What the next government should do to lift Kenya from economic doldrum

The annual inflation rate in Kenya hit 7.9 per cent in June, breaching the upper limit of the Central Bank’s target range of 2.5-7.5 per cent for the first time since August 2017.

Inflation has been rising since March as a consequence of disruptions caused by the war in Ukraine.

It stood at 8.3 per cent in July.

That said, upward pressure came mostly from prices of food and non-alcoholic beverages (13.8 per cent vs 12.4 per cent in May); transport (7.1 per cent vs 6.4 per cent) and housing and utilities (6.8 per cent vs 6 per cent).

On a monthly basis, consumer prices were up 0.9 per cent, after increasing 0.8 per cent in the previous month.

The annual inflation rate accelerated to 7.1 per cent in May, from 6.5 per cent in the previous month. 

Ordinary people are struggling more and more every day with the price of fuel, food and other basic commodities.

The industry is being challenged to remain competitive with input and transportation costs rising rapidly and shortages throughout the global economy driving scarcity, threatening to push already punishing costs even higher.

How did we get here? 

Kenya has made significant political and economic reforms that have contributed to sustained economic growth, social development, and political stability over the past decade.

However, its key development challenges still include poverty, inequality, lack of transparency and accountability, climate change, continued weak private sector investment and the vulnerability of the economy to internal and external shocks. 

Kenya ushered in a new political and economic governance system with the passage of a new constitution in 2010 that introduced a bicameral legislative house, devolved county government, and a constitutionally tenured Judiciary and electoral body. 

The first election under this new system was held in 2013. From 2015 to 2019, Kenya’s economy achieved broad-based growth averaging 4.7 per cent per year, significantly reducing poverty (which fell to an estimated 34.4 per cent at the $1.9/day line in 2019).

In 2020, the Covid-19 shock hit the economy hard, disrupting international trade and transport, tourism, and urban services.

Fortunately, the agricultural sector, a cornerstone of the economy, remained resilient, helping to limit the contraction in GDP to only 0.3 per cent. 

In 2021, the economy staged a strong recovery, although some sectors, such as tourism, remained under pressure.

GDP growth is projected at 5 per cent in 2022 and the poverty rate has resumed its trend decline after rising earlier in the pandemic.

Although the economic outlook is broadly positive, it is subject to elevated uncertainty, including through Kenya’s exposure (as a net fuel, wheat, and fertiliser importer) to the global price impacts of the war in Ukraine. 

The Kenya National Bureau of Statistics (KNBS) data on the cost-of-living index — known as the consumer price index (CPI) – showed that a kilo of edible cooking oil rose by 47 per cent year-on-year, retailing at an average of Sh370.71 in major towns around the country compared to Sh252 in the same month last year.

Similarly, the retail price of 500 grams of cooking fat also rose by 44.6 per cent to retail at an average of Sh175.9 compared to Sh121.7 in May last year. 

The increase in prices of cooking oil is due to the disruption in the supply of palm oil, the main ingredient used to manufacture cooking oil, from countries such as Indonesia and Malaysia.

Palm oil is also used to manufacture detergents and cosmetics, which explains why you have been paying more for bar soap and laundry soap.

Impact on household budgets

For 800 grams of bar or laundry soap, consumers paid an average of Sh153.7 in May, an increase of slightly over a fifth compared to Sh122 in May last year.

Five hundred grams of detergents retailed at an average of Sh192.9 compared to Sh165.5.

There was no respite for motorists despite the fuel subsidy. A litre of kerosene, diesel and petrol rose by 21.3 per cent, 21.5 per cent and 18.7 per cent respectively in the period under review. 

Wheat products have also been on the rise, owing mainly to the Russia-Ukraine war, two of the largest exporters of the cereal.

A 2kg of wheat flour rose by almost a third to Sh166 in the review month compared to Sh129 in May last year.

A 400g white bread retailed at an average of Sh58.15 compared to Sh53.86 in May last year.

A 2kg packet of maize flour retailed at an average of Sh147.57, an increase of 23.8 per cent compared to last year. 

This is even as the Central Bank of Kenya (CBK), whose main function is to stabilise the prices in the economy, sought to slam the break on the fast pace at which prices increased by raising its benchmark lending rate for the first time in seven years.

By raising the rate, the financial regulator was signalling higher interest rates charged by banks, which would then reduce the supply of money into the economy. 

