Falling prices: Mbadi's math doesn't add up

In recent weeks, the National Treasury has been on a public relations overdrive to convince Kenyans that they are better off now than they were a year ago or at least since the Kenya Kwanza administration took over. 

Last week, Treasury Cabinet Secretary John Mbadi issued a lengthy statement, showing how the cost of living has dramatically reduced over the past year.

In the statement, Mr Mbadi noted that inflation had reduced from 3.5 per cent in February this year from 6.3 per cent in February 2024. 

On February 13, he held a briefing on the steps of the National Treasury along Tumbo Avenue, the street that the Ministry shares with Kenya Revenue Authority (KRA), where he outlined measures that the administration had put in place to ensure there is more money in the pockets of Kenyans. 

These include Central Bank’s interventions aimed at lowering the cost of loans through the reduction of Central Bank Rate (CBR) as well as reducing the Cash Reserve Ratio for banks, availing them more funds to lend to their customers.

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The measures that Mr Mbadi spoke about also included lower food and fuel prices, achieved through such interventions as fertiliser subsidies that played a part in increasing food production and stabilising the shilling, which has resulted in Kenyans spending less when importing petroleum products. There has also been the promise to pay pending bills to Kenyan firms, which would then enable them to invest and create employment. 

According to CS Mbadi, Treasury increased disposable income for Kenyans following the recent review in law that introduced tax deductions on contributions made by employees to the Social Health Insurance Fund (SHIF) and Housing Levy.

The deductions have lowered taxable income and reduced the overall tax burden for Kenyans in formal employment. 

While analysts say it is not in dispute that the cost of essentials, including food, has reduced, they note that Mr Mbadi and other senior government officials are oblivious to the plight of Kenyans. 

They noted that the drop in some commodity prices has largely been on account of weak demand as Kenyans are unable to buy. 

Prof XN Iraki, a professor at the University of Nairobi, noted that Treasury should do the job and leave it to independent observers to give the verdict on the state of the economy.

Treasury, he said, is unlikely to be objective. He noted that the lower cost of goods has been due to weak demand. 

“The citizens have no money, and by extension, there is subdued demand, resulting in falling inflation,” said Iraki. “The data may be good, but what’s the hard reality on the ground? What are the hustlers’ sentiments?” he posed. 

“Ordinary citizens are more believable, they face reality every day. The government officials are ‘protected’ from the reality by salaries and perks. Ordinary Kenyans, the hoipolloi face Joblessness, hunger, lack of rent and fees and other economic challenges.” 

Dr Patrick Muinde, an economist, holds similar sentiments, noting that while inflation has come down, it is not necessarily because of the low cost of goods but the fact that Kenyans cannot pay. 

“The fundamental question is whether this [drop in inflation] is because of the low cost of goods or the lack of demand. The consensus has been leaning towards lack of demand and also driven by lower income for households,” he said. 

“One of the realities that the government has refused to admit is that household incomes have declined because of high taxes. This is something that cannot be cured unless the economy is responding at the household level.” 

The Tax Laws Amendment Act (2024) offered relief to Kenyans in formal employment when it introduced tax deductions on contributions made by employees to the Social Health Insurance Fund (SHIF) and Housing Levy.

The deductions have lowered taxable income and reduced the overall tax burden for Kenyans in formal employment. 

This, Mr Muinde noted, is too little to spur consumption and is also against other factors that have eroded the spending power among Kenyans.   

“The other bit that Mbadi has not been addressing is the issue of household income. The review in law has put some few coins back into the pockets of workers, but it is not substantive enough to reverse the challenge of household incomes,” he said. 

Consumers Federation of Kenya (Cofek) Secretary General Stephen Mutoro noted that despite the lower inflation, Kenyans are still feeling the pressure.  “The long and short of the talk about the cost of living is that theory and reality are worlds apart. Inflation dropped to 2.7 per cent at some point last year, but basically, there was nothing different in terms of the pressure that Kenyans area feeling,” said Mr Mutoro. 

“The bottom line is that Kenyans do not have money in their pockets. This is what happens when you do not pay contractors’ pending bills or engage in mega projects where money is wired to those countries and is spent in those countries without landing here.” 

He added that the reality is that Kenyans have lost jobs and are now unable to afford the basics. 

“People have lost their jobs. Those clinging on to their jobs are told to take lower pay, while the cost of goods, especially FMCGs (Fast-Moving Consumer Goods), has gone up. Even when they talk about unga prices having come down, it is relative.” 

Meanwhile, Prof Iraki noted that while banks have lowered lending rates, it was only after a Central Bank threat that it would penalise the lenders that failed to pass the benefits of lower CBR. 

CBK’s Monetary Policy Committee (MPC) in February cut the CBR to 10.75 per cent from 11.25 per cent. It has, since August last year, sustained a reduction in CBR. MPC, in its February statement, noted that despite the cuts, banks remained reluctant to reduce interest rates, which was, in turn, hurting the economy. 

It is only after CBK threatened to penalise the banks that do not cut their lending rates that they have in recent weeks announced lower rates on loans. Recent change in laws allows CBK to penalise the players, with non-compliant banks facing fines of up to Sh20 million or three times any undue benefits accrued. The Business Laws (Amendment) Act, 2024, which came into effect in December last year,  amended the Banking Act and introduced the penalties. CBK also reduced the Cash Reserve Ratio (CRR) to 3.25 per cent from 4.25 per cent, which it said would complement the lowering of the CBR and support the lowering of lending rates. Prof Iraki, however, questioned whether Kenyans are taking loans, considering their current plight. 

“Is the cost of credit going down? It was after CBK  reduced the rates that banks took the cue. But are we borrowing more because of lower rates? I doubt it,” he said. 

The rate of inflation had been on the decline last year, dropping to a 14-year low of 2.7 per cent in October last year from a high of 9.2 per cent in early 2023. It has, however, been edging and stood at 3.5 per cent in February. 

Economist Mr Muinde said Kenyans should expect inflation to further go up as what was harvested following last year’s bumper crops has already been absorbed in the market.

The October-December short rains season also failed in some areas that are also significant contributors to food consumed locally. 

“The short rains were not adequate, and if you look at the entire lower eastern, which contributes a significant chunk of the food basket, the crop failed, and this is the case for other parts, including the central region,” he said. 

“When you look at the Rift Valley food basket, most of the maize that was harvested has been absorbed in the market. Unless the government puts in place a stabilisation mechanism, we might expect prices to start going up.” 

Fuel and electricity are key drivers for the economy powering industries’ production processes as well as transportation of goods from farms and factories to the market.. They have been marked by a significant reduction in retail prices, but this has not been adequate to spur consumption. The cost both diesel and super petrol declined 14 per cent over the last year. Consumption for the two fuels however increased by only one per cent.  

Explaining why the fuel reduction has not translated into increased consumption, Ken Gichinga, chief economist at Mentoria Economics, in a recent interview with The Standard, said other factors are at play, limiting the impact that lower fuel and power prices might have for households.  “A drop in fuel prices has contributed to lower inflation. However, the labour market continues to be weak and disposable incomes have greatly reduced, thus putting household budgets under pressure,” he said.