Price controls, subsidies to worsen food supply

It’s a slippery path that many governments have taken to their ever-lasting regret. It usually starts off as a temporary measure to tackle rising prices for food, fuel and other basic commodities.

Prime Minister Raila Odinga and his Agriculture Minister, William Ruto, did not say it openly but the Kenyan government is now subsidizing foodstuffs.

Subsidies and price controls are used to calm a restive population from engaging in food riots. In some countries, food riots have toppled governments, hence the Kenyan leadership’s rush to re-introduce price controls and food subsidies.

Economists say that subsidizing food is the worst decision any government can make. It is not sustainable because food prices always rise as a growing population demands more food.

The Kenya government has announced two different prices for maize: one for the poor, the other for the middle class. The government will sell ‘government branded maize meal’ to the poor using a chain of government regulated retail outlets.

If there ever was a way of creating Zimbabwe-style shortages, this is it.

It gets worse: The government has instructed the National Cereals and Produce Board (NCPB) to buy maize at Kshs1,950 (US$25) a bag from farmers then sell to millers at lower rates. This means the government has to pay NCPB the difference. The decision was made after maize millers argued that they could not lower prices due to tight margins. With annual consumption of maize in Kenya in the millions of bags, the treasury must find hundreds of millions of dollars for the new subsidy.

The Kenyan government’s intervention will distort the food market to such an extent that the poor will be the biggest losers. There is no guarantee that only the poor will by the cheap, ‘government-branded’ maize. The nature of economics is such that entrepreneurs will strive to obtain the cheap maize at Shs52, then supply it to upper-income retail outlets at Shs72, thereby making a huge profit.

The poor will eventually realize that, while their shops are empty, the supermarkets of the upperclasses will be fully stocked. This is exactly the case in Zimbabwe, where government price controls have twisted the market into epic proportions. It is not that goods are not available in Zimbabwe, but nobody is willing to sell at the state-sanctioned rates. The black market has pushed inflation to world record levels.

With time, the Kenya government will find it impossible to sustain food subsidies. The millers will find it difficult to operate in a restricted market. Yesterday, the government banned millers from buying directly from farmers. Several millers may close shop under such a stifling business environment.

The supply of maize will get worse because a government-controlled distribution chain inevitably breeds corruption. Unlike a free market situation which is dictated by forces of supply and demand, a state-controlled supply chain will create opportunities for kickbacks, horse trading and extortion.

Creating two sets of prices for the same commodity is ill-informed decision making. Why should a supplier sell maize to the poor at Shs52 yet the same commodity can fetch Shs72 a couple of hundred meters away?

The government’s plans to launch ‘branded’ packets of cheap maize are likely to draw the wrath of the World Bank and IMF. In the early 1990s, the Kenyan government implemented the two institution’s recommendations to open up the economy following rampant inflation, shortages and corruption by officials who were supposed to supply the commodities. Since then, supply has been constant even though prices have risen.

In the 1980s, Kenyans had to walk long distances looking for maize, wheat and milk because price controls encouraged hoarding. A similar situation is in store for a population already used to the abundance of liberalization.

There are fears that a black market in maize and other food stuffs may emerge. A black market will fuel inflation and put food prices outside the reach of the majority.

Black markets are controlled by criminal organizations and groups like Mungiki will have a new source of income. At the same time, black markets are not subjected to quality standards and consumers will be exposed to poor quality and dangerous food stuffs.

Discontent on the rise as greedy politicians steal state maize

Kenyan politicians have lost all shame as they out-do each other in squeezing the last drop of blood from the country’s long-suffering citizens.

It is now emerging that politicians and their allies are putting pressure on the state-owned National Cereals and Produce Board (NCPB) to stop selling staple grains to milling companies.

Instead, the NCPB is forced to sell to the politicians at low prices so that they can demand hefty profit margins from millers.

As a result, consumer prices for maize meal have risen from Kshs85 (US1.1) to Kshs120 ($1.5) within a week. The price increase is disastrous in a country where more than half the population is surviving on less than $1 per day.

Kenya’s supermarket shelves are empty, an eerie resemblance to the situation in Zimbabwe. As a result of this unprecedented state of affairs, massive discontent is brewing among the Kenyan populace, as a greedy ruling elite plots the next orgy of rape, murder and ethnic cleansing.

In recent weeks, Kenyan legislators and judges have resisted paying taxes even as manual labourers earning a few dollars a day bear the burden of financing a bloated 42 member cabinet.

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Below are excerpts of the story from the Daily Nation (click here for the full story).
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A racket involving senior politicians and businessmen has been blamed for the artificial shortage of maize and maize flour that has hit many parts of the country.

Investigations by the Nation indicate that the politicians have been buying maize from the cereals board and selling it to millers at exorbitant prices.

