Kenya’s current inflation is imported. We have exhausted our borrowing and taxation capacity so much that the only option left is to live within our means or risk economic collapse. The fate of the country’s economy is now in the hands of the incoming government.
By Ephraim Njega
In recent months, many Kenyans have expressed concerns over the state of the economy. The worries emanate from the rising inflation and the public debt crisis. The relentless depreciation of the shilling and political uncertainties haven’t made things easier. A persistent drought is also a matter of great concern given that our food production is mainly rain fed.
The rising inflation is caused by either domestic and global factors, or a combination of both. Domestic inflation is driven by structural issues and temporary economic shocks. Structural issues are economic weaknesses that are deeply entrenched. For example, our overreliance on small scale rain-fed farming exposes us to food price inflation. Our small scale farms make cost of farming expensive as the advantages that accrue from economies of scale are missing. Increasing land subdivision is a big threat to food security.
Majority of Kenya’s population is settled on a small area within few hundred kilometres from the Northern Corridor which runs from Mombasa to Malaba. This has caused immense pressure on arable land as it competes with urbanization and the attendant settlement pressure. The population is growing, yet the land available for farming is shrinking. With less land available for farming it will be hard to tackle food price inflation.
Key inflation drivers
Food is one of the largest drivers of inflation in Kenya. In the Consumer Price Index (CPI) basket of goods and services used by the Kenya National Bureau of Statistics (KNBS) to compute inflation, food represents 32.9% of the household’s budget. There can be no long-term solution to inflation which does not involve dealing with food production bottlenecks.
Our agricultural sector needs a lot of reforms aimed at increased commercialisation. This will require modernization, land consolidation/expansion, irrigation, mechanization and diversification of value chains. To modernize our agriculture, we need to rely on science and evidence based farming techniques such as use of high yielding varieties. We need to climate proof our agriculture by investing in irrigation.
Mechanisation will help in lowering the cost of labour which is a huge component of farming costs. Lastly, we need to diversify our value chains to have a healthy balance between cash crops and food crops.
By increasing local food production, we will shield ourselves from imported inflation. In 2021, we spent Sh273 billion on food import. Out of this Sh121 billion was spent on cooking oil while Sh62 billion was spent on maize. Rice imports gobbled up Sh31 billion while sugar took Sh29 billion. Edible products and preparations took another Sh16 billion while maize imports cost Sh14 billion. All these are items we can produce locally.
The above figures demonstrates the need to diversify our agricultural value chains. Cooking oil constituted 44% of the food imports. Yet many oil crops such as soybean, canola/rapeseed, sunflower, and oil palm tree can all be grown in the country. We even have the Oil Crops Directorate which should spearheading these initiatives.
Within the CPI basket, housing, water, electricity, gas and other duels taxes are up 14.6% of the household budget. The government needs to invest in affordable and decent housing just as it does with roads. Leaving this to the private sector will never work as it is a social a goal yet businesses are profit driven. Under the private sector initiative, decent and affordable housing are mainly available for the middle income households. You end up with a situation where what is affordable is not decent and what is decent is not affordable.
Housing is a big burden for urban households. The 2019 census established that 79% of urban dwellers were renters. KNBS classifies Nairobi households based on monthly spend. Households spending Sh46,355 or less are categorized under lower income group and constitute 71% of the city’s population. Households spending between Sh46,355 and Sh184,394 are classified as middle income group and are 26% of the city’s population.
In June 2022, KNBS put the national average rent for a two-bedroom house at Sh17,408.60 monthly. If a low income group household in Nairobi spending Sh46,355 monthly were to live in such a house, it would have to spend up to 38% of its income on rent. The real situation is worse considering that most of the low income households do not even have this kind of money to spend.
The challenge with the current affordable housing project is that it focuses on turning renters into owners. Yet the most immediate concern for low income households is not owning a home but affording monthly rent. When people buy affordable houses they will rent them out at commercial rates beating the purpose for government’s involvement.
What we need from the government is affordable housing for renting. As for ownership, this should be promoted using affordable financing supported by the Kenya Mortgage Refinance Company. The National Housing Corporation (NHC) should be financed to build houses to let at affordable rates. This should be done at a large scale in order to cause a downward pressure on rents.
Long-term planning
The government also needs to have long-term plans for decongesting the city and improving urban planning. In the medium term, this should involve setting up well planned satellite cities such as Konza which are connected to Nairobi via high speed rail. Improving connectivity will reduce the need for people to crowd around Nairobi CBD which puts a lot of pressure on rents.
In the long-term, the government should consider relocating the administrative functions to a new city in the northern parts of the country such as Isiolo. This will help in opening up the northern parts of the country for settlement and economic production. This will also largely solve the issue of food and housing which constitute 48% of the CPI basket.
Cost of cooking is another burden for households which is classified under housing by KNBS. The current initiative by the government to lower the cost of electricity can go a long way in dealing with this. Lower cost of electricity will enable Kenyans to do most of their cooking using power. This will have multiple benefits. First, electricity is a clean source of fuel which is good for the environment.
Secondly, electricity is locally produced hence we wouldn’t suffer from volatile petroleum fuel prices. Thirdly, using local energy will shield us from imported inflation and slowdown the depreciation of the shilling. In addition, higher consumption of electricity will ensure we utilize idle power in the country which will also contribute to lowering the cost of power. Electricity will also be good for low income households which cannot afford the high cost of filling up a gas cylinder.
