Is the current Economic reprieve sustainable to the Long-term?

 

If there is something that economics replicate is life. In life there are moment of agony and there are good times there are moments of tumult and moments of peace. Likewise in economics there are chapters of economic turbulence and bout of stability, stretch of depression and duration boom, there are tempos of growth and spell of stagnation. There are period of inflation and period of deflation. Let’s get to it now. Now, if you have walked into Kenyan supermarkets in recent days to do your routine shopping, be it groceries grains, maize flour, cakes,milk, soda or any other food, you must have noticed that food prices have dramatically plummeted for the last three weeks. While the globe is currently experiencing times of geopolitical turmoil as are conflicts are soaring in the Middle East and Eastern Europe, two regions which are fundamentally important to globe because what they provide to the other countries are vital for their survival,fall in food prices is something uneasy to understand. The continuous missile strikes exchange between Israel and Hamas, Hezbollah and Israel, Houthis and the Saudis and Hamas against Israel coupled with continued Russia’s aggression to Ukraine have significantly destabilize the global economy. However, amidst all these, food prices have been witnessed shooting low for the last three weeks. And so the question is what led to this and most importantly, is this low food prices trend sustainable for the long-term. In this Weeks’s blog, I will be focusing on current inflation ease in the economy, how cost of living is expected to low and whether the trend is sustainable in the long term.

With tumultuous political atmosphere in the country as the impeachment of deputy president concludes following senate’s approval on Thursday, the economy has recorded a strong stability in the recent weeks. This is indicated by stable Kenyan shilling against the dollar which currently exchanging at 1$/Kshs.129, and inflation rate currently at 3.6% which is a drop from previous month’s 4.4%, this is great performance as it  has maintained below CBK’s  target of  5%. The current deflation has stimulated interest rate cuts by monetary policy committee with an aim of making credit more accessible thus continuing the trend.

Elaborately, the current confidence in the economy is attributed to the following factors;  

                 Reduction of oil prices.

In its monthly review of oil prices, EPRA reduced prices of petroleum products in the month October communicated in statement released on October 14^th specifying price drops. In particular, in Nairobi, super petrol saw a big drop of Kshs. 8.19 from   kshs. 188.84 to 180.66, Diesel experienced a drop of kshs.3.54 from 171.6 to 168.66 while kerosene dropped by about kshs. 7 from Kshs. 158.32 to Kshs.151.39. These sharp oil prices drop in the month of October have consequently affected other macroeconomic performance indicators. Usually, all economic activities are pegged on prices of oil. Prices of oil in effect determine prices of other products and services produced or supplied in the economy. For instance, food supplies are directly affected by oil prices. If prices oil prices goes up, food prices in correspondence leap up. The understanding is that, if oil price goes up then it will result to additional costs in supplying those products be it vegetables, bread, milk fruits and eggs to final consumer. And therefore, suppliers push that cost to the consumer hence hikes in the prices. In contrasts, when oil prices shoot down, it becomes cheaper to supply goods and services hence low prices. Case in point, EPPRA’s new oil prices have in consequence led to reduction of prices of other basic commodities that consumers use on daily basis. Hence lowering the cost of living.

Lowering of interest rates.

In cognizance of prevailing macroeconomic ease, the central bank whose major mandate is to stabilize prices, with a view to continue the deflationary trend in October decided to revise lending rates. Interest rates is a key macroeconomic tool used by the central bank to monitor inflation. Lending rate/ interest rate, are very useful in revamping the economy. Lowering lending rate can boost the economic growth of a country since it cheapen the accessibility of credit for both consumers and enterprise. Economy is able to expand as start-ups and existing businesses are can easily acquire credit to expand their businesses and hire more workers. Likewise, the purchasing power of consumers remains strong if they can cheaply access credit from their bank.

Stability of the shilling;

After a rough period of fluctuations of Kenyan shilling in the beginning of 2024, followed by acquisition $1.5B loan for settling Eurobond by June, the Kenyan shilling stabilized progressively well appreciating from highest depreciating mark of 1$ against 162. Importantly, stability of the local currency especially for a massively importing country is very necessary for a stable economy. When local currency is appreciating, it become more expensive in the international market making the foreign currency let’s say the US dollar inexpensive. The advantage of this economic phenomenon is that commodities in the international market in consequence become cheap for an importer consumer. Conversely, depreciation makes the foreign currency expensive to acquire hence making commodities in the international market expensive to buy. Conclusively, importing country will be forced to spend more money to import hence increasing cost of living in the economy.

Is the trend sustainable?

The question of sustainability remains uncertain because it is subject to a basket of factors. It depend on the prevailing geopolitical circumstances, political stability, and stability of the shilling, public debt management.

As explained, the current reprieve has been occasioned by significant drop of petroleum prices which was due to global marginal fall of prices as result of decrease of global demand. However, global oil market have tendency of uncertainty owing to variety of factors. Majorly the geopolitical stability in regions crucial to oil supply. Alteration to global peace, and conflicts resolution efforts in war tone regions such as the Middle East and Eastern Europe will elongate this period of economic stability. Further, the country has done impressively well amidst the political instability during the impeachment process of Kenya’s deputy president. This shows that country is rapidly closing chapters of serious disturbances occasioned by such political turbulence. Bottom-line is , the country is increasingly growing out of disdaining habit of politically-induced violence such as those experienced in the past, the post-election violence experiences. In addition, public debt still remain a major issue that country is grappling with. The current public debt stands at 11tr, pushing Kenya’s debt burden/obligation even higher. According to  annual public debt management report of 2023, Kenya orients  83% of total revenues to debt servicing leaving only 17% for both development and recurrent spending. In course of time, the public have called the government to implement better public debt management practices to eliminate the big burden to the public. The current economic stability can be sustained if proper methods of debt management are implemented while  downsizing the appetite for more borrowing.