Kenya in the jaws of spiralling inflation

In the recent past I have tried to give some idea of the prospects for Kenyans in the coming months. Prior to the Russian invasion of Ukraine I highlighted the series of deficient rains, post Covid-19 economic and social fallout and the protracted run up to the August elections as major factors.

That scenario was challenging enough in its own right and is still there. Whether the long rains will be adequate or not is now a burning question.

Then the Russian invasion of Ukraine began and the global village scenario kicked in. I tried to add on the possible implications of this even though it was early days. The most poignant point that came out was how dependent we are on that region for a significant amount of our foodstuffs and fertiliser. Now the downside of that dependency is coming into place.

Before digging in further, it is important to get the on-an- off fuel crisis in perspective, as wholesale blame cannot be put on the shoulders of the war in Ukraine or actual shortages.

World fuel and energy prices had been on an upward trajectory as much of the world recovered from Covid-19 economic shocks.

The Kenyan government decided to cushion the consumers by offering a subsidy, which was fine whilst it lasted. However, when the payments got significantly delayed,  the cash flow problems of the petroleum firms grew.

Double-edged sword

It is a classic example of how a subsidy is a double-edged sword. The intentions are noble but flaws arise in the implementation, especially if the resources are wanting.

The government is into the last quarter of its financial year and is cash-strapped anyway, so this is hardly a good time for payouts.

Obviously the Ukraine factor has put an upward pressure on energy prices all round as well and anyone buying cooking gas will have experienced a massive jump in prices.

It is clear that the government cannot sustain such subsidies and it was a matter of time before some of the price pain was passed onto the consumer. Considering that the subsidy is still there, albeit in a lesser form, then we have not seen the end of this story yet.

Before going further into the food issue, let us remind ourselves of the food poverty rate in Kenya. This is important because the real impact of the Ukraine war on food prices and the cost of living is now being piled onto an already distressed food scenario for many.

A reasonable guesstimate is that around 16 million Kenyans out of a population of 41 million suffer from different levels of food insecurity.

Therefore,  any relief must take into account the  prevailing situation and the fact that we are a net food importer even in a good year with adequate rainfall.

Ukraine fallout

The overall food situation was tight prior to the Ukraine fallout and is getting tighter. What is anybody’s guess at the moment is for how long, as the fallout could be protracted especially with regard to food exports.

Given that the warring region is a major surplus producer of wheat, edible oils and yellow maize and one of the world’s granaries, then the results are grievous. As such it is a major influencer of world prices. Taking it out of the global food chain will definitely push up prices, and that is what is happening.

It goes without saying that fuel and food prices have a tendency to spur an inflationary spiral all round.

Prices of other basic foodstuffs such as milk have risen across the board. So have the prices of cement and steel. The list is getting longer.

We are entering into a period of increased inflation,  in Kenya’s case on top of post-Covid-19 fallout, failed rains, drought and a potentially raucous run-up to an election. That mix could result in hyper-inflation.

What is happening with fertiliser could be another inflationary disaster in waiting.

Russia is the leading exporter of fertiliser in the world and Belarus is in the top six. Take them out of the supply equation for any period of time and prices go haywire.

And whilst the concept of government subsidy may appear well-intentioned, the result can actually have the opposite effect, especially if there is a challenge sustaining the subsidy.

We are seeing long queues for the subsidised fertiliser and a lot of rationing of quantities.  It is early days but the two questions that arise is how fair and equitable is it and will it be enough to ensure a reasonable crop? The third, of course, is how financially sustainable is it for the government?

The National Cereals and Produce Board is the official distributor of fertiliser.  And whilst it has the network,  it is not the most efficient of entities in terms of getting adequate supplies of the subsidised commodity.

In summary, what is emerging is a lethal combination of spiralling inflation in a number of key items, which in turn is triggering off inflation all round.

Government decisions at such a time risk having a larger element of populism than actual economic sense. The recently announced fertiliser subsidy plan is a good example. The danger is that economic recovery will be erratic, to say the least,  as a number of key downside ingredients come into play.

What is panning out is an economic slowdown which in turn will impact negatively on commercial activity. Indeed the there is an increased risk of stagflation.

The country is between a rock and a hard place; and in an election year.

Robert Shaw is a public policy and economic analyst: [email protected]