VZCZCXYZ0016
PP RUEHWEB

DE RUEHNR #1318/01 1431217
ZNR UUUUU ZZH
P 221217Z MAY 08
FM AMEMBASSY NAIROBI
TO RUEHC/SECSTATE WASHDC PRIORITY 5878
INFO RUEHXR/RWANDA COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC

UNCLAS NAIROBI 001318 
 
DEPT FOR AF/E, AF/RSA, AF/EPS, AND EEB/IFD/OMA 
DEPT ALSO PASS TO USTR FOR BILL JACKSON 
DEPT ALSO PASS TO DEPT OF LABOR FOR SUDHA HALEY, PATRICK WHITE AND 
MAUREEN PETTIS 
TREASURY FOR DAN PETERS 
COMMERCE FOR BECKY ERKUL 
 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN ELAB ETRD EAGR KE
SUBJECT: KENYA'S INFLATION SOARS HIGHER IN APRIL 
 
REFS: (A) NAIROBI 1122, (B) NAIROBI 970 
 
¶1. Summary: Overall inflation continued accelerating in April 2008, 
with prices an average of 26.6% higher than in April 2007 (YOY). 
Seasonally adjusted inflation reached 14.8%, driven mainly by food, 
transportation and fuel prices.  The Nairobi lower income group 
experienced the highest inflation at 28.9% YOY, followed closely by 
other urban areas at 26.6%.  To reduce the pressure on food prices, 
the GOK has decided to waive the 60% duty on up to 52,149 tons of 
imported wheat flour, and announced plans to import three million 
bags (270,000 MT) of maize by August.  The Central Bank of Kenya 
(CBK) believes the inflation is driven by shortages and rising 
global energy and food prices, but is stepping up its efforts to 
reduce the money supply, since seasonally-adjusted underlying 
inflation is well over the 5% target rate.  President Kibaki's 
decision not to mandate a minimum wage increase on May 1 means 
workers' buying power will continue to erode, but employers still 
face rising production costs and reduced sales.  End Summary. 
 
Inflation Still Accelerating 
----------------------------- 
¶2. Like a vulture riding an updraft over the Rift Valley, inflation 
continued to spiral upwards in April from March's high levels (ref 
B).  Overall inflation rose 26.6% year-on-year (YOY) in April 2008, 
the highest rate since 1994, while seasonally adjusted (average 
annual) overall inflation rose to a record 14.8% YOY.   The 
underlying inflation rate, which excludes volatile food, energy and 
transportation prices, fell slightly to 6.5% YOY.  However, the 
seasonally adjusted rate rose slightly to 5.6%, and both rates 
remained above the Central Bank of Kenya's (CBK) 5% target ceiling 
for money supply management. 
 
¶3. Food, fuel and transport prices continued to drive inflation 
(Table 1).  Food prices rose 4% from March to April (MOM), and rose 
36.8% YOY in April.  MOM increases  for fuel and transportation 
slowed to under 1%, but their prices rose 15.4% and 19.5% YOY 
respectively.  Housing costs rose 5.7% YOY.  GOK officials attribute 
most of the inflation to rising global food and fuel prices and to 
supply disruptions from the post-election violence, rather than 
monetary factors.  They acknowledge fears about high inflation are 
genuine, but predicted inflationary pressure would ease as the 
country's supply chains for goods and services are restored. 
However, they do not know when the local and global supply 
constraints will ease and inflation will decrease.  Ministry of 
Agriculture Permanent Secretary Dr. Romano Kiome predicted food 
prices would escalate for the next two to three years, and Suntra 
Investment Bank manager Charles Ocholla said inflation rates will 
continue to edge upwards. 
 
