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Food Price Policy in an Era of Market InstabilityA Political Economy Analysis$

Per Pinstrup-Andersen

Print publication date: 2014

Print ISBN-13: 9780198718574

Published to Oxford Scholarship Online: January 2015

DOI: 10.1093/acprof:oso/9780198718574.001.0001

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The Political Economy of Food Price Policy in Kenya

The Political Economy of Food Price Policy in Kenya

Chapter:
(p.197) 9 The Political Economy of Food Price Policy in Kenya
Source:
Food Price Policy in an Era of Market Instability
Author(s):

Jonathan Makau Nzuma

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780198718574.003.0009

Abstract and Keywords

This chapter evaluates Kenya’s food price crisis over 2002–11 using a political economy approach. Kenya’s food prices have been high and volatile relative to world food prices. Moreover, domestic food markets are highly integrated while about 30 per cent of the changes in world market prices are transmitted to domestic markets in Kenya. The study finds a relatively slow speed of adjustment of domestic food prices in Kenya of between three to five months. In response, the government implemented both supply-side and demand-side policies. However, the implementation of these policies has not been fully institutionalized and relies on the most part on the executive. These findings lend credence to calls to institutionalize the policy-making process in Kenya.

Keywords:   Kenya, food markets, food price crisis, political economy, policy-making process

9.1 Introduction

This chapter evaluates Kenya’s food price crisis over 2002–11 using a political economy approach. Kenya’s food prices have been high and volatile relative to world food prices. Moreover, domestic food markets are highly integrated while about 30 per cent of the changes in world market prices are transmitted to domestic markets in Kenya. The study finds a relatively slow speed of adjustment of domestic food prices in Kenya of between three to five months. In response, the government implemented both supply-side and demand-side policies. However, the implementation of these policies has not been fully institutionalized and relies on the most part on the executive. These findings lend credence to calls to institutionalize the policy-making process in Kenya.

Domestic food prices within Eastern and Southern Africa (ESA) countries show a different pattern from world food prices (Meijerink, Roza, and van Berkum 2009). While global food prices rose sharply and peaked in the first half of 2008, food prices within the ESA region increased too, but at lower rates (Karugia et al. 2009). Although global commodity prices slumped in the second half of 2008 and stabilized throughout 2009, food prices within the ESA region defied the international food price trends. In 2010 and 2011, food prices within the ESA region have continued to rise in tandem with world food price trends. While high food prices may no longer be making headlines in rich economies, the food price crisis has remained a topical issue in the policy arena of ESA countries, in particular Kenya. The food crisis has worsened the food security situation of most Kenyan households since a majority of these households are net food buyers. Estimates from the recent Kenya (p.198) Integrated Household Budget Survey (KIHBS 2006) indicate that about 63 per cent of crop and livestock producers are net buyers. In addition, food purchases constitute about 60 per cent of total expenditures of farming households. For these households, any food price increases negatively affect their food security status. Moreover, high and volatile food prices are not a new phenomenon to such households (Chambers, Longhurst, and Pacey 1981).

Commercial farmers, who can respond to the increase in prices by increasing production, can potentially benefit from the price boom, provided that changes in the prices are transmitted to them through the value chain (Okello 2009). The rising food prices put the country at risk of a reversal in gains made towards the attainment of the Millennium Development Goals (MDGs) especially MDG 1 on reducing hunger and poverty. The impacts of the high food prices in the country are complicated by unstable macroeconomic conditions and other regional factors such as persistent droughts and political conflicts that keep food prices high.

In response to the food price crisis, Kenyan policy makers adopted a broad spectrum of policy responses broadly classified into demand-side (food safety nets and tax reductions) and supply-side policies (subsidies and price support). The most common responses aimed at ensuring an adequate and affordable food supply for the majority of consumers. Safety nets are provided for the most food insecure and the vulnerable. They also aim at fostering a positive agricultural supply response. The food price crisis re-affirms the need for adequate investments in the agricultural sector, with a focus on the increasing productivity through improved access to inputs and markets so that farmers are less vulnerable and capable of responding to production incentives.

