How second hand clothing imports are costing Kenya's exchequer billions

A customer shop for mitumba cloth at Toi Market in Kibra, Nairobi on June 09, 2022. [File, Standard] Recent studies have shown that Kenya is now Africa's largest importer of second hand clothes. This could also suggest that the government has lost significant revenues due to misinvoicing. Latest Data by the Massachusetts Institute of Technology (MIT) shows that Kenya imported used clothes and textiles valued Sh38.5 billion (298 million usd in 2023) overtaking Nigeria. In the same period, Kenya had one of the largest trade deficits in second hand trade. In 2023, the leading exporters of Used Clothing were United States ($1.09B), China ($736M), and Germany ($391M). According to the Observatory for Economic Complexity, In the same year, Kenya ranked the fourth largest importer of used clothing globally, behind Pakistan ($335M), United Arab Emirates ($237M), and Guatemala ($211M), while Kenya imported 183, million USD. This huge import highlights Kenya's significant demand for affordable clothing, with used clothing ranking 17th among the country's most imported products in 2023. In a 2018 study by Global Financial Integrity, Kenya lost approximately $21 million in revenue due to under-invoicing of used clothing imports in 2013. This was part of a larger $907 million loss from trade misinvoicing that year. In 2013, Kenya imported 110,000 tonnes of second hand clothes valued at (140 million usd) Given this, misinvoicing could still be an issue and likely continues to affect government revenue and trade transparency, given Kenya's role as a major importer of second-hand clothes. 2023 imports were valued at upwards of 12.45 per cent from 2022. Misinvoicing in trade involves misrepresenting the value, quantity, or nature of goods to evade taxes, duties, or manipulate trade statistics. For second-hand clothes in Kenya, this often means under-invoicing to reduce import duties. The 2013 data indicates that under-invoicing was a significant issue, potentially used to evade the 35% customs duty or US$0.20 per kilogramme levy. Given the high volume of imports and the economic incentives for importers to reduce costs, this practice is likely to continue. With 2023 imports at Sh38.5 billion, the potential for misinvoicing could be even higher today. According to the U.S. trade data, Kenya imported second hand clothes valued at (19.4 million USD) from the United States in 2023. Overall, total US exports to Kenya stood at (484.7 million USD) in the review period. The economic survey 2024 by the Kenya National Bureau of Statistics recorded the value of imports to Kenya from the USA as Sh112.7 billion, (807 million USD), showing a significant variation from the US trade data. This discrepancy is attributed to the cost of insurance and freight, which was estimated at (322,3M USD)- a margin that appears high. It may only be plausible for significant imports such as petroleum products. Jossineter Syengo, the Customs and Excise Lead at KPMG East Africa, said that importers play with the values of goods, thereby increasing the likelihood of misinvoicing. "Importers just present invoices that are not going to attract high value of taxation. Invoices declared are always lower than the specific duty rate," Ms. Syengo said noting that when the invoice value is low, the country loses revenue on taxes like the 2 per cent Railway Development Levy (RDL). According to Ms. Syengo, the valuation of secondhand clothes is a bit complex. "It is easy to value new goods, unlike used goods." She notes that the variation in value of goods reported to have been imported by the two countries could be as a result of goods being consigned from other countries, whose origin is the United States. To address the complexity of valuing second hand clothes, the East African Community opted for specific duty rates per kilogram, to neutralize the challenge of undervaluation of goods. The East African Community (EAC) has a maximum customs duty of 35 per cent on all imported goods, including secondhand clothes Auditor General Nancy Gathungu wants countries that receive flows from Africa to scrutinize the money getting into their systems to ensure that they are not part of IFFs. "The weakest link has been the lack of sanctions not just on the entities and individuals taking the money out but also in the jurisdictions that the money goes," she said, adding that what is lost to IFFs could easily plug the budget deficits of many African countries and cut down reliance on debt to finance budgets. Africa loses Sh88.6B dollars every year to illicit financial flows. This is according to an audit report by the auditor generals from African countries. Imported secondhand clothes typically involve both ad valorem (customs duty) and specific (per kilogram) rates, with Kenya and Rwanda applying 35 per cent duty and a specific rate of $0.20/kg and $0.40/kg respectively. Ms. Syengo has also said that the lack of communication between different jurisdictions encourages trade misinvoicing. For Instance, when importing from Kenya to Uganda, "Sometimes information available with the commissioner on the Kenyan side, may not be the same information a commissioner on the Ugandan side has. So it is left purely to the importers to be truthful on the value of goods they are purchasing". Additionally, she has said that the trend of two trading countries reporting different values for the same goods as imported and exported has been analyzed to be