Treasury shuns law set to control goods prices

The National Treasury building in Nairobi. PHOTO | SALATON NJAU | NMG

The Treasury will not invoke the law that allows the government to control the prices of essential goods in reaction to the surge in inflation.

Treasury Principal Secretary Julius Muia on Wednesday said the State will not cap the price of basic items in line with the Price Control (Essential Goods) Act, 2011 as a weapon to control the cost of living measure.

The Act, which was enacted during the tenure of the late President Mwai Kibaki, allows the Finance minister to set maximum prices of gazetted essential commodities upon consultation with the relevant industry.

Consumer prices have rocketed this year and inflation hit a 27-month high of 7.1 percent in May, raising the prospect that the State would for the second time use the law to control the cost of essential goods.

“Restricting prices is in the old times, we have gone to a competitive economy where we want freedom, we want suppliers to be able to compete so price controls is not something that is encouraged nowadays in the current way of doing business anywhere in the world,” Mr Muia told the Business Daily on Wednesday.

President Mwai Kibaki in September 2011 signed into law a Bill that allowed Kenya to return to price controls of any essential commodity after the practice was abandoned in the 1990s in favour of economic liberalisation.

The law remained dormant until May 2017 when the Treasury capped the price of the two kilogramme packet maize flour at Sh90, with those in breach risking a fine of Sh1 million or a five-year jail term.

At the time, the price of the 2kg packet of flour had risen to Sh140 and presented a political headache for President Uhuru Kenyatta as he sought a second term.

The price of maize flour has now breached the Sh200 mark for the first time in history, up from an average of Sh148.57 in May, amid simmering public anger over the high cost of living.

The cost of living measure rose to 7.1 percent in May from 6.5 percent the prior month, and the Central Bank of Kenya (CBK) has warned that inflation risk rising above the government’s target range of 2.5-7.5 percent.

This has forced many households, especially in the low-income segment, to reduce their shopping basket in an environment where firms have frozen salaries as they recover from Covid-19 economic hardships.

The rise in the cost of essential commodities has forced workers to cut back spending on non-essential items such as beer and airtime, ultimately hurting firms like East Africa Breweries Limited (EABL) and Safaricom.

Prof XN Iraki, an economist at the University of Nairobi, reckons that price controls could trigger shortages of essential goods, arguing that entrepreneurs risk perfecting hoarding of commodities.

“Capping prices is not the best way to control inflation, forcing businesses to sell below cost will only create shortages, remember the fuel experience just the other day and the crisis it created,” Mr Iraki said.

Since 2010, every month the government has set a cap on prices of petrol, diesel and kerosene, to protect consumers from unfairly high prices.

Inflation in most countries has soared to multi-year highs, driven by a rebound in economic activity and a further straining of rampant supply chain disruptions that has made energy and food costly.

Russia’s invasion of Ukraine is behind the disruption of flow of goods from fuel to wheat and fertiliser.

Inflation has risen to a 40 year high of 8.6 per cent forcing the US Federal reserve to make the largest rate hike since 2000 of 0.5 percentage points.

In the United Kingdom, soaring food prices pushed British consumer price inflation to a 40-year high of 9.1 percent last month.

Supply chain disruptions and their impact on inflation remain largely out of central banks’ control, yet many in the West have begun withdrawing ultra-loose monetary policy to control soaring inflation through rate hikes.

Locally, the CBK’s Monetary Policy Committee (MPC) raised the benchmark central bank rate (CBR) to 7.5 percent from 7.0 percent where it had been stuck since April 2020.

The CBK’s inflation-targeting Monetary Policy Committee (MPC) on Monday raised 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,” CBK Governor Patrick Njoroge said last month.

Costly commodities have hit workers hard given that the average real wages, adjusted for inflation, stood at negative 3.83 percent last year compared to negative 0.59 percent in 2020.

Employers say the real wages will take longer to improve amid the recovery of the economy from Covid-19 economic hardships, which delivered layoffs, pay cuts and business closures.

Kenya’s private sector has also been hit by the rising cost of living measure through reduced demand for goods and services.

Besides expensive maize flour, cooking oil and fat prices jumped 47.09 percent to an average of Sh370.71 in May from Sh252.03 a year ago, official data show.

The 2kg packet of wheat flour averaged Sh165.89 -- a 28.45 percent rise over the prior year -- while an 800-gramme bar soap averaged Sh153.67, a 25.92 percent jump over Sh129.15 a year ago.

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