9.2 Study Approach

The conflicting interests of producers and consumers of a commodity in an economy are fundamental problems for government policy decisions (Timmer, Falcon, and Pearson 1983). The behaviour and dynamics of visible and invisible actors within the food sector therefore can only be understood in terms of their power and class position in the larger social system. In practice, however, economists rely on two frameworks, namely: public choice and the traditional political economy approach (De Gorter and Swinnen 2002).

This study employs the political economy framework in seeking to understand why governments choose a certain policy option over others in attempting to respond to food crisis. The study focuses on the price trends and policies of three major staple food crops in Kenya, maize, wheat, and rice. It explores prices at the wholesale and retail levels and describes the policy (p.199) context within the food sector. The price data used in this study are compiled from the Ministry of Agriculture, the Kenya National Bureau of Statistics (KNBS), and the East Africa Grain Council.

9.2.1 Recent Political History

The key salient features of Kenya’s recent political history are the reintroduction of multi-party democracy in 1992 and the recent enactment of a new constitution in 2010. The first two administrations under Jomo Kenyatta (1963–78) and Daniel Arap Moi (1978–2002) exercised control over both the state and markets. Policy decisions were basically made by the executive even though multi-party democracy was allowed under President Kenyatta. After an attempted coup in 1982, President Moi concentrated state authority by making Kenya a single party state. The state pursued inward looking policies mainly meant to protect food producers but at the same time subsidize urban consumers.

The state controlled food production and marketing by subsidizing production and administering controlled product prices. Official crop prices were gazetted and announced by the Agriculture Minister before the crop was planted each year. Decisions to import or export food were made by the cabinet and enforced through a monopoly state enterprise, the National Cereals Produce Board (NCPB). The price controls tended to benefit large-scale food producers, processors, and urban consumers who had the power to lobby the state.

After a decade of single party rule, multi-party elections were held in 1992, creating an opportunity for the opposition to check on the executive in policy decision-making. The advent of multi-party politics coincided with the era of market reforms where state control on marketing and trade of food commodities was reduced, while the private sector was allowed a greater say in markets and trade.

The key policy-making institutions in the multi-party era have continued to be the finance and agriculture ministries, wherein the ministers and permanent secretaries are key policy actors. A new constitution was enacted in Kenya on 27 August 2010. The new constitution devolves decision-making to county governments rather than concentrating it on the central government. This would encourage wider participation of stakeholders. In the recent past, producer associations under the umbrella of the Kenya National Producers Federation have been lobbying government before the national budget is read in parliament. Similarly, the parliamentary budget committee has been allocated wider powers in budget-making. These recent developments have tended to widen stakeholder participation in policy-making.

(p.200) Agricultural Policies since Independence

The first independent government weathered a period of protectionism that saw a lot of external pressure yield to structural reforms in the second administration that were enhanced by trade liberalization and the current multi-lateral trading systems. Thus, agricultural policies in independent Kenya can be grouped into two distinct categories. (1) Policies whereby direct government controls and participation dominated agricultural production and marketing—the era of government controls from 1963 to 1980. (2) Those whereby government participation was reduced and market forces and private individuals or organizations have played major roles in agricultural production, marketing, and investment—liberalized period.

Era of Controls

After independence, agricultural policies were underpinned on Sessional Paper No. 10 on ‘African Socialism and its Application to Planning in Kenya’ that focused on problems of transition (Kenya 1964). The immediate concern was Africanization of land ownership with financial support sought from various sources, resettlement of the landless and selection of suitable forms of organization. This typified the Kenyatta regime and saw the resettlement on one million acre schemes probably the greatest policy success this far. Farm organizations adopted the existing forms of national farms, cooperatives, companies, partnerships, and individual farms. Land use was to be closely monitored to prevent mismanagement and idle farms. Appropriate legislation and land use policy was proposed under the 1970–4 planning period. In addition, a policy of placing statutory management orders on mismanaged farms was reinforced and the reform of customary land tenure systems into a modern legal system was started.

