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Budget 2020: A short in the arm for local industry in advent of COVID-19

Despite featuring as one of the four thematic development pillars for Kenya over the medium, manufacturing has been seen by many observers to have the greatest opportunity but somehow still has a lot to be achieved as we approach the end of the goal in 2022.

To many, the dream to turn manufacturing to a propeller of economic robustness has been fading as the pandemic and economic challenges affect the local industries.

For instance, data from the 2020 Economic Survey indicates growth for the sector across 2019 fell to 3.2% from a higher growth rate of 4.8% from resulting constrained supply to inputs and costs continue to be high in a very competitive market across the continent.

The private sector and government’s goal of lifting the contribution of the sector to 15% of the gross domestic product by 2022 and create an estimated over 800,000 jobs on an annual basis needs a major shot into the arm of the industries and economy.

catalyst for local invention, innovation

Even prior to the budget statement presentation in Parliament, the manufacturing sector had found booting from the convergence of factors.

Kenyans are very talented and innovative, despite the recent outbreak of the COVID-19 pandemic have found the situation more of a catalyst for local invention and innovation even as it comes as a blessing in disguise.

Nations and business stakeholders have been forced to look internally to replenish its stock of commodities under widespread disruptions to global value chains.

Kenya has had to look deeper inwards for inspiration. I find this more an opportunity for value addition in manufacturing and food production.

This has been supported recently when Heads of State in an East African Community regional meet reinforced the drive to increase agribusiness and be self-producing and manufacturing in the region with fewer imports from global markets.

A steep rise in the demand for personal protective equipment against global shortages has seen the country mobilize its own industry expertise to satisfy its needs for the equipment.

Kitui County has not only featured locally but also internationally for its exploits in turning a factory overnight to manufacture face masks for the public with other institutions across both the public and private sector the following suit.

Against the odds arising from restriction measures like the containment and cessation of movement imposed on Kenyans, local capacity has emerged as the shining light in a dark economic tunnel as the country makes a plan for a post COVID-19 era.

Combined with the now tabled 2020/2021 Kenya budget policy, the manufacturing sector seems set for a timely reboot.

I still feel the overall budget, stimulus package and trade incentives need to be up-scaled towards a stronger manufacturing economy, as intra-Africa trade demand, shows the strongest growth opportunity, which will result in the more robust regional integration and increase of exports earning the countries much needed foreign exchange.

The buy Africa, build Africa brands will thrive in a difficult situation.

Industry cushion in Kenya budget

New tax proposals directed to manufacturing are more to do with cushioning than stimulation as the government moves to protect its local industry from external forces.

New custom measures adopted following consultation between the National Treasury Cabinet Secretary Ukur Yatani and peers in the East African Community which take effect from 1 July continue to show government keenness in sheltering the local industry.

For instance, local iron and steel products will continue to enjoy protection as the duty rate on imports is maintained at 35% for another year.

The import duty rate for paper and paper board products have also been maintained at 25% for a similar period while the import duty rate on electrical parts and accessories has been increased to 35%t from 25%.

Away from cushioning, the import of inputs used in the manufacture of baby diapers, new clothing, apparels and mobile phone parts has been waivered.

Moreover, the EAC has agreed to put a permanent duty remission on raw materials and inputs for the manufacture of masks, sanitizers, ventilators and personal protective equipment including overalls and face shields.

The measures if fully implemented will serve to safeguard the local industry and promote greater productivity to end in higher economic output.

Stimulus package

The recently announced economic stimulus package which made for this year’s budget theme further makes for a platform strengthen local industry.

Among the key thematic areas covered in the now higher KSh56.6 billion stimulus package will be players in manufacturing.

My view is manufacturing will continue to grow, creating, and supporting both employment and entrepreneurship.

Local Value addition is stimulating billions of shillings of revenues for entrepreneurs in the supply chains in the manufacturing sector.

Part of the monies allocated to the scheme includes KSh10 billion towards VAT refunds, with the payments largely owned to local production stakeholders.

The freeing up of the funds will work to better the liquidity of firms in the country as they too struggle to contain the effects of the pandemic on businesses including the payment of own debts and settlement of pay-roll bills and arrears.

Further, the allocation of KSh10 billion towards the payment of accumulated pending bills will serve a purpose towards the same ends as the VAT refunds bettering the balance positions of firms.

The allocation of KSh3 billion as seed capital for the expected credit guarantee scheme to small and medium enterprises will in part help build the bridges to new credit lines to the business, instilling confidence in a largely weakened economy.

Local motor vehicle assemblies are expected to see boosts from the allocation of KSh600 million to the purchase of locally assembled vehicles as the government declares its support for the branding of the Buy Kenya Build Kenya initiative.

In addition to the stimulus package, the Treasury CS has insisted on the need to scale up to industrial parks and special economic zones by including allocations to the manufacturing sector including KSh1.4 billion to the Kenya Industrial and Entrepreneurship Project.

A further KSh3.6 billion has been channeled towards the development of a special economic zone textile park in Naivasha, the Kenanie leather industrial park, and the Athi River textile hub.

The Dongo Kundu special economic zone is also in on the allocations while Rivatex is also set for modernization support

The balancing act

Having faced up to hard prospects of presenting a balanced budget in light of falling revenues from the pandemic-led economic disruptions, the budget has however set altering policies that will have a direct or indirect impact on the local industry.

For starters, the allocation under the four-thematic development areas has been set at a lower KSh18.2 billion against a total appropriation of KSh128.7 billion to the big four agenda.

Further, new taxes are expected to have an impact on domestic firms’ sales and profitability.

While the minimum taxed priced in at one percent of gross turnovers to loss-making firms seek to net companies under-declaring revenues, the levy will have the intended consequences of taming the performance of firms especially start-ups which average at least three-years before breaking into profit-making.

High investment costs for manufacturers to scale up both innovation and be more competitive need further incentives and actions to grow this important sector.

Secondly, the second wave of taxation to the digital market place-termed as the Digital Services Tax charged at 1.5% of gross sales needs to be implemented with the consideration that the pandemic has also created a new normal of digital transformation in business.

New tax policies have to consider market and business challenges. Moreover, companies will not be able to reclaim input VAT without the clear identification of an accompanying output VAT to consumers.

The business will, however, find relief in changes in the Tax Procedures Act which seeks to allow individuals and firms to reconcile tax differences over a period of three years.

This has been one of the toughest budgets in the region but all the Finance ministers had one common goal to stimulate the economies and create employment for the youth. This must be done and many mountains to climb ahead.

With all that in mind, the efforts towards a greater good on matters COVID-19 pandemic that has crippled economies across the world are good but for Africa, governments need to be more worried and tighten all ends to curb the further speared of the virus.

World Health Organization just released data indicating that the continent should prepare for the worse at the months of July, August and September have been marked to be rough period if the spread is not well controlled.

Governments stakeholders and citizens in the region, must not ignore the COVID-19 containment measures or be swayed as we all vision the full reopening of economies in the future, because otherwise, all the important financial support and gains made so far may go down the drain.

Chris Diaz is a Business Leader and EABC Director

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