How subsidies save and harm Ruto

President William Ruto. [Kelly Ayodi, Standard]

President William Ruto faces a major acid test as pressure piles on his administration to bring down the high cost of living. 

Restless Kenyans want the new administration to put measures in place to shield consumers and companies from the full impact of surging energy and food costs. Ruto faces the dilemma of trying to reduce the fiscal hit from vast subsidy bills on strained public finances placed by the previous government and the need for economic reform amid the risk of rising discontent and social unrest if the economic situation gets worse. 

Analysts say it is a pick-your-poison environment for Ruto’s administration which faces public discontent over economic conditions — and the risk that discontent will only get worse in the absence of subsidies if there are no additional urgent interventions.  The President has ruled out the reintroduction of subsidies that cushioned Kenyans from the blunt cost of living crisis under the previous administration.

Ruto and his economic policymakers are seen to bet that tolerating some pain now in hopes that conditions look better in a year or so is the safer option.

In his first 100 days, Ruto, then facing strong competition from his then rival Raila Odinga in the race to succeed former President Uhuru Kenyatta, had said he would prioritise investments in agriculture to increase food production locally and wean the country off expensive food imports.

Right decision

And in his recent New Year address, Ruto said his move to suspend subsidies when he took power in September was the right decision, terming them unsustainable and a risk to the economy.

In the address from State House Mombasa, Ruto hailed the decision to get rid of fuel, maize flour and electricity subsidies saying the move has set a strong foundation for the country’s economic takeoff.

He said every month the country would save Sh25 billion, which was used to subsidise the cost of the three items.

“We had to do away with those subsidies or they would cost our economy big time,” Ruto said from the Mombasa State House on New Year’s Eve. Ruto also blamed the former government for introducing the subsidies for allegedly political reasons, adding that the decision was not informed by “the science of the economy.”

“When I came into office, I found that some decisions were made for political expediency because we had an election,” he said.

But pollsters have signalled Kenyans feel the new administration must address the runaway cost of living and ditch explanations or the worsening situation risks reducing President Ruto’s popularity.

Emerging economies

A new poll by polling agency Infotrack, for instance, showed that more than half of Kenyans (52 per cent) want the cost of living prioritised by the government as a matter of urgency. The former administration turned to the consumer subsidies, favoured in many emerging economies, as a blunt tool intended to protect vulnerable Kenyans. 

As with subsidies, the bill for governments is, however, big and sometimes unsustainable, the International Monetary Fund (IMF) has warned Kenya repeatedly.

Subsidies also hinder efforts to cut budget deficits and they compete with other needs, such as public spending on roads, schools and healthcare, 

The Consumer Federation of Kenya (Cofek) weighed in on the worsening economic conditions yesterday saying the new administration must do more even as the reality of the economy favour removal of subsidies.

“Subsidies are a double-edged sword. While they are costly and unsustainable in the long run, they are inevitable on short-term basis especially if they are productive and not consumptive,” said Cofek secretary general Stephen Mutoro. “We need subsidies for farm inputs in order to achieve food security. We need affordable energy for ease all factors of inflation. But it can’t be a permanent feature.” Mr Mutoro called for targeted measures adding that cutting subsidies while not following through on austerity and cost savings on non essential items makes nonsense of the subsidies.

“While I support the long overdue government move to remove subsidies, it’s the transitionary mechanisms that are either missing and or poorly planned. You don’t wean a kid off milk drastically,” he said.

Wasteful spending

“Again, suspending subsidies assumes that other forms of pilferages like corruption and wasteful spending are equally suspended. In our case, the opposite appears true. I am not sure whether the DPP suspended new corruption or if no case exists since August. Instead a lot of graft cases have been dropped.”

Mr Mutoro claimed the budget control and fiscal discipline appears on a free fall.  “In a nutshell, closing the subsidies tap while leaving corruption, wasteful and luxurious spending intact ends up punishing the poorest of the poor - as the only option in such cases is more taxes and more borrowing,” he said.

Nairobi-based charity Oxfam says the new government needs to take urgent action to tackle the surge in food prices which is ramping up pressures on millions of households around the country.

“Withdrawal of subsidies on fuel and basic commodities by the new administration after assuming power increased prices of food, transport, and basic commodities, further contributing to making life harder for many Kenyans and worsening inequality at a time many Kenyans are hugely affected by the prolonged drought and high food prices,” John Kitui, Oxfam Kenya director told The Standard in an earlier interview.

Experts have predicted the inflationary pressures from strained supply chains on the back of the Russia- Ukraine war look likely to persist through the New Year and maybe beyond. They warn there is no guarantee of when or how much price pressures will come down, even as the world economy rebalances after the Covid-19 pandemic.

“I don’t see a solution. What I do know is that subsidies are not sustainable anymore. Kenya can’t afford it with the level of  external debt it has,” said Kunal Ajmera the chief operating officer of Grant Thornton Kenya.

“Also IMF wouldn’t allow it and we have much more to lose without IMF support. The only thing the govt can do is to curtail the wasteful expenditure, tighten the purse and hope for the price of commodities and oil to come down. However the prospects of that happening are grim.”

The Ruto administration is betting on a multibillion economic support package from the IMF and the World Bank but under stringent austerity conditions to stabilise it’s finances.

The Central Bank of Kenya (CBK) whose key monetary policy making committee is set to meet later this month has been tipped to tighten the money supply to tame inflation.

But the measure to increase lending rates that would be needed to bring inflation down more rapidly would risk sending the economy into a tailspin. Tightening money supply is set to cause economic slowdown.

Azimio has asked the new government to bring down the cost of living and shield ordinary Kenyans who are worst affected. High food and energy prices are among the factors cited as triggers of the Arab Spring uprising a decade ago.

The uprisings across the Arab world affected largely Muslim countries, including Tunisia, Morocco, Syria, Libya, Egypt and Bahrain.

Social unrest over energy prices is not exclusive to emerging economies however. A fuel tax increase set off France’s 2018 yellow vest protests, although underlying issues were often deeper rooted according to experts.

Official data released recently showed the cost-of-living crisis eased slightly in December.