US embassy cable - 05NAIROBI3826

UNCLAS SECTION 01 OF 02 NAIROBI 003826 
 
SIPDIS 
 
STATE FOR EB/TPP/ABT/EDWARD HEARTNEY 
STATE FOR AF/E 
STATE FOR AF/EPS 
USDOC FOR ITA/OTEXA/MDANDREA 
USDOC FOR 4510/ITA/MAC/ANE/OA/HVINEYARD/RTELCHIN 
USDOC FOR 3131/CS/OIO/ANESA/MSTAUNTON/GLITMAN/DHARRIS 
 
E.O. 12958: N/A 
TAGS: KTEX, ECON, ETRD, KE, AGOA, Export 
SUBJECT:  KENYA RESPONSE - TEXTILES AND APPAREL SECTOR: 
UPDATED STATISTICS AND PROJECTION OF FUTURE COMPETIVENESS 
 
REF: A) STATE 146213 (8/8/05); B) NAIROBI 3072 (8/1/05) 
 
1.   In response to ref A), Embassy Nairobi offers the 
following baseline data on Kenya's textile and apparel 
production and employment.  Total Kenyan industrial 
production in calendar year 2004 was USD 5.616 billion. 
Total textile and apparel production was USD 304.21 million 
in year 2004 and USD 182.28 million in the first half of 
2005.  Total textile and apparel share of Kenya's total 
imports in 2004 was 6% -- and also 6% in mid-year 2005. 
Total textile and apparel share of Kenya's exports in 2004 
was 9% -- dropping to 4% in mid 2005.  Total manufacturing 
employment in 2004 was 1,175,230. Total direct textile and 
apparel manufacturing employment was 30,000 in 2004. 
 
2.   Textile and apparel production plays a significant role 
in Kenya's economy.  Kenya's modest total economic recovery 
of the last three years is in part due to Kenya's growing 
garment and apparel sector, and most of this latter growth 
can be traced to AGOA incentives.  Since its inception in 
2000, AGOA has led to the establishment of about 50 garment- 
making factories in Kenya, employing approximately 30,000 
people directly and about another 200,000 indirectly. 
Presently Kenya has about 12 ginneries in operation, 
compared to only 7 that were in operation before 2001. 
 
3.   The Government of Kenya (GOK) has identified textiles 
and apparel as a growth sector.  In fiscal year 2002/2003, 
the GOK removed value added taxes (VAT) on all ginning and 
textile manufacturing machinery, and removed as well duties 
on all supplies of taxable goods and services to cotton 
ginning factories. 
 
4.   According to many industry sources, the expiry of the 
Multi Fiber Agreement (MFA), allowing apparel and textile- 
exporting countries to adjust to the removal of developing 
country export quotas to the European and American markets, 
will decimate jobs in Kenya's apparel industry-dominated 
Export Processing Zones (EPZ).  Several apparel companies 
have reported many lost orders due to high production costs 
in Kenya that cannot compete with China's very low cost of 
production and very large economies of scale.  According to 
the Kenya Apparel Manufacturers and Exporters Association, 
over 11,000 jobs have already been lost, and seven major 
factories shut down.  Several apparel companies have laid 
off more than 300 workers each. 
 
5.   The enormous market prospects presented by AGOA from 
2000 and the African, Caribbean and Pacific - European Union 
(ACP-EU) Cotonou Agreement rekindled interest in the 
industry in the earlier years of this decade.  Since Kenya 
qualified for AGOA, its exports to the U.S. expanded 
remarkably and so did investment.  Total investment in this 
sector rose from KSh 1.2 billion to KSh 9.7 billion (a 41% 
increase) while jobs increased from about 26,000 in 2002 to 
37,000 in 2003 (although they subsequently fell to 30,000 by 
the end of 2004).  As of mid-decade, the sector has been 
exposed to foreign competition and an influx of imported 
used clothing, the collapse of the local cotton-processing 
industry, weak domestic economic activity -- which reduced 
demand for apparel, and quota restrictions in the U.S. 
market.  The Tailors and Textile Workers Union has reported 
that some unscrupulous traders are importing textiles from 
China and Dubai duty-free, claiming they are from the Common 
Market for Eastern and Southern Africa (COMESA). 
 
