Kenya plans to relax rules for the production of industrial sugar in a bid to save the economy $90 million worth of forex spent annually on imports.

Kenya will thus become the first East African Community member to produce the commodity, but experts warn that the high cost of production could render industries such as confectionery that rely on refined sugar uncompetitive across the region. Under the EAC Rules of Origin, industrial sugar, as a raw material, is brought in duty-free.

The sugar is mostly used as in the making of sweets, biscuits, syrups and powders.

The Treasury said plans are underway to encourage investments in refinery plants by scrapping taxes.

“We are considering other incentives, including waiver of other levies once the relevant laws are reviewed,” Treasury Cabinet Secretary Henry Rotich told The East African.

Currently, regional confectionery firms import industrial sugar duty-free under the EAC duty remission scheme.

But there are questions about whether Kenya has the capacity to produce enough raw sugar to be used both for consumption and as an intermediate product, given that the country is a net importer of sugar and has high costs of production. The country would depend largely on imported raw sugar to sustain its factories.

Under the EAC rules of origin, Kenyan confectionery firms could export the end product to other EAC partner states if the raw sugar used in the manufacture of industrial sugar were sourced locally.

Trade experts said regional exports would suffer.

“It is a good move as it will facilitate the manufacture of confectionery in Kenya, but under the EAC rules of origin these products can only be sold in the local market if the raw sugar used in the production of industrial sugar has been imported under the duty remission scheme. If these products are exported to the region, they will attract a duty of 25 per cent,” said Eliazar Muga, managing director of MAP Advisory Services.

Kenya has sought and received a one-year stay for the importation of raw sugar for production of industrial sugar from the East African Council of Ministers. The window runs from June 5, 2016 to June 5, 2017.

Kenya has been hesitant to allow importation of raw sugar for the production of industrial sugar after two millers abused the facility by diverting the commodity into the local market.

“We are encouraging millers to diversify into other products, including refined sugar, but we want to put in place all regulatory mechanisms and controls to ensure that the sugar will not be diverted,” said Alfred Busolo, the director-general of the Agriculture, Fisheries and Food Authority.

The EastAfrican has established that the country has started issuing permits to local millers with the financial muscle to set up refinery plants in a bid to own a share of the regional refined sugar market estimated at 150,000 tonnes per annum.

Already, Kibos Sugar Miller has set up a Ksh2 billion ($19.4 million) refinery plant with a capacity of producing 150,000 tonnes of refined sugar per year. The millers have been licenced to produce only 30,000 tonnes of industrial sugar per annum.

“We encourage other millers to go that route,” said Mr Busolo.

Currently, companies using refined sugar import the commodity from Brazil, India and Thailand. The import price of refined sugar is estimated at $603.19 per tonne, compared with that of table sugar, estimated at over $716.88 per tonne.

Kenya produces raw sugar at $1,250 per tonne, thus refining it into industrial sugar would not be competitive. Sugarcane is bought from farmers at $350 per tonne.

According to the Kenya Association of Manufacturers (KAM,) the government should encourage millers to set up refinery plants.

“Incentives are offered by the government. We would encourage members to take them up to produce industrial sugar locally as there is a market for it in the EAC,” said Phyllis Wakiaga, the chief executive of KAM.

“Processing refined sugar will save the country some foreign exchange, but the issue is who will do it. Identifying the person to process the sugar is government policy and not an industry issue,” said Dan Ameyo, the chairman of Mumias Sugar Company.

Adverse weather conditions in key sugar producing countries of Brazil and India, and the increasing diversion of sugar stocks to ethanol production, inflated global prices by between nine and 10 per cent between January and September.

This has seen retail prices in Kenya soar, with some retail outlets being accused of rationing and hoarding the commodity.