Tough times ahead as prices of basic goods, services set to rise

With the expected increase in the cost of basic goods and services due to an increase in fuel prices, life is bound to become even more difficult for most Kenyans, who are struggling to make ends meet.

With fuel being the heartbeat of key economic sectors, ordinary Kenyans are staring at tough times with the prices of food, transport, electricity, healthcare, and housing, among others, expected to go up. This comes after the Energy Regulatory Commission (ERC) yet again adjusted the cost of fuel upwards, in what has become a trend since the beginning of the year.

In the monthly review announced yesterday, the price of super petrol increased by Sh1.53 to Sh113.73 per litre, while those of diesel and kerosene decrease by Sh0.51 and Sh0.78 to Sh102.74 and 84.95, respectively.

IMPORTED FUELS

The ERC says the prices are attributable to variations in the landed cost of imported fuels and a weakening shilling.

The decline in disposable income is having ripple effects on the economy, with Treasury data showing that gross domestic savings as a percentage of the gross domestic product (GDP), fell from 11.2 per cent in 2016 to 10.3 per cent last year.

“A majority of Kenyans are broke but things are going to get tougher because consumers will have to bear the costs of high fuel prices,” said Dr Joy Kiiru, an economist.

She added that, with the government engaging in austerity measures and increasing taxes, the high fuel prices could not have come at a worse time for the economy, following the disruptions caused by last year's prolonged electioneering period.

Since January, the prices of super petrol, diesel and kerosene have risen by about Sh10, greatly increasing the cost of living.

OVERALL INFLATION

This is evident, considering that fuel inflation, the major component of the overall inflation, rose from 3 per cent in January to 12 per cent in July.

This has continuously affected overall inflation, which rose from 4.28 per cent in June to 4.35 per cent in July.

Plans by the government to levy value added tax (VAT) on petroleum products from September 1 will aggravate the situation and see the price of a litre of fuel surge to about Sh130.

“VAT is a pass-through cost that goes directly to consumers. This is not the best time to introduce the tax because the cost of goods and services are already high,” said Kenya Association of Manufacturers Energy Manager David Njugi.

The increase in fuel prices and taxes means a ripple effect across all sectors of the economy, including agriculture, manufacturing, transport, tourism, building and construction, energy and healthcare.

It also means impacts on macroeconomic indicators, including inflation, the exchange rate and balance of payments. For instance, the exponential increase in the total petroleum import bill from Sh197.6 billion in 2016 to Sh265.3 billion in 2017 remains a major threat to the balance of payment.

CHEAPER FOOD

“Although the petroleum products' import bill is expected to increase due to higher international oil prices, lower imports of food and SGR-related equipment in 2018 will moderate the impact on the current account,” the Central Bank's Monetary Policy Committee said after a meeting a fortnight ago.

In agriculture, high fuel prices mean an increase in the cost of production for farmers, both at the farm level and transporting their produce to market.

While sufficient long rains have resulted in near-normal food production, the high fuel costs have denied Kenyans the benefits of cheaper food.

“In the agricultural sector, fuel constitutes 30 per cent of the costs. An increase in fuel prices ultimately means an increase in food prices,” said Mr Churchill Ogutu, a research analysts at Genghis Capital.

Manufacturers are also going to be hit, considering that many of them often use diesel generators due to power outages and unreliable supply in some parts of the country, particularly western and eastern.

INCREASE ELECTRICITY TARIFFS

Besides, coming only days after the increase in electricity tariffs by an average of 30 per cent, it means the cost of production, coupled with transport and marketing for consumer goods, has reached unprecedented levels.

“Making manufacturers increase consumer prices because of high energy costs is not sustainable and only makes local products uncompetitive,” said Mr Njugi.

The rising cost of production is even forcing the private sector to go slow on activities.

According to the Markit Stanbic Bank Kenya Purchasing Managers’ Index, manufacturing and services have declined steadily, standing at 55.4 in May, 55 in June and 53.6 in July.

For sectors like tourism, local operators are forced to bear the rising costs since many tourists book in advance, so it is impossible to pass on the new rates to them. The result has been narrow profit margins despite the rising numbers of tourists, particularly during the wildebeest migration high season.

INCURRING LOSSES

“Most tourists paid about six months ago, meaning it is tour operators incurring losses because of the increase in fuel prices,” said Kenya Association of Tour Operators Chairman Peter Ngori,

The high fuel prices have also contributed to the rising costs of electricity because of the fuel cost adjustments in power bills.

Until April this year, when the country started scaling down thermal electricity generation due to improved hydrology, generation from burning diesel had increased to a significant 27 per cent from 14 per cent in 2015.

With fuel adjustment a constant component in power bills, Kenyans have shouldered the burden of runaway electricity costs, considering that Kenya Power paid the firms generating power using diesel Sh22 billion last year, compared with Sh12 billion the previous year.