 
 
 
6.   In May 2005, Kenyan manufacturers reported a reduction 
in orders from USD 39,982 in 2003 to USD 32,572. There are 
declines as well in exports as well as employment. To date, 
Kenya has not implemented any measures to limit imports of 
textiles and apparel from any particular country -- but is 
looking into ways of reducing second hand textile imports 
into Kenya to protect the local textile industry. 
 
7.   Industry sources report that garment manufacturers have 
not reduced wages, despite the obvious financial pressures. 
In fact, most are apparently paying considerably more than 
the government-required minimum wage.  However, 
manufacturers have sought support from the government to 
ensure that minimum wages are pegged to productivity, and 
that a review of the minimum wage is done in consultation 
with them.  Both the government and the private sector are 
trying to identify additional measures to increase Kenya's 
competitiveness including reducing the number of licenses 
required for doing business in Kenya, reduction of the time 
required in processing an investor's license from 48 days to 
21 days, and the transformation of the Investment Promotion 
Center to the Investment Promotion Authority to act as a one- 
stop shop, affecting anti-dumping rules, subsidies, and 
emergency tariffs.  Other measures aimed at creating a 
friendly investment environment include research and 
development (such as improving cotton seeds and upgrading 
ginning technology).  Kenya is supporting regional 
integration through bilateral and multilateral trade 
relationships such as COMESA and EAC, which should 
facilitate regional exports of apparel.   A Cotton Bill 
currently in parliament is expected to introduce a 
regulatory framework to attract investments to the cotton 
sector.  The GOK has announced plans to remove impediments 
at Kenya's ports and to upgrade its transportation and 
telecommunication systems.   Also, most of Kenya's new 
clothing factories have been established within the Export 
Processing Zones (EPZs), which provide generous tax 
incentives, ready factory shells, access to superior 
infrastructure, and operational support. 
 
8.   All fabric and most accessories are currently imported, 
primarily from Asia.  AGOA requires that by September 2007, 
for continued duty-free market access to the U.S, Kenyan 
apparel factories must source from either U.S. suppliers or 
from eligible African countries.  Due to the stringent 
quality of U.S. buyers and large volumes involved, Kenyan 
textile mills are not able to produce the wide range of 
fabric and accessories required by the clothing factories at 
the right quality and price.  Importing from other African 
countries is not feasible, since they too have excess 
demand.  The fear of investors that they might have to 
relocate and put close to 30,000 jobs at risk in 37 EPZ 
factories is very real. 
 
9.   In August, the Pakistan Embassy in Kenya wrote to some 
investors mainly from Sri Lankan seeking a meeting to 
discuss possible relocation to Pakistan. The GOK officials 
shrugged off Pakistani's advances, saying it is part of a 
global competition to win Foreign Direct Investments (FDI) 
to help reshape their economic opportunities, which is what 
Kenyans are doing. Sri Lankan investors within EPZ, mainly 
investing in export of apparel through AGOA are experiencing 
difficulties with their imports mainly due to delay in 
clearing goods at the Mombasa port, delays in acquiring 
export visas and poor infrastructure which has affected 
their businesses, often resulting in cancellation of orders. 
 
 
10.  There is no revival in sight should the USD 250.8 
million export market collapse, and some critics are already 
blaming the Kenyan government for not helping exporters 
diversify into the other 6,000 products eligible under AGOA. 
With China expected to totally dominate the textile and 
apparel industries as trade barriers fall, there is an 
attitude of resignation in Kenya's EPZ apparel industry - 
that of simply relying on AGOA for favorable trade terms 
until 2007 when Kenyan apparel manufacturers may be locked 
out of the U.S. market.  In retrospect, business historians 
may severely fault African nations for using AGOA as a 
temporary "get rich quick" scheme for a few rather than use 
it as a tool as its creators intended - to buy entire 
industries and governments the time necessary to implement 
fundamental reforms that would benefit the many for the long 
term. 
 
11.  The GOK collects and reports textile and apparel 
employment data annually, and in addition, the GOK provides 
monthly data to the U.S. Customs Service on textile exports 
to the U.S. as required under AGOA.  Reliable monthly 
employment data is unavailable since the GOK lacks the 
institutional capacity to collect such data; the statistics 
in this report came from industry source estimates, the 
GOK's Department of Industries (Ministry of Trade and 
Industry), and the Kenya Association of Manufacturers (KAM). 
 
12.  This cable was cleared by State Economic and 
USAID/Regional Economic Development (REDSO) sections at 
post.  Best regards from Eastern Africa. 
 
BELLAMY