Kenya’s rising inflation

Kenya’s rising inflation
A continued inflationary trend in Kenya has resulted in a staggering rise in food prices, fuel prices and transportation costs in the country. Kenya's economy is market-based with a few state-owned infrastructure enterprises and it maintains a liberalised external trade system. The 2018 estimates show that Kenya had a GDP of $85.980 billion...

A continued inflationary trend in Kenya has resulted in a staggering rise in food prices, fuel prices and transportation costs in the country.

Background

Kenya's economy is market-based with a few state-owned infrastructure enterprises and it maintains a liberalised external trade system. The 2018 estimates show that Kenya had a GDP of $85.980 billion, thus making it the 69th largest economy in the world. The Per capita GDP was estimated at $1,790.

Prior to the liberalisation of the Kenyan economy, the country’s inward-looking policy of import substitution and rising oil prices made Kenya's manufacturing sector uncompetitive. The government began a massive intrusion in the private sector. Lack of export incentives, tight import controls, and foreign exchange controls made the domestic environment for investment even less attractive. From 1991 to 1993, Kenya had its worst economic performance since independence. Growth in GDP stagnated, and agricultural production shrank at an annual rate of 3.9%. Inflation reached a record 100% in August 1993, and the government's budget deficit was over 10% of GDP.

In 1993 the government of Kenya engaged in a major program of economic reform and liberalisation with the assistance of World Bank and IMF that resulted in an increase in the real GDP growth rate that averaged just over 4% a year.

In 1997, however, the economy entered a period of slowing or stagnant growth, due in part to adverse weather conditions and reduced economic activity prior to general elections in December 1997. In July 1997, the Government of Kenya refused to meet commitments made earlier to the IMF on governance reforms.

The economy’s heavy dependence on rain-fed agriculture and the tourism sector leaves it vulnerable to cycles of boom and bust. The agricultural sector employs nearly 75 percent of the country's 38 million people. Half of the sector's output remains subsistence production. Poor governance and corruption also have had a negative impact on growth, making it expensive to do business in Kenya.

Analysis

On September the statistics office of the Kenyan government Kenya’s inflation rose and is the highest in 11 months. It was pushed further by an increase in fuel, transporting and food prices.

The Kenya National Bureau of Statistics said the rate rose to 5.70 percent year-on-year from 4.04 percent a month earlier, while on a monthly basis inflation was 1.02 percent from 0.31 percent in August.

The Transport Index rose 7.99 percent from a month earlier and was up 17.29 percent when compared with September 2017 due to increased petrol and diesel prices. A litre of petrol now cost upwards of 127 shillings ($1.20) from the previous 112.

Sugar prices went up with a kilo retailing at Sh152.29 up from Sh147.33 in August. A kilo of Irish potatoes was sold at Sh77.60 up from Sh73.62 while Sukuma Wiki rose from Sh55.59 in August to Sh57.83. One kilo of beef with bones rose from Sh442.95 to Sh443.21, beans at Sh120.83 up from Sh119.04 while cabbage rose to Sh43.53 compared to Sh42.58 in August.

Razia Khan, head of research for Africa at Standard Chartered in London said, “The imposition of VAT on fuel was always anticipated to be a driver of September consumer price inflation.”

At the beginning of this month, the Kenyan revenue authority imposed a 16 percent value added tax on all petroleum products, which defied lawmakers who had voted earlier to delay the levy for two years due to concerns about the cost of living.

Economic analysts said as a result of this legislation, Kenya’s fiscal deficit is likely to be higher than projected after parliament rejected most of the tax measures proposed by the government for the 2018 budget. These planned tax hikes were initially designed to fund a range of government development goals including universal health care and affordable housing.

Counterpoint

The central bank governor, Patrick Njoroge, said that he expected inflation to remain within the government’s preferred band of 2.5-7.5 percent despite the pressure from the new tax.

Assessment

Our assessment is that the increase in VAT has had a severe effect on especially the poor. We feel that along with housing, water, electricity, gas, food grains and necessities like sugar and potatoes have been impacted. We believe that incremental pressures from higher oil prices will further compound prices of essentials in Kenya leading to an inflationary situation.

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