Kenya’s manufacturing sector plays a vital role in the economy, supporting jobs, driving innovation, and enhancing diversification. Despite its potential, the sector faces significant challenges, such as outdated regulatory frameworks and data inconsistencies. These problems have led to a need for better data management and stronger tax incentives.
One of the most significant issues facing the sector is the reliability of data. Inaccurate or inconsistent data makes it difficult for the government to create effective policies. At the same time, manufacturers are calling for tax incentives to boost production and attract investment. Both issues—data credibility and taxation—are essential for the sector’s growth.
Knowclick Media will explore the importance of accurate data in policy making and discuss manufacturers’ advocacy for tax cuts on inputs. It will also look at the implications of these issues for policy-making and suggest potential solutions.
Why Accurate Data Matters for Policy Making
Accurate data is a cornerstone of sound policymaking. In Kenya, however, the credibility of data has been called into question. Inconsistent or unreliable data can lead to poor policy decisions that do not reflect the true state of the manufacturing sector.
Cabinet Secretary for Investments, Trade, and Industry Lee Kinyanjui has raised concerns about the data presented by businesses. One key issue is that businesses often maintain multiple sets of financial records for different purposes. For example, a company might submit one set of books to the Kenya Revenue Authority (KRA), another to banks, and yet another to government agencies. This practice undermines the credibility of the data used to make decisions.
Inaccurate data can lead to misguided policies. For instance, official data might show a drop in cement production over recent years, while actual consumption is rising. This discrepancy could result from infrastructure projects, such as the Nairobi Expressway, driving up demand for cement. Thus, accurate and reliable data is crucial to forming policies that address the actual needs of businesses.
Manufacturers’ Push for Tax Incentives
Manufacturers in Kenya have long advocated for tax breaks to support the sector. They argue that the current tax regime increases production costs and makes local products less competitive compared to imports. The Kenya Association of Manufacturers (KAM) has been vocal in calling for tax cuts, particularly for raw materials.
The rationale is simple: when raw materials are taxed at high rates, production costs go up. This increases the price of locally made products, making them less competitive against cheaper imports. As a result, local manufacturers struggle to maintain their market share.
KAM believes that removing taxes on raw materials would reduce production costs, making local products more competitive. It would also stimulate investment in the sector and generate more jobs. Furthermore, it could help businesses reinvest their savings into innovation, creating a cycle of growth that benefits the entire economy.
The Case for Eliminating Taxes on Inputs
One of KAM’s key arguments is that taxes on raw materials hinder production and growth. Miriam Bomett, Head of Policy and Regulatory Advocacy at KAM, pointed to the example of the 25% tax on imported furniture introduced in 2022. This tax, according to Bomett, has had a positive impact on local production. In 2023, furniture production increased by 5.5%, and exports rose by 27%. This shows that tax incentives can drive growth.
Bomett also highlighted the impact of excise duties on key raw materials, such as refined sugar. In 2024, the government increased both the excise duty on white sugar and the Sugar Development Levy. These taxes raise the cost of production for manufacturers in the food sector, making it harder for them to compete with cheaper imports. Bomett argues that reducing such taxes would help lower production costs and allow businesses to grow.
The key takeaway here is that lowering taxes on raw materials would create a more favorable business environment. Manufacturers would be able to reduce costs, invest in growth, and generate more jobs. Additionally, a reduction in tax rates would allow businesses to compete more effectively with imported goods, boosting local manufacturing.
Government Policy and Taxation Challenges
The government is aware of the challenges that manufacturers face with Kenya’s tax system. However, policymakers have been cautious about making tax cuts without a clear understanding of the financial impact. CS Kinyanjui has pointed out the unpredictability of the current tax regime and how this creates uncertainty for businesses.
Kinyanjui has proposed a more predictable tax framework, with fixed tax policies over a four-year period. This would provide stability and allow manufacturers to plan better for the future. It would also give businesses the confidence to invest, knowing that tax rates will remain stable for an extended period.
Additionally, Kinyanjui mentioned that foreign investors are also concerned about the lack of tax predictability in Kenya. Many investors seek stable tax policies when deciding where to allocate capital. Frequent changes in tax rates can discourage investment, as businesses may be unsure of the financial implications.
Manufacturing’s Impact on Kenya’s Economy
Despite the challenges, the manufacturing sector remains a cornerstone of Kenya’s economy. In 2023, manufacturing output increased by 13.1%, a significant jump from the previous year. Employment in the sector also rose, with over 362,000 new jobs created in 2023 alone.
While manufacturing’s share of GDP has declined, its absolute value has been steadily increasing. In 2023, the manufacturing sector generated Ksh3.6 trillion in output, up from Ksh3.2 trillion in 2022. This shows that the sector has room for growth, especially if the right policies are put in place.
Solutions for Growing Kenya’s Manufacturing Sector
Several key steps could support the growth of Kenya’s manufacturing sector:
- Tax Incentives for Raw Materials: Reducing taxes on raw materials would lower production costs and improve the competitiveness of local manufacturers.
- Stable Tax Policies: A more predictable tax regime would allow manufacturers to plan for the future and invest with confidence.
- Improved Data Accuracy: Addressing data credibility issues would help policymakers make better decisions and create more effective policies.
- Access to Finance: Improving access to affordable financing would enable manufacturers to invest in innovation and expansion.
- Infrastructure Development: Continued investment in infrastructure, particularly in transport and energy, would help reduce costs for manufacturers and improve efficiency.
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The Path Forward for Kenya’s Manufacturing Sector
Kenya’s manufacturing sector holds significant potential for growth, but it faces challenges related to tax policies and data credibility. Addressing these issues could unlock opportunities for businesses to expand, create jobs, and contribute more to the economy. Manufacturers must continue advocating for tax incentives on raw materials and a stable, predictable tax system. At the same time, the government must work to improve the accuracy of data, ensuring that policies reflect the true state of the sector.
With the right policies in place, Kenya’s manufacturing sector can become a global leader, driving sustainable economic growth and job creation.
