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Kenya’s cost-of-living crunch

By Morris Kiruga, in Nairobi
Posted on Thursday, 16 May 2019 17:11

Rising fuel and food prices are beginning to squeeze Kenyan consumers. REUTERS/Thomas Mukoya

Rising oil prices, poor rains and government overspending are all putting pressure on consumers' budgets. Some analysts are predicting more pain in the coming years.

Fuel prices in Nairobi rose again on Wednesday, further increasing the likelihood that Kenya’s inflation rates will continue to rise for the next few months.

The industry regulator, the Energy and Petroleum Regulatory Commission (EPRC), announced a price hike that now brings a litre of petrol to KSh112.03 ($1.11) in Nairobi and as high as KSh120.85 in some towns. Pump prices for diesel and kerosene rose as well, by KSh2.24 and KSh2.40, respectively.

This is the third consecutive price hike by the regulator, which it blamed on increased landing costs and a weaker shilling.

  • “This is bad, really bad,” Moses Kimani, a cab driver, told The Africa Report in Nairobi. “I’m not sure what I’ll do if fuel prices go any higher than this.”
  • Maximum fuel prices are set on a monthly basis by the EPRC, but fuel stations rarely ever charge anything but the set maximum. With 8% value-added tax (VAT) introduced last year, Kenyans now have to shoulder multiple taxes per litre.

Players in the transport industry, like Kimani, will feel the direct impact of the recent price hike, even as the country braces itself for some of the highest inflation in recent years. The price hike’s biggest victims though, will be consumers, who will have to shoulder the extra cost in almost every other good and service they consume.

Figures released by the Kenya National Bureau of Statistics last month show that inflation stood at 6.58%, the highest it has been in 19 months. This is still within the government’s range of projections, and its upward trend in April was mainly caused by higher food prices.

  • With failing rains and increased prices of key staples such as fuel, electricity and food, inflation for May will most likely be higher.

The currency question

The fuel price hike also brings the health of the shilling’s exchange rate back into focus.

A report by Nairobi-based Amana Capital released last week claimed the shilling is overvalued by 30%, significantly higher than the 17% the IMF claimed last year. While the Amana recent report did not trigger as spirited a response from the central bank as the IMF one did last year, it sparked debate on the health of Kenya’s currency. The government is worried because a devaluation would make imports more expensive and raise the cost of paying loans taken out in foreign currencies, like yuan and US dollars.

  • The Amana report, titled ‘Kenya’s Economic Puzzle: Putting the Pieces Together’, analysed the current state of different indicators and the reliability of some key statistics, such as the currency exchange rate.
  • Its analysis is grim, describing ‘an economy which is all set up to implode waiting for a spark. In the short run 3-5 years, the current framework will manage to maintain order and a slow pace growth rate though some of the statistics are questionable. However, in the long run, we foresee a drastic drop in the Kenya shilling which will be the spark that will implode the whole system.’

The suggestion that Kenya and some of its neighbours have been propping up their currencies is not exactly new, and analysts see foreign-currency debt exposure and interest rates as the main reasons why central banks would be working hard to keep currencies overvalued.

Conversations among economists on the recent report by Amana Capital ended up back at the same issue as the earlier IMF one: on the methodologies the company used in its analysis.

  • “There is nothing wrong with using the exchange rate to reflect on purchasing power, but to use it to explain overvaluation of a currency is misuse of facts because there are many drivers that influence the Consumer Price Index including fiscal policies,” Tony Watima, an economist, wrote in The Business Daily.

Meanwhile, Kenya has opened the sale of its third eurobond in five years. The current offering, which will be listed on the Irish and London exchanges, is meant to help to service debt obligations and plug budget deficits.

  • Questions that might make investors wary of the bond include the fact that despite public pronouncements of the need for austerity and financial responsibility, the Kenyan government has shown no slowdown in its spending.
  • Just last week, it emerged that Kenyan legislators, already among the best paid in the world, had taken advantage of a court ruling and backdated their housing allowance to August last year. That new allowance will now cost Kenyans an extra KSh104m per month over and above the already subsidised mortgage scheme offered to legislators.
  • Treasury cabinet secretary Henry Rotich has also filed budget documents that show the government is also intending to increase budget allocations to some key functions, such as the presidency, the military and some of the same administrations that have recently been riddled with corruption and wasteful spending.

Another major of point of concern might be why, despite all efforts, Kenya is still not meeting its revenue collection projections.

  • 38 Kenya Revenue Authority (KRA) employees were arrested on Friday last week after what the authority and the police said was a four-month sting. The employees, who work in both the domestic tax department and customs and border control, have been arraigned in court this week and are being held under police custody. 48 more are on the run from the police.
  • According to prosecutors, they will face charges that range from tax evasion to accepting bribes.
  • When the KRA employees appeared in court on Monday, many were in various disguises, from hoodies to sunglasses and scarves around their faces. They succeeded in hiding their faces but ended up looking like train robbers.
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