Monday, 16 January 2012

Inflation in East Africa expected to shrink


Thanks to goods rains. The dams are full, farms are rich with crop and there is plenty of fodder for the livestock and the beast of the wild. Inflation in East Africa is set to decline significantly beginning the end of this month, we can report. So far, prices of food, fuel and electricity are inching down.  And these are the drivers of inflation in the region.

Poor rains in the last season resulted in poor crop yields, parched fields and drying up water reservoirs. Coupled with instability in the foreign market and a rising crude prices, inflation in East Africa went wild, rising from single digit figures to the late teens in Tanzania and Kenya, and up to 30 percent in Uganda in ten months.

 In Kenya inflation is has peaked at 19.72 per cent recorded at the end of November, It peaked at 30 per cent in Uganda and in Tanzania, it is expected to peak at 19.2 per cent posted in November.

By the end of December 2011, deflation picked up pace going down to 18.76 per cent in Kenya and 27 percent in Uganda. It is not clear how inflation behaved in Tanzania since records are not available. However, the Tanzanian shilling has strengthened against all major currencies since November 2011 rising 5.2 per cent against the US dollar and a similar rate against the Euro and the British Pound.

 Unstable currencies were among the causes of rising inflation. This means that their appreciation against world currencies will result in weaker inflationary pressures at home.

Food, energy, and fuel the culprits in the misery that East Africans suffered for the whole of last year are also posting downward trend. This downward crawl in prices is expected to turn into a stampede, reaching, experts say, a single digit by the second half of 2012.
Already electricity and fuel costs are beginning to shed some weight. Staple food prices have also followed suit, bringing some welcome relief to consumers.

Such declines will be boosted by ripening food crops come January and February which, experts say, will see inflation shrink.

Kenya is expected to drive the deflationary war in the region. This is because inflation in Kenya was driven by among other variables, the weakening shilling.  Although the shilling is still roughly 3.5 percent weaker than the US dollar at this time last year, it has recovered from being the worst performing currency in the world, to being the best performing against the dollar.

The shilling has recovered 21 per cent over the last eight weeks to sh87.5 to the dollar from shs107 to the dollar in October. The appreciation of the shilling has resulted in a 9.7 per cent decline in Pump prices in the last two months. This decline, though small, is seen as a signal for better things to come. Other things being equal further reductions are expected.
Kenya, the leading economy in the region, also exports her inflationary pressures to her neighbours who consume 50 per cent of her industrial output. The country depends largely on hydro generated electricity. During droughts, the dam levels decline, leading to a decline in electricity generating capacity.

To bridge the gap, the country results to expensive thermal power the cost of which is passed on to the consumer. The consumers, especially the manufacturing sector respond by raising the prices of their goods.

Now with dams full, thermal power plants must take a break. This will lower the cost of electricity significantly. In fact the cost of fuel exceeds the cost of power in power bills. So removal of fuel prices will mean lower prices and more electricity for the given amount of money- a welcome relief to hard pressed domestic consumers who bear the brunt of inflation.

Lower energy prices cut the cost of production for manufactured goods and hence motivates cut in prices of consumer goods.  From next year, Kenya goods will be cheap in the regional market which will be a relief for consumers in the regional markets. That is how Kenya spreads her problems and gains to the region.

Are we looking at a vibrant economic growth in the 130 million people market? Probably! The region has enjoyed a decade of vibrant economic growth, posting on average 6.1 per cent. However, the drought last year changed all that, and growth is expected to have slowed to around 5.0 per cent this year.

Next year, being the second full-year of the operation of the East Africa Common market is expected to bring in good tidings for region. 

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