- Firms across Kenya’s private sector report that rising inflation is suppressing demand.
- There are also reported cash flow challenges, leading to further cuts in activity, staffing and purchasing.
- The latest survey data indicated a sharp fall in new order volumes, similar to October’s and among the worst on record.
A gloomy outlook for business conditions in Kenya
Business conditions in Kenya remained in a steep decline halfway through the final quarter of the year, according to the latest Purchasing Managers’ Index (PMI) by S&P Global.
This comes amid sizeable falls in output, new orders, and employment in November, as indicated by the PMI, which closely monitors market-moving economic indicators, covering more than 30 advanced and emerging economies worldwide.
Firms across the country’s private sector noted that rapid inflation had again suppressed demand and created cash flow challenges, leading to further cuts in activity, staffing and purchasing.
Indeed, inflationary pressures on firms stayed near record levels during November, following October’s historic uplift, as companies widely reported currency depreciation, higher taxes and increased fuel charges.
The rise in input costs translated into another marked uplift in firms’ output charges, which was also slightly softer than October’s survey record.
PMI readings in Kenya
The headline figure derived from the survey is that PMI readings above 50.0 signal an improvement in business conditions in the previous month, while readings below 50.0 show a deterioration.
At 45.8, dropping from 46.2 in October, the headline index pointed to a sharp decline in the performance of the Kenyan private sector in November.
The reading marked the third contraction in as many months and was among the weakest in the index’s nearly decade-long history. Driving the downturn in operating conditions was another historic increase in business costs during November.
After reaching the highest level in the series history one month ago, the rate of input cost inflation remained marked and was the second-fastest on record, with firms largely relating this to a further depreciation in the shilling against the US dollar, higher taxes, and greater fuel charges.
“The Kenyan PMI deteriorated further in November, reflecting still difficult business conditions for the private sector. Besides the agricultural sector, output and new orders declined across all monitored sectors; the construction sector was the worst hit,” said Christopher Legilisho, Economist at Standard Bank.
He further noted inflationary pressures and cashflow difficulties saw customer spending decline and the rate of job losses increasing in the private sector because of weaker output and reduced workloads.
This corroborates a recent statement by the Federation of Kenya Employers (FKE) that Kenya has lost approximately three per cent year-on-year (about 70,000) jobs in the formal private sector due to the rising cost of doing business.
Likewise, output prices increased at a near-record pace in the latest survey period, as companies often passed on costs to clients to maintain their margins.
Rapid inflationary pressures on businesses and customers resulted in sustained contractions in trade activity.
Decline in new orders
The latest survey data indicated a sharp fall in new order volumes, similar to October’s and among the worst on record. Reports from survey members showed that customer spending had fallen due to increased prices and cash flow challenges. Subsequently, output levels were pared back at a steep and accelerated rate.
Contractions were seen in nearly all sectors, with agriculture the only broad category to record an expansion. By contrast, construction firms suffered the worst declines in new orders and output.
In November, reductions in output and new orders led to quicker falls in purchasing and employment at Kenyan firms. Most notably, staff numbers dropped at one of the sharpest rates on record, with stronger falls only registered during the first COVID-19 lockdown.
Lower input purchases helped to shorten delivery times for the second month running, although the improvement was only slight. Finally, business expectations for the coming year were subdued and dropped slightly to a four-month low. In total, just 17 per cent of companies were confident of growth, linked to expansion plans and launching new products and services.
“On the pricing front, Kenyan businesses reported increasing inventories and raised selling prices in November. Rising input prices and purchase price pressures are being attributed to further increases in fuel prices, electricity costs and taxes, among other factors,” said Legilisho.
Exporters continued to perform strongly, helping offset weak domestic output, as demand from Europe and Asia increased. “Still, the business outlook for the next 12 months is quite weak based on the survey results from respondents,” Legilisho said.
Cost of doing business in Kenya
According to the Federation of Kenya Employers (FKE), the cost of doing business has become unsustainable since enacting and implementing the Finance Act 2023.
The employers’ view is that the changes have negatively impacted cash flows and enterprises’ financial positions in various ways. These include direct impact on the payroll, impact on demand for general wages, review risk of business closure, and increased laying off of employees.
“The weakening of the shilling has aggravated the situation further and has adversely affected businesses that rely on imports, including imports of machinery and equipment necessary for our manufacturing industries,” FKE national president Habil Olaka said during a briefing in Nairobi.
The Kenya shilling lost 21 per cent of its value against the US dollar between September 13, 2022 and November 22, 2023. This has been largely attributed to capital flight and reduced inflow of foreign currency due to the low value of exports.
Business impact on jobs
“The employment state is still very fragile. We have not yet gotten back on track since Covid-19. Every day we receive notifications from employers on their intent to declare redundancy,” Olaka said.
FKE is surveying employers to determine the impact of the increased costs on jobs, to be released this month. However, preliminary results show that it is significant that between October 2022 and November 2023, at least 70,000 jobs in the formal private sector had been lost.
About 40 per cent of employers have also reported that they plan to reduce the number of employees to meet the increasing operating costs in Kenya. The country’s capital cost remains high, making it hard for the private sector to operate, FKE said.
The cost of capital is affected by various factors such as interest rates, inflation, market conditions, and government policies.
On June 26 this year, the Central Bank of Kenya (CBK) raised its benchmark rate by 100 basis points to 10.5 per cent, bringing borrowing costs to their highest since August 2016.
This has since gone up to 12.5 per cent in the latest review on Tuesday, a move that will make the cost of credit to businesses to go up, with FKE noting the cost is beyond reach, thus affecting business growth.
The business cost increase has also been largely driven by tax measures, global geopolitical developments, and climate change.
“The country may not be able to have much control on global geopolitical developments and climate change, but we can work on our tax measures to reduce the cost of doing business in the country,” said Olaka.
He said the government needs to implement measures that improve citizens’ purchasing power and the cash flow in enterprises.
This should specifically target reviewing taxes that have a high adverse impact on individuals and businesses. Employers said the key taxes that need to be reviewed include VAT on Petrol, PAYE and Corporate tax.
“We propose that the VAT on petrol revert to eight per cent as it was before the enactment of the Finance Act 2023. The increase in VAT on petrol has a regressive effect on the economy. We also appeal to policymakers to consider reducing the PAYE to a maximum of 25 per cent,” FKE executive director and CEO Jacqueline Mugo said.
Food inflation remains the highest contributor to the cost of living, with households spending about 60 per cent of their income on food.
“It is prudent that households are supported to increase their disposable income. If not, important basic needs like healthcare, education and savings for old age will grossly suffer,” Mugo said.
Employers have also requested a review of corporation tax, which they feel should be reverted to 25 per cent, to help attract investments and allow corporations to have money to plough back into their business to create more employment.