Inflation, weak shilling dampen Kenya economy

Saturday July 13 2013

An Uchumi supermarket in Nairobi, Kenya. Increases in inflation piles pressure on households who are left with less to spend. Photo/FILE

Kenya’s inflation could rise further in the coming months, eroding the purchasing power of struggling households and piling pressure on a resurging economy, business executives said, even as they forecast a positive growth outlook.

In a survey conducted by the Central Bank of Kenya and released on Friday, executives from both banks and non-banking firms expect inflation to rise in the remaining part of the year, oscillating around five per cent.

This, they argued, would be driven by the impact of proposed tax measures in the new fiscal year, principally the controversial VAT Bill, which could result in higher prices of essential goods; expected increase in demand in the economy; impact of base effects; and a likely rise in government spending with implementation of the devolved system of government.

A majority of bank bosses expect lending rates to continue declining in the remainder of 2013 due to improved liquidity and reduced political risk. But an upsurge in economic activity could also exert pressure on interest rates with increased demand for loans to finance investment.

At least 20 per cent of banks expect lending rates to rise, according to the survey — which polled all commercial banks, eight deposit taking microfinance institutions and 100 non-bank companies.

The shilling is also expected to remain under pressure as a result of the external account being in deficit.


The Kenyan shilling, which had remained strong after the March 4 General Election, has depreciated slightly to an average of Ksh87 to the dollar from a high of Ksh83.71 it hit in May. Ordinarily, exporters of mainly agricultural produce have tended to support a weak shilling arguing that it boosts their income, while importers generally favour a strong currency to help them cut production costs.

Any further increases in inflation will pile pressure on households, which will be left with less to spend.

Data from the Economic Survey 2013 show real average earnings or income per employee rose by a measly 4.8 per cent last year, indicating general erosion of the workers’ ability to buy goods and services at the prevailing market prices.

Comparatively, inflation stood at an average of 9.5 per cent during the year, wiping out all gains from the 4.7 per cent increase in nominal earnings and leaving workers in the negative territory.

High inflation has over the past five years been used as a weapon by employees to press for higher wages in the public sector, culminating in salary increments for civil servants, teachers, doctors, lecturers. Currently, Kenya’s teachers are on strike demanding at least Ksh47 billion ($552 million) in higher salaries and allowances.

However, a reprieve could be delivered by stable international oil prices; prospects for improved food supply with onset of harvest period; stability of the exchange rate due to increased confidence; and the monetary policy measures in place.

Increased optimism

Executives cited increased optimism for a strong growth in 2013 arising from growth measures announced in the June 13 budget; increased business confidence and rising foreign direct investments (FDI) inflows. The outlook leaves the CBK facing a tough balancing act as it continues to focus on the inflation outcome, while keeping an eye on the exchange rate.

On Tuesday, the banking regulator held the Central Bank Rate (CBR) at 8.5 per cent. The latest market perception survey now shows that 54 per cent of bank executives believe that inflation will go up at a faster pace, 32 per cent expect the inflation rate to remain the same while 14 per cent see a decline.

READ: CBK leaves benchmark rate unchanged at 8.5pc

This is a significant change from the last survey done in April in which 26 per cent of bank executives believed that prices of basics would rise at a faster pace, 43 per cent expected the inflation rate to hold while 31 per cent expected it to decline.

Similarly, 46 per cent of non-bank executives now believe prices of basics will rise at a faster pace, 42 per cent expect the pace to remain the same while only 12 per cent expect a slower pace.

In April 29 per cent of non-bank executives said that they expect the inflation rate to rise, 39 per cent expected it to remain the same while 32 per cent expected a decline.

Inflation has been increasing at a slower pace for more than a year after peaking in 2011 and seemed to have stabilised over the past four months in single digits.

“The recent wage conflicts, the demos against the VAT Bill and data in the month of June showed inflation rising from 4.05 per cent to 4.91 per cent, the reading from the survey is that inflation is raising, but all indicators are showing inflation moving to the target of five per cent,” said Prof Njuguna Ndungu, the CBK governor in an e-mailed response to The EastAfrican adding the faster pace of prices of basics was attributed to a blip in food prices.

Environments with persistent high inflation rates and slower growth of income levels have reduced disposable incomes leading to reduced savings levels, which results in fewer funds that can be used for investment.

A research note by Standard Charted bank shows that confidence in Kenya’s economic prospects has surged with the selection of a technocrat-dominated Cabinet in Kenya and increased investments in oil and gas in Tanzania and Uganda.

ALSO READ: $800m in new investment in Q2 bodes well for Kenya

Analysts at the bank said that in Kenya, the economy was resilient even in the first quarter of this year, “a quarter that we thought would be disproportionately influenced by the slowdown in activity evident ahead of March elections.”

“Kenya finds itself in the midst of an East African region experiencing a new resource boom. Tanzania is closer to becoming a gas producer. Uganda has reached agreement on the size of a domestic refinery, a step that should accelerate its progress to producing oil. The growth optimism in the region is palpable,” the research note states.

But uncertainty relating to the International Criminal Court trials of the president and his deputy and one other Kenyan persists and the country must still navigate its way through the requirements of a more devolved government.

Overall, prospects in sub-Saharan Africa remain largely positive, despite a slowdown in China’s growth.

By David Mugwe and Christine Mungai