Businesses are bracing for tough economic times as they grapple with high costs and cash-strapped customers, with many executives lining up cost-cutting measures in the face of lower orders and sales.
Many executives have downgraded their outlook for business activity in the July-September, citing pressures from new taxes and a toxic political environment.
In May, at least 41.7 per cent of chief executive officers (CEOs) surveyed by the Central Bank of Kenya (CBK) predicted that orders would increase in the current quarter, with only 19.7 per cent being pessimistic that orders would decline. Almost half of the executives (48.4 per cent) also predicted that sales would increase, with only 10.7 per cent fearing they would fall.
CBK’s July CEO survey now shows that more CEOs—39.2 per cent of those surveyed—expect orders to fall in the three months to the end of September, with 23.5 per cent of them predicting that sales will also fall.
“Manufacturers do not expect business conditions to improve. Respondents said that the new tax measures could add to inflationary pressures while reducing consumer demand. Disposable incomes are likely to fall as conservative consumers adjust their spending habits, resulting in lower orders and sales,” the survey states.
It also notes that most manufacturers cite high fuel and electricity prices as the main constraining factors. It adds that while the rains have improved the performance of the agricultural sector as farmers begin to harvest, executives in the sector expect orders and sales to remain subdued due to the high cost of living and high food prices.
Similarly, in the services sector, while firms in the financial, ICT and tourism sectors expect demand for their services to increase, “the majority of respondents expected the prevailing political noise and high cost of doing business to slow business activity”.
The CBK notes that purchase prices are expected to remain high for businesses across all sectors, meaning that Kenyans will continue to face a high cost of living. This is despite the companies saying they have the capacity and even the money to produce if demand for their products was high, but have been forced to operate below their optimum levels as markets prove difficult.
“In terms of operating capacity, the survey results show that most respondents were operating below capacity and could increase production if there was an unexpected increase in demand/orders. Firms reported that capacity was still well in excess of demand, leaving ample room for expansion. In addition, some firms reported that they were well financed and therefore had no difficulty in meeting increased demand.
“Firms that reported possible difficulties in expanding their operations cited lack of orders and price pressure from customers, which made it difficult to operate at full capacity,” the survey report states.
The CBK further notes that business optimism about growth prospects for firms and sectors remained subdued in the second quarter of 2023 due to high interest rates and the weakening Kenyan shilling. However, sectors such as financial and ICT services and agriculture, which has seen improved exports, performed well between April and June.
“However, respondents noted that increased taxes, especially on fuel, and the cost of food and other commodities, had offset any gains from improved business activity,” it said.
While inflation has started to decline and stood at 7.3 per cent in July, the CBK survey warns that new taxes, which will make it more expensive for businesses to produce and thus increase the prices of goods, will offset the expected positive effects.
With these projections, the CBK notes that the most important measure that firms will take in the current quarter is to cut costs.
“Firms expect to mitigate these constraining factors by managing costs and risks, diversifying their businesses and digitising their operations.
