goods and services.

This is critical, especially due to the enormous export market opportunity under the African Continental Free Trade Area, Kenya-USA Free Trade Area, Kenya-UK Free Trade Area and the European Union, under the Economic Partnership Agreements.

Policy stability and predictability are also fundamental necessities for businesses to thrive, by allowing long-term investment decisions. Policy shocks, especially during an economic crisis period deter recovery.

A stable macroeconomic environment will be pivotal for the recovery of the economy and the manufacturing sector. Persistent high fiscal deficit and increasing public debt level pose a risk to the stability of our economy. Furthermore, rising public debt stock leads to an increase in interest payments, constraints the fiscal space for development expenditure. Public finance management reforms are essential in prioritizing prudent management and use of public funds, to tame the rising stock of public debt.

Local industries have the potential and substantial capacity to serve our local and export markets if only the right environment is created.We remain committed to our Country’s growth and prosperity, and we will continue to work with the Government and other key partners to ensure that this is the focal point for all our policy advocacy endeavours.

I wish to thank all Members for their determination to Keep Kenya Moving and their continued support in realizing the potential of the sector towards economic sustainability.

Mucai KunyihaCHAIRMAN, KAM

With the government’s rollback

of COVID-19 tax incentives, 2021 will have tougher economic effect as

disposable income, for both businesses and consumers, shrinks.

vMANUFACTURING PRIORITY AGENDA (MPA) 2021

The manufacturing sector is the engine

of growth that drives an economy. There is consensus among

policymakers, academicians and researchers that hope rests in promoting industrial manufacturing for countries mired in poverty.

Kenya is already making efforts to industrialize, guided by aspirations set out in Vision 2030 among other development programs.

In 2020, the unprecedented health crisis and economic crisis due to the COVID-19 pandemic ravaged economies and businesses and destroyed livelihoods. A KAM, KPMG Survey revealed that COVID-19 severely impacted the manufacturing sector in Kenya. Nonetheless, manufacturers are optimistic that they will weather the storm created by the pandemic.

This optimism is reflected in this year’s Manufacturing Priority Agenda (MPA) themed, ‘From surviving COVID-19 to thriving: Manufacturing sector rebound for sustained job and investment growth’. It outlines proposals to support robust economic and manufacturing sector recovery, consistent with the government’s post-COVID-19 recovery strategy.

The Priority Agenda highlights the importance of a competitive local manufacturing sector. With the globalization of world economies, it is impossible to insulate production or demand from global competition and changes. As such, manufacturers in Kenya must battle it out with formidable competitors such as China, India, Egypt, and South Africa. Improving regulatory efficiency, promoting access

EXECUTIVE SUMMARY

to quality, affordable and reliable energy, reducing transport and logistics costs, and enhancing cash flow for manufacturers will drive our competitiveness.

The Agenda also outlines the need to enhance market access. Promoting the consumption of locally manufactured goods will forestall the overdependence of the Kenyan economy on imported goods. Additionally, diversifying our export markets will overcome limitations arising from small domestic markets.

Need for business certainty is also prominent in the Agenda. Of particular interest is the need to create a healthy manufacturing ecosystem through sound policy, regulatory and institutional framework to foster innovation, forward and backward linkages and dynamic economies of scale.

Small and Medium Enterprises (SMEs) development is also crucial. For SMEs to thrive, we must address access to markets, access to finance and governance challenges.

Industry’s resilience and sustainability are essential to our economic growth. We will continue to spearhead the advancement of a sustainable and inclusive sector through green growth and skills development. In this regard, the MPA is aligned to Sustainable Development Goals on Sustainable Cities and Communities, Responsible Consumption and Production, Affordable and Clean Energy and Quality Education, and the UN Global Compact Principles. We will also nurture nascent and emergent business opportunities uncovered by the COVID-19 pandemic. The Association is committed to achieving these goals, and we will work closely with both national and county governments and development partners towards the industrialization vision for Kenya.

Phyllis WakiagaKAM Chief Executive

With the globalization of

world economies, it is impossible to

insulate production or demand from

global competition and changes.

MANUFACTURING PRIORITY AGENDA (MPA) 2021vi

The development of the 2021 Manufacturing Priority Agenda has been made possible through participation of various departmental units within KAM. Acknowledgment is made to the KAM Board, led by the Chairman, Mr. Mucai Kunyiha for offering strategic direction for 2021 MPA and KAM Chief Executive Officer, Ms. Phyllis Wakiaga, for providing continued guidance in the preparation of the report.

Oversight of the development of the content for MPA 2021 was provided by the Policy, Research and Advocacy Unit Team headed by Job Wanjohi. Special thanks goes to KAM’s research team for taking lead in the content development.

The document benefited from contributions of various staff on the fourth chapter. Content on Pillar one- Competitiveness and level playing field for manufacturers in Kenya was written by Ruth Lemlem, Sylvester Makaka, Jackson Wambua, Samuel Mutisya and Dr. Simon Githuku. Pillar two- Enhancing market access was written by Manaseh Oiro. Pillar Three- Pro-industry policy and institutional framework was written by Dr. Simon Githuku and Samuel Mutisya. Pillar four- Government driven SME growth and development was written by Joseph Wairiuko. Pillar five- Industrial sustainability and resilience was written by Sharon Okwany, Catherine Mukoko and Miranda Pendo.

Sincere appreciation goes to Grace Mbogo, Faith Chebet and Sally Kahiu (Head of PR, Communications and Marketing) for reviewing and editing the report.

ACKNOWLEDGMENTS

1MANUFACTURING PRIORITY AGENDA (MPA) 2021

1. INTRODUCTION

1.1. Background information

The COVID-19 outbreak in the first quarter of 2020 resulted in economic slowdown across the globe as countries put in place measures to mitigate the spread of the virus. These measures restricted movement. Globally, industrial hubs bore the bigger brunt as disruption in supply chains and subdued consumer demand led to a decline in global manufacturing production.

The effect of the pandemic continues to be felt as other waves of COVID-19 infections surge in different parts of the world, forcing a resumption of tight containment measures, and increased economic uncertainty that further stifle the bounce back of the global economy.

a) Global contextGlobal manufacturing output has been on a decline since 2019. This is attributed to the uncertainty caused by Brexit and trade tension between the U.S and China (UNIDO, 2020). However, the global outbreak of COVID-19 exacerbated the drop in manufacturing output as several countries went into lockdown towards the end of the first quarter of 2020. Global manufacturing output dropped by 6%, 11.2%, and 1.1% in the first, second and third quarters of 2020, respectively, with industrialized economies registering the biggest drop.

The contraction in the first quarter of 2020 was recorded in all regions, save for Africa which registered an estimated 0.2% growth in output and East Asia whose output remained the same, as shown in Table 1.1. China experienced the biggest drop in manufacturing output in the first quarter of 2020, with a 14.1% decline in output. However, it was the only economy that registered a bounce back to positive growth in the subsequent quarters.

Africa’s biggest contraction in manufacturing output came in the second quarter of 2020 with a 12.4% drop in output but eased to a 4% contraction in the third quarter.

Table 1.1: Estimated growth rates of world manufacturing output in 2020

Share in world MVA (2015)

Q1 2020 Q2 2020 Q3 2020

World 100 -6.0 -11.2 -1.1Industrialized Economies 56.2 -2.5 -16.4 -5.9North America 19.3 -2.4 -16.5 -6.1Europe 22.3 -4.4 -19.3 -5.9East Asia 13.3 0.0 -12.9 -5.9China 27.6 -14.1 2.8 8.2Africa 1.7 0.2 -12.4 -4.0Asia & Pacific 7.6 -2.5 -23.7 -5.3Latin America 5 -2.8 -24.2 -4.0

Source: UNIDO World Manufacturing Production, Quarterly Reports 2020

MANUFACTURING PRIORITY AGENDA (MPA) 20212

b) Kenyan contextThe impact of the COVID-19 pandemic in Kenya was heavily felt in the second quarter of 2020 as the country instituted measures aimed at containing the spread of the virus. Output by the manufacturing sector contracted by 3.2 percent in 2020 Q3 and 3.9 percent in 2020 Q2 compared to a growth of 2.9 percent in 2020 Q1 (Figure 1.1). The contraction was witnessed in both manufacture of food and non-food products. Value added by the sector dropped to KSh. 183 billion in 2020 Q3 from KSh.191 billion in 2020 Q1.

Figure 1.1: Trends in quarterly manufacturing sector growth rate and value add

Source: KNBS, Quarterly GDP report, Third Quarter, 2020

The sector has been affected by the COVID-19 pandemic, with a May 2020 KAM-KPMG survey indicating that 53% of the surveyed manufacturers were operating below 50% production capacity during the COVID-19 period. 1 This is compared to only 8% of the respondents that were operating below 50% production capacity before the COVID-19 period.

The Manufacturing Priority Agenda (MPA) is developed by the Kenya Association of Manufacturer’s and launched early in the Year to guide the association’s advocacy agenda throughout the year. Most of the suggested actions should be achieved within a year while others can spill-over to another year(s). The suggestions outlined in the 2021 MPA seek to accelerate the recovery of the manufacturing sector in Kenya following the adverse effects of the COVID-19 pandemic.

1.2. An overview of 2020 Manufacturing Priority AgendaThe 2020 MPA was launched on 27th February 2020 under the theme” Establishing a competitive manufacturing-led economy for job and wealth creation”. It comprised of 25 Agendas and 76 action points. Out of the 25 agendas, four were fully achieved, 19 partly achieved while no progress was registered for the remaining 2 agendas. Table 1.2 provides details of the main achievements realized under 2020 MPA.

1 KAM-KPMG Survey (2020). The impact of Covid-19 on the manufacturing sector in Kenya. https://kam.co.ke/kam/wp-content/uploads/2020/05/KPMG-KAM-Survey-The-impact-of-Covid-19-on-the-manufacturing-sector-in-Kenya_FINAL_19May2020-1.pdf

https://kam.co.ke/kam/wp-content/uploads/2020/05/KPMG-KAM-Survey-The-impact-of-Covid-19-on-the-manufacturing-sector-in-Kenya_FINAL_19May2020-1.pdf

https://kam.co.ke/kam/wp-content/uploads/2020/05/KPMG-KAM-Survey-The-impact-of-Covid-19-on-the-manufacturing-sector-in-Kenya_FINAL_19May2020-1.pdf


Table 1.2: Main achievements realized under 2021 MPAOutcome

● Public Procurement and Asset Disposal Regulations, 2020 was published on 24th July 2020 providing for payments by Government at National and County levels within 60 days.

● The Movable Property Security Right Act 2017 and the Movable Property Security Rights (General) Regulations, 2017 are in force and the collateral registry is functional.

● The list was published, and Pre-Export Verification of Conformity (PVoC) was enriched to consider the criteria for agencies which were removed from the port following the Head of Public Service directive on 4th June 2019.

● The NTB Act, 2017 was passed and is in force. The Regulations have been finalized by the Technical EAC NTB Committee. The draft working procedures have been developed and reviewed to be submitted to the Trade and Customs Committee for consideration.

● The National Strategy on AfCFTA was developed.

● The Integrated National Export Development and Promotion Strategy has been developed and a Monitoring & Evaluation framework has been documented.

● Ksh. 3 bn allocated as seed capital for SME credit guarantee scheme.

● 57MW of thermal power plant has formerly been decommissioned on the grounds of lapsing of Power Purchase Agreement.

● KIPETO wind power plant 100MW has been commissioned and connected to the grid.

● The Kenya Plastic Action Plan has been successfully implemented. The Kenya Producer Extended Responsibility Organization (KEPRO) has been established to support members’ collective plastic waste management and increase recycling, creation of green jobs and promote the use of recycled raw materials.

1

2

3

4

5

6

7

8

Action

Fast track finalization of the Public Procurement and Asset Disposal Act Regulations to address payment issues and penalties on late payment by Government.

Fast track finalization of the Movable Property Security Right Act, 2017 that provides for creation of electronic collateral registry for use by Kenyan Banks.

Government to adopt and gazette list of locally manufactured goods for exclusive local sourcing.

Fast track the finalization of the Non-Tariff Barriers (NTB) Act, 2017 amendments and development of the regulations.

Develop a national strategy to guide the implementation of the AfCFTA.

Implement the 5 strategic objectives of the manufacturing chapter of the National Export Development and Promotion Strategy.

Implement a credit guarantee fund as proposed by the government in the 2019 budget.

Gradually reduce dependency on thermal production to renewable energy production.

Implement KAM’s Plastic Action Plan 2019.

9

Source: KAM, 2020


2. GLOBAL, REGIONAL AND KENYA’S ECONOMIC REVIEW

2.1 Global economic review

The global economic output is projected to have contracted by 3.5% in 2020 in comparison to a 2.8% growth in 2019 (IMF, 2021). The contraction of the global economy is attributed to the COVID-19 pandemic as countries went into lockdown to curb the transmission of the virus.

