Vision 2030 under threat as manufacturing declines


The contribution of the manufacturing sector to the economy and jobs has been declining over the past five years, reveals a NationNewsplex investigation.

The sector’s share of the gross domestic product (GDP) shrank by more than two percentage points from almost 11 per cent in 2013 to 8.4 per cent in 2017, according to the 2018 Economic Survey. In 2016, manufacturing contributed 9.1 per cent to GDP, a drop from the previous year’s 9.4 per cent and 10 per cent in 2014.

Manufacturing contribution to the economy contracted more than any other sector during the five years under review followed by education whose input to GDP declined by 1.2 percentage points and real estate (0.5 per cent).

The trends remain unpromising yet Kenya may not meet its ambitious goal of becoming a globally competitive and successful upper-middle-income country with a high quality of life by 2030, as outlined in Vision 2030, without a strong manufacturing sector. Currently, the country is a lower-middle income economy.

Globally, manufacturing has been the engine of innovation and economic growth since the industrial revolution in the 19th Century.

Figures from the World Bank show that the value added per worker in manufacturing firms has declined steadily since the 1970s, which points to structural issues.

The stagnation in the sector is partly due to low overall productivity and large efficiency differences in firms across subsectors, which allows uncompetitive companies to remain in business, according to a recent World Bank Kenya Economic Outlook report.

The industry also fares badly when compared to the largest sector agriculture, forestry and fishing whose contribution to GDP expanded by over five points to a third within the five years under review, the highest increase, followed by construction and financial activities (about one per cent each).

Food production is the dominant manufacturing activity with figures from the Kenya National Bureau of Statistics showing that two in five shillings that the industry contributes to GDP is from the food, beverage and tobacco subsector. This fact and the dominance of the agriculture, forestry and fishing sectors are signs that Kenya largely remains an agricultural economy.

All the other sectors, apart from the two, contribute less than nine per cent each to the GDP.

Salaried employees

Manufacturing growth also significantly trails overall economic growth. The sector posted a marginal growth of 0.2 per cent in 2017 compared to 2.7 per cent the previous year. But the overall economy grew by 4.9 per cent in 2017, which was 25 times the pace at which manufacturing grew. The economy also grew by 5.9 per cent in 2016, a pace double that of the sector.

The deceleration was partly attributed to uncertainties related to the 2017 General Election, high cost of inputs and stiff competition from cheap imports. Largely, most activities in the sector recorded significant decline leading to the slowdown experienced in 2017.

Figures from the World Bank show that the value added per worker in manufacturing firms has declined steadily since the 1970s, which points to structural issues.

The sectoral contribution to overall growth plunged 10 percentage points from 10.6 per cent in 2013 to 0.4 per cent last year.

In monetary terms, the sector contributed Sh648.4 billion to the GDP, an increase of more than a quarter (28 per cent) from 506.6 billion in 2013.

Despite the turbulent times, manufacturing is one of the largest employers by sector. Overall, the sector employs about 303,300 salaried workers which is a 20 per cent improvement from 252,100 in 2013. This means that one in nine salaried employees works in manufacturing. In 2013, the sector employed one in eight wage earning workers.

The average monthly wage in manufacturing in the private sector is Sh38,194, which is a third less than the overall mean monthly pay in the private sector of Sh56,624.

The best place to work in the private sector is with international non-governmental organisations with an average monthly wage of Sh264,630, followed by financial and insurance (Sh146,630 and electricity, gas, steam and air conditioning supply (Sh134,442). Activities of households as employers and goods- and services - producing activities of households for own use pay on average Sh19,469 monthly, the lowest in the sector.

The average monthly earnings in manufacturing in the public sector is Sh73,479, which is about a fifth higher than the sector’s overall monthly pay average of Sh57,915. The activity that pays the highest on average in the public sector is financial and insurance at Sh141,988 while the activity that pays the least is mining and quarrying at Sh33,871 monthly.
The real average earnings per employee in manufacturing in the private sector adjusted for inflation improved by eight per cent from 2013 to 2017, making it the fourth best increase in the private sector. The biggest increase in real wage earnings in the private sector during the five years under review was in the water supply, sewerage and waste management industry (a quarter), followed mining and quarrying (19 per cent). In contrast, the average real wage earnings per person in manufacturing in the public sector dropped by 12 per cent, the fifth worst decline by any industry in the public sector.

Real wage is the income of an individual after taking into consideration effects of inflation and purchasing power. Overall, real average earnings declined by 0.1 per cent from Sh30,723 in 2013 to 30,750 in 2017.
Last year the average real monthly wage in manufacturing for the private sector was Sh20,602, a third less than the overall private sector average real monthly earnings and one of the worst by industry. In the public sector, manufacturing paid an average real salary amounting to Sh39,635, which is over Sh8,000 more than overall real average monthly pay of Sh31,240.

Manufacturing output increased by more than a quarter from about Sh1,738 billion in 2013 to Sh2,205 billion in 2017. However, last year the volume of output from the sector contracted by more than one per cent which was attributed mainly to decline in food products, beverages and tobacco, leather and related products, rubber and plastics and non-metallic minerals sub-sectors.

Credit access

Manufacturing was also negatively affected by uncertainties relating to the 2017 General Election, rise in inflation, high production costs and competition from imported goods. The ban on production and use of plastic carrier bags also had adverse effects on the volume of output of the sector.

According to the World Bank, lack of access to finance affects manufacturing more than many others because the sector needs access to capital for investments, infrastructure to import inputs and export and distribute finished products, affordable and reliable electricity to produce, labour to man operations, and fair and streamlined regulations and trade policies that allow firms to compete.

Total loans advanced by commercial banks and other financial institutions increased by more than 70 per cent from Sh182.6 billion in 2013 to Sh311.8 billion last year. The value of approved credit by industrial financial institutions increased from Sh1.1 billion in 2016 to Sh1.3 billion in 2017.

But the number of approved projects decreased by 15 per cent to 338 in 2017 from 293 the previous year. This was mainly due to a decline in the number of projects within the micro and small enterprises financed by the Kenya Industrial Estates, which plays a major role in promoting local entrepreneurship by financing and developing SMEs.

The government has identified manufacturing as one of its big four-agenda and has set targets for growth and employment creation in the sector while the World Bank recommended several policy actions that could help anchor growth and spur the industry. They include helping raise firm productivity by facilitating the stock and flow of skills, technology, and information among firms, levelling the playing field between formal and informal firms by reducing and streamlining regulation, and ensuring even application, decreasing the cost of doing business by addressing critical issues related to energy, access to finance, and cross-border trade, as well as streamlining the process for starting a business and simplifying the bankruptcy laws.