Macroeconomic conditions in Kenya continue to get dire

By Steve UMIDHA

The overall macroeconomic conditions in Kenya continue to be average, according to a report by Standard Bank – which shows that the country’s economic growth has all but stagnated and public debt has surpassed 100 percent of GDP.

The Africa Trade Barometer survey, further reveals that challenges like high unemployment rates, inflationary pressures, and a heavy reliance on agriculture have led to broader economic difficulties, affecting the overall well-being of the country and its citizens.

“The recently passed Finance Act of 2023 has policies that some consider anti-business, including tax hikes on fuel and contributions to a national housing fund,” notes the report.

The rising cost of inputs was also identified as a significant challenge that businesses are currently grappling with, given relatively high inflation in the country.

There have been increases in the cost of fuel and other commodities in Kenya, as well as the fact that the Kenyan Shilling has been depreciating rapidly in recent months relative to the US dollar. Soaring costs have led firms to raise their prices charged for goods and services.

Inflation woes

Inflation grew to 9.2% in March 2023 compared to 5.6% in the same period in 2022 due to elevated food and fuel prices.

These prices increased due to higher prices of fresh produce following the recent drier-than-expected weather conditions in the country, elevated international oil prices and the gradual unwinding of the Government Subsidy Programme on energy items.

The annual inflation rate in Kenya fell to 7.3% in July 2023, the lowest reading since May 2022, from 7.9% in June. The inflation has now returned to the central bank’s preferred range of 2.5% to 7.5%, while policymakers were expecting it to fall back to the target in October only.

It rose marginally in September after all sectors recorded a general increase in prices. Inflation was 6.8% year on year in September from 6.7% a month earlier, while on a monthly basis inflation was 1% from -0.1% a month earlier, the Kenya National Bureau of Statistics said in a statement.

The KES, on the other hand, has been undergoing noted volatility against the US Dollar. The shilling lost 5% value against the US dollar in the period from January to March 2023, compared to a 1% depreciation in a similar period in 2022.

As the gap between Kenya’s interest rates and US and European rates has narrowed, the shilling has become less and less attractive, putting the currency on a downward spiral of depreciation. It is unlikely that the shilling will gain ground in 2023.

The US Federal Reserve remains committed to a course of higher interest rates, meaning the US dollar is likely to remain strong – with the latest Currency Exchange Rates at 1 US Dollar selling at 150.6 Kenyan Shilling as of Tuesday October, 31.

Mild optimism

Most Kenyan businesses—regardless of their size— retain a positive or neutral outlook on the performance of the economy and their businesses over the next three years.

Their optimism, according to the report’s drafters, appears to be supported by official economic growth forecasts.

The Kenyan economy has steadily recovered from the worst effects of the COVID-19 pandemic and is forecasted to grow by 5.1% in 2023 and 5.5% in 2024 due to expected increases in household and services consumption expenditure months relative to the US dollar. Soaring costs have led firms to raise their prices charged for goods and services.

Surveyed businesses in Kenya perceive access to credit as improving. This improvement was particularly high among small businesses and comes as the banking sector endeavours to expand its loan book, evident by the 12% increase in their loan book to the trade industry since 2021, amounting to USD 5.4 billion

This despite the national Treasury today signalled a reduction in the disbursement of cheap State-backed mobile loans with a cut in the budget for the Hustler Fund by almost half to Sh5 billion in the latest budgetary changes.

This is from the Sh10 billion that the Treasury Cabinet Secretary, Njuguna Ndung’u, initially set aside for the Hustler Fund, officially known as the Financial Inclusion Fund, in June for 2023/24.

The Fund is designed in line with the Kenya Kwanza coalition’s Bottom-Up election campaign promise of facilitating low-income earners and small businesses to access cheap loans on phone.

In the previous financial year ended June, the Hustler Fund, one of President William Ruto’s campaign promises, was allocated Sh20 billion.

The majority of businesses (74%) believe that their revenue will increase over the next year primarily due to the perception that demand for their goods or services will increase in the near future.

This overall sense of optimism reflects the waning effect of the COVID-19 pandemic on the operations of businesses as businesses anticipate an increase in demand.

At the same time, the optimism despite adverse conditions highlights those businesses in Kenya have managed to adapt and operate in such unfavorable conditions.

Kenyan businesses face significant obstacles in global trade including customs, trade regulations and tariffs.

While the Government collaborates with fellow African countries through memberships in the EAC and COMESA where preferential tariff regulations exist, perceived difficulties have increased over time for Kenyan businesses.

“This highlights the need for strengthened Government support through the encouragement of Government participation in global and regional trading blocs with favourable forex controls and tariff regulations that can provide a more conducive environment for trade,” it reads in part.

Businesses also feel that foreign exchange shortages are significant inhibitors on their ability to trade with other countries.

About 48 percent and 52% of surveyed businesses indicated that foreign exchange shortages are a severe or major obstacle constraining their ability to trade with countries within and outside of Africa respectively.

This is likely driven by the recent scarcity of US dollars in Kenya, resulting in significant challenges for Kenyan importers since the majority of cross-border transactions in Kenya are conducted in US Dollars.