Kenya inherited several statutory marketing institutions from the colonial regime. Virtually all important commodities had state boards, which regulated their production and marketing. These included The Sisal Board of Kenya, Kenya Sugar Authority, Coffee Board of Kenya, Tea Board of Kenya, Pyrethrum Board of Kenya, Kenya Dairy Board, the Cotton Board of Kenya, the Dairy Board, and the Kenya Meat Commission. Smallholder production and marketing was organized under cooperatives to assist in the procurement of production inputs and in the marketing of produce. A majority of these cooperatives were affiliated to the Kenya National Farmers Union. A number of state-run farmer organizations were also set up to support the production and marketing of most commodities. These included Kenya Tea Development Authority (KTDA) for tea, Kenya Co-operative Creameries for milk, NCPB for cereals, National Irrigation Board (NIB) for irrigated crops, Horticultural Crops Development Authority for horticulture.

(p.201) Similarly, price controls that predated the Second World War and covered virtually all sectors drawing legal basis from the Price Control Ordinance of 1956 that was later renamed Price Control Act of 1972 were applied. Price controls operated at both the production and retail levels depending on the commodity, mainly maize, wheat, and milk, which were considered essential foodstuffs. In the 1970s producer prices were set based on parity prices to discourage export surpluses during this period when Kenya was a net exporter of wheat and maize. Subsidized agricultural credit was availed through the Agricultural Finance Corporation (AFC), Land Agricultural Bank (LAB), and cooperatives. Later on LAB was absorbed by AFC once most transfer of land had been finalized.

The policy on research inherited at independence over-emphasized cash crops and a few food crops. After independence research efforts were geared towards both small and large African farmers. The government increased expenditure on agricultural research and extension. The policy on extension was to retain existing staff and expand their numbers and as such Egerton College was expanded to train increased staff. However, most of the extension agents were primary school graduates with little or no technical training. These problems were recognized in 1970 and a new policy was formulated to recruit school certificate graduates and train them for two years at agricultural training institutes.

The 1980s to early 1990s were a period of policy reforms in Kenya. The policy reforms were aimed at reducing the involvement of government in economic activities and therefore letting the country move towards a free market economy. Market liberalization policies started from the 1980s under the structural adjustment programmes of World Bank and International Monetary Fund. The impetus of the reforms, however, gained momentum in 1982 with the requirements of the World Bank for removal of distortions in the economy as a conditionality for the disbursement of the World Bank’s loans. However, it was not until 1986 that the government officially spelt out the wide range of policy reforms for the whole economy in Sessional Paper No. 1 on ‘Economic Management for Renewed Growth’.

The liberalization period also coincided with multi-party politics in Kenya and a period after an attempted coup in 1982 that shook the administration under President Moi. There was a complete failure in policy formulation and such efforts were disjointed and uninformed by local conditions. After the second multi-party elections, donor support was withdrawn on governance grounds and the government lost interest in agriculture. There was insufficient money voted to agriculture. Moi’s interest in agriculture was exercised through patronage on maize, milk, and tea with negative effects on coffee. In the last days of the Moi regime, an attempt was made to save the regime’s image by composing a team of technocrats popularly known as the ‘dream (p.202) team’ to tame corruption and spearhead policy formulation. However, they happened to arrive at the scene a bit too late after the horse had bolted and as expected they did not get the necessary political good will to formulate and implement policies.

The third political administration rode to power on promises of ridding the country of corruption and has made an attempt to institutionalize policy formulations by appointing qualified technocrats to positions of policy-making and giving them autonomy to do so. The new administration under President Kibaki that came to power at the end of 2002 wanted something to be identified within the agricultural sector. The ministers for agriculture and livestock therefore asked their respective permanent secretaries to prepare a strategy document (political expediency) towards this goal. Tegemeo Institute was asked to assist in the crafting of the document while United States Agency for International Development (USAID) was also willing to assist. The team borrowed heavily from the Kenya Rural Development Strategy (KRDS) to develop the Strategy for Revitalization of Agriculture (SRA).

