Kepsa flags double-digit inflation risk from Middle East conflict

Close to two million Kenyans are at risk of sliding into poverty due to impending inflationary pressures as a result of the US-Iran conflict. 

Kenya Private Sector Alliance (Kepsa) warns that as inflation numbers begin to rise, more Kenyans will be subjected to poverty levels as prices of commodities skyrocket beyond their ability to afford. 

More so, since Kenya is an agricultural economy, prices of inputs such as fertiliser will make food prices shoot up in the country due to import challenges. 

According to Kepsa, Kenya’s inflation figures could balloon to double digits as the country bears the burden of war in the Middle East, which has disrupted global oil supply. 

Kepsa has pointed this out in a new report, citing a possible increase in the cost of production and labour as a result and even proposing a Sh500 billion buffer to manage the situation.  

The latest Cost of Doing Business report by Kepsa warns that the economic consequences of the US-Iran conflict will extend beyond just fuel prices.

It notes that inflation numbers could hit 10 per cent in the long run as the full effect comes to be. 

March inflation figures stood at 4.4 per cent, a slight increase from 4.3 per cent in February. Food inflation in March stood at 7.7 per cent while transport settled at 3.8 per cent, according to the Kenya National Bureau of Statistics (KNBS). 

“However, this figure reflects a lag in transmission. Petroleum reserves are projected to last only until April, suggesting that the full impact of global increases has yet to materialise,” says Kepsa in the report.

“Should supply disruptions persist, inflation is expected to be between eight and 10 per cent, driven primarily by energy and food costs.” 

In the latest fuel price cycle, the Energy and Petroleum Regulatory Authority (EPRA) increased the price of petrol by Sh28 while diesel by Sh40. This price was despite a subsidy and a reduction in the value-added tax (VAT) applied to 13 per cent from 16 per cent. 

The government, however, further reduced the VAT to eight per cent so that a litre of petrol now goes for Sh197 a litre from Sh206 and that of diesel retails at Sh196 from Sh206 as well. 

Before these changes, a litre of petrol retailed at Sh178 while that of diesel went for Sh166. 

Kepsa explains that these changes will be trickling into household budgets through tangible hardships, citing the recent increase in transport costs as one of them. 

Transport costs have risen, with matatu fares increasing by approximately 20 per cent, while staple food prices have surged, with maize reaching Sh80 per kilogramme,” says the private sector lobby. 

It adds that electricity costs have also increased by 15 per cent. 

“These increases disproportionately affect lower-income households, particularly given that approximately 60 per cent of Kenyan households spend more than half their income on necessities,” it says. 

If these inflationary pressures persist, Kepsa warns that up to two million individuals could fall below the poverty line. 

The institution says the agricultural sector may bear a bigger portion of this global unrest. 

“Fertiliser prices have increased by approximately 30 per cent, driven by rising global energy costs. This affects approximately 17 million smallholder farmers, many of whom are likely to reduce input usage, leading to projected yield declines of up to 20 per cent,” says Kepsa.

“The resulting reduction in agricultural output poses a significant risk to national food security.” 

The report explains how the Middle East situation complicates what was a rather calm business environment locally, courtesy of a stable shilling and inflation figures. 

It notes that despite a moderated inflation, key operational components such as transport, utilities and certain raw materials continue to rise, becoming pain points for business. 

“Increased fuel prices, vehicle maintenance expenses, and logistics costs contribute directly to higher operating expenses,” the report says.

“Inflation also indirectly increases labour costs, as employees seek higher wages to maintain their purchasing power. This is particularly challenging for labour-intensive sectors such as agriculture, manufacturing, and construction, where payroll expenses constitute a large proportion of operating costs.” 

The report cites three major chokepoints for the economy this year, which will directly affect inflation. These are: Kenya’s fuel import bill of Sh1.2 trillion annually, which inflates, depleting foreign reserves, which threaten the stability of the shilling and debt servicing costs. 

The report postulates that the shilling could exchange between Sh170 and Sh185 against the US dollar if this situation persists. 

These three issues will directly impact inflation at the microeconomic level. Higher cost of energy in developed economies, the report adds, will affect remittances back home. 

Kepsa has proposed a Sh500 billion resilience blueprint to shield households and the economy at large. 

The lobby body proposes Sh100 billion towards expanding petroleum and grain reserves to a 120-day consumption buffer. Sh50 billion should be transferred to insulate the two million households at risk of sliding into poverty from price spikes. 

The government should put Sh200 billion in energy projects to accelerate clean power in geothermal, wind and solar. This should also extend to public transport through electrification to cut dependence on petroleum by 30 per cent. 

Sh100 billion should go into trade diversification by pursuing alternative markets such as Nigeria and Angola through the African Continental Free Trade Area (AfCFTA). 

Sh50 billion should go into diaspora preparedness to assist evacuation frameworks and non-aligned strategic energy partnerships. 

“Exposure to global systems makes external shocks inevitable. In an era of systemic geopolitical risk, economic resilience –anchored in diversification, energy independence and strategic foresight – is the foundation of long-term stability and growth,” Kepsa says.