Stanbic Bank Kenya PMI: Weak shilling & high fuel prices drive rise in costs

The latest Purchasing Managers' Index (PMI) data for Kenya has revealed a significant increase in input prices across the private sector in the country. The depreciation of the shilling and rising fuel prices have driven a record surge in purchase costs, impacting various sectors of the economy. Ronel Oberholzer, Head of Sub-Saharan African Economics at S&P Global Market Intelligence, discussed the implications of these developments in a recent interview on CNBC Africa. According to Oberholzer, inflation has had varying impacts on the export market and domestic demand. Despite a decline in new orders, export orders saw an increase due to the weaker currency, making exports more affordable. However, price pressures led to a decrease in new orders and output in the manufacturing and retail sectors, with consumer demand falling for the fourth consecutive month. Rising input costs have also hampered business activity, resulting in a decrease for the second quarter. The report also highlighted the impact on farm inputs and outputs, indicating that higher cost inflation prompted companies to raise selling prices and make cuts to purchasing activity. Firms began stockpiling items to mitigate further price rises and supply shortages, leading to a decline in business activity and new orders. Despite modest decreases in new orders, the employment sector recorded one of the fastest growth rates, with expansion seen in output services and backlog reduction. Looking ahead, Oberholzer expects a challenging business environment, especially if input prices continue to rise. Concerns over falling demand, supply shortages, and overstocking by some firms may impede growth in Kenya's real GDP in 2023. The ongoing drought conditions and global economic factors, including the Russia-Ukraine war, pose additional risks to the country's economic outlook. In terms of tax policies, Kenya is set to submit the finance bill for 2023, which includes VAT adjustments and new taxes. The government aims to triple tax revenue through enhanced administration, but businesses are wary of potential tax rate increases. Proposed VAT hikes on fuel and new taxes for small businesses and house construction have sparked concerns about capital outflows and increased living expenses. Opposition to these tax changes may result in protests and business disruptions in Nairobi. Oberholzer emphasized the need for fiscal consolidation amid slower growth and lower tax incomes, highlighting the challenges the country may face in managing its debt. The impact of global economic trends and geopolitical events, such as the Russia-Ukraine war, will continue to influence Kenya's economic performance in the coming months. As Kenya navigates these economic challenges, policymakers will need to carefully balance the need for revenue generation with the potential impact on businesses and consumers. The decisions made in the coming months will play a crucial role in shaping the country's economic trajectory and resilience in the face of external pressures.