Manufacturers explain why Kenya risks sinking into Ksh876B fiscal deficit
Kenya’s manufacturers have warned that the country could be staring at a deepening fiscal crisis—one with a projected deficit of Ksh876 billion in the 2025/26 financial year.
Appearing before the National Assembly’s Departmental Committee on Finance and National Planning on Friday, May 30, 2025, the Kenya Association of Manufacturers (KAM) laid out the critical challenges choking the sector.
They warned that the steady decline of manufacturing is not just hurting business—it is also robbing the government of much-needed revenue.
Tobias Alando, Chief Executive of KAM, said the manufacturing sector’s contribution to Kenya’s GDP has been on a decline, falling from 11.3% in 2010 to 7.3% in 2024.
“This downward trend in a traditionally “easy-to-tax” sector is attributed to several factors, including the taxation of industrial inputs, accumulation of VAT refunds, and policy uncertainty due to frequent changes in tax laws,” he told the Kuria Kimani-led Committee.
“Hon. Chairman, the ripple effect of this decline is evident in employment figures. While this sector employed 369,200 Kenyans in 2024, accounting for 11.8% of formal wage employees, reversing the declining manufacturing GDP would lead to an increase in wage employees, consequently boosting direct tax contributions like PAYE and indirect taxes such as VAT through increased consumption.”
KAM on burdensome taxes
At the heart of the problem, Alando explained, are burdensome taxes on industrial inputs, delayed VAT refunds, and unpredictable policy changes—especially on tax laws. These issues, he said, discourage investment and growth, making Kenya less competitive in both regional and global markets.
The consequences go beyond shrinking profits. Alando told lawmakers that 369,200 Kenyans were employed in the manufacturing sector in 2024, accounting for nearly 12% of formal wage earners. If the sector rebounds, it could absorb even more workers—boosting income tax (PAYE) collections and stimulating spending, which in turn lifts VAT revenues.
Illicit trade
One major source of lost revenue, KAM said, is illicit trade. Sectors like alcohol, tobacco, and textiles are bleeding billions each year through unregulated or counterfeit products. The estimated tax losses? Ksh120 billion from alcohol, Ksh33 billion from textiles, and Ksh9 billion from tobacco.
“KAM estimates that eradicating illicit trade could reduce the estimated fiscal deficit of Ksh876 billion in 2025/26 to Ksh50 billion,” the CEO stated.
KAM also flagged the high cost and unreliability of electricity as a key hurdle. Frequent outages, unpredictable billing, and expensive power make Kenyan products less competitive, especially compared to countries like Vietnam—now a global leader in textile and mobile phone exports, thanks to supportive government policy and infrastructure.
Tax proposals
With the Finance Bill 2025 under review, manufacturers urged lawmakers to reconsider proposals that could worsen the situation. One such proposal is the shift of several goods from zero-rated to VAT-exempt status. While this might seem like a minor change, KAM argues it would make input VAT non-recoverable—essentially increasing the cost of doing business.
KAM also expressed concern over the proposal to exempt locally assembled mobile phones from VAT while still taxing their components.
The lawmakers, led by Committee Chair Kuria Kimani, assured KAM that their submissions would be carefully reviewed.
“We have heard you, and when we sit to deliberate on the proposals you have submitted, we will thoroughly evaluate them. It is our desire that Kenya runs a vibrant manufacturing country because we do not want to be a net importing country,” Kimani assured.
The Committee is expected to kick off public hearings on the Finance Bill in Nairobi on Saturday, May 31, 2025, where more voices from industry and the public will weigh in.
