Businesses endured a sustained hit on sales for most of 2024 on lingering cash flow challenges, which prompted firms and households to cut back on expenditure in response to a softening economic environment.
Corporate executives in key economic sectors of the economy — agriculture, manufacturing, construction, wholesale and retail, and services — said they experienced a drop in demand for goods and services for about half of the year.
Sales dropped in January, March, June, July and September, with firms reporting marginal growth in the remainder of the months, according to Stanbic Kenya Purchasing Managers Index (PMI), which is based on feedback from about 400 panelists polled every month.
Firms largely attributed contraction in output, new orders and purchasing activity in the first half of the year to “fewer sales and less readily available cash flow”.
“Firms noted that, despite lower inflation, a stronger shilling against the USD [US dollar] and increased marketing efforts, cost-of-living pressures …subdued consumer demand,” Christopher Legilisho, an economist with South African-based Standard Bank, the parent firm of Stanbic Bank, said of the private sector performance in the first half of the year.
The flagging demand for goods and services prompted most firms to largely pause hiring, with recruitment restricted to casual workers.
The depressed circulation of money in the economy was exacerbated by economic uncertainty that followed deadly anti-government protests against new tax measures in June, which resulted in consumers delaying spending decisions on non-essential goods and services.
Ken Gichinga, chief economist at Mentoria Economics, attributed the economic woes facing households and businesses largely to eroded purchasing power and high interest rates charged by banks.
Increased payroll deductions following the enforcement of Social Health Insurance Fund (SHIF) deductions and the 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, analysts say.
“Most businesses I talk to have reported drops by between 35 percent 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,” Mr Gichinga said in a recent interview.
“This is a vicious cycle and the only way to fix it is through to reduce the interest rates and we should 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.”
President William Ruto's administration introduced a housing levy at the rate of 1.5 percent of gross pay for workers, which is matched by employers, and a 2.75 percent Social Health Insurance Fund (SHIF) levy from October.
Both levies were until December 27, gross-on-gross taxation on workers’ income where the Kenya Revenue Authority (KRA) uses the same gross to also calculate the pay-as-you-earn (PAYE), a form of ‘double taxation’.
The enforcement of statutory deductions to support the Ruto administration’s universal health coverage and affordable housing programmes has led to payroll deductions of up to 45 percent of workers’ earnings, further hurting growth in demand for goods and services.
Employers say the disposable incomes of workers have fallen to historic lows following the onset of the Social Health Insurance Fund (SHIF) deductions last month in addition to the housing levy which took effect earlier.
This has seen cumulative deductions account for between 40 percent 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 even worse for workers with other obligations such as loan repayments, whose take-home pay has fallen below a third of their gross pay, in breach of the employment law.
“The enforcement of the housing levy and the SHIF, alongside PAYE, has placed an increased financial burden on both employers and employees. Our members report that this has reduced disposable incomes for workers, significantly dampening consumer spending,” Federation of Kenya Employers (FKE) executive director Jacqueline Mugo told the Business Daily in late November.
“Due to the cumulative impact of statutory deductions (PAYE, housing levy, SHIF, NSSF, and others), many employees’ take-home pay has fallen below the one-third threshold. As a result, sales across various sectors, particularly retail and fast-moving consumer goods (FMCG), have declined by an estimated 15 to 20 percent on average this year, as per the latest member feedback.”
In November, the KRA revealed a trend in which companies are trimming average monthly pay for employees, while others are increasingly tapping tax refunds to offset payroll taxes.
As a result, the KRA has recorded a shortfall in PAYE taxes from the private sector in recent months, signalling the impact of a tough labour market on government revenues.
