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Kenyan CEOs express anxiety over soaring fuel, electricity costs

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The CBK said its latest CEOs and market perceptions survey had shown increased concerns on the rise in fuel and electricity prices—which usually filters into the economy through increased costs of other goods and services.
The CBK said its latest CEOs and market perceptions survey had shown increased concerns on the rise in fuel and electricity prices—which usually filters into the economy through increased costs of other goods and services.

The Central Bank of Kenya (CBK) has revealed that the steep increase in fuel and electricity prices has adversely affected consumers’ purchasing power, leading to a decline in the demand for goods and services. The latest survey conducted by CBK, focusing on the concerns of Kenyan chief executives, has highlighted their growing apprehensions about the surge in fuel and electricity expenses, which have subsequently led to increased costs for other products and services within the economy.

These concerns have arisen in the context of ongoing depreciation of the Kenyan shilling, a doubling of the value-added tax on fuel to 16 percent, and escalating crude oil prices, all of which have resulted in record-high fuel prices for Kenyan citizens. Additionally, electricity prices have been on the rise, partly due to the weakened shilling and the use of thermal electricity generated by diesel.

While there is some optimism due to improved agricultural production, decreasing inflation, and more favorable growth prospects, these positive factors are being offset by the challenges posed by rising fuel and electricity prices. The CBK’s survey has identified specific worries among respondents, including the impact of higher fuel and electricity prices, reduced consumer purchasing power, and potential adverse effects of the El Niño weather phenomenon.

Typically targeting CEOs of key private sector organizations, including members of the Kenya Association of Manufacturers, Kenya National Chamber of Commerce and Industry, and the Kenya Private Sector Alliance, the survey has highlighted the concurrent decrease in imports by 11.9 percent over the 12 months leading up to August, compared to a 16 percent growth during a similar period the previous year. The Kenyan shilling’s nearly 20 percent depreciation against the US dollar since January, coupled with rising fuel prices, has further compounded the inflationary pressures in an economy that heavily relies on imports.

The decline in imports has primarily been driven by reduced purchases of infrastructure-related equipment, manufactured goods, oil, and chemicals, indicating that companies are adjusting their import activities in response to weakening demand.

In July, the government doubled the value-added tax (VAT) on fuel, leading to price hikes in fuel products. In mid-September, the Energy and Petroleum Regulatory Authority raised prices for super petrol, diesel, and kerosene by significant amounts, pushing prices to historic highs, surpassing Sh200 per liter in some cases. Rising electricity prices, combined with escalating fuel costs, have halted the recent decrease in inflation. Inflation had been on a three-month downward trajectory, reaching 6.7 percent in August before slightly rising to 6.8 percent in September.

Consumers in Kenya are also grappling with other financial shocks, such as increasing loan interest rates and a rising number of defaults. In July, the proportion of defaulted loans in gross loans reached 15 percent, marking a 16-year high since June 2007. The survey by Ipsos Kenya in June found that upper-middle and high-income households were increasingly forgoing premium brands and opting for less expensive alternatives due to the rising cost of living.

Goods exports saw only a marginal increase in the 12 months leading up to August, growing by just 0.5 percent compared to the same period the previous year. However, receipts from tea and manufactured exports experienced growth of 4.5 percent and 23.2 percent, respectively. The surge in tea export receipts can be attributed to higher prices driven by demand from traditional markets, while the increase in manufactured exports reflects strong regional demand, according to the CBK.

The Stanbic Kenya Purchasing Managers Index (PMI) survey for July also revealed concerns about rising input costs and weakening demand. It highlighted the challenging business conditions and inflation pressures faced by Kenyan businesses, as input prices and staffing costs continued to rise due to a weaker exchange rate and higher taxes associated with recent tax measures in the Finance Act.