Last year, the economy grew by 7.2 per cent as it recovered from the aftershocks of the Covid-19 pandemic.

However, the International Monetary Fund (IMF) expects it to slow down to 5.7 per cent this year.

Kenya is mostly importing the high cost of living in advanced countries with the war in Ukraine exposing the underbelly of globalisation.

Our proposals to the next government are as follows: Short-term subsidies and incentives

A subsidy refers to the discount given by the government to make available the essential items to the public at affordable prices, which are often much below the cost of producing such items.

Specific entities or individuals can receive these subsidies in the form of a tax rebate or cash payment.

Fuel subsidy means that a fraction of the price that consumers are supposed to pay to enjoy the use of petroleum products is paid by the government to ease the price burden.

An incentive is defined as something that encourages someone to do something or work harder such as giving farmers cheap inputs to improve their land.

An incentive can also be a payment or concession to stimulate greater output or investment such as a tax incentive for investing in depressed areas.

But incentives are not just economic in nature – incentives come in three flavours: Economic incentives mean material gain/loss (doing what's best for us), social incentives mean reputation gain/loss (being seen to do the right thing) and moral incentives meaning standing for conscience gain/loss (doing/not doing the 'right' thing).

Economic incentives

Since the current subsidies on food, fuel and fertiliser cannot be sustained for long due to budgetary pressures, the next government must in the first 100 days lower the cost of food production by other means.

These would include providing ready markets for local crop producers at the optimal process through the various public agricultural produce aggregators like the National Cereals and Produce Board.

The Kenya Farmers Association (KFA) and the Agricultural Finance Corporation (AFC) must be enabled to provide cheaper and affordable sources of inputs and loans respectively for both large-scale and small-scale farmers in Kenya.

The government must notwithstanding the EAC and Comesa free trade negotiations, work out a formula to protect local producers from being negatively affected by competitive food imports from the two regions. 

Ways must be found to keep costs of fuel, electricity and LPG down to increase household disposable incomes as well as make local manufacturing competitive to promote local jobs while lowering the balance of trade to the benefit of Kenyans.

One way to do this would be by eliminating the multiple levies now in place, which eventual uses are, anyway, largely unaccounted for and inefficient.

Further, lowered fuel prices will contribute to a reduction in the cost of doing business, especially for the public transport sector and industry.

Social incentives

To build the trust of Kenyans, the next government must protect its reputation by being seen to do the right thing.

The trust of Kenyans in key institutions of governance such as the police, the courts as well as the public service must be restored.

It is not the time to splash on new vehicles and flashy infrastructure projects, but to focus on service provision and addressing key challenges that are facing the common people.

Moral incentives

The next government needs to stand for conscience gain by actually doing the 'right' thing. Kenyans of all walks of life are hungry for a conscientious state that stands for the right thing and actually puts their money where their mouth is.

Fighting and eliminating corruption is the single most important talk the new government should embark on.

It is not the right time to reward obvious cronies and family members with posh government jobs but emulating Singapore; it is time to promote meritocracy while shunning mediocrity, especially for key positions that the public’s trust needs to be built on.

As soon as the new government is sworn in, it needs to hit the ground running and implement interventionist sustainable policies and programmes that will reduce the cost of living from day one. 

The new government needs to lay out a plan and roll out an economic stimulus and recovery plan within the first 100 days.

In the agriculture sector, there is a need to initiate innovative and entrepreneurial approaches to agriculture and promote agro-processing and value addition by reviewing policies, laws, standards and norms to guide the sector to introduce a minimum return guarantee framework for farmers.

The livestock sector needs to be reinvigorated through improved access to affordable credit facilities for production and the establishment of an insurance scheme backed by an appropriate legal framework.

To promote environmental conservation and protect our wildlife resources, the new government should propose a life sentence as punishment for the offence of poaching, trafficking, and possession of ivory and begin progressive investment in high-level surveillance for national and wildlife parks.

Through the Kenya Wildlife Training Institute (KWSTI) and other institutions of higher learning, the government will promote research and innovation aligned to the exploitation, utilisation, conservation and management of the environment and natural resources.

Mr Gitobu Imanyara is a legal expert and former MP for Central Imenti. Ngure Mwaniki is a consulting economist, and Robert Gichira is a professor of Entrepreneurship. Tomorrow in the Daily Nation: How to tap the blue economy, energy and housing sectors, and addressing urbanization and unemployment