Private sector growth prospects remained lukewarm as high interest rates, political turbulence and depreciation of the shilling hit businesses, a fresh survey shows.

The above factors have dampened expectations for both individual company growth and broader sectoral expansion, according to the Central Bank of Kenya study which collected responses from a diverse business leaders.

The study has unveiled valuable insights into the sentiment of chief executive officers (CEOs) and business leaders amid a challenging economic environment.

“Optimism regarding growth prospects for the economy weakened with respondents citing the combined impact of the high cost of living and the weakening shilling as growth constraining factors,” it asserts.
Respondents also expressed guarded optimism, citing factors such as the expected reduction in inflationary pressures, a potential upswing in the agricultural sector’s performance, and the government’s focus on the digital economy as potential growth catalysts.

These bright spots in the economic landscape have provided a glimmer of hope amid the challenges. The survey was conducted between July 3 and 14, 2023.

The sentiment by the CEOs regarding the growth prospects of the Kenyan economy as a whole has also experienced a decline. Respondents pointed to the combined impact of the high cost of living and the weakening shilling as constraining factors that have eroded optimism. These factors have cast a shadow over the broader economic outlook.

Despite these uncertainties, respondents reported a marginal increase in business activity during the second quarter of 2023 compared to the first quarter.

Firms in financial services, information and communication technology (ICT), and agriculture particularly stood out for experiencing heightened business activity. The agriculture sector, in particular, reaped the benefits of improved exports.

However, respondents were quick to highlight that any gains from increased business activity were offset by other challenges. The introduction of increased taxes, particularly on fuel, coupled with rising costs of food and commodities, effectively negated the positive effects of improved business performance.
“Talent management, customer-centricity, and expansion into new markets were identified as the key drivers of firms’ growth,” the survey noted. Looking ahead, the outlook for business activity in the third quarter of 2023 remains uncertain.

Business leaders and CEOs anticipate that the elevated cost of doing business, combined with high input costs, particularly fuel prices, will impact business operations. Additionally, the adverse effects of the weakening shilling and the persistent political noise are expected to further dampen business activity.
Key drivers of growth for firms during the period under review were identified as talent management, a customer-centric approach, and strategic expansion into new markets. These factors were seen as crucial for navigating the challenges and uncertainties of the current business landscape.

Respondents identified several domestic and external factors that could constrain their growth in the near term.

Locally, these include increased taxation, high cost of doing business, and economic instability due to high inflation and a weakened shilling. Kenya is facing high costs of doing businesses with energy costs remaining high due to taxation while the local currency has lost nearly half of its value in five years. Public debt is 70 per cent of gross domestic product (GDP) and debt service remains a challenge even as access to foreign financing is tight due to choppy financial markets.

Externally, global inflation, potential macroeconomic volatility, and energy prices were flagged as potential threats to business expansion. “Firms expect to mitigate these constraining factors through management of costs and risks, diversification of their businesses, and digitisation of their operations,” the survey revealed.

The findings from the Central Bank survey paint a complex picture of cautious optimism amid economic headwinds. As Kenyan businesses continue to navigate the challenges of the current economic environment, strategic adaptation and resilience will remain pivotal to sustained growth.

The survey targeted CEOs of over 1,000 private sector firms through questionnaires administered via a direct online survey.

The respondents were from: Manufacturing (19 per cent), financial services (15 per cent), professional services (15pc), agriculture (10pc), healthcare and pharmaceuticals (nine per cent), tourism, hotels and restaurants (six per cent), ICT and telecommunications (six percent).