Federation of Kenya Employers Executive Director Jacqueline Mugo (left) and other board members address the Press on the status of the labour sector in Kenya at a past event. PHOTO | DIANA NGILA | NMG


Layoffs rise to Covid levels on higher taxes, fuel costs

Kenya’s unemployment crisis deepened further in October after companies cut jobs at a rate last witnessed at the peak of the Covid-19 pandemic when businesses resorted to layoffs, salary reductions, and unpaid leave to stay afloat.

Findings of Stanbic Bank Kenya’s Purchasing Managers Index (PMI), based on feedback from about 400 corporate managers, suggest the job cuts were in response to flagging sales, which prompted a further downscaling of output levels.

“The rate of job cuts accelerated to a solid pace that was the joint-quickest since June 2020,” analysts at Stanbic Bank and American analytics firm, S&P Global, wrote in the PMI report for October.

“Panelists commented on both the non-replacement of leavers and staff reductions due to lower workloads.”

The data indicates that all the surveyed five economic sectors — manufacturing, construction, wholesale and retail, services, and mining — posted a “sharp” and one of the “worst” month-on-month declines in output of goods and services in the history of the PMI series dating back to January 2014.

Should the job cuts be sustained, then the country is looking at loosing hundreds of thousands of jobs. About 1.72 million workers lost jobs at the peak of Covid-19 when the government imposed coronavirus-induced lockdowns that led to layoffs and pay cuts in in 2020.

At least 205,200 formal jobs were lost in the pandemic year alongside hundreds of thousands informal jobs.

The survey notes that firms reported a “marked drop” in demand for goods and services which they linked to elevated inflationary pressure and cash flow challenges. Construction and wholesale & retail were the hardest hit sectors, according to the report.

Inflation — a measure of the cost of living over the last 12 months— edged up for the first time in five months to 6.9 percent in October from 6.8 percent a month earlier. It was the first growth since May when it stood at eight percent, largely pressured by runaway fuel prices which raised the cost of transportation by 13.6 percent year-on-year.

“Cost-of-living pressures and cash flow difficulties saw customer demand declining, while weaker output and lower workloads led to an increased rate of job cuts,” Christopher Legilisho, an economist with South African-based Standard Bank, the parent firm of Stanbic Bank, wrote in the PMI report.

“Meanwhile, Kenyan businesses reported burgeoning inventories and therefore raised their selling prices in October to protect their profit margins. Input prices and purchase price pressures faced by Kenyan businesses were attributed to a further increase in fuel prices and transport costs.”

The survey findings are the latest pointer that the new tax measures by the Kenya Kwanza administration could be taking a big toll on firms, which have warned several times that they would be forced to fire employees to get the headroom to absorb the new wage bill costs that have come with the housing levy and retirement costs.

The Federation of Kenya Employers (FKE) last month warned that employers would soon be forced to stop hiring and to cut down on employees on permanent and long-term contracts as they struggle to tame the wage bill.

“All this raft of changes, whether it’s looking at health, training, PAYE, and housing levy just means that there is more burden on employers, and they have to find innovative ways of getting the job done without being stuck with a fixed wage bill,” FKE executive director Jacqueline Mugo said.

“The more you tax the formal sector, the more you make it difficult for those who enterprises to create jobs, and we’re seeing that.” Already, fuel consumption has reduced in the wake of high taxes.

Official data shows that oil taxes plunged by 8.6 percent to Sh71.7 billion in the first quarter to September from Sh78.5 billion at similar time last year despite the doubling of Value Added Tax (VAT) from 8.0 percent to 16 percent from July.

The overall PMI reading — a gauge for month-on-month private sector activity such as output, new orders, and employment — fell to 46.2 in October from 47.8 in the prior month.

Reading below 50 signals a drop in business deals compared to the previous month, while levels above that mark denote growth.

The overall decline in private sector conditions in October was the worst since July’s 45.5 when firms and households were rattled by increased taxation amidst a deepening cost of living crisis.

The PMI data suggests that companies fractionally trimmed pay for employees for the first time this year despite raising selling prices to insulate themselves from the impact of higher taxes and slide in shilling against major international currencies on profitability.

“The pace of inflation [in selling charges] was also at a record high, climbing above the previous peak in mid-2022,” the PMI analysts reported.

“Roughly 20 percent of firms raised their own prices during the month, compared to one percent that noted a fall, with panelists often citing the need to protect profit margins.”

Stubbornly unrelenting inflationary pressures have prompted the Central Bank of Kenya’s monetary policy committee to raise benchmark interest rates from 7.0 percent to 10.5 percent since May 2022.

Increasing the benchmark lending rate makes borrowing to fund the purchase of goods and services more expensive as banks use it as a base onto which they load their margins and risk profile of individuals when pricing loans.