Kenya is the largest economy in East Africa, with a GDP of USD 110.3 mn and a growth rate of 6.7% in 2021. Despite this commendable growth, there has been little trickle-down effects on the common mwananchi as the cost of living continues to rise. For instance, the prices of basic food items such as …
Kenya is the largest economy in East Africa, with a GDP of USD 110.3 mn and a growth rate of 6.7% in 2021. Despite this commendable growth, there has been little trickle-down effects on the common mwananchi as the cost of living continues to rise. For instance, the prices of basic food items such as a 2kg packet of maize floor rose to Kshs 205 in July 2022, from Kshs 100 one year ago. The prices of 1 litre cooking oil (salad) have also increased by 50.8%, to an average price of Kshs 400, from Kshs 265 during the same period, mainly due to the disruption in the supply of palm oil which is the main ingredient used to manufacture cooking oil.
With Kenya having concluded its election period and with the high cost of living, we decided to write a piece on Kenya’s current economic status. This blog will not be a political piece or focus on what the outgoing government could have done better. However, what we intend to accomplish is to paint a better picture of where we are as an economy.
Economic indicators
Kenya’s inflation rate has been on an upward trajectory since the beginning of the year, with July’s inflation rate coming in at 8.3%, the highest rate since August 2017. This was the second time in 5 years since the inflation rate was above the government’s target of 2.5% – 7.5%, with the first time being in June 2022, when the inflation rate was 7.9%. The Monetary Policy Committee has been proactive in taming the rising inflation rates by increasing the Central Bank Rate (CBR) by 50 basis points to 7.5% in May 2022, from 7.0%. It is important to note that the rising inflation rates being experienced in Kenya is mainly cost-driven.
In cost-push inflation, the prices of goods and services rise due to the increasing cost of production or raw materials. The weakening of the local currency is also an attributer to this type of inflation, as it increases the prices of imported goods. Consequently, this price growth is transferred from producers to consumers, a scenario currently being seen in Kenya. To put this better into perspective, we have tabulated the prices of essential items in 2021 vs 2022 below:
As seen in the above table, Kenyans have to dig deeper into their pockets to afford basic commodities. For instance, for a common mwananchi to eat Ugali and Sukuma wiki (Kenya’s staple food), they would need to spend more than Kshs 260 in July 2022, compared to Kshs 156 in July 2021. Githeri would cost approximately Kshs 213 compared to Kshs 183 last year.
However, the high cost of living is not unique to Kenya, as other countries, such as Tanzania, recorded the highest inflation rate since 2017 in July 2022 at 4.5%. South Africa’s June 2022’s rate of 7.4% was the highest in 13 years, breaking through the upper limit of the Reserve Bank’s target range of 3.0%-6.0%. The graph below highlights Kenya’s inflation rates for the past 10 years:
Herbert Hoover once said, “Blessed are the young, for they shall inherit the national debt”. Over the last decade, Kenya’s total debt has increased by 431.9% to Kshs 8.6 tn in May 2022, from Kshs 1.6 tn recorded in May 2012. The debt composition of the country has also evolved, with the debt mix being 50:50 external to domestic debt in May 2022, compared to 45:55 external to domestic debt in May 2012. In the last two years, as shown in the graph below, the increase in the debt levels was driven by the increased spending on COVID-19 related spending and infrastructure projects.
According to Reuters, the recent rise in Eurobond yields, more specifically the 10-year Eurobond maturing in 2024, led to the treasury cancelling its plans to float another Eurobond. The yields on the 2024 Eurobond reached peaks of 22.0% in July 2022, higher than the issue rate of 6.6%. The government has instead looked to borrow from Commercial banks to plug in the fiscal deficit, which is estimated to be 6.2% of GDP.
Despite the shift to cheaper concessional loans from the International Monetary Fund (IMF) & the World Bank, Kenya’s debt service to revenue ratio which is currently at 47.6%, is expected to reach highs of 79.3% in 2024 by the IMF. With 67.9% of the external debt being dominated in USD, the weakening of the Kenya shilling will continue to expose the country to high levels of debt distress and debt unsustainability.
In the past, the government has struggled to meet its revenue collection target, save for the 2021/2022 and 2020/2021 fiscal years. The over-projection of the revenue collection stems from the high expenditure set in the budget. For instance, in the 2022/2023 budget original estimates, the treasury has projected the total revenue collected to be Kshs 2.4 tn vs an expenditure of Kshs 3.3 tn. The budget deficit will be financed by the Kshs 862.4 bn borrowings. Despite the Kenya Revenue Authority (KRA) being proactive in expanding the tax base and improve revenue collection, Kenya should embark on fiscal discipline to reduce the widening fiscal deficit. This entails ensuring the share of development expenditure is more than 30% as prescribed by the Public Finance Management Act Section 15 (2) (a). In the recent budget, the recurrent expenditure consumes the largest share of the budget at 67%, with the development expenditure having a paltry 22%. County allocations account for the remaining 11%.
While recurrent expenditure is important, the government should focus on spending more on development expenditure to boost economic growth. Kenya being a Small Open Economy (SOE) is susceptible to economic shocks and as such, there is need to invest more in fiscal stimulus measures.
A case of Ghana and Sri Lanka
Ghana – In July 2022, Ghana opened talks with the IMF seeking USD 2 bn which will be used to bail out the country from an economic crisis. The country faces high inflation rates of 32% in July 2022 (the highest since 2003), a depreciating Cedi, a widening account deficit, and high debt levels of USD 45.5 bn (debt to GDP Ratio of 77%). If the IMF comes to Ghana’s aid, it will be the 17th time since the country’s independence. The country’s lower credit ratings and high expenditure at a time when revenue collection has been on a decline have left the government with no other alternative but to resort to the IMF.
Sri Lanka – The collapse of the Sri Lankan economy was a case of high debt levels, dwindling forex reserves, high budget and current account deficits, hyperinflation, and a devalued currency. The government’s poor economic policies such as the policy to transition farmers to organic farming by banning chemical fertilizers led to the country’s tea production and rice production slump by 18% and 20%, respectively. Key to note, Sri Lanka was the 4th largest tea producer in the world in 2021. To read more on Sri Lanka, click here.
Our take
For Kenya to remain the largest economy in East Africa, the incoming government needs to focus on the following:
Kenya needs to learn from the Sri Lankan economic collapse as one wrong policy decision could lead to economic turmoil. To compare where Kenya is against Sri Lanka, click here.
Written by: Ann Wacera
Disclaimer: This blog was inspired by the Economic symposium on ‘The Rising Cost of Living in Kenya: Causes, Effects and Policy Options’ held by Strathmore business school in July 2022.
