In declaring that Kenya will produce an affordable mobile phone within the next one year, President William Ruto has already set the tone as far as his administration’s vision for the role of manufacturing in Kenya’s economic development is concerned.
The President, judging by his public declaration, sees great possibilities in making Kenya a manufacturing hub that produces a wide range of affordable goods for its citizens.
All economic blueprints since Kenya’s independence have elevated the manufacturing sector’s critical role in the achievement of Kenya’s growth aspirations.
Manufacturing has the proven potential of creating high-quality jobs, increasing household incomes, widening the tax base and boosting our balance of payment position by enhancing exports.
Like other productive sectors of our economy, however, manufacturing has not achieved its full potential and has, therefore, not made the contribution it should to our national output.
Kenya’s economy has in recent years been largely driven by growth in public sector consumption, public sector investment and private consumption. This would have been fine and would have translated the economic growth to economic development indicators, only if the rise in demand for goods and services had been matched by an increase in domestic productive capacity to satisfy this demand. This has unfortunately not been the case. Our expanded demand for goods and services has to a large extent been fulfilled by foreign goods, which has driven up the import bill and trade deficit.
The manufacturing sector’s underperformance means that tax revenues have not kept up with government expenditure, which has created a fiscal deficit that is funded through increased domestic and external borrowings.
The trade and fiscal deficits are related, and their common denominator is that our productivity has not kept up with our appetite for goods and services. Our foreign borrowings have increased by 3.6 times from $10.5 billion to $37.8 Billion between 2013 and 2020 in our effort to plug the fiscal deficit. This has put further pressure on government revenues, with net foreign debt service taking up as much as 11.6 per cent of public revenue in 2021, up from 4.3 per cent in 2013.
The trade deficit, coupled with foreign debt repayment burden and negative Foreign Direct Investment (FDI) flows have put significant pressure on the shilling. Had we been at a level of competitiveness commensurate with our potential, a weakening shilling would have made our exports more competitive. Instead, it is driving up inflation due to the larger imported component in our consumer basket and the significant import component of intermediate goods that go into our manufacturing.
Cost of living
The inflation pressure has led to an increase in the cost of living. As an example, the manufacturing sector accounted for about half of our total imports in 2021, at Sh1.0 trillion. In the same period, the sector exported a paltry Sh208 billion, contributing Sh800 billion to Kenya’s trade deficit.
Our rate of new job creation has not kept pace either with economic growth rate or population growth. Aggregate wages have been stagnant, and this has been the cause of anguish for many educated youth who cannot find jobs.
Additionally, our tax policy has been driven by the urgent need to raise revenue as opposed to aligning it towards a set of coherent economic policies geared towards creating full employment, enhancing productivity and competitiveness. This has created an unpredictable operating environment that has dissuaded investment and hurt our national productivity.
Kenya’s local manufacturing capacity has stagnated over the years despite significant investment in public infrastructure.
This is perhaps a wake-up call to review the competitiveness and attractiveness of our economy as a manufacturing hub based on other aspects such as regulations and overall cost of doing business. Statistics indicate that by 2020, FDI flows had halved to about $700 million from a high of $1.5 billion in 2011.
Whereas government development expenditure’s contribution to GDP has declined from 9.1 per cent to 4.8 per cent between 2015 and 2021, the private sector investments to GDP ratio has fairly stagnated between 12.5 per cent and 14.8 per cent over the same period.
Thus, the gross capital formation to GDP ratio has declined from an all-time high of 21.6 per cent in 2015 to 19.6 per cent in 2021. Without sufficient enhancement of the local manufacturing capacity, there is limited scope for the whole economy to create jobs and increase wages to uplift our status to a ‘newly industrialised upper middle-income economy’ as envisioned in our Vision 2030 blueprint.
The 2021 Kenya Economic Survey indicates that the manufacturing sector accounts for about 15.8 per cent of private sector wage employment, which is a decline from 16.5 per cent in 2016.
The absolute number of jobs in this sector came down by 6.7 per cent over the period. On the other hand, total wage payments in the manufacturing sector grew by 8.8 per cent, and looking at this in the context of rising inflation and depreciating currency, real wages have stagnated if not deteriorated. This is the sad story even across the other sectors of the Kenyan economy.
Across any value chain, we have three key stages: Primary production (extractive sector), secondary production (manufacturing and assembly) and tertiary production (entails commercial services that support production).
The true definition of manufacturing is “the transformation of raw materials into final or intermediate goods” as contrasted with the definition of assembly, which entails putting together various parts to produce a new product.
Our economy, like many developing nations, has for far too long focused on assembly as opposed to manufacturing. This has partly contributed to the fragile economic structure that we find ourselves in.
The focus on assembly means reliance on global importation of intermediate goods, which results in undesirable effects such as exposure to global supply chain risks, imported inflation, exposure to global currency risks and widening of the trade deficit.
To cushion our economy from these global economic vulnerabilities, there is need to create an enabling environment to allow a greater focus on manufacturing in its true definition and move away from assembly.
Some of the broad policy priorities that would create alignment between the interests of the state and those of the enterprising private sector include: Providing an enabling environment for the growth of our manufacturing sector share of GDP, promoting the integration of manufacturing with agriculture, mining and other primary raw materials production sectors to enhance efficiencies and create new jobs and higher real wages across the entire economy, increase manufactured exports both in absolute terms and as a proportion of total exports and focus our foreign trade regime to drive exports in areas that contribute to broader growth.
Our tax policy should be focused on taxation of income as opposed to taxation of inputs so as to grow government revenue and drive human socio-economic development without an additional tax burden.
Dr Mworia is group CEO at Centum Investment Company PLC.