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Kenyan Households Face A 12% Income Erosion In Two Years As UDA’s Policies And Inflation Devastate The Average Consumer

BY Steve Biko Wafula · October 26, 2024 09:10 am

KEY POINTS

Rising incomes have been severely offset by inflation and increasing taxes. The new UDA payroll taxes have contributed to a 6% reduction in the disposable income of an average Kenyan. Factor in the skyrocketing inflation that has gnawed off another 11%, and we end up with a net loss of 12%.

KEY TAKEAWAYS

Inflation is eating into the average Kenyan's ability to save and invest. The already low savings rate is expected to drop even further as households struggle to make ends meet. Without savings, investments in long-term goals like homeownership, entrepreneurship, or retirement become impossible. In three years, we might see a situation where the majority of Kenyans have no financial safety net, leaving them vulnerable to future economic shocks.

The last two years under UDA leadership have seen the Kenyan citizen lose 12% of their purchasing power, without any mercy. In theory, macroeconomic indicators, such as GDP growth, infrastructure development, and foreign investment, are showing improvement. However, the disconnect between these indicators and the experience of the average Kenyan is growing more evident. Despite positive national trends, ordinary citizens are not feeling these gains in their wallets.

According to the latest data from KNBS, incomes have increased by around 5%. This figure might look promising on the surface, but the reality is far from positive. Rising incomes have been severely offset by inflation and increasing taxes. The new UDA payroll taxes have contributed to a 6% reduction in the disposable income of an average Kenyan. Factor in the skyrocketing inflation that has gnawed off another 11%, and we end up with a net loss of 12%.

This 12% cut in purchasing power means that the average Kenyan household now has significantly less to spend on food, utilities, education, and health. The consumer’s dinner table is emptier, and the dream of upward social mobility is becoming a fading hope. A gross salary of KES 50,000 in October 2022 saw a net pay of KES 41,457, but fast forward to October 2024, and the net pay has fallen to KES 39,092 due to cumulative statutory deductions. That’s a cut of nearly KES 2,365, which could have otherwise gone into buying food or paying school fees.

The most striking hit comes from the inflation rate. With an annual inflation rate averaging at 10.6%, the purchasing power of the Kenyan shilling is rapidly diminishing. Basic goods and services have become unaffordable for many. The average consumer finds themselves paying more for less, with prices for basic items like maize flour, cooking oil, and fuel soaring. Even though salaries have grown by 5%, these gains have been erased by higher living costs, leading to the significant erosion of disposable income.

Read Also: Think Beyond Saving: How Generating Extra Income Can Transform Your Financial Future

Looking forward over the next three years, if these trends continue, the outlook is bleak. Inflationary pressures show no signs of slowing down, especially in the current global economic climate, with rising energy costs and disrupted supply chains. Coupled with further potential tax hikes, Kenyans could see their real incomes shrink by another 10-15%. This would bring the total loss of purchasing power to nearly 25%, making the average citizen significantly poorer.

Further complicating matters, statutory deductions such as the National Social Security Fund (NSSF), National Hospital Insurance Fund (NHIF), and new levies like the Housing Levy have ballooned over time. As seen in the data, deductions on a KES 50,000 salary have increased from KES 8,542 in 2022 to KES 10,907 in 2024. This increasing tax burden has turned into a silent killer of disposable income. While these funds are touted as beneficial in the long run, the immediate effect is a growing hole in consumers’ pockets.

As disposable income continues to fall, consumer spending will inevitably slow down. This reduction in spending will have a ripple effect on the broader economy, reducing demand for goods and services. Local businesses, already struggling due to high costs of production, will see reduced revenues, further exacerbating the cycle of economic stagnation.

Moreover, the financial pressure on the average Kenyan will likely lead to a spike in personal debt. Unable to cope with the rising costs of living, many citizens will turn to loans, creating a potential debt crisis. Already, micro-lending platforms are witnessing a surge in activity, as consumers borrow to meet basic needs. In three years, we could face a situation where a significant portion of Kenyans are trapped in a cycle of debt, unable to break free due to stagnant wages and rising costs.

The housing sector, with the introduction of the Housing Levy, is another area where citizens are feeling the pinch. What was initially positioned as a way to promote affordable housing has now become an additional financial burden for workers. In three years, the cumulative effect of this levy will mean that the average Kenyan will be contributing even more to a project whose benefits may not materialize for them in the near future. This policy, while well-intentioned, is being executed at the wrong time when households are already stretched thin.

One major sector that will suffer is healthcare. With the transition from NHIF to SHIF, contributions have increased. The KES 1,020 previously deducted for NHIF has risen to KES 1,375 under SHIF. In an economy where every shilling counts, this extra KES 355 deduction is enough to disrupt household budgets. As the cost of healthcare continues to rise, and with public hospitals remaining underfunded, citizens may be forced to forgo medical care altogether, further compromising their well-being.

Read Also: Kenya’s Digital Economy To Contribute Ksh 662 Billion To GDP By 2028

Education will also take a hit. With reduced disposable income, parents will find it increasingly difficult to pay school fees, buy educational materials, or fund higher education for their children. This will lead to a generation of children whose education is compromised, further entrenching inequality in the country.

Inflation is eating into the average Kenyan’s ability to save and invest. The already low savings rate is expected to drop even further as households struggle to make ends meet. Without savings, investments in long-term goals like homeownership, entrepreneurship, or retirement become impossible. In three years, we might see a situation where the majority of Kenyans have no financial safety net, leaving them vulnerable to future economic shocks.

This dire situation will lead to increased pressure on the government to intervene. However, with the national debt levels already high and revenues dwindling due to economic contraction, the government’s ability to provide relief will be limited. Social safety nets will remain underfunded, leaving the most vulnerable citizens to fend for themselves.

As the economic situation worsens, we can expect to see an increase in social unrest. The frustrations of the average citizen will boil over into protests, strikes, and demonstrations. The disconnect between the government’s narrative of a growing economy and the reality faced by the people will drive political instability, as citizens demand accountability and better governance.

Businesses too will face the brunt of this economic downturn. Reduced consumer spending, coupled with higher operational costs, will force many small and medium enterprises (SMEs) to shut down. This will further drive up unemployment, creating a vicious cycle of poverty and economic decline. In the next three years, the SME sector, which is the backbone of the Kenyan economy, could see massive layoffs and closures.

The agricultural sector, which employs a significant portion of the population, is also at risk. As inflation drives up the cost of inputs like fertilizer and seeds, farmers will see reduced yields and profits. This, combined with unpredictable weather patterns, will threaten food security, exacerbating the hardships faced by ordinary Kenyans.

In conclusion, unless drastic measures are taken to address the economic challenges facing the country, the next three years will see the average Kenyan become poorer. The dinner table, already sparse, will become even emptier as purchasing power continues to erode. It is essential for the government to not only acknowledge this crisis but to take immediate action to alleviate the financial burden on its citizens.

Read Also: The Hidden Costs Of Kenya’s Tier 1 Banks Favoring Government Securities Over SMEs

Steve Biko is the CEO OF Soko Directory and the founder of Hidalgo Group of Companies. Steve is currently developing his career in law, finance, entrepreneurship and digital consultancy; and has been implementing consultancy assignments for client organizations comprising of trainings besides capacity building in entrepreneurial matters. He can be reached on: +254 20 510 1124 or Email: info@sokodirectory.com

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