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“If inflation is as low as the Kenya National Bureau of Statistics (KNBS) is saying, why are we not feeling it in our pockets?” This quite insightful question was posed to me by a participant during presentation of the results of the third KNCCI’s Quarterly Business Barometer two weeks ago in Nairobi.
The survey of 1,255 mainly micro and small businesses across the country found that about 65 percent of MSMEs were optimistic about their own revenue growth prospects for last quarter of this year.
Still, this optimism was less than in the previous quarter, when 71 percent of micro and small businesses were expecting growth.
Reflective of this waning optimism, small firms expect only modest increases in revenue, do not expect to hire additional staff and are pessimistic about prospects of lower production costs such as raw materials and energy, the low inflation figures notwithstanding.
Expectations about production costs are important drivers of decisions to expand or hire additional staff. Which takes us back to the question. Why is it, that despite 24 months of reduction in inflation, citizens are not “feeling” it in their pockets?
After five years of persistent increases, inflation had established a long-term upward trend by its peak of 9.59 percent in October 2022.
This trend pointed to structural issues rather than the normal, weather driven seasonal variations.
Those issues included declining productivity, tripling of public expenditure and a four-year drought. Two good rainy seasons, declining fuel prices and very high interest rates have brought 24 months of falling inflation. But that relief is not translating to peoples’ pockets.
A recent article framed the question as a paradox – low inflation but empty pockets. The article found explanation in the increased taxes, citing SHIF and housing levy. No doubt, Kenyans are paying higher taxes.
The prospects of relief from a struck off Finance Act 2023 were short-lived. The Supreme Court has set aside the Court of Appeal and High Court decisions, which had found the enactment of the taxation measures unconstitutional for skipping public participation. In addition to higher taxes then, what is going on?
First, inflation is low, because pockets are empty! A combination of crowding out effects and tight monetary policy has meant a decade-long decline in growth of credit to private sector. A decade ago, it was averaging 25 percent, year on year, compared to four percent today.
The reverse trend is true of credit to the public sector! Small businesses have no credit to grow their businesses, and when they find it, it is too expensive because government is outcompeting them and, Central Bank has driven interest rates high to bring down inflation!
Secondly, that sustained upward trend of inflation meant it was outpacing the annual increments in wages. As a result, real income – what your shilling can actually buy – has been declining. Between 2019 and 2023, real wages declined 12.5 percent across all employment, both private and public.
Moreover, the erosion of real wages is not uniform. Worst hit were workers in public administration and defense, where the decline was 26.6 percent, education (20.4), waste management (22.8), accommodation and food services (18.3) and agriculture, forestry and fishing (15.2).
Agriculture, forestry and fishing workers are the least paid, earning less than one quarter of what their counter parts in transportation and storage services earn. No surprise then, that young people prefer to be matatu crews than work in farms.
If you can learn, you are better off in technical or vocational school. Workers in electricity, gas, steam and air conditioning supply services earn six times more than those in agriculture, and one and half times those in transportation.
When will you feel the effects in your pocket? Although inflation was 2.7 percent in October, it will take many months for the erosion in real incomes to be reversed. And unless the low inflation window is utilised to create rapid growth, you might not experience the effect at all!
Stable supplies have taken the pressure off food prices. This will last as long as we have good rains. Lower fuel and energy bills are the result of an easing of international fuel prices. If wars in the Middle East and Ukraine do not disrupt supplies further, this may sustain in the sort term.
The tight monetary policy (high interest rates) is a policy choice. CBK has already signaled direction by reducing the policy rate, albeit modestly.
Questions linger, however, whether interest rates will come down fast enough to generate economic growth before another inflation upswing. Growth is important for a rebound in real wages, and for additional tax revenues that the administration desperately needs.
The writer, an economist, is a Partner at Ecocapp Capital and former Laikipia County governor
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