Businesses & Financial News

Private sector activities fall in May on rising inflation, weaker shilling

By Steve Umidha

Kenya’s services sector shrank at the second-sharpest rate in May, a private sector survey has shown, in the latest sign of a mounting economic toll triggered by rising inflation and weakening shilling value.

For the second consecutive month, businesses reported a drop in activity during the month, with the latest S&P Global Kenya Purchasing Managers’ Index (PMI) registering a fall of 48.2 from 49.5 a month earlier.

The Markit Stanbic Bank Kenya Purchasing Managers’ Index (PMI) dropped below the 50.0 no-change mark in April, falling to 49.5 from 50.5 in March.

The 50.0 mark separates growth in activity from contractions and readings below 50 show a deterioration.

“Economic activity in Kenya contracted for the second consecutive month in May due to inflationary pressures that resulted in a drop in customer demand and a reduction in firms’ output. Input price inflation remained at an 8-year high driven by rising fuel prices, higher taxes, and input shortages,” noted Kuria Kamau, Fixed Income and Currency Strategist at Stanbic Bank.

According to panelists, the reduction in activity was devastatingly due to inflationary pressures, which impacted both operating costs and customer demand with firms also forced to scale back on output and employment levels.

“Business confidence dropped to a record low for the third straight month in May, amid increased uncertainty over supply chains, inflation, geopolitical tensions, and the resulting impact on sales in domestic markets,” reads the Monday survey findings.

The latest findings point to back-to-back declines in new orders across the economy for the first time since the initial wave of the COVID-19 pandemic in what continues to concern the majority of Kenyans.

Prices of key food items like maize flour, milk and wheat products for instance have jumped considerably since March, straining the majority of Kenyan households that are still dredging from the economic hardships left by the plague.

Kenya’s inflation rate accelerated to 7.1 percent in May, from 6.5 percent in the previous month – the highest reading since February of 2020, as the cost of food products continued to rise sharply, partly affected by Russia’s invasion of Ukraine.

Consumer inflation quickened for the fourth consecutive month hitting a high of 6.5 percent in April, up from 5.6 percent in March with the Kenya National Bureau of Statistics (KNBS) noting that such a rise was the highest seen for more than eight years.

Similarly, the weakening shilling against world major currencies has broadened that elite status to a significant swath of the Kenyan private sector.

In a bid to address those concerns and soften the inflationary pressures – the country’s apex bank – the Central Bank of Kenya (CBK) stretched its financial safety net wide – raising its policy lending rate by half a percentage point to 7.5 percent from 7.0 percent last week to stem rising inflation and stabilize the shilling which closed yesterday’s trading at Sh116.90 against US dollar.

That decision may have also been influenced by Kenyan lawmakers who two weeks ago yielded to public pressure and shot down many proposals by the National Treasury that would have seen a further rise in the cost of living.

Proposals in the Finance Bill 2022 had suggested among other dares an increase in value added tax on maize and wheat flour, which are primary meals consumed in many households.

Inflation – which is the rate at which the value of a currency is falling and, consequently, the general level of prices for goods and services is rising, has continued to build up on account of rising oil prices triggered by the ongoing Russia-Ukraine war and its direct impact of a weaker currency via imported inflation.

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