Corporates in Kenya have mostly frozen hiring for the first time in seven months due to rising costs of living that slowed the demand for goods and services, reducing output.
Findings of a closely-watched monthly survey suggested that key economic sectors such as manufacturing, construction, wholesale and retail, services, and mining posted a decline in employment in September, with agriculture the only major sector to report growth in labour capacity.
Executives blamed the drop in headcount on lower new business levels due to increased taxation, cost of borrowing, and fuel prices, according to Stanbic Bank Kenya’s Purchasing Managers Index (PMI).
That eroded consumer purchasing power further, with nearly a third of surveyed firms reporting lower sales compared with August that pushed them to reduce production.
“The decline in momentum is attributed to pump prices having been increased by the Energy and Petroleum Regulatory Authority (Epra) by an average of Sh23.80, and cost-of-living pressures arising from increased taxation as well as likely further tax increases, per the newly released medium-term revenue strategy,” Christopher Legilisho, an economist with South Africa-based Standard Bank, the parent firm of Stanbic Bank, wrote in the PMI report.
“Furthermore, rising interest rates have been weighing on consumer demand, business levels and expectations.”
September marked the beginning of the second round of the Ruto administration’s painful taxation measures in the Finance Act.
These included export and investment promotion levy on the importation of clinker, iron, and steel as well as paper and paperboard and digital assets tax on the online sale of content, music, ebooks, photos, documents, and videos.
Consumers also started feeling the full impact of doubling value added tax on fuel to 16 percent, with prices crossing the Sh200 per litre levels for the first time after the price cushion in August was withdrawn.
Fuel prices are largely driven by a sustained weakening of the shilling and rising global crude oil prices.
The overall PMI reading — a gauge for month-on-month private sectors activity such as output, new orders, and employment — dropped sharply to 47.8 in September from 50.6 percent in the prior month.
PMI readings above 50 denote improved business conditions, while levels below signal a contraction.
“Despite reduced output, manufacturing firms were the most optimistic about the outlook, whereas wholesale and retail firms were the least,” Mr Legilisho wrote.
“Indeed, inflationary pressures persist, with both input and output prices still elevated — 42 percent of surveyed firms reported higher costs, often because of the deteriorating exchange rate.”
Inflation — a measure of annual growth in average prices — in September edged up for the first time in four months to 6.8 percent, but stayed within the government’s target range of 2.5 to 7.5 percent.
PMI findings suggested companies generally adjusted pay to cater for inflation at the most marginal rate in six months, with some firms cutting wages because of falling revenue from sales.
Elevated inflation has prompted the Central Bank of Kenya’s monetary policy committee to raise benchmark interest rates from 7.00 percent to 10.5 percent since May 2022.
Increasing the key lending rate makes borrowing more expensive as banks use it as a base on which they load their margins and risk profile of individuals when pricing loans.