Table 1: April 2008 Overall Month on Month (MOM) and YOY Inflation, 
not seasonally adjusted: 
 
Item Group                    MOM change  YOY Change 
--------------------------------------------- ------- 
Food & Non-alcoholic drinks . . 4.0%  .  .  36.8% 
Transport & Communication .  .  0.4% .  . . 19.5% 
Fuel & Power  .  .  .  .  .  .  0.8%  . . . 15.4% 
Alcohol & Tobacco  .  .  .  .  -0.6%  . . . 14.0% 
Medical Goods and Services .  . 0.0%  .  . . 7.9% 
Household Goods & Services .  .-0.1%  .  . . 7.5% 
Recreation & Education .  .  . -1.0% .  . .  5.5% 
Housing Costs  .  .  .  .  .  .-0.1%  . .  . 5.7% 
Personal Goods .  .  .  .  .  . 0.5% .  .  . 6.2% 
Clothing & Footwear  .  .  .  .-0.2%  . . .  4.3% 
Average all Groups .  .  .  .   2.7% .  . . 26.6% 
Source: National Bureau of Statistics 
 
¶4. Lower income consumers in Nairobi, for whom food constitutes 50% 
or more of their purchases, remain the hardest hit, with the price 
of their basket of goods rising 29% in April.  However, consumers in 
other urban areas were close behind at 26.6%. 
 
Table 2: 2008 overall inflation YOY % Changes 
Item Group         Jan     Feb     Mar      April 
--------------------------------------------- ------ 
Nairobi Lower 
Income ...........19.9% . 18.3% .. 23.2% .. 28.9% 
Nairobi upper 
Income ........... 9.6% . 10.1% .. 12.5% .. 14.6% 
Rest of Urban 
Centers ......... 18.2% . 20.6% .. 22.0% .. 26.6% 
Source: Central Bank of Kenya (CBK). 
Imported Food Should Reduce Shortages 
------------------------------------- 
¶5. In an effort to reduce anticipated shortages, the GOK announced 
it would waive the 60% duty on up to 52,149 tons of imported wheat 
flour, and announced plans to import three million bags (270,000 MT) 
of maize by August.  At the end of May, the government will 
authorize millers and importers to ship in 17,000 MT of duty free 
wheat flour from COMESA partners Egypt and Mauritius.  Agriculture 
Minister William Ruto said the government will import three million 
bags (270,000 MT) of maize by August to replenish the National 
Cereals and Produce Board's (NCPB) shrinking stockpiles and avert a 
major deficit before the September harvest (ref A).  Minister Ruto 
also said the government had increased NCPB's purchase price for 
maize from Sh1,400/90kg bag by 21% to Sh1,700 to boost production 
and reserves. 
 
CBK Struggles to Control Money Supply 
------------------------------------- 
¶6. The CBK is trying to tighten monetary policy to bring underlying 
inflation back down to 5%.  The CBK relies on repurchase agreements 
(repos) to implement its monetary policy, but has also sold dollars 
several times recently through the interbank foreign exchange market 
to mop up more shillings and to stabilize the shilling's 
appreciation.  In an effort to absorb more liquidity from the 
financial system, the CBK is experimenting with "term auction 
deposits" under which banks could deposit up to Sh20 million for 
three to 90 days in an interest earning account.  The deposits would 
count towards meeting the CBK's liquidity ratio requirement, but 
could not be used as collateral to borrow from the CBK.  Unlike 
repos and T-bills, there is no sale of a security involved. 
 
Interest and Exchange Rates Still Not Much Affected 
--------------------------------------------- ------ 
¶7. The raging inflation has still not affected the interest and 
exchange rates.  During the week ending May 15, 2008, the average 
interbank rate was almost unchanged at 7.73%, while the repo rate to 
7.39% from 6.51% the week before.  Both the 91 and 182 T-bill rates 
declined slightly at the May 15 auction, to 7.69% and 8.76% 
respectively, and the average interbank interest rate stayed about 
7.7%.  The shilling has held stable between 61 and 62/$, and about 
98/Euro.  Barclays Bank official Kihara Maina said he expected the 
inter-bank rate would rise to 9-10% over the next six months, and 
that commercial lending rates would rise from the current 14% to the 
16-18% range, as lenders cushion themselves against rising commodity 
prices.  He also predicted the shilling could depreciate to as low 
as 67/dollar after the Safaricom IPO is completed. 
 
