The Kenyan shilling has hit a new record low of Sh121 to the US dollar this month. Pressure has been mounting on the shilling due to an unfavourable export to import ratio. Demand for imports has risen since the Covid-19 pandemic.
The price of these imported commodities has also increased. This, coupled with the weight of paying off our significant foreign debt, has dried off the foreign currency inflows.
The scarcity of foreign currency has hampered local manufacturing. Our factories need the currency to import raw materials. The edible oils industry has especially been heavily impacted.
The industry imports thousands of metric tonnes of crude oils each month. It, therefore, needs more than $100 million every month.
To make matters worse, the industry has been hit by other weighty challenges. Indonesia had stopped the export of crude palm oil. Ukraine is the industry’s top supplier of sunflower oil. The war in Ukraine has cut that.
Alternative sources of sunflower oil and soybean oil in South America have been hit by a drought. The cost of crude oils has therefore risen to levels never seen before.
This will hit differently in the edible oils sector. To put this into perspective, let us run through the background of the skyrocketing prices of edible oil since 2019.
Around the last quarter of 2020, Covid-19 hit the island nation of Indonesia, with containment measures stopping all farm and post-harvest operations causing untold losses and critical hitch in palm oils supplies globally.
Indonesia is the global leader in palm oil exports. The effects of Covid-19 on the global economy especially in logistics, forex and world trade at the height of grounding of operations in many countries in the world all contributed to an increase in the price of crude palm oil.
In 2021, Malaysia, the second-largest exporter of palm oil also experienced a six-month-long precipitation that was caused by the La Nina. This saw a six-month tumble in the quantity of Malaysian export with December being the highest month-on-month fall in quantities.
Malaysia is slowly recovering but the deficit is still huge and cannot be covered by Indonesia alone.
Early this year in a bid to protect the local population against a lack of palm oil, Indonesia introduced an export quota for crude palm oils. This further reduced the amount available to the world.
This policy stands to date. Late April 2022, Indonesia introduced a total ban on refined palm oil exports. The ban lasted three weeks but its effects will not be undone immediately.
The world has been looking to alternative edible oils especially, soy bean oil (SBO) and the sunflower oils (SFO). But in 2019- 2020, a two-year drought ravished South America and reduced the global soy bean oil supplies. The major exporters, Brazil and Argentina are yet to stabilise from the effects as they await a new crop.
Then, as the Covid-19 effects extended to 2021, came in the Russian-Ukraine conflict, which effectively stopped all operations within the Black Sea region. Russia together with her Black Sea neighbours, including Belarus and Ukraine, account for 76 percent of global SFO exports. All this essentially robbed the world of two of the most important edible oil alternatives to palm oil.
The conflict is also responsible for a rise in the price of fuel oils, which has a direct effect on the cost of freight, electricity, silo handling and transport to the distributors and end consumers. This means that the cost of production shoots higher. The cost per ton of crude palm oil has risen from $600 to $2000.
All this added to the fall of the Kenyan shilling to the dollar means that we expect a further substantial increase in the sale price of edible oil. One litre of palm oil today is trading at Sh450 where it used to trade at Sh250.
The costs of all other FMCG products that depend on oil such as bread, soap, and margarine have also risen. And now with a scarcity of foreign currency, there will soon be shortages of these key household products on our shop shelves as local manufacturers will be unable to purchase sufficient raw materials to make the products.
The government must urgently take action to remedy this situation. Measures can include a delay in the implementation of the two percent AFA levy that is to be introduced on all oil crops and nuts. They can also consider suspending the 1.5 percent RDL and 1.5 percent IDF taxes currently put upon distributors. It is also possible to reduce VAT on edible oils only.
Alwojih is the chairman of the edible oils sub-sector in the Kenya Association of Manufacturers (KAM)
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