Kenya’s private sector returned to growth in
July for the first time in five months.
This signals gradual economic recovery from a prolonged period marked by weak consumer demand, high
operating costs and geopolitical shocks.
The latest Stanbic Bank Kenya Purchasing
Managers’ Index (PMI) rose to 51.3 in July, up from 50.0 in June, crossing the
crucial 50-point threshold that separates expansion from contraction.
“The improvement signals a moderate
recovery in business conditions after months of subdued activity and is the
strongest indication yet that firms are beginning to regain confidence in the
economy,” the index reads.
The July reading also marks a significant
turnaround compared with earlier months this year.
The PMI had fallen into contraction territory
in March before deteriorating further through April and May, reaching 46.6 in
May, the weakest reading in several months.
The report says that business conditions
stabilised in June before returning to expansion in July, reflecting a gradual
but notable improvement in demand.
According to the survey, the recovery was
driven primarily by the strongest increase in new orders since January.
Businesses reported attracting more customers
through referrals, aggressive marketing campaigns and the introduction of new
products and services.
“The stronger demand encouraged firms to
increase hiring, with employment growing at its fastest pace this year as
companies recruited temporary workers to meet rising workloads.”
Business confidence also climbed sharply,
reaching its highest level since February 2023 as firms expressed optimism
about future sales, expansion into new markets, innovation and supply chain
improvements.
The improvement comes after several difficult
months for Kenyan businesses.
Earlier in the year, companies faced mounting
pressure from high fuel prices, elevated transport costs, tight liquidity,
subdued consumer spending and uncertainty arising from global supply chain
disruptions linked to the conflict in the Middle East.
Rising operating costs squeezed profit
margins, forcing many firms to either absorb higher expenses or cautiously pass
them on to consumers.
Although demand improved in July, production
continued to contract for the fifth consecutive month, highlighting that
businesses are still struggling to convert stronger orders into higher output fully.
Stanbic attributed this mismatch partly to
persistent inflationary pressures, constrained liquidity and delays in
receiving imported inputs.
Most of the pressure emanated from the uncertainties in the global fuel market due to the ongoing war conflict in the
Middle East, triggered by the US, Israel and Iran.
On Tuesday, US President Donald Trump
hinted at progressive talks between worrying functions, a move that saw the
average price of a barrel of crude oil drop by five per cent.
The price of Brent crude, the global benchmark
for oil to about $84 (Sh10,852) a barrel.
Around 37 per cent of surveyed firms reported
higher operating costs, largely driven by fuel prices, transportation expenses
and shortages of raw materials.
Despite these headwinds, Kenya’s broader
macroeconomic environment has become considerably more supportive compared to a
year ago.
One of the biggest stabilising factors has
been the remarkable resilience of the Kenyan shilling.
After experiencing sharp volatility in
previous years, the currency has remained relatively stable, helping reduce
imported inflation and providing businesses with greater certainty when
purchasing raw materials and servicing foreign obligations.
The shilling is currently exchanging at 129.20
units against the US dollar, a position it has maintained for the past 22
months after initial setbacks that saw it drop to an all-time low of 160 units
in January 2024.
The Central Bank of Kenya has complemented the
currency stability with a gradual easing of monetary policy.
In June, the MPC retained the base lending
rate at 8.75 per cent.
The regulator used its benchmark rate to
signal the direction of interest rates, trimming the reference in 10 meetings
from 13 per cent in August 2024 to the current 8.75 per cent on stable
inflation.
Commercial banks expect the master bank to
keep its benchmark rate unchanged at 8.75 per cent at its policy meeting next
week amid ongoing uncertainty in the Middle East, which has kept the apex bank
on edge over inflation expectations.
Speaking to journalists during the last
post-Monetary Policy Committee (MPC) briefing, Governor Kamau Thugge argued
that stable inflation, adequate foreign exchange reserves and exchange rate
stability provide a strong foundation for economic recovery and renewed
investor confidence.
Kenya has also continued attracting foreign
investment into key sectors including manufacturing, financial services,
technology, renewable energy and infrastructure.
The country’s external position has equally
strengthened, with foreign exchange reserves remaining comfortably above the
statutory import cover requirement, while robust diaspora remittances, tourism
earnings and agricultural exports have continued supporting the balance of
payments.
International institutions have also expressed
growing confidence in Kenya’s economic management.
The International Monetary Fund and the World
Bank continue to support Kenya’s fiscal reform programme, noting improvements
in debt transparency, fiscal consolidation and debt management despite the
country remaining at high risk of debt distress.
Recent IMF technical assessments observed that
Kenya’s debt statistics are broadly accurate and timely while encouraging
continued reforms to enhance transparency and reduce borrowing costs.
Similarly, international credit rating
agencies have become more optimistic about Kenya’s outlook.
Moody’s improved its outlook on Kenya’s
sovereign rating, while Fitch and S&P have acknowledged improvements in
external liquidity, stronger foreign exchange reserves, resilient export
earnings and prudent debt liability management.
The National Treasury has attributed these
improvements to disciplined fiscal reforms, active debt management operations
and efforts to lengthen debt maturities while reducing refinancing risks.
