IMF advises poor countries on how to tame high cost of living

Thursday, April 21st, 2022 16:35 | By

The International Monetary Fund (IMF) has advised developing countries to prioritise spending and raising revenues to tame the ballooning cost of living amid growing concern over the repercussions of the Russia-Ukraine war.

According to the global lender, the higher demands on governments to address food security and tame surging global fuel prices pushed low-income countries into tight financial corner, forcing the need to boost more revenue.

“In this context, a sound and credible medium-term fiscal framework, including spending prioritisation and measures to raise revenues, can help manage urgent needs while ensuring debt sustainability,” a report by IMF reads in part.

Several low-income countries including Kenya, have lately been grappling with surging inflation which hit 5.6 per cent in March partly caused by the debt distress, weakening currency, and supply disruption triggered by Ukraine-Russia tension.

Fiscal policies

About 60 per cent of low-income countries are either at high risk of debt distress or already experiencing it, according to the IMF, which has been influential in shaping Kenya’s fiscal policies.

Sustained artificial fuel shortage that lasted for weeks and global pressures on the energy value chain has rallied consumer prices to historic high levels as oil majors toyed consumers over petroleum subsidy compensation.

Petroleum is a key input in manufacturing and determinant of the rate of inflation. The cost of energy, basic food commodities and transport significantly eat up a bigger share of the home budget, especially among low-income households.

Rural areas are still feeling the pinch of fuel shortage despite the government’s promise to quell the crisis by April 17. Fuel shortage, plus maize shortage, has combined to aggravate the food crisis in the country, especially in drought hit areas amid rain inadequacies.

The price of maize flour, Kenya’s basic food, currently retails at Sh130 per 2kg and could rise to Sh151 if the 16 per cent per cent tax proposal is okayed by the parliament, even as the country grapples with supply hitches. Two kgs of wheat flour is currently trading at an average of Sh160, about 22 per cent increase compared to the first quarter in 2021

Local economists put the country’s economic growth rate at 5.2 per cent, 0.8 per cent lower than the National Treasury’s projection, citing 2022/23 budget cuts and the aggressive tax measures amid rising inflation. “We are of the view that significant resource constraints did put in some impediment to what was achievable in this (2022/23) budget. Domestic risks are still abound, starting from the pandemic and rising inflation could go higher, presenting new territories for policy makers,” NCBA group said in a post-budget analysis.

Monetary policies

Kenya has spent billions of shillings in various subsidy programs to cushion consumers against high cost of living. The government has used about Sh34 billion to keep fuel subsidy running while another Sh5.7 billion was recently pumped into the fertiliser subsidy. IMF, however, notes that such additional spending will require corresponding tighter monetary policies to raise more revenue and prevent uncertainties linked to consumer price surges.

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