Kenyan Entrepreneurship Growth Slows Amidst Rising Inflation and Operational Costs

The growth of formal entrepreneurship in Kenya experienced its slowest pace in over a decade, excluding the pandemic year, due in part to the impact of increasing inflation and escalating operational expenses. This information, revealed in the official jobs report, highlights the challenges faced by Kenyan entrepreneurs in sustaining and expanding their ventures.

According to the Economic Survey 2013 released by the Kenya National Bureau of Statistics, the number of self-employed individuals and unpaid family workers grew by an estimated 2.69 percent in 2022, marking the most sluggish growth since 2009. During that year, Kenya was recovering from the deadliest post-election violence and grappling with the worst global financial crisis.

The report indicates that Kenya added approximately 4,400 workers who were engaged in their own businesses or working for family enterprises in the formal sector without salaries. The total number of Kenyans involved in such activities, commonly referred to as “hustles,” and supported by family members pro-bono, was estimated at 168,100.

Although this figure represents modest growth from the previous year’s count of 163,700, it remains the slowest expansion since 2009 when the workforce increased by a mere 0.15 percent to 67,500 individuals.

Several factors have contributed to this sluggish growth, including the country’s worst drought in four decades, a significant surge in the prices of basic commodities over the past five years, and a continuous depreciation of the shilling against major international currencies in Kenya’s net import economy.

These challenges, coupled with a multitude of taxes and levies faced by businesses, have compelled many smaller firms to operate in the informal sector, known as the “jua kali” sector, as highlighted by business lobbies such as the Federation of Kenya Employers and Kenya Association of Manufacturers.

Jacqueline Mugo, the Executive Director of the Federation of Kenya Employers, explained, “Many businesses, especially micro-, small-, and medium-sized enterprises (MSMEs), cannot afford the costs associated with operating in the formal employment sector. This has resulted in a growth in the number of unemployed Kenyans as employers struggle to manage their costs.”

Micro-sized businesses have borne the brunt of rising price pressures, driven by high material and energy costs, as well as a weakening shilling amid a scarcity of dollars. These inflationary pressures have eroded consumers’ purchasing power, reduced demand for goods and services, and constrained new investments.

Moreover, MSMEs have faced limited access to formal credit, leading to the closure of numerous businesses at an early stage of operation. Some have resorted to transitioning from formal to informal setups to survive. A 2016 survey conducted by the Kenya National Bureau of Statistics revealed that a majority of small businesses operate without licenses (65 percent) and lack approval from the registrar of companies (92 percent).

The labor market crisis has also affected the informal sector, which added the fewest number of jobs in seven years, excluding the pandemic year of 2020 when businesses were compelled to shut down. The Economic Survey data indicates that the Jua Kali sector, known for its unregulated businesses, created an estimated 702,900 jobs in the year ending June 2022 – the lowest figure since the estimated count of 185,800 workers in 2015.

The slowdown in job creation within the informal sector is a cause for concern among policymakers since unregistered businesses have traditionally been a significant source of employment, accounting for over 80 percent of the labor market. In contrast, wage employment in the modern sector, comprising government and private firms, represented approximately 18.89 percent of the market, with 3.015 million individuals employed.

“We urge the government to collaborate with employers to reduce the tax burden on labor. The current high labor costs are unsustainable and hinder job creation,” emphasized Ms. Mugo.

In response to these challenges, President William Ruto, who assumed office in September last year, has launched a financial inclusion fund known as the “Hustler Fund.” This initiative provides unsecured loans at eight percent interest to support micro-sized businesses, aiming to address market failures at the bottom of the economic pyramid.

The Treasury Secretary, Njuguna Ndung’u, stated, “Most of the time, we introduce financial products to address the needs at the bottom of the pyramid, but what often happens is that the product moves on to the next level, whereas the intention should be to empower people to move upward, not just the product.”

As Kenya navigates these economic challenges, fostering an environment conducive to entrepreneurial growth and providing necessary support to MSMEs will be crucial in stimulating job creation, enhancing economic stability, and improving living standards for Kenyan citizens.

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