Why Kenya should deal with imported inflation

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inflation

While multilateral agencies and governments across the world are avoiding explicit mention of the word “recession”, there is every indication that a number of inflationary factors are pushing global economies in this direction.

Economies of many countries (including Kenya) continue to stagnate as costs of imported oil, foods, and other goods continue 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 costs of imported goods thus fuelling inflation.

The recent surge of Covid in China has further slowed down the recovery of supply chains which are responsible for dispatching thousands of tons of manufactured goods across the world.

The invasion of Ukraine by Russia three months ago has further disrupted global food and energy markets leading to further price hikes and inflation across the world.

Even before the invasion, costs of oil and gas across the world were already going up, due mainly to supply/demand imbalances as the world recovered from Covid while struggling to position itself for the energy transition.

Specifically for Kenya, prolonged droughts and disrupted supply chains for grains and oilseed imports from the Ukrainian war zone, have resulted in significant increases in prices of imported food, which is fuelling 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 need to re-prioritise its agenda so as to address immediate global and local inflationary challenges. It will be a case of austerity measures to address costs of living and socio-economic sustainability, with feeding of the national ranking as a national emergency. How to fund food imports, and where to source them will definitely be a challenge.

Energy inflation, both electricity and oil, will remain a challenge that cannot be wished away. As droughts continue to reduce production of hydro power, more thermal generation will be needed at a time when prices of fuel oil imports are going up, and the shilling/dollar exchange rate is on the rise. And manufacturers will be waiting to pass on electricity cost increases to consumers of locally manufactured goods.

Medium to longer term, the incoming government will also need to rework the least-cost power generation plan, this time weighting it heavily on cheaper and sustainable renewables. How to gradually disengage existing thermal power producers will remain work in progress.

Turning to oil, even President Biden of USA unsuccessfully tried to reign in the high pump prices only to learn that global oil markets have their own unique behaviour which follows global supply/demand swings. Prices of oil are currently above $100 and could go higher depending on geopolitical events happening around the world.

Oil-driven inflation will continue to impact Kenya as happening all over the world. The only review that the government can undertake is on taxation (VAT and various levies ), subject to concurrence by IMF which has made imposition of oil taxes a conditionality for lending to Kenya. Oil price subsidy is an unsustainable anathema that should never have happened.

There are other economic parameters impacted by increased import costs with the key one being the balance of payments. At a time when there is a perceived scarcity of dollars, increased costs of imported oil, food and other goods will upset the balance of payment and also the shilling/dollar exchange rate as importers compete for scarce dollars.

Higher exchange rates will further hike imported inflation. Increased costs of imports will also be competing with financing demands for existing and future foreign debts.

Past experience informs us that the inflow of new Foreign Direct Investments (FDIs) will not start until after investors have assessed the investment policies and climate by the incoming government. This caution by investors is common during every election in Kenya, and it takes about one year before the free flow of FDIs commences.

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

It is important that Kenya understands and sufficiently reacts to critical inflation sources, for indeed this is the only way we can ensure socio-economic stability and sustainability.

George Wachira, Petroleum Focus Consultants, [email protected]

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