The services sector was worst hit by the mobility restrictions imposed by various countries, due to its contact-intensive nature. However, easing of the restrictions coupled with economic measures pursued by different governments helped boost economic activities from the third quarter of 2020.

The global economy is projected to recover in 2021 with a growth of 5.5%, with emerging and developing economies expected to post a 6% growth while growth in advanced economies is projected to be 4.3%. However, the forecasts rests on public health and economic factors that are inherently difficult to predict. Risks to economic recovery include public health response towards the pandemic especially for contact-intensive sectors; the extent of global spillovers from reduced consumer demand, weaker tourism, and lower remittances; financial market sentiment and its implications for global capital flows.

2.2 Regional economic review

Sub Saharan Africa’s (SSA) economy is projected to have contracted by 2.6% in 2020 compared to a growth of 3.2% in 2019 (IMF, 2021). Oil-exporting and resource intensive countries are projected to witness the sharpest contraction of their economies. The economic consequences of the COVID-19 pandemic triggered expansionary fiscal policy responses across all categories of economies in Africa. The expansionary fiscal policy widened fiscal deficits in the continent heightening the likelihood of a widespread sovereign debt crisis if debt is not properly managed.

SSA’s economy is forecasted to grow by 3.2% in 2021. Risks to the region’s economic recovery include continued spread of the coronavirus, subdued commodity prices; tight and volatile global financial conditions; and natural catastrophes—such as floods, other extreme weather events, and the desert locust swarm invasion in East Africa (AfDB, 2020).

2.3 Kenya’s economic review

a) GDP growthThe Kenyan economy is estimated to have contracted by 1% in 2020 compared to a 5.4% growth in 2019 (World Bank, 2020) as shown in Figure 2.1. The contraction came in as the economy took a hit from COVID-19. The pandemic resulted in reduced consumer demand both globally and locally, disruption of supply chains, job losses coupled with the COVID-19 prevention measures announced by the government, most economic activities in the service sector that demand manufactured goods such as the hospitality industry came to a near halt.


Economic output is forecasted to rebound in 2021, with real GDP increasing by 6.9 % on the assumption that there will be increased domestic and global demand following the easing of containment measures and increased international travel. The country is expected to experience normal weather that will support agricultural production and its strong linkage to industrial and services sectors.

Figure 2.1: Kenya’s GDP growth rate and projections, 2015-2021

Source: KNBS and World Bank, Kenya Economic Update, November 2020 Issue (e- denotes estimate figure, f- denotes forecasted figure)

In March 2020, the government initiated fiscal and monetary policies to mitigate economic impact of COVID-19 pandemic. Monetary policy measures included:

100%

10B 30 -25%30 -

25%13B10B 3- 1%

Allocating Ksh. 10 billion for VAT refunds or allow offsetting of withholding VAT.

Allocating Ksh. 13 billion for pending bills.

Allocating Ksh. 10 billion for the very vulnerable members of the society.

Tax relief for those earning up to Ksh. 24,000.

Reduction of PAYE rate from 30%-25%.

Corporate tax reduction from 30%-25%.

Turnover tax rate reduced from 3% to 1% for all MSMEs.

Increased expenditure on health.

8.25% to 7.25% and to 7.0%.

5.25% to 4.25%

Reduction of Central Bank Rate (CBR)

Reduction of cash reserve ratio (CRR) to release an additional Ksh. 35.2 billion into the market.

Announced flexibility to banks regarding loan classification and provisioning for loans.

Encouraged banks to extend flexibility to borrowers’ loan terms.

Fiscal measures included:

Tax relief measures introduced by the Government were contained in Tax Laws Amendment Act that was signed into law on 25th April 2020.


On 23rd May 2020, the President announced the 8-point economic stimulus programme valued at about Ksh. 53.7 billion, to further reduce economic fallout arising from the pandemic. Expenditure targeted hire of local labour, education, liquidity enhancement, health, agriculture, tourism sector, water, flood control and environmental protection and Buy Kenya Build Kenya through purchase of locally manufactured vehicles.

The 8-point stimulus is approximately 0.6% of GDP. Size of economic stimulus matter. A big stimulus program is required to stem a deep economic recession. After the 2008 global financial crisis, President Obama designed a $775 billion economic stimulus package to boost aggregate demand and quickly restore economic growth. However, “… there were widespread complaints that Obama’s stimulus did not deliver the needed punch quickly enough” (Taylor and Castillo, 2015, pp 10). Joseph Stiglitz while critiquing the Obama 2008 economic stimulus after the global economic crisis noted “The deeper and longer the downturn, the greater the spending… Faint measures would be foolhardy. A weaker economy will suffer lower tax revenues, more foreclosures, and more bankruptcies. Once a firm is bankrupt, you can’t unbankrupt it by providing a stronger stimulus later on”.2 A big fiscal stimulus programme is required to fill output gap (the difference between what an economy can produce and what it is able to sell) arising from plunging consumer spending and business investment.

b) Structure of the Kenyan economyKenya’s economy continues to be dominated by the services sector with a 49.7% contribution to GDP as shown in Figure 2.2. It is worth noting that the share of agricultural output in the economy has been increasing from 31.1% in 2015 to 34.8% in 2019 while the services sector’s has declined from 52.5% in 2015 to 49.7% in 2019. In the same period, the industrial sector contribution to GDP exhibits a declining trend, shrinking from approximately 16.4 % to 15.5%. The continued dominance of the tertiary (service) and primary (agricultural) sectors signals a slow pace of structural transformation towards an industrialized economy.

Figure 2.2: Sectoral contribution to GDP, 2015-20193

Source: Calculations based on KNBS, Statistical Abstract 2020

c) InflationConsumer Price Index (CPI) inflation remained within the envisioned single digit target of 5± 2.5% as shown in Figure 2.3. The annual inflation averaged at 5.16% in 2020 with February experiencing the highest level of price increase at 6.37%. This was attributed to an increase in food prices, alcoholic beverage prices, and increased cost of transportation due to increase in fuel pump prices (KNBS, 2020a). The lowest recorded inflation was 4.2% in September.

2 Joseph Stiglitz (2008). A $1 Trillion Answer. Available: https://www.nytimes.com/2008/11/30/opinion/30stiglitz.html.3 In this case, agricultural sector consists of agriculture, forestry, fishing, mining & quarrying while industrial sector comprises of

manufacturing, electricity, water, and construction subsectors.


Figure 2.3: Trend in CPI inflation, January-December 2020

Source: KNBS, Various issues of Consumer Price Indices Report

d) Interest rateIn the 12-month period running from November 2019 to October 2020, the Central Bank of Kenya (CBK) Monetary Policy Committee maintained an expansionary monetary policy stance, lowering the CBK rate from 8.5% to 7% as shown in Figure 2.4. This was part of the government’s efforts to cushion the economy from the adverse effects of the COVID-19 pandemic on the economy. The weighted average lending rate by commercial banks remained relatively stable at an average of 12.04% in the 12-month period.

Figure 2.4: CBK rate and average lending rate by commercial banks, Nov 2019-Oct 2020

Source: CBK, Monthly Economic Indicators October 2020

e) Exchange rateThe Kenyan Shilling depreciated against the major hard currencies in 2020 as shown in Figure 2.5. The shilling depreciated by 20% against the Euro trading from an average of 112.29 in January to 134.33 in December. Similarly, the Shilling depreciated by 12% against the UK Sterling Pound, closing at 148.42 in December compared to 132.15 in January. The Shilling traded at an average of 110.59 against the US dollar in December compared to 101.09 in January, marking a 9% depreciation. While the depreciation of the exchange rate will benefit exporters by making their goods cheaper, it is a major


cause of concern to manufacturers who rely on imported raw materials for processing. Depending on the currency of denomination, the stock of external debt increases by the same rate of exchange rate depreciation. It is therefore apparent that the exchange rate is crucial variable in determining stability of the macroeconomic environment.

Figure 2.5: Kenya Shilling exchange rate against major hard currencies, 2020

Source: Central Bank of Kenya

f) External tradeKenya’s merchandise trade deficit widened from Ksh.1,150.2 billion in 2018 to Ksh. 1,209.7 billion in 2019 (Figure 2.6) on the account of decreased value of domestic exports (KNBS, 2020b). The value of total exports declined by 2.9% from Ksh. 614.3 billion in 2018 to Ksh. 596.7 billion in 2019. On the other hand, the value of imports rose to Ksh.1,806.3 billion in 2019 from Ksh.1,764.5 billion in 2018. Consequently, the cover ratio, which is a ratio between the value of exports and imports, dropped to 33% in 2019 from 34.8% in 2018.

Figure 2.6: Balance of merchandise trade for Kenya, 2015-2019

Source: KNBS, Economic Survey 2020


Kenya’s total export earnings declined by 3% from KSh.614.3 billion in 2018 to KSh.596.7 billion in 2019 as shown in Table 2.1. However, the value of exports to Africa increased from Ksh. 217.6 billion to Ksh. 224.2 billion, over the same period, to account for 38% of total exports from Kenya.

Exports to the East African Community (EAC) were valued at Ksh.140 billion accounting for 62% of exports to Africa while exports to Common Market for Eastern and Southern Africa (COMESA) region rose to Ksh.164.2 billion representing 73% of total Kenyan exports in 2019.

Table 2.1: Kenyan exports to Africa (Ksh. Billion), 2015-2019

2015 2016 2017 2018 2019Total Exports 583.5 580.9 597.9 614.3 596.7Of which - Africa 244.6 237.5 227.6 217.6 224.2% of all exports 42% 41% 38% 35% 38%Of which (a) EAC 127.9 123.3 134 130 140EAC as a % of total exports to Africa 52% 52% 59% 60% 62% (b) COMESA 180.7 172.2 169.4 161.1 164.2COMESA as a % of total exports to Africa 74% 73% 74% 74% 73%


Value of imports to Kenya rose marginally by 2% from Ksh 1764.5 billion in 2018 to KSh 1806 billion in 2019 as shown in Table 2.2. Imports from EAC and COMESA regions represented 28.9 percent and 54.1 percent of total imports from Africa, respectively.

Table 2.2: Kenyan imports from Africa (Ksh. Billion), 2015-2019

2015 2016 2017 2018 2019Total imports 1581.3 1438.8 1736.5 1764.5 1806Of whichAfrica 151.8 145.9 211.4 210.2 234.2% of all imports 9.6% 10.1% 12.2% 11.9% 13%Of whicha) EAC 42.5 38.2 70.7 71.9 67.7EAC as a % of total imports from Africa 28.0% 26.2% 33.4% 34.2% 28.9%b) COMESA 69.4 74.7 125.1 119.5 126.7COMESA as a % of total imports from Africa 45.7% 51.2% 59.2% 56.9% 54.1%


Kenya’s trade balance with the US has been positive for the last three years in favour of Kenya. The total value of Kenyan exports to the US rose from $ 644.8 million in 2018 to $ 667 million in 2019 as shown in Table 2.3. On the other hand, manufactured imports from the US rose from $331.6 million to $375.4 million over the same period.


Table 2.3: US-Kenya bilateral trade (value in 1,000 USD), 2017-2019

Product category Exports Imports2017 2018 2019 2017 2018 2019

Agricultural products 160,779 145,139 115,334 71,647 34,808 51,738Forest products 967 1,036 668 17,702 18,180 23,086Chemicals and related products 5,136 12,391 13,940 45,115 62,926 90,873Energy related products _ _ 14 159 404 13,603Textiles and Apparel 339,134 392,006 454,258 11,808 12,838 10,401Footwear 107 127 251 561 567 357Minerals and Metals 31,797 4259 55,455 9747 8,969 9,595Machinery 285 694 826 43041 19,802 24,817Transportation equipment 539 1,312 393 163,840 115,097 74,161Electronic products 1,056 23,254 655 33,749 36,670 38,226Miscellaneous manufactures 7,605 7,524 10,266 3,095 4,991 9,824Special provisions 24,706 57,102 14,979 27,877 16,312 28,754All sectors 572,111 644,842 667,040 428,341 331,564 37,5435

Source: U.S. Department of Commerce

Slightly more than 75% of Kenya’s exports were destined to 16 countries in 2019 as shown in Figure 2.7. Uganda was the top market destination accounting for 10.7% of Kenya’s total exports. This was followed by U.S.A, Netherlands, and Pakistan, with exports to these countries accounting for 8.7%, 8.1% and 7.6% of total Kenyan exports, respectively.

