Unease amid widening price controls

Maize prices

The State recently resorted to subsidising maize flour to keep the prices of the commodity low.

Photo credit: File | Nation Media Group

The government targets to introduce new regulations on the pricing of cooking gas by June next year, adding to the list of products regulated by the government in the fresh dawn of State-backed price controls.

Unlike petrol, diesel, and kerosene prices, which are adjusted on the 15th of every month by the Energy and Petroleum Regulatory Authority (Epra) and stay in place for one month, cooking gas prices are presently not controlled.

Kenya introduced price controls on fuel in December 2010 through the Energy (Petroleum Pricing) Regulations 2010 amid resistance by private players who argued the move would make the local market unattractive for new investors.

The regulator said that it expects to put in place a framework to guide the pricing of liquefied petroleum gas (LPG) by June next year.

“The pricing framework is intended to enhance the robustness and efficiency of the sector’s regulatory framework as envisioned in Epra’s current strategic plan,” Epra Director-General Daniel Kiptoo told Nation.

Kenya’s cooking gas market is tightly controlled by a few private firms that control the importation of the commodity through the ports of Mombasa and Dar es Salaam and its distribution locally.

This has thwarted efforts by the government to lower the cost of the product in a bid to lower the cost of energy and reduce reliance on dirty fuels such as kerosene, charcoal, and firewood for cooking.

About 60 per cent of the cost of cooking gas comprises the landing cost of the commodity while about 32 per cent of the total price goes to LPG dealers, distributors, and retailers contributing to its high cost.

Price controls on the commodity will add it to a growing list of products that the government is setting their prices after the failure of the free market to lower their cost to make them more affordable for consumers.

Price controls

Kenya reintroduced price controls that were rife during the reign of former late President Daniel Arap Moi through the Price Control (Essential Goods) Act, 2011 which allowed the government to set the maximum prices of basic commodities to curb inflation.

The government has in recent years tightened its grip on the regulation of some key commodities which is seen by some as flying in the face of free market policies the country espouses that allow prices to be determined by market forces of demand and supply.

The State also sets electricity tariffs every three years and adjusts the price of electricity every month to adjust for changes in fuel prices, foreign exchange fluctuation, and water levies.

Price controls on electricity are especially essential considering the centrality of electricity supply to powering the country. Kenya Power, a State-owned Kenya Power monopoly, is the only grid-level power distributor in the country.

The government went a step further in September 2016 by introducing caps on interests charged by banks on loans leading to banks restricting lending to the private sector which heavily hit businesses.

This came after the Banking Act was amended to cap interest chargeable by banks on loans to not more than 4 percent of the base rate set by the Central Bank of Kenya (CBK). The caps were however lifted after three years in November 2019 much to the relief of banks who have now resumed charging higher interests.

The State has also turned to subsidies on maize flour to keep the prices of the commodity low amid a sharp increase in prices driven by low local production and reduced imports.

The government in July inked a Sh4 billion maize flour subsidy with millers to sell the product at a subsidised price of Sh100 for a two-kilogramme packet down from Sh205 to ease inflationary pressures on households.

Proponents of price control argue that the free-market economy has often failed to protect consumers from greedy entrepreneurs who charge an arm and a leg for their goods and services to make profits at the expense of suffering consumers.

Basic commodities

This has seen clamour by the government to control not only the prices of basic commodities but also rents charged by landlords as well as professional fees such as those charged by doctors to patients as consultation fees and those charged by hospitals for medical procedures.

Opponents of price controls however argue that the free market is the best route to making products more affordable to consumers through cut-throat competition that incentivizes producers to lower the prices to beat the competition.

Economists reckon price controls can be effective by cushioning consumers from higher commodity prices in the short term but can have adverse effects on the economy in the long term.

“Price controls can drive investors away from targeted sectors because why would they will find it difficult to continue to produce goods whose prices are determined by the government even though they bear all the business risks,” said Ken Gichinga, the chief economist at Mentoria Economics.

Instead of controlling product prices, Mr Gichinga said, the government has to address the wider issues that lead to high commodity prices, including removing barriers to investment to make it easy for people to invest in sectors that have few dominant players that control prices.