A report by the Kenya Association of Manufacturers (KAM) has highlighted how Kenya lost its competitive edge to neighbouring countries in recent years.
Citing the World Investment Report, 2023, the manufacturers in their Manufacturing Priority Agenda (MPA) report for 2024 noted that Foreign Direct Investments (FDIs) in Uganda doubled that of Kenya in 2022.
While FDIs to Uganda in 2022 hit USD 1.5 billion, Kenya only recorded USD 759 million. Tanzania on the other hand, saw investors pump in US$ 1.1 billion.
"Foreign direct investment (FDI) inflow to Kenya remains relatively weak compared to its neighbouring countries, considering the size of its economy and level of development. This implies that Uganda and Tanzania are more attractive to foreign investors relative to Kenya," read the report in part.
The Why
According to the report, the poor performance of Kenya in FDI was attributed to the high cost of energy, taxation and policy reforms made by Uganda and Tanzania.
"In Uganda, increased foreign investment is anticipated to drive growth, partly owing to improved business confidence and infrastructure investment ahead of new oil production in 2025. Similarly, in Tanzania, reforms aimed at improving the business climate are expected to stimulate growth," read the report in part.
Regarding Energy costs, the report highlighted that most companies involved in manufacturing were paying more in power bills in comparison with their counterparts in Uganda and Tanzania.
Notably, the manufacturers added that electricity prices have risen by over 50 per cent in the last two years.
There has been a rapid increase in the unit electricity cost per kWh charged to manufacturing enterprises. Unit electricity cost per kWh charged to a cement manufacturer (one of the heavy electricity-consuming processes) in Kenya increased from Ksh15.8 in January 2021 to Ksh25.1 in January 2024.
"This represents a 58.9 per cent increase. This greatly undermines the competitiveness of manufacturers in Kenya," the manufacturer noted.
The Taxation Factor
On the other hand, various tax measures introduced by the government in Kenya have seen investors opt to go to Uganda and Tanzania.
In particular, manufacturers seeking to set up shop in Kenya were repulsed by the increase in VAT on machinery in 2020.
"In 2020, the government introduced 16% VAT on plant and machinery. Figures show a decline in the value of imports by Kenya over the period under review and a rise in the value of imports by Uganda and Tanzania.
"This can be taken to mean increased investments in Uganda and Tanzania," read the report in part.
Kenya's Intervention
Following the recent developments, the government has since proposed a reduction in the Corporate Tax from 30 per cent to 25 per cent.
Corporate tax is usually imposed on profits that have been made by companies/investors.
The tax is set to be reduced in the upcoming financial year.
"The Government will reduce the corporate rate of tax from the current 30 per cent to 25 per cent over the strategy period. Kenya's Corporate Income Tax (CIT) rate is at 30 per cent compared to the world average of 23 per cent and the African average of 29 per cent," Treasury noted in the Budget Policy Statement (BPS).
