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Expansion boosts firms despite high cost pressure

Kenya’s private sector made huge expansion in both output and new business during the month of August, a new report indicates. The rise in the headline index was driven mainly by ongoing growth of both activity and new work inflows in the month which quickened since July.

According to the Purchasing Managers Index by CfC Stanbic Bank, commercial initiatives and the opening of new branches contributed to new clients, which in turn led to output growth.

CfC Stanbic economist Jibran Qureishi attributed the business growth to new orders, mainly in the construction sector. He, however, said the cost pressures remained high, adding that it was no surprise since the Kenya shilling remains under pressure against the US dollar.

“We still think there was need for the Monetary Policy Committee (MPC) to tighten its policy stance further to curb inflationary expectations from rising, while also ensuring that the currency pressures subside, even though the August 15 headline inflationdeclined,” he said.

Qureishi said given the current business risk philosophy that foreigners have adopted towards Africa, a tighter monetary policy stance will have to be supplemented with higher real yields in the money market to stabilise the currency.

“New export orders also fell in August despite the weaker local unit, which perhaps is a reflection of the weak performance of our source markets.

However, at the same time it’s encouraging to note that domestic demand was probably the main driver of the expansion in growth, which underlines the resilient and diversified nature of the Kenyan economy,” Qureishi said.

On the price front, cost pressures picked up to a 17-month high in the month. Data suggested that the overall rise in input prices was due to a sharp increase in purchasing costs, although further salary growth also contributed.

The rate of expansion in purchase prices accelerated for the sixth consecutive month, with the weakness of the shilling versus the dollar continually mentioned as the driving factor.

However, growth of new business was slightly undermined by a weaker rise in new exports. The pace of increase eased to an 11-month low, and was subdued in the context of historical data.

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