TOUGH TIMES

Commodity prices to rise further, manufacturers warn

This is on increased operating costs, elections jitters

In Summary

•The Russia-Ukraine war and local taxes also remains a major concern.

•No respondent expected a price decrease for their manufactured goods.

Kenya Association of Manufacturers CEO Phyllis Wakiaga during an interview with The Star at the association's offices in Nairobi/DOUGLAS OKIDDY
Kenya Association of Manufacturers CEO Phyllis Wakiaga during an interview with The Star at the association's offices in Nairobi/DOUGLAS OKIDDY

Majority of manufacturers in Kenya are foreseeing tough times ahead, with the industry warning of continued increase in commodity prices.

Skyrocketing cost of production and other business operating costs, and delayed payments from government top the list of manufacturers’ worries, an industry survey by the Kenya Association of Manufacturers (KAM) has revealed.

Findings in the KAM first quarter (January–March), Manufacturing Sector Barometer 2022, also indicate local manufacturers are concerned about the Ukraine-Russia war that has created a global economic crisis, majorly due to supply-chain disruptions.

There is also uncertainty as the country heads into the August elections, with industry players in a wait-and-see mode mainly on new investments and employment.

The cost of production has also become expensive on forex fluctuation, high prices of raw material and increasing prices of oil and gas.

Manufacturers are also concerned about the country’s taxation policies and legislative regulatory pressure and uncertainty.

“The Finance Bill 2022 has introduced excise duty on certain products and other taxes, which will negatively impact businesses,” the report reads in part.

High costs, unavailability of fertilizers and higher cost of local production have also had had “a great impact on agricultural inputs.”

About 93 per cent of the surveyed respondents registered an increase in cost of their raw material in 2022 Q1, compared to 75 per cent in 2021 Q4, mainly due to the Ukraine-Russia war that has caused global increase in the cost of raw materials. 

The weakening of the Kenya shilling has led to increased importation costs.

There is also the aspect of high taxes and inflation, and supply chain disruptions.

These factors add up to the cost of final products with about 93 per cent of the surveyed manufacturers in 2022 Q1 foreseeing a price increase of their manufactured goods in the coming quarter, compared to seven per cent who expect a price stabilisation.

“No respondent expected a price decrease for their manufactured goods, relative to nine per cent in the 2021 Q4 survey,” KAM notes.

Only 22 per cent of the surveyed respondents expect a positive economic performance in the next quarter, a decrease compared to 56 per cent in 2021 Q4.

“The 22 per cent is majorly attributed to the positive economic performance due to business resilience, despite the effects of the Covid-19 pandemic, the impact of Russia’s invasion of Ukraine and fuel shortage. Respondents with a negative outlook of the economic performance increased to 44 per cent in Q1 2022 from six per cent in Q4 2021,” KAM notes in its survey.

About 33 per cent of the respondents hold a neutral view of the country’s economic performance in the coming quarter.

An increase in commodity prices spells doom to households who are already grappling with a high cost of living, mainly on high food prices, a mid a shortage of some commodities such as milk.

KAM, led by chief executive Phyllis Wakiaga, has since asked the government to consider lowering VAT rate from the current 16 per cent to cushion consumers from the rising cost of living.

Meanwhile of the surveyed respondents, only 14 per cent see a probable increase in their workforce in the next six months.

The shortage and high cost of inputs however signifies a decline in production, thereby leading to downsizing of the workforce.

Majority of the surveyed firms (57%) intend to maintain their current size of workforce in the next six months.

However, 29 per cent of the surveyed firms in 2022 Q1 estimate a downsize in their workforce, compared to nine per cent in 2021 Q4.

This could be caused by the disruptions in business from global market dynamics.

The top two constraints to the growth of the manufacturing sector over the next six months, as reported by the surveyed manufacturers, include high cost of raw materials and oil/energy prices, at 86 per cent.

These were followed by low demand and legislative regulatory pressure and uncertainty, both at 64 per cent.

The barometer, which features top CEOs and industry players under the KAM umbrella, reviews the sector's performance in the last three months and gives a forecast for the next six months.

Sub-sector widely featured include service and consultancy, chemical and allied, food and beverages, leather and footwear, metal and allied, automotive, paper and board sector, pharmaceutical and medical, and plastics and rubber.

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