Central bankers on the spot as high inflation hits businesses and homes

Monday May 9 2011

With the advent of the current sharp increase in food and fuel prices, the resilience exhibited by the region during the past few years is being tested again. Photo/FAITH NJUGUNA

With the advent of the current sharp increase in food and fuel prices, the resilience exhibited by the region during the past few years is being tested again. Photo/FAITH NJUGUNA 


Central bankers in East Africa will this month be scouring for new monetary interventions to tame the spiralling cost of living, as Kenya and Uganda battle double-digit inflation rates.

The International Monetary Fund has warned that the region needs tighter monetary policies to sustain economic growth, which has largely returned to pre-financial crisis levels.

Rising inflation also looks set to derail the recovery and hurt businesses.

Kenya’s year-on-year inflation rate rose to 12.05 per cent last month, from 9.19 per cent in March, on the back of high fuel and food prices.

The two factors also pushed Kampala’s inflation up by 3 percentage points to 14.1 per cent.

Kenya’s Central Bank Monetary Policy Committee will be meeting later this month to review the country’s economic situation, which appears set to raise the interest rates.

In March, the CBK tightened its monetary policy stance by raising the CBR by 25 basis points to 6 per cent.

This sent the signal that temporary shocks such as exchange rate volatility and seasonal food shortages should not be allowed to persist lest they affect pricing structures.

“Monetary policy remains looser than desirable in many countries in the region, even before the surge in fuel and food prices. Interest rates have failed to keep pace with the cyclical recovery, and the policy now needs to move ahead of the curve, particularly where output is back to trend paths,” said the IMF in its latest regional economic outlook.

“Where food and fuel price increases are pronounced, monetary policy should accommodate the first-round response and lean against any second-round effects,” the report says.

Discontent has gripped Kampala and Nairobi over the past few weeks as citizens protest the rising cost of living. And business executives are beginning to worry that the worsening economic outlook could hurt profitability in 2011.

“First quarter 2011 was fairly good but the remaining part of the year could be a little tougher as consumer confidence continues to waver, both in Kenya and across the region, over the surging cost of living and higher political risks,” said Richard Etemesi, the chief executive officer of Standard Chartered Bank.

“I will be surprised if, for example, Kenya’s banking sector maintains last year’s otherwise impressive profitability,” he said.

Kenya last week announced it had scrapped all taxes on kerosene, slashed taxes on diesel and planned to increase minimum wages for millions of workers by 12.5 per cent. But the policy changes are yet to be felt by many households.

The country said it would also remove import duty on wheat and maize.

Uganda is yet to announce any policy or monetary shift, even as protests continue one month later over high food and fuel prices.

The country’s central bank seems bent on tackling the second-round effects of the inflation surge, in light of strong external spillover elements.

“We recognise the possibility of second-round effects connected to spiralling prices of fuel and food. In the meantime, our monetary policy is focused on the effects, rather than on specific price shocks, in the economy because of the limited scope of monetary tools,” said Elliot Mwebya, communications director at the Bank of Uganda.

Of the five East Africa Community economies, Uganda and Kenya have been particularly hard hit by inflation since the onset of the global financial crisis, a situation that has been made worse by the weakening of local currencies against the dollar and other hard currencies.

High inflation has hit millions of poor people and angered opposition leaders, company executives and trade unionists.

Economists at the IMF noted that high levels of foreign inflows into relatively small economies had posed policy challenges in several countries before the crisis, and again when investors pulled out, increasing exchange rate volatility.

They argued that some countries may consider temporary controls on capital inflows to mitigate a recurrence of such instability.

“CEOs are confident of revenue prospects over the next 12 months and three years. But as they work towards meeting these targets and addressing challenges along the way, they are not focused on risk management strategies,” said Kuria Muchiru, the country senior partner at advisory services firm PricewaterhouseCoopers, Kenya.

Additional reporting by Bernard Busuulwa