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Kenya Businesses Unhappy with Price Control Law

  • Michael Onyiego

In the face of rising food prices, the Kenyan Parliament passed a bill this week that would allow government to regulate the price of essential commodities. The bill has garnered widespread opposition from Kenyan economists, who say the effects could be disastrous.

The passage of Kenya's Price Controls (Essential Goods) Bill of 2009 Wednesday now threatens to undermine the free market ideals espoused by President Mwai Kibaki during his seven-year tenure in office.

The bill would give the Kenyan Treasury the authority to set maximum retail and wholesale prices for essential goods, making it illegal for producers and retailers to sell above that price and, in effect, controlling the profit margins for goods such as sugar, rice and flour.

The controversial law stems from increases in the price of staples such as maize, flour and petroleum after a severe drought hit the east African nation last year. According to the World Bank, the shortage helped push Kenyan inflation to about 10 percent, squeezing farmers and citizens alike.

Inflation has dropped to around 5 percent as the Kenyan economy recovered from the shock but prices remain high and the move to control them will likely strike a chord with the country's large rural and poor populations.

Despite the apparent popularity of the bill, economists and members of the country's private sector say the new law is a mistake. Analyst on the Kenyan Economy Robert Shaw says price controls are not likely to have the desired effect of increasing supply.

"Like most price controls it will have the absolute opposite. A price control is an artificial vice; it distorts the market. If someone is producing an item and they cannot make a return on it, then they will either not produce or they will sell it via another route where they will get a return. That results in shortages," said Shaw.

There is also concern that the move will affect investor confidence. Kenya has benefitted over the past decade from a boom in foreign investment. According to World Bank figures, Kenya received more than $700 million in direct foreign investment, up from $11 million just a decade earlier.

Shaw noted that the price control regime in effect through the early 1990s drove many businesses out of the Kenyan market. The economist worries this could happen again under the new scheme.

"It is a major turnoff for investment. Any country that has a price control regime of any sort whatsoever immediately tends to bring out the red flags. It is one of the first things you look at," he said.

The outlines a maximum penalty for anyone caught breaking the price guideline of five years in prison.

President Kibaki now has three weeks to sign the bill into law. Many in Kenya's business community hope that Mr. Kibaki, an economist trained at the London School of Economics, will send the bill back to Parliament.

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