The rising clamour for price controls

The clamour of price controls on key commodities including food, rent and medicine is gaining momentum on perceived failure of liberal economy, putting policy makers on the crossroads.

Kenyan economy, widely known for free market policies, is now facing increased pressure to pass regulations to cap prices and curb profiteering amid sharp division about the sustainability of a price-controlled economy.

Currently, there is a push to cap how much doctors should charge patients as consultation fee and how much hospitals should levy for medical procedures.

The lower fees were first mooted in 2006 through Professional Fees Rules and Guidelines but this was never gazetted. Instead, Medical Practitioners and Dentists Rules 2016, with higher fees, took effect.

But Parliament has renewed the slashing of fees, saying it is acting on the realisation that Kenyans need legal protection from alleged exploitative practices such as unnecessary admissions, unjustified hidden costs, excess diagnostic tests and exaggerated prescriptions.

The National Assembly Committee on Health recently approved the proposed amendments to the Health Act 2017 that will see medical charges determined and capped by an 11-member council.

This comes at a time the State is also seeking to control commercial and residential rents through a proposed law that seeks to protect tenants from arbitrary hikes in rents.

The government-backed Landlord and Tenant Bill of 2021 demands that rent increase should not exceed the annual average inflation rate for the preceding year.

This will be the first attempt for the State to regulate rent in an economy where housing has been one of the fastest growing sectors, fuelled by heavy demand and returns.

The clamour for price controls is also being seen on agricultural commodities, petroleum products, and transport amid a clash in opinions over interfering with market forces.

Chief Economist at Mentoria Economics, Ken Gichinga terms the trend as an unfortunate development and one that risks causing instability to the private sector.

“These are very unfortunate developments because they show we moving away from a market-based economy. The problem is that we will end up in a situation where government has to dominate everything,” said Mr Gichinga.

“We risk putting an existential risk to the private sector. When there is no price discovery and true market, then no players can be motivated to come in.”

Just as was the case with classical economists who failed to agree on how far government interventions should go, Kenya finds itself at crossroads.

John Keynes, a British economist whose ideas shaped economic policies, argued that governments should solve problems in the short run rather than wait for market forces to fix things over the long run.

And this is because, as he wrote in 1923: “This long run is a misleading guide to current affairs. In the long run, we are all dead.”

But Mr Gichinga says government cannot afford a weaker private sector given that the muted growth in tax revenues and the need to cut borrowing is limiting its public investments more than before.

In the long run, he argues, weakening the private sector through price controls will see the public pay a huge price through collapsed systems.

“There have been some anti-competitive behaviours but the cure lies in strengthening Competition Authority of Kenya to stop behaviours such as rent-seeking,” said Mr Gichinga.

Former Health CS Sicily Kariuki was in 2019 pushing for a law to control drug prices and have the cost indicated on drug packages.

Ms Kariuki was relying on the Price Control (Essential Goods) Act, 2010, law that allows for price controls of any essential commodity, to push for this.

Government has also been keen to set farmers’ minimum earnings on commodities such as sugarcane, milk, maize and coffee when they deliver to factories.

The ministry of Agriculture in March directed millers to start paying famers at least Sh4,040 per tonne of sugarcane deliveries, up from Sh3,700 that has been prevailing since 2018.

The Kenya Tea Development Agency in July set the minimum reserve price for processed tea at the Mombasa auction in an unprecedented move aimed at cushioning smallholder farmers.

As a result, auction tea prices shall not fall below Sh267 (US$2.43) per kilo. But there has been mixed reactin on the move, with some tea remaining unsold over the high price.

Kenya transitioned into free market policies on the advice of the World Bank and IMF’s structural adjustments that argued that market-determined prices would attract investments in profitable sectors.

Controlling prices was meant to allocate resources in priority sectors but the policy was abandoned after it emerged that the market started seeing this as a constraint.

For instance, the banking sector had to put up with foreign exchange restrictions in 1970s to late 1980s to control dollar-holdings for private sector, making many importers to cut or exit businesses.

Kenya’s cross road on whether to stick to a liberal economy or roll back the years and go back to price controls is not unique.

Mr Keynes’s ideas on government intervention have found life again in the 2009 The Return of the Master book by Robert Skidelsky.

Only that Mr Skidelsky argues that conditions have changed.

“The strange situation has arisen that there is no shortage of prescriptions on offer, but very little in the way of fundamental diagnosis. It's like doctors furiously prescribing for a disease which some deny exists, and others acknowledge exists, but cannot explain,” writes Mr Skidelsky.

But Kenya has no much success stories on price controls especially with the interest rate cap law that lasted for less than three years before it was lifted.

While the cap significantly cut the price of loans, banks reacted by cutting down on lending — a scenario CBK governor Patrick Njoroge equated to “strangling” the economy.

Oil marketers have had to content with price controls and now charge consumers depending on prices set on 14th of every month.

This capping started in 2006 following the enactment of the Energy Act that empowered Energy Regulatory Commission to regulate importation, exportation, refining, storage, transportation and sale of petroleum.

With this trend, even without legal backing, other sector have also been sucked into the price control euphoria that was once popular in 1990s.

In 2017, when maize prices had skyrocketed, the Treasury gave millers limited window to import maize tax free on condition that the price would be capped at Sh90 per two-kilogramme bag.