State should tame inflation for growth
The new administration needs to strike a delicate balance in its policy objectives as it navigates what is an otherwise turbulent economic environment with lots of inflationary pressure at home and abroad.
As it hits the road running, it must bear in mind that economic progress is a process that must be hinged on a balance between cushioning the most vulnerable in society even as it tackles the big challenges like the high public debt and a ballooning Budget deficit.
While it is imperative to evaluate the effectiveness of every penny spent, care must be taken to avoid exposing vulnerable Kenyans to a further increase in price inflation, particularly at a time when the country is facing historically high prices of commodities like fuel.
As such, having decided to give consumption subsidies a wide berth, the State must carefully plan how to tackle the ensuing surge in prices of commodities, including basic consumer goods like food. However, the move to offer subsidised fertiliser is a move in the right direction given that some regions are already experiencing short rains.
The government should, however, be wary of the knock-on effects of high fuel prices that now worry consumers. Fuel is a key economic enabler in Kenya and its impact on services, transportation, agriculture and manufacturing cannot be gainsaid. When the cost is too high, like it is now, it stymies government ability to incentivise economic growth. This is something that needs to be reviewed, even if it requires Treasury to review the tax component in fuel. This will be critical in the short and medium term because the services sector is already suffering after the cost of transportation increased. Farmers who use diesel to power tractors, run shelling machines and deliver produce to markets are also feeling the pressure of the extra cost.
As such, policy makers will need to come up with ways to address these and related challenges to stabilise food prices given that some regions of the country are experiencing drought and there is food stress in many families. As the government balances its campaign manifesto with the reality on the ground, it must ensure that the right thing is done if only to ensure that the high cost of living doesn’t hurt citizens and that economic growth is not crippled. In the long term, it will also need to incentivise private investments that can drive growth, job and wealth creation that will benefit both white and blue collar workers to reduce income inequalities and shield the poor from sliding further into poverty.