High production costs hurting Kenya’s apparel exports

By Pankaj Bedi 

A Cabinet communique dated 6^th December 2022 highlighted government’s plan to drive Kenya’s export-led growth. This is through strengthening existing trade partnerships including EAC and the UK whilst negotiating various trade pacts for duty-free and quota-free access of Kenyan goods to the USA, the UAE, South Korea, and the EU markets.

The Kenya Association of Manufacturers (KAM) Textiles and Apparel Sector is committed to supporting the government attain this plan. In fact, we aim to increase apparel exports to $7 billion in the next ten years from the current $540 million, provided the global cost competitiveness challenge is addressed. This is why we continuously engage the Government of Kenya to provide a conducive environment for the country to take advantage of the immense opportunities that duty-free market access and USA-China trade war present us.

The textiles and apparel sector is the third largest exporter in Kenya after horticulture and tea, with the USA being the key market for Kenyan-made apparel under African Growth and Opportunity Act (AGOA). Unfortunately, over and above the global economic recession, the economic slowdown experienced in the US has severely affected our exports.

The increased cost of doing business in the country has further exacerbated the situation, rendering the sector uncompetitive. The cost of doing business in the country has increased by almost 25% from May 2022 to February 2023. This is attributed to increased costs including employee costs, increase in statutory contributions such as the NSSF, power tariffs, logistics and finance, among others. With the depreciation of the Kenyan shilling against the dollar and other hard currencies, the perception is that this would help enhance export competitiveness. However, this has not been the case since the cost of doing business in the country continues to soar compared to other countries.

This has resulted in a high rate of order cancellations and requests for delayed shipment by global buyers, leading to a cashflow crisis among sector players as much of their cash is locked in inventory that is not due for payment as per forecasted schedules. Whereas buyers are committed to protecting their African suppliers during the slow period, Kenyan manufacturers cannot compete with regional players, namely Egypt, Tanzania, Uganda, Ethiopia, and Ghana.

The high cost in Kenya has also affected jobs within the sector. A recent survey by KAM showed that jobs within the textile and apparel sector reduced by 20% to 30% between October 2022 and February 2023. Sadly, we foresee job opportunities decreasing further as cost competitiveness increases and the US market slows down.

KAM aims to increase the manufacturing sector contribution to GDP from 7.2% to 20% by 2030 through the Kenya Manufacturing 20BY30 Plan. The Association has identified export-led growth as a critical pillar in driving this growth, as outlined in the Plan and the Manufacturing Priority Agenda, 2023. As a crucial sector in driving this pillar, the textile and apparel sector has identified interventions to sustain apparel exports.

First is an export incentive to bridge competitiveness gaps by making the production processes of firms and industries more efficient and productive. Such an initiative that links to the domestic market will drive the growth of the sector.

Second is the creation of a vertically integrated value chain to supply fabrics and yarns to the sector. This will be instrumental in enhancing the sector’s ability to meet the speed-to-market requirements. A vertically integrated value chain will necessitate an overhaul of the incentives framework to support a vibrant yarns and fabrics manufacturing sector.

Third is reduced electricity costs to allow for investments and competitive manufacturing in spinning, weaving, and knitting. The recent increment of power tariffs announced by EPRA does not make it economically feasible to run a competitive textile manufacturing firm.

Fourth is access to affordable funding for investments and trade financing. Global competitors are accessing credit at single digits below the 7% annual interest rate. Global buyers also have a maximum allowable interest rate factoring in the pricing of their sourcing decisions. This will enable the sector to finance its capital-intensive and high operating capital needs.

Lastly, secure the US market through AGOA extension for a minimum of 10 years. The ongoing Kenya – US Free Trade Area negotiations would also provide certainty to the future of preferential market access to the US. The optimization of other market access opportunities such as EU and AfCFTA would be instrumental in enabling the country and sector to reach an ideal export led industrialization.

Kenya is a front runner in apparel’s exports; we are the leading exporter of apparels under AGOA. There is a need for Kenya to capitalize on this head start and ensure that it creates a conducive environment for sustained growth of the sector.

We need to ask ourselves a very pertinent question. With the enormous opportunity that Kenya has; a duty-free market access to USA, U.K, Europe, Africa among others with an approximately combined USD 50 trillion GDP, why haven’t we been able to take the opportunity to industrialize, create many needed jobs, boost our forex reserves and in turn grow our economy? I believe the most opportune time for the government to relook at this opportunity is now and start doing things differently.

The writer is the Chair of the KAM EPZ Textiles & Apparel Sub-Sector. He can be reached at info@kam.co.ke.