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Why you will pay dearly to fund Uhuru’s Big Four legacy project

By Dominic Omondi | Published Tue, August 14th 2018 at 09:12, Updated August 14th 2018 at 14:20 GMT +3

Not all that glitters is gold. While President Uhuru Kenyatta’s Big Four agendahas been been touted as the next big thing, a closer look at it shows it might come at a huge cost.

Simple consumer products such as steel wool, stoves, cookers and cooking gas, all valued at more than Sh500 billion, will find it hard to enter Kenya as Treasury begins shielding local manufacturers from competition under the guise of implementing President Uhuru Kenyatta’s pet project.

If not well handled, the Big Four agenda could leave consumers worse off. The Government has slapped a number of imports with higher tariffs as it moves to protect certain sectors that Treasury believes will create jobs, enhance food security, boost universal healthcare and shield low-cost housing from the competition.

Besides mining more cash from taxpayers to fund the plan by increasing excise duty on mobile money transactions to 12 per cent from 10 per cent, introducing a tax of 0.05 per cent on transactions of Sh500,000 through any financial institution, or taxing winnings on betting to fund Universal Health Care, President Kenyatta has decided to protect textile, iron and steel, leather, agro-processing, oil, mining and gas, construction, ICT and fish processing sectors from competition.

It is a delicate balancing act that if not well executed, might see the already high cost of living skyrocket even as they are denied the liberty to choose goods that they believe can make their lives better.

Already, protectionism has seen the consumers endure steep prices of locally-produced sugar as the country continues to shield moribund millers from the competition. 

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And now, for the next 12 months and possibly four years, Kenyans will pay more for cheap imported clothes and shoes, cookers, gas cylinders, steel wool and stoves as the Government imposes high import duty on these products.

Other imported goods that might get expensive include doors, windows and frames, bolts and nuts, bridges, road guard rails as well as roofing tiles.

Prices of soya bean oil and palm oil might also go up as President Kenyatta seeks to give impetus to his Big Four agenda. Today, textile and footwear imports are some of the hardest hit in the latest protectionist move.

Most of these items have been assigned the “sensitive” label for the local market for a year. The biggest casualties will be textile imports, with the Government keen on reviving the fledgeling sector. Kenya’s import of new fabrics and garments is valued at around Sh189 billion.

Textile imports include non-knit women’s suits, synthetic woven fabric, non-knit men’s suits, second-hand clothes, knit men’s suits, knit women’s suits and knit men’s suits. Others are light pure woven cotton, non-knit men’s shirts, knit t-shirts, among others.

In his Budget Speech in June, Treasury Cabinet Secretary Henry Rotich proposed to introduce an import duty of Sh500 per unit or 35 per cent, whichever was higher, on cheap imported textiles. “Our textile and footwear sector is closing down due to increased unfair competition from cheap imported textiles and footwear,” he said.

“In order to encourage local production and create jobs for our youth in the sector, I have introduced a specific rate of import duy of Sh500 per unit or 35 per cent whichever is higher.”

Treasury did not increase duty on second-hand clothes but instead increased duty on new fabrics.

The Sh500 per tonne that CS Rotich talked about will only apply to new fabrics, apparels, and garments.  

Wood products

Indeed, if the mitumbas (second-hand clothes) would have been subjected to this tariff line, they would have been even cheaper.

Other items that started attracting higher tariffs since July 1 include paper, wood and wood products, iron and steel and surprisingly, Liquefied Petroleum Gas (LPG).

LPG, which was previously on the list of products that come into the country duty-free, has been slapped with a 25 per cent import duty.

It was not immediately clear why National Treasury would hit LPG with punitive taxes since the Government has been campaigning to have more people abandon wood fuel for the cleaner and more efficient fuel. CS Rotich’s assault on Kenya’s kitchen did not end with LPG gas.  Other kitchenwares that have been hit with the import taxes include iron or steel wool, pot scourers and scouring or polishing pads.

Gloves have also been hit with a 35 per cent or Sh20,000 per tonne, whichever is higher. The duty will apply for the next 12 months starting July 1 - which is an increase from an import duty of 25 per cent that applied before.

And this is not all. The new rate will also apply to stoves, ranges, grates, cookers (including those with subsidiary boilers for central heating), barbecues, braziers, gas-rings, plate warmers and similar non-electric domestic appliances, according to the Gazette Notice.

Here, Kenya has suspended application of the East African Community (EAC) Common External Tariff (CET) rate of 10 per cent and instead applied a rate of 35 per cent for one year.

This is part of the State’s move to protect local producers of iron and steel.

As of 2016, Kenya’s total value of imported metals was Sh141 billion. 

Last year, the country imported steel and iron worth Sh86 billion.

This, the Government reckons, has been to the detriment of local manufacturers.

“Mr Speaker, our iron and steel industry is facing stiff competition from imported cheap and subsidised iron and steel products.  In order to protect the local iron and steel  industries,  I  have increased the rate of import duty from 25 per cent to 35 per cent in a wide range of steel and iron products which are available in the region,” said Rotich in his budget speech.

