The Economic Survey 2017, published annually by the Kenya National Bureau of Statistics, revealed that GDP is estimated to have grown by 5.8% in 2016 from 5.7% in 2015; this was in line with our expectation of a band of 5.7% - 6.0%. In order to assess the cost of living, we have picked two components of GDP, agriculture and financial intermediation, because (i) food is a big component of the Consumer Price Index (CPI) and a necessity that is produced through agricultural activities, hence knowing how the agriculture sector performed will give us insight on food supply and prices, and (ii) knowing about the growth of money supply in the economy and credit accessibility to households will give us an indication of household income and whether they can easily subsidize this with credit when the need arises. Agricultures contribution to GDP declined by 0.4% to 21.8% and its weighted y/y growth rate slowed down to 4.0% from 5.5% in 2015. This was attributed to the drought experienced from the 2nd half of the year that rendered the weather conditions unfavorable for agricultural activities. Financial sector growth also slowed down, growing by 6.9% in 2016 from 9.4% in 2015 driven by (i) slow private sector money supply growth of 3.6% in 2016 from 14.1% in 2015, and (ii) a slump in domestic credit growth to 6.4% from 20.8% in 2015. These two prevailing conditions have had an effect on the cost of living. Consequently, this week we focus on the main factors that affect the cost of living, look back at periods that have had similar prevailing conditions and how these affected the cost of living, and finally, conclude by looking at the governments preparedness and how they can improve on this going forward to avoid pressure on the cost of living.
Cost of living is simply what one needs to sustain their daily needs and is a function of ones disposable income and ones expenses. Below, we explore the factors that affect the cost of living and look at whether the factor is prevalent in the Kenyan scenario and how it has affected the cost of living:
| Factor | Effect on Cost of Living | Kenyan Scenario | Current effect on cost of living? |
| Cost of Necessities* | The more basic goods and services cost, the more you have to pay for them. Hence, the cost of necessities and the cost of living have a direct and positive relationship in that, holding all other factors constant, if the cost of necessities increases, then the cost of living also rises and vice versa. Inflation is covered in this bucket | · The April 2017 inflation rate came in at 11.5%, having risen 6.2% y/y and 5.1% from December 2016 · Food & non-alcoholic beverages index increased by 3.5% m/m and by 21.0% y/y in April 2017 · The clothing & footwear index rose by 4.0% y/y in April 2017 · The housing, water, electricity, gas & other fuels index rose by 2.9% y/y in April 2017 · Health, transport and education indices rose by 3.1%, 5.1% and 2.9% y/y in April 2017 | Negative |
| Level of Disposable Income** | The less you have to spend, the less you can afford. Hence, the level of disposable income and the cost of living have an inverse relationship in that, holding all other factors constant, if the level of disposable income increases, the cost of living decreases and vice versa. Unemployment and credit accessibility are covered in this bucket | · The 2017 Human Development Index revealed that Kenyas 2016 unemployment rate was the highest in East Africa at 39.1% up from 24.1% in 2015, meaning that the general populations disposable income declined in 2016 · According to the Economic Survey 2017, there was a slump in domestic credit growth in 2016 to 6.4% from 20.8% in 2015 and M3 money supply growth declined in 2016 to 3.6% from 14.1% in 2015, meaning that there was less money in circulation and a larger part of the population was able to subsidize their income with debt to improve their living standards | Negative
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| *Necessities in this case refer to goods and services that a household needs on the regular like common food items, utilities, housing, clothing, education and healthcare **Disposable Income refers to the income one has after deductions such as taxes and additions such as subsidies and donations | |||
Looking at the current trends, inflationary pressure has been felt more by the low middle income people given that they spend most of their incomes on basic necessities like food whose inflation has been quite high. From the chart below, we can see that the lower income class inflation has been high especially during the two drought seasons (circled in red), where food and utilities inflation are usually at their peak due to subdued rainfall leading to lower food, electricity and water production/availability.
