- Businesses in Kenya are facing the impact of tightened monetary policy that is resulting in high lending rates.
- The government is under increasing pressure from investors to settle huge pending bills.
- At the same time, the Kenya Shilling is steadily losing ground against major world currencies, piling pressure on external debt obligations.
In the second half of the year, business optimism for companies and sectoral growth prospects in Kenya appears to be subdued, largely influenced by the dual challenges of high taxes and a weakening Shilling.
The government’s task of balancing rising debt levels with tax revenue generation is taking center stage in a scenario complicated by other economic factors.
A confluence of high-interest rates within the banking sector, a politically sensitive environment, the accumulation of pending bills that impact private sector cash flow, and the depreciation of the Kenyan Shilling is painting a complex business environment.
The Shilling has experienced a decline of approximately 20 per cent since January, trading at Kes144.55 to the US dollar lately.
“We expect to see more pressure on the shilling with increased forex demand,” said Terry Karanja, senior treasury associate at AZA Finance.
This decline is attributed to the strong demand for the US dollar by importers, particularly those in manufacturing, energy, and merchandise trade.
High taxes, weakening shilling and tight fiscal policy
As businesses grapple with these challenges, they also face the impact of tightened monetary policy and the resulting high lending rates. These rates, hovering above 15 per cent and reaching as high as 20 percent in some banks, place pressure on businesses’ cost structures, especially given the global factors like the Russia-Ukraine conflict.
Further, the weight of pending bills owed by the government is adding to the private sector’s struggles. These pending bills have risen to a substantial $3.92 billion (KSh567.5 billion) as of June 2023.
“Those still in operation are having cashflow challenges due to the pending bills,” said the Kenya Association of Manufacturers.
Such delayed payments are adversely affecting private sector operations, forcing some smaller entities to close or face financial strain.
“Pending bills in Kenya and non-performing loans have been trending in the same direction for the last two years,” World Bank said in its June Kenya Economic Update.
According to National Treasury Cabinet Secretary Njuguna Ndung’u, the governemnt is developing a comprehensive strategy to clear the outstanding bills. All ministries, departments and agencies are expected to clear all the expenditure carryovers from fiscal year 2022/23 as a first charge, before payment of commitments of the current financial year.
Amidst this challenging landscape, the business outlook for the next 12 months remains cautious. A survey by the Central Bank of Kenya reveals that CEOs’ optimism about growth prospects in their companies, sectors, and the economy is restrained due to the cumulative effects of high living costs and a weakening Shilling. While global growth prospects are viewed as relatively stable, concerns over geopolitical tensions, such as the Ukraine conflict, remain.
Elevated cost of doing business
“The outlook for business activity in 2023 Q3 remains mixed. Firms expect business activity to be affected by the elevated cost of doing business and high cost of inputs, notably fuel prices,” CBK said in the survey.
Despite these hurdles, there are pockets of optimism. Improved business activity in certain sectors, such as financial services, ICT, and agriculture, is noted.
However, any gains from this activity are often offset by increased taxes, particularly on fuel and food. Challenges in the form of high input costs, political uncertainty, and currency volatility are expected to continue influencing business activity.
The path forward for companies involves a strategic focus on talent management, customer centricity, and expansion into new markets. The survey indicates that firms are exploring methods to manage costs, mitigate risks, diversify, and embrace digital transformation to counter external threats.
Stability in the macroeconomic environment, conducive business regulations, and a steady Kenyan Shilling are highlighted as potential drivers of positive outlook, although these factors are currently uncertain.
In the services sector, majority of the respondents reported higher or the same company and sectoral growth prospects over the next 12 months.
Businesses in the healthcare and pharmaceuticals, security as well as tourism and travel industry expect positive growth prospects on account of firm-specific growth strategies, supported by government interventions in their respective sectors.
The Finance Act 2023 has introduced tax measures that could hurt companies. Employers are likely to tweak their contracts to fit within new tax commitments.
The new law has seen a sharp increase in employees’ and employers’ monthly contributions to both the National Social Security Fund (NSSF) and the National Hospital Insurance Fund (NHIF), for instance.
Read also: Kenya’s private sector activity dips further in July as Uganda grows
Discourage employers
This, private sector players say, could discourage most employers’ ability to match. Employees earning above $3,472 (KSh500,000) per month are now paying 32.5 per cent in taxes, and those making above $5,555 (KSh800,000) are parting with 35 per cent in income tax.
Combined with a new housing tax of 1.5 per cent and a medical insurance tax of 2.5 per cent, the new burden will see some Kenyans part with about 40 per cent of their monthly income.
“As a result, most employers may be forced to re-hire their own staff on a short contract model to avoid the looming tax burden on their side,” Jijenge Credit Ltd CEO Peter Macharia said. The survey by CBK was conducted between July 3 and 14, 2023.
The respondents were from manufacturing (19 per cent), financial services (15 per cent), professional services (15 per cent), agriculture (10 per cent) and healthcare and pharmaceuticals (9 per cent).
Tourism, tourism, hotels, and restaurants accounted for xi per cent of surveyed captains if industries, ICT and telecommunications (6 per cent), transport and storage (5 per cent), real estate (4 per cent), and wholesale and retail trade (3 per cent).
Other sectors such as mining and energy, education, security, building and construction, and media accounted for two percent each or less.
Majority of the respondents (62 per cent) were privately-owned domestic firms, while the rest were privately-owned foreign businesses and publicly listed domestic companies.
Ultimately, despite the challenges, there are hopes that easing inflation pressures, improved agricultural performance, and governmental focus on the digital economy could support growth in the future. However, the dynamic interplay of multiple economic elements makes the path ahead unpredictable for businesses in Kenya.
