TOUGH TIMES

Tame inflation, IMF tells governments

Kenya's cost of living rose to a two-year high of 7.9% in June.

In Summary

•The country's inflation has been rising on a monthly basis since February.

•This is partly attributed to Ukraine - Russia crisis which has stoked energy and food prices after choking the global supply chain. 

A display of tomatoes at Kangemi Market, Nairobi
A display of tomatoes at Kangemi Market, Nairobi
Image: MERCY MUMO

With increasing prices continuing to squeeze living standards worldwide, taming inflation should be the first priority for policymakers, IMF now says.

“Tighter monetary policy will inevitably have real economic costs, but delay will only exacerbate them,” the financial institution says in its latest World Economic Outlook update.

It says targeted fiscal support can help cushion the impact on the most vulnerable, but with government budgets stretched by the pandemic and the need for a disinflationary overall macroeconomic policy stance, such policies will need to be offset by increased taxes or lower government spending.

Tighter monetary conditions will also affect financial stability, requiring judicious use of macroprudential tools and making reforms to debt resolution frameworks all the more necessary.

In Kenya, a rise in food prices and transport pushed up the cost of living in June to a two-year high of 7.9 per cent, above the government's ceiling by 40 basis points.

Kenya National Bureau of Statistics (KNBS) data shows the Consumer Price Index, a measure of 12 top items in the food basket rose to an index of 124.22 compared to 123.12 the previous month. 

The cost of living has been rising on a monthly basis since February, hitting 7.1 per cent in May. 

This is partly attributed to Ukraine - Russia crisis which has stoked energy and food prices after choking the global supply chain. 

“The rise in Kenya’s inflation was mainly due to increase in prices of commodities under food and non-alcoholic beverages (13.8 per cent); furnishings, household equipment and routine household maintenance (9.2 per cent); transport (7.1 percent) and housing, water, electricity, gas and other fuels (6.8 per cent),” KNBS said. 

According to IMF, policies to address specific impacts on energy and food prices should focus on those most affected without distorting prices.

And as the pandemic continues, vaccination rates must rise to guard against future variants.

“Mitigating climate change continues to require urgent multilateral action to limit emissions and raise investments to hasten the green transition,” IMF says.

A tentative recovery in 2021 has been followed by increasingly gloomy developments in 2022 as risks began to materialize.

Global output contracted in the second quarter of this year, owing to downturns in China and Russia, while US consumer spending undershot expectations.

Several shocks have hit a world economy already weakened by the pandemic: higher-than-expected inflation worldwide––especially in the United States and major European economies––triggering tighter financial conditions; a worse-than-anticipated slowdown in China, reflecting Covid- 19 outbreaks and lockdowns, and further negative spillovers from the war in Ukraine.

The baseline forecast is for growth to slow from 6.1 percent last year to 3.2 per cent in 2022, 0.4 percentage point lower than in the April 2022 World Economic Outlook.

In June this year, the World Bank projected Kenya’s real GDP to grow by 5.5 per cent in 2022 and 5.2 per cent on average in 2023–24.

“This growth rate, while still strong, will be a moderation following a remarkable recovery in 2021 from the worst economic effects of the pandemic, when the country’s economy grew by 7.5 per cent,” World Bank noted.

This is much higher than the estimated average growth in Sub-Saharan Africa of four percent (4%).

IMF notes lower growth earlier this year, reduced household purchasing power, and tighter monetary policy drove a downward revision of 1.4 percentage points in the United States.

In China, further lockdowns and the deepening real estate crisis have led growth to be revised down by 1.1 percentage points, with major global spillovers.

And in Europe, significant downgrades reflect spillovers from the war in Ukraine and tighter monetary policy.

Global inflation has been revised up due to food and energy prices as well as lingering supply-demand imbalances, and is anticipated to reach 6.6 per cent in advanced economies, and 9.5 percent in emerging market and developing economies this year.

This is an upward revisions of 0.9 and 0.8 percentage point, respectively.

In 2023, disinflationary monetary policy is expected to bite, with global output growing by just 2.9 per cent.

The risks to the outlook are overwhelmingly tilted to the downside.

According to the IMF, The war in Ukraine could lead to a sudden stop of European gas imports from Russia; inflation could be harder to bring down than anticipated either if labor markets are tighter than expected or inflation expectations unanchor.

Tighter global financial conditions could induce debt distress in emerging market and developing economies, it notes.

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