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Bailout will save manufactures from virus shocks

By Isaac Kalua | May 31st 2020 at 00:00:00 GMT +0300

On May 27, the US hit the grim milestone of more than 100,000 Covid-19 deaths. On this same day, Kenya also reached its own grim milestone of 123 new Covid-19 cases in a single day. These two tragic occurrences show that Covid-19 will be like a prolonged drought stretching into many months, and not like an intense hurricane that lasts for a few days or weeks. This drought of a pandemic is killing lives, economies, dreams, businesses and jobs.

KPMG and Kenya Association of Manufacturers recently conducted a joint survey on the impact of Covid-19 on Kenya’s manufacturing sector. The survey unearthed some staggering results. Before the virus, the biggest priorities of local manufacturers were to increase revenue, domestic market share and profitability. Now, after the ravages of this pandemic, the biggest priorities of manufacturers are reducing costs, retaining jobs and improving cash flow.

The severe cash-flow constraints of these manufacturers are worsened by debtors who are either unable or unwilling to pay them. Unfortunately, the Government of Kenya is among the biggest debtors. Most of these companies have been chasing their tax refunds for years. Further compounding matters for the motorcycle assembly sector, a KRA system error left players in this sector burdened with an over-payment of VAT since 2016.

In late March, President Uhuru Kenyatta directed KRA to expedite payment of all verified tax refunds within three weeks. Regrettably, most of these refunds are yet to be paid two months later. Considering that this figure amounts to Sh10 billion, it is going to revitalise local manufacturers and inject a much-needed cash flow into the economy.

These tax refunds need to happen this week. They are the oxygen that will keep dozens of local manufactures and other sector players afloat and alive. If the government continues dragging its feet on this matter, local manufacturers will collapse right before its eyes. They were already stumbling even before Covid-19 because of an influx of imported goods that literally kill local manufacture and local jobs. Every time you take a walk in the supermarket and see an imported product, you are staring at local jobs that are six feet deep, buried by needless imports. Covid-19 has worsened the situation.

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Grace period

Indeed, local firms are so deep in the economic pit that tax refunds should just be a small part of a much broader and deeper economic stimulus plan. For instance, since 60 per cent of local manufacturers have difficulty paying tax obligations, I suggest that they be given a grace period that extends into 2021. This will breathe further life into their liquidity and buy them time to recover.

It is evident that many local manufacturers are in need of mouth-to-mouth resuscitation, which should be offered. However, the government and society cannot walk away at this juncture. We all have a serious obligation to ensure empathy and survival for each other. VAT refunds, tax breaks and payment of pending bills are steps in this direction, and we should also appreciate that government service delivery is anchored on the same taxes. Nevertheless, the journey ahead is still very long and must be grounded on policy.

One of the big steps that will make a difference in this journey is a local manufacturer stabilisation fund modelled after Germany’s wirtschaftsstabilisierungsfonds, which means Economy Stabilisation Fund. This fund seeks to stabilise businesses whose continued destabilisation would adversely impact Germany’s economy, technological sovereignty, supply security, critical infrastructure and labor market. The German government has deposited Sh71 trillion into this fund and is channeling two-thirds of this amount into public guarantees to secure credits issued by local banks.

I suggest that we customise this approach to our unique needs, weaknesses and strengths. Germany has invested 60 per cent of its GDP into its economic stimulus plan, far more than other developed countries. While Kenya’s economy cannot afford such a massive stimulus, we must go a lot further than we already have.

The question therefore is this – what should be done so that the government can channel at least Sh1 trillion into public guarantees that will enable banks to extend low interest credit to hundreds of local manufacturers? Unless we take such preventive steps now, we will be forced to take curative radical steps later, and that will be much worse. Critically, people at the grassroots from the remote villages of Witu to the crowded alleys of Kibra, should be part of this journey. They should be consulted and engaged in Kenya’s journey to full economic recovery. This is what it means to think and act green.

- The writer is founder and chairperson, Green Africa Foundation. www.isaackalua.co.ke


Covid-19 President Uhuru Kenyatta KRA KPMG Kenya Association of Manufacturers
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