Taxes increase input cost to a 7-month peak

Businesses in Kenya raised selling prices of goods in May, ending a pattern of relatively stable prices in the preceding three months as higher taxes and fuel costs pushed input costs to a seven-month high.

The latest Markit Stanbic Bank Kenya Purchasing Managers’ Index (PMI) covering May shows that input cost inflation climbed the sharpest, prompting firms to raise output prices at the quickest pace this year.

“Panel members frequently mentioned higher costs arising from taxes on various commodities, including larger importation fees. Some firms also noted a rise in fuel prices over the course of the month,” noted Stanbic Bank.

The sharp uptick in overall input costs was despite the headline PMI reading rising from 49.3 in April to 51.3 in May to signal a modest uplift in the health of the private sector activity.

This was the first increase in PMI in five months and the fastest improvement in business conditions since January.

During the month, purchasing activity was also up from the previous month, albeit extending the trend of weakening growth to six months due to rising input prices.

“Notably, many firms held back on purchases as input prices rose at a marked pace. The rate of inflation was the highest since last October, as new taxes such as importation fees on commodities came into effect,” notes the PMI note.

Stanbic Bank regional economist for East Africa Jibran Qureishi said higher power and transport costs also contributed to the sharp rise in both input and output costs.

He expects a further rise in PMI to be driven by government clearance of pending bills, which have deprived many businesses of working capital.

“In any case, should the government clear arrears owed to the private sector as promised on Madaraka Day, private sector activity could benefit from a huge boost,” said Mr Qureishi.

Meanwhile, businesses resumed employment growth, noting a modest rate of job creation after a slight fall in April.

Panellists mostly related this to higher demand levels and increasing marketing roles, according to the report.

Despite this, firms were unable to keep up with new orders as backlogs grew at the fastest rate since last September.