Price controls will cause shortages

The Kenyan government’s threat to impose price controls on fuel could create shortages and make life worse for its people.

Faced with rising prices, declining agricultural production and a weakening currency, authorities in Kenya are eager to calm a restive population recently scarred by ethnic violence.

Analysts warn against price controls in an economy liberalized 14 years ago. “Market forces are the most efficient price determinant for goods and services,” says an economics lecturer at the University of Nairobi, “because governments often cannot act quickly enough to raise or lower prices depending on demand and supply.”

It is feared that spiraling inflation caused by rising commodity prices could undermine a fragile peace between supporters of President Mwai Kibaki and those of Prime Minister Raila Odinga.

This week, the coalition cabinet discussed the rising prices and their impact on the economy. During the weekend, the Prime Minister promised that the government would tackle high food prices but fell short of mentioning specific steps. Raila was addressing his constituents in the Kibera slum, Africa’s largest.

Meanwhile, acting Finance Minister John Michuki has promised to take tough measures against oil companies for not heeding a government ‘directive’ to lower fuel prices by Shs10 (US$0.133) a litre. Michuki accuses oil companies of greed, a charge widely repeated by Kenya’s media.

As international crude prices hit a high of US$147 by mid this year, petrol prices surpassed Kshs105 (US$1.4) a litre. Now, international crude prices have settled at below $100 a barrel but fuel prices locally have reduced marginally. Most stations are retailing petrol at about Kshs99 ($1.32) per litre.

Multinational oil companies say they are being condemned unheard. Intense competition in the sector has reduced profit margins to just a few cents for every litre of fuel. “Kenyans think that oil companies are making huge margins, which is not true,” explains the University of Nairobi lecturer.

Oil companies say they are yet to clear old stocks bought when international crude prices were still high. Besides, the weakening of the Kenya shilling is cancelling out any savings made from reductions in international oil prices. In the past month alone, the Kenyan currency has suffered 15% devaluation against the dollar.

Harsh taxation measures imposed by the Kenya Revenue Authority (KRA) to curb oil smuggling have placed a heavy toll on prices. KRA demands payment of oil taxes before the product is released for sale, a measure that forces oil companies to borrow amidst a worldwide credit crunch.

Meanwhile, taxes take up almost half the retail price of fuel in Kenya. The state has been urged to cut down expenditure in order to ease the burden on the Kenyan consumer. However, with a giant cabinet of 42, there are no prospects of tax cuts any time soon.

High fuel prices have had a domino effect on electricity tariffs, which have risen over 100% since June 2008. Manufacturers have threatened to relocate their plants lamenting that Kenya’s energy costs are among the highest in the world in spite of erratic power supplies. Businesses must operate fuel-powered standby generators which further drives up the energy bill. Already, hundreds if not thousands of jobs have been lost as industries cut production to a bare minimum.

If the government imposes price controls on fuel and other essential commodities, suppliers will not be willing to sell at a loss and severe shortages will arise – Zimbabwe style. A black market will emerge with the phrase ‘consumer-exploitation’ assuming a sinister meaning altogether.

Black markets are not subjected to quality standards and are controlled by criminal gangs. Shops and supermarkets will be empty as the Mungiki, Taliban and others have a field day smuggling essential commodities through the back streets. Kenyans will waste many hours queuing for items that should normally be readily available.

Such is the harsh reality should the government re-introduce price controls.