Business Daily (Nairobi)
Michael Omondi And Mwaura Kimani
3 April 2008
(Page 2 of 2)
This would present an awkward situation for the government as the price of grains and other agricultural commodities are trading at record prices, which are not expected to cool down any time soon.
The booming agricultural commodity prices have been attributed to a drop in stocks and the biofuels boom that has added to demand.
The costly food prices will be made worse by the sky high prices of oil, which dealers predict will remain high for the better part of the year.
Last week, crude oil prices hit $106 a barrel, having risen from $88 at the start of the year on increased demand for the commodity and fears over supply of the commodity.
Local oil marketers are also showing a strong bias for expensive fuel with many saying that the sky-high fuel pieces are here to stay.
"I don't expect fuel prices to come down due to the volatile crude prices," said Patrick Obath, the managing director of Kenya Shell.
A litre of unleaded fuel is retailing at an average price of Sh95 in Nairobi up from Sh84 in mid December.
But with indications that barrel prices are likely to remain high, players in the oil market say the prospects of pump prices coming within touching distance of Sh100 does not sound remote.
The price increase would affect manufacturers and transporters, among other businesses, which would be reflected in higher prices for commodities and transport.
"When fuel prices go up, everything goes up, so I expect an increase in general commodities," said Mr Peter Wachira, senior investment manager at AIG Investments in an earlier interview.
While prices surges have so far been largely contained to food and fuel, policy makers fret they would spread to other commodities as well.
Already, investors have began to shy away from the construction sector as cost of construction inputs including cement, paints, steel beams and corrugated sheets rise beyond the reach of investors.
The rising cost of living is a fatal blow as it sets in at a time when the economy is facing a sluggish growth in employment and reduced incomes attributed to the after effects of the political violence.
Though a peaceful deal has been brokered, the Government reckons that the country might not hit its growth targets due to the political turmoil with talk it could knock at least two percentage points off the country's economic growth this year.
The economy grew at the rate of 7.1 per cent last year.
This is made worse by the fact that earnings in formal employment have not kept pace with the inflation levels, leaving those in employment with weaker purchasing power.
A survey by consultancy firm PricewaterhouseCoopers indicate that wages are likely to grow by an average of eight per cent this year, which pales in comparison to inflation at above 10 per cent.
But the damage from the rising inflation levels is not restricted to people's pockets alone. The savings industry including bank deposits, pension savings and stocks investment look set to post a negative return in a high inflation environment.
Currently, most commercial banks are paying an interest of between four and six per cent with most pension schemes posting returns of between 12 and 18 per cent, its clear the inflation will this year eat deep into the savers return.
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