Oil rebound puts inflationary pressure on East African economies

Saturday May 21 2016

Regional inflation rates could spike in the

Regional inflation rates could spike in the medium term following the sustained rebound of the price of crude oil in the international market, where it has risen from a low of $29 early this year to the current $47 per barrel. GRAPHIC | FILE 


Regional inflation rates could spike in the medium term following the sustained rebound of the price of crude oil in the international market, where it has risen from a low of $29 early this year to the current $47 per barrel.

Rwanda recorded a rise in its April inflation rate to 4.6 per cent, up from 4.1 per cent a month earlier, which it blamed on rising energy and transport costs. Kenya, Tanzania and Uganda have also recorded an increase in fuel prices in the past month.

The three countries saw their inflation drop in April, with Kenya’s year-on-year inflation dropping to 5.27 per cent in April, from 6.45 per cent a month earlier.

Uganda’s inflation dropped to 5.1 per cent in April from 6.2 per cent in March, while Tanzania saw its April inflation decrease to 5.1 per cent from 5.4 per cent a month earlier.

Rwanda’s central bank (BNR) said the country’s inflation levels experienced pressure as a result of increased transport prices after the recovery in global oil prices.

Rwanda’s monthly inflation rate rose by 0.8 per cent in April, while its food prices rose by 5.6 per cent. The annual inflation rate for housing, water, electricity, gas and other fuels increased by 3.9 per cent while that for transport rose by 7.6 per cent.

Last week, Rwanda’s Ministry of Trade and Industry announced an increase in the petrol pump price from Rwf826 ($1.05) to Rwf860 ($1.09) per litre, making it the highest in the region.

“The increase is due to international oil prices, [with] crude increasing by 35 per cent between January and May,” the ministry said in a statement.

Kenya also adjusted its petroleum prices upwards last weekend with a litre of petrol now retailing at Ksh84.25 ($0.82) while diesel will retail at Ksh70.37 ($0.67) in Nairobi. The previous petrol price was Ksh80.67 ($0.78) per litre while diesel was at Ksh66.23 ($0.64). The price of kerosene also went up by Ksh3.02 ($0.03) per litre for the second month to retail at Ksh46.98 ($0.48).

The Energy Regulatory Commission (ERC) said the price of crude oil in the international market has risen, leading to an increase, early this year, of the price of diesel, kerosene and petrol.

“The impact of this change will begin to affect the local retail prices from this month,” said the ERC in a statement.

The rise in crude oil prices has seen the average cost of imported super petrol increase by 13.29 per cent from $417 per tonne in March this year to $472.9 in April, while diesel recorded an increase of 16.06 per cent from $322.76 per tonne to $374.60 per tonne.

Genghis Capital macroeconomic analyst Kevin Tuitoek said countries in the region face inflationary pressure with the rebound in oil prices.

Last week, on the sidelines of the World Economic Forum in Kigali, Kenya’s Central Bank Governor Patrick Njoroge said there was room to start loosening the tight monetary stance as inflation had started falling within the acceptable range.

“We are seeing room for a downward policy adjustment but that decision will be made by the committee in the coming week. However, I hold the view that the inflationary pressures are not there in the mid-term so we should not expect it to increase,” said Dr Njoroge.

However, the rise in oil prices is expected to start swelling the country’s import bill, which will put pressure on the shilling.

According to the Kenya National Bureau of Statistics, inflation was up 0.69 per cent on a monthly basis. The rate of inflation has been falling steadily this year, after peaking at 8.01 per cent in December last year, and analysts said the latest reading may encourage policymakers to start easing rates.

Razia Khan, head of research for Africa at Standard Chartered in London, said April’s data would give the MPC leeway to ease the rates.

“However, food prices rose by 1.5 per cent in April when compared with March. This means that any decision will have to consider the rising cost of food and it could result in a cautious approach by the policy committee,” said Ms Khan.

Across the border, falling food prices helped ease Uganda’s inflation rate in April but a slight spike in energy and petroleum costs could be a concern for the country’s central bank.

The Uganda Bureau of Statistics (UBOS) said the annual core inflation, which excludes food, fuel, electricity and metered water, declined to 6.4 per cent this month, from 6.9 per cent in March.

“The slowdown in food prices due to oversupply in the market of vegetables and fruits helped reduce the inflationary pressures,” said Chris Mukiza Ndatiira, director of macroeconomic statistics at UBOS.

Early last month, the Bank of Uganda (BoU) cut its policy rate to 16 per cent, citing a likelihood of both headline and core inflation hovering around 6.5 per cent in the first half of 2016, before declining to a medium term target of five per cent in the first quarter of 2017.

“Since the last time the Monetary Policy Committee met, the inflation outlook has improved slightly, mainly due to the exchange rate and food price developments,” said BoU Governor Emmanuel Tumusime-Mutebile.

Uganda also saw a decline in its annual energy, and utilities inflation rate but its monthly headline inflation rose by 0.1 per cent in April compared with 0.9 per cent in March driven by a slight increase in fuel costs.

Tanzania’s case

A slight increase in food and fuel costs in Tanzania, the region’s second largest economy, was recorded in April despite its inflation rate dropping.

Late last month, the National Bureau of Statistics of Tanzania (NBS) hinted at lowering the price of petrol in the expectation that this would help lower inflation rates further in May.

According to Ephraim Kwesigabo, a director at NBS, a slower rise in both food and non-food prices was the cause of the decrease in inflation rates, but Tanzania still remained exposed to the rising global oil prices.

“We saw a decrease in food prices in April by around 8.3 per cent. We also recorded a drop in petrol prices, but have since seen a rise in diesel and kerosene prices, which should reflect in our May figures,” said Mr Kwesigabo.

Tanzania, like the other regional economies, has recorded an increase in the month-on-month inflation rate, by 0.5 per cent. In February, the government changed its formula for calculating its annual headline inflation rate.

This reduction, coupled with a rise in fuel costs, is expected to start exposing it to inflationary pressures in the medium-term.

Last month, the Energy and Water Utilities Regulatory Authority lowered the cost of petrol by 4.57 per cent per litre in Dar es Salaam, while the price of diesel was increased by 2.02 per cent per litre and that of kerosene went up by 2.45 per cent.

The price of petrol in Dar es Salaam dropped to Tsh1,728 ($0.79) per litre, while diesel rose to Tsh1,516 ($0.68) per litre. Kerosene prices also increased to Tsh1,501 ($0.66) per litre.