Figure 2.7: Leading export market destinations for Kenyan products, 2019

Source: ITC trade map


g) Composition of Kenyan exports and imports Food and Beverages constituted the largest share of Kenyan exports accounting for 44.2% value of exports in 2019 as shown in Table 2.4. This was followed by consumer goods and non-food industrial supplies at 27.49% and 23.94%, respectively. The continued dominance of Food and Beverage exports was attributed to increased value of primary and processed Food and Beverage exports for both industry and household consumption (KNBS, 2020b).

Capital goods constituted a large share of Kenyan imports with industrial supplies, machinery and transport equipment accounting for 33.4%, 17.97%, and 10.55% of Kenya’s 2019 imports, respectively. The Fuel and Lubricants import bill represented 18.5% of Kenya’s total imports.

Table 2.4: Exports and Imports by broad economic category (% share), 2015-2019

2015 2016 2017 2018 2019 2015 2016 2017 2018 2019Exports Imports

Food & Beverage

44.58 45.09 47.95 47.66 44.22 7.94 8.28 14.4 9.98 10.34

Industrial Supplies (Non-Food)

25.87 24.52 23.68 23.52 23.94 33.18 36.07 31.76 34.58 33.44

Fuel and lubricants

1.43 1.03 1.03 0.99 1.19 15.07 14.56 16.28 19.19 18.5

Machinery and other capital Equipment

1.91 2.61 1.34 1.25 1.93 18.18 21.69 17.9 16.47 17.97

Transport Equipment

1.42 1.15 0.84 1.12 1.22 16.88 10.25 11.37 10.72 10.55

Consumer Goods not elsewhere specified

24.78 25.58 25.15 25.45 27.49 7.98 8.86 8 8.43 8.66

Goods not elsewhere specified

0.01 0.02 0 0 0 0.76 0.3 0.3 0.64 0.54


h) Kenya’s public finance

• Government revenueTotal government revenue rose by 2% from Ksh.1.7 trillion in 2018/19 to Ksh.1.73 trillion in 2019/20 as shown in Table 2.5. However, ordinary revenue to GDP ratio declined from 16.1% in 2018/19 to 15.4% in 2019/20, against a target projection of 15.8% (GoK, 2020). The decline in ordinary revenue is attributed to the effect of the COVID-19 pandemic.


Table 2.5: Government revenue, 2015/16-2019/20 (Ksh. Billion)

2015/16 2016/17 2017/18 2018/19 2019/201. Ordinary Revenue 1,152,972 1,306,568 1,365,063 1,499,757 1,573,4182. Appropriation-in-Aid 79,671 115,963 157,356 201,915 160,213Total revenue (1+2) 1,232,644 1,422,531 1,522,419 1,701,672 1,733,631External Grants 29,597 26,962 26,484 19,702 19,820Total revenue and External grants

1,262,240 1,449,493 1,548,903 1,721,373 1,753,451

Ordinary Revenue (% of GDP) 17.2 17.1 16 16.1 15.4Total revenue & external grants (% of GDP)

18.8 18.9 18.2 18.5 17.2

Source: National Treasury, Various issues of Budget review & Outlook Paper

• Government expenditureTotal government expenditure rose by 5% from Ksh.2.43 trillion in 2018/19 to Ksh. 2.56 trillion in 2019/20 as shown in Table 2.6. Recurrent expenditure accounted for 62% of total expenditure with operation and maintenance constituting the biggest share of recurrent expenditure at 39%. Wages and salaries, and interest payment made up 28% and 27% of the recurrent expenditure, respectively. Development expenditure rose from Ksh. 534.9 billion in 2018/19 to Ksh. 594.9 billion in 2019/20, constituting 23% of total government expenditure which is below the Public Finance Management (PFM) Act allocation requirement of 30%. Transfers to county governments declined to Ksh.325.3 billion in 2018/19 from Ksh.360.7 billion in 2018/19, constituting 13% of total government expenditure. Table 2.6: Government expenditure, 2015/16-2019/20 (Ksh. Billion)

2015/16 2016/17 2017/18 2018/19 2019/20Total Expenditure 1,781,945 2,109,976 2,146,651 2,433,707 2,565,444Of which1) recurrent expenditure 1,027,543 1,165,037 1,349,704 1,489,844 1,603,128as % of total expenditure 58% 55% 63% 62% 62%

· Wages & salaries as % of total recurrent expenditure

30% 29% 29% 28% 28%

· Interest payment as % of total recurrent expenditure

21% 23% 24% 25% 27%

· Pensions as % of total recurrent expenditure

5% 5% 5% 5% 6%

· Operation & Maintenance as % of total recurrent expenditure

44% 42% 40% 39% 39%

2) Development expenditure and net lending

478,964 639,923 469,673 534,922 594,944

as % of total expenditure 27% 30% 22% 23% 23%3) Transfer to County

Governments264,039 305,016 327,274 360,740 325,278

as % of total expenditure 15% 14% 15% 15% 13%Source: National Treasury, Various issues of Budget review & Outlook Paper


• Fiscal deficitKenya’s fiscal deficit widened to 8.2% of GDP as shown in Figure 2.8 from Ksh. 734.8 billion in 2018/19 to Ksh. 831.8 billion in 2019/20. Consequently, total net debt financing increased from Ksh. 721 billion in 2018/19 to Ksh. 791.2 billion in 2019/20. The fiscal deficit was plugged with Ksh.450.4 billion of domestic financing and Ksh. 340.8 billion of net foreign financing.

Fiscal consolidation efforts were hampered by revenue shortfalls due to the COVID-19 pandemic (GoK, 2020). However, the 2019/20 fiscal deficit was lower than the projected deficit of 9.3% of GDP on account of low budget absorption by the national government.

Figure 2.8: Kenya’s fiscal deficit and net lending, 2015/16-2019/20

Source: National Treasury, various issues of Budget Review & Outlook Paper

• Stock of public debtKenya’s stock of public debt rose from Ksh.5.8 trillion in 2018/19 to Ksh.6.69 trillion in 2019/20. In turn, the public debt to GDP ratio rose to 65.5% as shown in Figure 2.9. External debt constitutes a large proportion of the debt stock. In 2019/20, external debt stood at KSh. 3.52 trillion while domestic debt stock was KSh. 3.18 trillion, each accounting for 52.5% and 47.5% of the total public debt, respectively.

Figure 2.9: Stock of public debt in Kenya, 2015/16-2019/20

Source: National Treasury, Various issues of Annual Debt Management Reports


i) Distribution of domestic creditThe amount of credit advanced by the banking system rose from Ksh. 3.38 trillion in 2018 to Ksh. 3.6 trillion in 2019 as shown in Table 2.7. Credit advanced to the private sector accounted for 74% of the total domestic credit while credit to the central government and other public sector accounted for 26% and 3% of total domestic credit, respectively.

Table 2.7: Distribution of domestic credit, 2015-2018

2015 2016 2017 2018 2019Domestic credit (Ksh. Million) 2,817,470 3,003,646 3,232,565 3,381,067 3,628,093Central Government 19% 20% 23% 25% 26%Other Public Sector 3% 3% 3% 3% 3%Private Sector 79% 78% 75% 74% 74%

Source: CBK

Credit advanced to the private sector rose in the 12 months to October from Ksh. 2.6 trillion in November 2019 to Ksh. 2.78 trillion in October 2020 as shown in Figure 2.10.

Figure 2.10: Trend in credit to the private sector, November 2019-October 2020

Source: CBK, Monthly Economic Indicator, October 2020

j) Non-performing loansGross non-performing loans (NPLs) were Ksh. 335.9 billion, representing 12.48% of the gross loan advanced by end of December 2019 as shown in Table 2.8. Trade, personal/household, and manufacturing sectors accounted for the highest proportion of gross non-performing loans at 26.33%, 16.95%, and 16.04%, respectively. There is a likelihood that NPLs increased in 2020 due to the effects of COVID-19 pandemic.


Table 2.8: Sectoral contribution of gross non-performing loans in December 2019 (Ksh. Million)

Economic Sector Gross Loans Gross NPLs Gross NPLs % of Gross Loans

Personal/Household 745,047.97 56,953.91 16.95%Trade 512,314.00 88,453.23 26.33%Real Estate 396,349.63 48,065.11 14.31%Manufacturing 352,189.88 53,893.69 16.04%Transport & Communication 186,390.34 19,233.62 5.73%Energy & Water 108,973.10 24,386.30 7.26%Building & Construction 102,381.27 6,819.33 2.03%Agriculture 100,532.78 11,013.39 3.28%Financial Services 89,579.05 16,841.32 5.01%Tourism, Restaurant & Hotels 77,695.78 8,281.55 2.47%Mining & Quarrying 19,455.74 1,987.76 0.59%Total 2,690,910 335,929 12.48%

Source: CBK, Bank Supervision Annual Report 2019

k) Performance of the Nairobi Securities ExchangeIn the 12 months to October 2020, the Nairobi Securities Exchange (NSE) market recorded declining performance with both the market capitalization and equities turnover exhibiting a general declining trend as shown in Figure 2.11. Equities turnover declined from Ksh.17 billion in November 2019 to Ksh.5.9 billion in October 2020. The market shed Ksh.260 billion in the same period, with the NSE market capitalization dropping to Ksh.2.15 trillion from Ksh.2.41 trillion. The performance of the NSE is a good indicator of the general economic performance; both move in the same direction.

Figure 2.11: Equity market performance, November 2019- October 2020

Source: CBK, Monthly Economic Indicator October 2020


3. AN OVERVIEW OF MANUFACTURING SECTOR IN KENYA

a) Contribution to GDP The Manufacturing sector’s contribution to GDP reduced to 7.5% in 2019 from 7.8% in 2018 as shown in Figure 3.1. This is an indication that Kenya is deindustrializing instead of industrializing. However, the value added in the manufacturing sector increased from KSh. 690.6 billion to Ksh. 734.6 billion over the same period. The increase in value addition was on account of increased volume of output in manufacture of transport equipment; chemical and chemical products and pharmaceuticals (KNBS, 2020b). The continued decline of the sector’s contribution to the GDP paints a worrying picture on attainment of policy target of 15% contribution to the GDP by 2022, as envisioned by the Big Four Agenda.

Figure 3.1: Value added in the manufacturing sector and contribution to GDP, 2015-2019


Value of output and intermediate consumption by the manufacturing sector grew by 7% in both cases in 2019 while value added increased by 6% as shown in Table 3.1. Output increased from Ksh. 2.4 trillion in 2018 to Ksh. 2.56 trillion in 2019 while the value of intermediate consumption increased from Ksh. 1.7 trillion to Ksh. 1.8 trillion.

Table 3.1: Value of output, intermediate consumption and value added, 2015-2019 (Ksh. million)

2015 2016 2017 2018 2019 % change (2018-2019)

Value of output 1,977,169 2,131,907 2,255,687 2,409,981 2,568,758 7Intermediate consumption

1,388,274 1,477,450 1,596,546 1,719,388 1,834,149 7

Value added 588,896 654,456 659,141 690,592 734,609 6Source: KNBS, Economic Survey, 2020


b) Contribution to exportsExport value of Kenyan manufactured goods rose from Ksh. 155.1 billion in 2018 to Ksh. 159.8 billion in 2019 as shown in Figure 3.2. On the same breadth, share of manufactured exports as a share of total Kenyan exports increased from 29% in 2018 to 31% in 2019.

Figure 3.2: Manufactured products exports for Kenya, 2014-2019

Source: KNBS, Statistical Abstract 2020

c) Contribution to employmentThe private manufacturing sector created 7,700 new jobs in 2019 to register a 2.4% increase in wage employment from 321,300 in 2018 to 329,000 in 2019 as shown in Table 3.2. On the other hand, public sector wage employment in manufacturing declined by 8.5% from 26,600 in 2018 to 24,300 in 2019. The number of employees engaged in manufacturing in the informal sector grew by 6% from 2.88 million in 2018 to 3 million in 2019.

The private manufacturing sector recorded a higher growth in formal wage earnings of 13% compared to a 0.2% growth in the public manufacturing sector. Total formal wage earnings in 2019 were KSh. 174 billion and KSh. 24 billion in private and public manufacturing sectors, respectively. The annual wage per worker remained high in the public sector at KSh. 1,001,369 compared to KSh. 529,968 in the private sector.

Table 3.2: Wage employment and earnings in manufacturing sector, 2015-2019

Sector 2015 2016 2017 2018 2019 % change 2018-2019

Formal wage employment ‘000

Private 309.5 315 317.4 321.3 329 2.4%Public 26.5 26.5 26.4 26.6 24.3 -8.5%

Formal wage earnings employment (Ksh. Million)

Private 114,806.7 124,454.7 139,106.8 154,247 174,362.8 13%Public 22,331.9 23,339.5 23,317.8 24,298.8 24,355.3 0.2%

Formal average annual wage per person (Ksh.)

