Kenya’s manufacturing sector recorded slower growth between April and June 2025 despite a rise in borrowing.

According to the Kenya National Bureau of Statistics (KNBS), the sector’s real GDP expanded by one per cent compared to 3.2 per cent in the same period last year, even as loans to manufacturers rose by Sh17.2 billion to Sh598.3 billion.

“Credit advanced to enterprises in the manufacturing sector increased from Sh581.1 billion as at June 2024 to Sh598.3 billion as at June 2025,” reads the KNBS Quarterly Gross Domestic Product statistical release.

The report notes that performance varied across subsectors. In the food segment, milk deliveries to processors surged by 24.1 per cent to 272 million litres, up from 219.2 million litres in the second quarter of 2024. However, soft drink production fell by 6.7 per cent to 143.9 million litres, while sugar output plunged by 43.8 per cent to 107,300 tonnes, down from 191,000 tonnes in the same period last year.

“Tea production declined by 5.3 per cent to 146,300 tonnes during the review period,” the KNBS report adds.

In the non-food subsector, output showed gains. Cement production rose by 21 per cent to 2,469,700 tonnes, galvanised sheet production increased by 11.3 per cent to 77,200 tonnes, and motor vehicle assembly grew by 20.8 per cent, reaching 3,350 units from 2,773 units in the second quarter of 2024.

During the same period, Kenya’s overall GDP grew by five per cent, up from 4.6 per cent in the corresponding quarter of 2024.

“The growth was mainly supported by growths in agriculture, forestry and fishing activities (4.4 per cent), transportation and storage (5.4 per cent), and financial and insurance (6.6 per cent),” KNBS said.

“The growth was also supported by rebounds in construction and mining and quarrying activities that rose by 5.7 and 15.3 per cent, respectively, after contracting in the second quarter of 2024.”

Despite these gains, the Kenya Association of Manufacturers (KAM) says sentiment among industry players remains weak. Its survey for April to June 2025 shows that 53.3 per cent of manufacturers expressed a negative outlook on the economy, citing high taxes, low demand, illicit trade and political instability as major constraints.

“In quarter two of 2025, the majority (53.33 per cent) of the manufacturers surveyed held a negative view of the country’s economic outlook, indicating a challenging business environment. This signals reduced investment, lower production and limited growth for the industry,” KAM said.

Meanwhile, only 7.1 per cent of manufacturers were optimistic about growth in the next six months, while 42.6 per cent remained pessimistic.

“76.9 per cent of manufacturers reported rising raw material costs driven by taxes, freight charges and global geopolitical tensions. While 50 per cent of manufacturers hold a neutral view, only 7.14 per cent are optimistic, and 42.6 per cent remain pessimistic, pointing to concerns of potential stagnation in sector growth,” the association added.

The report highlights that, even with increased borrowing and pockets of growth in non-food manufacturing, challenges such as high operational costs, weak demand, and policy uncertainties continue to weigh heavily on the industry.

Meanwhile, the Kenya Association of Manufacturers has launched the Manufacturing Priority Agenda (MPA) 2025, a strategic roadmap to strengthen local industries and enhance global competitiveness.

Key to this agenda is ensuring a stable and predictable policy environment, including the implementation of National Tax Policy guidelines and a revised National Industrial Policy.

Manufacturers have consistently raised concerns about high and unpredictable taxation, high operational costs, and regulatory unpredictability, which they argue deter long-term investments.

The government's efforts to improve the ease of doing business are ongoing, with the Nairobi International Financial Centre aiming to position Kenya as a regional investment hub and attract USD 2 billion in Foreign Direct Investment (FDI) by 2028. This includes addressing liquidity challenges within the manufacturing sector.

While lower interest rates offer an opportunity for manufacturers to access capital, the slowdown in sector growth suggests that other significant challenges persist. These include high raw material costs, increased labour expenses, excise duties, energy price hikes, and forex volatility. The influx of cheaper imports also continues to disadvantage local manufacturers. Unpredictable policy shifts and a complex regulatory environment further create an unstable climate, discouraging long-term investments.

Kenya's public debt remains a concern, reaching KSh 11.8 trillion as of June 2025, with debt servicing absorbing a significant portion of government revenue. This limits funds available for development spending and could impact the government's ability to implement supportive industrial policies. However, the government has recently converted three dollar-denominated railway loans from China into yuan, aiming to save approximately USD 215 million annually on interest payments.

At the same time, the full impact of the Central Bank's sustained interest rate cuts on the broader manufacturing sector's growth trajectory remains to be seen. While some banks have reduced their lending rates, the average commercial bank lending rates remain relatively high compared to the CBR, raising questions about the effectiveness of monetary policy transmission.

However, the revised banking sector risk-based pricing model is expected to be fully operational by March 2026, aiming to improve the transmission of monetary policy decisions to commercial bank lending rates.

In a major boost, an Industrial Policy for Africa Conference will be held in Kenya next February, bringing together researchers to discuss industrial policy, in what is expected to be a Key moment for the sector.

Observers will be closely watching the impact of continued monetary easing on manufacturing sector growth and investment. The implementation of the Manufacturing Priority Agenda 2025 and the government's commitment to creating a stable and predictable policy environment, plus the success of the upcoming regional event, will also be crucial.