Manufacturers have cited reducing costs and maintaining jobs as top priorities during the global pandemic.
This is according to findings of a KAM, KPMG report on the impact of The pandemic on manufacturers in Kenya.
Nations have put in place stringent measures to curb the spread of the pandemic which include lockdown regulations that have crippled business operations.
Despite fears of the impact of the pandemic on local industry, 81 per cent of manufacturers say they are not likely to close down as a result of the impact of the pandemic. However the report noted that this number reduces to 76 per cent for manufacturing SMEs.
To help businesses navigate the pandemic, the survey proposes clearing outstanding VAT refunds and pending bills, re-evaluating tax reliefs, providing moratorium on changes in the tax regime, establishing an emergency rescue fund, re-evaluating regulatory overreach, and developing a comprehensive rebound strategy among others.
Speaking during the launch of the report, KAM Chair Mr Sachen Gudka noted that while it is important to have measures in place to curb the spread of the virus, the regulations coupled with uncertainty are likely to lead to a prolonged recession that will affect business continuity.
“It is important to assess the impact of the pandemic on businesses so as to work with various partners and stakeholders, including the government to develop appropriate policies that will cushion the economy from the adverse effects of the pandemic as well as minimize job losses. The report findings shall guide us as we engage the government in developing additional measures to further mitigate the adverse impact the pandemic has had on businesses,” said Mr Gudka.
KPMG CEO and Senior Partner Mr Benson Ndung’u noted that the report has come at a critical moment because there is great optimism in the manufacturing sector and its role in job and wealth creation.
“We applaud the government for their role in handling the health situation. Our focus now is saving livelihoods. We hope to have the economy start picking up again after this crisis. The report will inform the government on the impact of the stimulus package and where we can focus on to rebound the economy. The current crisis will end, and we shall come out stronger as a country.”
Many businesses are playing their role in limiting the spread of the virus, having introduced accessible sanitization points around the premises, practicing social distancing, providing PPEs such as masks and gloves and launching awareness campaigns. This comes at a cost. Businesses have: reduced their workforce either through layoffs, unpaid leave or paid leave due to the social distancing measures that have been put in place; reduced the number of shifts due to the fall in demand; or increased the shift periods to adhere to the 7pm to 5am curfew. Although working remotely is being encouraged, this is not possible for 48 per cent of manufacturers which increases the risk of spreading the virus.
From the survey, 78 per cent of manufacturers’ top priority is reducing costs, 61 per cent are keen on job retention with 53 per cent giving precedence to improving cash flows. On employment, 40 per cent of surveyed manufacturers have reduced their casual employees whereas 17 per cent have reduced the permanent workforce. On the other hand, 91 per cent of non-essential manufacturers have seen a significant decrease in demand for their products compared to 74 per cent of essential goods manufacturers.
42 per cent of manufacturers are operating at less than half of their operating capacity, whereas 37 per cent of SMEs have scaled down production. On the other hand, 79 per cent of surveyed companies are experiencing cash flow constraints, with 86 per cent of SMEs facing the same challenge, leading to difficulties in facing their financial obligations such as salaries and operational costs. To resolve cash flow challenges, manufacturers have negotiated payment plans with their suppliers (66 per cent), customers (62 per cent), banks (55 per cent) and sought additional financial support from other individuals and institutions (45 per cent).
On economic incentives, 71 per cent of surveyed manufacturers indicated that zero tax on income less than Kshs 24,000 was the most helpful while reducing the VAT to 14 per cent had the least benefits. Reduction of Corporate Tax from 30 per cent to 25 per cent was positively received by 60 per cent of the surveyed manufacturers. 52 per cent of manufacturers, to whom turnover tax (ToT) is applicable found its reduction from 3 per cent to 1 per cent very helpful or helpful.
50 per cent of manufacturers indicated that VAT refunds are helpful. However, the funds are yet to be disbursed to manufacturers.
The impact of the pandemic has also been felt by SMEs, who are more exposed to its effects, with start-ups being the most vulnerable. SMEs are currently facing more challenges in access to finance, greater cash flow constraints and a bigger drop in demand and turnover. 30 per cent have experienced a loss of between 65 per cent – 100 per cent with 49 per cent reporting losses of between 30 per cent – 64 per cent.
The study has noted that manufacturers have had to rapidly change focus. The top three priorities for the majority of businesses before Covid-19 were to increase profitability, increase revenue and increase domestic market share. These strategies have now been pushed down the agenda and are overtaken by reducing costs, retaining jobs, and improving cash flow. However, when faced with the dilemma of reducing costs or retaining jobs, the former usually takes precedent and downsizing considerations seem more of a reality.
In spite of the rising costs, most manufacturers have not been able to adjust their prices accordingly. “We have a moral obligation to ensure that at this particular time we won’t take advantage of the situation but be very supportive of our country, Kenya.” – Bobby Johnson, Chair – Metal & Allied Sector.
The survey targeted manufacturers under the KAM Membership base and mainly focused on employment, business resilience, the impact of the economic stimulus package announced by H.E President Uhuru Kenyatta and proposals to further cushion the economy from the adverse effects of the pandemic.