What government can do about the rising cost of living

forex bureau dollar

A client holds US dollar notes at a forex bureau in Nairobi. The Kenyan shilling hit an all-time low of 145 for one US dollar this week, down from 119 in the first week of August 2022.

Photo credit: File | Nation Media Group

When I wrote about the cost of living and the government’s role in it a month back, a reader from Nyeri sent word that he found the article tough going (too many numbers, he said — my apologies) and very unsettling. He was dismayed to learn that governments do not mind some inflation.

They differ, of course, on the amount of pain they are willing to inflict on their citizens. But around the world, inflation targeting has been a common practice for the last three decades. 

Set annually by the CS Treasury, Kenya’s target is 7.5 per cent. It is set as a range, that is five per cent, plus or minus 2.5 per cent.

However, the markets always pick the higher point. Once set, the Central Bank controls the money supply and exchange rates, to achieve it.

Setting a specific target creates a self-fulfilling loop. The labour unions use it in their wage negotiations. Businesses use it in their pricing decisions. Kenya Power uses it in the inflation adjustment in your electricity bill. The Energy and Petroleum Regulatory Agency uses it to fix fuel prices.

The water companies use it when submitting tariff review proposals to their regulator. And on it goes. Target becomes reality.

Some countries are doing remarkably well in controlling inflation, others not. In January, inflation was 1.3 per cent in Benin and 2.9 per cent in Equatorial Guinea. Closer home, it was 2.39 per cent in Seychelles, 3.6 per cent in Djibouti, 4.5 per cent in Eritrea, and 4.9 per cent in Tanzania. It was nine per cent in Kenya and 10.4 per cent in Uganda.

Rain-fed agriculture 

The inflation target, drought, rising oil prices, exchange depreciation, and the amount of money people have to spend all impact inflation.

I doubt Kenyans have too much money to spend. But drought and war in Ukraine have definitely driven food prices up. The former because our agriculture is rain-fed, the latter because we import wheat from there. The dramatic fall of the shilling has made things worse.

The Kenyan shilling hit an all-time low of 145 for one US dollar this week, down from 119 in the first week of August 2022. All our imports, from clothes, maize, wheat, and powdered milk, to pre-owned matatu vans and boda bodas, are now 22 per cent more expensive than they were in August last year.

Governments have no control over drought. That is why they focus on exchange rates and the control of the money supply, using interest rates. But there is plenty more governments must do.

India has increased interest rates, reduced exercise tax on petroleum, reduced import duties on critical raw materials and removed duty on sunflower imports.

Governments can promote irrigation, but this takes time. In the short term, they can provide subsidies, as Kenya is doing with kerosene. 

They can reduce their own inflation target. The Central Bank Act, 2015, requires the Treasury CS to — once a year — set, publish and take to Parliament, an inflation target, currently 7.5 per cent.

Reducing it only requires a decision. So, one can understand why Kenyans are angry with a government that chooses the blame game rather than concrete action. From South Africa to Nigeria and Tunisia, citizens are taking to the streets to express their frustration.

@NdirituMuriithi is an economist