Kenya's Biggest Manufacturers Have 3 Months to Live - KPMG Report

  • Workers at the Kitui County Textile Centre (KICOTEC) sew surgical masks on Wednesday, April 8, 2020.
    Workers at the Kitui County Textile Centre (KICOTEC) sew surgical masks on Wednesday, April 8, 2020.
    Washington Post
  • On Wednesday, May 20, KPMG Kenya, released a detailed survey report on the current state of Kenya's manufacturing industry, since the first Covid-19 case was reported in the country back on March 12, showing that the 69% of the country's biggest manufacturers were currently operating on 3-months worth of supplies.

    "Currently, 69% of manufacturers have raw material stock levels that could only last for 0-3 months.

    "On the other hand, only 10% of the respondents have raw material stock levels that can last for more than 6 months which are mostly manufacturers of the non-essential and non-perishable goods as they are unable to sell their products owing to low demand," reads an excerpt from the study.

    The report gives a non-filtered and detailed breakdown of Kenya's key industries and their current state following the outbreak of the global pandemic.

    President Uhuru Kenyatta unveils the new Mahindra pick up at State House on March 9, 2020.
    President Uhuru Kenyatta unveils the new Mahindra pick up at State House on March 9, 2020.
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    An online survey was sent out to the Kenya Association of Manufacturers (KAM) membership, targeting mostly top management who were tasked with filling out the relevant information within a week.

    The results painted a grim picture as a huge percentage of the manufacturers are on the last stretch due to challenges created by the coronavirus outbreak.

    "8 out of every 10 participants are experiencing cash flow constraints while 9 out of every 10 agree or strongly agree that they are facing challenges in being paid by their customers,

    "What was a common issue before businesses were affected by Covid-19 has been exacerbated further by the pandemic," the report reads in part.

    The cashflow challenge has had a domino effect on the various companies as it implies difficulty in running payrolls, which in turn translates to lay-offs or slashing of salaries.

    The Impact of COVID-19 on Kenya's Manufacturing Sector, May 20, 2020.
    The Impact of COVID-19 on Kenya's Manufacturing Sector, May 20, 2020.

    "58% are having difficulties in meeting their tax obligations, 69% are finding it difficult to pay their employees, and 71% are having challenges in paying other operating costs such as rent and utilities,

    "These difficulties have contributed to 39% sending their staff on unpaid leave while 27% have made salary/wage adjustments, the report states.

    In 2019, the manufacturing industry was the highest contributor to employment in the private sector accounting for 15.9%.

    However, following the Covid-19 pandemic, Kenya's casual labourers have so far felt the biggest brunt of the downsizing measures, with 40% of the key industry players indicating that they have already reduced the number of casual labourers.

    "If the support doesn’t come forward, that [unemployment] figure will increase,” Suresh Patel, Vice-Chair -Chemical & Allied Sector, predicts. 

    The Impact of COVID-19 on Kenya's Manufacturing Sector, May 20, 2020..
    The Impact of COVID-19 on Kenya's Manufacturing Sector, May 20, 2020..

    Worryingly, 69% of the participants agreed to experiencing difficulties in paying salaries and wages, with the figure rising to 79% when it comes to Micro, Small and Medium Enterprises (MSMEs).

    "We need a cash injection into the business to go through the difficult period either in procuring raw materials, paying rent, or paying wages.” Suresh further detailed.

    "As cash trickles in, the pressure to pay interest, loans, taxes, salaries and wages, and other operating costs continues to build, " the report further reads.

    The reduction in workforce was seen more prominently amongst the MSME manufacturers, where 41% that previously employed over 100 permanent employees fell to 30%.

    A drastic loss of demand for goods following the global pandemic has had a huge toll on the production capacity.

    The survey revealed that the sectors most affected were those considered to be non-essential namely; textile & apparel, timber & furniture, and automotive sectors where production capacity has been cut by at least 40%.

