Strong shilling, falling cost of energy to ease consumer pain
Shoppers at a Nairobi supermarket. Prices of maize flour, wheat and cooking oil has dropped steadily in the past four weeks, offering reprieve to consumers who have had to contend with a near quadrupling of the inflation rate since the year began. Photo/FILE
Kenyan consumers are set for big relief this festive season as a stronger shilling cuts the cost of imported goods and heavy rains bring down the price of electricity, reversing the course of inflation that rose steadily in the past 13 months to peak at 19 per cent.
The prices of maize flour, wheat and cooking oil dropped steadily in the past four weeks, offering reprieve to consumers who have had to contend with a near quadrupling of the inflation rate since the year began.
In weeks, the prices of electricity and petroleum are expected to fall, pulling down the cost of manufacturing and transport that have been the key drivers of inflation.
The economy has been under severe battering from an inflation storm, sparked off by shortage of food and a weakening of the shilling that only eased in the past two weeks.
High rate of inflation has also significantly eroded consumer purchasing power, slowing down the uptake of goods and causing a revision of growth forecast for the year.
The World Bank estimates that growth will fall to 4.3 per cent this year from 5.6 per cent in 2010 before rising again next year.
“A fall in the cost of key inflation drivers such as energy and transport is good for consumers and the economy, especially in the festive season,” said Gerishon Ikiara, an economics lecturer at the University of Nairobi.
“The positive impact can be even greater if the price drops are sustained in the next three to four months,” he said.
Electricity distributor Kenya Power and the Ministry of Energy have promised to cut the cost of electricity and fuel prices beginning next week, a move that should save the economy billions of shillings.
Fuel cost charge for electricity consumed this month will drop to Sh8.02 per kilowatt hour (kwh) from Sh9.02 last month while forex charges will drop by 50 cents per kilowatt hour to Sh2.12, according to Kenya Power managing director Joseph Njoroge.
“We expect fuel cost charges on electricity bills to keep dropping as the rains increase the amount of hydro-electricity on the national grid and reduces reliance on expensive thermal power,” said Mr Njoroge.
That alone will save consumers nearly Sh1 billion on power bills to be settled in January. The Ministry of Energy has promised that petroleum prices will drop by between Sh3 and Sh5 per litre in the monthly review due this week.
A drop in pump prices by this margin should save the save another Sh1 billion in one month. Continued rise in the production of food items such as vegetables should further slow down the rate of inflation, easing the burden on consumers.
Mr Njoroge said the ongoing strengthening of the shilling should reduce the forex charge on power bills and offer additional relief to the consumer during the festive season.
The shilling has clawed back much of lost ground in the past four weeks to trade at an average of Sh90 to the dollar from a record low of Sh107 in mid-October.
The Kenyan currency posted the gains after the Central Bank of Kenya (CBK) reversed its policy stance to tighten liquidity and restricted commercial banks’ foreign currency trading to curb speculation.
The CBK has raised its signal lending rate three-fold from 6.5 per cent to 18 per cent in less than three months.
This has eliminated cheap credit and cooled off demand for imports, effectively shielding the shilling from speculative attacks and promising a drop in petroleum prices.
“The projected price drops of between Sh3 and Sh5 per litre is primarily due to the recent strengthening of the shilling,” said Kaburu Mwirichia, the director general of the Energy Regulatory Commission (ERC).
Mr Mwirichia said international crude prices are still high at about $110 a barrel but promised that fuel prices could fall further if the shilling continues to strengthen in the coming months.
Average prices of diesel, liquefied petroleum gas (LPG), kerosene, and petroleum rose by a third since January, eating into household budgets and inflating operating costs for businesses.
A stronger shilling is also expected to cool down imported inflation as international prices of raw materials fall due to sluggish demand in the weak global economy.
The cost of rubber fell by 35.7 per cent over the past eight months, coal (16 per cent), palm oil (21.4per cent), wheat (16.9 per cent) and Copper (20.69 per cent.
The International Monetary Fund (IMF) has forecast a further decline in commodity prices this year and in 2012 on bigger harvests of food crops and as slower global economic growth weighs on demand for base metals.
Significant benefits
Manufacturers have welcomed the promised drop in the cost of key inputs, such as fuel and electricity saying significant benefits to consumers will come if the prices fall further.
“We will definitely pass on any operational cost savings to customers. Volume growth is critical in a competitive market and lower pricing forms a critical part of that growth,” said Jaswinder Bedi, the chairman of the Kenya Association of Manufacturers (KAM).
Pwani Oil has, for instance, reduced the prices of its cooking oils by six per cent while flour miller Unga Group expects the price of wheat flour to drop from next year.
The heavy rains in most parts of the country have dealt the biggest blow to inflation by boosting production of food – one of the biggest components of the consumer price index (CPI).
“Between the two months (October and November), there were notable falls in the prices of sukuma wiki, maize flour, tomatoes, mangoes, cabbages, spinach, and carrots among other items,” the Kenya National Bureau of Statistics (KNBS) said in its latest CPI report.
While rains and a stronger shilling are taming inflation, analysts say the economy remains fragile to cyclical inflationary pressures that require quick implementation of longer-term measures to stabilise the economy.
“Expensive electricity will still be a problem in the next two to three years due to inadequate investment in cheaper sources like geothermal and wind,” said Patrick Obath, the chairman of the Kenya Private Sector Alliance (Kepsa).
Mr Obath said that while monetary policy has helped stabilise the shilling in the short-term, the ultimate solution lies in increasing the country’s production of goods and services to match the cost of imports that are paid for in foreign currencies.
Interest rates
Analysts say that CBK should consider reversing the sharp rise in interest rates now that inflation is easing off, arguing that high interest rates pose a threat to economic growth and is likely to be a new driver of inflation.
“Businesses rely heavily on bank loans and the high interest rates mean they have to significantly raise their prices to protect their margins,” Mr Ikiara said.
High cost of deposits and the tightening of liquidity by CBK have seen most banks raise their base lending rates to more than 24 per cent from a low of 14 per cent in January.
