TOUGH TIMES AHEAD FOR KENYANS

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Presently, there are two topics that are the mainstays of any conversation by typical Kenyans: the first is of course the country’s political discourse while the second is the skyrocketing costs of living. It is not uncommon to hear a Kenyan lament, Uchumi imeharibika.

 On Monday, the 14th of March, the Energy Petroleum Authority (EPRA) released the petroleum review prices for the period 15th March to 14th April which saw diesel and petrol prices hit a 10 year high.

Diesel and Super petrol jumped by sh5 a litre to sh134.72 and sh115.60 in Nairobi respectively. This increase is bound to cause cataclysmic effects on the costs of living.

In response to the petroleum review, matatu owners yesterday threatened to hike bus fares. Additionally, the transportation costs for businesses will shoot and this increase in transportation costs will certainly be passed on to the consumer. It is almost a given that most food processing industries such as bakeries, maize millers and milk processing plants are bound to adjust upwards the prices of their products in light of the increase in the price of diesel which they use to power their machines. This will further push inflation rates higher.

Whilst the fluctuation of fuel prices and the introduction of new taxes have taken a larger portion of the blame for the hike in the costs of living, the tottering strength of the Kenyan shilling has had a part to play in this. Since the last quarter of 2021, the Kenyan shilling has been on a somewhat downward spiral hitting new daily lows. Election driven uncertainty is set to make the situation even grimmer. Analysts from Focus economics forecast that the depreciating trend will continue taking the Kenyan shilling to ksh117.7 per USD by the end of the year.

While it is normally expected that there is a direct correlation between fuel prices and inflation trends, the same has not been necessarily true in the Kenyan case especially in the last quarter of 2021. This is because, when Super petrol and diesel prices took a dip of sh 5 in October of that year after a review by EPRA, year-on-year inflation continued to soar and so did the costs of living. It can therefore be rightly argued that the weakening shilling has been the major driver of inflation and the increased costs of living in Kenya.

Depreciation means that the Kenyan currency buys lesser dollars therefore making imports dearer and exports cheaper. This is especially risky because Kenya is a net importer- In December of 2021, according to the Central Bank, Kenya recorded a balance of trade deficit of about Ksh168883 million as imports scaled an all time high of Ksh235233 million while exports stood at Ksh 66351 million.

In a classical textbook case, if the depreciation continues into the long-run, cheaper exports would drive up the demand for Kenyan exports. Consequently, since imports have become dearer, a dip in the demand for imported goods follows, shifting consumption to domestic goods. This means that there would be an increase in the domestic aggregate demand leading to demand pull inflation.   

The expected downward spiral of the Kenyan shilling coupled with the Russian-Ukrainian conflict which is bound to cause supply shocks to some of Kenya’s key imports from the two countries namely wheat means the going is certainly going to get tougher for Kenyans.

            Political factor

While it is plausible that the political debate this season has had the conversation about the economy at its epicenter, there haven’t been meaningful proposals from aspirants on how to curb the rising costs of living.

How the debate on the need to curb the high costs of living affects voting patterns this year remains to be seen.

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