Principle of Cause and Effect is too Simplistic for Local Market Dynamics

By Soko Directory Team / Published February 16, 2016 | 2:26 pm

Lately there has been a lot of excitement since the announcement of reduced fuel prices and anticipated relief on the part of consumers spending. However, this good news is delivered in piece meal and sensationally thereby leaving out factual explanations of what this translates to and how much change is expected if any.

The issue of a trickle-down effect of economic gain from global activities in any country is such that we do not expect an obvious correlation due to their unique political structures and economic factors. So to say that fuel prices will automatically result in a drop of prices for everything, transport, food, commodities, is to wrongly assume that everything that happens in the financial market is within human control. That is not accurate. As we know there are many factors that affect the markets in any economy such as the weather, quality and availability of labour, the political good will, political stability, regulatory framework for business and how these are influenced by global markets.

Hence even as we expect to benefit from good tidings that befall others around the globe we must ask ourselves if our unique disposition as a country could hinder us from enjoying them. A healthy competitive business environment increases the purchasing power of customers whilst at the same time allows for new innovative ideas to thrive and thereby grows the existing industry. If the environment is unfavourable it constricts local businesses, making it hard for them to reap and grow from their local profits let alone find relief in changes in the global markets.

In the World Bank’s ease of doing business report for 2015, Kenya’s competitiveness went up to position 108 from the previously held 129^th slot. The improvement was attributed to indicators such as acquisition of credit, electricity connection, starting a business and registering property. However, when we look at a neighboring country like Rwanda taking position 62 in the same report it tells us that more can be done for the other indicators.

When it comes to taxation, for instance, we have seen counties unconstitutionally applying double taxation to national businesses, a practice that may discourage any planned expansions and investment in to counties by other companies. We have also seen some taxation applied across the board without consideration on the size of businesses thereby stifling growing businesses in the process.

Local manufacturers have been negatively affected by cases of double taxation and other levies which are unconstitutional. This is couple with other issues that they have to contend with including security, infrastructure, cost of labour and the availability of raw material. These are all factors that affect the pricing and value of the end product. It is not all doom and gloom because the export sector has experienced some relief with the falling fuel prices, making the export rate higher now than in the past 3 to 4 years.

But, in industry, not all sectors are the same, some do not have fuel as a huge component of their day-to-day processes. In fact for energy intensive sectors such as the cement industry we have seen a decrease in prices, for example a 50kg bag that sold for 720Kshs is now selling at Kshs. 650. But in the cases where fuel does not contribute as much to the end product, as say, labour or raw material availability and transport, then the rise or fall of the prices makes nary a difference.

If we take for example the issue of transport alone and the factors that have to be put into consideration; like where do I source for raw material? If it is cross-border, how long does it take for goods to be cleared at the port? What barriers, both Tariff and Non-Tariff do I have to spend money on to ensure that the materials reach in good time and in good condition? The Africa competitiveness report of 2013 by the World Bank has specifically talked about the need to eliminate infrastructural bottle necks to boost intra-regional trade and consequently shield the continent from external shocks. The same applies within the country – if we are able to remove the number of Non-Tariff Barriers that curtail to business transactions then our industry would have breathing space to accommodate any external shocks and vice versa would be more likely to reciprocate any good tidings from a change in global market dynamics.

Luckily, for us as industry, the government has recognized the need to attract local capital in the recently launched Kenya Industrial transformation Programme. The Blueprint has cited the importance of increasing responsiveness to the industry which ‘cannot be overlooked’. This includes the commitment of the Ministry of Industrialization and Enterprise Development to move quickly and resolve issues that impede effective business operations. The programme has also earmarked the ease of doing business as one of its enablers for industrialization and will action tactical changes such as digitization of processes and reduction of approval steps – to reduce the costs that local businesses bear.

A lot of collaboration and political will is need to actualize the transformation programme and enable it to run smoothly for the benefit of industry and the citizens of this country. As industry we have already started to galvanize Public-Private Partnerships that will roll out some of the envisioned actions from the blue print. However some aspects will take longer to realize because of their sheer size and perhaps also cultural aspects that need to be changed. But in the meanwhile whilst we are optimistic about changes in the fuel prices we must be cautious to not simply apply the cause and effect phenomena that leaves out a lot of the narrative on the complexities of different market environments.

The writer is the CEO of the Kenya Association of Manufacturers and can be reached on ceo@kam.co.ke

About Soko Directory Team

Soko Directory is a Financial and Markets digital portal that tracks brands, listed firms on the NSE, SMEs and trend setters in the markets eco-system.Find us on Facebook: facebook.com/SokoDirectory and on Twitter: twitter.com/SokoDirectory

View other posts by Soko Directory Team