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How high will Kenya’s Inflation go with the ongoing drought?

BY David Indeje · February 28, 2017 06:02 am

Kenyan economists expect February inflation to show a slight pickup from the 6.99 percent release in January due to rising pump prices of petroleum products, fare hikes, and the ongoing severe drought.

“The rate of inflation is expected to be on the rise this year, driven by high food prices due to the ongoing drought, which according to the Meteorological Department (KMD) department will persist, as it projects below average rainfall in the March-May season, and high fuel prices following the revisions by the Energy Regulatory Commission (ERC),” according to Cytonn Investments.

Growth and agriculture in drought period

According to Geghis Capital, the rise in inflation, “Will stem from the trickledown effect on the upward fuel pump price revision by the Energy Regulatory Commission that has a direct impact on the 18.3 percent weighted fuel and electricity segment and indirectly affect the 36.04 percent food component.”

“Overall, an upward inflation print will drive activity on the shorter end of the yield curve,” the add.

In February, the ERC price review saw the prices of diesel, petrol and kerosene increase by 6.0 percent, 4.4 percent and 5.9 percent to Ksh 89.3, Ksh 100.3 and Ksh 67.2 per litre, from Kshs 84.2, Kshs 96.0 and Kshs 64.3 in January 2017, respectively.

Inflation has been climbing for the past seven months averaging 10.24 percent from 2005 until 2017, reaching an all-time high of 31.50 percent in May of 2008 and a record low of 3.18 percent in October of 2010.

Month-on-month, consumer prices increased 1.66 percent following a 0.76 percent gain in December of 2016.

“The food situation in the country has deteriorated and this has had a massive impact on inflation, as the food component of the Consumer Price Index (CPI), which carries a weighting of 36.0% has been on a gradual increase over the past three months, clocking month on month changes of 1.2%, 1.3% and 1.7% in November, December and January 2017, respectively,” says Cytonn Investment.

Cytonn is of the view that besides the approval by the government to import 5.0 million bags of yellow maize from Ukraine, the country is still at manageable levels when it comes to import dependency.

“Kenya’s dependency on imported food has improved over the last five years, with the import dependency ratio on food products, vegetable products and animal products having declined by 0.8% points, 0.9% points and 0.3% points, to 28.3%, 31.7% and 0.8%, from 29.1%, 32.6% and 1.1%, respectively. The country’s ability to cater for its food needs without external assistance has also improved over the last five years, with the country’s self-sufficiency ratio on food products, vegetable products and animal products having risen by 0.6% points, 0.6% points and 0.1% points, to 75.2%, 72.1% and 100.0%, from 74.6%, 71.5% and 99.9%, respectively.”

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However, the investment firm remains optimistic that the economic growth this year will be strong delivering a GDP growth of between 5.4% – 5.7%, a slowdown from the 6.0% expected for 2016.

Read: Kenya’s growth Prospects Positive, but Rising Inflation Greatest Risk

The central bank of Kenya’s Monetary Policy Committee is set to hold its next meeting on March 27 after leaving the benchmark lending rate at 10 percent in January.

About David Indeje

David Indeje is a writer and editor, with interests on how technology is changing journalism, government, Health, and Gender Development stories are his passion. Follow on Twitter @David_Indeje David can be reached on: (020) 528 0222 / Email: info@sokodirectory.com

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