Kenyans spend less, borrow more as value of Sh1,000 drops

Kenyans are spending less and borrowing more, a new survey has revealed.

The poll indicates spending on essentials by households fell last year as Kenyans grappled with multiple shocks including high price of commodities, which are now beyond the reach of many, coupled with high taxation that has eroded their purchasing power.

Kenyans have in recent years been grappling with multiple shocks that ranged from Covid-19, high prices of fuel and a multiyear drought.

High taxation, especially following last year’s implementation of the Finance Act 2023 that introduced different taxes and eroded the earnings of many Kenyans while further pushing up the cost of essential products, has made the situation worse.

The survey by ICEA Lion Asset Management shows Kenyans are sinking deep into debt, borrowing for consumption as they devise mechanisms to survive.

Decline in spending

The survey showed a 1.5 per cent decline in spending among Kenyans during the July to September.

It further noted that the amount of money Kenyans are spending on goods and services had gone up but on account of the higher cost of goods.

This means Sh1,000 will get a consumer significantly fewer goods over the third quarter of last year compared to what they could in the second quarter and the options that Kenyans had were to reduce the essentials one could buy or pay a higher amount for the same quantity of goods.

“The individual spending sub-index fell by three per cent between July and September 2023 while the retail business sales sub-index remained broadly flat in the same period, resulting in a decline of 1.5 per cent in the overall consumer spending index (which is weighted 50 per cent by changes in individual spending and 50 per cent by changes in retail business sales),” said ICEA Asset Management, adding that there was an increase in spending among consumers but due to higher cost of goods.

“We note that many consumers attributed the additional spending to an increase in the cost of items purchased rather than higher income per se. At the same time we also note that the spending came in spite of continued slowed private sector credit.”

Kenyans have in the last six months been grappling with higher taxes at the personal and business front imposed by the Finance Act 2023. The Finance Act introduced measures that have hiked the cost of essential products. 

These include fuel, which was hit by higher Value Added TAX (VAT) at 16 per cent, up from earlier eight per cent.

Higher fuel prices has a multiplier effect across goods and services, with manufacturers and farmers relying on transportation to get inputs into farms and factories and the finished products to market as well as use fuel to power their processes.

The Finance Act also introduced the Housing Levy at 1.5 per cent, which has resulted in reduced earnings for formal sector employees.

High income earners were hit by higher Pay as You Earn (PAYE) at 35 per cent for those earning upwards of Sh800,000 per month from 30 per cent.

Those earning between Sh500,000 and Sh800,000 are being taxed at 32.5 per cent.

This even as the economy continues to feel the effects of different shocks both local and global including the prolonged drought and geopolitical factors such as the Russia-Ukraine war.

The situation is set to get worse, with new deductions for the state-fronted health insurance and retirement schemes come effect next month, further eroding the disposable income for many Kenyans particularly those in formal employment.

The NSSF rates are set to go up further in February as the state continues implementation of the NSSF Act 2013. Its implementation was delayed due court battles that ended in February last year and NSSF rates went up to Sh1,080 up from a previous Sh200. The contribution is then matched by the employer to bring the total contribution to Sh2,160 per month.

This is set to further increase effective February 1. This will see contributions for some employees increase to a maximum of Sh4,320 per month, shared between the employee and employer.

Additionally, the Social Health Insurance Fund (SHIF) is also set to come into effect February following the court ruling that gave the state the go ahead to implement the new health care funding model.

SHIF has set contributions at 2,75 per cent of one’s gross salary. The new law has a minimum contribution to the Social Health Fund of Sh300.

SHIF will replace the National Health Insurance Fund, whose rates are graduated with the least contribution being Sh150 per month while those earning Sh100,000 and above paying the highest Sh1,700 per month.

Until 2021, when the NHIF that are currently being replaced came into place, workers and their employers paid a combined Sh700 per month, or Sh350 per month each.

Income levels

According to the survey, 38 per cent of Kenyans reported a decline in income while 37 per cent said their income retained the same over the two quarters.

It further showed that the majority of consumers at 56 per cent held a negative attitude as to their spending power increasing.

“Our sentiment analysis on individual spending trends indicated that 44 per cent  of consumers had a positive mindset regarding their spending while 56 per cent had a negative mindset regarding their spending trends,” said ICEA Lion.

“On the business side, 48 per cent of businesses appeared to hold positive sentiments regarding sales trends while 45 per cent had negative sentiments regarding sales.”

And while the very large business and micro businesses displayed resilience and grew their sales by 25 per cent and seven per cent respectively over the third quarter, the medium sized enterprises recorded a fall of 18 percent in sales trends in the same period.

The reduced level of consumer’s disposable income has forced many to devise coping mechanisms including borrowing from Saccos according to ICEA Lion.