2020 Budget Policy Statement: Review from SME perspective
Kenyan SMEs play a critical role In the economy constituting 98 percent of all registered businesses, contribute 33 percent to GDP, employs over 30 percent of Kenya’s youthful population (KNBS 2016) with SMEs accounting 83.6 percent of new jobs (KNBS 2019 Economic survey).
Further current SME sector distribution is as follows; wholesale-retail, motor vehicle-cycle repair, accommodation and food service with top sub sector contribution to GDP being; manufacturing, wholesale, transport-storage and education (KNBS 2016).
Traditionally SMEs have faced systemic challenges leading to a mortality rate of 75% within three years of inception due to challenges of access to finance, access to market, lack of information, management skills, access to technology, infrastructure challenges and unsupportive policies among others.
Cognizant of the importance of SMEs, the Kenyan government must address these challenges faced by SMEs to reduce their high mortality through interventions that require resources through the national budget process which is heavily informed by the budget policy statement as well forward looking and supportive legislation.
Focusing on the Kenya’s 2020 budget policy statement I would want to examine proposed efforts to support SMEs, identify gaps and propose solutions that will resonate with the plights of SMEs in Kenya.
The first area of focus is manufacturing a sector government aspires to reform and improve by encouraging investment and protection against dumping. Some of the ongoing efforts are; establishment of special economic zones and industrial parks across the country, boost cotton production through modernization of Rivatex East Africa, tax incentives in finance act 2019 expected to promote value addition and make locally produced goods competitive in various export markets, launch of Kenya coast guard to boost fish production.
Whilst these efforts are commendable, they must all be aligned to the current SME realities and must be gradually implemented to ensure no one is left behind. For instance, instead of creating new special economic zones; efforts must be made to recognize and support current ones that are struggling such as Kariobangi Light Industries, Kariokor leather market, Uhuru Textile market and Jogoo-Ngong Road markets to name a few.
More efforts must be done such as supply of basic utilities such as water and electricity at a subsidized rate, product quality support by the Kenya Bureau of Standards, capacity building, availing of modern shared production equipment and capacity building among others and only shifting these enterprises to other designated special economic zone over time as they expand. Similarly a low hanging fruit in the coastal region is the coconut value chain that for instance can play a much bigger role in supporting the flower industry by supplying soil alternative which forms an important input to the flower industry but is mostly imported from Asia with very little tax hence decimating local coconut value chain players in the coast region.
The same script applies for SMEs manufactures in Kariokor leather market and Uhuru textile markets who have to deal with cheap low-quality imports leading to less than 2 percent of value addition of raw material hence very little return which paints the start irony of Africa owning a fifth of global livestock while accounting for less than four percent of world leather products. Matters are made worse when the same government imports products that can be produced locally such as furniture and textile among others to the tune of Ksh 38 Bn (Central Bank of Kenya).
The second area is ICT where government has invested in digital infrastructure as well as aided in improved access to affordable broadband connectivity with key examples being national optic fibre backbone, Konza Technopolis complex, Konza Data centre as well as establishment of national ICT policy and Data protection act 2019. Kenya is among the leading countries in Africa on matters innovation as evidenced by Kenya’s ranking 77th globally and 2nd in Africa (Global Innovation Index 2019) as well Kenyan start-ups leading Africa in attracting 17% of total funding in Africa (Partech Africa 2018).
Kenya therefore needs to build on this foundation by establishing a coordinated start-ups strategy and law that recognizes theses unique business that have the potential to catapult the economy to new heights and provide the necessary support such as tax incentives for start-ups and their support infrastructure that includes incubators, investors and knowledge partners among others as well as a financial de-risking framework.
The third area is financial sector development and reforms with efforts such as operationalization of the Nairobi international financial centre, promoting the diversification of products and services within the capital markets space with key initiatives including the implementation of the derivatives market, commodities exchange market, strengthen capital markets infrastructure and institutions, promote cross border trade and lay down a framework to enable State Corporations and County Governments to raise funds through the capital markets, interest rate cap repeal, formulation of a nation policy for the insurance industry in Kenya to strengthen the framework of providing insurance services in the country with special focus on pension coverage of informal sector as well as increase insurance penetration.
Government reforms in the financial sector must adopt design thinking or customer marketing philosophy an instance where SME interventions are developed bottom up and not top bottom by designing the interventions based on actual SME demography and behaviors. For instance, the credit guarantee scheme must be more inclusive to include other SME-Startup financial players other than banks who play complimentary role in the life of an SME whose growth stage starts from ideation, launch, moderate growth, rapid growth, plateau with different financiers needed for each stage. Similarly, insurance products must be aligned to SMEs who have hazard management mechanism as well as social safety nets inculcated in their chama groups which explains for instance why SMEs in Gikomba market are able to rebound fast after fire outbreaks.
Finally, on business regulatory reforms government efforts have been on making Kenya secure and attractive destination for investment critical for a strong and sustained high growth, poverty reduction and the attainment of the “Big Four” Plan. This has led government to pursue business regulatory reforms aimed at removing red-tape issues thereby reducing cost of doing business while enhancing service delivery to the public as evidenced by Kenya’s improvement on the World bank ease of doing business ranking attaining position 56 in 2019.
These efforts will go a long way in attracting external investment but cannot create the critical number of jobs the country needs given our reality is SMEs are the ones currently doing it. These efforts must to a large degree be inward looking and must done based on the current felt SME needs 79% being informal in nature with little incentive for them to formalize. Regulatory reforms must start where these informal SMEs are, with clear framework for gradual formalization tied with appropriate incentives.