Cost of living set to go up as high fuel prices weigh in

By NJIRAINI MUCHIRAOver the past five months, Kenyans have enjoyed relative calm as the economic turmoil that characterised part of last year has been easing.Since last November, inflation has been on the decline. The prices of fuel have been falling due to a decline in the international crude prices and a stronger shilling, while interest rates, though still high, have stabilised.Traders shop at one of the supermarkets. Higher fuel prices will have ripple effect on the price of commodities leading to high cost of living. [Photo: FILE/STANDARD]While the relative stability of the macro-economic factors have translated in a resurgent of economic activities, experts reckon that another round of turbulence could be coming. Government efforts to achieve the equilibrium could be eroded by external factors.Monetary policySpeaking on Wednesday during a Petroleum Institute of East Africa forum, Finance Minister Njeru Githae said the Government intends to continue tightening monetary policy to dampen inflationary pressures and stabilise the exchange rate.In particular, Githae said the Government was hoping inflation could maintain a downward trend to a single digit in the coming months."Inflation is going down and we are hoping the trend can continue for another month or two," he said, adding that stability is the primary focus for Treasury and the Central Bank of Kenya, which has maintained the central bank rate at 18 per cent since November.Inflation peaked at 19.72 per cent in November last year from 5.42 per cent in January, but started declining to 15.61 per cent last month.But is Githae unrealistically optimistic? This is the question in the minds of many as all signs show the country could witnesses the return of rising inflation driven by high fuel prices and its ripple effects.Low rainsBesides, the meteorological department has predicted depressed and poorly distributed rainfall during the March-May long rain season. Political temperatures are also rising fast as the country gears up for another crucial transitional General Election. The outlook seems gloomy."Achieving a single digit inflation under the current environment is quite ambitious. Probably the government should hope for about 10 per cent considering also where the country is coming from," said Stanley Ngaine, the chairman of Sterling Capital Ltd.Ngaine said since the international fuel prices are on the rise and projections of insufficient rainfall means the country cannot avoid imported inflation. In recent months, the prices of crude oil on the international market have recorded significant surge from $114 per barrel in January to $127 per barrel last month, which translates to 11.2 per cent rise.In terms of refined petroleum products, the price of petrol has surged by 16.9 per cent $975 per tonne in January to $1,140 per tonne last month while diesel has increased by 7.1 per cent, from $1,011 per tonne in January to $1,086 per tonne.The trend, which is expected to continue in the coming months as tensions in the Middle East intensify due to Iran’s controversial nuclear programme that has seen the UN Security Council impose more sanctions to the country. The instability in Nigeria and halting of oil production by South Sudan, has not only resulted to a return of rising pump prices but will instigate a return to high energy costs.Thermal powerWith KenGen being on record that the current rains are inadequate and will not fill the dams, the country could be headed for expensive thermal power generation to meet the rising demand hence higher charges and inflation.Kenya is a net importer of petroleum, which accounts for about 22 per cent of the primary energy sources and the demand has been growing steadily at an average of 10 per cent over the past decade.The country’s petroleum import bill stood at a staggering Sh166 billion as of June last year, equivalent to $100,000 barrels per day. Experts observe this could fuel inflation as manufacturers pass on increased costs to consumers by increasing the prices of basic commodities.’Higher inflation"There is high likelihood that even if inflation declines this month, come May and June, we could see a reversal in trend," said Ngaine.Though the government had made it clear it plans to maintain a tight monetary policy at least in the immediate future, more so to tighten liquidity, the country’s continued susceptibility to external factors is rendering such efforts impotent.But Githae hopes the recent discovery of oil in Turkana could save the country the dangers of fuel-driven inflation if found to be commercially viable."Oil discovery in Kenya would mean reduction of the petroleum import bill and have cheaper oil for local consumption," he said.The discovery will also help shore up foreign exchange reserves that have drastically reduced to below $4 billion – equivalent to between three and seven months of import cover.

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