Falling inflation: Market correction or a shrinking economy?

The topic of market correction has always been close to former National Treasury and Economic Planning Cabinet Secretary Prof Njuguna Ndung’u’s heart.

On one occasion, he narrated how during his tenure as the Central Bank of Kenya (CBK) Governor, someone confronted him with the claim that many Kenyans did not feel the economic boom at the time.

“I explained that this [economic growth] is not a bus that you wait to get in at the stage. You have to be in the market to feel the growth,” he said.

This was during President Mwai Kibaki’s era that many associate with economic prosperity for the country.

Prof Ndung’u’s term as CS was filled with policies of market correction geared at benefitting those low-income earners. 

“The new administration is concerned with the problems that have led to many Kenyans sink into abject poverty. One of the identified problems is market capture so that those at the bottom of the pyramid do not get the returns for their sweat,” he said during the launch of Kenya Economic Report 2023.

A market correction is defined as a decline in a stock market index by more than 10 per cent, but less than 20 per cent from its recent peak. It typically signals a short-term drop in prices and can be a natural part of market fluctuations.

Prof Ndung’u’s policies might be paying off long after he was kicked out of the Treasury docket, considering the current 2.7 per cent inflation rate and the shilling’s exchange rate has remained stable against the US dollar at Sh129, although the majority of Kenyans have questioned the purported reduction in the cost of living.

This raises the question: is this market correction as planned by President William Ruto’s administration or more people are being squeezed out of the economic growth space?

The recent notices by Tile & Carpet Centre downsizing its production at Athi River and private security company G4S announcing a restructuring that will render 400 jobless make this question valid.

Simply put, if the economy was working as the Kenya Kwanza administration claims, shouldn’t businesses be recruiting more than they are letting go of their staff?

Vice Chairperson of the Public Finance Sector Board at Kenya Private Sector Alliance (Kepsa) Jilna Shah speaking at the recent launch of the Annual Public Debt Management Report detailed how businesses are struggling with the recent wave of taxes.

As such, many are not expanding or re-investing anymore. “We are paying so much in taxes. Businesses are frustrated,” she said.

Shah noted that the cost of compliance has become high for many businesses.

Other speakers at the event noted how domestic debt has crowded out the private sector, with the report showing that Sh807 billion out of Sh1.5 trillion went into servicing domestic debt in the financial year ending June 2024. This has been occasioned by treasury bonds, which offer returns of up to 18 per cent.

“It is very sad to see that credit to the private sector in the 12 months to September was only 0.4 per cent at a time when growth is close to five per cent. That is a contraction in credit in real terms.  That is not what we want to see going forward,” said the Director General at the Public Debt Management Office Raphael Otieno.

XN Iraki, an economics professor at The University of Nairobi, noted in his last week’s column in Financial Standard titled “The paradox of falling prices in a broke economy” that the current situation is a result of more or increased taxes that have reduced disposable income for Kenyans and businesses as well.

“The simple explanation is that there is no money. Without money, the demand for goods and services, from ice creams to cars goes down,” he noted.

This money has instead gone to interest rates and taxes.

“More taxes or higher tax rates get money from us and we have less to spend, reducing the demand for goods and services,” wrote Prof Iraki, adding that the effect of higher or more taxes is pronounced because the private sector or individuals are more efficient in investing or consumption.

He added: “Taxes also raise the prices of goods and services, this reduces demand, business owners have to reduce the prices to attract customers, at times making losses. Some could easily close shop or relocate.”

The government has, however, vehemently defended the idea of increased taxes even as the National Treasury and Economic Planning Cabinet Secretary John Mbadi agrees that the economic numbers do not match the market situation.

“Our economy is very robust. The question we are asking is how come we have challenges in an economy that is growing at more than five per cent, which is above the average in this region and globally?” he posed during the recent Kenya Revenue Authority (KRA) Annual Summit.

He cited the 3.6 per cent inflation at the time, which has since dropped to 2.7 per cent, the shilling’s exchange rate of between Sh128 and Sh131 against the US dollar in recent months and a forex reserve of 4.6 months.

“We have all fundamentals working apart from just two things: our public debt, which is proving to be difficult to sustain, and the interest rate - which has been high crowding out the private sector, but which we can balance now with the inflation rate,” said the CS.

David Ndii, chairperson of President William Ruto’s Council of Economic Advisors, said while businesses close and open every day, the ongoing situation is a market correction as envisioned by the current administration.

“Tile & Carpet is an upper deck business. That is why its flagship outlet is in Lavington. And as I have told you, the debt binge economy will shrink. The soft drink business, a bell weather indicator for the mwananchi economy, is up 18 per cent year to August. Bottom-up economics is working,” he said on X, formerly Twitter.