Why there is no end in sight to soaring prices in Kenya

Corruption has all of a sudden dropped off the headlines and been replaced by the high cost of living and taxes. Yet the three items are interlinked.

The high cost of living is sometimes driven by forces beyond our control like the war in Ukraine and closer home, drought. All these affect the supply of either food or oil.

The demand does not change suddenly; births, deaths and immigration are gradual. A third driver is the “human factor.” When there is a political transition, we take advantage of the arising uncertainties to raise prices, cut deals and perpetrate fraud.

This is especially high if the key players in the economy (read entrepreneurs) want to hedge against uncertainties.

The uncertainties are counterbalanced by the feel-good effect after a regime change. But the Kenya Kwanza government is unique - there is no “feel-good effect.”  Or you are feeling it? 

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Taxes are seen as the bulwark against debt. The debate over taxes is made hot because of the involvement of the political elites. It’s a double-edged sword.

Higher taxes while covering the deficit, lead to higher prices and impact the cost of living. Taxation has a demonstration effect - if the price of one item goes up, the other items also tend to go up even when it has no tax loaded on them. 

The higher prices as you load more taxes could depress demand, leading to lower tax revenues.

Corruption too raises the cost of living. Bribe givers “recover” their costs with higher prices. The innocent pay the price of corruption. What next then?

The political promise that prices would go down was just that. What was to change after the polls?

It becomes even more interesting when subsidies for several commodities were removed, raising prices further.

The new regime is a big believer in the market system, but it will soon realise that despite all its hype, it has limits. How do you protect the citizens who can’t compete? Worldwide, governments intervene when the market fails, but as honest brokers. That is the problem with subsidies; they are not determined by economic reality but by political reality.

Who should get subsidies is always the problem. Policing subsidies is even more challenging.  The best alternative to subsidies is to let the market do its work, but they should be well-regulated.

Competition forces efficiency. Think of the Nairobi-Nakuru route and all its matatus. The fare is likely to remain low because of the many Saccos and their matatus. Think of a route dominated by one Sacco. Can we ensure there is competition in every sector? Calling charges would be higher without telcos competing.

University fees would be higher without competition as would be the cost of healthcare. Are there any monopolies that need to be broken? Remember school uniforms? 

Let’s check the level of competition in inflation-driving sectors. Take agriculture, for example. There is good competition when you have many farmers.

But the supply chain is choked as food is delivered to the market by bad roads and cartels that limit access to the market. 

Stabilises prices

I am amazed by the difference between what farmers are paid and what the final consumer pays. Who appropriates the value?  If farmers got their value, they would produce more food and stabilise the prices. Remember food has no substitute.

Food drives inflation because we must eat. When you stabilise prices, you stabilise the whole economy, with more productive workers, setting a chain reaction of economic growth. 

The other sector that drives inflation is energy. Unlike food where we have good control over the supply, we do not have much control over energy (read oil).

Until electric cars become mainstream, we are unlikely to wean ourselves off oil dependency.  It’s still not clear why we left our oil underground. Could it be that it might not be necessary with electric cars coming into the pipeline?  With the oil supply falling in the wake of the war in Ukraine and demand after the opening of China, we find ourselves victims of global trends.

Renewables are not that mainstream yet, but they are the future. Add the fact that like food, we must travel to work or seek other services. Telcos have become an alternative to travel as Covid-19 demonstrated.

Working from home is for the elite; the hoi polloi must leave their home in search of work. Transport is not competitive.

It’s mostly in private hands. And there is little integration between road, rail and air, which further raises the cost of transport as you change from one mode to another. 

You need a taxi or matatu to the Standard Gauge Railway (SGR) station.

The train from SGR station to the downtown station is a step in the right direction. 

The two sectors illustrate why a rise in prices is inevitable. It’s also possible the economy is finally feeling the money spent during the campaigns, albeit with a lag.

Add the weak shilling, and our imports become more expensive.

This is reflected in the prices. We must add political uncertainty. Remember the polls were too close to call? What next? If it rains and the new regime’s economic direction becomes certain, prices will stabilise. But injecting more competition is the way to go. Subsidies should be used as first aid.