An aura of gloom has engulfed the manufacturing sector in Kenya as hopes of industrialisation-led growth fade away due to the dwindling fortunes of leading companies.

That the sector is in a slump became evident last week when Nairobi Securities Exchange-listed companies released financial results that showed declining revenues and issued profit warnings, joining a retinue of manufacturers in East Africa that are struggling to sustain profitability.

British American Tobacco released full year results for the year ended December 31, 2016 that showed profitability had declined by 15 per cent to $39.8 million.

Both Unga Group and Mumias Sugar Company announced that profitability for the half year ending December 2016 would plummet while East Africa Portland Cement Company sank deeper into loss-making over the same period.

The depressed performance is a reflection of a sector whose fortunes are dwindling despite the government expecting it to anchor high economic growth by contributing at least 15 per cent to the gross domestic product.

“The manufacturing sector is stagnant because we have open markets, and goods are moving freely across the world. Therefore, we have to be more competitive as a country,” said Phyllis Wakiaga, Kenya Association of Manufacturers chief executive.

Just two years ago, the manufacturing sector in Kenya seemed to have taken the corner on the road to a turnaround after plunging from a growth of 5.6 per cent in 2013 to 3.2 per cent in 2014 and maintaining a marginal growth of 3.5 per cent in 2015.

Stagnation

The sector’s contribution to GDP has stagnated at around 10 per cent in recent years, with its total contribution to exports now at 11 per cent.

The tide of optimism seems to have turned and the once promising sector —which the World Bank had projected would drive growth with the right policies in place — is in a slump.

Some companies have closed down or relocated to other countries that offer better operating environments.

Ethiopia and Egypt have emerged as the key destination for companies winding up operations in Kenya.

Electricity in the two countries costs four US cents per kWh and six US cents per kWh respectively, compared with Kenya at 15 US cents per kWh.

“There are worrisome indications that the manufacturing sector is losing competitiveness,” warns a World Bank report on the state of Kenya’s manufacturing sector dubbed Anchoring High Growth: Can Manufacturing Contribute More?

The report adds that Kenya’s manufacturing exports are losing ground in the EAC to exports from India and China while the mortality rate among exporters is high, and there is little dynamism in export relationships.

Apart from cheap imports, the sector is feeling the weight of the credit squeeze after banks reduced lending due to the interest rates caps.

Depressed earnings

The perennial problem of delays in value added tax refunds also continues to be a bane for a sector facing challenges of operating capital while threats from counterfeits are destroying markets. Worse still, the introduction of a multiple charges regime within counties has become a barrier to growth because it has become costly to trade across-borders.

The ongoing drought has also affected the supply of raw materials to manufacturers, particularly industries that depend on agricultural products like the food and beverage, agro-processing and textiles sectors.

Manufacturers that announced depressed earnings join companies like Eveready East Africa which is technically on its knees after closing its plant and losing the Energiser battery distribution contract, and Sameer Africa, which last year closed it tyre manufacturing plant in favour of imports.

Besides local companies, multinational manufacturers like Cadbury Kenya, Procter & Gamble, Reckitt Benckiser, Johnson & Johnson, Bridgestone, Unilever and Colgate Palmolive have all exited the Kenya market.

According to industry players, the crisis facing the manufacturing sector has resulted in the loss of about 10,000 jobs over the past three years.

“We are hopeful that the sector will pick up pace and create more jobs, increase productivity and consequently increase our country’s GDP,” noted Ms Wakiaga.

While it is obvious that Kenya’s ambitions of pushing for a manufacturing led-economic growth is going up in smoke, the government maintains the sector is still vibrant and the few struggling companies are feeling the weight of internal inefficiencies.