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Kenya’s manufacturers need external financing to survive

By David Whitehouse
Posted on Tuesday, 8 September 2020 15:34

Virus Outbreak Kenya
A worker sews surgical-type face masks at the New Dawn company in Kikuyu, north of Nairobi, April 4, 2020. (AP/John Muchucha)

Kenya urgently needs a credit guarantee scheme to protect small and medium-sized businesses from the impact of COVID-19, Kenya Association of Manufacturers (KAM) CEO Phyllis Wakiaga tells The Africa Report.

Wakiaga met the central bank and the government last week to discuss such a plan, which for now remains a “work in progress.” The government, which has committed some money, needs external partners to financially contribute to the scheme, with development finance organisations a possible avenue, she says. “It’s an urgent priority.”

The government has given some help with taxes and VAT refunds, but “more things can be done,” says Wakiaga. Banks also need to help small businesses survive by restructuring loans, she adds.

READ MORE What can be done about the damage Covid-19 is causing to South African agri-SMEs

A survey carried out by the association with KPMG in May found that survival, not growth, is now the aim of the game.

  • Among manufacturers surveyed, 78% said the top priority was reducing costs, 61% cited retaining jobs and 53% improving cash flows.
  • In terms of output, 42% said they were operating at less than half production capacity, while the average utilized capacity for SMEs was just 37%.
  • Among SMEs, 86% said that cashflow constraints were affecting their ability to meet tax obligations, and pay employees and operating costs.
  • While the association had been planning for a post-COVID recovery, Wakiaga says, the reality is that “there is no post-COVID.”

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Wakiaga is cautious on the prospects for the African Continental Free Trade Area – delayed until January – giving a quick lift to confidence. Tariffs and rules of origin of products are still to be fully finalised, she says. “These are basics. Both need to be fixed.”

  • If that doesn’t happen quickly, then the agreement risks getting off to “a slow start” in January, she says

Competitivity

According to the Kenya National Bureau of Statistics, 79% of Kenyan SMEs are informal. Some businesses have been able to take advantage of the pandemic to re-engineer production processes, with hygiene products and personal protective equipment seeing growth, says Wakiaga.
She also hopes to see diversification of African supply chains away from China. “Governments will see healthcare as needing local investment,” she said. “We’ll see a lot more local sourcing.”

READ MORE Reality check: Making Africa relevant must come from Africans

Even without COVID-19, Kenya’s competitivity in manufacturing has disappointed. The country came 115 out of 152 countries in the Competitive Industrial Performance (CIP) Index Report 2020 published by the United Nations Industrial Development Organization (UNIDO).

  • The result “isn’t too good,” says Wakiaga. “Other countries are doing much better. It’s not where we want to be.”
  • Wakiaga and the KAM are now working with the government to find ways to improve the ranking.
  • Countries including Egypt and South Africa, which scored better than Kenya, are being studied to see what can be learned, she adds.

Kenya’s diversified economy and export base offer some protection. Rand Merchant Bank (RMB)  in South Africa predicts that the economy will still grow by 1.6% in 2020. The 4.7% first-half decline in cargo through Mombasa port is not as bad as initially feared, says the bank.

  • RMB cautions that fiscal support and government spending “will be key in ensuring growth through the cycle.”

Bottom line

External financing partners will be needed if some small business in Kenya are to survive.

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