The nation’s position at 115th on the UNIDO Industrial Competitiveness Index reflects deep-seated institutional and operational inefficiencies that demand reforms rather than iterative policy adjustments.
In contrast to the economic transformation paths seen in prosperous developing economies, the sector’s diminishing gross domestic product (GDP) contribution—from 15 percent to 7.6 percent over the last 10 years—is a notable de-industrialisation trend.
This decline in industrial capacity points to institutional restraints and basic market flaws that hinder capital formation and technological development in the manufacturing sector.
The current framework for infrastructure development needs to be significantly reevaluated, even though it promises a minimal rise to $1 billion in yearly expenditure by 2027.
Significant negative externalities are produced by the current infrastructure gap, which shows up as higher manufacturing costs and decreased competitiveness.
Inadequate water infrastructure, unstable power supplies, and decaying transport networks are all significant barriers to industrial growth and efficiency improvements.
The development of human capital is another bottleneck. Although ambitious, the plan to upskill 100,000 people a year through vocational training needs to be significantly revised to account for skill-biased technology progress. There is a serious skills mismatch in the labour market as a result of current technical education frameworks that are still out of step with Industry 4.0 requirements.
Of particular concern is the technical divide in the sector. Automation accounts for one percent of GDP, which is underinvestment in vital technologies that boost productivity. Although the proposed research and development tax credit system appears promising, institutional friction and bureaucratic inefficiencies could hinder its ability to effectively spur the adoption of new technologies.
Despite being in line with the demands of global sustainability, the aims for the transition to renewable energy need stronger implementation mechanisms. Particularly for energy-intensive firms in price-sensitive marketplaces, the 30 percent renewable energy utilisation target calls for careful assessment of transition costs and competitive ramifications.
For 2025, several policy initiatives are essential: First, it is crucial to rationalise regulations. Manufacturers are subject to exorbitant transaction costs under the current regulatory framework, which makes institutional reforms necessary to simplify compliance requirements and lessen administrative load.
Second, infrastructure development must give industrial demands top priority by making targeted investments in infrastructure that improve reliability.
Kenya’s industrial trajectory in the ensuing decades will depend on the decision between significant structural change and ongoing policy iteration.
This necessitates shifting the emphasis from overall spending goals to particular infrastructure quality indicators that have a direct bearing on manufacturing productivity.
Third, the growth of the capital market is essential. Manufacturers are disproportionately affected by credit restriction, which is one of the major market failures in industrial financing that are present in the current financial architecture. It is crucial to develop specialised financial instruments and risk-sharing arrangements.
Fourth, there needs to be a significant recalibration in the development of human capital. Building adaptable capacities rather than static skill sets should be the main goal of international partnerships for the modernisation of technical education.
Fifth, there has to be a major overhaul of the tax system. Significant working capital constraints are imposed on manufacturers by the current system's reliance on front-loaded revenue collection, especially through VAT methods. The prolonged VAT refund cycle creates fictitious liquidity restrictions that hinder investment potential and operational effectiveness.
Industrial operators are disproportionately burdened by the complicated compliance requirements and the unequal treatment of manufacturers in tax administration. To free up operating capital for profitable investments, this calls for the adoption of streamlined tax laws and expedited refund procedures.
Moving from the articulation of aspirational goals to the implementation of tangible policy actions is necessary for the future. It is not a lack of strategic planning that has prevented Kenya from achieving its potential as a regional industrial hub, but rather a failure to pay enough attention to the operational factors that determine industrial competitiveness.
For industrial transformation to be successful, substantial institutional reforms must be implemented in place of more minor policy changes.
The writer is a Development Economist and Public Policy Specialist. Email: [email protected]
