Kenya: Manufacturing Costs Affected by Interest Rates, Electricity Tariffs
Thursday, 04 April 2013

As the new Kenyatta/Ruto government assumes office, job creation will inevitably be among the top priorities: unemployment and underemployment rates are high and in particular the lack of opportunities for Kenya’s youth are effectively a security risk.
Manufacturing has for a long time been identified as a sector with serious potential as a jobs provider as well as an economic driver. Official statistics indicate that the sector accounted for about 10% of the Gross Domestic Product (GDP) in 2011. The sector’s formal employees number around 250,000, with related transport and trade activities providing in excess of a million jobs.

Interest Rates, Electricity Tariffs

While the sector faces numerous challenges to growth, energy and cost of credit in particular continue to pose serious problems. Listed manufacturers who are obliged to release their financial statements   indicate falling profitability. Mumias Sugar, East African Breweries Ltd and Bamburi Cement are some of the big names that recorded significant drops in profitability in 2012. This fall has been largely attributed to high interest rates.

Statistics from Central Bank of Kenya (CBK) show that lending to the manufacturing sector grew strongly in the second half of 2012 despite interest rates averaging 18.3%, nearly double the Central Bank Rate (CBR). In its March meeting, CBK’s Monetary Policy Committee (MPC) retained the benchmark lending rate at 9.5%. This was largely expected due to the climate of uncertainty created by the March 2013 general election as well as other unfavourable macroeconomic indicators like an uptick in consumer price inflation that rose from 3.67% in January to 4.45% in February. This indicates that manufacturers will continue to face higher interest rates.

Another concern are the proposed electricity tariff hikes by Kenya Power:‘The existing base non-fuel retail tariffs are proposed to be adjusted…this would result in overall non-fuel tariff increases of 21%, 9%, 4% and 11% proposed to be applicable on March 1, 2013, July 1, 2013, July 1, 2014 and July 1, 2015, respectively.’ These adjustments are meant to cater for rising costs as well as boost sales. The changes that were supposed to take effect in March 2013, but this has been delayed by the Energy Regulatory Commission’s review of the proposals.
Electricity is central to manufacturing and tariff changes have multiple effects, including on inflation and making the country’s goods uncompetitive. Betty Maina, the CEO of manufacturers’ umbrella, the Kenya Association of Manufacturers (KAM), has continually criticised the pricing of electricity, arguing that Kenya’s continental competition was at an advantage.

‘If the increases sail through, the country has to brace itself for a massive exodus of manufacturing companies to countries that have cheaper energy costs such as Ethiopia, Egypt, Tanzania and Uganda whose electricity costs are USc3/kw, USc5/kw, USc9/kw  and USc 18.6 respectively compared to Kenya’s current USc18.7/kw,’ she argued.

Kenya Power: Housekeeping over Shareholders

According to Maina, industry consumes 60% of power in Kenya and is yet to recover from the previous adjustment: ‘The manufacturing sector grew by a disappointing 3.3% in 2011 compared to 4.4% in 2010. This translates to a decline of 25% in industrial growth which mainly attributable to energy costs and other primary input costs.’
KAM has also argued that the previous adjustments were made on the understanding that system losses would be reduced to no more than 15%. This has not happened, with only five of the planned 13 projects cited in the 2008 review completed.
Kenya Power has been accused of concentrating on pleasing its shareholders at the expense of a vital service. It has been suggested that the utility company should first ensure system efficacy by reducing transmission losses as well as recovering debts owed.

Tip of the Iceberg?

Kenya has been ranked 121st out of 185 economies in World Bank’s latest Ease of Doing Business report, sliding from 109th in 2012 and 106th in 2011. Not a good sign: Despite the lofty Vision 2030 promises, service delivery in key areas deteriorated. These include a higher cost and lengthier period in obtaining documents necessary for cross-border trade, and difficulties in registering property and obtaining electricity.

The cost of credit and electricity prices may well just be the tip of the iceberg: In a meeting with private sector players, president-elect Uhuru Kenyatta has promised to lower the cost of doing business. Business leaders on the other hand have provided him with a priority list to fast track the process. According to the Business Daily, they list energy, labour and transport costs as in need of an urgent review to boost the competitiveness of Kenyan goods. It’s also proposed that the tax regime be harmonised to make it easier to pay taxes. Currently, several manufacturers are embroiled in multi-billion legal disputes with the Kenya Revenue Authority (KRA) over taxes with the unclear taxation laws to blame. In the Ease of Doing Business report, although the country rose four places in the payment of taxes index, it is still the worst performer among the measured areas. Globally the country is ranked 164th in this area. Sluggish VAT refunds lock up valuable working capital.

Mombasa Port, although handling more than its designed capacity, is also on the private sector’s wish list of key institutions that need urgent reform. It has been argued that breakdown of the port’s core systems and uncoordinated government agencies contribute a huge percentage of the delays experienced in the entry point. Although there are reforms like the recently announced joint cargo inspection, these are slow in implementation. The costs of importing and exporting have risen, and the average period for importing a container has also increased to 26 days compared to 24 days in the previous year.

While agriculture continues to dominate Kenya’s GDP, manufacturing has enormous potential for local value addition, job creation and export growth (never mind that a significant share of manufacturing is agroprocessing, so both sectors are linked). Export figures show Africa, and especially East Africa, becoming the most prominent market for Kenyan goods. The regional integration process has been relatively promising, no doubt because it is mainly driven by the private sector. The EAC has been implementing the Customs Union and Common Market Protocols to create a market of over 120mn people. Kenyan manufacturing – despite its high cost structure feared by its neighbours   stands to take advantage of this, together with its logistical advantage and a more mature, diversified economy to grow the sector’s contribution to GDP as well as provide more jobs to the urban youth. All eyes on the Kenyatta/Ruto government – one of their challenging first tasks will be to boil down the numerous Grand Coalition ministries to a more manageable 22 and divide them amongst coalition partners. This will set the ground for Kenya’s immediate industrial development.

Share this article with others:
Digg!Reddit!!Facebook!Slashdot!Netscape!Technorati!StumbleUpon!Newsvine!Furl!Yahoo!Ma.gnolia!Free social bookmarking plugins and extensions for Joomla! websites!
Comments (0)Add Comment

Write comment