Why Kenyaâ€™s high GDP growth is not putting food on table
A farmer in Matunda between Eldoret and Kitale will today eat his ugali with boiled vegetables because he cannot afford to buy cooking oil to fry his delicacy.
The farmer is not really poor, his bountiful harvest is partly behind the rise in Kenya’s gross domestic product (GDP) which increased by 6.3 per cent in the second quarter of 2018 compared to 4.7 per cent during a similar quarter in 2017, on the back of heavy rains that impacted positively on agricultural output.
However, his crop is stuck in the silos because he is unable to sell it above costs incurred during planting, to be able to afford the little conveniences in life.
Pwani Oil Commercial Director Malde Ramesh, who visited the farmer, says he was appalled by how much Kenya’s buying power has been eroded that homes can barely afford basic necessities and have to do without the bare minimums.
He was confronted with this reality when touring the market in Western and North Rift in the last week doing word-of-mouth marketing.
In one of the homes he visited, he was told that they were prepared to boil the vegetables rather than fry it because all they needed was a meal.
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“He did not have enough money yet he is a maize farmer, with the maize sitting in his farm because he is not getting the right price,” Ramesh said.
“I believe that in the cooking oil industry we are a necessity product and if people slow down consumption of (such) products that says a lot in terms of disposable income availability.”
The mainstay of Kenya’s economy is agriculture, which means that the plight of the maize farmer is one of the issues causing the decline in disposable income.
Last year there was drought that affected production; this year maize is plenty but the price is ridiculously low to an extent that farmers cannot recover costs.
According to the Kenya National Bureau of Statistics, one kilogramme of loose grain of maize fetched Sh42.30 in the market this month, down from Sh57.84 last year while farmers could only get Sh72.80 on a kilo of tomatoes, down from Sh103.40.
Ramesh says as a result of empty pockets, consumption is worse than it was a year ago when Kenya was in the throes of repeat political competition which was seen as the lowest point in the economy.
“We have absolutely seen a decline in consumption. Last year same time we were in the election period and obviously demand and disposable income was affected so we were at a low. This year we are lower,” he said.
This is despite the government doing all it can to kill illicit trade through a multi-agency task force that should mean genuine manufacturers would be able to sell more.
Kenyans did not suddenly find themselves broke, it has been a slippery slope that can be traced to the challenges of the retail sector, the home of disposable incomes.
Generally, after you have satisfied the basic needs including paying the househelp, rent and bills as well as fees, you are able to go to the supermarket and spend extra cash on that luxury item.
If you cannot do that, then a supermarket or that local boutique can only sell bread or hair braids which cannot sustain the employees and pay for the investment in luxury items.
It started with Uchumi, which besides its supply woes felt the pinch of thinning pockets. A year later, Nakumatt sank, suffering from the twin effects of lower sales against binge expansion that had amassed too much debt.
Clothing retailer Deacons East Africa published a profit warning on October 9, 2017 and has lost the Mr Price franchise as well as closed a number of stores including the baby shop store at the Junction, 4U2 store at the Capital Centre mall on Mombasa Road and a discount store at the Thika Road Mall.
It also closed down one logistic centre and collapsed its two warehouses to further save on costs.
Initially, the country’s diminished purchasing power and doubts on the growth story of the Kenyan middle class was blamed on job losses and temperatures of an election year. The capping of interest rates and subsequent credit squeeze has also reduced disposable income and hampered economic growth.
Nine months into the year has seen the economy spring back but this has not been the magic bullet to raise spending power.
“The shopping basket has been reducing in value even prior to the value added tax (VAT) on fuel,” says Retail Trade Association of Kenya Chief Executive Wambui Mbarire.
“We are yet to track the second quarter figures but the patterns vary; some places it has stayed the same, for some it has dropped and others it has actually increased.”
Market players believe that the consumer spending power has been eroded by the severe taxes and little has been done to increase meaningful employment or offer relief to the low-income consumer to enable them spend.
