27 November 2009

In yet another clear indication of why MPs should not be entrusted with too much power over economic policies, parliament on Wednesday passed a Bill seeking to reinstate price controls in certain segments of the economy.

The crux of their argument is that the prices of commodities for which they seek control have appreciated at too fast a pace taking them beyond the reach of millions of Kenyans.

That prices of essential commodities stand beyond the reach of many is a fact beyond reproach. What the politicians have missed is a proper diagnosis of the problem.

In passing the Price Control Bill 2009, the MPs have stated as their targets the cost of essential commodities such as maize, cooking fat, sugar, paraffin, diesel and petrol -- undeniably key items in every household's consumption basket.

Yet an informed look at the realities of Kenyan consumer goods market should restrain anyone from rushing for quick fix solutions such as price controls.

It may sound politically right to cap prices in the marketplace but supporters of this move should be forewarned that the consequences will be swift and dire.

Take the petroleum products for instance. It cannot be imagined that the MPs do not understand that the main driver of prices in this market is global and supply dynamics that are beyond the reach of any local instrument of control.

What is also very clear is the price that the very ordinary Kenyans will pay in a controlled market.

Investments in the oil sector will dwindle, hoarding will become the common mode of operation among traders, causing serious shortages that will only slow down the pace of activity in the economy.

Similar dynamics drive pricing in the cereals, and sugar markets. A casual look at the cereals market indicates that supply shortage is the single biggest driver of prices making it fluctuate with seasons.

In the past the price of a 90kg bag of maize has dropped to as low as Sh900 during harvests in the grain basket region of the North Rift and peaked at more than Sh2,500 with prolonged drought and the accompanying shortages.

One also needs to look at the population and agricultural output dynamics to identify the main drivers of pricing in the segment.

Interim census results show that Kenya has been adding a million new mouths to feed every year. That means that since 2002, when the maize flour price was price at Sh34 per two-kilogramme packet, there are six million more people to feed.

But agricultural output has been growing slower. It should also be of concern to the MPs as to whether price controls project is in tune with the country's long term development goals and compliant with the provisions of supra-national commitments such as membership in the planned EAC common market.

These realities only point to the fact that answers to Kenya's commodity pricing crisis lie in fixing the supply side.

Though oil remains a commodity whose pricing will in the near future largely depend on global demand and supply, it has become clear that increasing the country's processing and storage capacity alone could help shield consumers from frequent price fluctuations. Some effort has gone in doing that.

For the cereals market, it would be prudent for the MPs to enact legislation that will ensure that the government invest big time in farming by for instance cutting to size the huge allocations that Treasury makes to security services every year and channelling it to the productive sectors of the economy.

Backing such reforms with the management of competition to increase market efficiency is what will deliver affordable prices.

allafrica