State should tread cautiously in its bid stabilise economy

Treasury Cabinet Secretary Njuguna Ndung'u. [Edward Kiplimo, Standard]

In the midst of Kenya’s economic storm, we find ourselves grappling with four significant challenges – high fuel prices, the rising cost of living, the depreciation of Kenya shilling and the raise of inflation.

Kenya is a democracy and the popular dictum of democracy as government of the people by the people and for the people underlines the principles of good governance and accountability. What does that mean for our economic challenges? It’s a call for good governance and accountability to ensure that decisions made by the government are in the best interest of the people.

Kenya’s economic landscape is undergoing a turbulent phase, marked by many challenges that demand dynamic vision. 

At the core of Kenya’s economic strategy lies the neo-liberal perspective, guided by the principles of Washington Consensus of macroeconomic stability which focuses on fiscal discipline, control of government spending, and maintaining low inflation rates. The call for a balanced approach recognises the need to align these principles with the current economic challenges faced by the nation.

Beyond the evident influence of global oil prices, local factors also contribute to the pain Kenyans feel at the pump. Taxes and currency depreciation emerge as significant contributors, turning fuel price increase into more than just numerical figures at the pump. The ripple effect extends to higher transport cost, altered spending patterns of Kenyans and increased production cost, ultimately impacting the overall cost of living, thus leading to high inflation rate.

Effectively managing inflation is a delicate balance for the government by implementing monetary and fiscal policies. In such situations, the government should not rush when choosing mixtures of policies to stabilise the economy.

Adjusting interest rates and taxes can help but might also harm other sectors of the economy.

Inflation causes each unit of currency to buy fewer goods and services than before resulting in decline in purchasing power of consumers. During inflation period the government will respond desperately through the measures of monetary and fiscal policies in an attempt to stabilise the economy while steering growth. That is the point where the country might find itself in a hyperinflationary situation given the position of public debt in the economy which is growing by the day.

That is why sometimes it is counterproductive to implement such measures as adjusting interest rates and taxes will affect other sectors of the economy to warrant hyperinflation.

When the central bank adjusts interest rates to influence borrowing, it also reduces spending and borrowing in the economy. Increased taxes, on the other hand, affects the disposable income of consumers, limiting spending as well as savings.

Similarly, currency interventions as a measure to manage exchange rate is crucial but it is imperative to strike a balance to avoid more problems. Depending on what causes inflation, whether it is a demand - pull or cost-push, it is important to note that the effectiveness of these measures require a balanced approach to avoid a hyperinflation situation.

-Mr Abdisitar is an internal auditor


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