Private 370,925.6 395,058 438,217.8 480,109 529,968.4 10%Public 843573.8 881901.1 881,745.9 913,901.8 1,001,369.4 10%

Informal employment ‘000

2,438.8 2,596.2 2,728.9 2,878.8 3,044.9 6%



d) Contribution to taxes During the 2019/20 Financial Year (FY), the agricultural sector accounted for about 35.4% of GDP and 2.3% of tax revenue. Wholesale and retail trade accounted for 7.5% of GDP in the FY 2019/2020 and about 5.9% of tax revenues. The manufacturing sector contributed 7.2% of GDP and 17.5% of tax revenues in the FY 2019/20. This demonstrates a more than proportionate contribution of the manufacturing sector to taxes, relative to its GDP ratio. An implication of this is that growth and performance of the manufacturing sector is instrumental in raising tax revenues for government. This will reduce the growing fiscal deficit, reduce the stock of public debt and reduce domestic borrowing which will reduce crowding-out of the private sector in the domestic credit market.

Table 3.3: Tax contribution of different economic sectors in Kenya

Economic Sector Revenue Ksh. million Revenue contribution GDP contribution2017/18 2018/19 2019/20 2017/18 2018/19 2019/20 2017/18 2018/19 2019/20

Agriculture 19,943 23,445 20,478 2.4% 2.6% 2.3% 34.4% 34.6% 35.4%

Manufacturing 154,768 164,832 158,313 18.5% 18.3% 17.5% 8.0% 7.5% 7.2%Wholesale & Retail Trade

50,616 61,293 53,581 6.0% 6.8% 5.9% 7.4% 7.5% 7.5%

Source: Draft 2020 Budget Review and Outlook Paper

e) Credit to the manufacturing sector A total of Ksh. 366.9 billion credit was advanced to manufacturing ventures in 2019 compared to Ksh. 335.7 billion in 2018 as shown in Table 3.4. Commercial banks accounted for 99.5% of loans advanced to manufacturing projects at Ksh. 365.3 billion. In comparison, industrial finance institution advanced Ksh. 1.66 billion in 2019, representing 0.4% of total credit to manufacturing entities.

Table 3.4: Credit advanced by commercial banks and industrial finance institutions (Ksh. million)

Institution 2015 2016 2017 2018 2019Industrial Development Bank Capital Ltd

252 129.8 200.1 551.8 330

Development Bank of Kenya 341 292.3 130.5 230 94Kenya Industrial Estates Ltd 120.8 165.3 181 243.7 602.7Industrial and Commercial Development Corporation

421.2 495.6 791 315 640

Sub Total 1135 1083 1302.6 1340.5 1666.7All other commercial banks 289727.8 274725.4 314045.5 334388 365257.4TOTAL 290862.8 275808.3 315348.1 335728.5 366924.1% of credit advanced by industrial financial institutions

0.39% 0.39% 0.41% 0.40% 0.45%

% of credit advanced by commercial banks

99.61% 99.61% 99.59% 99.60% 99.55%


Manufacturing projects that were approved for funding by industrial finance institutions rose to 395 in 2019 from 240 in 2018 as shown in Table 3.5. The increase in approved projects is attributed to a rise in the number of projects financed by Kenya Industrial Estates.


Table 3.5: Number of manufacturing projects approved by public financial institutions

Institution 2015 2016 2017 2018 2019Industrial Development Bank Capital Ltd 5 3 3 8 8Development Bank of Kenya 6 6 3 3 1Kenya Industrial Estates Ltd 233 325 280 225 380Industrial and Commercial Development Corporation

7 4 7 4 6

TOTAL 251 338 293 240 395Source: KNBS, Economic Survey 2020

f) Performance of the Export Processing ZoneThe number of operating enterprises in Export Processing Zone (EPZ) increased by one to 137 in 2019 as shown in Table 3.6. EPZ activities increased with both capital investment and employment figures registering a positive growth. Cumulative capital investment in the EPZ increased slightly by 1.3% to KSh 106.4 billion in 2019 from KSh. 105 billion in 2018. The number of employees engaged in EPZ companies rose to 57,581 in 2018 from 55,486 in 2017. However, the value of exports declined by 5% to KSh. 68.5 billion in 2019 from KSh. 72.4 billion in 2018. On the other hand, imports by EPZ enterprises rose to KSh. 39.6 billion in 2019.

Table 3.6: Selected EPZ performance indicators, 2015-2019

2015 2016 2017 2018 2019

Number of Enterprises 89 111 131 136 137Number of Employees 50,899 53,565 55,486 57,743 61,048Capital Investment (Ksh. Million)

48,128 88,977 95,278 105,066 106,433

Imports (Ksh. Million) 31,370 30,160 30,305 34,229 39,638Exports (Ksh. Million) 60,879 64,151 60,729 72,390 68,502


g) Competitive Industrial Performance IndexAt the heart of manufacturing sector’s performance is its competitiveness. The latest Competitive Industrial Performance (CIP) Index data from United Nations Industrial Development Organization (UNIDO) ranks Kenya’s manufacturing sector’s competitiveness at position 115 out of 152 countries in global manufacturing as shown in Figure 3.3. Kenya’s CIP index has been on a slight downward trend dropping from 0.0129 in 2010 to 0.0088 in 2018.


Figure 3.3: CIP index and rank for Kenya, 2010-2018

Source: UNIDO, CIP 2020

The CIP Index benchmarks the ability of countries to produce and export manufactured goods competitively, based on a set of indicators which measure the structure, productive capacity and impact of an economy’s manufacturing sector in global manufacturing, and intensity of industrialization. Indicators of CIP that capture structural change; capacity to produce and export; impact on world production and trade, and technology deepening are indicated in Table 3.7.

Table 3.7: Indicators of CIP

Dimension IndicatorsStructural change · Manufacturing Value Added (MVA) as a share of GDP.

· Manufactured exports as a share of total exports.Capacity to produce and export · MVA per capita.

· Manufactured exports per capita.Impact on world production and trade

· Share in world MVA.· Share of manufactured exports in world manufactured

exports.Technological deepening and upgrading

· Industrialization Intensity Index.· Index Industrial Export Quality Index.

Source: UNIDO

From the industrial competitiveness scorecard presented in Table 3.8, both industrial sector contribution to GDP and manufactured exports as a share of total exports have witnessed an increasing trend. Industrial sector’s contribution to the GDP increased from 14.4% in 2017 to 15.3% in 2018 while manufactured exports as a share of total exports rose from 42.4% to 42.9% in the same period under review. Manufacturing capacity to produce has increased, as reflected in the rise of MVA per capita, from 123 in 2017 to 125 US dollars in 2018. Similarly, the capacity to export manufactured goods has risen from 42 to 44 US dollars over the same period of time. The impact of Kenya’s industrial sector in the global industrial sector has been on a decline, as reflected in the drop of both global share to world MVA and manufactured exports. Kenya’s share of world MVA dropped from 0.168 in 2017 to 0.164 in 2018. Similarly, Kenya’s share in world manufacturing export dropped from 0.096 in 2017 to 0.093 over the same period of time. Industrialization intensity index has been on a declining trend, dropping from 0.215 in 2016 to 0.191 in 2018. However, industrial export quality index rose from 0.316 to 0.333 over the same period.


Table 3.8: Industrial competitiveness scorecard for Kenya

Scorecard: Kenya’s manufacturing sectorIndustry Indicators (MVA) Trade Indicators (Exports)

2016 2017 2018 2016-2018 2016 2017 2018 2016-2018Structure (%) 17.9 14.4 15.3 42.4 42.4 42.9

Capacity (constant 2015 US $)

126 123 125 42 42 44

Impact (%) 0.178 0.168 0.164 0.096 0.098 0.093

Technology deepening

0.215 0.192 0.191 0.316 0.322 0.333

Source: UNIDO, CIP 2020


4. PILLARS TO SUPPORT MANUFACTURING SECTOR’S REBOUND FOR SUSTAINED JOB AND INVESTMENT GROWTH

Pillar One: Competitiveness and level playing field for manufacturers in Kenya

Globalization of the world economy challenges manufacturers in developing countries, Kenya included, to be competitive both locally and internationally. With globalization, it is not possible to insulate production or demand from global competition and changes (Bernal, 2000). Manufacturers in Kenya have to battle it out with formidable competitors such as China and India; and Egypt and South Africa on the African continent. For local manufacturers facing intense competition from international markets, the government needs to devise supportive policies to drive the sector’s growth. Figure 4.1 shows factors that undermine in-bound, value-add and outbound competitiveness of the manufacturing sector in Kenya.

Figure 4.1: In-bound, value-add and outbound factors that hinder competitiveness of manufacturing sector in Kenya

Cost Disadvantage

12.80%

InboundCompetitivenessIDF on industrial inputs 1.5%RDL on industrial inputs 1.5%Ports&Transport charges 1.5%Inspection delays 1.5%PVoC 0.5%

Outbound CompetitivenessLogistics turnaround time 0.5%Delayed payments 1%County levies& charges 0.2%Harassment 0.1%

Value-add CompetitivenessPower 1.5%Fuel Energy 1%Labour productivity & O/H 2%

6.5%

4.5%

1.8%

Source: KAM

Some of the proposals to address competitiveness challenges facing manufacturers in Kenya include: improving regulatory efficiency, promoting access to quality, affordable and reliable energy for manufacturing, reducing transport and logistics costs, sustaining the fight against illicit trade, addressing multiple charges, fees, and levies, enhancing cash flow for manufacturers, lowering the cost of imported industrial inputs, incentivizing prompt payment culture and availing long term financing to manufacturers.


a) Agenda one: Improving regulatory efficiencyAlthough effective regulation is important for proper functioning of businesses, regulations can also become burdensome and hinder enterprise growth. Regulations become troublesome when: they are numerous, hence increasing the cost of compliance, become

difficult to administer and comply with, especially when similar regulations are administered by more than one agency.Manufacturing firms in Kenya, like in many developing countries, are required to obtain multiple licenses, and pay various fees, among meeting other business regulatory requirements. While the need for regulations is appreciated, the way these regulations are administered may lead to arduous regulatory regimes which could in turn discourage investors as this leads to increased cost of doing business.

In addition to many regulatory agencies, there are duplication of roles and mandates of the implementing institutions leading to numerous visits to enterprises by public officials from various government agencies. This provides an avenue for extortion of bribes by public officials thus discouraging firms from complying with the requirements.

Improving regulatory efficiency therefore aims to establish simpler, more appropriate, sustainable regulatory environments for businesses and at the same time protect essential public interests. Regulatory efficiency should focus on both the quality and quantity of regulations. It is paramount that government develops, implements, and evaluates regulations by championing evidence-based approaches and practices.

Therefore, there is a need for:

i. Fast-tracking the enactment of the Government Ow ned Entities Bill.

ii. Merging permits and fees imposed by regulatory agencies e.g., inspection fees by Department of Occupational Safety and Health (DOSH) and National Environmental Management Authority (NEMA) on air quality and noise surveys.

iii. Government agencies need to create sharing platforms to facilitate compliance and reduce costs for businesses.

b) Agenda two: Promote access to quality, affordable and reliable energy for manufacturing

Electricity is a key input in the manufacturing process. The government has, in the past, initiated policy initiatives to reduce the cost of electricity for manufacturers. Examples include discounted time of use (ToU) tariff and electricity rebate program. The ToU tariff was implemented by the government in December 2017 to benefit commercial and industrial consumers. This is for different off-peak hours for weekdays, weekends/holidays. The ToU tariff is subject to meeting a prescribed monthly energy consumption threshold (a 6-month average consumption adjusted by a growth factor of 6%). Any units over and above the threshold benefits from the ToU tariff. Beneficiaries of ToU have recorded savings and an increase in sales and demand. By the end of August 2020, there were 1,054 customers who saved about Ksh. 148 million (Table 4.1).


Table 4.1: Time of use tariff-number of beneficiaries, savings, sales and demand

Tariff category Total No. of customersJuly 2020 August 2020

CI-1 727 842CI-2 129 152CI-3 34 33CI-4 21 17CI-5 11 10Total 922 1,054Savings by customers (Ksh. million) 112.4 148Total Increase in Sales (GWh) 16.8 23.2Increase in demand based on beneficiaries (MW) 47.8 61.4

Source: KPLC, August 2020 power situation report

In determining the baseline for ToU Tariff, the reference baseline was then determined based on consumption period June - November 2017. The current policy considered that the specific manufacturing facility will demonstrate growth in terms of energy consumed in every billing cycle. This growth according to the current policy, is reviewed after every six months and a new baseline is determined for the specific facility.

KAM opines that enough data has been captured, it is time to establish a baseline for each facility that will not be subjected to a six-month review. This will bring about predictability to the manufacturers for planning of their respective energy costs. By fixing the baseline, we will see more manufacturers qualify for the benefit of ToU and therefore make the ToU tariff a great success.

