Henry Hazlitt, co-founder of the Foundation for Economic Education famously said “inflation is not only unnecessary for economic growth. As long as it exists, it is the enemy of economic growth.”
The global cost of living continues to rise owing to soaring food and energy prices. As per statistics “In August 2022, 91 per cent of households in Great Britain reported that their cost of living had increased in the previous month compared with 62 per cent in early November 2021.”
Adjusted for inflation, disposable incomes continue to drop. Gas prices are surging upwards, which will dent already near-empty pockets, due to expensive heating during winter. In the USA, economists warn that the economy is on the verge of a cost of living crisis due to rapid inflation. Food prices have jumped 9.4 per cent in 12 months to April 2022, the largest annual rise in 40 years.
How different is the situation in Kenya? During the past two years, the costs keep escalating despite outcry from wananchi. According to Trading Economics, “The annual inflation rate in Kenya accelerated for the sixth consecutive month to 8.5 per cent in August of 2022”. As the population increases, the country is still battling poverty. World Bank states “poverty is expected to fall to 33.4 per cent in 2022, below the pre-crisis level of 34.4 per cent.”
This situation is not unique to Kenya and can be witnessed across many developing countries. The Kenyan economy is slowly emerging from the grip of Covid-19 menace. Although economic recovery has seen some of those who lost jobs in 2020 return to gainful employment, the real wages, adjusted for inflation, will take much longer to recover.
Rising fuel prices
Rising fuel prices are a key factor in increasing inflation and hampering economic growth. Not only do energy/oil prices directly affect the prices of commodities made with petroleum products but also affect the cost of manufacturing and transportation as well as heating.
In Kenya, fuel prices were revised upwards by Energy and Petroleum Regulatory Authority (Epra) on Wednesday 14th September 2022 to an all-time high, bringing petrol to Sh179.30 and diesel to Sh165, Kerosene at Sh147.94 per litre in Nairobi. The price of fuel will increase even further in the coming months.
While supply-chain disruptions from Covid-19 had already pushed up prices, inflation is rising due to further disruptions attributed to global geopolitics and the Russia-Ukraine war. The fuel subsidy, which was in effect in Kenya since last year was seen as being unsustainable, however, it acted as a cushion to the already impacted pockets of the citizens. Fuel prices must be reduced, perhaps the way forward could be to cut taxes on fuel.
Are incomes rising at the same level as inflation or the cost of living? The answer is no. Cost of living is set to get worse after an increase in fuel prices. Some sectors are yet to recover from the hard-hitting impacts of the pandemic. The Kenyan service industry has shown significant signs of improvement, however manufacturing sector requires a boost. Kenya’s manufacturing sector is failing to perform as envisioned.
As per the Kenya National Bureau of Statistics, the manufacturing sector in Kenya grew 3.7 per cent during first quarter of 2022, and 3.2 per cent during the second quarter. This is below the expected level. Are we going to be less competitive than our East African counterparts? Are the rising costs of production to blame? Epra has also recently increased the cost of electricity in Kenya by 15.7 per cent. Industrial power consumers will now pay more to continue operating. The costs of finished products will be pushed on to consumers.
Tanzania and Uganda are competing with Kenya for markets for their manufactured products. While excise tax rates have increased in Kenya, they have remained unchanged in Tanzania and Uganda, making their products more affordable. If we look at some regular shopping items, the subsidy on maize flour has ended bringing the price to Sh200 per two-kiloramme packet. The tax on bottled water is up from Sh6.6 per litre to Sh7.02. The duty on beer is now Sh134 per litre which is a 9.97 per cent rise, wines have a tax of Sh229 per litre, and filtered cigarettes Sh4.06 up from Sh3.82. Food prices have been escalating.
Erratic rains have reduced the domestic production of maize and other crops in Kenya. Production is approximately 15 per cent to 20 per cent lower than the five-year average. Kenya imports most of its wheat from Russia, Ukraine, Argentina and other States. Ukraine is exporting 60 per cent less wheat this year compared to 2021, leading to a rise in the price of wheat.
Some of the drivers of Kenya’s inflation are local while others are external and beyond its control. The key drivers of inflation in Kenya’s CPI (Consumer Price Index) are food and energy. With the prices of fuel, milk, grain, flour, fertiliser and electricity surging, the population is feeling pain especially as real incomes have been impacted negatively.
We are underperforming as a nation, how long will we continue underperforming? Food security must be achieved. Do we have the financial support to deal with any acute shortages? Food security was among the Big Four agenda blueprint of former President Uhuru Kenyatta.
President Ruto, in his manifesto, pledged to invest Sh500 billion in agriculture and small businesses over the next five years. Kenya’s borrowing has already left the future generation indebted, can we afford further international borrowing?
While the price a country pays for international borrowings is a subject of much debate, the common man is grappling to budget for family requirements in an environment where his earnings have long stopped keeping pace with what he needs to payout.
Ritesh Barot is a business and financial analyst, [email protected]