Letters from the Ministry of Agriculture are being used by the cartel to authorize the purchase of maize from the National Cereals and Produce Board. The cartel later resells the maize to millers at a higher price.

The shortage of maize has seen the price of the staple maize meal shoot from an average Sh85 a week ago to Sh120 for the two-kg packet.

Sources have revealed that those in the cartel, including a number of MPs, have made millions of shillings from the dubious deals.

On Monday, Prime Minister Raila Odinga held a crisis meeting with a Cabinet sub-committee on food security where they decided that middlemen be pushed out of the maize business.

Fears are also emerging that the cartel has been engaging in similar dealings for sugar and fertiliser, whose prices have been on the increase since the beginning of the year.

The politicians and businessmen are said to be buying a 90-kg bag of maize at Sh1,700 ($21.8) and selling it to the millers at between Sh2,200 and Sh2,700 ($28.2 – $34.6).

It is, however, believed that the politicians are not using their money in the shady deals. Instead, they have been acting as brokers. According to one reliable source, several associates of the politicians showed up three weeks ago at the cereals board depots with letters authorizing them to buy 25,000 bags of maize each.

After the dubious deal, each of the politicians earned between Sh12.5 million and Sh25 million ($160,000 – $320,000) depending on the price at which they sold the maize.

The price of maize flour has shot up by up to 50 per cent in the recent past to retail at Sh120. Millers have warned of an acute shortage of the product that was selling at between Sh80 and Sh85 only a week ago.

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What are your comments regarding the conduct of leadership in Kenya?

Food, fuel shortages worsen Kenyan life

As though life for the ordinary Kenyan wasn’t hard enough, inefficiencies in government are causing shortages in maize, petrol and LPG gas.

What makes it painful is that the products are in the country but are unable to reach the shops thanks to political interference intended to create lucrative business opportunities for well-connected personalities.

Unreasonable taxation by the Kenya Revenue Authority has impeded the movement of fuel from the Mombasa port into the interior. The harsh measures are intended to increase government revenue and pay high salaries for the President, Prime Minister, Cabinet ministers and Members of Parliament.

At the moment, President Mwai Kibaki earns almost as much as US President George W. Bush even though Kenya is at the rear end in terms of economic, social and political indicators.

Kenyans will, thus, have to pay more for food and fuel because of an artificial shortage designed to line the pockets of a corrupt ruling elite already wallowing in ill-gotten wealth.

According to the Saturday Nation, maize millers are unable to obtain supplies from the National Cereals and Produce Board (NCPB), which is a state organization. The millers say they are forced to negotiate with brokers, who buy the maize from the NCPB then sell it to millers at 26% commission. The brokers are likely to be people with high level connections.

As a result, consumers are buying a packet of the 2kg Jogoo maize flour at Shs87 (US$1.2). With Christmas holidays just a month away and demand expected to soar, the price of maize flour is bound to break the Shs100 barrier. As always, the poor will be hardest hit. Consumer inflation will exceed the 31% recorded in the middle of this year.

The obvious solution to such a crisis would be to import from regional countries, especially Tanzania and Malawi. However, the Ministry of Agriculture is making it cumbersome to import foodstuffs, arguing that Kenyan farmers need to be protected. The gains of a liberalized market are slowly being reversed for the benefit of a few.

Shortages in LPG gas are inflicting major losses on hotels and restaurants. 5-star restaurants now resemble rural kiosks as they resort to using firewood and charcoal to prepare meals. Of course, the results are nothing to boast about and customers are turning away in droves. The use of firewood and charcoal is extremely expensive on a large scale. The gas shortage has been attributed to inefficiencies at the Changamwe Oil refinery and tax measures.

Interruptions in the supply of petrol have become alarmingly frequent in the past year. A decade ago, Kenya’s oil industry prided itself on its efficient distribution network that made it easier to buy fuel than to find clean water. That is no longer the case. Multinational oil companies, fed up with a short sighted government, are deserting the country.

In a move that only a Kenyan politician can dream of, the government wants to create a new oil monopoly in the form of National Oil Corporation of Kenya (NOCK). The government has 100% shares in NOCK and multinationals leaving the country are being pressured to sell to NOCK. It is feared that, in the next few years, shares in NOCK will be sold to highly placed individuals disguised as “strategic partners.”

At the same time, individuals close to the centre of power have their eye on departing multinationals. They took over the operations of Mobil Kenya by creating a new company called Oil-Libya. The deal was sealed following shuttle diplomacy between Kenya and Libya.

What does this mean for Kenyans? More fuel shortages and higher prices for the little that is available.

In addition to supply shortfalls in food and fuel, Kenya is currently experiencing shortages in electricity and water supply. Utility companies – all owned by the state – have failed to keep pace with a growing population. Industries are worst hit and must maintain expensive fuel-powered generators just to keep going. Now, even their generators may grind to a halt because fuel does not arrive on time.

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