Kenya has opted to pursue a different model for subsidising maize flour from the one deployed in the fuel market.
Fretful that the subsidy will hit a snag over shortages, it opted to create a third-party account where millers are paid every five days the difference between the market price and the cost set by the government.
Kenya was in April gripped by fuel shortages due to cash flow problems at some smaller retailers and delays in the payment of subsidies to the companies by the government.
Now, the Treasury has opted for an escrow account to ensure timely payments to the millers as they release flour to the market to prevent shortages.
The subsidy deal with millers has cut the price of maize flour by half to Sh100 for a two-kilo packet from a market cost of above Sh210.
Escrow Account
The Treasury has rejigged the budget of the Ministry of Agriculture to free Sh8.5 billion that will be put in an escrow account under the watch of the Central Bank of Kenya (CBK).
An escrow is an account where funds are held in trust while two or more parties complete a transaction.
This is meant to offer millers comfort about prompt payment and avoid cash flow troubles at the factories, curbing shortages that could stoke further consumer anger ahead of a national election in August.
The government has stationed officers in each of the milling plant to verify the volumes of flour leaving the factory floors to the shop shelves and curb fraudulent activities.
According to the contract, millers are supposed to be paid the Sh93 a packet subsidy after five days of deliveries.
Government officials and their private sector counterparts abused a similar maize subsidy programme in 2017 to make money, leading to distortions in the market.
The government spent Sh6 billion to subsidise maize imports after a drought caused shortages and sent the price of the staple soaring before a key election.
The subsidies lowered the cost of a 90-kg bag of maize to Sh2,300 against a market rate of Sh4,600, with the State settling the difference.
A total of 10.5 million bags were imported under the subsidy programme, the Senate committee found, well above the six million bags targeted under the programme.
Some of this maize was then sold to the State-backed National Cereals Produce Board at a profit, leaving genuine millers with unpaid bills.
The government has set aside Sh500 million to clear millers’ arrears for the 2017 subsidy programme.
Compliance
The government is using chiefs to ensure corner shops, which, unlike supermarkets, are largely unpoliced to sell maize flour at Sh100 a two-kilo packet.
Retailers risk a fine of Sh1 million or a five-year jail term for selling the commodity above Sh100.
The State promised a gazette notice giving legal backing for capping sifted maize flour costs, marking the second time the order will be issued under a law passed in 2011 allowing price controls on essential goods.
The order will empower the State to punish a trader selling the subsidised flour above the set maximum price.
In the run-up to the General Election in 2017, the government used the order under the Price Control (Essential Goods) Act to cap flour prices at Sh90 a packet after retail prices hit Sh143.
President Mwai Kibaki in September 2011 signed into law a Bill that allowed Kenya to return to price controls on any essential commodity after the practice was abandoned in the 1990s in favour of economic liberalisation.
The law allows the Finance minister to set maximum prices of gazetted essential commodities upon consultation with the relevant industry.
Costly maize
A crop failure due to poor weather and shift in movement of Uganda maize to South Sudan, has seen flour prices rocket to a record high of Sh210 for a two kilo packet, up from Sh120 at the start of the year.
Kenya traditionally receives imports from Uganda and Tanzania, but trade flows in the grain has shifted to other countries.
A 90-kilo bag of maize in South Sudan is going at Sh7,000, way above what a trader selling maize to Kenya would earn.
Consumer prices in Kenya have skyrocketed this year and inflation hit a 58-month high of 7.9 percent in June, taking it beyond the Treasury’s preferred upper limit of 7.5 percent.
The sky-high inflation on the back of a jump in the price of essential items like cooking oil, food, fuel and soap is squeezing household budgets and demand for goods and services
Politics
Government critics have used the high costs of living to portray it as incompetent.
President Uhuru Kenyatta is supporting his former political foe, Raila Odinga, after the two made peace in early 2018, effectively sidelining Deputy President William Ruto, who is also a front runner for the top seat.
A crop failure due to poor weather and a shift in the movement of Uganda maize to South Sudan have seen flour prices rise to a record high of Sh210 for a two-kilo packet, up from Sh120 at the start of the year.
Policy makers and politicians are taking notice of the online campaigns by ordinary Kenyans concerned about reduced cash flow, fewer employment opportunities, and rising cost of living as campaigning for elections enters the home stretch.
Margins
Millers are selling the subsidised two Kg packet for Sh91 wholesalers, pushing the total cost from the factory floor to Sh184 after accounting for the State compensation of Sh93.
This puts the margin of wholesalers and retailers at Sh9 for the 2kg packet.
