The private sector activity dropped in August to its lowest level since May, with cashflow problems hurting performance, a survey showed on Wednesday.
The Markit Stanbic Bank Kenya Purchasing Managers’ Index (PMI) for manufacturing and services fell to 52.9 from 54.1 in July. Any reading above 50 indicates growth. In May, the index stood at 51.3.
The survey showed that activity was affected by cashflow problems, partly arising from a backlog of bills from government departments.
“To ensure inclusivity in economic growth, urgent reforms ought to be conducted on improving accessibility to credit for companies, in addition to a consistent plan by the government to clear arrears owed to the private sector,” said Jibran Qureishi, regional economist for East Africa at Stanbic Bank.
In June, the finance ministry said the government would make it a priority to pay 10.9 billion shillings ($106 million) owed to its suppliers by the end of that month.
Firms complain that the government takes years to settle bills for goods and services supplied to it, mainly due to widespread corruption.
Experts have blamed the delayed payments for causing a jump in bad debts in the banking sector.
The survey showed that a credit squeeze due to a cap on commercial lending rates, in place since late 2016, had also worsened conditions.
The finance ministry proposed to parliament in June that it repeal the cap on lending rates. A similar proposal was shot down in 2018.
In March, a court ruled that the rate cap was unconstitutional, but judges suspended the ruling for 12 months to allow parliament to re-examine the law.
“In fact, the interest-rate-capping law continues to strangle the private sector and if the law remains in place in its current form, it will only add to the plight of the private sector,” Qureishi said.