The timing for President William Ruto’s State of the Nation Address last Thursday was perfect, at least when it comes to macroeconomic indicators.
Inflation at 17-year low on lower food and fuel prices, economy expanded by 4.6 percent in second quarter and the volatile forex market has calmed, with shilling trading at Sh129.20 against the dollar compared to Sh170 in February 2023.
But taxi driver, Boniface Muthusi, thinks otherwise.
“We cannot eat GDP (gross domestic product). Yes, they are saying the economy has improved, but we cannot feel it. Things are worse,” says the digital taxi operator in Nairobi.
Mr Muthusi, a digital taxi operator in Nairobi, says there has been a general slowdown in requests for rides over the last two years.
“Up until around 2022, my average earnings were Sh3,000 a day. Today, this has fallen to about Sh1,000. I used to decline requests for rides but now I am struggling to get those requests.
“This means there are people who used to take Uber before, but they are probably using matatu or boda boda.”
His comments echo business activity reports indicating that companies and households are facing a cash crunch crisis, triggering layoffs, reduced salaries and a cut on orders for goods and services in corporate Kenya.
Private sector conditions such as output, new orders and employment have largely been depressed since President Ruto took power about 26 months ago, an analysis of findings of Stanbic Kenya Purchasing Managers Index (PMI) suggest.
In the first 10 months of the year, for example, private sector companies recorded marginal growth in orders in only four months (February, April, August and October), pointing to a tough operating environment.
This is according to PMI surveys, which is based on feedback from about 400 panellists drawn from key sectors such as agriculture, manufacturing, construction, wholesale and retail and services.
The monthly surveys have recently indicated a general trend companies have largely paused hiring on falling demand for goods and services.
There have also been suggestions of companies replacing permanent employees with casuals to rein in on operating expenses by keeping a tight lid on staff costs.
The Kenya Revenue Authority (KRA) earlier this month revealed a trend where companies are trimming average monthly pay for employees, while others are increasingly tapping tax refunds to offset payroll taxes.
This has seen the KRA record a shortfall in pay-as-you-earn (Paye) taxes from the private sector in recent months, signalling the impact of a tough labour market on revenue.
For instance, Paye receipts from the private sector for October underperformed target by slightly more than Sh1.2 billion, the KRA said without disclosing the amount it was expecting in the month.
In explaining the deficit, Time Towers said analysis of average monthly pay per employee in the private sector between June and September showed a drop of 2.89 percent to Sh75,781 from a similar period last year at Sh78,034.
The drop, the KRA says, points to “effects of ongoing restructuring by various organisations to manage operational costs”.
Ken Gichinga, chief economist at Mentoria Economics, attributes the economic woes facing households and businesses largely to eroded purchasing power and high interest rates that have made companies defer borrowing decisions.
Increased payroll deductions following the enforcement of Social Health Insurance Fund deductions and Housing Levy have significantly cut the take-home earnings for workers, slashing their purchasing power.
Reduced disposable income has, in turn, hurt demand for goods and services with most businesses and households prioritising expenditure on essential needs.
“Most businesses I talk to have reported drops by between 35 and 50 percent in sales this year, reflecting the erosion in purchasing power. This means businesses are being forced to lay off people, and when they lay off people, the unemployment rises,” said Mr Gichinga.
“This is a vicious cycle and the only way to fix it is through reducing the interest rates and we should also rethink the new statutory deductions. Effecting them has cut the purchasing power and at the end of the day, demand is what drives this economy. If demand is weak, then businesses have no business setting up.”
Federation of Kenya Employers (FKE) says there has been an increased number of firms issuing formal notices of corporate restructuring and declared redundancies in the last two years.
Most of the firms have cited economic slowdown, rising operational costs and legislative requirements that have significantly impacted business sustainability, said FKE executive director Jacqueline Mugo.
This is happening in an economic setting where cumulative deductions on payslips account for between 40 and 45 percent of gross pay on average, eroding the purchasing power in an economic setting where growth is largely driven by consumption.
The situation is worse for workers with other obligations such as loan repayment whose take-home pay has fallen below a third of their gross pay in breach of the employment law.
“FKE reiterates the need for urgent dialogue between government, employers, and workers to mitigate the unintended consequences of recent legislative measures,” Ms Mugo added.
“We recommend streamlining statutory deductions to align with sustainable income thresholds and provision of transitional support for firms undergoing restructuring to preserve jobs.”
National Treasury Cabinet secretary John Mbadi appearing in the National Assembly last week admitted the economy was grappling with cash flow challenges, partly because of piling pending bills to government suppliers and contractors. This has been compounded by elevated cost of borrowing which has made access to capital especially for small businesses difficult.
“Why Kenyans feel they don’t have money in their pockets is what we must deal with. And I have talked about pending bills which are hurting and choking this economy and we are dealing with that,” Mr Mbadi said.
“But the second, which is now starting to look good, is interest rates. We have started to see a fall in interest rates.”
The Treasury has formed a Pending Bills Verification Committee validating the arrears for the period between July 1, 2005 and June 30, 2022. The team, led by former Auditor-General Edward Ouko, had by September received 114,376 claims worth Sh664.7 billion.
A large number of business people who have contracts with the government have ended up being blacklisted by credit reference bureaus after falling behind on loan repayments or defaulting, hurting chances of borrowing in future.