Government Trying to Limit Borrowing 
------------------------------------ 
¶8. It appears the GOK is trying to avoid an increase in domestic 
borrowing that could push up interest rates and inflation.  Finance 
Minister Amos Kimunya claimed that tax revenues hit a record high in 
April, were Sh8 billion above the year to date target, and that he 
expected Kenya Revenue Authority's 2007-08 collections would exceed 
the annual target.  However, he admitted Kenya was also seeking Sh27 
billion ($435 million) from donors to address the impact of 
post-election violence on key economic sectors, including food 
security, roads, health and water, and that he was also pushing for 
the sovereign Eurobond to raise funds for infrastructure and social 
spending. 
 
But the Real Economy Will Feel the Effects 
------------------------------------------- 
¶9. Frank Akoten, an economist at the Kenya Institute of Policy 
Analysis and Research (IPAR), warned that Kenya's rising high 
production costs will make Kenya's products uncompetitive in the 
international market, especially in COMESA, its largest market, 
where it competes with Egyptian and Chinese products.  The 
manufacturing sector contributes about 10% of GDP and grew 8.3% in 
¶2007.  However, it is unlikely to reach that level in 2008, much 
less the previously predicted 10% growth.  Manufacturers have frozen 
employment, increased their search for alternative fuels, and are 
introducing energy saving devices into their production lines that 
may also reduce labor. 
 
¶10. At a stakeholders planning meeting on the 2008-2012, five year 
Medium Term Plan for implementing the Vision 2030 strategy, Minister 
of Planning and National Development Wycliffe Oparanya told 
journalists he expected 6.5% economic growth in 2008.  Skeptical 
commentators noted the disparity with Finance Minister Amos 
Kimunya's growth estimate of 4-6%, and the average forecast from a 
Reuters poll of analysts and businessmen that growth would drop to 
3.8%.  Respected business journalist Robert Shaw predicted growth 
would drop to 2-3% and said that Minister Oparanya: "Is basically 
giving propaganda. He must be the only person in Kenya that believes 
this." 
 
Salaries Eroding Quickly 
------------------------ 
¶11. Under GOK guidelines, workers can factor only past inflation 
into their wage negotiations, not anticipated inflation.  Although 
the minimum wage of Sh5-6,000/month is not sufficient to live on, 
the GOK decided not to announce an increase on May 1, presumably to 
avoid a further increase in production costs.  Therefore, the 
accelerating inflation will continue to erode wages and buying power 
for the next year or more.  A recent article claimed high fuel 
prices are causing Nairobi drivers to start forming carpools and 
slug lines.  Nairobi traffic was noticeably lighter in the last 10 
days of May, allegedly because drivers had exhausted their fuel 
budget until the next paycheck. 
 
Comment 
------- 
¶12. There is no relief from inflation in sight for Kenyans, who will 
have to rely on their existing or new coping mechanisms to survive. 
The poor and middle class are tightening their belts or are simply 
unable to pay some bills.  The GOK's program to pay tuition for all 
secondary students comes at a critical time for parents, but other 
education costs continue to rise.  Low-income urban consumers must 
be getting food from family farms or remittances from expat Kenyans 
to survive, but urban and rural hunger and malnutrition is likely 
growing.  The GOK's decision to waive the 60% duty on wheat flour 
imports is welcome, but long-overdue, since domestic wheat producers 
can supply only a small portion of demand.  The planned maize 
imports should prevent major food shortages (if they arrive in 
time), but high international prices will continue driving up 
domestic prices.  Manufacturers, service providers, farmers and 
exporters will be squeezed by rising input prices.  Economic growth 
is already predicted to drop from 7% in 2007 to 4% or less in 2008, 
and poverty is going to increase.  Kenyans faced similar conditions 
in the 1990s without uprisings or food riots, but the Coalition 
government will have to make visible and effective efforts to assist 
consumers and producers to minimize criticism and social unrest. 
 
RANNEBERGER