Kenya’s formal sector employment conundrum

BY DAVID ONJILI Job losses and unemployment are always a good barometer for a country’s economy. In Kenya, the job sector can be classified into the formal sector and the informal sector.  I delve into the formal sector scenario especially the manufacturing sector because as a nation we have experienced severe job losses and minimal job creation. It is also worth noting that close to 800,000 graduates join the job market annually. This is evidenced by the unemployment figures, which have risen from 12.7% in 2006 to 40.2% in 2016 according to Kenya National Bureau of Statistics. The Government is putting up a brave face, insisting that jobs are returning, giving the return of assembly of VW Polo Vivo cars at Kenya Vehicle Manufacturers (KVM) in Thika as an example. However, importing the cars as Semi Knocked Down units creates no jobs. KVM is sending staff home. The Government must wake up to such realities and look into her policies that stagnate jobs creation opportunities and also mitigate on why many investors are heading to Ethiopia, Rwanda and Tanzania and not Kenya. From the table below, courtesy of a survey done by Anzetse Were, a regional development economist published in August 2016 titled Manufacturing in Kenya: Features, Challenges and Opportunities, it is clear that while Kenya boasts of the largest and most sophisticated manufacturing sector in East Africa in terms of growth trends over the past decade, other East African countries like Ethiopia, Rwanda and Tanzania are way ahead of us. Most East African countries are laying most emphasis in building labour intensive manufacturing industries to help ease the unemployment burden. Ethiopia for example is creating industrial parks and making land available while Kenya on the other hand does not seem to be going this direction. An industrial park is simply a portion of a city that is zoned strictly for industrial use as opposed to residential or commercial use. They may contain ports, warehouses, distribution centers, chemical plants, food and beverage processors, and steel manufacturers just to name a few. A number of industrial parks offer tax incentives for businesses to locate there such as tax increment financing (a public financing method used as a subsidy for redevelopment, infrastructure and community improvement projects that countries adopt) A perfect case in point is the announcement of General Electric (world’s leading digital industrial company), which has officially opened their offices in Addis Ababa Ethiopia. The new facility will host a minimum of 60 staff members according to their chief executive officer in Ethiopia, Daniel Hailu. The strength of the sector is measured by the size of the market both locally and externally. In Kenya, the strongest in the formal manufacturing sector are the agro-industry that is mainly the food and beverage (East African Breweries), the textiles, primarily under EPZ comes in next, pharmaceutical and the construction sector (cement and metals) follows in that order. So when Nestle, Tata Chemicals, Magadi and Cadbury cumulatively lay off more than 600 members of staff in 2016/17, this should help us gauge the health of our economy without appearing to give political bias. Flower firm, Sher Karuturi sent home her staff due to bankruptcy, both Eveready and Cadbury chose to move their operations to Egypt and Sameer sent home close to 600 staff crying the importation of cheap tires. Whom does it benefit to flood the local market with cheap tire imports when we are having a company that is making the same, is the government for the masses or for a few connected people? Corruption remains the greatest threat to setting up industry or even just acquiring licenses in this country. In Ethiopia the process of registration is transparent and little documentation is needed and bribery is mainly unheard of. This appeals to many investors who are bypassing Kenya. The same, sadly, cannot said about Kenya. The red tape an investor needs to go through, the much documentation and the duration it requires plus the many ‘hidden charges’ that they go through is discouraging. And even when they finally set up, high taxes and expensive overheads including of electricity and its unreliability is a headache they will have to put up with. When Kenya was ranked 92 out of the 190 economies worldwide on the global ease of doing business index in 2016, it was an appreciation of the fact that the country had done well in implementation of regulatory reforms in resolving solvency, starting business, protecting minority investors and getting electricity. The report cited that it required seven procedures that took about 22 days to start a business in Kenya, yet it is at these stages that corruption prevails and chases away investors. A report conducted by Transparency International confirmed that Kenya had retained its 2014 score of 25 out of 100 in 2015 too. Of the 168 countries surveyed, Kenya was at position 139 as the most corrupt country (position 1 indicating the least corrupt while 168 the most corrupt). Failure by the Government to punish those implicated in graft is a major stumbling block to ensuring steady economic growth. In addition the same report found the Judiciary, Ethics and Anti Corruption Commission, Department of Public Prosecution to be highly corrupt. The three departments are responsible for investigating, prosecuting and adjudicating corruption cases. On the global competitive index, Kenya was ranked 99 out of the 140 countries in the 2015/16. The country trailed regional rivals Rwanda who were ranked 58. High corporate taxes majorly dimmed Kenya’s competitiveness with the government taking around 38.1% of the profits firms posted as opposed to 33.5% in Rwanda and 30% in Ethiopia. Kenya scored 3.9 points out of 7 across several indicators that range from labour, education, infrastructure and macroeconomic stability. Interesting, corruption was cited as the weakest link here again with 2.9 points out of 7. Favoritism in decisions by government official, bribes and irregular payments featured prominently. The capping of banking interest rates has been a major headache in the country so far and the manufacturing sector has not been left out. With such high rates, financial institutions are very skeptical on the businesses that they fund. Asia and Ethiopia provide some of the lowest interest rates, as early as 1995, the interest rates in Ethiopia were at 5% before they rose to the current 11 percent with China having them at 10.9% as opposed to Kenya’s 14% A key observation of Kenya also notes that equity funding is not common. Most of the local investors who set up rely majorly on debt financing unlike in Ethiopia where the former is prevalent. Another fear was that majority of businesses in Kenya feared listing in the stock exchange despite the fact that this would open up better avenues for finance to them. Listing at the bourse, as professionals have observed, is traumatizing to many as there is increased scrutiny and tough measures enforced by the government yet many local investors love taking short cuts. Other investors fear equity financing as they want to maintain the business in the family and this limits their expansion and capital potential. Educating such investors is of utmost importance because they limit the potential of expansion of their companies and thus do not exploit their full potential. Brexit has been a major issue of concern to Kenya. The UK is the major importer of Kenyan products, although when compared to our neighbors in East Africa, we mostly export raw materials and they fetch lower prices as opposed to Tanzania who do value addition to their exports. With the UK exit from the EU, the pound has depreciated in value and this has an effect on imports into the UK, which will become expensive for the citizens there and thus lower their purchasing power and Kenya can look forward to a decline in Foreign Direct Investment (FDI) from there, yet the upside to this is that buying inputs from the UK will be in turn cheaper The government must shift its focus. Our economy is heavily service driven and these majorly produce fewer jobs as opposed to the manufacturing sector. A focus on export driven manufacturing will be a welcome move; we must also invest and make sure we do value addition as opposed to priding ourselves in exporting raw materials like tea or milk. While the government has claimed to build and expand the road network, this must be visible, as it will help open up the country and reduce significantly the cost of transport for industry raw materials and finished products. Kenya needs industrial parks and incentives to those yearning to come invest here or we will continue to lose to our very focused neighbours, Rwanda and Ethiopia as the local population will continue to suffer from unemployment job losses.

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