Kenya’s shadow economy has grown large enough to rival the country’s formal manufacturing sector, exposing a widening imbalance between compliant businesses and illicit operators in an increasingly costly regulatory environment.
- •A 2025 regulatory audit by the Kenya Association of Manufacturers (KAM) shows that illicit trade accounted for between 8.9% and 9.3% of GDP in recent years, exceeding the manufacturing sector’s contribution of about 7.7%.
- •The disparity shows a deeper structural problem where firms operating within the law face a dense web of taxes, levies, licensing requirements, and overlapping regulatory mandates, while counterfeit and substandard goods avoid much of that burden.
- •The report comes as Kenya’s manufacturing sector continues a long decline, with its share of GDP falling from 11.08% in 2011 to about 7.3% in 2024.
The contraction of manufacturing's contribution to the overall economy has unfolded alongside rising compliance costs driven by both national and county-level regulations, creating what industry data suggests is an increasingly uneven playing field between formal and informal producers.
“As industries evolve and new technologies emerge, regulatory systems must provide a stable and predictable framework that encourages innovation while maintaining public trust. Unfortunately, this balance has not always been achieved in Kenya’s regulatory landscape,” said KAM Chief Executive Tobias Alando.
Manufacturers now contend with multiple layers of taxation, including recent statutory additions such as the 1.5% Affordable Housing Levy, 2.75% Social Health Insurance Fund (SHIF) deduction, and increased National Social Security Fund (NSSF) contributions, all of which have raised labor costs.
At the same time, changes in import duties and the Railway Development Levy have added to the cost of raw materials, complicating planning and, in some cases, contributing to business closures.
The Licensing Debacle
Beyond taxation, the report highlights the proliferation of licensing and regulatory requirements across sectors. In highly regulated industries such as pharmaceuticals and medical equipment, firms must comply with up to 57 separate licenses, permits, fees and charges, often issued by different agencies with overlapping mandates. Environmental compliance alone can involve multiple authorities at both national and county levels, requiring repeated inspections, audits and reporting for similar obligations.
The burden extends across all major manufacturing subsectors reviewed in the audit, including chemical and allied products, metal and allied industries, paper and paperboard, plastics and rubber, building and construction materials, pharmaceuticals and medical equipment, automotive and accessories, timber and furniture, sugar milling, salt processing, textile and apparel, food and beverage, and energy, electrical and electronics. Each faces a distinct but cumulatively heavy mix of regulatory fees, permits and levies tied to production, environmental management, product standards, and workplace safety.
County-level regulation has emerged as a major source of cost escalation. Despite a legal requirement introduced in 2012, no county has adopted a formal tariff pricing policy, leaving fees and charges to be set through annual finance acts without a standardized cost framework. The result has been a steady rise in levies including charges on the movement of goods across counties and multiple branding fees for company vehicles operating in different jurisdictions.
This fragmentation has effectively introduced internal trade frictions within the country. Manufacturers moving goods across regions often incur additional “cess” charges and local compliance costs, increasing distribution expenses and weakening the efficiency of their national supply chains.
National agencies and county governments frequently regulate the same areas such as air pollution, wastewater discharge, fire safety and public health, thus forcing firms to undergo parallel compliance processes. Within individual agencies, separate audits for safety, risk and fire compliance are often conducted independently, adding further administrative and financial strain.
Environmental regulation has become an increasingly significant cost center. New requirements include expanded Extended Producer Responsibility obligations, stricter air quality standards requiring investment in continuous emissions monitoring systems, and higher packaging-related levies. In some cases, regulatory changes have sharply increased input costs, with projected impacts including substantial rises in production expenses for certain industries.
A Central Bank of Kenya survey cited in the report shows that 23% of firms identified the business environment as a key constraint, while 21% pointed to increased taxation, alongside concerns over the broader economic and regulatory landscape.
Manufacturing activity is also highly concentrated geographically, with Nairobi accounting for 36.9% of total manufacturing gross value added, followed by Mombasa, Kiambu, and Machakos. At the same time, more than two-thirds of counties contribute less than 1% each, highlighting limited industrial dispersion and uneven development across the country.
The regulatory environment is now emerging as a central constraint on Kenya’s ability to capitalize on regional trade opportunities under frameworks such as the African Continental Free Trade Area (AfCFTA). While the agreement expands market access, domestic cost pressures and compliance complexity risk leaving Kenyan manufacturers less competitive against peers operating in more streamlined regulatory systems.
The audit concludes that reducing duplication, harmonizing regulatory mandates, and establishing predictable tax and fee structures will be critical to restoring competitiveness. Without such reforms, compliant manufacturers will continue to face rising costs, while illicit and informal operators expand their share of the market.
