• The country is considered East Africa’s strongest economy.
• It is among countries facing a huge challenge of illicit trade, estimated to be valued at above USD6.34 billion (Ksh800 billion).
• According to official government data, up to 70% of imported goods are counterfeits.

Kenya has a domestic market of over 50 million people and is among the leading economies in sub-Saharan Africa.

The country is considered East Africa’s strongest economy, with the region having a GDP of about USD163.4 billion (at purchasing power parity, about USD$473 billion), and the average GDP per capita is about USD941 (at purchasing power parity, $2,722).

In addition to the EAC market, investors in the partner States have access to other African markets such as COMESA, SADC and AfCFTA, as well as international markets through preferential trade arrangements.

The Common Market for Eastern and Southern Africa (COMESA) comprises 21 Member States with a population of 560 million, and a total GDP of USD768 billion.

This is one of the largest trading arrangements in Africa. Kenya, Rwanda, Uganda, Burundi and South Sudan are members of COMESA, whereas Tanzania withdrew from the organization in 2000.

This, together with the domestic market provides a huge ready market for manufacturers in Kenya, with potential of driving the country’s industrial growth agenda.

However, Kenya is among countries facing a huge challenge of illicit trade, estimated to be valued at above USD6.34 billion (Ksh800 billion).

According to official government data from the country’s Anti-Counterfeit Authority (ACA), up to 70 per cent of imported goods are counterfeits, eating into 40 per cent of local manufacturers’ market share.

About 78 per cent of consumers in the country buy counterfeit goods because they are cheaper compared to original brands. It is estimated that more than 70 per cent of Kenyans buy these products knowingly because they cannot afford original brands.

Most of these goods are imported through official entry points, a trade that is facilitated by rogue government officials.

A study by ACA–National Baseline Survey on Counterfeit and Other Forms of Illicit Trade in Kenya, reveals that the government loses more than Sh153.1 billion annually in potential revenue to illicit trade.

The reality of this threat is further amplified by the fact that illicit trade in goods manufactured by sixteen sectors, accounted for 71 per cent of the total illicit trade.

The negative impact on industry is being transmitted through sales losses, investment opportunity losses which run into billions of shillings and lost employment opportunities.

Most of the counterfeits are imported from the country’s key trading partners mainly China, India, Uganda, UAE, Turkey, Netherlands, France, Germany, the US, South Africa and the UK.

But what is causing the rise in illicit trade?

Poor governance, corruption and porous borders are among the underlying reasons for the increase in illicit trade.

According to the Organization for Economic Co-operation and Development (OECD), Free Trade Zones (FTZs) facilitate trade by offering businesses advantageous tariffs and lighter regulation on financing, ownership, labor and immigration, and taxes.

However, the gains from reduced customs presence in FTZs can offer opportunities for illicit trade.

“There is a risk that, without additional transparency and oversight, the economic benefits from FTZs could be jeopardized,” the inter-governmental organization notes.

In Kenya, high taxation has been blamed as one of the major bottlenecks to make local industries more competitive. The hardest hit products are excisable goods mainly alcoholic drinks, cosmetics, cigarettes and other tobacco products, juices, energy drinks, among others.

There is also proliferation of cheaper mobile phones, most which are counterfeits, electronic goods, and designer clothes among others.

Fast moving consumer goods are also cheaper in neighbouring countries which has seen an increase in smuggling of these products across the porous borders.

For instance, the cost of basic goods such as milk, flour, rice, and bread are on average betweenSh20 and Sh50 cheaper in Uganda compared to Kenya.

Beer and cigarette prices are twice expensive in Kenya compared to Tanzania and Uganda.

“This presents an incentive for smugglers to exploit our porous borders and sell cheaper goods from neighbouring countries,” Retail Trade Association of Kenya (Retrak) CEO Wambui Mbarire says.

Major manufacturers and dealers in excisable goods have sounded an alarm over the high cost of doing business in the country, mainly as a result of taxation which continues to see an increase in commodity prices.

