Brace yourself for tough times ahead as dark clouds gather over the economy

1. DROUGHT AND SCARCITY OF WATER

If you hated the short-rains in October and December 2016, then in 2017 you will literally pray for a downpour.

 According to the Government, the short rain season was “far too brief and weak to have any meaningful impact on recovery.” And with experts forecasting for below-average March to May 2017 long rains, there will be little water for crops and vegetation cover for livestock.

Drought is real. And Kenyans are staring at hunger and starvation akin to the one of 2011. Already, the National Drought Management Authority has said in its early warning bulletin that during the short-rains period in December 2016, West Pokot, large parts of Turkana, and in Sericho and Oldonyiro wards of Isiolo, there was not even a drop of rainfall.

Such areas as Marsabit had a day of rainfall while others such as Kitui, Mandera and Samburu had their blessings of rainfall short-lived before they could extract maximum benefit. Currently, it is hell on earth for herders in Kilifi, Kwale and Lamu whose cattle, sheep and goats are dying in droves.

 The same fate has befallen herders in Ijara (Garissa), Garsen (Tana River), Wajir South, Wajir West and Tharaka which have sunk into what climate experts call negative vegetation condition Index (VCI), or extreme vegetation deficit.

Urban households have not been spared the wrath of drought. Nairobi Water and Sewerage Company has already announced plans to review water bills, a signal to Nairobians that they will have to make do with little of the precious commodity at a higher cost.

 This follows the reduction of water levels at Ndakaini Dam, the main source of water for the capital city. As it gets drier and dustier, motorists will have to learn to drive around with dirt after the subsidiary of Nairobi City County banned car-washing business.

Reduced water will also result into reduced food. Although drought is yet to spread to Kenya’s food basket areas, experts predict that they too will be affected.

 However, food security situation has already deteriorated in southeastern and northern pastoral areas, according to Famine Early Warning Systems Network, a USAID agency that provides early warning and analysis on acute food security. The agency has since reported acute food insecurity in Tana North in Tana River County, Laisamis in Marsabit, Fafi, Balambala and Dadaab in Garissa.

And because the drought will be regional thus affecting surplus-producing countries as Tanzania and Uganda from where we get a deficit of our staple foods mainly maize, beans, and rice, Kenyans will have to pay more for these food items.

2. WEAKENING OF THE SHILLING

Combine the drought situation and the weakening Kenyan shilling against the US dollar and you have something akin to a crisis. Over the last one month, the US Dollar has been strengthening against the shilling, at some point touching a low of 104 against the greenback. A weaker shilling means a high cost of living for most Kenyans.

This is because a weaker shilling results into high cost of imports. And Kenya imports more than it exports. Kenya imports most of its wheat and rice, two cereals that Kenyans consume the most after maize.

Although Kenya produces its own wheat and rice, local demand exceeds supply, forcing the country to plug the deficit by importing these cereals. A weak shilling means the country will pay more for wheat.

The result is that Kenyans might struggle to have a taste of chapati, bread, mandazi, cakes or pastries. In 2015, 90 per cent of the wheat that was consumed in Kenya was imported mostly from Russia, Ukraine, Lithuania, Estonia, Germany, Poland and Australia.

Wheat imports during this period stood at 1,421,785 tonnes against a total of 1,539,000 that was consumed as food. The country spent Sh35.6 billion to bring wheat into the country.

The third most consumed cereal and whose demand also exceeds domestic supply is rice. In 2015, of the 550,000 tonnes of rice that Kenyans consumed, 442,700 tonnes, or 80 per cent, was imported from Pakistan, Vietnam, Thailand, and India.

The country coughed out Sh13.4 billion to import rice. Actually, a depreciating Shilling might have a ripple effect on the general prices of goods and services from transportation, construction to healthcare. One commodity that comprises the largest chunk of the country’s import bill is oil.

3. OIL

In November last year, the Organisation of Petroleum Exporting Countries (OPEC) agreed to cut production of crude oil by 1.2 million barrels a day in a bid to get rid of an oil glut that had seen crude trade at under $30 (Sh3,115) per barrel in 2015.

This ended the oil bonanza that Kenya enjoyed, following a drop in the price of the black gold. Prices of crude oil have since jumped to a high of $58 (Sh6,026) per barrel at some point in the course of the last three months.

The World Bank raised its 2017 forecast for crude oil prices to $55 (Sh5,711) per barrel. According to analysts from Cytonn Investments, the capping of production will put a lid on oil supply, coupled with an improvement in demand from emerging markets that drive oil demand, like China, should see relative stability in oil prices during the year, with estimates of prices between $50 (Sh5,192) and $60 (Sh6,231) per barrel.

For Kenya, this will mean a high import bill, which has been relatively low over the last two years owing to low oil prices.

