Cost of living still high despite gains in exchange rate

It was interesting reading the archival history of the Kenya shilling in the Business Daily a couple of weeks ago.

The shilling evokes a lot of memory because it carries with it a lot of economic (and political) history of this country from the colonial days to date.

Yes, the shilling today is a meagre fraction of the purchasing power it used to enjoy in the past, thanks to crippling inflation over the decades. In the last one year alone, the exchange rate deterioration and high oil prices resulted in inflation that greatly diminished the purchasing power of our shilling. This remains the case even after the exchange rate improvement was expected to correspondingly reduce prices of local and imported goods and services.

The purchasing power of a currency can only be correctly assessed when compared with the corresponding incomes of households and consumers.
When prices move ahead of incomes, the relative quality of lives declines and in most cases households poverty sets in. This looks like the situation we are in today. The result is widespread clamour by the salaried workers for higher wages to bridge the gap, while the unemployed have limited recourse.
The Central Bank of Kenya takes credit for having recently strengthened the exchange rate, and slowed down inflation. However, no one has explained why market prices of goods and services have not come down to match the improved exchange rate. The shopping list bill remains high and is likely to remain that way.

Where is the missing link? The Central bank addresses and monitors inflation (rate at which prices fluctuate), but no regulator looks into the fairness or correctness of consumer prices — with the exception of fuel and electricity which the Energy Regulatory Commission monitors on a monthly basis.

Being a free market economy, it is possible that some manufacturers, importers, producers and transporters are not passing down the full benefits of improved exchange rate. Instead, businesses may be taking the opportunity to strengthen margins on their goods and services. It should also be noted that most consumer goods businesses in Kenya are family owned, and some of these families may actually be related. Public transport fares on the other hand are decided not by free competition but by transport associations.

It is interesting to note that the Treasury occasionally gives import duty waivers on key imports to stem increases on consumer prices, but they do not have in place any mechanisms to ensure that the benefits are actually passed on to the buyers. For example, in the last Budget, duties were either waived or reduced on imported inputs that go into manufacture of animal feed. Feed prices did not go down. The cost of milk remains high. In the process the exchequer may have sacrificed their revenue. I am sure the same story can be repeated on duty waivers on grains, and other direct subsidies.

The only time I have witnessed perfect competition that brought down cost of services in recent times was when a worthy competitor entered the mobile telephony in Kenya a few years ago.

The competitor challenged the market status quo, and within a short time, we had significant reduction of call charges. Competition in this sector was also amply facilitated by an alert regulator who significantly reduced existing market barriers to competition.

However, we have recently heard of these mobile telephone “competitors” jointly discussing rates fixing, which is a pure case of an “anti-trust” market malpractice. The nascent Competition Authority was, however, quick to notice this in good time .The Competition Act is very clear on price fixing penalties.

The other items that seem to follow the supply/price rules are the perishable vegetables and grains where prices fluctuate with amounts of supplies.

Oversupply means reduced prices mostly to the detriment of farmer’s morale and welfare. Again, here is a case where we may need to consider farmer protection to ensure that the country remains motivated to feed itself by guaranteeing a market and a fair producer price to the farmer.

The consumer and agricultural producer interests should be balanced correctly to guarantee food security and price fairness.
There is lot that various sector regulatory agencies can do to improve competition and consumer protection in their areas of jurisdiction using existing sector laws and also the new Competition Act.

The shilling will always be open to geopolitical and local challenges. As such, occasions of market inflation will always be there. However, it is a question of how we ensure that the market does take advantage of momentary inflationary shifts to unfairly price goods and services. The country should not in principle introduce price control of goods and services, unless there is irretrievable proof of breakdown in free and fair market competition.

Monopolies (mainly utilities providers) will, however, need monitoring and regulation. The emphasis should be for the newly created Competition Authority to address market imperfections that hinder fair and open competition; prevent collusion and price fixing; and address consumer protection.

At the end of the day, we should obtain a fair parity between consumer prices and levels on income, and I am not sure I know how this will be achieved. This is what will correctly define the purchasing power and the strength of our shilling.







Copyright © 2004-2014 Africagrowth Institute. All rights reserved