Removing subsidies is sensible

Customers shop for subsidized maize flour at the Naivas Supermarket.

Customers shop for subsidized maize flour at a Naivas Supermarket. Kenyans who are grumbling that they were told the prices of unga would fall when the new government came into power completely missed the point; no government on earth has the power to dictate consumer prices in a capitalist economy.

Photo credit: File | Nation Media Group

What you need to know:

  • Subsidies may make sense in a command economy but not in a free market environment.
  • Nobody wants Kenyans to struggle too hard to put food on the table, but in the short term, they will have little choice.
  • In the long term, economic strategists say, the situation will stabilise and commodity prices will fall to reasonable levels on their own.

The removal of subsidies on oil products and electricity has been a hot topic this season and Kenyans are hurting.

Yet they should have seen it coming. For, of course, subsidies may make sense in a command economy but not in a free market environment.

Indeed, one does not need to be an economist to know that subsidies are a very unsustainable way of making essential consumer products available, and in a situation where a poor Third World country is caught up in the maelstrom of global food prices gone haywire, there is no simple way of preparing for such an eventuality.

By now, it should have occurred to even the most ardent supporters of the new government that most of the stuff they were hearing during the campaigns was so much poppycock, and that the Jubilee administration was not responsible for the high energy and food prices like maize flour.

Nor was the handshake between Mr Uhuru Kenyatta and Mr Raila Odinga responsible for the escalating prices of petrol, diesel, paraffin and gas.

As matters stand, without subsidies, the price of petrol would have hit the Sh200 mark long ago, while that of food would have gone through the roof.

Deal with reality 

On this issue, both the former and the new administrations have not been forthright.

During the campaigns, when one side of the political divide tried to explain that the war between Russia and Ukraine was one of the reasons for the rising prices, the other side poophooed the notion, insisting that maladministration of the country’s finances was entirely to blame.

Now, the campaign season is over and the Kenya Kwanza government has to deal with the reality. Removing subsidies on consumables was perhaps a step in the right direction.

The problem with subsidies, economists say, is that they distort the free market dynamics.

Apparently, the new government is not averse to lowering the price of fertilisers and other agricultural inputs so that farmers can grow more food, but it has balked at cushioning the ordinary folk from the rising prices of consumer goods.

Nobody wants Kenyans to struggle too hard to put food on the table, but in the short term, they will have little choice.

In the long term, economic strategists say, the situation will stabilise and commodity prices will fall to reasonable levels on their own.

But Kenyans should be forgiven for a healthy dose of scepticism; from experience, when prices rise, they rarely ever fall.

One of the greatest problems with subsidies is that since the government does not have money of its own, the cost has to be borne by the taxpayer. In short, higher taxes are inevitable.

Undesirable outcome 

There are a few possible scenarios should the food situation not improve. One of them is rioting in the streets, a most undesirable outcome.

Widespread riots over food scarcity have been known to happen throughout history, which is why governments are always tempted to intervene. 

The situation becomes dire when natural calamities like inadequate rainfall lead to drought.

Many areas are already experiencing this condition and how this nascent government gets out of the tight spot, especially in light of its erstwhile populist campaign rhetoric will be a major test.

Secondly, the government needs to collect a lot more money in taxes than before in a situation where Kenyans believe they are already paying too much tax on just about everything.

At 8.5 per cent, this country is reeling under food inflationary pressure that is not likely to subside until next year.

More taxation means less purchasing power, but if they feel the pain now after the removal of subsidies, it should be temporary, they are told.

But can the long-suffering consumers really have the patience to wait for the good days to come back?

Fiscal discipline 

They don’t have much choice. A prominent investor argues that countries which rely on subsidies to keep their populations calm achieve nothing.

Indeed, their economies stagnate to the point where they collapse. What is required, he said, is for the government to exercise fiscal and monetary policy discipline that discourages waste and conspicuous consumption. 

That done, the money saved will be enough for investing in human capital through job creation, thus allowing more people to earn enough money for sustenance.

In summary, those Kenyans who are grumbling that they were told the prices of unga would fall when the new government came into power completely missed the point; no government on earth has the power to dictate consumer prices in a capitalist economy and mitigation measures like subsidies are not only too expensive, they are harmful in the long run.

So, my unsolicited advice to fellow sufferers; just bear with it and hope things will improve in the near future. There is no shortcut and no free lunch.

Mr Ngwiri is a consultant editor; [email protected]

Welcome!

You're all set to enjoy unlimited Prime content.