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Oil prices threaten economic recovery

By | May 5th 2010 at 00:00:00 GMT +0300

Signals that inflation rates are slowing are certainly good news for businesses and consumers. Data released by Kenya National Bureau of Statistics indicated the year-on-year rate fell to 3.7 per cent last month from four per cent a month earlier. Thanks to slower increases in food prices, the rate is at its lowest levels since October of 2005, when it was also at 3.7 per cent. (However, the two measures were calculated in different ways and are not directly comparable.)

The current ‘headline’ rate is also well below the Central Bank of Kenya target of five per cent. Weaker inflation has allowed the CBK to ease monetary policy this year and help the country’s economy rebound from the effects of the global recession, even as the rest of the world is beginning to withdraw stimulus measures.

Policy-makers in Europe, the United Kingdom and the United States have not cut rates since May last year, while India, Australia and Israel have raised rates this year. With a disinflation trend comfortably in place, Kenyans have begun benefiting from affordable credit from commercial banks after several heeded a plea by CBK to lower interest charges. The rate benefits come months after CBK cut its key rates to encourage lending.

The response by banks is providing a crucial lifeline for a number of cash-strapped manufacturers, small and medium sized enterprises and households, to jump-start their investments.

But emerging optimism is under serious threat following plans by oil marketing majors to adjust pump prices upwards, citing increased demurrage costs and rises in international crude prices.

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Already, a litre of Super petrol retails at above Sh90 mark. This is likely to climb further once the new adjustments take effect, and seriously undermine the gains on the inflation front.

With petrol and diesel prices expected to rise, the recovering business is in a quandary: Raise prices and risk losing out to competition, or keep prices low, and take a hit on profits. Many feel they’ve reached the point where they have no choice. From the jua kali operator to multinationals, the jump at the pump would start to put a squeeze on profits. This means higher prices for just about everything, from those airline tickets to maize flour.

But it is not only fuel bills that are increasing. Over the past few months, we have seen products that are transported by road increase accordingly. This is especially the case with food. Most Kenyans, with majority living below the poverty line (one dollar a day) will not keep up with the rising costs of living.

Political motivation

The reasons for oil price increases are varied. Partly they are a result of the war in Iraq and instability in the Middle East. And, lately, high transport costs thanks to piracy along the Somali coastline. With renewed threats now against Iran, and continuing rebel action in Nigeria, this is not expected to improve soon.

Another major reason is growing demand for oil in China and India. With their rapidly expanding economies, their increases in demand for oil are outstripping the world’s potential to increase production. Kenya, which is the world’s largest exporter of black tea and a major supplier of horticulture products to Europe, had been benefiting from a good start to the March-May rainy season, which ended a two-year drought. During this drought, high food prices were to blame for the soaring inflation. The onset of the rains helped ease matters.

But with the threat of higher fuel costs — a key factor in oiling economic recovery — the current optimism is likely to fade away. It is, indeed, worrying that oil companies’ desire to maintain their profit margins could stand in the way in the elusive economic recovery. Credit has gradually become affordable and it is expected that the list of lenders that loosen their purse strings would increase with time. But the rise in fuel costs and its damaging inflationary pressure may infuse uncertainty in consumers.

The economy cannot afford to lose its newfound momentum.

That is why the action by oil companies needs to be critically examined to establish if it is founded on fundamental principles or just to fill their pockets.

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