The average monthly wage in Kenya’s private sector fell for the first time in more than three decades to Sh75,781, reflecting the impact of the country’s weak economy that has prompted companies to curb costs.
The Kenya Revenue Authority (KRA) says pay per employee has fallen from Sh78,034 in the quarter ended September last year.
This suggests that companies are asking workers to take pay cuts while they are going through a period characterized by declining sales or taking advantage of cheap labor through new hiring.
The wage cuts come at a time when inflation has wiped out the average 2.8 percent salary increase offered to Kenyan workers last year, making it the fourth consecutive year that wage increases have lagged behind the cost of living measure.
“The decline in the average monthly cash remuneration per employee…indicating the effects of ongoing restructuring by various organizations to manage operational costs,” KRA said in an internal document highlighting the tax performance.
Public records available since 1990 have failed to capture years in which average private sector wages fell, including during the economic hardships imposed by the coronavirus when companies shed jobs and forced workers to take pay cuts as the virus put businesses on hold.
The KRA has recorded a shortfall in wages when it collects taxes (Paye) from the private sector, indicating the impact of a difficult labor market on government revenues.
For example, Paye’s receipts from the private sector for October fell just over Sh1.2 billion below target, KRA said without disclosing the expected amount for the month.
Businesses have complained this year of a cash crunch in an economic environment in which consumers’ purchasing power has been eroded in recent years by dual tax cuts on gross wages.
President William Ruto’s administration imposed a housing tax at a rate of 1.5 percent of workers’ gross wages, which is matched by employers, and as of October, a 2.75 percent tax on the Social Health Insurance Fund (SHIF).
Both levies are lump-sum taxes on workers’ total income with the KRA using the same total to calculate PAYE as well, thus a form of ‘triple taxation’.
The erosion of purchasing power combined with the economic uncertainty that followed the deadly anti-government protests further reduced business orders, prompting companies to adopt a cost-saving approach.
Overall, taxes on salaries, wages and allowances, including the public sector, fell short of KRA targets by Sh10.43 billion in the first four months of the current financial year ending in October.
The Revenue Authority collected Sh178.04 billion in the four months against a target of Sh188.72 billion.
The poor performance was recorded despite collections growing by 4.8 per cent above Sh169.94 billion in the corresponding period last year.
KRA said Paye’s performance was partly boosted by transfers from the public sector especially in October, “which is an indicator of Treasury payments to various agencies”.
The Federation of Kenya Employers (FKE) had earlier said the high cost of doing business was forcing companies to lay off tens of thousands of workers every month to sustain their businesses.
The lobby said that there is an increase in notifications from its members regarding the intention to announce the layoff of workers to confront the high operating costs and protect profit margins.
Kenya’s Stanbic Purchasing Managers’ Index (PMI) results, based on feedback from about 400 business leaders, in recent months indicated a trend for companies to temporarily stop hiring due to falling demand for goods and services.
There have also been suggestions that companies replace permanent employees with contract employees to curb operating expenses by cutting wages.
“Anecdotally, hiring was concentrated on temporary workers as companies looked to bolster capacity,” analysts at Stanbic Bank and US analytics firm Standard & Poor’s Global wrote in their October PMI report.
Confidence regarding future activity has risen to its highest level in four months, according to an October Stanbic report, as companies plan new outlets and investments in products and marketing.
However, sentiment remained weak compared to historical trends.
The decline in core earnings, which KRA uses to calculate Paye, will worry policymakers in an economic environment where net earnings have fallen over the past four years.
The latest results of the annual economic survey by the Kenya National Bureau of Statistics (KNBS) showed that inflation-adjusted wages fell to negative 4.1 percent in 2023 when the cost of living remained high due to expensive fuel and food.
This has left many households struggling to pay their bills despite Kenya’s economy growing by 5.6 percent in 2023 from a revised 4.9 percent the previous year, supported by strong production in the agriculture sector.
Employers are warning that it will take longer for pay rises to return to pre-pandemic levels, with companies concerned about business uncertainty despite the economic recovery.