Posted on September, 20, 2018 at 10:05 am
By NJIRAINI MUCHIRA
Nairobi. Plans by East African countries to anchor economic growth to manufacturing are increasingly becoming unfeasible as existing manufacturers grapple with financing challenges and rising competition from cheap imports.
Across the region, governments have identified the manufacturing sector as the cog that will accelerate economic growth, create employment and alleviate poverty.
In Uganda, manufacturing has for years been on NRM’s top development agenda, forming one of the Big Four sectors that the government has identified to drive growth.
However, the rising cost of production - particularly energy and transport - competition from imports from China, declining purchasing power, rising labour costs, unfavourable policies including tax hikes and counterfeits have placed hurdles in the development path of this sector.
In Uganda, mounting challenges have forced industries to downscale their operations, so much that the manufacturing is operating at only 54 per cent of installed capacity, according to the Uganda Manufacturers Association.
It is not only in Uganda where manufacturing is in distress. In Kenya, a regional cement maker ARM Cement recently joined a growing list of manufacturers that have folded while others struggle to survive.
ARM was placed under receivership due to massive debt, and its shares suspended from trading at the Nairobi Securities Exchange.
ARM joined Unga Group, whose shares were temporarily suspended to facilitate takeover talks by US firm Seaboard.
Other listed manufacturers such as Bamburi Cement, East African Portland Cement Company, Unga Group, British American Tobacco and East Africa Breweries Limited have either posted declining profits or sunk into loss making.
“High and multiple taxation, an unpredictable and unstable policy environment, the high costs of energy, the scarcity of the necessary technical skills and the high cost of labour have hampered business growth and expansion of the industry,” said Phyllis Wakiaga, the Kenya Association of Manufacturers chief executive.
In Kenya, the fact that the manufacturing is in crisis, it is evident in Central Bank of Kenya’s data which shows that the sector is leading in loan default as uptake of new credit remains flat.
The Central Bank of Kenya data for the first quarter of 2018 show that non-performing loans in manufacturing increased to $455.3m in March from $390.3m in December 2017.
“The manufacturing sector registered the highest increase in NPLs due to a slowdown in business, which led to delay in loan repayments,” said the quarterly economic review.
In Tanzania, notable challenges such as rising production costs, limited infrastructure and high tax burdens have seen the sector’s contribution to GDP decline from 7.6 per cent in 2011 to 4.9 per cent last year.
“Recent years have been challenging for domestic manufacturers, as an increasing tax burden and a sagging macroeconomic outlook have weighed on growth of the sector in Tanzania,” said a report by Oxford Business Group, a global research and consultancy firm.
Notably, the region does not have a strong manufacturing sector considering that food and beverage industries dominate, accounting for more than 40 per cent of total output.
Other categories of manufacturing include textiles and apparels, chemicals, furniture, rubber and plastics, non-metallic minerals, fabricated metals, basic metals and paper.
This state of affairs has been brought about by the fact that although East Africa is endowed with vast resources, the level of value addition has remained low despite gradually increasing from $2.5b in 2010 to $6.5b in 2016, according to KAM.
The basic structure of the sector has meant that about 80 per cent of the products are consumed in the domestic market, with Kenya for instance only managing to export 18 per cent of its manufactured goods, with the EAC market accounting for six per cent and the rest of world 12 per cent.
More critically, the structure of the sector has meant that it cannot withstand shocks ranging from increase in electricity tariffs, to high taxes, transportation costs and more significantly imports from China.
The situation of manufacturers has not been made any better by the unprecedented surge in illicit, substandard and counterfeit products in the market, a menace that has hit some manufacturers hard.
In Kenya, it is estimated that manufacturers lose up to 40 per cent of market share, 50 per cent of revenue and 10 per cent of company reputation due to the proliferation of counterfeits, with the government losing about $80m in tax revenue annually.
In Kenya, the recent increase in electricity tariffs by 30 per cent and introduction of value added tax on petroleum products is posing real threats that could further cripple the struggling manufacturing sector.
“The business environment in Kenya is increasingly becoming cost disadvantaged. To stay afloat, business will have to make very hard and drastic decisions of whether to shoulder the extra cost or pass the tax burden onto already overburdened consumers in order to meet their overhead costs,” noted Ms Wakiaga.
Source: Daily Nation