Why the High cost of living?

This is not how to lower cost of living

There is a justifiable outcry over the high cost of living, not just in Kenya, but globally. Everywhere the shoe is pinching.  Have our feet grown bigger or has the shoe tightened? Whatever the case, the shoe is pinching.

When did it begin to pinch and why?  Let’s begin with when?  A little recent history is a good starting point: Back in 2020, a nasty epidemic hit the world. It was vicious, spreading fast, and claiming lives faster than wars. It was the COVID-19 epidemic.

 To check its spread and protect their people, countries instituted lockdowns that lasted for months.  The world economy was devastated!  Lockdowns meant joblessness, no money, and no tax revenue for governments.

Towards the end of 2020, the lockdowns were lifted worldwide leading to massive supply chain bottlenecks because of excess demand for goods and inputs.  And, before the world handled that shock successfully, Russia invaded Ukraine in a war that still rages on.

These shocks reduced the supply of goods and services while demand was still robust leading to price increases.  One more shock happened in the US when the government raised interest rates to contain raging inflation. That made the US dollar, attractive to investors and a lot of them liquidated their assets elsewhere to buy dollar-dominated assets. The US dollar strengthened by 8 percent,  weakening other currencies.

The so-called emerging and developing economies were ravaged!  Picture this; your currency weakens amid high commodity prices, especially  of energy and food. That is a recipe for high imported inflation. Coupled with domestic shocks such as failed rains, inflation ran amok- the shoe got tighter with no cobbler around to loosen it.

The Kenyan currency, the shilling, is suffering the ravages of these shocks and has so far lost 15 percent of its value against the green buck. That is to say, in addition to the high market prices, in terms of the US dollar we have to pay 15 shillings more to buy the dollar so that, if the price of a barrel of oil is $80, we shall buy it at KEs 12,000. Previously, when the shilling exchanged at 100 to the dollar, we bought that barrel at 8000 shillings.

Now exporters are happy because they earn more shillings for their exports- tea, coffee, horticultural produce, and other manufactured goods. However, importers are crying because they have to dig deeper into their pockets to import rice, Wheat, fuels, and other imports.

Consumers too-you, me, and other guys, are digging deeper into our pockets to buy our daily supplies of these goods.   The shoe is getting tighter.

So what to do? The dismal Science, economics, dictates- please note: it dictates, it does not request- we must tighten our belts. We must either produce more of these goods at home or reduce our consumption of them. Since we cannot produce Machinery and food overnight, in the short term, we must pay a high price or cut consumption. In the medium to longer term, we must produce these goods at home. There simply is no shortcut!

Which leads me to the next question? How about the government, does it have to tighten its belt too? Theoretically, it can. In practice, however, it is a different ball game.  We have donated some of our responsibilities to governments. Among these is our security, defense, health, education, development projects, and external relations, including borrowing,  and creating jobs.  All these burdens cost money. So short of abandoning some of the responsibilities with the attendant risks, governments cannot cut their cloth according to their size.

In the Holy Book, the Bible, at 1 Samuel 8:10 onwards, the Prophet Samuel warned the Israelites of the cost of human kings. They will have the right to demand taxes among other rights. This is why governments raid our pockets in terms of taxes and other statutory deductions from our incomes in order to function. So, we are just fulfilling our part of that prophecy when we pay taxes. While it is painful, taxes are the price we pay for installing governments and donating some of our responsibilities to them.

 It has, for instance, to pay public debt including external debts.  Kenya’s debt repayment per year is estimated at $1.67 billion. Half of that goes to service Chinese debt and the other half to other lenders including the IMF, World Bank, and Africa Development Bank among other debtors. Since the government does not make any money outside tax, we have to pay taxes- grudgingly of course

Oh! There is one more reason why the cost of living is high. We have developed and our population has grown and is still growing.  Large populations mean larger demand and higher prices of everything. While it is fashionable to compare our current situation with the past, the comparisons are lopsided. For instance, we keep praising Kibaki's frugality.

True our debt was low during that era and so was our GDP. GDP was US$50 billion by the time the late President Kibaki left office in 2013. By 2022, when President Uhuru left office, it was US$107 billion- double the Kibaki era size. How did it get there?  Investment and growth meaning Development. With a larger wealth, our consumption behavior has shifted. Our basket contains more goods and services than when Kibaki left office. That shift in our consumption habits pushes prices of certain goods up because the standard of living of a large segment of Kenyans has risen. A high standard of living means higher prices due to increased demand for goods and services.

Given these” gloomy” facts, one may ask, when will things turn around so that the burden is eased. The gloomy answer is when the economy creates more taxpayers so that the burden is spread around.  Economies create more taxpayers when they grow and growth is driven by consumption. Consumption in turn is driven by employment of the people that need jobs.

Job creation is a product of investment in the productive sectors.  This is not easy because governments do not possess magic wands they can wave around and create jobs. It takes money and time. It does not matter whether job creation was a major plank  of a government’s economic policy.  It will still take investment and time.  If the government is a major investor, means more taxes or more debts. Which of the two evils do you choose since each is painful?