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Inflation now topples poll jitters as leading concern for economy


A customer picks fruits at Naivas Supermarket in Nyeri on August 7, 2021. PHOTO | JOSEPH KANYI | NMG

Rising costs of goods and services and below-average long rainfall amid an electioneering year will cut Kenya’s economic growth by 2.5 percentage points compared to last year’s, according to a forecast from global firms.

A consensus growth outlook from 15 world-leading banks, consultancies and think tanks indicate expansion in economic activities could slow to 5.2 percent from 7.5 percent in 2021.

“GDP (gross domestic product) growth will decelerate this year as higher inflationary pressures, drought and tighter monetary policy temper demand,” analysts at Barcelona-based FocusEconomics, which tracks the forecast across the world, wrote in July 2022 outlook report for Kenya late Tuesday.

“The war in Ukraine, global supply constraints and the domestic drought have spurred both consumer and producer price pressures in recent months.”

Kenya’s month-on-month private sector activity fell in three of the first five months of the year under the weight of a sustained inflation-driven drop in consumer demand, which prompted companies to cut down on output, according to Stanbic Bank Kenya’s Purchasing Managers Index (PMI).

Economists say inflationary pressures from the rising cost of fuel and other basic commodities as a result of global supply constraints, weakening shilling and poor weather will slow down growth momentum in an election year.

The FocusEconomics Consensus Forecast report shows UK’s Capital Economics is the most optimistic about Kenya’s growth prospects for 2022 with a 6.3 percent projection. It is followed by American investment banker Goldman Sachs (6.2 percent), Moody’s Analytics (6.1 percent) and Fitch Ratings (6.0 percent).

Other firms which see economic activity growing at least five percent are New York-headquartered JPMorgan (5.6 percent), London’s Euromonitor International (5.5 percent), Paris-based BNP Paribas (5.4 percent), Fitch Solutions (5.0 percent) and American brokerage house Citigroup Global Markets (5.0 percent).

Those projecting growth of below five percent are StanChart (4.8 percent), HSBC (4.6 percent), Economist Intelligence Unit (4.5 percent), Washington-headquartered consultancy FrontierView (4.3 percent), Switzerland-based Julius Baer (4.1 percent) and Oxford Economics (4.1 percent).

The consensus growth outlook of 5.2 percent is below Treasury’s 6.7 percent, Central Bank of Kenya’s 5.9 percent, International Monetary Fund’s 5.7 percent and World Bank’s 5.5 percent— all of which revised downwards their forecast between April and May.

Companies surveyed in the closely-watched PMI reported a jump in the cost of inputs such as fuel, crude palm oil and wheat as well as a range of other items like fertiliser due to Russia’s brutal war in Ukraine amidst strengthening US dollar.

The higher global prices — coupled with below-average rainfall, which has hurt agricultural output and pushed persons facing starvation to more than four million — pushed inflation to a 27-month high of 7.1 percent in May.

This was on the back of average food prices climbing 12.4 percent compared with 12 months earlier.

“Looking ahead, our panellists see inflation flirting with the upper bound of the central bank’s 2.5 –7.5 percent target band over the next few quarters, due to the drought and elevated import prices,” FocusEconomics analysts wrote.

The Central Bank of Kenya on May 31 also warned of a “clear and present danger” of inflation punching above the upper inflation target of 7.5 percent in coming months.

This, if it passes, would be the first breach since August 2017 when the inflation measure climbed to 8.04 percent.

Elevated inflation prompted CBK’s inflation-targeting Monetary Policy Committee (MPC) on May 30 to raise the benchmark Central Bank Rate (CBR) — a signal for direction in interest rates — to 7.5 percent from 7.0 percent where it had been stuck since April 2020.

“We will take all measures necessary to deal with inflation. But it is clear that on supply-side-driven inflation [growth in cost of commodities], there’s virtually nothing that monetary policy can do. What monetary policy does is to deal with second-round effects,” said CBK governor Patrick Njoroge on May 31.

“Even then, we understand that this [rise in CBR] is not totally effective. That will need some time, say about three months, to be completely embedded in the economy.”

The last breach of the upper inflation target of 7.5 percent in 2017 came on the back of a biting drought, which hurt crop and fodder production.

Elevated inflation back in 2017 prompted the Treasury to allow subsidies and waiver of import duties to smoothen purchase of key food items such as maize, rice and milk powder from abroad.

This year the Treasury allocated Sh5.7 billion for fertiliser subsidy to small-scale farmers for the main crop planting season between March and May after supplies from Russia were cut off because of sanctions, sending prices through the roof. A further Sh1.5 billion has been budgeted for the October-December short-rainfall period.

Kenya, however, plans to discontinue the fuel subsidy, which started in April last year in a bid to stabilise pump prices and reduce the second-round effects on the prices of the essential commodities whose cost has been exacerbated by Russia’s war on Ukraine from February 24.

The Treasury and Petroleum ministry have said Kenya cannot sustain the fuel prices stabilisation scheme into the financial year starting July, after pumping an estimated Sh84 billion in the year ending this month.

“Fuel subsidies are inefficient and often lead to misallocation of resources and crowding out of public spending on productive sectors, resulting in unintended consequences such as disproportionately benefiting the well-off,” Treasury Secretary Ukur Yatani said on June 14.

“The cost of the fuel subsidy could eventually surpass its allocation in the national budget, thus potentially escalating public debt to unsustainable levels and disrupting the government's plan to reduce the rate of debt accumulation.”

Mr Yatani added: “For this reason, a gradual adjustment in domestic fuel prices will be necessary in order to progressively eliminate the need for the fuel subsidy, possibly within the next financial year.”

Higher fuel prices will exert more pressure on inflation in an economy that largely depends on diesel for farming, transportation and manufacturing.

That, in an environment of stagnant wages, will continue butchering consumer purchasing power and cut demand, sending output into a further downward trajectory.

“Subsidy cuts are an upside risk,” FocusEconomics wrote in the outlook report. “FocusEconomics panelists project that inflation will average 7.0 percent in 2022, which is up 0.2 percentage points from last month’s projection.”

Kenya’s growth outlook for 2022 is, however, faster than sub-Saharan’s average of 3.6 percent, according to the report.

Key economies seeing growing faster than Kenya include Cote d'Ivoire (6.3 percent), Tanzania (5.4 percent) and Uganda (5.4 percent).

Kenya’s real GDP — a measure of economic output adjusted to inflation — has a history of slowing down during election years when firms put investment decisions on hold pending a return to normalcy in the political landscape.

During the last election in 2017, the economic growth slowed to 3.82 percent from 4.21 percent the year before, while in 2013 it decelerated to 3.80 percent from 4.57 percent, according to GDP figures which have been revised following last year’s rebasing of the economy.

The aftermath of the deadly December 2007 presidential sunk growth to 0.23 percent in 2008 from 6.85 percent, while in 2002 it slowed to 0.5 percent from 3.78 percent the year before.

The same trend was witnessed in 1997 when growth dropped to 0.48 from 4.15 percent, and in 1992 when it contracted to negative 0.8 percent from 1.44 percent on the onset of multiparty elections.

“As a country, we have matured democratically, we have learnt our lessons from past elections,” Mr Yatani said on May 5. “I am quite optimistic that we are going to maintain that sense of stability throughout the electioneering period.”

Deputy President William Ruto and ODM Party leader Raila Odinga are the leading candidates to succeed President Uhuru Kenyatta, who has led the country since April 2013, after the August 9 polls, which so far have four contestants cleared by the electoral body.

The election will be repeated if no winner garners more than 50 percent of the votes cast.

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