Price increases bedeviling consumers, businesses and policymakers present additional challenges to a recovering private sector.
The annual inflation rate accelerated to a three-month high of 5.56 percent in March, up from 5.08 percent posted in the previous month.
Should the supply-side inflationary wave persist, a rate jump could turn out to be more harmful than beneficial in providing economic stability.
What’s the Russian-Ukraine conflict got to do with us? Well, we are affected quite a bit. A measure of Kenya's manufacturing activity fell to a low in March amid rising inflationary costs.
The Stanbic Purchasing Managers Index (PMI) dropped from 52.9 in February to 50.5 - readings above 50 signal an improvement in business conditions in the previous month, while those below 50 show a deterioration.
Disruption in the global supply chain and yes, the ongoing Russia-Ukraine conflict all contributed to the drop. The survey’s findings almost mirrored the Central Bank of Kenya (CBK’s) Monetary Policy Committee CEO’s study released earlier in the month of March.
All shared similar concerns; rising inflation with higher commodity prices heightened geopolitical tensions and “shaky” confidence about the future. The big question is; against a vicious supply-driven inflationary wave, is the Kenyan private sector ready for a tough fight?
Price increases bedeviling consumers, businesses and policymakers present additional challenges to a recovering private sector. The annual inflation rate accelerated to a three-month high of 5.56 percent in March, up from 5.08 percent posted in the previous month.
In addition, the ratio of gross non-performing loans (NPLs) to gross loans remains high at 14 percent (February 2022) compared to 13.1 percent (December 2021). A weakening Shilling is already affecting business confidence.
The local unit faces an uphill battle in the ongoing “flight to safety” US Dollar purchases. Foreign exchange reserves, which currently stand at $8.4 billion equivalent to five months of import cover, may not be “adequate”.
If manufacturers decide to pass the costs to consumers, the pace of slowdown may pick up as demand dries up. The resulting contraction in factory activity may further weigh on the economy especially as we head towards the General Elections in August.
Some policy intervention could help. When the monetary policy committee (MPC) met late last month, its conclusion was that the current accommodative monetary policy stance (Central Bank Rate retained at seven percent) remains appropriate.
However, it also noted that it is closely monitoring the global and domestic economy, and stands ready to take additional measures as necessary. Stated differently, should the weakness in business momentum continue into Q2 compounded by a sharp intensification of inflationary pressures, it’ll be ready to act.
In such a scenario, a rate rise could alleviate some pain. However, should the supply-side inflationary wave persist, a rate jump could turn out to be more harmful than beneficial in providing economic stability.
On a more sanguine note, the PMI survey showed the replenishing of inventories will likely underpin manufacturing and sustain the economic expansion. Besides, private sector credit has been on an upward trend - it increased to 9.1 percent (February 2022) from 8.6 percent (December 2021).
According to the CBK survey, strong credit growth was observed in the manufacturing sector at 7.6 percent in the above period.
That notwithstanding, these positive signals could prove too optimistic if consumers keep experiencing rocketing prices without some form of government intervention. If this happens, then the PMI gauge could sink below 50 - a contraction zone.
The writer is managing director, Canaan Capital
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