China’s tax cuts spell doom for local manufacturers

The Chinese government's move to cut taxes will further open the floodgates for cheap imports into Kenya, dealing a blow to local manufacturers.

The three-year programme will see corporate-income, value-added and other corporate taxes for small and medium enterprises (SMEs) reduced, with the country's Central Bank cutting the amount of reserve a bank should maintain so as to release more money for lending.

The move will enable Chinese factories to produce goods at far much lower costs, giving them an edge in the global marketplace.

This comes as latest statistics show that China is Kenya’s largest source of imports for machinery and transport equipment, accounting for Sh291.8 billion. It's followed by India at Sh161.2 billion, Saudi Arabia (Sh138.4 billion) and UAE (Sh126 billion).

With a conducive environment back home, Chinese companies could launch a trade offensive against Kenyan companies reeling from high energy costs, punitive licensing regimes, cheap imports and high taxes.

In an interview, the Kenya Association of Manufacturers (KAM) Chief Executive Phyllis Wakiaga said the trend is worrying since Kenya’s import bill increased by 20.5 per cent from 2016’s Sh1.4 trillion, to Sh1.7 trillion and Sh25.6 billion in 2017.

And the last 10 months of 2018, goods worth Sh997.1 billion came compared to Sh291.8 billion worth of exports, hurting Kenya’s quest of finding a home-grown solution that promotes local manufacturing and hence more exports.

KAM said continued importation of goods, even those made locally, makes no sense of the government's plan to promote Kenyan firms.

KAM noted that while paper manufacturers were struggling to break even, Kenya imported paper and paperboard products such as newsprint, printing papers and packing stuff worth Sh19 billion in the last three quarters of 2018.

“Kenya is experiencing a construction boom that has informed multibillion shilling investments by the six cement companies expanding their facilities as well as new cement firms coming in, but the country still imported cement clinker worth Sh7.3 billion.

“Asbestos, wire, nails, nuts, rivets and screws, domestic utensils of base materials and dry cell batteries are locally manufactured but why do we allow their importation?” she posed.

KAM spoke after the government announced plans to spend Sh1.6 billion in purchasing 64 units of high capacity buses for use in planned Bus rapid transit project to be rolled out in Nairobi.

Defending the purchase, Transport Cabinet Secretary James Macharia said, “we are only acquiring the first batch from South Africa because the buses that were available did not conform to the KS-372- body building standards, but the rest will be sourced locally.”

Kenya Bus Body Builders Association Chairman Daniel Maundu termed the buses' importation a big loss to Kenya’s economy.

“Kenya has 12 bus body builders that have been in business for the past five decades supplying the local and regional markets across East, West and Central Africa,” said Mr Maundu who is the managing director of body builder LSHS.

Isuzu East Africa Managing Director Rita Kavashe said Kenya should not export jobs and cash to other countries, but it must intensify promotion and facilitation of local companies to meet the said standards.

Ms Wakiaga maintained that local industries have substantial capacity to meet market needs as well as regional requirements.

“If the competitiveness of manufacturing sub-sectors such as pharmaceutical and medical equipment, timber and furniture, and paper and paperboard, among others are prioritised, we can realise the manufacturing agenda goal in the next four years,” she said. The KAM boss said the pharmaceutical sector could save Kenya and generate new income if 95 per cent of all imported raw materials are locally sourced. She said imports should be subjected to heavy penalties to help local industries flourish.

She said duty on finished imported products that can be manufactured locally should be enhanced to promote local production and discourage imports.

“Increasing the verification fee from 0.75 per cent to 12 per cent as well as imposing a 25 per cent import duty on pharmaceutical products that Kenya can manufacture locally will play a huge role in growing the sector,” she said.