In 2018, through the Finance Act 2018, the government provided for the electricity rebate program, which was gazetted on 31st July 2019 for implementation. However, the rebate program was removed through the Tax Laws Amendment Act 2020. To enable access to quality, affordable and reliable energy, the government needs to strive to achieve the following:

i. Review Time-of-Use policy to bring on board more industry beneficiaries by reworking a new baseline based on current industry consumption data to create predictability.

ii. Reinstate the electricity rebate program.

c) Agenda three: Reduce transport and logistics costsGlobalisation and automation provide an opportunity for economies to boost trade and industrialisation. However, this must be complemented by an improved transport infrastructure, trade and transport facilitation and private sector capacity to produce

goods and services competitively. Improved government service, reduction in risk and transaction costs for trade are also key to improving trade facilitation in the region.

Government’s commitment to improve the infrastructure network across the country is commendable. Significant investment has gone into rail and road in the last 8 years. On rail, the government successfully completed and launched phase one (Mombasa-Nairobi Standard Gauge Railway) – the SGR commercial freight service commenced in January 2018. The SGR phase 2 B (Nairobi–Naivasha route) was completed and launched in December 2019. Generally, SGR comes with the potential to haul large volumes of cargo at a cheaper and faster rate compared to road transport.


According to Kenya Railway Corporation (KRC), the development and operationalization of Phase One of SGR was expected to:

• Reduced freight transport tariff charges from US$0.20 per ton/kilometre on average to US$0.083 per ton/kilometre.

• Reduced transit time of freight trains from 30 hours on the average to less than 8 hours on the Mombasa –Nairobi section.

• An annual GDP growth of at least 1.5% during construction and subsequent.

• Increased rail transport share in the northern corridor hence reducing damage to the roads.

• Reduced road accidents and damage to the road network.

However, industry performance figures (presented in Table 4.2 depict rather expensive SGR service rates compared to road services. The average return transportation cost by road from Mombasa to Nairobi is US Dollars (USD) 855 for containers and USD 1,080 for 40ft containers up to a maximum of 20.9 tons and USD 1,280 for 40ft above 21 tons. Use of SGR services incurs extra charges averaging between USD 725 for 20ft, USD 1,385 for 40ft up to 21 tons and USD 1,120 for 40ft above 21 tons.

Table 4.2: A comparative analysis of SGR and road transport costs

a) Average Transport cost by SGR 20ft 40ft Up to 20.9T 40ft Above 21T Mombasa-Nairobi-SGR 500 700 750 Shore handling and wharfage-KPA 150 225 225 Last mile (average)4 250 450 500Empty return Nairobi-Mombasa-SGR 100 100 100Empty container handling charge-KPA 30 45 45 Empty collection from port-Truck 30 60 60 KPA remarshalling up to 4 days 110 165 180KPA storage (based on dwell time of 7 days)5 210 420 420Shipping line margins 100 100 100Demurrage 100 200 200Total Rail 1580 2465 2400b) Average transport costTruck Transport (Mombasa- Nairobi- return) 700 850 1050KPA Shore handling and Wharfage at Port 155 230 230 Total Road 855 1080 1280Difference between Rail - Road and Road 725 1385 1120

Source: KAM analysis

The additional costs are incurred due to re-marshalling, storage, and demurrage. If removed, the cost of rail transport for 20ft and 40ft container will be USD 1,160 and USD 1,680/1,780, which is still high compared to road transport by USD 305 and USD 600/500 respectively. Further, if the cost of empty return by rail, shipping line margins and KPA shunting of empties to empty container depots are removed, the cost of 20ft will be USD 930 and 40ft will be USD 1,435/1,535, creating a difference of USD 75 and USD 355/255 respectively compared to road.___________________ 4 Based on estimated by Kenya Transporters Association,20195 Importers and exporters incur charges of between $30 and $60 per day for cargo that has stayed beyond the free storage period and

more than 24 days, depending on the size of the container.


Several factors contribute to increased cost of transport via SGR: delayed transfer container from Mombasa to Nairobi-worst scenario going for over 60 days after the last-slain, poor coordination among the intervening government agencies.

To achieve an efficient and cost-effective logistic supply in Kenya, the following actions can be undertaken:

i. Review the KPA and KRC tariff with view of merging and reducing the rate to make them competitive compared to the road rates. (Inbound costs of $ 400 per container)

ii. Construction of sidings in industrial areas as well as rehabilitation of railway line in industrial areas railage to provide last mile services.

d) Agenda four: Sustain the fight against illicit tradeKAM in collaboration with the government, developed and published three documents aimed at enhancing enforcement and raising awareness on matters illicit trade in 2020. These documents include the 2nd Edition of the Enforcement Manual to Combat Illicit

Trade in Kenya, 2020 Practitioners Guide for Enforcement Officers on Combating Illicit Trade and the Harmonized Standard Operating Procedures (SOPs) for the inspection, verification, and clearance of imports at the ports/points of entry in Kenya.

The SOPs framework for the enforcement Multi-Agency Team (MAT) sought to harmonize the various operating procedures for the inspection, verification, and clearance of imported cargo at the points of entry in Kenya within the framework of enhancing and sustaining the fight against various forms of illicit trade.

KAM will continue advocating for the speedy development, finalization, and implementation of a regional intellectual property framework to ensure that all genuine products in the market are not threatened by the influx of counterfeit goods in the market. This will enhance industrialization through the growth and development of micro-small and medium enterprises (MSMEs) to create the much-needed job opportunities for the larger population as well as come up with more and more innovative products.

In order to increase efficiency and accountability at the ports of entry while sustaining the fight against illicit trade, emphasis should be placed on:

i. Implementation of SOPs for multi-agency team.

ii. Development and implementation of regional intellectual property framework.

e) Agenda five: Address multiple charges, fees, and leviesThe unpredictable and high county fees, levies and charges ranging from single business permits, distribution permits, offloading fees (different from parking fees), land rates,

garbage collection fee, fire licensing fees and health permit charges by counties are a major challenge facing manufacturers in Kenya. This can be remedied if the County Revenue Raising Bill which lapsed in December 2019 is reintroduced.


The following are the critical bills which will affect County fees, levies, and charges:

1. Investment Promotion (Amendment) Bill, 2020 which seeks to amend the Investment Promotion Act to ensure the participation of County Governments in the promotion of trade in the country. The Bill seeks to also include the participation of county governments in the formulation and implementation of policies and strategies formulated by the Kenya Investment Authority to attract investors, both foreign and local in the counties.

2. The Co-operative Societies (Amendment)Bill, 2020 to promote the development of the co-operative sector and the effective management of co-operative societies.

3. County Planning (Roads, Pavements and Parking Bays) Bill which provides a legislative framework for the planning, construction and maintenance of county roads, streets lanes, alleys, parking bays, drainage systems and pavements in each county. It also provides for the proper planning and placement of access ways to commercial buildings along major roads within counties. Further the bill needs to define classification of public roads and harmonization with the Kenya Roads Bill 2017 and the Kenya Roads Act 2007.

To address multiple charges, fees, and levies by counties, the following specific actions need to be implemented:

i. Reintroduction of County Government Revenue Raising Regulation Process Bill that provides mechanisms for introducing new levies, fees, and charges by the County Governments.

ii. Launch county competitiveness index.

iii. Manufacturing-centric county planning and budgeting cycle.

f) Agenda six: Enhance cash flow for manufacturersCashflow is critical for the survival of any business enterprise. Cashflow challenges is one of the main reasons why small businesses fail. Before the COVID-19 pandemic, manufacturers

were already experiencing severe liquidity constraints, mainly because of accumulation of value added tax (VAT) and withholding VAT refunds. All taxes collected by KRA are deposited in a National Consolidated fund. KRA has no expropriation powers, and money for refunds has to be budgeted for and released by the National Treasury. This has occasioned inordinate delays in VAT refund payments. This can be addressed by amending the Public Financial Management (PFM) Act 2012 to create a tax refund account thereby creating a sustainable solution to VAT refund backlogs.

Cashflow challenges facing manufacturers was exacerbated by the COVID-19 pandemic which reduced consumer demand. The negative impact on demand was more severe for complex value chains such as motor-vehicles. As part of fiscal measures to cushion the economy from downside effects arising from the pandemic, on 25th March 2020, the President, directed the National Treasury to allocate KSh. 10 billion for VAT refunds or allow offsetting of withholding VAT, among other interventions. In addition, the President announced an allocation of KSh. 5 billion for VAT refunds under the Economic Stimulus Package. Refund of VAT by KRA commenced in the month of May 2020.

According to KRA, Ksh. 25 billion in VAT refunds was paid in the FY 2019/2020 and aimed at clearing another Ksh. 25 billion by the end of FY 2020/2021. This has supported cashflow of businesses and retention of some jobs. The National Treasury has also increased monthly allocation for VAT refunds from KSh. 1.2 billion to KSh. 1.7 billion. However, the monthly allocation should be increased to at


least KSh. 5.5 billion to allow prompt payment of VAT refunds. The National Treasury should also make a one-off payment to clear all outstanding withholding VAT and excise tax refunds such as those for industrial kerosene users. VAT refund amounts should also attract interest, as manufacturers are forced to take overdrafts and other credit facilities from banks to alleviate cashflow constraints.

In order to ensure cashflow for manufacturers, the following specific actions should be implemented by the government:

i. Amend the Public Finance Management (PFM) Act 2012 to establish a Tax Refund Fund.

ii. Increase monthly budgetary allocation for VAT and excise tax refunds to about Ksh. 5.5 billion.

iii. The National Treasury to make a one-off payment to clear all outstanding withholding VAT and Excise Tax refunds.

iv. Amend the VAT Regulations 2017 and VAT Act 2013 to recognize refund/offset of tax arising from the VAT formula, income taxes and facilitate outstanding payment through retrospective provisions.

v. Refund interests accrued through pending bills and outstanding VAT refunds.

g) Agenda seven: Lower the cost of imported industrial inputsKenya’s manufacturing sector is highly dependent on imported raw materials, which is estimated to be at least 80%. This, therefore, makes the cost of imported industrial inputs a key determinant of industry’s competitiveness. Imported raw materials attract Import Declaration Fee (IDF) and Railway Development Levy (RDL) of 1.5% each, amounting to a

cost-disadvantage of 3%. If both IDF and RDL are zero-rated, this will reduce the cost-competitiveness disadvantage from 12.8% to 9.8% (refer Figure 4.1). The reduction should also include industrial machinery and spare parts for manufacturers.

To lower the cost of imported industrial inputs, it is critical that government undertakes the following:

i. Reduce Import Declaration Fee (IDF) rate from 1.5% to 0% for all industrial inputs (basic raw materials and intermediate inputs) and industrial machinery and spare parts for manufacturers.

ii. Reduce Railway Development Levy (RDL) from 1.5% to 0% for all industrial inputs (basic raw materials and intermediate inputs) and industrial machinery and spare parts for manufacturers.


h) Agenda eight: Incentivize prompt payment cultureDelays in payment affects the financial flow of funds necessary for operations in the manufacturing sector. In addition, late payment causes increased administrative and financial burden to businesses especially MSMEs. Over the years, late payment concerns

have continued to grow. This is in the form of:• Refunds owed to manufacturers by government, arising from withholding VAT and export

formula under the VAT regulations, 2017.

• Late payment arising from supply of goods and services to both national and county governments.

• Late payment within the private sector with the main concern being on retail supermarkets.

• Delays in adjudication of disputes related to payments in the Courts such as tax cases, contractual disagreements, among others.

The benefits of prompt payments far outweigh the challenges that it causes and includes:

• Drives the country’s the growth of the economy and business enterprises through increased cash flows.

• Enables businesses to thrive which in turn guarantees employment creation and increased competitiveness.

• Promotes fair trade practices amongst supply chains to ensure their sustainability.

• Improves business relationships.

• Promotes business certainty in terms of growth and for investment.

• Payment by retail sector supports local market access.

The National Treasury, in the 2018 Budget Policy Statement, acknowledged pending payments as a problem and noted that “non-payment of suppliers and contractors had adverse effects to other sectors of the economy, such as the financial sector, by increasing non-performing loans.” To incentivize prompt payment culture, the following actions should be carried out by the government:

i. The National Treasury’s Committee to validate and clear outstanding refunds in 2 months’ time, publish the report and implement immediately.

ii. Implement the 60 days payment period provided for under the Public Procurement and Assets Disposal Regulations for 2020.

i) Agenda nine: Avail long term financing to manufacturersMost of the financial markets in developing countries lack sufficient finance to achieve desired economic transformation. One key feature of investments in manufacturing is

that they require huge financial capital outlays and have long maturation periods. Such investments require long-term finance. Commercial banks may lack incentives to bear risks associated with such investments. One possible source of long-term finance is pension funds. Figure 4.2 shows growth of assets of pension funds, from December 2015-December 2019.