Another driver of high cost of living is transport. Transport costs consume 9.6% of households’ budget. The government is dealing with this through the fuel subsidy. However, the Sh21 billion being spent monthly on the subsidy is not sustainable. Besides this is just a temporary solution.
Local energy resources
The government should focus on using local energy resources to power our transportation sector. Production of the Turkana Oil should be fast-tracked. The 585 million barrels of oil recoverable oil can support daily production of 120,000 barrels. Africa Oil, one of the companies behind the project says the production cost will be $22 per barrel. Instead of doing a pipeline to export this oil, we could build a refinery targeted at the domestic and regional markets.
The other solution to high transportation costs is electrification especially for commuter transport. The 25 seater fully electric bus being sold by start-up BasiGo is retailing at Sh5 million. The Sh21 billion being spent on the fuel subsidy can import 4,000 such buses. There are also many companies in the country assembling electric motorcycles. These initiatives need to be supported and scaled up.
The government should lead the charge by adopting e-mobility for its transportation needs. This will facilitate the installation of charging infrastructure countrywide and pave the path for faster adoption by the private sector. Tax incentives should also be provided to support e-mobility. The Standard Gauge Railway should be extended and electrified.
We have a lot of coal in the country. We can adopt Coal to Liquids technology which converts coal into fuels such as petrol and diesel. South Africa is a leader in this technology and have been using synthetic fuels made from coal for decades. Botswana is also working on a similar project. If we don’t utilise these fossil fuel resources to drive our economy, we risk having them as stranded assets due to the ongoing energy transition in the world. Time is not on our side.
The fourth item in the CPI basket which contributes to high cost of living is Restaurants and Accommodation Services taking up 8.1% of households budgets. This issue can be partly addressed by lowering the cost of food as discussed above. Lowering the cost of labour, cooking fuel and electricity would also suppress the inflationary impact of this item.
This fifth item driving high cost of living is information and communication. This takes up a surprising 7.8% of households’ budget. This is mainly the cost of things like airtime, internet and pay TV. This should be addressed by ensuring healthy competition in the telecommunications sector. It should also be tackled through lowering of taxes. The Universal Service Fund should be deployed more creatively to improve internet quality and reduce costs.
There is no reason why internet and airtime should attract almost 40% in direct taxes. Lowering the cost of data and airtime will contribute to employment for the youth through online businesses. Cheap internet will also encourage working from home which will lower transportation costs and contribute to decongestion of our urban areas.
Education consumes 5.6% of the households’ budget. Increasing privatization of education is hurting families. The government needs to lower the cost of public education.
First, it should increase secondary school capitation by Sh20,000 for boarders. I estimate the number of boarding students at 1.5 million hence this would cost Sh30 billion. This would lower the cost from the current Sh45,000 to Sh25,000.
Secondly, the government should increase day secondary school capitation by Sh10,000 which would translate to Sh22 billion annually. This would make day secondary education almost totally free. This would be a big step towards free secondary education. This capitation would cater even for lunch. Parents would only need to buy school uniform.
Thirdly, Higher Education Loans Board (HELB) should finance all the students who apply for funding. HELB puts the number of applicants in universities, and Technical and Vocational Education and Training (TVET) institutions at 386,383 in 2022. If each institution is given an average of Sh40,000, this would translate to Sh15 billion.
The total for all this is Sh67 billion. Given the current fiscal challenges, this amount can be allocated progressively as the economy improves. It is doable if there is commitment and political will. The above 6 items constitute 79% of CPI basket. Dealing with them will reduce the cost of living and doing business in the country.
Final thoughts
While it is easy to attribute the current inflationary pressures to global factors, it is clear that we can deal with imported inflation through increasing local production. The large balance of payment deficit we are running is a big threat to the economy. Total imports in 2021 amounted to Sh2.2 trillion against total exports at Sh744 billion. This puts the trade deficit at Sh1.4 trillion. In 2021, imports rose by 31% while exports grew by 16%.
The huge trade deficit is leading to fast depletion of the forex reserves especially with rising commodity prices. It is weakening the shilling which worsens the problem of imported inflation. The challenge is further compounded by the high external debt servicing burden. Every time the shilling depreciates by Sh1 to the dollar, our external debt rises by Sh37 billion.
Many Kenyans are worried when they watch and read the horror stories of the economic collapse in Sri Lanka. They wonder if it can happen here. If we continue to rely so much on imports and to borrow heavily, this is the fate which awaits us. If we can’t import oil because we have no forex, the economy will grind to a halt just as it did in Sri Lanka.
One of the least talked about drivers of high cost of living is high taxation. The cost of living and doing business in the country is high because of excessive taxation. This problem is tied to the public debt crisis. We have accumulated too much debt too fast. This has increased our debt servicing burden which is not being matched by growth in tax revenues. The government is forced to keep on raising taxes to shore up revenue to service the debt while meeting other service delivery costs.
Unfortunately, we have exhausted our borrowing and taxation capacity. The only option left is to live within our means or risk economic collapse. The fate of the country’s economy is now in the hands of the incoming government.
The next president should not seek to be remembered for huge infrastructure spending. His legacy should be about stabilizing the debt and reviving the economy.
Njega is a Business and Development Consultant, and economic analyst. He holds an MBA from the University of Nairobi.
