Once a giant, it now rivals the financial sector in terms of contribution to Kenya’s GDP

At that time, the share of the processing industry in the country’s total production, i.e. gross domestic product (GDP), was approximately 10.5%, second only to agriculture.

The financial sector – including real estate and business services – generated 6.2% of GDP.

Fast forward to 2023, and the financial and insurance sector’s share of GDP will surpass that of the manufacturing sector and become the fourth largest industry after agriculture, transport and real estate, according to the latest annual economic survey conducted by the Kenya National Bureau of Statistics (KNBS).

Last year, the financial and insurance sector generated 7.8% of GDP compared to 7.5% for the manufacturing industry, signaling faster growth in banking and insurance activities compared to manufacturing.

However, the manufacturing sector’s share of GDP declined from 10.4% in 2007 to 7.7% in 2022 against the 15% target set in the Uhuru Kenyatta administration’s Big Four Agenda.

The services sector, including transport, real estate and trade, recorded faster growth in the same period.

While banking activity has revived thanks to financial technology and the regional expansion of some of the country’s largest lenders, the manufacturing sector is struggling with high production costs, the spread of counterfeits, low levels of technology uptake and recurring drought, the government says in its fourth medium-term plan (MTP). IV).

There are also punitive tax measures that have been implemented in various sub-sectors, said Christopher Kandie, vice-chairman of the production committee at the Kenya National Chamber of Commerce and Industry ((KNCCI).

“Conversion costs, which include labor and electricity, also continue to rise. It has also been reported that some multinational corporations find it more profitable to import finished products from their operating units in other countries, thereby limiting the growth of the sector,” Kandie said.

The difficult operating environment caused many top manufacturers to leave the country. These include confectioners Cadbury Kenya which has been relocated to Egypt in 2014, where they found labor and energy costs to be relatively lower.

In early 2007, personal care giant Reckitt Benckiser stopped direct production in Kenya due to “costs and scale issues”.

Colgate-Palmolive, an oral and personal care company, also closed its plant in 2006, sending nearly 50 permanent and casual workers into unemployment.

Factories in Kenya, like many others around the world, have difficulty competing with factories in China, which has recently been a major source of products made in Kenya, including those made of iron and steel, plastics and textiles.

Not only was the Kenyan market flooded with Chinese goods, China-made goods also flooded neighboring countries that had long relied on Kenya for products made of iron and steel as well as plastics.

One of the manufacturing giants was the textile and clothing industry, whose fortunes collapsed.

In the 1990s, thanks to the promotion of import substitution through import tariffs and quotas, the textile subsector employed about 30 percent of the labor force in the domestic manufacturing sector.

The promotion of import substitution was also supported by currency allocation measures. The exchange rate has also been inflated to take into account the cost of importing raw materials, and credit and interest rates have also been implicitly subsidized for imported raw materials, writes Dr Jacob Omolo, an economics lecturer at Kenyatta University.

The import of second-hand clothing, known as mitumba, is also blamed for the poor performance of the textile sector.

Nevertheless, successive regimes, from the late Mwai Kibaki to Uhuru Kenyatta and William Ruto, have pinned their hopes on reviving the textile manufacturing sector.

Former Treasury Cabinet Secretary Henry Rotich, after revealing the Big Four Agenda in Kenyatta’s 2018 fiscal policy, launched an attack on mitumba and even suggested that Kenya would stop the flow of used clothes into the country.

“Our textile and footwear sector is shutting down due to unfair competition from cheap imports,” Rotich said in his June 2018 budget speech.

From July 2018, Rotich announced that all imported clothing, including mitumba, will be subject to a higher import tariff of $5 (500 pounds) per item or 35 percent, whichever is higher.

He said the tax aims to encourage local production and create jobs for young people in the sector.

New clothing imported from countries such as China have also been subject to higher tariffs, intended to encourage local production.

Imported spirits are also subject to higher tariffs, intended to encourage local production of alcoholic beverages.

The Ruto administration in its fourth medium-term plan attributes the decline to high production costs, competition from counterfeit goods, poor technology adoption and recurrent drought.

However, the government believes that progress has been made in reviving the manufacturing sector.

“The sector has facilitated export-oriented investments through the development of a textile hub on the Athi River; modernization of the Rivatex Textile Factory; and initiating the creation of Special Economic Zones in Dongo Kundu and

Naivasha. The share of the processing industry in Kenya’s GDP compared to lower-middle- and upper-middle-income countries in the years 2007–2022,” we read in MTP IV.