Figure 4.2: Value of assets of pension funds in Kenya (KSh. million)

Source: KNBS, Economic Survey, 2020

Total pension fund assets grew from Ksh. 814 billion in December 2015 to Ksh. 1.32 trillion in December 2019 (Figure 4.1). According to the Economic Survey 2020, most of the assets by pension funds were held in government securities, immovable assets and quoted equities accounting for 42.5%, 18%, and 17.7% respectively as at the end of 2019.

The idea of development banks has also been advanced to fill the gaps left by private financial institutions which are mainly profit driven (UNCTAD, 2016). Kenya Development Bank Limited is set to be established in the country and manufacturers are hopeful that it will provide long-term financing to meet their requirements. The Kenya Development Bank Bill, 2020 to create the proposed bank was subjected to public participation in 2020.

To ensure availability of long-term finance for the manufacturing sector in Kenya, the following should be undertaken:

i. Incentivize saving institutions and pension funds to invest in the manufacturing sector.

ii. Design an inclusive framework in the Kenya Development Bank to serve all sizes of manufacturing enterprises from startups, SMEs to large enterprises.


Pillar Two: Enhance Market Access

For the manufacturing sector to grow, access to local, regional, and international markets is crucial. Governments often promote preferential market access through public procurement policies. Regional trade initiatives are also preferred policy approaches to take advantage of market opportunities in the region. For regional markets such as the EAC, the main challenge for exporters has been non-tariff barriers. Prolonged delays in the review of the EAC Common External Tariff (CET) has become a deterrent to exports because the existing tariff cannot accommodate industrial development that has taken place over time. Diversification of export basket of manufactured goods including markets is important for Kenya to diversify export market risks.

a) Agenda one: Enhance local market accessThe Buy Kenya Build Kenya (BKBK) initiative was formulated to address the gap in consumption of locally manufactured goods vis a vis imported goods. The over-dependency

of the Kenyan economy on imported goods has over the years exacerbated the country’s trade deficit, slowed down employment growth and the pace of industrialization and denied the country an opportunity to enhance its competitiveness.

Successful implementation of local market access as envisioned by the local content policy needs to be supported by law. The Public Procurement and Disposal Act, 2015 (PPDA) and the Competition Act, (2012) are important anchors to this policy. However, it is important to adopt the policy and draft regulations to guide its implementation. While it is appreciated that the policy is undergoing review at Cabinet level, of extreme importance is its implementation framework that will ensure the policy achieves the desired outcomes.

A list of 371 locally manufactured goods has been developed and shared with Ministries and other government agencies to ensure that these commodities a locally sourced. Further to this, there is need for periodic reports to track adherence to this policy by government agencies.

Unfair trading practices have posed challenges to local market access to domestic producers and manufacturers. These practices are partly responsible for the decline in the market share of locally produced goods. Dumping and importation of goods which benefit from prohibited subsidies unfairly push Kenyan commodities from the local market. Kenya has since enacted the Trade Remedies Act (2017) which created the Kenya Trade Remedies Agency (KETRA). The agency’s mandate is to investigate dumping, subsidies and import surges and advise the Cabinet Secretary for Trade on the appropriate action(s) to be taken. KETRA has since been operationalized. However, it needs both financial and adequate human resource capacity to be able to effectively execute its mandate.

The following actions are thus proposed to support increased local market access:

i. Enhanced monitoring and evaluation of Buy Kenya Build Kenya.

ii. Finalization of local content policy.

iii. Increase Kenya Trade Remedies Agency’s capacity to conduct investigations.


b) Agenda two: Promote regional market accessKenya’s trade performance in the regional market has declined over the last 10 years. The country’s dominance in the regional market is facing threats from multiple quarters. The EAC partner states are implementing their own industrial strategies and have been able

to replace some Kenyan products with their own. Uganda, Tanzania, and Rwanda are good examples of this phenomenon. Additionally, Kenya’s export profile has not fundamentally changed in the last 20 years while its competitors such as China and India have transformed their export commodities over the years to produce high-tech manufactured exports. Case in point, Kenya’s share of exports in the Ugandan market was 31.7% in 1998 while Tanzania’s was 12.6% in the same year. By the year 2018, Kenya’s export share fell to 12.9% and 2.5% for Uganda and Tanzania, respectively. These being the Kenya’s key export destinations, this is a matter of concern to the business community and policy makers. While it is acknowledged that Kenya’s penetration of these markets is affected by competition, Non-Tariff Barriers (NTBs) have also played a major role in the country’s declining export performance. There are some long standing NTBs that remain unresolved at the expense of Kenyan exporters. These are for example Uganda’s discriminative export fees on pharmaceutical products and Tanzania’s discriminative import fees on Kenya’s beef and beef products. Implementation of the NTB Act (2017) will go a long way in establishing timelines and procedures for resolving NTBs to the benefit of regional trade.

The EAC Rules of Origin have been identified as prohibitive to Kenya’s export agenda within the EAC region. Sectors such as Edible Oils, for example, are affected by the Change in Tariff Heading rule which is unfavorable for Kenya since we lack capacity to produce the raw material. The non-conclusion of Common External Tariff (CET) review has largely increased the region’s propensity to import because the region currently implements a 3-tariff band structure. The current EAC CET structure of 0% on raw materials and capital goods, 10% on intermediate products and 25% on finished products pushes the economy towards imports. There is need to agree on the 4th tariff band with consideration to tariff differentials that discourage imports. KAM is pushing for a 35% upper tariff band for finished goods to promote local manufacturing.

The National Export Development and Promotion Strategy (NEDPS) aims to help the country to consistently produce quality goods and services for export to various destinations. Production of quality products can only be achieved through strong regional value chains and a conducive business environment to support manufacturing and export development. The strategy thus needs to monitor and track all the factors influencing the performance of exports and product development. The strategy adopted an integrated approach to its implementation. Various export destinations have been identified by stakeholders and a roadmap has been prepared for their utilization.

The strategic objectives of the NEDPS strategy includes:

• To establish a database of manufacturing sector exporters in all focal sub-sectors and exporter support system for enhanced production and export of manufactured products exports.

• To promote development of enabling business environment for target manufactured products to ensure their competitiveness in destination markets.

• To promote production of manufactured products in all NEDPS focal sub-sectors for target export markets.

• To promote destination market access of all target manufactured products in the identified destination markets.

• To resolve non-tariff barriers that Kenyan manufactured products face in the domestic and destination markets.


A value addition strategy has been developed and central to this, a manufacturers’ database will be compiled for ease in identification of manufacturers of frontier products.

The following actions will help enhance the country’s regional market access:

i. Fast tracking the finalization of an optimal EAC Common External Tariff structure review which can promote value addition and industrialization.

ii. Review of EAC Rules of Origin.

iii. Fast tracking the finalization of the Non-Tariff Barriers Act amendments and development of the regulations.

iv. Implementation of National Export Promotion and Development Strategy.

c) Agenda three: Diversify international market accessThe Africa Continental Free Trade Area (AfCFTA) presents enormous opportunities for Kenya to diversify its markets and products. Trading under the AfCFTA officially commenced on 1st January 2021, though the trading instruments are yet to be finalized. Customs

procedures, tariff offers, and rules of origin are yet to be concluded. Actual trade under preferential terms can therefore not take place until these are concluded. On the positive side, 34 countries have ratified the agreement and deposited their instruments with the Africa Union. It is anticipated that the outstanding work will be finalized by the end of 2021 for preferential trade to take place under the AfCFTA framework.

Kenya’s key export markets outside the EAC are in the European Union, Pakistan, China, India, UAE, and the United States of America. Trade agreements like Economic Partnership Agreements (EPAs), Africa Growth and Opportunity Act (AGOA) and Kenya – UK Free Trade Area (FTA) have helped Kenya secure markets under preferential terms. Kenya has been keen to retain these markets upon the expiry of the trade agreements.

To this end, the Kenya-UK FTA was negotiated and concluded to coincide with UK’s exit of the EU. Kenya is currently negotiating an FTA with the USA to ensure it gets preferential treatment for its exports upon the expiry of AGOA in 2025. The negotiations will culminate in the signing of a mutually beneficial reciprocal trade agreement between the two countries. Kenya, however, needs to ensure that it pushes for the observance of the asymmetry principal in these negotiations because the two countries are not equal both economically and in terms of geopolitical standing.

Proposed actions for the Government of Kenya to diversify international markets include:

i. Create an AfCFTA advisory document/trade guidelines for manufacturers’ use in continental market penetration.

ii. Promote US-Kenya FTA Strategy supportive of industrial agenda in Kenya.

iii. Advocate for the implementation of Kenya-UK FTA for the benefit of the manufacturing sector.


Pillar Three: Pro-industry policy and institutional framework

There is no generally accepted definition of industrial policy, but the most referenced definition is by Pack and Saggi (2006) who consider industrial policy to be “any type of selective intervention or government policy that attempts to alter the structure of production toward sectors that are expected to offer better prospects for economic growth than would occur in the absence of such intervention”. Industrial policy cannot work in a vacuum, it has to be supported by relevant institutions.

a) Agenda one: Ensure predictable and stable industrial policies development through industry consultation

Businesses cannot thrive in an uncertain environment. This suggests that ad hoc approach to policy formulation must be avoided. An unpredictable and unstable policy environment will discourage both domestic and foreign investments. Unpredictability also undermines businesses planning. Regulatory institutions and their associated compliance requirements continue to frustrate businesses due to the sudden change of policy with little or no stakeholder consultations.

One of the ways of ensuring a predictable and stable industrial policy is by:

i. Developing compliance support mechanisms and corrective action plans collaboratively with manufacturers to avoid local brands being

b) Agenda two: Ensure certainty and predictability of tax policiesA key feature of tax policies in Kenya is that they are highly unpredictable. This creates business uncertainty which is inimical to a conducive business environment. A good

example of tax policy uncertainty is the electricity rebate program which was gazetted on 31st July 2019 to allow a 30% cost of electricity while computing final tax. However, before a full year of implementation, the rebate was removed on 25th March 2020 through the Tax Laws Amendment Act 2020. The Tax Laws Amendment Act 2020 also reduced the investment allowance deductions for industrial buildings and machinery from 100% to 50% in the first year and 25% onwards. This ignored the fact that ongoing investments and capital projects had been made on the basis of the previous provisions. This is likely to stall investment projects and have a negative impact on cashflow due to the sudden change in policy.

In the midst of COVID-19 pandemic ravaging economies and businesses, the government, through Finance Act 2020, introduced minimum tax payable at the rate of 1% of gross turnover, effective 1st January 2021. Introduction of this new tax, in an ongoing pandemic, that seeks to target loss making businesses is untimely and will negatively affect investments in the country. The tax should not be implemented. Such ad hoc tax policy measures can be cured through a national policy on taxation. In 2020, KRA commenced drafting a National Tax Policy which shall be subjected to stakeholder participation for feedback.


In order to ensure certainty and predictability of tax policies, the following should be carried out:

i. Abolish 1% minimum tax.

ii. Revert investment deduction allowance to 100% or 150%.

iii. Finalize the national taxation policy to amongst other things, create a 5-year cycle for reviewing of tax rates and measures.

c) Agenda three: Ensure national policy coherence for the manufacturing sectorIn theory, policy coherence entails consistency, comprehensiveness, and harmonious-compatible outcomes across domains and sectors, in a manner that does not compromise

the integrity of policymakers’ goals (Challis, Fuller and Henwood, 1988; Stead and Geerlings, 2004). Shades and labels of policy coherence are diverse; they include coherent policy making, policy coordination, policy integration, holistic government, and whole-of-government policymaking (Challis, Fuller and Henwood, 1988; Stead and Geerlings, 2004).

The Constitution of Kenya 2010 introduced a devolved system of government with 47 counties and a national government. This creates complexity in policy making and therefore a risk of policy incoherence. Article 6(2) of the Constitution states that the national and county governments are distinct and interdependent and should conduct their relations based on consultation. Thus, the Constitution anticipates that the two levels of government work together for the benefit of the country. Kenya requires integrated policy making, planning and budgeting between the two levels of government.

National policy coherence for the manufacturing sector can be promoted through:

i. Implementation of The County Government (General) Regulations, 2020 to ensure better coordination between the National and County Governments.


