Why cost of living will remain high for months

This year started with the news that price of maize flour has increased from Sh90 to Sh115 after the stock of subsidised flour ran out.

Understandably, Kenyans are complaining with many asking how they are going to manage rising costs of living, particularly in urban areas.

There are several factors informing the increase in the cost of living, the first of which is that the country has not fully recovered from the 2017 drought.

The short rains have not been as robust as hoped and thus food production is till sub-par. As a result, until the country fully recovers, Kenyans can expect to continue to face upward pressure on food prices.

Linked to the point above is continued relatively aggressive inflation. During the last four months of 2017, average inflation was between 7.98 and 8.4 per cen — well above the preferred government ceiling of 7.5 per cent.

Thus inflation will mean money does not stretch as far as it used to and Kenyans will find basic items significantly eating into their household budgets.

Then there is the reality that 2017 was a tough year for the economy due to several factors, the first of which was a struggling agriculture and financial sector.

Agriculture which is about 30 per cent of the economy was hit by the drought and the financial sector, which is about 10 per cent, was hit by the effects of the interest rate cap.

READ: Kenya not yet out of the woods over high food prices

As well, the prolonged election period affected the economy and GDP growth was revised downward from 5.9 per cent to 4.4 per cent in Q3.

 Elections have tended to have a negative effect on economic growth and 2017 was not an exception.

Suspended investment decisions and disrupted business activity led to the reality that Kenyans did not make as much money as they would have had.

As a result, they are feeling the pinch of muted economic growth like having less money in their hands.

Again, as I have stated before, the interest rate cap led to a contraction in credit growth as banks became more hesitant to extend credit in the context of capped loan pricing.

Sadly, credit growth may be further stymied by the onset of the new International Reporting Financial Standard 9 (IFRS 9) where banks are required to switch from an incurred to an expected loss model.

Without getting into much detail, IFRS will mean that, at least in the short term, banks will be more risk-averse as they reduce lending periods to high-risk borrowers to limit the probability of default.

Thus Kenyans may find that it will be even harder to get credit due to both the cap and adoption of IFRS. This will lead to less money, which will make them feel more acutely the cost of living.

Finally, the cost of oil is set to rise in 2018, which is not good news for Kenya which imports oil. This will likely drive inflation further.

In short, Kenyans should brace for high cost of living in the short term. It is hoped that a return to stability will allow the economic engine to get back to normal and create channels through which we can earn an income to adequately meet cost of living.