Why lower inflation is good news for Kenya

By Isaac OGANGA, Phyllis MUCHOKI and Victor MUJIDU

Kenya’s inflation dropped to 7.3 percent in July from 7.9 percent in June due to significant drop in prices of some food items and cooking gas, government statistics office showed Monday.

Figures by the Kenya National Bureau of Statistics (KNBS) indicate that this is the lowest year-on-year inflation since May 2022 when it stood at 7.1 percent – bringing the figure to below Central bank’s target of 7.5 percent.

Surprisingly, the country’s private sector activity fell during the month in question, June, undermined by slowing business in the services, wholesale and retail sectors in an environment of high inflation and weak consumer spending power.

Stanbic Bank Kenya Purchasing Managers’ Index (PMI) fell to 47.8 in June from 49.4 a month earlier. Readings above 50 signal growths. It was the fifth month in a row that the PMI had stayed below 50, signaling a contraction in activity.

A month earlier, Kenya’s inflation (KECPI=ECI) had risen to 8 percent year-on-year, from 7.9 percent in April this year. On a monthly basis, May inflation was at 0.9 percent compared to 0.5 percent in April. The government has a preferred inflation range of 2.5%-7.5% in the medium term.

Deflation in the June figures, is generally the decline in the prices for goods and services that occur when the rate of inflation falls below 0%. Deflation will take place naturally, if and when the money supply of an economy is limited. Deflation in an economy indicates deteriorating conditions.

Higher interest rates are generally a policy response to rising inflation. Conversely, when inflation is falling and economic growth slowing, central banks may lower interest rates to stimulate the economy.

Lower inflation is good news. CBK has been raising interest rates to slow the economy so that businesses will have fewer reasons to raise prices. We’re hoping for a “soft landing,” which means solving the inflation problem without needing a recession.

Inflation measures how much prices are rising over time. A recession is a period of negative economic growth. An emergency fund could give you a financial cushion in down markets brought by inflation and recessions.

Kenya’s average annual per capita income is US$5,270. With inflation, citizens lose even this limited purchasing power. The same money buys less. Wages and salaries do not go up fast enough.

Kenya could increase the supply of basic commodities by allowing competitive importing of maize and wheat. The increase in supply would reduce the price. Competition is one of the most powerful weapons against inflation. In the long run, Kenya must produce more of whatever is in shortage.

Markets’ response 

Kenya’s paint sector for instance, has until the June inflation figures been facing a deteriorating outlook as inflation – related snags, price variance in raw materials as well as high fuel costs weigh heavily on some firms’ performances.

Market trends and some executives’ analysis for the year give a grim view on the future of some paint companies, with expectations that there will be a marked slowdown.

Companies like Neuce Kenya Paint industry ltd, although a small player in the local market and depend heavily on imports, is one of the firms feeling the long-term effects of an economic vagueness, with the sinking value of the Shilling against global currencies and high fuel a growing concern.

“Apart from the forex, other major factors such as price variance in raw materials, fuel cost, clearing goods, NSSF and other costs have seen a similar upward spiral.

Due to these reasons, we will not be able to sustain the current prices and we have no alternative but to further review the prices,” read a statement in part from the firm’s managing director Nelson Fiuza to its customers last month.

Prices of raw materials used to make paint and coatings are still skyrocketing, with the upward trajectory set to continue over the next few months as new taxes begin to take effect.

Some of the raw materials used in making paint include unsaturated polyester, alkyd, Emulsion VAM, Emulsion-styrene acrylic, Homopolymers, and Emulsion B.A.M.

In march last year, paint firms lost a bid to block new taxes on raw materials. In their petition, the manufacturers including Basco Products (K) Limited, Crown Paints Kenya limited, Nasib Industrial Products Limited, Maroo Polymers Limited, Galaxy Paints and Coatings Limited, and Super Manufacturers Limited described the tax measures as unlawful, unconstitutional, null and void as they impose an unfair tax burden on them and their customers.

They were opposed to the 10 percent excise duty rate introduced in 2021 in the Finance Act 2021 as the government mobilized tax revenues to finance the 2021/22 budget of Sh3.6 trillion. Their main contention was that the amendments were not subjected to public participation.

But with the introduction on new taxes in the Finance Bill 2023, manufacturers and not just paint companies are expected to increase their price margins as they contend with the high cost of doing business in the country.

Weakening of the shilling against the dollar since last year for instance, has also led to the spike in the cost of importing goods for paint firms which source over 95 percent of raw materials from abroad.

The new prices look set to protect margins for the paints maker which is recovering from the sales drop caused by the Covid-19 economic fallout, inflation brought by the war in Ukraine, and general weak economy.

The Shilling against the dollar is presently trading at 140.65 while the annual inflation rate in Kenya eased marginally to 7.9 percent in June 2023, down from 8 percent in the prior month but still above the central bank’s preferred range of 2.5% to 7.5 percent.

Auto industry

New vehicle sales in Kenya fell by 14 percent in June compared to the same period last year, a lobbyist for the formal motor sector has said, as the industry’s difficulties under the weight of a global inflation continue into 2023.

Figures by Kenya Motor Industry Association (KMIA) show that the industry sold a total of 6,492 units in the first half of this year, 813 units less than it managed in a similar period last year, between January and June 2022.

The association attributed the low retail sales numbers to a difficult six-month period in which the sector has borne the brunt of the lingering European war which broke in February 2022, causing supply chain bottlenecks and driving up costs for everything from labor to raw materials.

Similarly, Kenya’s new tax package – a host of which kicked in July 1, have loosen the local labor market, with employers in many sectors confronting a truly tight equilibrium for the first time in decades and face the prospect of salaried employees’ ability to spend on luxury condensed by tough economic times.

Other factors such as unpaid or pending bills by the National and County Governments have sapped Kenyan auto sales and a recovery will likely be slow, threatening auto workers whose jobs depend on fleet sales.

Coupled with currency fluctuations and wobbly interest rates, auto executives are particularly concerned that continued inability by both sets of governments to pay their suppliers, has already seen most of them ‘write off’ the year.

And so, during a slump auto sale typically fall, often significantly and many buyers tend to back out of the market until the economy recovers.

Automakers’ executives are however hopeful this year’s new vehicle sales — the worst thus far in more than a decade — will mark a bottom for the market, at least in the near term.

“This year is gone,” offered Dinesh Kotecha, the Group CEO of Simba Corporation – sellers of Proton vehicle brands, Mitsubishi, Fuso, Mahindra, and Same Tractors.

In a recent telephone interview, Mr. Kotecha decried the mounting worry in form of pending bills and high interest rates as the most pressing and lingering holdups likely to see the industry perform dismally this year.

Arvinder Reel, the Managing Director of CFAO Group which sells Toyota vehicles and Hino trucks, shares similar worries and is “hoping to do at least what we did last year.”

“Government is the largest buyer and with these challenges we have already seen the market shrink by 13 percent. And with high taxation we have also seen disposable income of would-be buyers limited as a result,” said Mr. Reel in an interview yesterday.

In the short term, both agree that fleet sales are not a major concern for automakers who are now focused on ramping up production to beef up lackluster dealer inventories which has existed since the onset of Covid-19.

Figures by the Controller of Budget (CoB), Margaret Nyakango shows that National and County Governments’ unpaid bills stood at Sh637.91 billion as of February 2023.

Editing by Steve Umidha