Reversing price spiral not easy but it is doable
The ever-increasing cost of living is attributed to the rising exchange rates, increased fuel prices and taxes.
Year 2023 is soon coming to an end with the upward spiralling cost of living showing no sign of abating. Recent statistics show the annual inflation rate in Kenya rising to 6.8 per cent in September 2023.
The strengthening of the dollar against the shilling and rising fuel prices have also dealt a blow to the pockets of individuals as the prices of all commodities gradually rise.
The ever-increasing cost of living is attributed to the rising exchange rates, increased fuel prices and taxes. The Central Bank of Kenya Governor, Dr Kamau Thugge, recently claimed the shilling had been overvalued for several years.
He said “Kenya has maintained an artificially strong shilling for the past six years due to overvaluation”, thereby leaving the currency misaligned with the real economy.
This discussion began in 2017-2018, when the IMF reviewed the way the shilling is valued. How can one know when a currency is overvalued or undervalued, and what is the litmus test? The best litmus test is to see how much intervention is needed by the regulator. When the currency is at the perfect equilibrium point, the correct market price will require very little intervention from the regulator.
Foreign exchange reserves
Over the past few years, the CBK has depleted foreign exchange reserves, leaving not enough dollars to intervene in the market. Arguably, over the past year, the shilling has been finding its equilibrium point between supply and demand. The CBK needs to hold four months of import cover. It seems we have been slowly approaching the equilibrium point as there has been little intervention.
Certain vital aspects of trade—including our terms of trade, balance of payment, interest rates, inflation and tax policies— must be addressed. It is true to say that high-producing nations yield higher incomes.
As for Kenya, industries are struggling. An MSE survey published by the CBK last month shows a 60 per cent loan repayment default rate for small and micro enterprises (SMEs) in Kenya.
This default rate indicates a non-performing loan book of Sh586 billion, leaving lender banks chasing for repayment and, in turn, shareholders suffering. Kenya is also seen as a net importer and consumer nation and all efforts must be put in place to encourage the growth of the manufacturing sector.
Suffering losses
If we look at employment beyond manufacturing, in the finance sector, where brokerage firms are also suffering losses, and the securities exchange is impacted, perhaps policymakers could consider removing withholding tax from dividends to encourage local and foreign investors to invest in the shares of blue-chip companies.
We need to strategically revive the Nairobi Securities Exchange (NSE) and encourage manufacturers to set up and produce goods covering all aspects of the production and value chains.
Let’s have policies that create an enabling environment for employment. A coherent tax strategy with a long-term view to enhance investment and growth should be considered, thereby leading to policies as opposed to reactive strategies. All things considered, reversing the cost spiral is not a task for the faint-hearted and the policymakers should start working on it at the earliest opportunity.
Mr Ritesh is a business and financial analyst. [email protected].