Pillar Four: SME Development

Small and Medium Enterprises (SMEs) in Kenya play a key role in employment creation, income generation and is the bedrock for industrializing the country in the near future. However, the contribution of the SMEs in proactively driving economic growth has been hampered by challenges, including low access to market for their goods, finance, and governance related issues. This section explores ways in which these challenges can be addressed to enhance the development of SMEs.

a) Agenda one: Enhance market access for SME’sLow market access continues to be a constraint to SME development (KNBS, 2016). It hinders the survival and expansion of SMEs. Therefore, the inclusion of SMEs in the public procurement supply chain of public procurement would provide them with a much-

needed lifeline.

Under the Buy Kenya Build Kenya (BKBK) strategy and the draft Local Content Policy, the government aims to promote a culture of consuming what is locally produced and manufactured and discourage importation of similar products as part of the import substitution strategy. In August 2020, the government, through the Ministry of Industrialization, Trade and Enterprise Development gazetted a list of locally produced and manufactured goods for purposes of ensuring that they are prioritized when it comes to local procurement by various procurement entities.

To ease the challenge of market access by SME’s, the government should fast-track:

i. Implementation of the gazetted list for exclusive local sourcing and compliance reporting by MDAs.

b) Agenda two: Enhance governance In 2016, the Capital Markets Authority (CMA) launched a Code of Corporate Governance Practices for issuers of securities to the public that listed companies have to comply with

as part of their reporting obligations. However, adoption of these corporate governance practices among SME’s has been a challenge due to fear of the unknown and costs incurred in the adoption of the practices.

The financial market provides an avenue through which SMEs can raise capital for their operations. However, issuers are required to adhere to set rules and regulations including good corporate governance practices which are set by the regulator.

To unlock the potential of SME’s participating in the financial market, the following actions need to be undertaken:

i. Encourage SMEs to formalize their business through training and awareness creation.

ii. Capital Market Authority to reduce the costs associated with the implementation of corporate governance framework for SME’s.


c) Agenda three: Enhance access to financeSMEs face significant financing gaps that stifle growth. In recent times, the government has made deliberate efforts to resolve the challenges facing SMEs in access to finance. Through the National Treasury and Planning, the government has developed a draft

Public Finance Management (Credit Guarantee Scheme) Regulations, 2020 whose key objective is to promote enterprise development through access to quality and affordable credit to MSMEs. The targeted credit support to MSMEs businesses will lead to growth in output with the potential to uplift the lives of many Kenyans through job creation.

To enhance access to finance for SMEs, the following actions are proposed:

i. Ensure allocation of funds towards the SME Credit Guarantee Scheme.

ii. Incentivize private incubators, research, and development organizations to nurture startups and SME’s.


Pillar five: Industrial resilience and sustainability

In Kenya, the COVID-19 pandemic has had far reaching implications on the economy. This is particularly true for the manufacturing sector, as reflected in the May 2020 KAM-KPMG impact survey. From the survey findings, manufacturers experienced significant reduction in outputs, increased liquidity and logistics challenges, and workforce reduction. The pandemic affected all businesses but had far worse consequences for MSMEs.

Appropriate steps to maintain the sector’s growth should be put in place to accelerate industrial development. A critical deciding factor in the success of the manufacturing sector is the investment environment in which manufacturing companies work. Macroeconomic stability and a fit-for-purpose public service are essential in not only in influencing economic growth but also investor’s participation in manufacturing ventures and price competitiveness of manufactured goods. In addition, a labour market with industry driven skills taking into account industry 4.0 and Sustainable Development Goals (SDGs) are crucial in sustaining the development of the manufacturing sector in Kenya.

a) Agenda one: Implementation of manufacturing sector resilience and sustainability strategy

The COVID-19 pandemic resulted in an economic slowdown in the country, and the manufacturing sector was not spared. Consequently, the pandemic exposed the economy’s vulnerability towards external shocks that threatened to stifle Kenya’s development agenda. The pandemic uncovered manufacturing opportunities that should be exploited. Subsequently, in 2020, KAM developed a manufacturing sector resilience and sustainability strategy to aid the recovery of the manufacturing sector. The strategy outlines sub sector specific challenges, opportunities, and recommendations.

One of the overarching recommendations to enhance sustainability of the sector is nurturing nascent and emergent business opportunities uncovered by the COVID-19 pandemic.

b) Agenda two: Ensure stable macroeconomic environmentKenya’s fiscal deficit widened to 8.2% of GDP in 2019/20 from 7.9% in 2018/19 (GoK, 2020). Fiscal consolidation efforts were hampered by revenue shortfalls due to the COVID-19

pandemic. Persistent high fiscal deficit and increasing public debt level pose a risk to the stability of the Kenyan economy. Rise in public debt stock subsequently leads to an increase in interest payments which constraints the fiscal space for development expenditure.

It is important to undertake public finance management reforms to enhance oversight of government cash flows, prioritize prudent management and use of public funds through a treasury single account. High fiscal deficit is the main reason for the rising stock of public debt and there is thus the need to rationalize government expenditure to enhance efficiency and effectiveness.


Macroeconomic stability of the economy can be enhanced through undertaking the following prudent fiscal policy stance:

i. Implementation of the proposed single treasury account.

ii. Undertaking fiscal consolidation to attain a fiscal deficit of 3% to GDP by 2023 in line with the EAC Monetary Union Protocol.

c) Agenda three: Pro-industry skill developmentThe gap between the industry’s skills demands and training provided by institutions calls for enhanced collaboration between them in curriculum development. By so doing, the country will be placed at a better position to offer demand-driven training programmes

that are focused on the needs of workers, and industry as well as facilitate development of a pool of skilled workers in all the sectors of the economy.

On its part, the private sector has expressed its interest in supporting initiatives to establish Industry apprenticeship programs where university and technical school graduates are recruited into industry for training. KAM already supports these initiatives through the Technical, Vocational Education and Training (TVET) apprenticeship program, while encouraging manufacturing firms to take on students from TVET institutions on internship programs.

To further reduce the mismatch between training institutions and industry, the following actions should be undertaken:

i. Fast-tracking operationalization of Sector Skill Advisory Committee to guide in the development of occupational standards and influence curriculum development.

ii. Driving the Sustainable Development Goals (SDGs) through skills development and capacity building.

iii. Supporting skill-based job creation through Technical, Vocational Education and Training.

d) Agenda four: Green growth and sustainable developmentWith less than 10 years left to achieve SDGs, a decade of action call was made in 2019 to mobilize everyone towards their delivery with global, local and people actions. Globally,

the call for sustainable business practices has continued to shape both the private and public sectors.

In Kenya, both sectors have continued to strive to introduce sustainable practices in their activities through enhanced policy frameworks and the introduction of circular economy. As a key driver of the country’s development goals, local industry through KAM, is at the forefront of instituting sustainable manufacturing practices in their activities. The long-term goal is to ensure minimal adverse effects on the environment whilst conserving and replenishing energy and water and other natural resources. New environmental concepts and technologies have also been widely adopted to help manage the effluent waste and post-consumer solid waste in particular plastics through the Extended Producer Responsibility (EPR) approach.


Some of the actions that can be undertaken to promote green growth and realization of the SDGs include:

i. Implementation of the Kenya Plastic Action Plan 2019.

ii. Creation of policy and legal frameworks to establish Extended Producer Schemes for post-consumer waste.

iii. Localize and implement SDG Goal No 12 on Responsible Production and Consumption under circular economy.

d) Agenda five: Fight against corruptionCorruption remains an impediment to the delivery of public services and the development of the private sector. The vice is expressed in numerous ways in the public sector,

including the embezzlement of public funds. Therefore, improving the management of public finance to enhance transparency and accountability in public financial reporting is one way of preventing corruption in the public sector. The private sector also has a role to play in the fight against corruption. Through the UN Global Compact principles, the private sector can voluntarily commit to improve their business operations in line with the principles of anti-corruption, human rights, labour standards and the environment.

To sustain the fight against corruption the following actions should be pursued:

i. Promote uptake of the Code of Ethics for Business in Kenya and compliance with anti-corruption requirements to foster transparency and accountability in industry.

ii. Advocate for the passage of the Bribery Regulations to actualize provisions of the Bribery Act.

e) Agenda six: Fit-For-Purpose public serviceGovernment-owned entities play a critical role in improving public service delivery, employment creation and promoting national development. However, inadequate

coordination leads to conflicts and fragmentation in mandates, that lead to the proliferation of poorly resourced state corporations. This calls for efficiency in the delivery of public services in the face of constrained fiscal space.

To transform the management of the various Government Owned Entities for purposes of achieving the national development agenda, the following actions should be undertaken:

i. Finalize implementation of key recommendations in the 2013 Parastatal Taskforce report to reduce duplication and overlaps especially in the Agriculture sector.

ii. Strengthen performance contracting to enhance public service delivery.


f) Agenda seven: Enhance digitalization in manufacturing As Kenya gears towards transforming itself into an industrialized middle-income economy by raising the contribution of its manufacturing sector to the national output, adoption of Industry 4.0 technologies will be key towards this endeavor. The fourth industrial revolution refers to the application of information and communication technology in facets of manufacturing process. By employing data analytics and robotics, industry 4.0 technologies transform business models and processes to enhance productivity, induce innovation, and enhance resource efficiency among firms.

The World Economic Forum (WEF) ‘Readiness for the Future of Production Report 2018’clusters Kenya as a nascent economy with a limited production base today and a low level of readiness for the future.

6 WEF defines readiness as ‘the ability to capitalize on future production opportunities, mitigate risks and challenges, and be resilient and agile in responding to unknown future shocks.

To enhance the resilience of the manufacturing sector through digitalization, the following measures need to be undertaken:

i. Support a well-embedded manufacturing ecosystem of start-ups and technology hubs.

ii. Support upskilling of industry personnel on digitization for increased industry competitiveness and productivity.

iii. Design and implement appropriate core processing systems (Enterprise Resource Planning solutions) with a bias towards manufacturing verticals.

iv. Design and implement appropriate data analytics and robotic tools for use by the manufacturers.

v. Build resilience (IT disaster recovery and business continuity planning) information systems and information processing systems for manufacturers. This includes assurance over the IT security around the core processing systems.

vi. Strengthen internal control environment for the manufacturers. This will be achieved through design, implementation and embedding of Enterprise Risk Management.

6 World Economic Forum (2018). Readiness for the Future of Production Report 2018. http://www3.weforum.org/docs/FOP_Readiness_Report_2018.pdf


CONCLUSION

The 2021 MPA was developed against a backdrop of a global outbreak of the COVID-19 pandemic that turned to be both health and economic crisis. The containment measures put in place to avert the spread of the virus caused global supply chain disruptions and reduced consumer spending, resulting into a global economic slowdown. No economic sector has been spared. Preliminary estimates show that the economy contracted by 1% in 2020 and is expected to rebound in 2021 to record a GDP growth rate of 6.9%. The manufacturing sector output contracted by 3.9% in 2020 Q2 compared to a growth of 2.9% in 2020 Q1.

In 2020, the government instituted fiscal and monetary policy measures to cushion businesses and households from adverse effects caused by the pandemic. Some of the tax measures such as reduction of income tax rate and corporation tax rates from 30% to 25% and VAT from 16% to 14% have been reversed due to the current fiscal constraint facing the government through the Tax Laws (Amendment) (No. 2) Act, 2020. This is hardly a year since implementation. The 8 point economic stimulus program (about 0.6% of GDP) is by all estimate small-sized and therefore unlikely to stabilize the economy and create necessary pre-conditions for a robust economic recovery. Inadequate budgetary allocation can easily condemn the economic to a prolonged economic slump which can linger for many years to come. Thus, the anticipated 6.9% GDP growth in 2021 might turn out to be a too optimistic projection.

The pandemic has created a lot of uncertainty about the future. This uncertainty induces precautionary saving behavior by households, businesses hold on to their investments while banks may lack credit worthy borrowers and therefore sit on their excess liquidity. This directly affects overall consumption and reduce demand for manufactured goods.7 It is for this reason why full implementation of BKBK strategy is critical. The AfCFTA will also create enormous export opportunities for manufactured goods. However, Kenya has to contend with stiff competition from other countries in and outside of the African continent. It is for this reason the importance of competitiveness cannot be overemphasized. High cost of power, high logistic costs, liquidity challenges and such challenges must be addressed with urgency. In the midst of uncertainty caused by the pandemic, the government must avoid policy shock such as those tax measures introduced under the Tax Laws Amendment Act 2020 and Finance Act 2020 for example 1% minimum tax.

A stable macroeconomic environment will be pivotal for the recovery of the economy and the manufacturing sector. Fiscal deficit must be consistently reduced to tame the rising stock of public debt. A stable exchange rate will be useful in avoiding imported inflation and keeping public debt stock in check. The MSEs are the future of manufacturing, and if fully supported, they are likely to support robust economic recovery and job creation. Despite all the economic turbulence globally and in Kenya, manufacturers are hopeful that 2021 will be better than 2020. This is clearly reflected in the MPA 2021 theme ‘From surviving COVID-19 to thriving: Manufacturing sector rebound for sustained job and investment growth’.

