Continued poor performance of manufacturing and tourism industries could derail Kenya’s plans of attaining over 6.5 per cent growth this year.

The two sectors were the only ones that registered negative growth in the first quarter of this year in comparison to a similar period in 2014.

Kenya’s gross domestic product (GDP) rose to 4.9 per cent in the first three months this years from 4.7 per cent recorded in a similar period in 2014.

Tourism and hospitality posted a negative growth for the fifth consecutive quarter. The once vibrant industry contracted by 7.5 per cent during the first quarter of 2015 compared to 14.1 per cent suffered in the same quarter last year due to insecurity in parts of Kenya’s Coast and the north east.

Similarly, the poor run of the manufacturing industry, which accounts for 11 per cent of the GDP, has persisted, hitting a five-year low last year. By March, the sector’s contribution to growth hit 3.5 per cent compared to a 6.4 per cent posted over a similar period last year. This is attributed to the decline in the processing of canned fruits, maize meal, tobacco and sugar.

The industry was, however, boosted by assembly of motor vehicles, beer production, manufacture of galvanised iron sheets and the production of soft drinks as well as cement.

“We need to up our game by fast-tracking development of special economic zones, raising the share of value addition to agricultural commodities and elevating the standards of our products so that we stay ahead of the competition,” said Industrialisation PS Wilson Songa.

The influx of cheap goods from countries such as India and China have hampered local manufacturing, which is also grappling with high cost of energy.

VAT exemption

Ambitious plans such as the setting up of industrial centres targeting the small and medium enterprises in Nairobi, Nakuru, Kisumu, Mombasa and Eldoret have received a boost through exemption from VAT on goods and services for use in the development of infrastructure in industrial and recreational parks of at least 100 acres. About Sh3 billion has been set aside to facilitate the establishment of these parks and special economic zones.

A multi-billion shilling food processing industrial park in Dongo Kundu, Mombasa, is also in the pipeline.

The zone, which is projected to add $300 million to Kenya’s wealth and create 60,000 jobs, banks on the farm produce from the one-million-acre Galana irrigation scheme. The country is set to market the plan during the year to international investors, starting with Japan.

“If the food processing industrial park in Dongo Kundu can add $300 million to GDP, it will significantly ramp up manufacturing’s contribution to the economy from the current level of 11 per cent,” Dr Songa said.

New road, rail, and ports as well as power plants are expected to improve the overall business environment and attract foreign direct investments.

Agriculture is expected to be the main attraction due to low levels of value addition of farm produce currently. Only about 16 per cent of Kenya’s agricultural produce is processed.

“We have had a poor record in processing and adding value to our agricultural produce. This is now the time to address this,” Dr Songa noted.

The ministry is finalising work on Kenya’s industrial transformation strategy, which gives priority to the assembly of motor vehicles, domestic appliances and computers.

The strategy also targets labour-intensive, low-technology industries such as textiles and leather in a bid to tap into the African Growth Opportunity Act (Agoa) and other global markets.

In June, fresh tax measures aimed at protecting the local manufacturing sector from cheap imports were unveiled. For instance, the import duty on plastic tubes for packing toothpaste and cosmetics was increased from 10 to 25 per cent while import duty on aluminium milk cans was raised to 25 per cent from 10 per cent.

To protect local sugar millers, the Treasury raised duty on imported sugar from $200 to $460 per tonne.

Even as efforts to spur industrialisation gets underway, small and micro enterprises, which are critical to economic transformation, are hindered by inadequate financing as banks consider them high risk.

They are also constrained by limited access to market, poor infrastructure, inadequate knowledge and skills, rapid technology changes and unfavourable laws and regulations.  

“These challenges have curtailed the growth of many SMEs, contributed to low export product diversification and undermined the national efforts towards graduating from commodities trade to high-end goods,” said Treasury CS Henry Rotich when reading the 2015/16 budget.