Assurance of preferential US market terms lifts Kenya’s EPZ business

Workers at an EPZ factory in Athi River sew garments. PHOTO | FILE 

By KIARIE NJOROGE, gkiarie@ke.nationmedia.com

In Summary

• Since the extension of the Agoa pact last year, local manufacturing firms have received a new lease of life with one of the biggest Export Processing Zone set for expansion.

The Kenyan manufacturing sector has in recent years been fraught with challenges including subdued product demand in key export markets, high production costs and competition from cheaper producing rivals especially in Asia.

The exclusive Export Processing Zones (EPZ) are among the segments that for years suffered a downturn due to a high demand for cheaper second-hand clothes and uncertainty over preferential entry of products into the US market under the Africa Growth and Opportunity Act (Agoa).

But a decision by the US Congress in June 2015 to extend the Agoa by another 10 years has triggered fresh enthusiasm in the EPZ business.

Though the Act originally covered the eight-year period from October 2000 to September 2008, amendments by then US President George Bush in July 2004 extended it to 2015.

Several Kenyan products, notably apparel and agricultural produce, are big beneficiaries of this arrangement which has lifted import duty on all eligible products and granted preferential market access upon compliance with Rules of Origin.

Latest statistics in the Economic Survey 2016 showed that the EPZs recorded a 12.1 per cent growth in sales last year underlining a resurgence of the sub-sector that is expected to be a key pillar of Kenya’s development.

The EPZs recorded growth in all key fronts including employment and investment-- offering support for the government’s plan to establish a variant of these zones- the Special Economic Zones (SEZ).

The growth was mostly driven by apparel exports under the Agoa .

“In 2015, enterprises operating under the Export Processing Zone (EPZ) programme recorded increase in employment, exports, imports, and expenditure on local goods and services,” The Economic Survey 2016 states.

“Total EPZ sales went up by 12.1 per cent from Sh57.2 billion in 2014 to Sh64.1 billion in 2015. The number of local employees increased by 8.7 per cent to 50,523 persons in 2015. The bulk of employment was in the garment/apparel enterprises with a total of 41,548 persons mainly due to expansion of existing apparel, and agro-processing firms.”

EPZs in Kenya date back to 1990 when the legislation establishing them was passed with a view to stimulating employment and growing exports.

Investors were given a number of incentives including a 10-year corporate tax holiday and 25 per cent tax thereafter, 10-year withholding tax holidays and stamp duty exemption.

READ: Kenya EPZs ranked low on wealth creation

They also get 100 per cent investment deduction on initial investment applied over 20 years and VAT exemption on industrial inputs.

The programme had a sluggish growth until 2000 when the Agoa deal was made. By 2011, the number of gazetted zones had risen to 44 with a further 13 established since bringing the total to 57. A further four EPZs have been gazetted since January this year.