very common, and this, together with lost exports and orphan imports, has led to rampant cases of smuggling. The Mitumba second hand clothing business operates in a relatively informal way, which means the government loses revenue due to its inability to track its informal transactions. "Traders make a lot of money from second hand clothing business, but government losses revenue in income tax because of the informal way that Mitumba business operates," Ms. Syengo said. A Mitumba trader who sought to remain anonymous, told The Standard that the traders still import banned goods like inner wears. "Imported inner wears are still being sold because the demand for it is high, therefore importers are forced to falsify the contents and have the Mitumba inner wear brought into the country". The trader has stated that importers also manipulate the value of imports by falsifying the content. "If a bale of curtains is Sh5,000, and the inner wear is Sh30,000, the trader gets away with the Sh25,000 difference," the trader said noting that this ultimately changes the tax element by almost similar amount robbing the exchequer, considerable amounts of revenue. "It is difficult for KRA to check what is inside the container at import, sometimes they try to open a whole container, but they can't check everything," Even as the importers enjoy the loopholes, the trader has said that by so doing, importers are risking their businesses. He hints that sometimes, "Maybe the importers are working in cahoots with KRA. There is a huge likelihood of tampering with manifesto, because the illegal goods are available in the market". He notes that this trend is not only in the Mitumba sector, but in most of the other imports, including car imports. Auditor General Nancy Gathungu has said that transfer pricing has been identified as one of the key areas that are vulnerable to illicit financial flows. "Manipulative practices such as misinvoicing and other fraudulent schemes are major contributors to IFFs," Kenya's Auditor General Nancy Gathungu said. She notes that collaboration between government institutions was lacking, "in most if not all countries, hindering coordinated efforts to tackle illicit financial flows. Poor information exchange across borders has also allowed IFFs to flourish across borders in the continent". Additionally, she has noted that the deepening use of cryptocurrency is an emerging challenge relating to IFFs that has created an avenue for individuals to move funds across borders without detection. "African governments have become increasingly reliant on debt. If IFFs are not addressed, the economic challenges facing African countries will only intensify," Ms. Gathungu said. In the five years to 2023, imports of second hand clothes grew marginally, driven by High demand for affordable clothing among low- and middle-income earners, as mitumba is often cheaper than new clothes. Trade Policies such as the African Growth and Opportunity Act (AGOA) require allowing mitumba imports, especially from the US, which has also fueled Kenya's reliance on used clothing. According to data from the Kenya National Bureau of Statistics, in 2019, Kenya imported second hand clothes valued at Sh17.7 billion. In 2020, Kenya imported Sh12.2 billion worth of Mitumba, which was the lowest value in the five-year period (2017-2021) due to COVID-19 disruptions, which reduced global trade and demand. The Economic Survey 2023 further showed that the country imported used clothes worth Sh18.9 billion and Sh19.9 billion in 2021 and 2022 respectively. In the efforts to revive the local textile sector, Cabinet Secretary for Trade and Industry Lee Kinyanjui, Kenya cannot have a thriving textile Industry, while at the same time remaining a favorite export destination for second hand clothes. "The current global trade realignment calls for us to be inward looking to see what we must do," CS Trade said there is a need for political goodwill to revive Kenya's textile industry. The East African Community has in the past tried to ban the import and use of second hand clothes in Africa. With Trump's Tariffs in place, "I think the opportunity for a reset, and not just textile is now. We need to see more of intra Africa trade," he said. "I want to confirm that much of the Mitumba is made in Kenya and exported outside, after which it is sold back here as second hand clothes," he said. Juma Mukhwana, Principal Secretary, State Department for Industry has said that most of the ginneries in the country have become obsolete due to the collapse of the textile industry. "Part of our stagnation is because of import of used clothes. How do you grow a vibrant textile sector, while importing used clothes in bales?" Mukhwana noted. "We need to address the issue of dumping, we have not growth because of policy contradiction in that regard," Juma Mukhwana said. At the time of publishing this story, our efforts to get a response and retrieve recent data on trade misinvoicing from the Kenya Revenue Authority had proven futile. CREDIT: "The project received support from the Thomson Reuters Foundation as part of its global work aiming to strengthen free, fair and informed societies. Any financial assistance or support provided to the journalist has no editorial influence. The content of this article belongs solely to the author and is not endorsed by or associated with the Thomson Reuters Foundation, Thomson Reuters, Reuters, nor any other affiliates".

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