    "In the automotive industry, they have lost total sales of new vehicles so all the assembly plants and everything is more or less closed,” Ashit Shah - Director, Sales and Marketing at Mutsiomoto Motor Co. Ltd stated.

    The survey also established that manfucturers have massively realigned their priories as compared to the pre-Covid-19 era, with Cost reduction, job retention and improving cash flow taking up the first 3 spots in that order.

    Before the pandemic broke out, increasing revenue was the number one priority, closely followed by increasing market share, with increasing profitabilty taking up the final top three spot.

    It was not all doom and gloom though, as 3 industry players recorded an increase in turnover namely; Metal & Allied (18%), Chemical & Allied (6%), Paper & Paperboard (5%) and Food & Beverage (3%).

    The Impact of COVID-19 on Kenya's Manufacturing Sector, May 20, 2020.
    The Impact of COVID-19 on Kenya's Manufacturing Sector, May 20, 2020.

    However, even within the various sectors, the differences ranged quite vastly such as the Paper & Paperboard sector where there was growing activity on the packaging side as goods still need to be packaged.

    "On the other hand, commercial printing and exercise books production has come to a virtual standstill,” Mohan Krishnaswami, Chair - Paper & Paperboard Sector explained.

    How to Recover
     
    KPMG went on to detail 9 measures that could be adopted to mitigate the crisis that has hit Kenya's manufacturing industry.

    Clearing outstanding VAT refunds and pending bills
    The government was urged to prioritise clearing all outstanding Value Added Tax (VAT) refunds and pending bills owed to the manufacturers.

    Re-evaluating tax reliefs
    The government through the Tax Laws (Amendments) Act, 2020, introduced a number of reliefs to combat Covid-19. However, through the same legislation, VAT was introduced on a number of items that were previously zero-rated or exempt from VAT. By introducing VAT on these items, doing business has become more expensive. 

    The government should consider reintroducing the previous reliefs such as zero-rating pharmaceutical products; providing relief on raw materials imported into the country, and reintroducing the higher wear and tear allowances, the report proposes.

    Moratorium on changes in the tax regime
    The government should consider providing a moratorium on tax regime changes during the crisis period to give room to businesses to adjust.

    Establishing an emergency rescue fund
    An emergency rescue fund could be established, supported by development partners, to identify and support the most vulnerable businesses and entrepreneurs affected by Covid-19.

    Widening the scope of social protection measures
    Coverage of social protection measures already instituted by the government through the emergency response fund that are targeting vulnerable groups in society and workers who have lost their jobs should be widened.

    President Uhuru Kenyatta Speaking during his radio interview at State House Nairobi on April 7, 2020.
    President Uhuru Kenyatta Speaking during his radio interview at State House Nairobi on April 7, 2020.
    PSCU

    Seeking additional support from lending institutions
    Under this, it was suggested that there should be: Increase moratorium for loan repayments including interest to 6 -12 months, a decrease of the interest rate further to about 8%, a loan and overdraft books full waiver of the 3 months, and a cap on fees for re-arranging facilities due to Covid-19.

    Re-evaluating regulatory overreach
    Ease of regulations on the importation of raw materials, intermediate goods, industrial spares and types of machinery especially where ports of origin have been closed down and inspecting agencies are not operating optimally.

    Subsidizing the cost of Covid-19 compliance
    Subsidize the cost of compliance to curb the spread of Covid-19 including testing employees, PPEs and sanitisers, as well as ensuring an adequate supply of water.

    Developing a comprehensive rebound strategy
    A comprehensive rebound strategy for the general economy should be developed placing particular focus on the manufacturing sector. 

    Manufacturing forms a key part of President Uhuru Kenyatta's Big 4 Agenda, an economic blueprint that was developed by the government to foster economic development and provide a solution to the various socio-economic problems facing Kenyans. 

    Deputy President William Ruto inspecting a farm in Kikuyu constituency. May 20, 2020.
    Deputy President William Ruto inspecting a farm in Kikuyu constituency. May 20, 2020.
    DPPS