Why Kenyans are feeling financial pinch despite cheery inflation data

A roast maize vendor along Ngon Road Nairobi on November 19, 2022. [Elvis Ogina, Standard]

The national statistician has released the October 2024 economic brief, showing that inflation has dropped to its lowest level in recent history, ending the month at 2.7 per cent. This marks a steady 12-month decline from 6.9 per cent in October 2023, with the only exception in January 2024, when inflation briefly rose to 6.9 per cent from 6.6 per cent in December 2023.

Top economic advisors of the Kenya Kwanza administration are over the moon with this news. It follows a notable reduction in fuel prices announced on October 14 by the energy and petroleum regulator, with decreases of Sh8.18 for super petrol, Sh3.54 for diesel and Sh6.93 for kerosene. For some observers, these positive developments seem well-timed to ease the burden on employees and households facing the newly implemented 2.75 per cent Social Health Insurance Fund (SHIF) levy.

For consumers and businesses, this positive economic indicator feels like distant music—pleasant in theory but with little impact on their day-to-day financial reality. While government agencies celebrate, social media is abuzz with analyses showing the SHIF levy’s net negative impact on various income groups.

For example, the levy’s effect on most people earning Sh50,000 or less would be minimal, costing them around Sh175. However, those earning over one million shillings will have to part with Sh25,800. Other projections circulating online suggest that by January 2025, when revised National Social Security Fund (NSSF) deductions take full effect, top earners will be contributing roughly 49.3 per cent of their income to taxes and levies, including pension, NSSF, SHIF, the housing levy and PAYE.

On top of this, consumers will still face indirect taxes, like the 16 per cent VAT, at the point of purchase.

This raises the question for consumers and businesses alike: Why aren’t they seeing gains in their wallets despite easing inflation, which should, in theory, lower the cost of goods and services?

For conspiracy theorists, the positive economic indicators released by various government agencies are simply “cooked up” data intended to soften public sentiment toward President William Ruto’s economic and fiscal policies. However, there is also a sound economic rationale that could explain why consumers and businesses may not feel the benefits of lower inflation.

Purchasing power

Two key economic concepts to consider when evaluating the impact of current policy decisions are purchasing power and disposable income. According to the global financial media website Investopedia, a loss in purchasing power has the same effect as rising prices due to inflation: as prices go up, consumers lose purchasing power, and conversely, as prices fall, they gain it.

In simple terms, purchasing power is lost when the same amount of money buys fewer goods or services over time. Conversely, purchasing power increases when the same amount of money buys more or covers the same basket of goods with some leftover cash. Ideally, a reduction in inflation should boost purchasing power. So why aren’t Kenyans experiencing these benefits or relief in their cost of living?

The answer lies in looking at the other factor in this equation: disposable income. Investopedia defines disposable income as the amount of money an individual or household has left to spend or save after paying taxes and other mandatory deductions. Economists pay close attention to disposable income as a key indicator of economic strength.

Disposable income covers both necessary expenses like food, rent, utilities (water, electricity), transport, and school fees, as well as discretionary spending on leisure and luxury items. It is essential because it determines how much consumers can spend, how much businesses can earn, and how much people can save and invest.

This understanding of disposable income’s role in driving economic activity reveals the damaging impact of the policies introduced by the Kenya Kwanza administration. Increases in PAYE taxes, the housing levy, and now the SHIF levy strip employees and households of the disposable income needed for essentials, leisure, and investment.

In simple terms, when disposable income falls, consumers lose the ability to purchase the same basket of goods or services as before. This supports the view among some economists that inflation’s recent decline may not be due to government interventions but rather to reduced consumer demand, as people have less money to spend.

This argument is quite plausible; most of us can bear witness that there is simply less cash in circulation across the economy. The hard truth is that consumers cannot buy goods and services with money they no longer have. This reduction in spending power contributes to a slowdown in business activity. To make matters worse, much of the revenue collected through these taxes and levies is wasted on foreign travel, extravagant shopping sprees abroad by officials, or siphoned off into tax havens.

Working capital

When the government does buy from local businesses or contractors, payments are often delayed, adding to the billions of shillings held in pending bills. According to the Controller of Budget’s report for the 2023/24 fiscal year, the national government and its agencies owed around Sh516 billion in pending bills, denying businesses the essential working capital they need. County governments, meanwhile, owed suppliers approximately Sh181 billion. Unfortunately, the issue of pending bills shows no signs of resolution as the National Treasury tightens disbursements to counties and other state agencies.

The severe impact on consumers becomes clearer when we consider how these taxes relate to income distribution in the country. Multiple data sources indicate that at least 74 per cent of Kenya’s estimated 3.1 million formal sector employees earn Sh50,000 or less per month, with the majority in the Sh30,000-Sh49,999 bracket. A TIFA opinion poll from July revealed that only three per cent of Kenyans earn over Sh100,000 monthly, while 38 per cent reported having no regular monthly income.

Economic theory since the Great Depression of the 1930s shows the shortcomings of the Ruto administration’s fiscal policies. Economic activity thrives when consumers have more disposable income—not less. With more disposable income, consumers gain financial flexibility, which drives higher living standards, economic growth, increased savings and investments, and ultimately more tax revenue for the government.

This is the hallmark of sound economic policy. Stripping consumers of disposable income, only for it to be misused through public plunder and poor allocation, is an unusual approach in economics. The result is predictable, yet we are here to witness firsthand how not to run an economy, Inshallah.