Manufacturing sector feels the heat as tobacco industry runs out of puff

The Government is between a rock and a hard place after the release of the First Quarterly Gross Domestic Product and Balance of Payments 2015 report. It suggests a decline in the manufacture of tobacco products that has played a significant role in the overall plunge in the manufacturing sector during the first three months of the year.

This comes on the heels of the Government’s move to extract more revenue from tobacco manufacturers to compensate for the harmful effects its products have.

And though cigarette manufacturer British American Tobacco (BAT) last week convinced the High Court to suspend a Bill that would require cigarette makers contribute a portion of their revenue to the State, the sector’s troubles are not over.

First, the suspension is temporary, and second, the National Assembly is set to debate even more punitive legislation in the Excise Duty Bill, 2015.

The Bill seeks to levy so-called sin taxes on perennial targets, who include brewers and tobacco manufacturers. For instance, cigars, cheroots, cigarillos and tobacco substitutes are to be slapped with an excise duty of Sh10,000 per kilogramme.

Cigarette makers are required to brand their products with warnings on the harmful health implications of smoking, and are banned from advertising. Manufacturers have argued these stringent regulations are proving too expensive.

Slowed growth

The manufacturing sector generally suffered slowed growth of 3.5 per cent in the first quarter of this year, compared to 6.4 per cent over a similar period in 2014, according to the report from the Kenya Bureau of Statistics.

In addition to the decline in tobacco manufacture, the sector’s performance has been attributed to decreased processing of canned fruits, maize meal and sugar.

Interestingly, one of the reasons for the little growth the sector experienced during the quarter was the increased production of beer.

It remains to be seen what effect new tax proposals on beer manufacturing will have on the sector. For instance, the Excise Duty Bill imposes a levy of Sh150 on wines, including fortified wines, and other alcoholic beverages obtained through the fermentation of fruits.

Powdered beer gets a Sh100 per litre levy, with excise duty of Sh100 proposed per litre of beer, cider, perry, mead, opaque beer and mixtures of fermented beverages with non-alcoholic beverages.

Manufacturers of tobacco and alcoholic beverages have in the past argued for some sort of tax relief on the basis that their businesses contribute significantly to the creation of jobs, and they are among the top taxpayers.

Opponents have countered this by saying the jobs such firms create and the taxes they pay are lost in the expenses the State incurs to fight the harmful effects that result from the production, supply and consumption of their products.

Cheaper imports

The 3.5 per cent growth in manufacturing was also supported by the assembly of motor vehicles, manufacture of galvanised sheets and cement, and the production of soft drinks.

There have been concerns over the declining growth in the country’s manufacturing, with the World Bank in a report early this year noting that the sector’s contribution to exports and growth is less than optimal.

“Kenya needs to increase the competitiveness of its manufacturing sector so that the country can grow, export and create much-needed jobs,” said Maria Paulina Mogollon, a private sector specialist at the World Bank.

The institution added that a strong manufacturing sector would reduce the country’s vulnerability to a widening account deficit.

XN Iraki, an economics lecturer at the University of Nairobi School of Business, however, does not think the manufacturing sector is on its death bed just yet.

“I think the sector might not be shrinking, but the service sector is growing faster and drowning manufacturing,” he said.

But he admits that competition from cheaper imports, especially from countries that offer subsidies to manufacturers, might be taking a toll on the local industry, as is the country’s poor business environment.

In his Budget speech last month, Treasury Cabinet Secretary Henry Rotich proposed measures aimed at rejuvenating the struggling sector. Prominent among these were proposals to increase tariffs on certain imports to protect local producers.

The CS also put on notice public entities that were yet to fully adhere to the requirements of the ‘Build Kenya, Buy Kenya’ campaign. One of the directives includes ensuring firms that win tenders source for at least 40 per cent of their content from local firms.

The CS said this requirement covers all procurement for works on roads, railways, airports, ports and harbours, and materials for generation, transmission and distribution of energy.

Industrial hub

Suppliers were also asked to establish manufacturing or assembly plants locally to position Kenya as a regional industrial hub. One of the stories dominating headlines in the manufacturing industry is the near collapse of Kenya’s biggest miller, Mumias Sugar Company. Mumias’ woes are reflective of what has come to characterise the country’s sugar industry. Mr Rotich promised action on this in his speech.

“Most of our sugar factories are on the verge of closing down due to competition from cheap imported sugar. In order to protect our sugar industry, I have increased the specific duty rate on imported sugar from $200 (Sh19,909) to $460 (Sh45,791) per metric tonne.

“This measure will cushion the sugar sector from unfair competition and enable our local factories to break even and pay farmers promptly.”