High inflation erodes workers’ buying power

Shoppers queue at Nakumatt Mega along Mombasa Road, Nairobi. FILE
Shoppers queue at Nakumatt Mega along Mombasa Road, Nairobi. FILE 

Kenyan workers lost purchasing power last year even as favourable weather propelled economic growth to the rate of 4.6 per cent.

Real average earnings or income per employee dipped 4.8 per cent indicating erosion of the workers’ ability to buy goods and services at the prevailing market prices, according to official statistics released on Thursday.

“Annual average nominal wage earnings increased by 4.7 per cent in 2012 while the real average earnings declined by 4.8 per cent due to high level inflation,” said Devolution and Planning secretary Ann Waiguru when she released the Economic Survey 2013 at the Kenya International Conference Centre in Nairobi.

This was the second year in a row that inflation eroded the purchasing power of the millions of households who depend on monthly wages to meet their daily needs. The survey found that real monthly wages (adjusted for inflation) were down 21 per cent in the past five years, having stood at Sh33,000 in 2008.

Inflation stood at an average of 9.5 per cent during the year, wiping out all gains from the 4.7 per cent increase in nominal earnings and leaving workers in the negative territory.


This outcome underlines one of the most outstanding macro-economic paradoxes that Kenya faces in its quest for higher rate of economic growth and a stable business environment.

To achieve the high rate of growth, the government has had to boost consumption using cheap personal loans but that has also had the effect of increasing inflation.

A decline in real wages in an economy that expanded by nearly five percentage points means the growth did not translate into positive earnings for workers.

The disconnect is seen as having been the main cause of the wave of labour unrest that began in 2011 and persisted for much of last year. Real wages dropped by an even larger margin of 8.6 per cent in 2011.

The survey found that the Kenyan economy produced goods and services worth Sh3.44 trillion at current market prices in 2012 pushing the gross national income per capita to Sh84,269 (or just about $1,000 dollars) up from Sh76,965 in 2011 or a 9.5 per cent growth.

Kenyan workers earned an average of Sh394,675 annually (or about Sh33,000 monthly) but that figure was down to Sh325,269  (or about Sh27,000 monthly) last year adding up to a 21 per cent decline in real income in the past five years.

The survey also found that recent public sector wage increments have left government workers with stronger economic muscle than their private sector counterparts.

Average annual public sector earnings stood at Sh346,208 in 2012 compared to Sh316,082 for the private sector – meaning that on average, government workers earned Sh29,000 a month, compared to Sh26,000 for private sector employees.

David Cowan, the head of research on Africa at Citibank in London, said it was important to consider the fact that the government now has a big number of skilled workers that could partly explain the higher average wage.

He said the lower average wage for the private sector may be the result of the large number of lowly workers in the agricultural and hospitality sectors.

“You need to consider that there are very many lowly paid workers in the horticulture, hotels and restaurants. This definitely brings the private sector average down,” Dr Cowan said adding that the problem for the public sector is that it now accounts for a big portion of the GDP.

The high average public sector earnings is also the reason the public service wage bill has risen steadily to a massive Sh458 billion or 12 per cent of the GDP compared to an average of seven per cent for Africa. This leaves Kenya government workers as the highest paid on the continent taking into account its annual productivity.

Agitation for higher wages in the public sector has persisted the past five years culminating to salary increments for civil servants, teachers, doctors, lecturers.

Kenya is in the middle of another wave of agitation for higher public sector wages led by MPs, senators, governors and county representatives. MPs have warned that they will paralyze government business in the House if their quest to get paid Sh851,000 per month is blocked.

The Salaries and Remuneration Commission has fixed an MP’s monthly salary at Sh542,000 a move that has the support of President Uhuru Kenyatta.

Kenya’s rate of economic expansion is yet to reach the 5.8 per cent realized in 2010 and is still far from 2007’s  two-decade high of 7.0 per cent.

The Jubilee government has promised to grow the economy at the rate of more than seven per cent and above in the next couple of years as part of its plan to create at least one million jobs annually.

Kenya’s economy grew at the rate of 4.4 per cent in 2011 after a massive failure of rains that slowed down growth in the key agricultural sector to 1.5 per cent. Agricultural production grew at the rate of 3.8 per cent in 2012 pushing its contribution to GDP to a new high.

“Agriculture and forestry sector recorded the highest contributions to the GDP growth in 2012 accounting for 17.6 per cent of the overall economic performance and reflecting a recovery from adverse weather in 2011,” said the Economic Survey 2013.

Manufacturing grew at a slightly slower pace of 3.1 per cent compared to 3.4 per cent in the previous year. That also cut back its share of GDP to 9.2 from 9.6 per cent in the previous year.

“The slower growth was due to high cost of production, stiff competition from imported goods, high cost of credit, and political uncertainty associated with the General Election,” said Ms Waiguru.

The sector, however, created 6,400 more jobs in the year. The survey found that growth also slowed down in the key financial services sector dropping to 6.5 per cent in 2012 compared to 7.8 per cent in 2011 - the lowest since 2009.

Ms Waiguru said the growth was on account of high interest income, other bank charges, increased branch network and agency banking.

“Growth in the sector was however curtailed by a tight monetary policy in the first half of 2012 and a relatively slow pace at which the lending rates dropped despite a significant cut in the Central Bank Rate (CBR) in the second half of the year,” said Ms Waiguru.