Private sector growth slows down on weak demand

Kenya’s private sector activity fell for the first time in nine months to January, largely due to weak consumer demand, the findings of a monthly survey showed Wednesday, pointing to poor cash flow in the country.

Companies that were surveyed in the Markit Stanbic Bank Kenya’s Purchasing Managers Index (PMI) reported that output and new orders fell to their lowest levels since October 2017, pushing the headline reading to a low last seen in April 2019.

Erosion of consumer purchasing power resulted in slowed growth in new job opportunities amid a faster rise in the cost of goods and services than December due to a corresponding rise in input prices, company managers reported.

“Overall activity levels contracted solidly at the start of the year, as firms reported that a lack of money at households led to much softer demand pressure. Poor weather conditions also curbed output at many businesses,” Stanbic Bank and UK’s Markit said in a statement.

“The slowdown was chiefly domestic, as firms selling to international markets saw one of the sharpest increases in new export orders on record.”

The resultant headline PMI – a measure of month-on-month business activity such as production, new orders, order backlogs and employment based on feedback from around 400 corporate managers – declined to 49.7 from 53.3 in December.

This marked the quickest monthly downturn in more than two years, with households racing to clear back-to-school expenses and President Uhuru Kenyatta adamant on the 100 percent transition from primary to secondary schools.

PMI readings above 50 signal an improvement in business conditions on the previous month, while those below 50 show decline. Jibran Qureishi, Stanbic Bank’s regional economist for global markets, said business managers remained optimistic despite a slow start to the year.

“Business confidence for future output soared, which doesn’t come as a surprise given some of the recent reforms such as the repeal of the interest rate capping law and ongoing clearance of private sector arrears which should underpin activity going forward,” Mr Qureishi said.

Public payment of arrears to contractors and suppliers from July last year on Mr Kenyatta’s directive helped keep private sector activity on the upswing in the second half of last year, as mirrored by the PMI that remained above 52 throughout the June-December 2019 period.

Treasury data shows counties had by January 8 cleared Sh33.35 billion of the Sh51.2 billion pending bills validated by the Office of the Auditor-General in June 2019. State ministries, departments and agencies had, on the other hand, paid out nearly Sh10.23 billion of the validated Sh14.99 billion, although a significant Sh43.19 billion in claims is under verification after being classified as contested or historical.

Development spending is critical to building infrastructure like roads and sewerage systems and putting money in private hands through demand for raw materials, which ultimately creates new jobs. County authorities are the biggest buyers of goods and services at the grassroots, meaning that reduced spending on projects has a negative impact on job creation

Industrialists have proposed punitive legislation to force firms and government entities to settle unpaid bills, saying the current stalemate was hurting the growth of small and medium enterprises (SMEs).

The Kenya Association of Manufacturers (KAM) wants a stricter statute enacted to compel both private and public sector actors to honour outstanding bills within 90 days.

“We have a situation where government pays private sector late, the private sector pays itself late and government pays itself late. It is a vicious cycle,” the association’s chairman, Sachen Gudka, said last month.