Why Kenya has to deal with imported inflation

Ideas and debate

Why Kenya has to deal with imported inflation

Wednesday, May 25, 2022

While multilateral agencies and governments around the world avoid explicitly mentioning the word “recession”, there is every indication that a number of inflationary factors are pushing global economies in this direction.

Economies in many countries (including Kenya) continue to stagnate as the cost of imported oil, food and other goods continues to rise at levels that could trigger a global recession.

Global supply chains, previously disrupted by the Covid pandemic, have not fully recovered, and this has continued to increase the cost of imported goods, thus boosting inflation.

The recent rise in Covid in China has further slowed the recovery of supply chains, which are responsible for shipping thousands of tons of manufactured goods worldwide.

Russia’s invasion of Ukraine three months ago has further disrupted global food and energy markets, leading to further price increases and inflation worldwide.

Even before the invasion, the cost of oil and gas rose worldwide, primarily due to imbalances between supply and demand, as the world overcame Covid as it struggled to position itself for the energy transition.

Specifically for Kenya, prolonged droughts and disrupted supply chains for imports of grain and oilseeds from the Ukrainian war zone have resulted in significant increases in the prices of imported foodstuffs, fueling significant inflation.

This will be an uncomfortable situation for a newly elected government in Kenya when it launches itself in August.

The newly elected government will have to re-prioritize its agenda to address immediate global and local inflationary challenges. It will be a case of austerity to meet the cost of living and socio-economic sustainability, with feeding the national ranking as a national emergency. How to finance food imports and where to pick them up will definitely be a challenge.

Energy inflation, both electricity and oil, will continue to be a challenge that cannot be wished away. As the drought continues to reduce hydropower production, more thermal production will be needed at a time when fuel oil import prices are rising and the dollar exchange rate for shillings is rising. And manufacturers will wait to pass on electricity cost increases to consumers of locally produced goods.

In the medium to longer term, the incoming government will also have to recast the cheapest electricity production plan, this time focusing heavily on cheaper and sustainable renewable energy sources. How to gradually disconnect existing thermal power generators will continue to work.

As for oil, even President Biden of the United States tried unsuccessfully to rule in the high pump prices only to learn that global oil markets have their own unique behavior, which follows global supply / demand fluctuations. Oil prices are currently above $ 100 and may rise depending on geopolitical events happening around the world.

Oil-driven inflation will continue to affect Kenya as it does worldwide. The only review that the government can carry out is taxation (VAT and various taxes), subject to the consent of the IMF, which has made the imposition of oil taxes a condition of lending to Kenya. Oil price subsidies are an unsustainable anathema that should never have happened.

There are other economic parameters that are affected by increased import costs, the most important of which is the balance of payments. At a time when there is a perceived shortage of dollars, increased costs for imported oil, food and other goods will upset the balance of payments and also the shilling / dollar exchange rate as importers compete for scarce dollars.

Higher exchange rates will further increase imported inflation. Increased import costs will also compete with financing requirements for existing and future external debt.

Past experience tells us that the inflow of new foreign direct investment (FDIs) will only start after investors have assessed the investment policy and climate of the incoming government. This caution from investors is common during every election in Kenya, and it takes about a year before the free flow of foreign direct investment begins.

The world, and indeed Kenya as well, is currently experiencing significant inflationary effects, and these are pushing economic growth back with the likely eventuality of recessions.

It is important that Kenya understands and responds adequately to critical sources of inflation, because that is the only way we can ensure socio-economic stability and sustainability.

George Wachira, Petroleum Focus Consultants, [email protected]