High cost of electricity to stall economic growth

By Morris Aron

Economists and manufacturers have expressed concern that the increase in cost of electricity is bound to push up the cost of production, dampen economic growth prospects and make Kenya an uncompetitive investment destination.

Betty Maina the chief executive of the manufacturer umbrella body Kenya Association of Manufacturers said that any rise in cost of electricity would be felt across the chain as manufacturers spend as high as 40 percent of their input costs on energy alone.

In Kenya, manufacturers pay between Sh10 and Sh15 per kilowatt of electricity while among their competitors in China and India it cost an equivalent of Sh2.50 and Sh3.80 per kilowatt of electricity.

"The new electricity tariffs are too high for the industry to absorb and it must be reduced as soon as possible before it causes further damage to the industry," said Ms Maina in a recent interview.

Kenya’s electricity—before the current increment—is four times costlier than it is in Egypt that is a major trading partner within the Comesa block.

Manufacturers worry, given the precedence, that any products made in Kenya will be more expensive and not competitive in the increasingly global village and market.

The end result is that on average their products are in most cases cheaper and more competitive.

This is a major set back for Kenyan manufacturers, whose commodities will not be able to compete with those from other countries where the cost of doing business is still low.

As a result, our products have become very uncompetitive, a fact that has adversely affected the export market.

"With the cost of energy increasing, manufacturers are left with no alternative except to pass on the costs to the end consumer in order to protect bottom lines," said Vimal Shah chief executive officer of Bidco.

Growth engine

"But with the world now a global market, it is not good for business especially for companies like us who operate in a number of countries."

Manufacturing, alongside a majority of Small and Medium Enterprises in the informal sector, are considered the engine of Kenya’s economic growth.

However, the negative impact of increasing energy costs might force the emerging SMEs to shut down their operations due to increased production costs.

Economists’ biggest worry is that the current trend is not good for the country’s plan to industrialize as outlined in the Vision 2030.

Responding to a query on the impact of the rising cost of living, Mugo Kibati the chief executive of Vision 2030 acknowledged the fact.

"If the current trends of high fuel prices, in as much as I don’t like it, we will be forced to revise our growth targets," said Mr Kibati.

Industries generally find it unsustainable to operate in a country with high production costs. To survive, some of them shift to friendlier countries or into trading, transforming the country into a net importer of consumer goods.

With such a trend, Kenya’s hopes of rising into a middle income economy by the year 2030 seem to be a pipe-dream, given the current status of the country’s economy.

The ambitious Vision 2030 which pledges to triple Kenya’s economic fortunes within the next 22 years to the levels of economically rising countries including Malaysia and Singapore.

Among the raft of proposals being put forward to curb the high costs include that of Kenya Power and Lighting Company (KPLC) issuing consumers with a forecast guideline on fuel cost adjustment for a period of time for budgetary purposes.

This strategy will cushion the manufacturing sector from shock adjustments in excess of 50 percent. This will help industry plan forward and avoid incurring losses. There should also be total transparency in the calculation of fuel cost adjustment in terms of the actual fuel consumed by each plant and total units generated by each plant, which should be made public.