Kenya's 2025 Salary Outlook: Navigating Inflation, Economic Growth, and Employee Retention

“Sharon, please could you give Finance the forecast salary increase percentage for 2025 and the projected increase in our salary cost.”

As we stated in our article dealing with the South African salary forecast for 2025 (Click here to view this article) this request normally sparks a sense of foreboding as it is a clear indication that the annual salary increase process is imminent- with all the associated angst, issues, problems, heated negotiations and hard work that is required.

Formulating salary increases in Africa can be a difficult undertaking for organisations. A salient reason is that most international surveys do not cover many countries in Africa. Moreover, the surveys that do include African countries, often provide information of limited utility which is often out of date by the time it is published.
However, the forecast is not difficult, and we have long advocated that clients adopt a scientific approach to the preliminary salary increase forecast and then use the unfolding economic data over the next few months to update the original forecast. Finally, to incorporate other factors into the decision and then formulate an equitable final salary increase for 2025.

INFLATION

Our departure point in the forecast process is to determine the expected inflation rate for 2025. Salary increases are implicitly linked to inflation; where inflation is one of the most important determinants when deciding on the quantum of the salary increase. Employees want to retain the same purchasing power with their remuneration from one year to the next.
Consistent with the Axiomatic methodology, a “forward-looking” approach must be adopted where inflation is forecasted for 2025, and the proposed salary increase is based on this result. We remain firm advocates of this methodology as it calculates the amount of the salary increase which will be “forfeited” to inflation. The alternative approach, namely the “backwards looking” methodology, uses the previous year’s inflation rate which is “sunk” and thus does not exert an influence on the additional purchasing power given to the employee by granting him or her an increase.
Kenya’s historic inflation rates and the Axiomatic forecast for the remainder of 2024 and 2025 are detailed in the table below:
Normally we state that the risks to the forecast are to the upside- where the risk is greater that inflation could be higher than our forecast. This year, barring any exogenous shocks, we think the risk is possible to the downside because of the strengthening of the shilling (17% appreciation YTD) and lower fuel and food prices.
The Kenyan MPC Committee agrees with our inflation forecast and at the 6 August 2024 meeting stated that “Overall inflation is expected to remain below the midpoint of the target range in the near term, supported by a stable exchange rate, lower food prices with expected harvests, and stable fuel prices”. The mid-point of the range referred to is 5.0% (range of 2.5% to 7.5%).

REAL SALARY INCREASE

The next step in the scientific process is to establish the possible quantum of the “real increase”. A real increase is defined as the increase after inflation has been considered. As an example, if the salary increase is 6.0% and inflation is 4.0%, then a 2.0% real increase has been granted. The quantum of real salary increases in African countries is difficult to quantify and unlike developed markets, there is no “normal” real increase which is targeted. Our approach is that an equitable real increase for employers to target is 1.0%.
The graph below indicates the real salary increase granted to employees in Kenya over the last few years. Cognisance must be taken of the fact that 2022 and 2023 were outliers resulting from the COVID-19 pandemic and the implications of the supply chain shocks experienced in those years.

FORECAST OF 2025 SALARY INCREASE

The scientific and qualitative approach would conclude that an equitable salary increase would therefore be:

However, before we flippantly forward this salary increase to Finance, we must take cognisance of the fact that certain new social security deductions in Kenya this year have significant reduced employees net take home pay.

 1.   In February 2024, the National Social Security Fund (NSSF) employee contribution increased considerably: 

 2.   The Affordable Housing Act established a framework for the collection of a housing levy and the implementation of the affordable housing program for low-income citizens. Each employee is now required to contribute 1.5% of their gross monthly salary.

3.   The new Social Health Insurance Regulations (SHIFU) have been published and will probably be effective in October 2024. These regulations stipulate that a household will pay a monthly statutory deduction contribution to the SHIF at a rate of 2.75% of the gross salary or wage of the households

The current recommended forecast salary increase for Kenya in 2025 is 5.75%.

While this salary increase will provide employees with a real salary increase of 1.39%, it will take account of the increased social security deductions and ensure employees maintain their purchasing power.

The above forecast obviously ignores quantitative factors such as economic growth, union demands, trends in compensation and benefits and of course, the unique financial position of the company. These however should be considered closer to salary increase time.

These however should be considered closer to salary increase time. Over the coming months Axiomatic will continue to update our 2025 recommended salary increase in response to new data, include some quantitative considerations, the possible VAT reduction and discuss some emerging trends we are observing in the market.

Need help navigating the complexities of salary increases in Kenya? Our team of experts at Axiomatic can provide you with personalised guidance and support to ensure you make informed decisions about your 2025 salary increases.

Contact Us

COOKIE POLICY

Welcome to our website.

1. Introduction

This Cookie Policy explains how we use cookies and similar technologies on our website axioconsult.com. This policy is designed to help you understand what cookies are, how we use them, and the choices you have regarding their use.

2. What Are Cookies

Cookies are small text files that are stored on your device (computer, tablet, or mobile phone) when you visit certain websites. They are widely used to enhance your online experience by remembering your preferences and actions over time. Cookies are not harmful and do not contain personal information like your name or payment details.

3. How We Use Cookies

We use cookies for various purposes, including:

    • Essential Cookies: These cookies are necessary for the basic functioning of our website. They enable you to navigate our site, use its features, and access secure areas.
    • Analytical/Performance Cookies: These cookies help us understand how visitors use our website. They provide information about which pages are visited most frequently, how long visitors stay on each page, and whether they encounter any error messages. This data helps us improve the performance and usability of our website.
    • Functionality Cookies: These cookies allow our website to remember choices you make (such as your username, language, or region) and provide enhanced, personalised features.
    • Targeting/Advertising Cookies: These cookies are used to deliver advertisements that are relevant to your interests. They may also limit the number of times you see an ad and help measure the effectiveness of ad campaigns.

 

4. Your Cookie Choices

You have the option to manage your cookie preferences. You can usually modify your browser settings to accept, reject, or delete cookies. Please note that if you choose to block or delete cookies, some features of our website may not function properly.

5. Third-Party Cookies

We may allow third-party service providers to use cookies on our website for the purposes outlined in Section 3. These providers may also collect information about your online activities over time and across different websites.

6. Updates to This Policy

We may update this Cookie Policy from time to time to reflect changes in technology, law, or our data practices. Any changes will become effective when we post the revised policy on our website.

7. Contact Us

If you have any questions about our Cookie Policy or how we use cookies on our website, please contact us at

By continuing to use our website, you consent to the use of cookies as described in this Cookie Policy.