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Cablegate: Kenya Response - Textiles and Apparel Sector:

This record is a partial extract of the original cable. The full text of the original cable is not available.

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
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

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