Third Eye

We need stability, predictability to attract investors

Wednesday, July 6th, 2022 01:21 | By

Investor trust is essential for any economy to attract and retain investments. Both local and foreign investors gain confidence to trade in a business environment that guarantees a stable and predictable macroeconomic framework for businesses. 

Let us think for a minute of the detergent manufacturer running his business in the city. He took the risk to go into this business knowing that although there would be elements beyond his control, certain elements would remain steady to enable him to run his business. Hence, he employed several people in his shop. Ideally, a stable macroeconomic environment should enable him to operate smoothly and to withstand eventualities that are ‘uncontrollable’ such as force majeure.

However, if the regulatory and taxation structures, for example, are whimsical – changing suddenly every now and again forcing him to make drastic adjustments each time then, his business becomes unsustainable. When this happens, he is forced to let go of some staff and downgrade his spending on technology, which reduces the overall productivity of his business. In this case, there are job losses and he (as the investor) has lost the will and capacity to expand his business. 

Predictability and investor confidence are mutually inclusive. Investors derive confidence to invest where they trust policymakers and the government’s intent to maintain a predictable environment as much as possible for their investments to yield returns.

Without predictable policies, investors are not only discouraged from scaling up their business, but also begin seeking alternative markets that are more suitable, predictable and secure to relocate their businesses.  A practical example of significant sudden changes that have the potential to destabilise local industry is the Finance Act and Bill, which comes with new changes in the tax code every year.  

Taxation is a key element in the cost of doing business so it needs to be predictable. Therefore, taxation policies should be formulated in consultation with all stakeholders for them to be effective in providing shared value. Moreover, should there be an administrative cost incurred due to the implementation of a government directive, then, the government should ideally bear these costs to avoid increasing the cost of doing business for investors. It would be unfair to ask the industry to cater for costs arising from a policy that has been issued by the government, especially where such a policy is implemented without engaging those affected. 

Taxes impact the cost of production currently and in the future for many industries. Taxation policy can be useful in predicting output fluctuations throughout the business year, encouraging long-term investments, and increasing revenue to the country. Hence, taxes should be designed to optimize the growth of industry and increase competitiveness. Our Manufacturing Manifesto launched earlier this year, highlights three key concerns in our taxation regime – lack of clear tax policy objectives, erratic changes in the tax code, and multiple taxation at the county and national levels. Remedying these challenges shall go a long way in ensuring predictability and as a result, attract investors. 

According to the EAC Industrialization Strategy (2012-2032), the rate of industrial growth needs to be 11.7 pc per annum to achieve a GDP contribution of 25pc. For us to advance our economy and realise this goal, we must focus on increasing and sustaining four critical facets; job creation, revenue generation, value addition and export earnings. A thriving manufacturing sector is able to deliver all four and much more. 

The case for industrializing economies has a proven track record throughout history, only if taxation leans towards the protection and nurturing of local industries. As the sources of productivity and socio-economic stability for our country, it is imperative that the government boosts investor confidence by providing the right policies which motivate the latter to invest or scale up their investments in Kenya. 

— The writer is the acting CEO of Kenya Association of Manufacturers

—  [email protected] 

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