Iron and steel are some of the sectors that President Kenyatta hopes will help him achieve one of his Big Four agenda - job creation.

The Government’s aim is to attract investments valued at Sh100 billion in the iron and steel industry by 2022.

The State hopes to achieve this by developing a policy and incentive framework, establishing coal and iron deposits and committing Government share of at least 30 per cent to the iron and steel players in the country.

The increased taxes on iron and steel will perhaps hit hard the construction sector. Bridges and bridge sections, towers and lattice masts, equipment for scaffolding, shuttering, propping or pit-propping, road guard rails will attract a common external tariff of 35 per cent or Sh25,000  per tonne, whichever is higher for one year. Screws and bolts, whether or not with their nuts or washers, as well as nuts will also be subjected to the same duty rate. 

Still, in the construction sector, doors, windows and their frames, and thresholds for doors will be hit with an EAC CET rate of 35 per cent or Sh25,000 per tonne instead of the normal 25 per cent.

For expensive shoes and other footwear, Kenya will stay application of the EAC CET rate of 25 per cent and apply a rate of 35 per cent or Sh1,000 per pair, whichever is higher for one year.

For refined soya bean oil, Kenya is to stay application of the EAC CET of 25 per cent and apply a rate of 35 per cent or Sh50,000 per tonne whichever is higher for one year.

The country will also stay application of the EAC CET of 25 per cent  on refined palm oil and apply a rate of 35 per cent or 50,000 per tonne whichever is higher for one year. For inputs used in the manufacture of roofing tiles coated with acrylic paint and the weather side coated with natural sand granules, Kenya and Uganda granted a remission to apply a duty rate of zero per cent for one year

President Kenyatta on Sunday assured Kenyans that implementation of the Big Four Agenda will create job opportunities for the youth.

The Head of State who was speaking yesterday in Kisii where he led the country in celebrations to mark this year’s International Youth Day cited the manufacturing sector which is expected to create more than 800,000 jobs annually.

“Textile and apparel making, assembly of electricals and electronics, motor vehicle assembly, agro-processing, and fish processing are emergent opportunities that our youth can now exploit,” President Kenyatta said. But it is a delicate balancing act which, if not well executed, might be counterproductive.

Consumers might be denied choice, a hallmark of a free market economy.

It is not only the price that might be affected by the latest attempt at import substitution, the quality of the products available might also be compromised as local manufacturers feel no pressure to innovate due to lack of competition. 

For example, even as the Government seeks to revitalise local shoe-making by increasing import duty on all imports of footwear, the Government ought to know that cheap rubber shoes from China have had such a tremendous impact in rural Kenya.

Not long ago, a few lucky adults in rural Kenya put on Akala (open shoes made from car tyres) while children went to school barefoot.

Import substitution

Today, while not many rural folks can afford expensive leather shoes from Bata, most of them have been able to wear open shoes popularly known as tuk-tuk.

Protection of manufacturers or import substitution is ostensibly being done to ensure job creation.

However, some observers argue that most of the proposals aimed at revamping the sector are, by and large, being pushed by influential individuals and families of industrialists in the iron and steel, paper and edible oil industries where Kenya does not enjoy a comparative advantage.

Controversial economist David Ndii in a recent article said the Government’s import substitution is not meant to improve the lives of Kenyans but to benefit a few well-connected individuals.

He singled out the recent import tariffs on timber, vegetable oils, and paper products as one which benefitted some players in the industry, even as they made life more difficult for consumers.

The economist argued that what made the leaders of the East Asian Tigers pursue export-led industrialisation was the need to “improve a lot of their people”.

“I postulated that they (leaders of East Asian Tigers) did not set out to perform economic miracles, but rather to improve the lot of their people, which led them to the realisation that capital-intensive import substitution industries would not create jobs for the masses,” said Dr Ndii in the article that appeared online.  If nothing concrete is done by reducing the cost of power and labour, for example, efforts to resuscitate the local textile manufacturing might be futile. 

Anzetse Were, a development economist, said most of the taxes being proposed by Treasury are meant to shore up revenue generation rather than reduce the cost of production. 

“Those taxes are not linked to anything beneficial,” she said, noting that without helping ease the cost of doing business, consumers absorb the high prices of products.

Dr Scholastica Odhiambo, an Economics lecturer from Maseno University, said the Government is being “revenue-conscious” rather than protective in its latest tariff hikes.

“They know there is a lot of money involved in these industries, so they say let us penalise them to raise more revenue,” she said, noting that the industrial capacity of for most local firms is inadequate.

This, she says make consumers worse off. “An increase on the tariff on steel, for example, will only result raising the cost of production which will then result in layoffs,” added Odhiambo. This is what happened when the Government tried to prop up textile makers as Kisumu Cotton Mills and Rivatex, said Economist Gerishon Ikiara.

It took longer for the benefits from these industries to percolate to consumers.

Those were the days when parents could buy their children only a few locally-made jeans, carelessly embroidered with a lot of colourful patches. 

Mr Ikiara said consumers were beginning to get impatient with the local garments and when second-hand clothes started streaming, it was such as huge relief. “Consumers benefited a lot from a liberalised market of the textile market,” he said.

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