Kenya’s private sector experienced growth in July for the first time in five months, marking a vital step toward economic recovery. This positive trend comes after a challenging period characterized by weak consumer demand, high operational costs, and geopolitical uncertainties.
The latest Stanbic Bank Kenya Purchasing Managers’ Index (PMI) climbed to 51.3 in July, up from 50.0 in June, surpassing the crucial 50-point threshold that distinguishes growth from contraction. This improvement indicates a moderate recovery in business conditions, suggesting that companies are beginning to regain confidence in the economy.
July’s PMI reading represents a significant turnaround compared to earlier months. After falling into contraction in March and deteriorating further through April and May, reaching a low of 46.6 in May, the index rebounded as business conditions stabilized in June and transitioned back into expansion in July. This reflects a gradual yet noteworthy improvement in demand.
The survey highlights that the recovery primarily stemmed from a substantial increase in new orders, marking the strongest growth since January. Companies reported successfully attracting more customers through referrals, dynamic marketing strategies, and the launch of innovative products and services.
The surge in demand prompted businesses to ramp up hiring, resulting in the fastest employment growth this year as companies brought on temporary workers to meet rising workloads. Business confidence surged sharply, reaching its highest level since February 2023, as firms expressed optimism about future sales, market expansion, innovation, and supply chain enhancements.
This progress follows several challenging months for Kenyan businesses. Earlier this year, companies grappled with high fuel prices, soaring transport costs, liquidity constraints, subdued consumer spending, and uncertainties stemming from global supply chain disruptions related to the conflict in the Middle East. These rising operating costs squeezed profit margins, compelling many firms to either absorb higher expenses or cautiously pass them on to consumers.
While demand improved in July, production continued to contract for the fifth consecutive month, underscoring that businesses still face challenges in fully translating stronger orders into increased output. Stanbic attributed this disconnect partly to ongoing inflationary pressures, liquidity constraints, and delays in receiving imported inputs. Much of this pressure arose from uncertainties in the global fuel market, exacerbated by the ongoing conflict in the Middle East.
On Tuesday, US President Donald Trump hinted at positive developments in negotiations, leading to a five percent drop in the average price of crude oil. Currently, Brent crude, the global oil benchmark, stands at approximately $84 (Sh10,852) per barrel. Around 37 percent of surveyed firms reported higher operating costs, primarily driven by fuel prices, transportation expenses, and raw material shortages.
Despite these challenges, Kenya’s overall macroeconomic environment has become significantly more supportive compared to a year ago. A key stabilizing factor has been the resilience of the Kenyan shilling. After experiencing sharp volatility in previous years, the currency has remained relatively stable, aiding in the reduction of imported inflation and providing businesses with greater certainty when acquiring raw materials and fulfilling foreign obligations. The shilling currently trades at 129.20 units against the US dollar, maintaining this position for the past 22 months after initially dropping to an all-time low of 160 units in January 2024.
The Central Bank of Kenya has complemented this currency stability with a gradual easing of monetary policy. In June, the Monetary Policy Committee (MPC) retained the base lending rate at 8.75 percent, signaling the direction of interest rates while trimming the reference rate over ten meetings from 13 percent in August 2024 to the current 8.75 percent, supported by stable inflation.
Commercial banks anticipate that the central bank will maintain its benchmark rate at 8.75 percent in the upcoming policy meeting, amid ongoing uncertainties in the Middle East that keep the apex bank vigilant regarding inflation expectations. During the last MPC briefing, Governor Kamau Thugge emphasized that stable inflation, adequate foreign exchange reserves, and exchange rate stability create a robust foundation for economic recovery and renewed investor confidence.
Kenya continues to attract foreign investment in key sectors such as manufacturing, financial services, technology, renewable energy, and infrastructure. The country’s external position has strengthened, with foreign exchange reserves comfortably exceeding the statutory import cover requirement. Robust diaspora remittances, tourism earnings, and agricultural exports continue to support the balance of payments.
International institutions express growing confidence in Kenya’s economic management. The International Monetary Fund and the World Bank back Kenya’s fiscal reform program, recognizing improvements in debt transparency, fiscal consolidation, and debt management, despite the country remaining at high risk of debt distress. Recent IMF technical assessments noted that Kenya’s debt statistics are generally accurate and timely, while encouraging ongoing reforms to enhance transparency and lower borrowing costs.
Similarly, international credit rating agencies have adopted a more optimistic outlook for Kenya. Moody’s has upgraded its outlook on Kenya’s sovereign rating, while Fitch and S&P have acknowledged improvements in external liquidity, stronger foreign exchange reserves, resilient export earnings, and prudent debt management. The National Treasury attributes these advancements to disciplined fiscal reforms, proactive debt management, and efforts to lengthen debt maturities while mitigating refinancing risks.
