Stagflation creeps in on Kenya
Motorist refuel their vehicle using a jerrycan along the Northern Bypass in Nairobi.
What you need to know:
- Stagflation is a term used by economists to define an economy that has inflation, as well as a slow or stagnant economic growth rate.
- Inflation has been mounting and for the first time in Kenya’s history, the country bought more goods from Africa than it sold to the continent.
At the onset of the Covid-19 scourge, economies contracted. Now the world is in a quagmire due to conflicts. Building tension due to pandemics, war, and erratic weather patterns, particularly drought in our region are playing musical chairs at the expense of the vast populations who are barely scraping through with reduced earnings and escalating cost of living.
Most governments across the globe have been gradually raising taxation both directly and indirectly, while economies grapple with unemployment and rising cost of living.
Product costs have increased due to higher operating expenses, an increase in the cost of raw materials due to supply chain breakdowns, higher costs of labour, consumables, general overheads and ever-rising indirect taxes.
Fuel prices are at a record high and will continue to escalate. This is giving rise to greater cost-push inflation, which occurs when some force or condition increases the costs of production. This could be caused by government policies including tax regulations, or from purely external factors such as a shortage of natural resources or as we now witness, an act of war in countries from where products are sourced.
According to the Kenya National Bureau of Statistics, the prices for staple commodities in the food basket used to compute inflation such as maize flour, wheat flour, potatoes, onions, tomatoes, cabbages, cooking oil, sugar, and kales rose by an average of 20 percent in January 2022 compared 2021. Most countries across the continent and globe share a similar story and fate.
Stagflation is a term used by economists to define an economy that has inflation, as well as a slow or stagnant economic growth rate, and a growing or high unemployment rate.
High unemployment rates further contribute to the slowdown of a country's economy, causing the economic growth rate to oscillate no more than a single percentage point above or below zero.
Economic policymakers ensure they take measures to avoid stagflation at all costs. Global economies are experiencing cost-push inflation which leads to stagflation.
Where does this fit into Africa? Economies across the continent have faced a downward spiral since the onset of the Covid pandemic in early 2020. In South Africa for instance, the results of the quarterly labour force survey indicate that the number of unemployed people continued to increase despite an indication of economic growth during the fourth quarter of 2021.
As per the Trading Economics Global Macro models and analysts’, the unemployment rate in Kenya is expected to be at seven percent by the end of this quarter.
If we look at the United States, the Bureau of Labour Statistics released the Consumer Price Index which has seen a rise in the inflation rate in the United States at close to 8.5 percent, the highest in the last 40 years. Is the US expecting a recession? Last month saw a rise in fuel and food prices in the US to the highest levels.
The story is similar here in Kenya where fuel and food prices continue to rise. Effects of inflation have been felt locally with the inflation rate going up to 5.6 percent up 0.5 percent from February’s 5.1 percent.
Inflation rates are anticipated to remain raised as the year progresses. The cost of basic food such as wheat, cooking oil, and grains are set to shoot up almost six per cent by end of April. The shilling continues depreciating against the dollar.
Inflation has gradually been mounting in recent months and for the first time in Kenya’s history, the country bought more goods from African countries than it sold to the continent, creating an unprecedented trade deficit.
Kenya's trade deficit in the 11 months to November 2021 grew to a record Sh1. 24 trillion, widened by a surging fuel and industrial goods import bill. The Kenya National Bureau of Statistics reported “a rise in imports by 29 per cent or Sh430 billion to hit Sh1.91 trillion, outperforming exports that rose by a more modest Sh89 billion or 15 percent to Sh672.6 billion” during the year 2021.
Economic policies
Countries across the continent share a similar story. In Burundi, coffee production is in free-fall due to the anger of farmers and the lack of traceability of actors in the sector. To what extent are governments stepping up actions to mitigate the impact of the Russian-Ukrainian crisis on the wallets of their citizens?
If the existing economic policies do not change, Kenya will find itself in stagflation, a perilous situation that presents a toxic mix of high inflation, high unemployment, and low growth. The danger of inflation has amplified with Russia's invasion of Ukraine and the retaliatory Western sanctions.
European Central Bank President Christine Lagarde notes that, "the Russia-Ukraine war will have a material impact on economic activity and inflation". This threat has also been highlighted by US Treasury Secretary Janet Yellen, International Monetary Fund Managing Director Kristalina Georgieva warning of wide-ranging sanctions on Russia will worsen inflation.
The Fed is raising interest rates in the United States. Interest rates do not distinguish between credit for customers and investment spending. In a bid to diminish demand sufficiently, interest rates are increased sharply.
Such monetary contraction can do considerable, lasting economic loss. Declining or lower investment is harmful to the progress desirable for sustainable development, necessitating innovation and productivity growth.
According to various economists, wealth creation and investments in advanced economies are anticipated to return to pre-Covid levels in 2023. In Kenya, however, all eyes are on the proposed Finance Bill 2022, where there is a series of proposed changes to tax policies including an alarming proposal to increase capital gains tax from five percent to 15 percent effective 1st January 2023.
These are difficult times, people are already witnessing global effects on the availability of products, shortages, breakdown of supply chains, and impacts on the availability and pricing of fuel and energy, lack of necessities.
This is the environment the world is spinning in, what we need are leaders who are willing and capable of altering this reality. Alas, we seem to have a global shortage of this too.
Ritesh Barot is a business and financial analyst, humanitarian, conservationist, occasional artist, recipient of OGW honour. [email protected]
