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Why Kenya is teetering on the brink of a full-blown economic crisis

Graph showing a business decline. [Getty Images]

You know you are staring into a major economic crisis when your leaders can’t feign a feeling of helplessness.

“Instead of leaders sitting down and trying to find solutions, others are going out there to incite the wananchi ‘prices have gone up, ask Uhuru.’ I, Uhuru, am I in Ukraine… what would I be doing there?” said President Uhuru Kenyatta in a speech on Labour Day on May 1.

The jibe was aimed at his deputy, Dr William Ruto, who has since turned into a fierce critic of his boss.

Dr Ruto, a presidential candidate in the August 9 General Election, has insisted that the high cost of living, which has been epitomised by a spike in the price of a two-kilogramme packet of maize flour to over Sh220, is the culmination of mismanagement of the economy ever since President Uhuru called a truce with his erstwhile competitor, former Prime Minister Raila Odinga.

“Before the handshake, a packet of maize flour was retailing at Sh80, but now it’s at more than Sh200 because, after the political deal, they suspended fertiliser and other farm input subsidies, which has resulted in high prices of food,” said Dr Ruto.

On Friday, Agriculture Cabinet Secretary Peter Munya, urged Kenyans, the biggest consumers of maize on this side of the Sahara, only matched by Malawians, to stop their over-reliance on the grain.

“I am not saying maize is bad, but you should have alternatives. When you have maize as the main source of food, it becomes a challenge when the prices soar,” said Mr Munya.

A typical Kenyan family, across the different income groups, consumes some maize in a day, said Gerald Masila, the executive director and chief executive of the East African Grain Council.

Used to make ugali, a staple dish for most Kenyan households, maize, which was brought to Kenya by the Portuguese, has been synonymous with food security.

On average, each Kenyan consumes 67kg of maize in a year, official data shows.

Although per capita consumption of maize over the years has been coming down while that of wheat and rice has been rising, maize remains the most consumed cereal in most Kenyan households.

The remarks aimed at helping Kenyans diversify their staples are not as dismaying as those of Njeru Githae, the finance minister from 2011 to 2013. Unlike Mr Munya, who urged Kenyans to diversify to other indigenous cereals like sorghum and millet to reduce their dependence on maize, Mr Githae had different delicacies.

“For example in Tanzania, they eat rats. But in this country, if you tell people to eat rats, they will not eat. Therefore, people will die of hunger and there are rats here,” said Mr Githae in June 2012.

Recently, when the Central Bank of Kenya (CBK) Governor Dr Patrick Njoroge was asked about complaints of dollar shortage coming from manufacturers, he scoffed at the suggestion of a shortage.

He said the forex market generated up to $2 billion (Sh234 billion) every month while faulting manufacturers for not following rules. “They should understand that they (manufacturers) are small in that sense and, sort of, go to the market like everyone else,” said Dr Njoroge.

The truth is that an economic crisis is brewing. One that experts fear, if not well managed, could lead to food riots. Already, in countries like Ghana, police have been forced to fire tear gas at those protesting record-high cost of living, with the protests quickly taking a political shape where members of the opposition have taken advantage of the tough economic times to push for regime change.

In Kenya, the upcoming elections, in which Dr Ruto of the Kenya Kwanza Alliance will be facing off with Uhuru’s choice of successor Raila Odinga, is increasingly complicating the policy decisions aimed at addressing the high cost of living.

A combination of factors, including the neglect of the agricultural sector, with the country increasingly relying on the importation of foods, as well as the emerging issues such as the Covid-19 pandemic and the Russia-Ukrainian war, have combined to push up the cost of living.

Last month, prices of goods and services in the economy rose to a five-year high of 7.9 per cent.

This was as prices of such basic commodities as cooking oil, maize flour, wheat flour, fuel, potatoes and carrots went through the roof.

The retail price of cooking oil rose more than half, with a litre going at an average of Sh387.98 in June this year compared to Sh255.83 in the same month last year, data from the Kenya National Bureau of Statistics (KNBS) shows.

 Wheat flour

A 2kg packet of wheat flour retailed at an average of Sh186.90 last month, an increase of 44.2 per cent compared to an average of Sh129.58 in June last year.

Prices of wheat flour also had one of the highest month-on-month increases, going up 12.7 per cent from an average of Sh165.89 in May.

An 800-gram bar of soap retailed at an average of Sh160 around the country outlets, an increase of a third from Sh123.11 in the same month last year. Petroleum products, whose increase has been slowed down by a fuel subsidy, increased by between 25 per cent and 30 per cent.

A litre of super petrol retailed at an average of Sh159.94 in the review period compared with Sh127.98 in June last year, while a litre of paraffin, mostly used by the poor for cooking and lighting, has also risen by a third to retail at Sh128.86 a litre.

