Can Kenya’s manufacturing sector spur food, and economic diversification post Covid-19?

Atula Owade
Oct 22, 2020 · 8 min read

Introduction

The Covid-19 pandemic has affected all sectors of the Kenyan economy. According to a report in the East African newspaper, just two months into the crisis, more than one million people had lost their jobs, while 75% of small businesses were facing imminent collapse. In light of these unprecedented disruptions, this article delves into some repercussions, as well as future perspectives, for Kenya’s agri-food sector.

Since the majority of Kenyans derive their livelihoods from agriculture, and related industries, the article explores whether the agro-processing sector could help realise the country’s constantly missed industrialization targets, while bridging the employment gap and creating more economic opportunities in the rural, and informal sectors.

This article draws on an interview with Hon. Betty C. Maina, Cabinet Secretary in the Ministry of Industrialization, Trade and Enterprise Development (ITED), as well as analyses from key stakeholders in the Ministry of Agriculture, and other policy experts.

Mission interrupted or rejuvenated? The status of Kenya’s manufacturing agenda

It is estimated that Kenya currently loses more than KES 150 billion worth of food (roughly US$1.5 billion) annually due to post-harvest losses. Prior to the onset of the pandemic, the government had embarked on an initiative to establish six agro-processing hubs in key food-producing regions, as envisioned in the Agricultural Transformation and Growth Strategy (2019–2029). Work is underway to build the first of these — the KES 100 million potato cold storage and processing facility in Nyandarua County.

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Cabinet Secretary Betty Maina

According to the Ministry, the industrialization agenda has gained momentum as a result of COVID-19. The 2020/2021 budget allocated more than KES10 billion (around US$100 million) to support initiatives such as the Special Economic Zones in Naivasha and Dongo Kundu, and various kickstarter projects, including the Kenya Industry and Entrepreneurship Project and the Kenya Youth Empowerment and Opportunities Project . The funds also seek to increase access to finance for micro, small, and medium-sized enterprises.

Furthermore, CS Maina notes that the government has made provisions for a KES3 billion (US$300 million) for a proposed credit guarantee scheme to support enterprises, Despite thus it is unclear whether this money will reach the right pockets. Already, billions allocated for Covid-19 medical support have been lost to government corruption on an industrial scale. Given Kenya’s long history of financial scandals, it remains to be seen whether funds allocated to agro-processing initiatives will be well managed.

Unfriendly business environment stifling agro-processing initiatives

Even with the aforementioned government initiatives, several serious bottlenecks prevent the continued development of agro-processing in the country. According to the Kenya Association of Manufacturers, the high cost of doing business, and an unpredictable policy environment, are among the main factors for stifling Kenya’s industrial growth. This has precipitated the exit of major manufacturers, such as Colgate-Palmovile, Cadbury, and Reckitt Benckiser while discouraging the entry of new players.

Moreover, the recent introduction of a 5.5% excise duty, has further diminished the competitiveness of the local industry. While the Kenya Revenue Authority has delayed implementation by up to six months, the announcement is just one more blow to a struggling sector that was already in crisis prior to the outbreak of the pandemic. Agro-processors, such as those making fruit juices and beer, have already sounded the alarm. One such company, East African Breweries Limited, argues that heavy taxation will force them to reduce sorghum uptake from farmers.

Consequently, thousands of livelihoods are at risk. The situation is likely to worsen for small- and medium-sized enterprises whose operations have already been severely impacted by the pandemic, courtesy of newly introduced levies. The Ministry of Finance recently introduced a 14% VAT on solar equipment, which a good number of farmers depend on for irrigation. This was the latest blow to farmers, following the introduction of a 16% VAT on pesticides two years ago. These levies will drive up already high costs of production, with knock-on effects for the price of raw materials for processors.

Linking agro-processing to food and nutrition security

Beyond job creation, one of the core objectives of promoting agro-processing is to boost food security and livelihoods through improved post-harvest management of fresh produce, and a creating a greater diversity of food choices. To this end, one of the major focus areas with respect to agro-processing in Kenya is the availability of milling infrastructure for crops such as cassava, millet and sorghum.

Kenya’s overreliance on maize is a major threat to national food security. According to Agriculture Principal Secretary Prof. Hamadi Boga, only 5% of Kenya’s landmass is suitable for growing the crop, with an additional 20% being mildly suitable. Furthermore, he argues that growing the crop on anything less than 20 acres — as is currently the case for most smallholdings — is not economically viable.

This dependence on maize impoverishes farmers, destroys soils, and threatens national food security. His assertions are supported by Dr. Lusike Wasilwa, Director of Food Crops Systems at the Kenya Agriculture and Livestock Research Organization. These and other leading agricultural experts argue that the situation can be improved by encouraging utilization of less popular traditional crops, such as millet, sorghum and cassava.

