Opportunities for exporters through the budget
The Cabinet Secretary for Finance Henry Rotich on Thursday last week presented the 2018/2019 budget to the nation. The budget was premised on the government’s priority spending areas of manufacturing, universal healthcare, affordable housing and food security which have been baptized the “big four”.
In the area of manufacturing, the CS was expected to outline the government’s strategy to raise the manufacturing sector’s share to GDP from below 10% to at least 15% by 2022. Over the years, Kenya’s manufacturing sector has continued to decline with the closing shop of many manufacturing entities or moving their operations elsewhere.
A leaping manufacturing sector consequently reduces our competitiveness as a country in international trade since we either do not produce enough for export or our prices are not competitive enough. Further product diversification has been a challenge. We still rely on the traditional exports of tea, coffee, articles of apparel and horticulture. To illustrate this, under the African Growth and Opportunities Act which was recently extended, Kenya has been allowed to export over 6,500 different kinds of products. However, we are currently just exporting a paltry 20 products!
In addition, the low quality of our products has contributed towards the closing up of international markets that could easily absorb these products. This has been occasioned by information gaps between destination countries and our local manufacturers and producers. The role of bridging this gap falls squarely on the commercial attachés in different embassies and consulates that we have across the globe.
Production has been the other key challenge that has dogged our exports for a long time now. We are losing some of our traditional markets purely due to production capacity. This may be attributed to ageing machinery, industrial actions, inadequate raw materials and efficiency challenges.
To address some of these bottlenecks stifling our exports, the CS treasury proposed a raft of measures aimed at boosting our exports and eliminating unfair competition from illicit goods and cheap imports. Further the CS sought to address the rising cost of manufacturing that is making our products uncompetitive.
In addressing the cost of production, the CS in his budget speech proposed to provide relief for the cost of power by allowing manufacturers to deduct 130% of their electricity bills. This is an addition to the reduction of night tariffs by over 50% so as to encourage night manufacturing. Electricity is one of the major costs of production that manufacturers bear. While this is a welcome move, the costs are still high compared to our neighbours and Asian competitors.
Kenya’s electricity costs is the highest in East Africa after Rwanda, at US cents 18 kilowatt per hour(KWh) compared with Rwanda’s US cents 20/KWh. Tanzania and Uganda’s are relatively cheaper at US cents 9/KWh and US cents 12/KWh respectively. In the continent our major competitors are Egypt and South Africa. Kenya’s power rates are four times those of Egypt. Competitors in China and India pay the equivalent of between Ksh2.50 and Ksh3.80 per KW respectively hence making their products cheaper than the Kenyan ones.
Even as Kenya seeks to address the cost of power, we should also fix the reliability of the power. Power outages are a common phenomenon in Kenya and we seem to have adopted it as a norm. Power outages increase production costs as machines have to be restarted and also the extra labour capacity is absorbed as a cost.
The CS also in a bid to cushion manufacturers from high cost of inputs exempted various raw materials and equipment from VAT. In his proposals, the CS exempted raw materials for making animal feeds, plant and machinery for manufacture of goods, computer parts and the materials that are used in Public Private Partnerships (PPPs). If these proposals go through then this will be a welcome relief to manufacturers.
In addition to reducing the costs to exporters, the budget also proposed measures to fight illicit goods and employ protectionist measures for the local industries. The CS increased the import duties of vegetable oils, pesticides, acaricides, iron and steel, paper and paper board among other. These protectionist measures are meant to make imports expensive and hence provide a competitive edge to the locally manufactured goods. To combat the illicit goods, the CS proposed to slap a fine of KShs 5 million on persons dealing in contraband goods in addition to confiscating the equipment that is used for manufacture of these illicit goods.
Of the proposals put forward, increase of duty on paper and paperboards seems not to be well thought out. Currently, there is a ban on logging so as to prevent the degradation of our environment and increase the forest cover that has been thinning over the years. By increasing the duty on paper that means we rely more on the paper that we manufacture hence leading to more cutting of trees. Further, the revival of the Pan Paper plant has not borne tangible fruit despite the billions pumped into the factory. This conflict of policy should be addressed so that we can have clarity of our objectives as a country.
To further boost the export sector, the CS’s goody bag for exporters included the continued zero rating of exports goods, exempting the entities operating in Special Economic Zones (SEZs) from the provisions of Capital Gains Tax and Compensating tax. This effort is geared towards allowing investors to recoup their investments in these SEZs without eroding the benefits. This is welcome though we need to interrogate the benefits of some of these SEZs and their impact on the economy. The SEZs have further been given preferential tax rates in the infant stages so as to produce for export.
The government has proposed to introduce Special Operating Framework Arrangements (SOFA) where entities can enter into arrangements with government to fulfill certain objectives and in return receive negotiated preferential tax rates. Exporters can also exploit this arrangement so as to produce products that are competitive in the international market. In addition the government has pledged to provide land for the setup of industries that are geared towards exports.
Finally the CS allocated resources to various key sectors and entities that promote exports. The CS proposed to revive Rivatex in addition to modernizing KCC and other parastatals. The CS also proposed to put up leather parks and textile parks in an effort to boost the country’s exports.
We hope that manufacturers and exporters will be able to take up these incentives provided in the budget so as to increase our exports and stimulate the local economy.
By Nathan Omayio
Nathan is a Senior Tax Consultant at Andersen Tax, Kenya.