New Year clouded by famine fears

Kenyans welcomed 2009 with joyous celebrations across the country amidst worries over drought and famine.

Concerns for the country’s political stability took a back bench as fireworks, shouts and song filled the atmosphere. For many, this was the first New Year feast in two years.

Last year began with political and ethnic clashes following disputed electoral results. The violence was to last till March 2008 when a peace agreement was signed between President Mwai Kibaki and his rival, Prime Minister Raila Odinga.

Amidst the ups and downs of coalition building, little attention was paid to the failure of seasonal rains. Most parts of Kenya, especially east of the Rift Valley, had very little rain in the second half of 2008. This is expected to worsen food shortages that have widely eroded the ratings of the Giant Coalition of Kibaki and Raila.

Just a few weeks ago, rumblings of discontent forced the government to take the unprecedented step of creating to different types of maize flour: one for the well-to-do and the other for the poor. By offering low-priced maize for the poor, Kenya was effectively getting into the food subsidy business which is currently the preserve of wealthier countries.

With clear signs of drought and the famine that goes with it, the government’s food subsidy bill is bound to rise astronomically. Already, the Treasury has ordered government ministries to shelve construction projects.

In their New Year speeches, President Kibaki and Prime Minister Odinga vowed to tackle high food prices. It remains to be seen how this will be accomplished without either running a gigantic debt or squeezing the earnings of farmers. The second option – lowering farm gate prices – is already running into problems.

While launching its subsidized brand of maize, the government banned millers from buying directly from farmers. Instead, farmers were to sell maize to the state-owned National Cereals and Produce Board (NCPB) at a fixed price. Maize farmers oppose the directive while wheat growers accuse the government of favouring maize farmers.

2008 food production was hurt by political violence. When the peace deal was signed in March, it was too late for the 2008 crop. Fertilizer stores had been looted and fresh supplies became extremely expensive. Those farmers not affected by violence could not afford fertilizer either, resulting in poor yields.

2009 food production will be affected by lack of rain and continued insecurity in the highly productive farmlands of the Rift Valley where ethnic clashes continue intermittently. Many farmers have not returned to their farms for fear of future attacks. All it takes is fallout between the president and prime minister before full scale violence resumes.

Meanwhile, the continued destruction of Kenya’s forest cover is negatively impacting food production. Once mighty rivers have become seasonal, many have dried altogether. Rainfall in former forest areas has declined dramatically and when it does rain, massive soil erosion is a consequence due to the lack of protective vegetative cover.

With clear evidence of food shortages, the government must import food but like everything else in Kenya, the importation process is mired in corruption and political intrigues.

It’s far from being a fair, transparent process.

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Price controls, subsidies to worsen food supply (previous article)
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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.