Increased Cost of Living – Cartels? Pirate Money? Or Not.

I’m sure most people are glad that the church took some time off holding prayer rallies and meetings for some of the Ocampo 6 to petition the two principals to address the rising food and fuel prices in the country. Despite the news and newspaper headlines over the past 3 months being dominated by another issue – the real issue that’s been eating into most Kenyans has been the increased cost of living. Everything seems to be going up: ugali unga; unga ngano; bread, oil, fuel… The official inflation figures confirm the price increments; the inflation rate in January was 5.42%, February 6.54% and March 9.19%-the result, public outcry culminating in last week’s mass action protests peaceful demonstration by the Consumer Federation of Kenya (COFEK).

The (inflation) facts speak for themselves, the question is WHO IS TO BLAME for this extra burden on Kenyan citizens? Some people have laid all the blame on cartels others claim that the influx of Somali pirate money has led to increased demand which has led to a corresponding increase in prices. Others have blamed the government for inaction.

While there may be some truth to some of the ‘explanations’ above it is important to remember that a lot goes into rising prices than pirate money or cartels.

Take unga ngano prices, for example. The country does not currently produce enough wheat for our unga ngano demand so we usually export wheat from Russia and the States. However, over the past 12 months Russia has been hit by a wheat shortage of their own, partly due to the wild-fires they experienced a while back, so they cut down on their wheat exports. This lead to an increase in global wheat prices-Kenya, cartels-or-not was not immune to this price increase.

Apart from the wheat situation, the global market has led to increased global commodity prices. Polyethylene terephthalate (PET, raw material for plastics), titanium dioxide (raw material for paint), coal (key energy input for cement production) e.t.c. You could think of 100 more raw materials that have seen price increments the past 18 months, not forgetting the increasing global oil prices. Much of this increase in the prices of raw materials in the global market has been attributed to the increased demand from developing countries such as China and India (and I guess most African nations) which are quickly industrialising.

Most Kenyan manufacturers have to factor in these increased costs into their production costs leading to us facing increased prices when the finished goods hit Uchumi and Nakumatt shelves.

So, what can the government do to combat this? Usually, the CBK would be obligated to intervene but CBK intervention’s best left to situations where the inflation is caused by the local demand side (demand-pull inflation), i.e. too much money chasing too few goods. In this case, at least at a local (Kenyan) level the cause of the inflation seems to be on the supply side. Thus an increase in interest rates may reduce the money in circulation in the country but leave the raw material prices still on the increase.

In my opinion, there’s not a great deal the CBK or the government can do to directly combat this sort of inflation (cost-push inflation, unless the increased import costs are due to a weak Shilling at which point CBK may be obligated to intervene (but that’s a story for a whole other blogpost). The government can however take up indirect measures that may lead to reduced prices, the magic words being increased efficiency. For goods that require imported raw materials the government should ensure that the goods should not lie at the port any second longer than they should-this will greatly cut down the extra storage costs that manufactures commonly have to face. Improved transport in also necessary – thankfully, Mombasa Rd has improved a great deal since 2002 but the government’s record in improving the rail system that the Brits built hasn’t been as stellar the oil pipeline, no comment!

The cabinet should also devote a fair amount of time to coming up with ways to ensure that, at least for essential goods, we are not left susceptible to increased global prices, the new voucher storage system introduced by the NCPB (National Cereal and Produce Board) is a good start. Unfortunately, subsidising various commodity prices may not be a viable option at the moment considering the fact that we have a massive budget deficit and growing public debt (without even considering the cost of implementing the Constitution or paying the legal fees for some of the #$%*&^).

Reducing VAT may be an option though, but only if the reduced VAT stimulates extra spending to the extent that KRA actually collects more VAT revenue than under the current 16% rate. Speaking of taxes, the government could lift some of the burden off Kenyans by reviewing the PAYE (Pay As You Earn) tax bands. The PAYE bands have not shifted since 2006 despite the increased cost of living since then meaning that an individual earning KShs.39,000 per month finds some of their income taxed at the top band of 30%, similar to a CEO earning KShs.500,000 per month. Surely a scenario where only income over something like KShs.80,000 per month is taxed at 30% would be more fair? Again, this is a story for a whole other blogpost.

Despite all I’ve said above, if indeed the increased prices are due to increased local demand due to too much money in the loan market then the Prof. Ndung’u should step in (but make sure not to depress the economy). If there are indeed cartels then the new Competition Act should be enforced to the letter. If the cause is money laundering then now would be a good time to start implementing the Anti Money Laundering Act.

6 thoughts on “Increased Cost of Living – Cartels? Pirate Money? Or Not.

  1. What about the influx of cash coming in from Pirates? And rising prices of land & houses? And definitely the political instability?

    What in the world have we got ourselves into?

  2. My High School-level Economics aside, I feel that the Ministry of Finance, Treasury and the Central Bank ought to do *alot more* to stabilise the price levels in this country. I guess as Kenyans we have to acknowledge that the Minister of Finance has done *something* to address the skyrocketing fuel prices. Although cosmetic measures such as that have gone a long way in ensuring Kenyans don’t take to the streets in violent anger, dismally low salaries and galloping living costs are the stuff that the “revolutions” are made off, as witnessed so far in North Africa and the Middle East.
    We also cannot ignore the huge expenses by the Executive that were never approved by Parliament.
    As one legislator put it: “We are now paying the price for grand corruption in this country”. There are cartels within Cabinet. Cabinet Ministers and MPs are colluding with Somali Pirates and drug barons left right and centre. The bloated government and our pot-bellied MPs must step in and show true willingness to tighten their own belts and the country’s purse strings in order to ensure our economic situation doesnt not get worse.

    • I read the article. He makes some good points especially with regard to keeping the budget deficit within the targets. The issue of export competitiveness is also crucial especially seeing as our foreign exchange cover is currently at around 3.89 months of imports-we need all the dollars we can get!!!!!!!!! Am not too sure about the tight monetary policy he is advocating for though. You can be sure that commercial banks will raise their interest rates if the CBK pursues this. There’s a high chance that that could slow down economic growth, the last thing we would want to see is slow economic growth coupled with inflation. That being said a rate increase may be necessary if the Shilling hits new lows (another 0.25% perhaps?)…

      Cash transfers to combat food shortages may be a good idea but it would be best if the cash for this is sourced from cutting government expenditure rather than creating totally new government spending…

  3. Interesting thing about alot of the proposals you’re making is that they need to go through Parliament/ the cabinet for approval… Je pense. But realistically speaking the agenda items are: 1. Hague 2. Constitutional Implementation… so we’re lucky if these things get airtime before the next general elections…

    Thereafter, they’ll have to go Senate as well…

    Is there nothing else that can be done?

    *Back in a minute… a kenyan minute*

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