According to the Economic Survey 2016, petroleum products import remained at almost same levels in 2014 and 2015 but the import bill freed by more than a third. The total amount spent on petroleum products reduced by 32.6 per cent to Sh226 billion in 2015, compared to Sh335.7 billion in 2014.

Other than being a reprieve for motorists and the entire transport sector, low prices also helped in stabilising prices of manufactured goods, with the sector heavily reliant on diesel for its processes.

With prices of crude expected to stay at above $55 per barrel, this is going to put pressure not only on pump prices but also prices of manufactured goods. The Energy Regulatory Commission has in the recent past said Kenyans should expect to see a rise in retail prices of petroleum products. “The issue has been that OPEC was of agreeing on the level of output but now that together with non-OPEC members like Russia, they have brokered a deal, the prices will go up. Inevitably, local prices will start going up,” said ERC Director General Joseph Ng’ang’a in a recent interview with The Standard.

A rise in global crude oil prices has a ripple effect on fuel prices locally which, if it continues unabated, will also drive up the price of kerosene thus affecting household’s purchasing power. “Every time a price rises by one shilling it reduces your purchasing power by that one shilling,” says Dr Scolastica Odhiambo, an Economics lecturer at Maseno University.

4. FOOD PRICES

Over the last six months, there has been a discernible rise in prices of food items attributed to different factors, with less than expected rains during the short rain season of October to December being a critical factor.

Data from different Government agencies on pricing of some of the commonly used food items in Kenya showed a rise on most of the food items. According to data from the Ministry of agriculture, maize prices have gone up to close to Sh3,000 per 90 kilogramme bag at the beginning of 2017, an over 11 per cent increase compared to prices in January last year.

This has resulted in rise in the price of maize flour, the raw ingredient of ugali, which is the meal of choice in most Kenyan homes. A kilogramme of flour is going for between Sh110 and Sh120 this year, from Sh90 in March 2016.

Over the next few months, this might further go up following poor harvests of maize from major producing regions. Counties in Western Kenya last year reported a 50 per cent drop in maize harvest and in December, different counties said the second plant that is traditionally supported by the short rains in October had failed.

Popular accompaniment for ugali, sukuma wiki went up 64 per cent to Sh1,550 per 50 kg bag in January this year from Sh940 in January 2016.

This has been largely due to poor rains during 2016. The price of the vegetable has steadily risen, with a major spike in July last year where the same quantity was going for Sh1,650 before a slight decline in October to Sh1,350 then started rising. The impending dry spell will aggravate things.

Sugar prices have also gone up 25 per cent during the year, with a kilogramme retailing at Sh131 at the beginning of this year compared to Sh105 in January last year.

Already, the country is running out of sugar with some supermarkets limiting shoppers to a certain number of two-kilogram packets of the commodity. Nakumatt Supermarkets, for example, limits shoppers in one of its stores to two 2-kilogram packets of sugar. Analysts from Cytonn Investments expect food prices to stay up due to the drought. “Going forward, we expect higher inflation due to... prolong dry weather, which will persist until mid-2017 driving food prices up,” said the firm in an analysis last week.

5. ELECTRICITY

Kenya’s over-reliance on water to generate electricity has over the years left the country grappling with a rise in the cost of power especially in periods of prolonged dry spell. Worst cases in the recent past were the power rationing instances of 1999 and 2011, when droughts led to reduced water levels at the seven folks dams and resulted to reduction in electricity generation capacity from the hydro electricity system.

It is the same case today where the current drought has resulted in decline in water levels at the Masinga dam, which feeds the power generating stations downstream. This has resulted in the power producers scaling up the electricity generation from thermal power plants, which use fossil fuel to generate electricity.

The cost of fuel is passed directly to consumers and this has gone up to Sh2.85 per unit in December from Sh2.30 per unit and could go up to over Sh3. This is likely to further go up to Sh3.52 per unit.

While Ministry of Energy Cabinet Secretary Charles Keter said the power sector would not resort to power rationing yet, he conceded that the country is staring at a crisis especially if the long rains fail or delay.

Thermal plants have increased and they are now accounting for 18 per cent of the power generated up from 11 per cent. If the dry weather persists, this might go up to 24 per cent. Contribution of hydro generating systems has gone down from 45 per cent to 35 per cent and is expected to further reduce to 28 per cent should the short rains not come by March.

“If the dry weather continues beyond April or May, then we will have problems. But we expect the rains to come by March,” said Keter during a recent tour to inspect water levels at Masinga.

The rise in the fuel cost charge (FCC) component of the electricity bill will be compounded by the weakening of the shilling that is expected to see an upward revision of the Foreign Exchange Adjustment component.

Forex adjustment component is related to the fluctuation of major currencies against the local currency for expenditure related to the power sector, which include projects loan repayments. The shilling has over the last week hit a low of Sh104 to the dollar.