Higher inflation threatens to stifle growth of key sectors

Thursday, May 12th, 2022 04:00 | By

Kenya finds itself in a precarious situation despite a remarkable 7.5 per cent economic growth recorded in 2021 as inflation threatens to stagnate the growth of core sectors of the economy.

On the back of two colossal external shocks – the Coronavirus pandemic and now the Russian invasion of Ukraine – and financial sector shocks that also threaten to deny small and medium enterprises (SMEs) funds on risks signal slower growth of the sector.

Trends from the latest Economic Survey data indicate that SMEs were hit the hardest by shocks in 2021 explaining the near-stagnation of household real disposable incomes since March 2020 and are likely to fall further in 2022 as rising inflation and tax increases hit families, posing a headache to consumption.

Business conditions

Companies saw a renewed deterioration in business conditions in April, in what signalled a decrease in customer demand in response to rising consumer prices and living costs, noted the latest Stanbic Purchasing Manager Index (PMI) report.

“A solid fall in output was also registered as firms experienced supply shortfalls for a number of items and a near-record rise in input prices. Subsequently, selling charges were raised at the quickest rate in the survey’s history, while business confidence dropped to a fresh record low,” said the report. Since SMEs constitute about 98 per cent of all business in Kenya and are believed to be creating 30 per cent of all jobs every year in trouble, it is feared that the country may struggle to sustain its surprise economic growth if this situation continues.

The survey shows that most micro, small and medium enterprises (MSMEs) are involved in the processing, production and preservation of goods and commodities, contributing about 40 per cent of the gross domestic product (GDP) with majority falling in informal sector.

Amid the rising inflation rate which naturally reduces purchasing power of money, the critical sub-sector is in serious danger, with little cash in hand to run such businesses.

Consumer inflation jumped to a six-month high of 6.5 per cent In April alone, up from 5.6 per cent in March. According to April’s PMI, business confidence regarding future activity dropped to a record low for the second successive month in April with 81 per cent of those interviewed forecasting negative growth.

“Concerns over rapid price inflation and reduced client spend meant that only 9 per cent of businesses gave a positive outlook,” noted the report released last Friday.

Supply shortages

High rates of inflation mean that unless income increases at the same rate, people will be worse off and the ensuing impact is a dewdrop in overall GDP.  A number of factors including the impact of supply shortages of fuel, food products and raw materials linked to the war in Ukraine affected most business operations.

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

More on Business