7 https://www.project-syndicate.org/commentary/stimulus-policies-must-benefit-real-economy-not-financial-speculation-by-joseph-e-stiglitz-and-hamid-rashid-2020-06.

https://www.project-syndicate.org/commentary/stimulus-policies-must-benefit-real-economy-not-financial-speculation-by-joseph-e-stiglitz-and-hamid-rashid-2020-06

https://www.project-syndicate.org/commentary/stimulus-policies-must-benefit-real-economy-not-financial-speculation-by-joseph-e-stiglitz-and-hamid-rashid-2020-06


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MPA 2021 From surviving COVID-19 to thriving: Manufacturing

sector’s rebound for sustained job and investment growth

S/N Pillar Agenda Actions End Result/Target Targeted Stakeholders

1 Competitiveness and level playing field for manufacturers in Kenya

Improving Regulatory Efficiency

• Fast-tracking the enactment of the Government Owned Entities Bill.

• Merging permits and fees imposed by regulatory agencies e.g., inspection fees by DOSH and NEMA on air quality and noise surveys.

• Government agencies to create sharing platforms to facilitate compliance and reduce costs for businesses.

• Reduce compliance cost and number of intervening agencies.

• Centralized & automated regulatory processes.

Government Regulatory Agencies : NEMA, KEBS, DOSH

Promote access to quality, affordable and reliable energy for manufacturing

• Review Time-of-Use policy to bring on board more industry beneficiaries by reworking a new baseline based on current industry consumption data to create predictability.

• Reinstatement of the electricity rebate program.

• Competitive energy costs

• Target USD 9 cents/KwH from current USD 16 cents/kWH for import substitution heavy industries such as Metal, Textile Sectors & Glass Manufacturers

Ministry of Energy

Reduce transport and logistics costs

• Address transport and logistics inefficiencies at the port and the Nairobi Inland Container Depot to reduce transport costs.

• Construction of sidings in industrial areas as well as rehabilitation of railway line in industrial areas.

• Inbound costs of $ 400 per container

• Inbound & outbound processes supported competitively & logistically via railage

Ministry of Transport, KPA, KRC

Sustain the fight against illicit trade

• Review and implementation of SOP for the multi-agency team.

• Implement regional intellectual property framework.

• Low cost, fast clearance by coordinated intervening government agencies.

• To reduce breach of Kenya’s Intellectual Property Rights by players in EAC Partner States.

Office of the Deputy Head of Public Service, Multi-Agency Team (ACA, KPA, KRA, KRC, etc.)Ministry of IndustrializationEAC SecretariatEAC Manufacturers’ Network



Address multiple county charges, fees and levies

• Reintroduction of County Government Revenue Raising Regulation Process Bill that provides mechanisms for introducing new levies, fees, and charges by the County Governments.

• Launch of county competitiveness index.

• Manufacturing-centric County planning and budgeting cycle.

• Mutual recognition of county business permits to reduce inter-county business costs.

• To determine county industrial competitiveness & establish policy gaps to be addressed with county governments.

• Counties have prioritized industrial development at county levels

CoGParliamentMinistry of Devolution

Enhance cash flow for manufacturers

• Amend the Public Finance Management (PFM) Act 2012 to establish a Tax Refund Fund.

• Increase monthly budgetary allocation for VAT and excise tax refunds to about Ksh. 5.5 billion.

• The National Treasury to make a one-off payment to clear all outstanding withholding VAT and Excise Tax refunds.

• Amend the VAT Regulations 2017 and VAT Act 2013 to recognize refund/offset of tax arising from the VAT formula, income taxes and facilitate outstanding payment through retrospective provisions.

• Refund interests accrued through pending bills and outstanding VAT refunds.

• VAT refunds are no more than 3 months.

• Refund of withholding VAT in 3 years.

NDITC, MOITEDNational TreasuryKRA

Lower the cost of imported industrial inputs

• Reduce Import Declaration Fee rate from 1.5% to 0% for all industrial inputs (basic raw materials and intermediate inputs) and industrial machinery and spare parts for manufacturers.

• Reduce Railway Development Levy from 1.5% to 0% for all industrial inputs (basic raw materials and intermediate inputs) and industrial machinery and spare parts for manufacturers.

• Reduce Kenya’s industrial cost un-competitiveness from current 12.8% to 9.8% compared to global practices

MOITEDNational TreasuryKRA



Incentivize prompt payment culture

• The National Treasury’s Committee to validate and clear outstanding refunds in 2 months’ time to publish the report and implement immediately.

• Implement the 60 days payment period provided for under the Public Procurement and Assets Disposal Regulations for 2020.

• Outstanding Bills to be cleared in 60 days as provided in Regulations 2020

MOITEDNational Treasury

Avail long term Financing to Manufacturers

• Incentivize saving institutions and pension funds to invest in the manufacturing sector.

• Design an inclusive framework in the Kenya Development Bank to serve all sizes of manufacturing enterprises from startups, SMEs to large enterprises.

• Drive firms’ long-term liquidity during COVID-19 recovery period


2 Enhance market access

Enhance Local Market Access

• Enhanced monitoring and evaluation of Buy Kenya Build Kenya (BKBK).

• Finalization of local content policy.

• Increase Kenya Trade Remedies Agency’s capacity to conduct investigations.

• Increase BKBK compliance level from 18% (2019) to 40% (2021)

• Reduce raw materials/intermediate imports from 80% (2019) to 50% (2025)

• Reduce from 40% (2012) to 0% (2025) unfair and unleveled market in the country controlled through dumping, subsidization and safeguards.

MOITED

Promote Regional market Access

• Fast track finalization of an optimal EAC Common External Tariff structure review which can promote value addition and industrialization.

• Review EAC Rules of Origin

• Fast track the finalization of the NTB Act amendments and development of the regulations.

• Implementation of National export promotion and development strategy.

• More investments & jobs along the value chain through a 4-band EAC CET structure.

• Revised EAC RoO supportive of Value Add, Material Content, Change in Tariff Heading and Sub-Heading e.g., Edible Oils- Chapter 15.



• Increased rate of resolved Kenya NTBs from current 70% to 100%.

• Achieve the 25% per year export growth target over the period 2018-2022.

MOITEDNational TreasuryMin of EAC

Diversify International market access

• Create an AfCTA advisory document/ trade guidelines for manufacturers’ use in continental market penetration.

• Promote US-Kenya Strategy supportive of Industrial Agenda in Kenya.

• Advocate for the implementation of Kenya-UK FTA for the benefit of the manufacturing sector.

• Increase exports to Africa from USD 2240M to USD 2800M (25% increase) by 2022.

• Post-AGOA FTA strategy is better post-2025 than current AGOA.

• 25% export increase into UK while quota free, duty free access to EU is sustained under Market Access Regulations (MAR).

MOITED

3 Pro-industry policy and institutional framework

Ensure predictable and stable industrial policies development through industry consultation

• Develop compliance support mechanisms and corrective action plans collaboratively with manufacturers to avoid local brands being destroyed.

• Response time by regulators be embedded in Service Charters/Service Level Agreements and monitored and adhered to.

• Sustained company brands and collaborative corrective actions.

• Reduce time-related costs and improved inter-agency coordination.

Government Regulatory Agencies: NEMA, KEBS, DOSH



Ensure certainty and predictability of tax policies

• Abolish 1% Minimum Tax.

• Revert Investment Deduction Allowance to 100%/150%.

• Develop and implement a National Taxation Policy that should amongst other things creates a 5-year cycle for reviewing of tax rates and measures.

• Eliminate ad-hoc policy formulation/review subsequently promoting predictable manufacturing policy decisions.

• Promote tax-cost competitiveness and avoid infringement to rights to properties.

• Increased industrial investment in Kenya, especially for large scale projects that require longer pay-off periods.

National TreasuryMOITEDKRA

Ensure national policy coherence for the manufacturing sector

• Implementation of The County Government (General) Regulations, 2020 to ensure better coordination between the National and County Governments.

• Mutual recognition of county business permits to reduce inter-county business costs.

The Presidency PDUCoG

4 SMEs development

Enhance market access for SMEs

• Implementation of the gazetted list for exclusive local sourcing and compliance reporting by MDAs.

• Local market penetration by SMEs.

MOITEDMSEACMA

Enhance governance

• Encourage SMEs to formalize their business through training and awareness creation.

• Capital Market Authority to reduce the costs associated with the implementation of corporate governance framework for SME’s.

• Promote bankability and well-defined processes within SMEs.

• SMEs subscribe to Growth Enterprises Market Segment (GEMS) for capital market access

MOITEDMSEACMA

Enhance access to Finance

• Ensure allocation of funds towards the SME credit guarantee scheme.

• Incentivize private incubators, research and development organizations to nurture startups and SME’s.

• Collateral security for SMEs provided by guarantee scheme.

• Non-financial support advanced to SMEs through incubators, research and development organizations.

National TreasuryMSEAMOITED



5 Industrial sustainability and resilience

Implementation of manufacturing sector resilience and sustainability strategy

• Nurturing nascent and emergent business opportunities uncovered by the COVID-19 pandemic.

• Scale-up of nascent and emergent business opportunities.


Ensure stable macroeconomic environment

• Implement the proposed treasury single account.

• Undertake fiscal consolidation to attain a fiscal deficit of 3% to GDP by 2023 in line with the EAC Monetary Union Protocol.

• To determine exact financial/revenue position for the government.

• Attain a fiscal deficit of 3% to GDP by 2023.

National Treasury

Pro-industry skill development

• Fast-track operationalization of Sector Skill Advisory Committee across sectors to guide in the development of occupational standards and influence curriculum development.

• Drive realization of Sustainable Development Goals through skills development and capacity building.

• Supporting skill-based job creation through Technical, Vocational Education and Training.

• Industry-led curriculum development & skills befitting industrial employment.

MOITED Ministry of Labor National Treasury Ministry of EducationMinistry of YouthNITATVETA National Employment Authority

Green Growth and sustainable development

• Localize and Implement SDGs Goal No. 12 on Responsible Production and Consumption under circular economy.

• Implement KAM’s Plastic Action Plan 2019.

• Create policy and legal frameworks to establish Extended Producer Schemes for post-consumer waste.

• Creation of more industrial opportunities & environmental sustainability in Kenya.

National TreasuryMOITEDMinistry of Environment

Fight against corruption

• Promote uptake of the Code of Ethics for Business in Kenya and compliance with anti-corruption requirements to foster transparency and accountability in industry.

• Advocate for the passage of the Bribery Regulations to actualize provisions of the Bribery Act.

• Enhanced economic governance, growth, and development by 2030.

MOITEDThe Attorney GeneralEthics and Anti-Corruption Commission



Fit-For-Purpose public service

• Finalize implementation of key recommendations in the 2013 Parastatal Taskforce report to reduce duplication and overlaps especially in the Agriculture sector.

• Strengthen performance contracting to enhance public service delivery.

• Reduced fiscal recurrent bill, duplicity and overlaps of regulations and government procedures.

• Enhanced public sector performance/unit cost.

Ministry of Interior/PDUMinistry of Public Service

Enhance Digitalization in manufacturing industry

• Support a well-embedded manufacturing ecosystem of start-ups and technology hubs.

• Support upskilling of industry personnel on digitization for increased industry competitiveness and productivity.

• Design and implement appropriate core processing systems (Enterprise Resource Planning solutions) with a bias towards manufacturing verticals.

• Design, select, and implement appropriate data analytics and robotic tools for use by the manufacturers.

• Build resilience (IT disaster recovery and business continuity planning) information systems and information processing systems for manufacturers. This includes assurance over the IT security around the core processing systems.

• Strengthen internal control environment for the manufacturers. This will be achieved through design, implementation and embedding of Enterprise Risk Management

• Increased productivity and standardization of industrial outputs for global markets.

MOITEDMin of ICTICTA

Who we areEstablished in 1959, Kenya Association of Manufacturers (KAM) is a representative of manufacturing and value-add industries in Kenya. The Association has grown into a dynamic, vibrant, credible Association that unites industrialists and offers a common voice for businesses.

We have been front and centre in driving fact-based policy advocacy towards the formation of industrial policies to strengthen and support the country’s economic development. Through fact-based advocacy, KAM partners with Government and its associated agencies to ensure a dynamic and flourishing manufacturing sector in Kenya, to realize a double-digit contribution to GDP.

Our VisionTo be a World Class BMO that effectively delivers services to its members

Our MissionTo promote competitive and sustainable local manufacturing

©2020. All Rights ReservedA publication of the Kenya Association of Manufacturers (KAM)

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Phone: +254 (020)2324817, (20)2166657Fax: +254 (020)3200030E-mail [email protected]; [email protected]

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