High electricity costs, taxation and illicit trade are emerging as major obstacles to President William Ruto’s plan to expand manufacturing and make the sector a bigger contributor to the economy.
The challenges are highlighted in the draft National Industrialisation Policy 2026.
The policy says manufacturing continues to face high production costs, an unpredictable regulatory environment, financing constraints and weak competitiveness.
The draft comes three years after the Kenya Kwanza administration made manufacturing one of the pillars of its Bottom-Up Economic Transformation Agenda, promising to increase local production, promote value addition and create jobs.
However, manufacturing’s contribution to GDP fell to 7.1 per cent in 2025, from 7.7 per cent in 2022, putting the sector well below the Vision 2030 target of 20 per cent.
The new policy seeks to raise annual manufacturing growth to 15 per cent and increase the sector’s contribution to GDP to 24 per cent by 2063.
The policy, for which the Industry department is seeking public input, identifies the cost of electricity as one of the main constraints facing manufacturers.
It says unreliable power supply, voltage fluctuations and the need for backup generation add to production costs and make Kenyan manufacturers less competitive against regional and global producers.
The policy proposes a dedicated industrial electricity tariff, increased investment in transmission networks and substations serving industrial areas and measures to reduce power outages.
It sets a target of narrowing the industrial electricity tariff gap with regional competitors to within 10 per cent by 2032.
The concerns come as manufacturers continue to lobby the government for cheaper and more reliable electricity.
Industry officials have also warned that high energy costs have contributed to companies relocating production to neighbouring countries.
Industry PS Juma Mukhwana says the government is reviewing the policy to allow industries to access cheaper and more stable electricity, including through direct evacuation of power from producers.
Taxation is another major concern. Manufacturers have raised concerns about the cumulative effect of taxes, levies and regulatory charges on raw materials and other industrial inputs, the policy says.
During consultations on the Finance Act 2026, the Kenya Association of Manufacturers raised concerns over increased excise duties affecting imported wood panels, industrial sugar, printing ink, resins, kraft paper and glass.
The manufacturers also raised concerns over fees under the Extended Producer Responsibility framework and called for a more predictable tax regime.
The Industry department has proposed reviewing the excise regime, with Trade CS Lee Kinyanjui saying duties should primarily target finished products rather than raw materials to avoid increasing the cost of manufacturing.
Illicit trade has also been pointed as a key challenge
Manufacturers say smuggled, counterfeit and tax-evading goods are competing directly with locally produced goods while avoiding many of the taxes, standards and regulatory costs borne by legitimate businesses.
The Kenya Association of Manufacturers estimates illicit trade costs the economy about Sh800 billion annually, with legitimate manufacturers losing up to 40 per cent of their market share. The government, on the other hand, is losing more than Sh153 billion in tax revenue.
In this regard, the draft industrialisation policy calls for stronger measures against unfair trade practices, including illicit trade in substandard and counterfeit products. It also identifies the need to strengthen Kenya’s ability to participate in regional and global value chains.
The problems come as the Kenya Kwanza government seeks to use manufacturing to drive economic growth, create employment and reduce dependence on imported finished products.
The Kenya Kwanza manifesto identified manufacturing as a sector that was “headed in the wrong direction” and proposed a value-chain approach to address competitiveness bottlenecks.
Its agenda included increasing value addition in sectors such as leather, pharmaceuticals and building products, while expanding manufacturing activity outside the traditional industrial centres.
The new policy retains that focus but proposes wider reforms covering energy, infrastructure, taxation, finance, technology and regulation.
It also calls for existing industrial parks to be completed and operationalised before the government commits to new ones, except where there is a clear strategic justification.
The Auditor General’s audit of county governments found that at least 13 County Aggregation and Industrial Parks were either stalled, significantly behind schedule or affected by serious implementation problems. The projects were part of Ruto’s flagship BETA manufacturing and agro-processing agenda.
The policy proposes that industrial parks should have power, water, transport and digital infrastructure in place before or alongside commissioning.
The government is also proposing measures to improve access to long-term financing for manufacturers, including recapitalising the Industrial Development Fund, expanding credit guarantees and promoting equipment leasing and asset-based lending.
Manufacturers also face difficulties accessing affordable finance, with the draft policy noting the financial system remains largely oriented towards shorter-term lending while industrial investment requires longer-term capital.
The State Department of Industry says the new policy is intended to provide a framework for implementing the manufacturing pillar of BETA.
It targets 15 per cent annual growth in manufacturing and greater export diversification, with manufactured goods currently accounting for 59.5 per cent of Kenya’s exports.
