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The struggles of small businesses in Kenya’s bottom-up economics

Kenya Kwanza's ambitious economic plan is encountering significant challenges, putting its realization into jeopardy

Ruto’s Kenya Kwanza government ran its campaign with the promise of a transformative economic model – the “bottom-up” approach. According to the government, this model is aimed at uplifting Kenyans at the bottom of the economic pyramid, particularly Micro, Small and Medium Enterprises (MSMEs). However, as the government faces the realities of governance one year into office, there are indications that the ambitious economic plan is encountering significant challenges, putting its realization into jeopardy.

The bottom-up economic agenda has six pillars: micro, small, and medium enterprises (MSMEs) economy; digital superhighway and the creative economy; housing and settlement; healthcare; agriculture; and environment and climate change.

According to the government, the model is aimed at lowering the cost of living, creating employment for the youths, eradicating hunger, widening the tax base, inclusive growth and improving the country’s foreign exchange.

In the plan, President Ruto pledged to allocate Ksh.50 billion to the MSME sector, giving birth to the concept of the “hustler fund,” which was envisioned as a mechanism to provide accessible and affordable loans with low-interest rates to MSMEs. This fund aimed to empower entrepreneurs by creating an environment where small businesses could thrive, which would, in turn, foster economic growth from the grassroots.

The government’s promise to achieve these objectives within its first year in office appears rather too ambitious. Lowering the cost of living, providing food security, creating employment opportunities, widening the tax base and improving foreign exchange balance now look like a pipe dream. If anything, the economic policies of the Ruto-led government contradict these very campaign promises.

High taxes hurting businesses

Much to the chagrin of ordinary citizens, the Kenya Kwanza government increased taxes in lieu of  “widening the tax base”. The introduction of a mandatory housing levy of 1.5% and the doubling of the VAT on fuel from 8% to 16% are some of the disturbing examples.

The high taxes, which have affected businesses and consumers, have brought President Ruto’s government under criticism. The increased tax burden is particularly challenging for small enterprises, leading to closures and layoffs. The promise of a supportive economic environment for the “hustlers” appears to be undermined by the very policies implemented by the government.

“Due to the tough economic times, we have closed shop. Moving forward, we will be operating online services only,” a social media post reads.

Wamboi Kuria, who sells men’s clothing in Nairobi, is on the verge of closing her shop; she took to social media to advertise her business, citing tough economic times that make it hard to stay afloat.

“I am selling my shop, fully stocked with men’s official and casual clothes, with a stock of not less than 1 million. The monthly rent for that shop is KSh 50,000. Come one, come all, and buy. Tough economic times cannot allow me to maintain that and others for now. DM me if interested within Nairobi,’’ wrote Wamboi Kuria, adding that high importation taxes are killing businesses. In her view, 2022/23 has been the most difficult due to these taxes.

In many corners of the country, the morale is low, with some arguing that the government is creating a nation of poor people, as high taxes mean no savings, no flow of capital, businesses closing down and massive layoffs.

In today’s Kenya, small businesses, often referred to as the backbone of the economy, are struggling. Reports indicate a growing number of closures, attributing the challenging economic environment to the failure of the government’s model to translate campaign promises into tangible benefits for Kenyans and MSME entrepreneurs.

Government data from the business registration service of Kenya indicates that the number of private registered companies has dropped to 26 in the 2023/2024 financial year compared to the same period in the last financial year, where private registered companies stood at 38.

In the current financial year, as of October 2023, the number of registered business names stood at 28,332 compared to 29,222 during the same period in the last financial year.  The number of businesses that have closed shop, however, is 601, slightly lower compared to the financial years 2021/22 and 2022/23 (873 and 725 respectively). However, experts argue that the higher number of closed businesses in the country in the 2021/22 and 2022/23 fiscal years is attributable to the impact of Covid-19.

This week, the Federation of Kenyan Employers (FKE) released a report showing that 70,000 Kenyans have lost their jobs in the last year, citing the cost of doing business in the country as a key reason for this, which, as they argue, has further been exacerbated by the implementation of the new Finance Act. The Federation also warned that more Kenyans are at risk of losing their jobs, while others might lose revenue as employers consider pay cuts.

“Between October 2022 and November 2023, we have lost 3 per cent (70,000) of the jobs in the formal private sector, and 40 per cent of employers have reported that they are planning to reduce the number of employees to meet the increasing costs of operating in Kenya.”

The FKE argues that the state of business in the country is worsened by the increase in business costs coming as a result of newly introduced tax measures and global geopolitical developments like the Russia-Ukraine war.

FKE suggests that some taxes need to be reviewed, including VAT on petroleum products, which rose from 8% to 16% PAYE and Corporate tax, which the Federation argues has greatly reduced the purchasing power of citizens and the cash flow in enterprises.

“The increase in VAT on petrol has a regressive effect on the economy,” FKE said.

Hustler Fund

Moreover, the “Hustler Fund,” touted as a lifeline for MSMEs, is facing its own set of challenges. Despite the availability of loans, there is a significant default rate of 29%, which is higher than the one reported by local commercial banks (15.4 per cent). This raises questions about the effectiveness of the fund in supporting sustainable business growth. By November 2023, the fund had disbursed sh.38.65 billion to about 22 million Kenyans, with the repayment of the loans standing at Sh27.88 billion.

Critics argue that the government’s focus on providing financial assistance without addressing underlying economic challenges may be counterproductive.  “When we talk about the Hustler Fund, ‘Mama Mboga’ is given a loan to expand stock, but who will she sell to if customers’ pockets have been raided to the extent that Kenyans are sleeping hungry?” Nairobi Senator Edwin Sifuna asked.

The Fund has also been hit hard in the budget allocation. Initially, it was expected to be a KSh 50 billion revolving fund, according to the promise made during campaigns. However, it was allocated Ksh.10 billion at the start of the financial year in July 2023. Now, it has been cut by 50% in the supplementary budget for the current financial year, which means that only KSh.5 billion has been allocated.

The Kenya Kwanza government’s response to the economic downturn has received mixed reactions from Kenyans. While some applaud the efforts to boost MSMEs, others believe that a more holistic approach is required, including a reassessment of tax policies and economic diversification.

Analysts argue that the Hustler Fund has the capability to change the business environment for small-scale businesses but is not living up to its intended purpose. The Fund’s low-interest rates make it affordable, but the low amount of money disbursed is limiting.

For Iraki, an associate professor at the University of Nairobi,  “The Kenya Kwanza government can opt to increase the amount someone can borrow and also increase the repayment period.”

In a recent State of the Nation address, President Ruto acknowledged the economic challenges facing the nation but remained optimistic about the long-term success of the bottom-up economic model.

The success of the bottom-up economic model is dependent on the Kenyan government’s ability to address the challenge of high taxes, which is resulting in business closures. Kenyans continue to wait with bated breath as the Ruto administration asks for more time to deliver on its promises.

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