Slow SME growth heralds a bleak future for Kenya’s economy

By Steve Umidha

Kenya finds itself in a precarious situation despite a remarkable 7.5 percent economic growth the country recorded last year.

In the last three years, Kenyan economy has been buffeted by two colossal external shocks – the Coronavirus pandemic and now the Russian invasion of Ukraine – and one domestically generated one, Corruption.

The implications of those shocks, according to traceable economic trends, seem to have hit hardest the country’s economic backbone – Small and Medium Enterprises (SME) sector, in what explains the near stagnation in household real disposable incomes that has preceded the squeeze seen since March 2020.

It is now feared that the country may struggle to sustain its surprise economic growth if recent studies tracking the country’s SME sector progression are anything to go by.

Estimates by the National Economic Survey by the Central Bank of Kenya (CBK) show that SMEs constitute about 98 percent of all business in Kenya and are believed to be creating 30 percent of all jobs every year – translating to 3 percent of the country’s GDP.

On the other hand Micro, Small and Medium Enterprises (MSMEs) – enterprises that are generally involved in processing, production and preservation of goods and commodities, contribute about 40 percent of the GDP with the majority falling in the informal sector.

There are about 7.41 million MSMEs in Kenya, with only 1.56 million of those having licenses, against 5.85 million that are operating without proper business documents like permits.

Mathematically, the sector makes nearly half of the country’s overall gross domestic product (GDP), which is the standard measure of the value addition created through the production of goods and services during a certain period, normally 12 months.

With the rising inflation rate – a key economic barometer which naturally reduces the purchasing power of money now at an all-time high, the critical sub-sector is under serious danger, with little cash in hand to run such businesses.

High rates of inflation mean that unless income increases at the same rate, people are worse off and the ensuing impact is a dewdrop in overall GDP.

Indeed, the rate of overall input cost inflation in Kenya quickened for the fourth consecutive month in April, according to S&P Global Kenya Purchasing Managers’ Index (PMI) by Stanbic Bank, which showed that such a rise was the highest seen for more than eight years.

Consumer inflation jumped to a six-month high of 6.5 percent In April alone, up from 5.6 percent in March.

“According to April’s PMI, business confidence regarding future activity dropped to a record low for the second successive month in April. Concerns over rapid price inflation and reduced client spend meant that only 9 percent of businesses gave a positive outlook,” noted the report released Friday.

The seasonally adjusted Output Index indicated a contraction in Kenyan private sector activity in April, the third time in the past four months in which a fall has occurred. The drop was blamed on rising consumer inflation and the general living costs.

A number of factors were highlighted by its drafters, most notably the impact of supply shortages of fuel, food products and raw materials linked to the war in Ukraine which affected most business operations, majority the SME sector.

“Selling charges were raised by a considerable extent in the Kenyan economy at the start of the second quarter,” it found.

In fact, the rate of increase was the sharpest recorded in the survey’s history (since January 2014), as the study highlighted increased pressure to pass cost burdens to consumers.

“Of the five monitored sectors, charge inflation was most notable in construction and wholesale and retail,” continued the report which showed that Kenya Purchasing Managers’ Index (PMI) dropped to 49.5 in April from 50.5 a month earlier.

Kenyan firms displayed greater concern that growth will be dampened by rising prices and living costs in the months ahead, with sentiment regarding future activity fell to the lowest recorded in the survey’s history.

Only 9 percent of firms projected output to rise over the next 12 months, but that hinges on a ‘favorable’ outcome in the August 9 Elections.

The economy has been reeling from the effects of Covid-19, Russia-Ukraine war and wanton looting of public resources for several months, factors that have affected incomes and jobs, with an April 2021 Bretton Woods institution estimating that Kenya’s GDP contracted by 1 per cent last year due to Covid-19 alone.

Up until July last when the government lifted all movement restrictions, for most part of 2020, the economy was exposed through the dampening effects on domestic activity of the containment measures and behavioral responses.