How State cushions the rich at the expense of the poor as cost of living soars
By Dominic Omondi
| May 10th 2022 | 6 min read
In Nairobi, just like in many other cities, some families are more equal than others.
It is the harsh reality of life. But societies try to make this reality less painful, lest it morphs into bigger social problems like crime and prostitution.
Life has recently been harsher for the poor households in Nairobi who have been hit the hardest by the spike in the prices of food, an analysis of official data shows.
Unfortunately, the government has not done a splendid job at cushioning the urban poor against the spiralling food prices.
If anything, it seems to have protected largely the middle class and the rich who own cars with a fuel subsidy, which the International Monetary Fund (IMF) in February described as regressive, saying it is poorly targeted and leads to inefficient allocation of resources.
The government — which says it has made peace with the IMF on this issue — insists that without the subsidy, prices of almost everything, including food, which takes close to half of the poor families’ income, would have gone through the roof.
“Fuel price is a trigger to the cost of living: Transport, food and all logistics,” said National Treasury Cabinet Secretary Ukur Yatani.
In his Labour Day Speech, President Uhuru Kenyatta noted that without the fuel subsidy, everything transported by diesel would have gone up by 25 per cent.
Data from the national statistician, Kenya National Bureau of Statistics (KNBS), shows that in April food prices rose by 12.15 per cent, the fastest food inflation in two years.
Analysis of different weights for items used to generate the cost of living index, technically known as the Consumer Price Index (CPI), shows that around 24 per cent of the items in a typical poor household’s shopping basket comprised of items whose prices shot up last month due to a cocktail of factors, including the war in Ukraine, drought and the aftershocks of Covid-19 pandemic.
The items were mostly foodstuffs. They included cooking oil, onions, wheat flour, potatoes, sugar, milk, beef, oranges and tomatoes.
The prices of laundry soap and rent for a single room also jumped last month.
For a typical middle-class family in Nairobi, these items only occupied 14 per cent of their shopping basket. It was just under 10 per cent for the rich in the capital.
The weight of these items in the shopping basket of a typical Kenyan family was 20 per cent.
This is a clear indicator that the high cost of living has disproportionately hit the urban poor and families in rural areas the hardest.
The explanation is quite simple. Take cooking oil, for example, which rose by a blistering pace of 41 per cent in April compared to the same month last year.
Analysis of CPI shows that for every Sh100 that a poor family in Nairobi spends, Sh1.20 is likely to go to cooking oil. For the middle class, it is 75 cents, while for the rich it is negligible.
In other words, even if the prices of cooking oil doubled, the rich families would barely feel it. However, an increase in the prices of cooking oil by two-fifths might force poor families to make serious adjustments to their budgets.
The high food prices have put Nairobi on the global map, with Kenya among the countries in sub-Saharan Africa whose citizens experienced a spike in food prices, according to a recent report by the World Bank.
The report notes that the rate at which food prices in Kenya increased over one year — technically known as food inflation — was close to that in war-ravaged countries on the continent.
“Sudan, Ethiopia, Angola and Kenya have the highest rates of food inflation in the region as of February 2022,” said the World Bank in its latest edition of Africa’s Pulse, a bi-annual publication that reviews the continent’s economy.
The report noted that Kenya was among the countries that experienced two-digit food inflation in the region. More than four out of five countries experienced year-on-year food inflation that exceeded five per cent.
The middle class and the rich could have been worse off if pump prices (which have zero space in poor families’ shopping baskets) could have been left alone as other countries have done.
However, the prices of petrol and diesel have been subsidised, a situation that has seen pump prices of these petroleum products remain lower compared to other countries in the region.
The irony of this subsidy is that not only has it resulted in fuel shortages, but it has also been given to families that could have paid for the products even at a higher price of Sh171 for petrol.
Mr Tobias Rasmussen, IMF’s representative in Nairobi, told Bloomberg, a business news publication, that the inefficient allocation of subsidies in Kenya is because energy products have a higher share of the budget among high-income groups.
For the poor, there is no major reprieve. Their hope hinges on key farming areas receiving ample rains, which will, in turn, drive food prices down.
This is even as the government says it has started implementing a fertiliser subsidy, which it hopes will help bring down the cost of foodstuffs.
In the current and next financial year, the government has set aside Sh5 billion to subsidise fertiliser, a key input in food production.
“The government takes part of the cost to make it affordable to the farmers who are going to access fertiliser,” Mr Yatani said last Thursday.
The Treasury boss added: “Those interventions are going to stabilise food prices the same way we have done for the fuel prices.”
Some of the food items whose prices have gone up such as onions, potatoes, and sugar can benefit from cheap fertiliser. However, farmers have already planted using expensive fertiliser whose prices have more than doubled, said Dr Timothy Njagi, a research fellow at Tegemeo Institute, a public policy think-tank.
“Farmers are going to recoup their costs first,” he explained.
Dr Njagi, an agricultural economist, also noted that the subsidised fertiliser is going to coffee and tea farmers, who already have access to cheap fertiliser from their co-operatives such as the Kenya Tea Development Agency.
But the problem is with items that are mostly not locally produced such as wheat, which has led to a spike in prices of wheat products, including wheat flour by nearly a fifth.
Kenya imports wheat from Russia, Ukraine, Argentina, Canada, the US, Germany and Poland.
The price of cooking oil has shot up due to a shortage in the supply of palm oil, a critical ingredient in the production of cooking oil and soaps.
Initially, the prices of palm oil spiked due to limited supply triggered by unfavourable weather, infrastructure issues and the Covid-19 pandemic.
Indonesia, one of the countries where Kenya buys its palm oil, has recently restricted exports, worsening the crisis.
Besides Indonesia, other Asian countries where Kenya imports its palm oil from, forking out over Sh50 billion worth of its foreign exchange reserves are Malaysia, Cambodia, Thailand, China and India.
As far as wheat and cooking oil go, offering cheap fertiliser will not do much to bring their prices down.
President Yoweri Museveni’s proposal to Ugandans that they turn to tubers such as cassava instead of expensive bread might be a hard sell in Kenya.
Consumption of wheat and wheat products, such as bread, cakes, wheat buns or scones, biscuits, breakfast cereals and pasta, has been on the ascendancy as Kenya has become more urbanised.
Poor families in Nairobi spend twice as much of their income on wheat products as the middle class. The weight of wheat products in the shopping basket of Nairobi’s poor families is nearly thrice that of the rich.
Not only is there a low appetite for tubers such as sweet potatoes and cassava in urban areas, but they are also quite expensive.
Then, what is the way out of this crisis, which some analysts fear might last — or get worse — for as long as the war in Eastern Europe rages on?
There are no quick fixes. Mr Kennedy Gichinga, an economist, reckons the government can reduce value-added tax (VAT), or sales tax, on key household items and focus on raising revenue from the property.
Mr Tony Watima, another economist, has a similar diagnosis, noting that the government can have these measures passed in Parliament and implemented as soon as possible. But Mr Watima agrees that the task is not easy.
“The high cost of living for the urban poor is not temporary. Reviving the economy back to providing sustainable income that can uplift the urban poor is not a quick-fix thing,” he said.
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