This has affected their sales amid reduced business in the country compared to neighbouring countries.

For instance, East African Breweries Limited (EABL) net sales for the half-year ended December2022 dropped by one percent in Kenya, its largest market, while Uganda and Tanzania grew by19 per cent and 11 per cent, respectively.

Beer volumes went down 13per cent in Kenya, with performance further undermined by a re-emergence of illicit alcohol during the period under review.

BAT has also decried prevalence of illicit trade in tax evasion cigarettes, currently estimated at about 26 per cent of products in the market.

Consequently, the shrinkage of the legitimate market continued to adversely impact industry revenues and deny government an estimated Sh6.5 billion in taxes annually.

“We continue to call for increased resources and enforcement to be deployed by government against illicit trade in tobacco products,” the company said.

Taxation

An unpredictable tax environment in Kenya has been blamed for continued rise in the cost of doing business in Kenya, which is said to have increased tenfold in the last five years.

Kenya Revenue Authority (KRA) has in the latest move proposed an increment in the rates of excise stamps which has not gone well with manufacturers in the country.

KRA’s proposed Excise Duty (Excise Goods Management System) (Amendment) Regulations,2023, seek to increase the fees of excise stamps for bottled water, juices and any other non-alcoholic drinks, cosmetics, alcoholic beverages, tobacco and nicotine products, and export products subject to excise with effect from March1,2023.

The Kenya Association of Manufacturers (KAM) is worried an increase in taxes will further drive up illicit trade whose value rosefromUSD5.7 billion (Ksh726 billion) in 2017, to US6.5 billion (Ksh826 billion)in 2018, despite the existence of excise duty measures.

KAM says the move by KRA, coupled with other factors such as high energy costs, could derail the ambitious plan to increase manufacturing contribution to GDP from the current 7.2 per cent to 20 per cent by 2030.

The sector is expected to create more direct jobs from the current approximately 348,000 toapproximately980,000 jobs.

“However, with the ever-increasing and unpredictable taxation regime, uncontrolled increase in power costs, inflation, forex shortage and influx of cheaper goods from COMESA & EAC regions at zero import duty, this dream to grow manufacturing will remain a mirage as it has happened over the decades,” KAM chairman Rajan Shah said.

The proposed increment in the EGMS stamp fees shall have a detrimental effect on consumers and manufacturers due to the increased cost of production and the cost of finished products amid the rising cost of living.

The proposal comes barely four months after a 6.3 per cent inflation adjustment on specific excise tax rates was effected on October1, last year, impacting cosmetics, confectionary, alcoholic and non-alcoholic beverages including bottled water, and tobacco and nicotine products, among other products.

Manufacturers and importers of these products were forced to increase prices, amid low disposable income by households which has affected sales.

Three months before the inflation adjustment, there was an increase in excise taxes from July1, 2022, by between 10 per cent and 20 per cent through the Finance Act, 2022.

“Despite the strive to support the economy’s push to lower the cost of living, manufacturers shall, therefore, be forced to pass this new cost to Mwananchi, exacerbating an already dire situation as Kenyans try to make ends meet,” Shah said.

According to KAM, some of its members who are in the regional markets and have established manufacturing industries in other African countries are already reporting a cost of production deficit of up to 23per cent for the same finished products manufactured in Kenya, vis a vis producing in other countries such as Egypt and importing to Kenya.

“We cannot afford to lose these kinds of investments to our regional neighbours,” the manufacturing sector lobby group says, adding that the increased tax burden will also discourage foreign investment in Kenya.

“Investors are attracted to countries with favorable and predictable tax regimes,” Shah notes.

Whereas taxation is a critical component of any government’s fiscal policy, an over-reliance on this source of income can lead to a decline in competitiveness.

Increased pressure on legitimate producers by counterfeiters and smugglers could lead to downscaling of production by manufacturers in the country, with some forced to close shop in the long-run.