Looming job crisis threatens millions as more firms see red

Four in ten companies in Kenya reckon the worsening business. [iStockphoto]

President William Ruto’s plan to create more jobs faces a bleak future with more than half of Kenyan firms warning of a business slowdown this year which could lead to a fresh round of job losses.

Additionally, according to the just published Central Bank of Kenya Market Perceptions Survey, which polls businesses, four in ten companies reckon the worsening business on the back of higher tax and regulatory levies burden coupled with slow demand from consumers could hurt their operations.

 “55 per cent of the respondents expected high inflation to lead to tighter monetary policy and higher interest rates, thereby dampening economic growth outcomes in 2023 and 2024,” said the survey.

According to the CBK survey, respondents cited challenges such as the high cost of living, weak shilling, low activity, an unfavourable business environment, decline in business due to high taxation and high fuel prices, reduced output, poor cash flow, increased cost of doing business and increased cost of production as factors that are set impact on hiring in 2024.

“40 per cent of respondents cited increased taxation as a risk to economic growth in 2023 and 2024  with the costs of higher taxes on manufacturers being passed on to consumers, and the concentration of tax burden on a small tax base leading to contraction of household consumption demand, private sector investment and employment while adversely affecting incentives to work and invest more, amidst sustained high-interest rates,” said firms polled.

Only banks said they will hire this year as they expand services and strengthen their capacity to support business growth.

However, only seven per cent of respondents were pretty sure they would hire, 15 per cent said they probably would, 47 per cent probably won’t and 15 per cent said they definitely won’t.

News of the gloomy outlook is set to deal a blow to the Government’s efforts to turn around the economy, grow jobs and boost incomes.

President William Ruto who was elected on a platform to grow jobs has been keen on the revival of the economy to tackle a worsening unemployment crisis at a time for millions of unemployed graduates.

Manufacturers have in recent weeks complained inflation and higher taxes have dented their operations by reducing consumers’ purchasing power even as their input and regulatory compliance costs jumped due to the high ingredients costs.

The Federation of Kenya Employers (FKE) had for instance last November warned that the critical condition the economy was in could lead to closures and subsequent job losses.

FKE Chief Executive Jacqueline Mugo and National President Habil Olaka said changes such as increased taxation as the introduction of the housing levy and enhanced National Hospital Insurance Fund (now Social Health Insurance Fund) rates and other tax-raising measures in Finance Act 2023 had had an overall negative impact on cash flows and the financial positions of enterprises in various ways.

“There is a risk of business closures and increased laying off of employees, they told a press conference.

The rise in the cost of essential commodities has forced workers to cut back spending on non-essential items such as beer and airtime, ultimately hurting giant firms such as EABL and Safaricom.

EABL for instance said recently multiple excise tax increases in Kenya and inflation have exacerbated consumer prices and have particularly impacted price-sensitive consumers.

Restless Kenyans want the Ruto administration to put measures in place to shield consumers and companies from the full impact of surging energy and food costs.

“Input cost inflation, currency devaluation and rising interest rates impacted profitability, partly mitigated by pricing and cost management initiatives,” said EABL.

This has forced many households, especially in the low-income segment, to reduce their shopping basket in an environment where firms have frozen salaries as they recover from Covid-19 economic hardships and confront the Ukrainian war’s global economic fallout.

“The macro environment remains challenging with GDP growth outweighed by inflation, rising interest rates and currency depreciation across the region,” said EABL.

The economic crisis is compounding financial distress for many Kenyans at a time when they are already facing higher food and energy costs tied to Russia’s invasion of Ukraine.

The worsening projections have coincided with listed firms continuing to issue profit warnings signalling the worsening economic conditions that have constrained demand.

Firms listed at the Nairobi Securities Exchange are required to issue warnings when their profits are projected to fall by at least 25 per cent against the previous similar period.

Corporate Kenya may face additional obstacles in light of the recent profit warnings issued by leading companies. 

In response, affected firms may consider implementing measures such as reducing costs, halting expansion and hiring, discontinuing or reducing dividend payments, and potentially even resorting to significant layoffs, which could have a detrimental impact on the overall economy.

FKE earlier stated that the Kenyan economy is in a critical condition and could potentially result in widespread business closures and subsequent job losses.

“The employers’ view is that the changes have had an overall negative impact on cash flows and the financial positions of enterprises in various ways,” said FKE Chief Executive Jacqueline Mugo and national president Habil Olaka at a press conference in Nairobi.

“There is a risk of business closure and increased laying off employees.”

FKE said business expenses have become unmanageable since the introduction and execution of the Finance Act 2023, which brought in a series of taxes as the Kenya Kwanza government intensifies its revenue-raising strategies.

A section of firms which have issued profit warnings include Paint maker Crown Paints, marketing and communication group WPP Scangroup, agricultural firm Sasini, automotive dealer Car and General and Nation Media Group.

Consequently, concerns regarding earnings have been mounting as companies grapple with rising inflation and the possibility of weakening demand.

The sharp rise in interest rates already threatens to choke economic growth as it has lifted borrowing costs and encouraged cutting costs or saving over spending, investing, and hiring. 

Last September, the Parliamentary Budget Office (PBO) cautioned that President William Ruto’s ambitious revenue-raising measures could work against his objective of cutting the country’s debt.

The team noted that the higher tax measures contained in the Finance Act 2023 as well as other planned reforms in tax administration might shock consumers into spending less, resulting in less tax revenue.

The new taxes that include a higher value-added tax (VAT) on fuel, the 1.5 per cent housing levy fund, taxation of digital assets and increasing turnover tax for small businesses to three per cent from one per cent have been criticised as too steep and could hinder economic growth.

Other measures that came into force with the Act include taxation of digital content monetisation, limiting the deduction of foreign exchange losses, change of the threshold and rate for turnover tax, enforcement of the use of Electronic Tax Invoice Management System, expansion of the pay as you earn bands and withholding of tax on advertising.