Price cuts: Why State could be taking undue credit

Have the policies that the Kenya Kwanza regime put in place in its one-and-a-half years in office lowered the cost of living?

That is the question that many Kenyans may have been asking in the last week with government officials, including President William Ruto, claiming the lower cost of living experienced in the recent past has been due to the policies that the Kenya Kwanza government has put in place.

The most recent is the drop in the cost of fuel and electricity, which the government officials have been on an overdrive in taking credit for as they seek to show the administration has delivered on its promise to lower the cost of living.

Pump prices also reduced for the fifth straight month last week. The cost of super petrol has since November last year reduced by Sh23, while that of diesel has reduced by Sh25 since October last year.

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President William Ruto has said the interventions that his administration had put in place to revive the economy had started bearing fruit.

The President last week noted that the lower costs are because “we are making the right decisions not the popular decisions and Kenya is going to go forward. This nation will change for the better.”

He had earlier in March told Kenyans that he had found an economy in the doldrums and had needed time to start steering it in the right direction. 

“I had asked you to give me an opportunity to strengthen our economy, it had been going in the wrong direction… I have made some progress and you can see that the shilling is strengthening against the US dollar,” said Dr Ruto.

Analysts have, however, poked holes into the President’s claims, saying he might be taking credit for something, not of their doing.

The lower inflation rate, reduced cost of electricity and fuel, analysts say, are largely being driven by the weather and the rally that the shilling has experienced since February this year.

Following the rains, power sector agencies have ramped up electricity production from hydropower plants, which is the cheapest energy source in Kenya, while scaling down production from costly thermal power plants.

The reduced dispatch of electricity from thermal power plants has seen the Fuel Cost Charge reduce to Sh3.26 per unit of electricity that will be consumed in April from Sh4.33 per unit in January this year.

The strengthening of the shilling has also resulted in the Foreign Adjustment Charge reducing to Sh1.96 per unit in April from a high of Sh6.46 in January. The shilling has strengthened to the current level of Sh130 to the dollar from a low of Sh160 in December.

The lower fuel and forex charges have seen a drop in the cost of electricity from Sh36.81 per kilowatt hour (kWh) in January for households to Sh31 this month.

The lower pump prices are also due to a strong shilling. Diesel is currently retailing at Sh180.38 per litre in Nairobi, Sh25 lower than a record high of Sh205.47 in October last year.

The retail price of super petrol, on the other hand, has reduced to Sh193.84, which is Sh23 less than the Sh217.36 that motorists bought a litre of petrol for in Nairobi last November.

The lower fuel and electricity costs are expected to further bring down the cost of living. The rate of inflation has steadily been on the decline this year, dropping from a high of 9.2 per cent in February 2023 to 5.7 per cent in March this year largely on account of the recent rains that have resulted in lower cost of some food items.

Dr Patrick Muinde, an economist, doubts the sustainability of the lower prices noting that they are susceptible to shocks, including the recent increase in the cost of crude oil in the global markets.

At the same time, he noted that the shilling’s rally against the dollar and other major global currencies is not based on solid fundamentals and it is also susceptible to shocks and could weaken in the coming weeks as Kenya services the foreign loans due in June.

“It might be sustained for Kenya Power because of the good rains for the hydro, but the component on the pricing driven by the dollar exchange rate may be temporary for the time being,” said Dr Muinde.

“The global pump prices have started going up, at least in March, the crude oil per barrel went back to the $90 (Sh11,700).”

When the Energy and Petroleum Regulatory Authority (Epra) published pump prices for April-May and reduced the cost of diesel and kerosene by as much as Sh10 and Sh18 per litre respectively, it attributed the drop to a strong shilling. The energy industry regulator noted that the cost of products had gone up.

Epra further argues that the reduction in fuel cost was solely associated with the reduction of the exchange rate as the landed price in March was slightly higher than in previous months. 

Epra noted that in March, the landed cost of imported super petrol rose 4.86 per cent. Crude oil prices rose from $76 (Sh9,880) per barrel on average in March to $79 (Sh10,270). Following the deepening of the geopolitical crisis in the Middle East, oil prices rallied to $90 (Sh11,700) a barrel last week.

