Consumers hit by new wave of shilling-driven inflation
Ms Mary Odhoch displays fermented flour for making porridge at Kibuye market in Kisumu, 23rd May 2011, with a two kilogramme tin of this flour selling at Ksh 140. The cost of living is expected to touch a new high at the end of the month with the adjustment of official data to reflect the impact of the weak shilling on prices of consumer goods. Photo/JACOB OWITI
The cost of living is expected to touch a new high at the end of the month with the adjustment of official data to reflect the impact of the weak shilling on prices of consumer goods.
Thursday’s release of inflation figures promises to offer the much awaited reality check as to how the shilling, under siege most of the month, has impacted on inflation which has been on the rise since February and crossed the double-digit mark two months ago.
“We expect inflation to average 13.6 per cent in 2011, with further increases probable before it peaks and starts to decline again,” said Razia Khan, a London-based economist with Standard Chartered. The National Economic and Social Council (NESC) met in Naivasha at the weekend with the twin threats of inflationary pressure and the shilling’s crash weighing heavily on the participants’ minds.
The Kenyan currency has plummeted from a high of Sh83 to the dollar in March to Sh91 to the greenback last week, representing nominally the lowest level in the currency’s history. Kenya National Bureau of Statistics estimates that 87.9 per cent of Kenya’s inflation is driven by the surge in food, oil and housing prices that feed on each other to worsen the cost of living.
Inflation hit 12.95 per cent in Kenya last month staying only behind Uganda whose inflation rate of 16.10—and historic shilling lows — has as well been dictated by high oil and food prices, but also loose electioneering fiscal policy.
Tanzania and Rwanda, at 9.70 per cent and 4.54 per cent respectively have fared better, mainly as a result of huge donor injections of hard currency in their budgets besides their maintaining less liberal capital accounts and restriction of currency movements. Rwanda food prices have also moderated.
Finance minister Uhuru Kenyatta, who has been trying to extinguish the fire of inflation through fiscal action will be particularly a frustrated man as a weak shilling erodes any gains arising from the recent zero-rating of wheat and maize flour imports.
“Logically, there is no benefit at all as these concessions have been wiped out by the weak shilling,” said Cereal Millers Association executive officer Paloma Fernandes. “High oil prices have a similar effect on other industries,” he said.
Mr Kenyatta also cut the tax on petroleum products, an effort many analysts now say amounts to naught when the currency crash is factored in.
Discomfort over exchange rate volatility is rooted in the fact that commodity prices have been on the rise globally – a trend that has been partly attributed to speculation by global commodity traders.
“Kenya is already a net food importer, so a decline in total output implies an increase in food imports,” say analysts at Renaissance Capital. “Rising global food prices and a weak shilling therefore means Kenya will has to spend much more and will in the end be importing food inflation.”
Besides consumer price inflation, Kenya will also be watching keenly what happens to its manufacturers, transporters and even farmers as these sectors of the economy absorb the high cost of transport, fossil fuel-generated power and the cost of credit that is already responding to currency pressure forcing the central bank to cut its lending rate to defend the shilling.
Crown Berger, a paint-maker that uses oil as raw material, is a good example of what inflation means in the marketplace.
“We see consumers cutting down their uptake of our goods and this is definitely going to a negative effect on the economy,” said Rakesh Rao, CEO Crown Berger.
His views are, however, not shared by Arun Devani, the owner of Synresins, a resin manufacturer based in Nairobi. “While there is currency induced inflation element on the cost of production, devaluation is good for exports and in soaking up excess consumer cash to check inflation,” he said. “A weak shilling has raised the competitiveness of the industry by about 3 per cent on the net and with time we expect inflation to disappear.”
CBK governor Njuguna Ndung’u, who found himself in the eye of a storm last week as the shilling hit an all- time low of Sh91.90 to the dollar told the NESC forum in Naivasha that recent increases in food and fuel prices are to blame for the surge in inflationary pressures that have become the biggest risk to the pace of economic recovery.
Though the steep rise in consumer and producer prices are most prominent outcomes of the currency slide, the shock waves are being felt on a wider scale going by latest official data.
Kenya’s trade deficit has deepened well ahead of the massive imports of food and the sharp rise in oil prices after the Middle East and North Africa (Mena) political crises which pushed crude oil prices well beyond the current more reasonable price of $113 a barrel.
The country’s current account deficit has risen from $1,653 to $2,731 million on account of merchandise imports, mostly oil, machinery and chemicals, according to the CBK’s latest monthly Economic Review data released on Friday.
The data for January however does not capture the whole picture as it does not reflect the plummeting of the shilling that began in mid-February and coincided with the steep rise in oil prices.
It is unlikely the rising incomes of commodity exporters and hospitality industry players will have a significant impact on the deficit situation. This is partly because the horticulture industry that is one of the country’s leading forex earners is already griping over input costs.
Prof. Ndung’u gave the clearest signal of a looming tightening of monetary policy to control inflation.
His statement came even as the Monetary Policy Committee came under intense criticism of its recent decisions to stay on a loosening path even as the economy showed clear signals that tightening was needed to control inflation.
Last week, Prof Ndung’u moved with speed to stave off mounting public anger over the exchange rate turbulence by ordering an audit of banks he accuses of moving huge currency amounts from the system. He said three banks with international links had aggravated the situation by shipping out $260 million mid June for speculative reasons.
“The movement will not continue as we have taken action,” he told the press on Friday as he revealed that the CBK had compiled a report on the shilling’s crash and handed it over to Mr Kenyatta together with unspecified recommendations known to include stringent monitoring of banks to decelerate the outflows.
Opinion is divided on how the slide can be halted. Ms Khan has accused the CBK of ‘benign neglect’ of the currency. “We have long maintained that the pace of the shilling’s depreciation in recent days is at odds with Kenya’s fundamentals, and would expect some retracement following the governor’s press conference,” said Ms Khan.
“It is now clear that the authorities are no longer applying a policy of benign neglect towards the forex rate, and market participants are likely to react to this signal.”
But Prof. Ndung’u maintains that it would be unwise to intervene in the market with the sale of dollars because such an action would merely erode the reserves, giving speculators another reason to place big bets on the shilling.
“A fight with the markets would be ill-advised,” said economist Mbui Wagacha, who is also a member of the CBK board. “It is also important to remember that the exchange rate is not the primary policy goal -- price stability is as per CBK Act,” he said.
CBK has been gradually building its reserves since last year to the current level of 3.9 month cover helped by the International Monetary Fund. East African Community member states have proposed a minimum cover of six months.