Now that we have seen the main factors that affect the cost of living and how these factors have taken shape in the Kenyan scenario, we now look into the past because history has a tendency to repeat itself. We want to look at periods with similar prevailing conditions and how these conditions affected the cost of living.
| Period | Prevailing Conditions | Measures Taken by The Government | Effect on Cost of Living |
| 2004/05 | · The prevailing drought had pushed up the inflation rate to highs of 18.3% in October 2004 · The food & non-alcoholic drinks index had risen by 24.8% y/y · The fuel & power index had risen by 33.8% y/y · The transport & communications index had risen by 24.6% y/y | · The government ensured that there were food reserves in form of maize for the FY 2004/05 · The government imported 180,000 tonnes of maize to supplement the strategic grain reserves · The government appealed to the international community and development partners to donate 166,000 tonnes of assorted food stuff · The government set aside Kshs 65.0 mn to supply seeds to farmers across the country as a long term measure | Negative |
| 2008/09 | · The drought had stricken once again, pushing up the inflation rate to highs of 31.5% in May 2008 · The food & non-alcoholic drinks index had risen by 44.2% y/y · The housing, transport & communication, fuel & power, medical goods and education indices had risen by 6.5%, 20.3%, 17.9%, 8.3% and 6.8% | · The government appealed to the international community to assist through donations to deal with the crisis · The government embarked on activities of water trucking, borehole digging, destocking-slaughter and animal health & feed programmes to help livestock farmers and pastoralists · The government increased the budgetary allocation to agriculture as a long term measure. The government would buy surplus production from farmers for storage in preparation for the next cycle | Negative |
| 2011/12 | · The drought pushed inflation to highs of 19.7% November 2011 once again · The food & non-alcoholic drinks index had risen by 26.2% y/y · The clothing & footwear index rose by 10.6% y/y in April 2017 · The housing, water, electricity, gas & other fuels index rose by 17.0% y/y in April 2017 · Health, transport and education indices rose by 8.2%, 28.0% and 4.7% y/y in April 2017 | · The government declared the drought a national disaster and called for local and international aid to counter the situation · Food distribution programmes were started · To stabilize high prices of cereals, the government allowed importation of cereals · A drought intervention strategy was embarked on with the government allocating funds and disbursing them in tranches/phases to cater for intervention in various sectors | Negative |
From the table above, we see that most instances of a spike in the cost of living are brought about by cost-push inflation and an increase in cost of necessities, usually in drought years. This is mainly because as a country, we are still highly dependent on rain-fed agriculture and a large portion of our electricity is still hydro-electric power (HEP). We also see that as a country, we have been putting in place short term measures to cushion us against the negative effects on the cost of living, and the long term measures such as setting up large irrigation schemes might not be taking place as fast as the country demands them. The drought is a cyclical natural catastrophe that the government can strategically plan for and mitigate against.
To help curb recurrence, the following are some of the long-term solutions we would suggest:
- Developing irrigation schemes to reduce dependence on rain-fed agriculture and ensure food security in low rainfall seasons,
- Encouraging a culture change in the population to embrace all food types and enable us depend on drought resistant crops, such as sorghum and millet, in times that we have to,
- Better budgetary disaster management allocation,
- Diversifying sources of electricity to reduce dependence on HEP which is reliant on good rainfall,
- Investing in water reservoirs across the country to harvest rain water and ensure water is stored for use in times of low rainfall,
- Doing more to preserve water catchment areas especially forests,
- Investing in proper national food storage facilities to enable us store enough food for drought seasons, and
- Improving the food distribution and preservations channels in the country to ensure food moves swiftly from areas with a surplus to areas with a deficit.
We are of the view that the government needs to embark on these longer term solutions to prevent a recurrence of similar conditions going forward. This way, we will ensure that economic growth achieved in 5 years will not be wiped out by a single 2-year Act of God come the next drought.
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