Consumers hold key in plan to boost manufacturing
Friday, January 24th, 2020
President Uhuru Kenyatta’s Big Four agenda’s pillar on manufacturing envisages Kenya to double its manufacturing output to 15 per cent of gross domestic product by 2022. While this is doable, we need to broaden our thinking.
Two years is a fairly short time to double the output of a capital intensive and complex sector like manufacturing, which has extensive value chains that cut across other vital economic sectors such as logistics, transport, finance and retail.
Transforming a sector this complex requires a masterstroke. It requires a comprehensive action plan that not only focuses on improving the operating environment for producers, but also gives equal attention to consumers.
Initiatives aimed at improving the competitiveness of producers, such as the fight against illicit trade, elimination of non-tariff barriers and introduction of rebates on electricity costs, among others, are all commendable.
However, these initiatives will not catalyse the kind of growth we need in the sector if they are not accompanied by a sustained increase in consumer spending.
It is consumers—the ordinary Kenyan who buys a kilo of flour and a litre of cooking oil—who keep producers in business.
If Kenyan consumers cut their personal spending, as was the case last year when massive layoffs led to a decline in household incomes, manufacturers bear the brunt.
Without sufficient consumer spending, manufacturing is simply an expensive hobby where you invest billions to produce goods that expire in outlets because of slow uptake.
This explains why the dip in consumer spending last year—estimated at around 9 per cent for essential commodities such as oil, rice and sugar according to economic data available —was accompanied by under-utilisation of installed production capacity in nearly every industry.
What happens when you don’t utilise your installed capacity? The same thing that happens when you park your car for a year without ever switching on the engine. The rate of depreciation rapidly accelerates.
If consumer spending is not consistently high to support production at full capacity, deprecation of plants will increase unsustainably, compelling manufacturers to decommission equipment before it delivers a full return on investment.
This will not only translate to massive losses, but will also lower appetite for future investment in a sector that carries the best hope of creating sustainable jobs for the over 900,000 Kenyans who join the labour market yearly.
The government, therefore, needs to take urgent and decisive steps to increase consumer spending.
The State needs to look at the most effective way of rapidly pumping liquidity into households. A good starting point is to target the two sectors that account for the lion’s share of household incomes—SMEs and agriculture.
Farmers, who account for close to 70 per cent of the labour market, have consistently gotten a raw deal through the years, even in seasons when commodity prices soared.
The sector needs cross-cutting reforms to ensure more money gets into the hands of farmers, who can in turn spend more on household purchases, creating steady demand for goods manufactured in Kenya.
Likewise, SMEs, where eight out of every 10 employed Kenyans work, need a boost.
In recent years, they have been starved of liquidity due to factors such as the rate cap and delayed payment by national and county governments, leading to delayed salaries and layoffs.
I was encouraged by President Kenyatta’s recent Mombasa address, where he noted that since issuing a directive on pending bills in November last year, about 70 per cent of pending bills owed by national and county government had been paid by December 31, 2019.
The remaining 30 per cent needs to be paid in the coming weeks and months. This will unlock liquidity for businesses.
In his address, the President said this year he is focused on “putting money in Kenyans pockets.”
This holds the key to reviving manufacturing. Only when consumer spending can support full capacity utilisation will manufacturing truly deliver double-digit growth. —The writer is the Commercial Director, Pwani Oil