Consumer prices shoot through the roof as govts increase taxes

The cost of living in the East African countries is on a worrying upward trend with governments shifting huge debt repayments burdens to households and businesses through increased taxation measures.

The issue is further compounded by a surge in fuel prices and weaker local currencies, which have seen the prices of essential commodities like bread, milk, wheat flour, beef, tomatoes, greengrams and fruits in countries such as Kenya, Rwanda, Tanzania and Uganda sky rocket, according to data from national bureaus of statistics.

Last year, inflation in the region was estimated at 5.2 percent, falling within the EAC convergence criteria of no more than eight percent, but higher than 3.2 percent in 2019, according to the Bank of Tanzania (BOT) Monetary Policy Statement dated February 2021.

In March, Kenya and Uganda posted increases in the overall monthly inflation, which rose to 5.9 percent and 4.1 percent, respectively, from 5.78 percent and 4.1 percent in February respectively.

Tanzania and Rwanda, on the other hand, experienced marginal declines in the cost of living with the monthly inflation figures going down to 3.2 percent and 6.2 percent, respectively from 3.3 percent and 6.7 percent, respectively, during the same period.

“In both Uganda and Kenya, foreign exchange rates have strengthened recently — and this should help to limit near-term inflation fallout. However, supply disruptions, and the risks stemming from that, will also need to monitored,” said Razia Khan, managing director and chief economist in-charge of Africa and Middle East Global Research at the Standard Chartered Bank Plc.

According to economists at the African-focused research firm NKC African Economics, rising energy prices will stoke inflation in the EA region and weigh on external balances and currencies.

“Weak albeit improving demand-side pressures suggest that core inflation will not become too much of an issue over the short term, but we are likely to see higher energy costs which of course has spill-over effects into other spheres of the economy,” said Jacques Nel, Head of Africa Macro at NKC African Economics

“The expected increase in global food prices is another concern, given that many East African countries remain dependent on food imports. Still, inflation is expected to remain at comfortable levels in Uganda, Rwanda, Kenya and Tanzania over the short term.”

According to analysts at the AIB-AXYS Africa Ltd headline inflation in Kenya is likely to edge higher this year driven by an uptick in local food prices, increased global commodity prices, the depreciation of the Kenyan shilling, and the relatively higher tax rates that had been lowered in 2020 as the government sought to cushion Kenyans during the pandemic.

The country’s debt repayment obligations are expected to cross the Ksh1 trillion mark ($9.3 billion) in the next financial year (2021/2022), putting pressure on the taxman to collect each and every cent from individuals and businesses.

The World Bank and the International Monetary Fund forecast Kenya to spend 68 percent of its tax revenues including grants on debt repayment this year and increase to 74.5 percent in 2022 up from 58.3 percent last year.

“Like everyone else, Consumer Federation of Kenya (Cofek) is concerned about the massive spike in the cost of living against an economy that is literally grinding to a halt due to Covid-19 shutdowns,” said Stephen Mutoro, secretary-general, Cofek.

In Tanzania, the debt service-to-revenue ratio is expected to increase to 13.8 percent in the 2021/2022 fiscal year from 13.7 percent in the current fiscal year, according to the Bank of Tanzania (BoT). 

In February, BoT predicted inflation to remain in the range of three to five percent until June 30 supported by adequate food supply as a result of favourable weather, low global oil prices, and exchange rate stability, but warned that upward risks to inflation may emanate from food supply conditions in the neighbouring countries, partly due to lockdown measures to contain the spread of Covid-19.

“BoT will monitor all possible risks to the growth of the economy and inflation, and take appropriate policy actions,” said BoT.

In Uganda, the government expects to spend a bulk (96.7 percent) of its domestic revenue on debt servicing in the next financial year (2021/2022) as the country works to resuscitate its Covid-19 battered economy.

The country expects to mobilise Ush21.69 trillion ($5.96 billion) in domestic revenues to fund its budget estimated at Ush45.65 trillion ($12.55 billion), of which Ush20.9 trillion ($5.75 billion) will go towards debt servicing.