Statement on New Tax Measures To The Economy

Kenya Association of Manufacturers notes with concern the impact that the newly imposed tax measures will have on the manufacturing sector and, the overall economy.

These taxes touch on various key sectors of industry, and are bound to have a negative bearing on Foreign Direct Investment, the size and productivity of local industry, as well as, the capacity for manufacturing to boost the local economy and achieve 15% GDP contribution by 2022 as aspired under the Big 4 Agenda.

At a time when our neighbouring countries, namely Uganda, Tanzania and Ethiopia, are attracting critical investment in their manufacturing sector by lowering production and labour costs, Kenya seems to be upscaling, which is contrary to the Big 4 Agenda and to creating sustainable and productive jobs for the citizens of this country.

The general populace is already grappling with the high cost of living, which significantly reduces their purchasing power and threatens to wipe away any savings by households. This means that the consumption of locally produced goods will continue to decline. The decline will be further exacerbated, when the cost of raw materials, transport and fuel, used in the production of goods is passed on, ultimately raising the final costs. The price of basic goods will increase and this will affect demand. In situations where the level of economic activity is on a downward trend, it is imprudent to increase taxes as well as government expenditure.

Over the years we have unfortunately seen an exodus of investors from Kenya to neighbouring countries, some opting to move their operations and sell their final products locally; meaning jobs along the value chains are lost and no new ones are created. Additionally, more money is channeled out of the country instead of circulating within the local economy. Other companies have simply shutdown completely.

The excise duty rate of Ksh 20 per kg imposed on Sugar Confectionaries and Chocolate, for example, will inevitably be passed on to consumers and reduce the products’ demand. This will consequently have an implication on the number of jobs that can be created and planned investments within this sector.

KAM expects the new tax measures to increase inflationary pressures, and this could easily exceed single digit if amplified by poor weather conditions. Currently, the excise tax paid on excisable goods such as Water, Juice and Beer, has an inflation adjustment factor. An increase in inflation will necessarily lead to higher excise tax payable. It is important to note that the control of inflation squarely lies with the Government as it has the fiscal and monetary tools to do so.

Most of the sectors in industry import more than 90% of inputs. The exchange rate has shown signs of depreciation as a result of the current impasse with regard to the Country’s debt position. This will increase the cost of imported inputs and further decrease the competitiveness of Kenyan products domestically and globally.  Further, it will be much more expensive to retire foreign external debt denominated in foreign currency when the currency is depreciated.

In another instance, manufacturers of paints, resins and shoe polish who use kerosene as a main input for their products have been hit with the anti-adulteration levy on all illuminating kerosene at a rate of Ksh 18 per litre of the custom value, this is in addition to the 8% VAT on fuel. By making it more expensive to manufacture these products, this sector becomes less attractive to investors both foreign and local. The 8% VAT on fuel will also impact the cost of transporting raw material and finished products.

We note that these increased costs had not been factored into the operational planning of businesses and the disruptions could mean loss of jobs. The newly introduced housing tax of 1.5% is one such cost that employers will have to bear. Specifically sectors such as Garment Manufacturers (EPZs mainly), which are labour-intensive will be adversely affected. Some may opt to move their operations to neighbouring countries or automate their processes.

Add to this, existing challenges to the manufacturing sector that have reduced its competitiveness. For example, the persistent high cost of electricity and unreliability; rising demurrage and storage costs due to inefficiencies experienced in the logistics chain (ports, rail, road etc); accrued VAT refunds arising from the export formula and Withholding VAT which affects manufacturers’ liquidity position.

The new tax measures do not at all sync with the spirit of the Big 4 Agenda to boost the productivity of local industry. An increase in the cost of doing business renders the local environment hostile to investments and derails any growth prospects of existing projects and planned expansions.

Keeping in mind that the solutions to the country’s debt challenge and economic situation are beyond the stated issues, we would like to highlight the following;

It is crucial that the Government involves all relevant stakeholders in the development of policies that will have an impact on the economy. Manufacturers have always advocated for a stable and predictable policy environment. Public outcry of the new tax measures is a clear sign the Government has little leverage when it comes to levying new taxes.

Going forward our focus must be on reducing and prioritizing expenditures.  Capital expenditures should always be subjected to economic appraisal to determine their viability before commitment of public funds. Counties are an integral part of the public system and must be included in this exercise. We must be deliberate in the fight against corruption and rent-seeking which undermine the country’s endeavor to reduce poverty and achieve sustainable economic growth and development.

As a country we need to introspectively interrogate how we arrived at this current state of affairs with regard to the economy. It is essential to institute strong measures to ensure transparency of public affairs, including debt management, to avoid a recurrence of the current situation.