Last year, when the government was wooing voters, Treasury Cabinet Secretary Henry Rotich announced a new taxation schedule on incomes, which was expected to put more money in the pockets of the least-paid workers.
Expansion of the tax band for the second time under the Jubilee administration raised the minimum taxable income from Sh11,135 to Sh13,486.
It would see a worker who is paid a salary of Sh13,000 make a Sh95 saving each month as their pay would not be taxable.
Monthly personal relief, which is extended to every salaried worker regardless of the level of pay, also increased by a tenth from Sh1,280 to Sh1,408.
Compare it with South Africa where individual income tax ranges from 18 per cent for income below R188,000 per year (Sh1.3 million) to 41 per cent for amounts over R701,300 (Sh5 million).
The progressive tax threshold of R75,000 (Sh535,000) means that anyone earning less than this amount pays no income tax.
Thus, if you earn less than Sh40,000 equivalent in South Africa, you pay no tax hence you have higher purchasing power.
With piecemeal relief the government - which has run a huge deficit over the years that has necessitated borrowing - has now turned focus on taxes to pay back the debt.
Institute of Certified Public Accountants of Kenya (Icpak) chairman Julius Mwatu says as much as VAT on petroleum products is meant to supplement domestic revenue mobilisation, public interest should be prioritised before tax enforcement.
“All the stakeholders including investors and consumers through their elected representatives needed to be incorporated and their views taken into consideration,” he said.
The Icpak chair said the government should look at other areas to widen the tax net because everyone is limited and that is why MPs interacting with the people on the ground are uneasy about the taxes.
“The housing fund and the value added tax on fuel are direct taxes and at the end of the day the final consumer will be affected and they are asking, ‘Can we look at any other way of raising the money?’” Mr Mwatu said.
The new taxes have made things expensive for Kenyans, with the cost of basic goods growing by 5.7 in September, up from 4.04 per cent in August.
This was the highest rate since October last year when Kenya had a repeat election that disrupted the economy, with inflation climbing to 5.72 per cent.
“When the value added tax was imposed at the beginning of September at 16 per cent, we saw the first round of effect which was a direct transmission on CPI (consumer price index) of about 0.4 per cent,” Central Bank of Kenya Gorvenor Patrick Njoroge said on Wednesday during a monetary policy briefing.
He said there was then a second round effect where other prices also went up as a result; for instance, transport which rose about 0.6 per cent as some lines had adjusted to the higher VAT.
“We expect that it will take a few months for the inflation to seep in and at eight per cent going forward will come down. Food inflation to continue coming down as well as energy especially as the Lake Turkana Wind power and Garissa solar power inject 360 megawatts. The two were to be commissioned this month which would improve stability in supply and provide cheaper, cleaner energy,” Dr Njoroge said.
The Monetary Policy Committee (MPC) was forced to hold the benchmark lending rate, fearing that if raised, banks would continue denying people credit essentially making Kenyans poorer.
The MPC position has been constricted by the law that caps interest rates since the decision to lower the Central Bank Rate to encourage lending in May and July saw loan growth stagnate at 4.4 per cent, meaning Kenyans are not getting enough money from banks to spend and invest.
“It is a nightmare for this economy and what it is doing is actually squeezing credit out of the economy and increasing the liquidity crunch that we already have,” Pwani Oil’s Ramesh said.
The government has also introduced new statutory deductions on salaries besides the National Hospital Insurance Fund and National Social Security Fund, charging 1.5 per cent of an employee’s income which will be matched by the employers to go into a housing fund.
But even as the State milks dry every penny from the formal worker to achieve the Big Four Agenda, market players warn the fruits will not mean people will have food to eat.
“The challenge that the economy is facing today is the availability of disposable income in the market. So while the Government is focused around the Big Four, the problem remains: While you industrialise and manufacture more, who is going to consume it?” posed Ramesh.
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