Diesel, critical for mass transport as well as running heavy industrial machines, went up by 29.8 per cent to retail at Sh140.91 compared to Sh108.58 in June last year.

A day after KNBS released the report on the consumer prices index (CPI), or the cost of living index for June, the National Treasury issued a statement noting that the high cost of living was caused by factors, which “are mainly global.” These factors, said the National Treasury Cabinet (CS) Secretary Ukur Yatani, include the Covid-19 pandemic, prolonged drought and desert locusts, the Russian-Ukraine conflict and the weakening of the shilling.

However, Mr Yatani explained that the government had since initiated some interventions aimed at cushioning Kenyans against the high cost of living, including the removal of import duty and levies on imported maize. This, said the CS, would allow individuals to bring in maize to bridge the deficit of 2.2 million bags.

The waiver is for 540,000 tonnes (six million bags) of white maize for July and August before the next harvest.

Millers, however, have argued that the period is too short for importers to get maize from areas such as Mexico and sail through the seas for three months. Moreover, due to the high cost of fertiliser, the government has launched a fertiliser subsidy programme and has since released Sh5.8 billion for this input and others in what is aimed at improving the yields and stabilising prices. Another Sh3.5 billion has been released to the tea and sugar sectors to help boost production and pay farmers.

Because wheat from Russia and Ukraine has not been flowing into the country easily, several countries, including the US, Brazil, Argentina, Spain, Kazakhstan, Bulgaria, Hungary, Latvia, Poland, Czech Republic, Canada and Auraria, have been identified as alternative sources of wheat.

CS Yatani also talked about the subsidy programme aimed at stabilising the price of fuel to cushion Kenyans against volatility in fuel prices by paying Sh45.9 billion under the programme.

Servicing debts

The global economic crisis is already having a toll on people, with banks noting that some customers have started having difficulties servicing their debts.

Equity Group Chief Executive James Mwangi said increased prices of wheat, a bulk of which comes from the two warring countries, had made some traders struggle to service their loans.

Mr Mwangi noted that the crisis, which has seen Equity move swiftly to help local wheat farmers plug the deficit left by the expensive imported wheat, has had unintended consequences.

“And we are seeing the strain in terms of the repayment as cashflows are being disrupted,” said Mr Mwangi during the bank’s 18th Annual General Meeting held virtually.

He explained that the bank had responded by shoring up its stock of insurance cash just in case there are increased cases of loan defaults. The dollar shortage, which has made some companies such as Pwani Oil Refineries, announce the closure of their factories has only made matters worse.

Besides the evacuation of investments in form of dollars from the frontier markets such as Kenya into stronger assets in advanced economies, the situation has been aggravated by the reduced inflow of dollars and other foreign currencies due to poor tourism and export earnings.

A disruption in the global supply chains due to the lingering effects of Covid-19 and the Russia-Ukraine war has also pushed up the price of raw materials such as palm oil, which is used to manufacture cooking oil.

Palm oil is also used in the manufacture of detergents, which explains the high price of soap. Other raw materials whose prices are pushing up the cost of living include oil, fertiliser, and wheat. Agriculture CS Munya agrees that the removal of levies will only reduce the retail price of unga by Sh2.

East African Grain Council Chief Executive Gerald Masila noted that although they can get a bag of maize from Zambia and Tanzania for as little as Sh2,000 compared to the prevailing Kenyan market price of Sh6,500, the high cost of transportation and permits has made the waiver on levies insignificant.

“I don’t see prices of unga coming down soon. That you can take to the bank,” he said, noting that the cost of fertiliser will remain high until the end of the Russia-Ukraine conflict. 

 As for getting maize from places such as Mexico, Romania and Serbia, which have non-GMO (genetically modified organisms), the time before August is too short.

They say it takes time to aggregate, load (between one and two months), sailing (60 days), and two weeks to offload.

“The gazette notice gave and removed on the same breadth,” said Mr Masila, adding that no one can take the risk of using a loan of Sh2.2 billion to bring a ship-load of maize only to land in Kenya and be slapped with a 50 per cent duty on the consignment.  

The decision to roll back the stringent containment measures that had been implemented to curb the spread of the Covid-19, helped the economy to grow by 6.8 per cent in the first quarter of 2022.

However, the agricultural sector continued to underperform due to poor rains and the high cost of inputs.

A reduction in the production of maize saw the quantity of imported maize more than triple in the first three months.

Mr Masila insists that with the war in Ukraine not about to end soon and the expected poor harvests this season due to expensive fertiliser that saw some large-scale farmers refuse to grow maize and failure by the government to logistical nightmare, things will keep getting worse.