Inflation as become the reason to all the problems that have engulfed the Kenyan in the last couple of days. We are all blaming the problem to the ever soaring inflation. One begs to ask; what is the inflation we are talking about and how does it affect us?

Inflation is the general increase in price levels over a given period of time. The Kenyan scenario can be analyzed in four different situations.

The post election violence effects will be here for a while. The effect on food supply is what concerns us. While Kenya’s granary was adversely affected, the distribution channels were also affected immensely. Kenya is largely an agri-based economy and more so substantial. With the food supply patterns affected, the cost of food started to soar with the little available food becoming golden; the effect- inflation that was demand driven.

Then came the coalition government and there was a ray of hope to the end of senseless killings and violence witnessed at the start of the year. But wait a minute; a cabinet of 40 members? What of the commissions of inquiries? You will tell me that they were all inevitable for healing a broken nation. I agree. The poor Kenyan, bearing the cost of high food prices was to further finance it all through taxes the result of which was higher food prices as the tax man tightened his belt. This further contributed to the Inflation.

Before the dust settles, the global crude prices started soaring hitting a high of over $140 per barrel in May. Most of the Kenyan industry operations largely depend on fuel to drive them. Thus fuel costs are a direct cost in their operations. With the margins becoming thinner and the pinch of inflation being felt, it was inevitable for the firms to break even to remain in business. Transport costs too started soaring. Cost push inflation was recorded.

Is the inflation pressure going to ease down? In my opinion when the causative factors rescind, then we may. However, increased Government spending may not go down. There is also a ray of hope as the Government is intervening using long term policy measures- subsidies on fertilizer, seed and farm implements is one such way.

We need to adjust our spending habits and conform to the new ways.

LIGHT AT THE END OF A TUNNEL FOR KENYA 

A colleague once reckoned that after a mountain there is a valley. Yesterday was a historic moment for Kenyans gleaning with a sigh of relief and hoping for a return to normalcy after weeks of lawlessness, wanton destruction, killing of fellow Kenyans and hundreds of thousands more displaced.

Everyone is hopeful that the process will come up with a win-win solution applicable and agreeable to all parties. It is hoped that our leaders will be lead by a spirit of loyalty and patriotism keeping the common mwananchi at heart and not for their selfish gains and interests.

A look at the stock market, a market driven more by investor perception and confidence says it all. The Nairobi Stock Exchange is recording improvements with most of the counters going up as at 12.30 pm today.

This may mark the beginning of a healing process and reconciliation that will help pave the way for a better Kenya, a Kenya we have all been yearning for.

GOD BLESS KENYA.

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In the course of last week, this question was put forward to me; “there were forecasts for the Kenyan economic growth of around 8% for this year, is that still possible?”

 Given the “peaceful demonstrations” then, I would have been quick to answer in the negative and give a pessimistic outlook. However, we are bound to be objective. 

What drives our economy? 

Kenya is largely an agri-based economy- horticulture (flowers and vegetables), tea and coffee, dairy products. The tourism sector has also played a vital role in our economy. Our manufacturing sector is not well developed, and mainly depends on imports be it of raw materials or equipments (plant and machinery). The commercial and services sector is slowly coming up with the telecommunications and IT sectors leading the way on a very optimistic growth path. 

The general global outlook too has an impact on the economy too. Most analysts are of the opinion that the global economic growth will slacken in the year 2008. This, they support through a number of arguments. Demand for fuel is building up and its price is at an all time high of $100 per barrel, and with the possibility of soaring higher. Gold and commodity prices are also very high with gold prices at over $900 per ounce. China and India who are the major contributors of the global economy are poised to record low growth rates. Their increasing economic growth rates have led to an increase in their disposable incomes and by extension their demand for commodities, fuel inclusive. This poses the threat of a looming inflation. To avoid a situation of inflation biting on their economic growth, there is thus need for them to regulate their growth rates. 

Our industries depend so much on fuel to run them save for a few innovative ones- e.g. Mumias sugar that uses biofuel to run its machinery. Rising fuel costs will thus mean an increase in the cost of production. Whether these costs will be passed on to the consumer depends on the competition in the specific industry. This may dampen our economic growth rate. 

The loss at the beginning of the year occasioned by the post electoral violence quantified at above 100B will also dampen our growth rate. It will take us time to recover fully from the loss. Investor confidence, and more so the Foreign Direct Investments (FDI) that we had started experiencing, might take longer time for us to rebuild them.  

A look at the African economies may also shed some light. Zimbabwe has seen it, as regards biting inflations, black market and constant mass actions called for by the opposition. I choose on this country since in the short term, we are more or less experiencing the same political situation as of now. The increased mass protests have led to decreased investor confidence, with sanctioned donor aid, low if any FDI and ever increasing inflation levels and the thriving black market. While these may not be what we may be experiencing, it will however give us a glimpse of what to expect if the current political situation persists- think of the queues experienced in Kisumu as the locals shop in groups of five in the supermarket or the cost of fuel in western Kenya going at triple the rates in Nairobi. 

In the recent past, the greatest contributor to the real GDP of the country has been Tea, Coffee, cut flowers and vegetables. Dairy exports have also played a role. With continued violence a number of things will happen. The transport sector will be affected and thus the said commodities cannot make it to the market. Labor too will be affected on both key skills and labor intensity. This may in turn lead to low productions and by consequence low exports of the same thus low GDP. 

Locally, the currency market has been on the receiving end. It has been depreciating and closing the week on 66.70 levels. This has majorly been contributed by the reduced dollar inflows from tourism, tea and coffee auctions. 

The bond market has not been very active. Caution is being taken with inflation looming. Food prices are a major contributor to the inflation and have been rising owing to shortages. The government expenditure has also increased away from the normal domestic debt clearances and into the cost of supporting internally displaced. This is on the back drop of reduced income from low tax collections. Thus, there is the possibility of a competition between the government and the private sector for funds in the domestic market which will lead to an increase in interest rates and further fuelling inflation.  

Increased cost of borrowing- high interest rates, default risk premium, political risk premium- will lead to a reduction in accessibility to the loans and other financial products consequently hampering development. 

The property market has recorded remarkable growth in the recent past. However, owing to the political uncertainty, the last quarter of 2007 and the first quarter of 2008 has seen substantial drop. The pace of growth in this sector will be affected much by the level of disposable income. 

With reduced tourism activities, affected transport activities, increased cost of borrowing, a weakening shilling against the dollar, increasing fuel costs, increased net imports, looming inflation levels and anticipated slower global economic growth, an 8% growth rate may not be possible.