Kenya recorded an improvement in private sector business conditions during May, as falling cost burdens and rising new business contributed to a solid expansion in activity.
The Latest Stanbic Bank Kenya Purchasing Managers’ Index indicates that activity’s upturn was the sharpest in 20 months, as was input buying growth.
Job creation continued at a mild pace even as reductions in fuel prices and import costs led to a further drop in overall input prices in May, after the first decrease in nearly four years during April.
Selling prices started to rise again, albeit slowly. The Purchasing Managers’ Index (PMI). Readings above 50.0 signal improved business conditions in the previous month, while readings below 50.0 show a deterioration.
The latest headline PMI reading of 51.8 marked the index’s best performance since January 2023. Rising from 50.1 in April, the index signaled a slight improvement in the health of the private sector economy.
The strengthening of private sector conditions was mainly due to a turnaround in inflationary pressures at Kenyan companies.
After pointing to record-high rises in costs in late 2023, inMay survey data, the private sector signaled a fall in overall input prices for the second month running, and the fastest ever outside of the 2020 COVID-19 lockdown.
Panelists attributed the drop to lower fuel prices and decreased import costs, as shilling dollar exchange rates remained firm.
“Private sector activity was surprisingly strong in May, implying a further improvement in economic activity, as we had expected to see some impact from the recent floods. Output and new orders recorded strong gains in May as firms reported increased consumer demand,” noted Christopher Legilisho, Economist at Standard Bank.
There were also expansions in the services, manufacturing, wholesale, and retail sectors. However, heavy rains saw output decline in the agricultural and construction industries.
With costs falling, Kenyan firms increased their output for the first time since February, and at a solid pace that was the quickest for 20 months.
Overall inflation is expected to remain stable around the mid-point of the target range.[Photo/Nation Media Group]Firms also saw a renewed uplift in new order inflows as falling inflationary pressures led to more robust customer spending.
The country’s overall inflation slightly increased to 5.1 per cent in May from 5 perc ent in April, when it dropped to a 24-month low on lower food prices.
Food inflation stood at 6.2 per cent in May, compared to 5.6 per cent in April. This reflects increases in prices of select vegetables, particularly onions, tomatoes, Irish potatoes, and kale (Sukuma Wiki), due to supply disruptions attributed to the heavy rains and flooding experienced in some parts of the country.
Following improved supply, prices of critical non-vegetable food items, mainly maize, sugar, and wheat flour, declined.
Fuel inflation declined to 7.8 per cent in May from 8.3 per cent in April, partly reflecting a downward adjustment in pump prices and lower electricity prices. Non-food non-fuel (NFNF) inflation eased to 3.4 per cent in May from 3.6 per cent in April, reflecting the impact of monetary policy measures.
“Overall inflation is expected to remain stable around the mid-point of the target range in the near term, supported by the stable exchange rate, improved food supply attributed to favorable weather conditions, stable fuel prices, and the impact of monetary policy actions which continue to filter through the economy,” Central Bank of Kenya governor Kamau Thugge said last Wednesday.
The private sector’s sales growth rate in May was the fastest recorded since January 2023. Notably, though, output expansions were only registered in the services, manufacturing, wholesale, and retail sectors.
By contrast, agriculture and construction saw output decrease as firms highlighted the impact of heavy rainfall and floods.
Kenyan firms increased their purchasing activity quicker in May amid rising sales and output requirements. The rate of purchasing growth was the fastest for 20 months and contributed to a more substantial uplift in inventories. Additionally, firms hired more workers for the fifth month running.
“Job creation continued for a fifth successive month amid larger workloads and prospects of new business. Firms also purchased larger quantities, raising their inventory levels and improving their buffers,” Legilisho said.
After falling for the first time in over three years in April, average prices charged by private sector firms rose slightly in May. The price increase was broadly related to efforts to improve margins, though there were many reports of firms passing on cost reductions to clients.
Kenyan businesses remained more confident about future.[Photo/victormatara.com]
Meanwhile, Kenyan businesses remained more confident about future activity than at the start of the year despite the degree of confidence slipping from April’s 13-month high.
Growth projections partly reflected plans to open branches, purchase new vehicles, and boost marketing spending.
According to a CEO Survey and Market Perceptions Survey conducted ahead of the Central Bank of Kenya’s Monetary Policy Committee meeting last week, there was sustained optimism about business activity and economic growth prospects for the next 12 months.
“The optimism was attributed to expected continued good performance of agriculture, resilient services sectors, and a stable macroeconomic environment. Nonetheless, respondents expressed concerns about fiscal policy measures, high interest rates, and potential impact of geopolitical risks on the economy,” Governor Thugge said.
Tax policy measures proposed in the Finance Bill 2024 have also raised concerns, with key sectors led by manufacturers warning they will have a negative impact and could see some players opt to import rather than produce locally.
The Bill, which is headed for tabling in Parliament, seeks to amend laws relating to various taxes and duties, including the Income Tax Act, the Value Added Tax Act (VAT), the Excise Duty Act, the Tax Procedures Act, the Miscellaneous Fees and Levies Act, and the Affordable Housing Act.
Among the most significant concerns by manufacturers is a proposal toremove the provision allowing manufacturers to offset the costs of their raw materials subject to excise. The offset mechanism encourages local value addition and drives cost competitiveness.
Additionally, the government has proposed to impose excise duty on various products, including coal, plastic products, and cooking oil. This will increase the cost burden on consumers, who are already reeling from the effects of increased cost of living and reduced disposable income.
The government has proposed a 25 per cent excise duty on crude palm oil, a 25 per cent excise duty on finished cooking oil, a 10 per cent excise duty on plastic packaging materials, and an eco levy on plastic packaging at $1.2 per kilogramme. This will see the cost of a litre of cooking oil increase by $1.3 from $2.3 to $3.6
“If implemented as is, the Finance Bill 2024 will increase the cost of production, thereby destroy industry’s competitiveness, and subsequently, dent our local and export markets, increase retail prices, burden Mwananchi, and increase cashflow requirement at a time when the environment is characterised by rising interest rates,” Kenya Association of Manufacturers CEO, Anthony Mwangi, said.
Ultimately, this will render local industries uncompetitive, pushing them to either downsize, move to more competitive countries, or close down as a last resort.