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However, there is very little supporting infrastructure to encourage such a shift, chief among including high costs of upgrading milling facilities. That is believed to be the main reason millers rejected the government’s 10% blending policy in 2018, which was aimed at reducing the country’s reliance on maize. There are similar technical challenges being experienced by processors in other value chains.

Current efforts by the ITED ministry could therefore facilitate the adoption of this policy by creating an enabling environment for local manufacturing of such equipment. Likewise, the Ministry of Agriculture will need to play a leading role in such development. Unfortunately, that is unlikely to happen as the sector currently receives around 50% of the minimum required budget allocation of KES 97.7 billion (approximately USD 1 billion).

The trade dimension

In the midst of the pandemic, the ministry has been negotiating a bilateral free trade agreement (FTA) with the US. The agreement is expected to replace the existing multilateral African Growth and Opportunity Act (AGOA) scheme, which will lapse in September 2025. According to CS Maina, if signed, the FTA would enhance the volume of US-bound exports from Kenyan agro-processors. Textile, coffee, and tea exporters, being among the leading exports, will likely be the biggest beneficiaries.

Another benefit that may accrue from the deal is equipping standardization agencies to enhance sanitary and phytosanitary standards. As per the terms under negotiation, the USA will equip standards bodies to ensure that items exported to its market meet strict quality standards in line with Good Agricultural and Manufacturing Practices. The Cabinet Secretary states that the equipment will also be used for assessing products sold within Kenya, where there are widespread concerns over the toxicity of food supplies.

However, the East African Trade Network, a lobby group consisting of trade unions, farmers’ groups and civil society organizations across the sub-region, strongly opposes the deal. Similar opposition is being exerted by Econews Africa, a Pan-African research and advocacy network. These and other entities argue that the massive economic mismatch between the two nations severely puts Kenya at a disadvantage. The deal, if signed, will open the floodgates to American goods at the expense of Kenyan ones. That will destabilize Kenya’s and by extension the East African region’s emergent agricultural and manufacturing industries.

Many observers also note that in pursuing a bilateral agenda, Kenya will damage trade relations with its neighbours, as set out in the East African Community Customs Union Protocol. The proposed deal would further damage the viability of the flagship Africa Continental Free Trade Agreement (AfCFTA), barely two years since its formal launch. With Kenya being one of the prominent signatories to the continental agreement, breaching it will open doors for other countries to do the same, killing the dream of wider trans-continental trading activity. A collective of institutions under the umbrella of bilaterals.org have written to the AfCTA Secretariat calling for it to intervene against the deal.

An additional fear is that a trade agreement with the-US will play into the agenda of American Big Oil corporations, with grave environmental consequences. There has been concern that the deal would flood Kenya, and by extension other African countries, with plastic waste ostensibly for recycling. With Americans increasingly switching to renewable sources of energy and China having banned importation of plastic waste, the perception is that the negotiations are heavily influenced by oil corporations seeking new sources of revenue.

For a country that successfully launched a far-reaching ban on single-use plastics just a few years ago, such an eventuality would be akin to committing environmental suicide. The threat of such a scenario underscores the importance of firmly embedding the country’s international agreements with national interests. If, and when the deal is agreed upon, the government should seal all loopholes that would allow for importation of plastic waste into Kenya. Whether that call will be yielded can only be revealed once the details of the closed-door negotiations are made public.

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A scavenger amongst plastic waste at a Nairobi dumpsite (Source: Simon Maina/Agence France-Presse — Getty Images)

Conclusion

Kenya is seemingly entering a post Covid-19 period. Although daily infection rates are still reported and a nationwide 11PM to 4AM curfew is still in place, public paranoia has largely waned. The government has kickstarted a phased re-opening of educational institutions. The airspace has been reopened for international travel. Entertainment events are now welcoming audiences. Less people are working from home than a few months back. Still, millions of people are unemployed with the waning pandemic having wiped away their sources of livelihoods.

Growth in the manufacturing sector, which includes agro-processing, offers one pathway to economic recovery. Beyond providing employment opportunities, agro-processing significantly contributes to food security. Therefore, it is a sector whose development is critical for post-pandemic recovery. It is the government’s role to create an enabling environment for such development. This begs the question, given the prevailing policy environment, can Kenya’s manufacturing sector spur food, and economic diversification post Covid-19?

Written by Atula Owade

This article is part of Covid-19 Food/Future, an initiative under TMG ThinkTank for Sustainability’s SEWOH Lab project (https://www.tmg-thinktank.com/sewoh-lab). It aims at providing a unique and direct insight into the impacts of the Covid-19 pandemic on national and local food systems. Also follow @CovidFoodFuture, our Video Diaries From Nairobi, and @TMG_think on Twitter. Funding for this initiative is provided by BMZ, the German Federal Ministry for Economic Cooperation and Development.

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