MANUFACTURERS are facing a growing squeeze from illicit trade amid rising production costs, taxation and an increasingly complex regulatory environment, sector association now says.
This, it says, is threatening the competitiveness of legitimate businesses and weakening the country’s ambition to become a regional manufacturing hub.
The Kenya Association of Manufacturers (KAM) estimates that illicit trade costs the economy about Sh800 billion annually, equivalent to nearly nine per cent of gross domestic product.
Legitimate manufacturers are estimated to lose as much as 40 per cent of their market share each year, while the government forfeits more than Sh153 billion in tax revenue.
The scale of the problem was highlighted during a KAM engagement with BIC East Africa, whose Nairobi plant produces about one million ballpoint pens daily.
The factory serves six East African markets, demonstrating Kenya’s potential to manufacture at scale for the regional market.
However, BIC East Africa general manager Paloma Lengema said illicit trade remained a major threat to businesses operating within the formal economy.
“Illicit trade remains a major challenge, including counterfeit and smuggled goods entering the country, as well as duty evasion through undervalued imports,” she said.
Such practices give illegal operators an unfair price advantage over manufacturers that comply with taxes, quality standards, labour requirements and other regulations. They also expose consumers to potentially substandard and unregulated products.
KAM chief executive Tobias Alando said the association was engaging the government to address the factors driving up the cost of doing business, including production expenses, taxation, regulation and the wider policy environment.
“Electricity costs also remain a major barrier, and we are actively engaging the government to help address them,” Alando said.
Manufacturers say the challenge extends beyond illicit trade. Outstanding verified VAT refunds stood at Sh35 billion as of February 2026, tying up working capital that could otherwise be used for production, investment and exports.
Delayed refunds particularly affect exporters, who accumulate recoverable VAT while continuing to finance operations and bear the cost of capital.
KAM says some manufacturers may respond by reducing exports and shifting production towards the domestic market.
The sector is also grappling with the cost and complexity of compliance. The Extended Producer Responsibility (EPR) Regulations introduced a Sh150 fee per item on specified products and packaging imported as manufacturing inputs.
While manufacturers recognise the importance of EPR and its intended purpose for the environment and a circular economy, the association says unclear provisions, including the definition of “per item”, can make compliance expensive.
Tax policy remains another concern, with manufacturers citing unstable taxation of raw materials, including excise duty, alongside multiple and overlapping fees, levies and charges.
Despite these pressures, manufacturing is showing signs of recovery. Real value-added growth reached 4.4 per cent in the first quarter of 2026, up from 2.8 per cent a year earlier, according to KNBS.
The sector contributed 7.1 per cent of GDP, employed 388,564 people and generated Sh462 billion in tax revenue during the 2025-26 financial year.
KAM is calling for stronger action against illicit trade, clearance of the VAT refund backlog, more predictable tax and regulatory policies, and preferential access for locally manufactured goods.
The association argues that reducing the cost of doing business, while protecting compliant manufacturers from unfair competition, will be critical if Kenya is to expand industrial production, create jobs and strengthen its position as a manufacturing and export hub for East Africa and wider African markets.
