Manufacturers’ costs dilemma

KAM policy research and advocacy head Job Wanjohi. PHOTO | SALATON NJAU

Manufacturers are facing a hard choice over whether to pass on to consumers higher production costs brought about by electricity and fuel price increases, at a time when high inflation is already eroding demand for their goods.

The price of diesel was adjusted upwards by Sh20 per litre in the September fuel price review after the government partially wound back the subsidy that had held the cost stable in the previous review.

Three weeks ago, the Energy and Petroleum Regulatory Authority (Epra) raised power costs by 15.7 percent, reversing the January cuts by the former President Uhuru Kenyatta administration. Fuel, forex and inflation adjustments were also increased, leaving industrial users facing hefty jumps in their power bills this month.

The Kenya Association of Manufacturers has however said that its members are making an effort not to pass through all these costs to consumers, alive to the fact that when prices increase, demand inevitably decreases.

Earlier, some of the manufacturers in the fast-moving consumer goods segment had told the Business Daily that they were only able to pass on about 60 percent of their additional costs to consumers, partly out of concerns over loss of market share.

“Despite the high cost of production, manufacturers are making all necessary efforts, to the greatest extent possible, not to pass on the costs to consumers in the form of increased prices for goods,” said Job Wanjohi, KAM’s head of policy, research and advocacy.

“Kenya’s prevailing economic situation is currently characterised by the high cost of living, low purchasing power, ever-soaring levels of unemployment, widening trade deficit, and the heavy public debt burden.”

The lobby is instead urging the government to intervene by reviewing the levies which constitute about 46 percent of the retail prices for fuel, as an alternative measure (to subsidies) to cushion both manufacturers and consumers from the high cost of energy.

Economists reckon that failure to soften the blow will eventually force the manufacturers to raise prices, especially now that the cost of other non-energy inputs such as imported raw materials also remains high.

“Unless they [manufacturers] get some form of incentives, it will be a bigger cost on their production which will eventually be passed on to the consumer, hence a negative impact on manufacturers,” said Churchill Ogutu, an economist at IC Asset Managers (Mauritius).

There is also the expected impact of the inflation adjustment of 6.3 percent on excise that is coming up on Saturday this week, which will further add to the cost of fuel.

Kevin Ngige, an economist said with Kenya being a free market where the laws of supply and demand provide the sole basis for the economic system, the higher costs are usually passed on to the consumer unless there is government intervention.

“This is the basic template for inflationary pressures on consumable goods Kenya is experiencing in addition to exogenous factors,” said Mr Ngige.

The new administration has, however, ruled out offering subsidies on the consumer side, meaning that manufacturers looking to maintain their prices will be forced to absorb the higher costs.

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