Drivers of inflation
In Kenya, a confluence of many factors has inflated prices, particularly after the Ukraine war and the pandemic.
One is elections. Lots of money is spent during electioneering. Some of it is just given out with no commensurate productivity. Kenya saw this in 1990, when money in circulation rose before the 1992 elections and so did the rate of inflation.
The second factor is corruption and mismanagement. Whether it’s in procurement where prices are inflated, or when goods are not supplied or substandard ones are supplied, consumers pay the price.
The cost of corruption to the economy has been put by President Uhuru Kenyatta at 2 billion shillings, translating to about 7% of GDP annually.
If people make illegal water or power connections, honest people pay for that. If a tender for building a road is inflated, someone pays for it. If government and its agencies over-employ, someone pays for that. If it takes longer to get services like port clearance and building approvals, someone pays for it. If bribes are exchanged, someone pays for it. The 50-shilling note given to police at a roadblock is paid by someone else.
A third driver of inflation is a weak currency. Kenya’s currency has declined by 3.5% since the start of the year, partly because of decisions taken in other countries that affect the value of their currencies.
A fourth driver of inflation is tax. It raises the price of goods and services. The Finance Act 2022 brought in new taxes and raised the rates of other existing ones. It seems the government did this to raise money without incurring more debts.
Fifth is market structure. Lack of competition in some sectors makes it easy for owners (or cartels) to raise prices. Kenya has a Competition Authority but its reach and effect have not been felt.
What can be done
In Kenya, politicians have proposed a number of solutions, some vague, others unsustainable.
Price controls are the most popular with politicians because you are seen to be doing something. But that will make matters worse by creating shortages. Suppliers will not take goods and services to the market if they can’t make a profit.
Subsidies have to be paid by someone. They often penalise efficiency and they can distort the market with overproduction and vested interests. They are also hard to implement. For example, the price of maize flour has suddenly been cut by more than a 100%, from Ksh 210 to 100. How will the government ensure this passes to consumers without creating shortages? Price police?
Raising interest rates can reduce money in circulation and cool off the economy. But Kenya is still largely an informal economy with 80% of jobs outside formal set-ups. Operators in the informal economy don’t always borrow through formal channels, so adjusting interest rates has limited impact.
Kenya could increase the supply of basic commodities by allowing competitive importing of maize and wheat. The increase in supply would reduce the price. Competition is one of the most powerful weapons against inflation.
In the long run, Kenya must produce more of whatever is in shortage. For example, Kenya produces only 39% of its national wheat consumption. Land for agriculture is being put into alternative use or is subdivided.
Productivity is key in reducing inflation. High productivity rides on innovation and efficiency, which should be encouraged. Increasing productivity takes time. You have to redesign factories, irrigate new land, try new crops or animal breeds, put money into research and development and change national culture to focus on efficiency while cutting red tape and bureaucracy. You have to come up with new and enforceable laws to create competition.
Voting is a few minutes’ business but taming inflation takes a long time. The politicians can make their promises, but they can’t beat the market and its laws.