This could in the coming months set up Kenyans for higher fuel prices, reversing the declining trend over the past few months. 

“Global prices are bound to go up, we are not likely to see a reduction. Unless the dollar goes below where it is almost stabilising. Prices might go up or maintain their current level. Consumers might only enjoy a reduction in the power bill this month alone,” Dr Muinde said.

The shilling also took a beating last week and started reversing the gains it has made since February, trading at Sh131.78 to the US dollar on Friday compared to Sh130 earlier, according to Central Bank data. commercial banks sold the dollar at about Sh137.

Dr Muinde projects that in the next two quarters, the cost of global oil will increase, further. “For the Kenya shilling, whether it will remain at the current rate we are yet to know as there have been no strong fundamentals supporting the significant drop seen in February,” he said.

He, however, noted that the Kenya Kwanza administration can put in place a solid intervention and offer Kenyans reduced cost of energy by reducing taxes on fuel.

“We have not seen any response towards reducing the taxes that are inbuilt in the petrol and petroleum products. The policy interventions that we are targeting should be on taxes,” said Dr Muinde.

“If not addressed, we might rebound to the high cost of living, we need tangible action at the policy level.”

He said sectors like public transport are also less likely to adjust their prices as they may not see the changes as sustainable.

Despite the chest-thumping by a section of leaders that the initiatives by the Kenya Kwanza administration have brought down the cost of fuel and electricity, the current cost is nowhere near where it was this time last year. 

In April 2023, a litre of super petrol was going from Sh179.30 in Nairobi, while diesel retailed for Sh162. It was even lower in the months tending to the elections at Sh159 for super petrol and Sh140 for diesel but shot up when the current regime came into office.

And while electricity bills have come down in recent months, they are still higher compared to where the Ruto regime found them when it came into power.

Households consuming 50 units, for instance, will this month pay Sh1,312 compared to the amount they paid in January last year of Sh1,023. In August 2022, a month before President Ruto was sworn into office, this band of consumers paid Sh796 a month for power.

Ken Gichinga, chief economist at Mentoria Economics, says contrary to the narratives by some leaders, the best indicator that the economy is doing well is job creation.

“You want to look at companies hiring and expanding. That is the number one singular litmus taste,” he said.

“When you look at jobs, it tells you we are still having challenges since there are plans to reduce the wage bill among civil servants.”

The other indicator, he added, is how much money is in circulation. This can be determined by looking at Non-Performing Loans (NPLs). He references the latest Monetary Policy Committee (MPC) statement by the Central Bank of Kenya, which showed NPLs had jumped to 15.5 per cent in February 2024 from 14.8 per cent in December 2023.

“That tells you that money is not circulating because if it were, people would be in apposition to meet their obligations,” said Gichinga.

MPC, which is CBK’s highest decision-making organ, noted that the regulator’s foreign exchange reserves as of April 3, 2024 stood at $7.136 million, which is 3.777 months of import cover. CBK said this is enough to provide a buffer against any short-term risks.

Dr Alex Kamau, a business consultant, sharing his expertise on the performance of the shilling against the dollar, explained that the recent recovery (of the shilling) is speculative.

“There are some people, investors, who hoard money waiting for a good opportunity so they can buy things when they are cheap. In this case, investors had hoarded dollars waiting for the government to go to the market to buy dollars so that it can repay Eurobond,” he explained.

However, the government opted to float another Eurobond, which left the investors stranded with their dollars.

“Those who had hoarded money for speculation had to release it into the market. Currently, the supply of dollars in the market is high and because of the forces of demand and supply. The dollar is getting a beating,” said Dr Kamau.

He added: “Kenya is a net importer. The stock of dollars we have will with time be depleted.”

Despite the lower energy costs, the prices of many essential commodities in the market have not dropped. For example, a 1.5kg bread that was about Sh175 before the Russia-Ukraine crisis is retailing at Sh240.  

Transport costs for commuters in the Nairobi metropolitan area have not changed despite a drop in fuel prices.

For a common mwananchi, the drop in the price of fuel and the strengthening shilling have had almost no effect to the actual cost of living.

- Additional reporting by Graham Kajilwa and Esther Dianah