Kenyan borrowers are being held back by economic headwinds including higher interest rates and increased taxes, according to the East African nation’s largest bank.
(Bloomberg) — Kenyan borrowers are being held back by economic headwinds including higher interest rates and increased taxes, according to the East African nation’s largest bank.
James Mwangi, Equity Group Holdings Plc’s chief executive officer, said consumers were being pinched from numerous angles and “you see disposable income for most of the households shrinking by up to 30%.”
“That means reduced economic activities and that is reflected in the transaction volumes,” he said in an Oct. 12 interview in Marrakech, Morocco, during the annual meetings of the International Monetary Fund and World Bank.
Kenya’s economy grew by 5.4% in the second quarter from a year earlier, powered by a recovery in the agricultural sector that expanded at its fastest pace in more than two years.
Even so, rising prices have eroded spending power. Average pay in the private sector declined by 3.4% in real terms in the five years through 2022, according to the Kenya National Bureau of Statistics.
Kenyans have taken to the streets to protest the surging cost of living and higher taxes proposed by President William Ruto, while the central bank has lifted interest rates to a seven-year high of 10.5% to cool inflation.
Mwangi also pointed to excise duties on digital transactions, which he said add up to an additional cost of 16% and were dampening demand.
Ruto, who took office in 2022, is trying to narrow the country’s budget deficit amid mounting debt-service costs and a weakening currency ahead of the repayment in June of a $2 billion eurobond.
His administration has announced a raft of new taxes and proposes more in 2024, prompting legal action by critics who say the levies are unconstitutional.
The country’s Supreme Court heard oral arguments against the taxes on Sept. 13 and is now considering its verdict, which will be delivered on Nov. 24.
Kenya’s finance minister has pushed back on arguments that the tax hikes in the 2023 Finance Act — which introduced higher personal income tax bands of 32.5% and 35% — are hobbling consumption and investment.
But others have warned that the tax increases will probably trigger job cuts.
“You’re likely to see employers proposing voluntary early retirement schemes,” Habil Olaka, who leads the Federation of Kenya Employers, said in an interview last month. “Some of them will be forced to retrench staff, declaring them redundant or even having pay cuts.”
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