KRDS had been prepared earlier in year 2000 with efforts spearheaded by Professor Shem Migot-Adholla, a member of the so called ‘dream team’ in President Moi’s era. KRDS was broad in coverage and extensively participatory unlike SRA that was not fully accepted by stakeholders. The SRA mainly related to the organizational/institutional reform of ministries (downsizing) rather than agricultural sector policies. Nonetheless, the SRA has now been developed as a strategy for the next ten years as a sectoral implementation of the ERS. The focus is on raising productivity of agriculture mainly through providing support (public goods), private sector development, and democratization of policy-making. There is renewed emphasis on improving the institutional governance of stakeholder organizations and groupings.

However, the culture of ministries is still very much personality-driven by the permanent secretary. Moreover, the design of much of the legislation has vested too much power in the directors of agriculture and livestock, hence making other decision makers irrelevant or having to accept the director’s decision (even the PS in this position on some issues). Each line ministry now has a Central Planning Unit (CPU). Heads of planning departments who head the CPU’s are seconded from the Ministry of Planning as are many staff under the Economics Scheme of Service. However, there are insufficient staff and capacity from this source so the planning departments have staff with agricultural economics training seconded from the ‘technical’ departments to assist in the work and provide technical expertise, which provides new synergies.

At the CPUs, a new policy preparation process has been devised where documents are passed from the ministry to a cabinet committee after which they may or may not be sent to the attorney general for legal interpretation (p.203) depending on the seriousness of the issue at hand. After this stage the policy is then sent to parliament for debate. Again there is a high staff turnover in the Economics Scheme of Service with a lot of staff joining policy research institutes. The ten-year government embargo on employment led to a decline in this scheme’s staffing levels and permission was given to recruit a hundred graduate economists. It is hard to retain officers within government terms, which has led to the 9 am to 5 pm mentality that has demoralized the service. Clearly there is a need to retain and strengthen CPU for institutional memory. There is also need to build capacity among officers on negotiating skills with regard to international trade issues such as World Trade Organization. Moreover, the civil service within ministries in the Kibaki administration has been weakened and demoralized by the retention of retired officers as key decision makers. There is also a return of ethnicity and corruption in public sector recruitments.

9.3 Food Price Trends and Shocks

This section analyses the food price trends in Kenya using wholesale market prices relative to the international prices for the period 2007–11. The wholesale price data used in this study are collected from the agriculture ministry and KNBS.

9.3.1 Food Price Trends

Food prices in Kenya rose gradually when global food prices surged in 2007, but defied the global food price trends to continue rising throughout 2009–11 and remained high relative to the world food prices (Figure 9.1). The Kenyan food price movements are heavily dependent on rainfall patterns since Kenyan agriculture is largely rain-fed.

The Political Economy of Food Price Policy in Kenya

Figure 9.1 Monthly trends in food prices, 2007–11 (January 2007=100)

Source: FAOSTAT (2000–9) and KNBS (2007–11).

Underlying the domestic food price volatility are price increases in key staple crops such as maize, wheat, and rice. Maize is a major staple crop in Kenya and food security in Kenya is equated to the availability and lack of maize. It carries a weight of about 13 per cent in computation of food inflation and is the highest proportion attributable to a single food commodity. Unlike the international maize prices which fell in the second half of 2008 and stabilized throughout 2009 and the first half of 2010, maize prices in Kenya rose throughout much of 2007, 2008, and 2009 (Figure 9.2). The stable global maize prices persisted up to July 2010 when prices began to climb and have been on an upward trend up to the fourth quarter of 2011. In contrast, maize prices in Kenya have remained relatively high but fell in the last quarter of 2010 but rose sharply since the start of 2011 (Figure 9.2).

The Political Economy of Food Price Policy in Kenya

Figure 9.2 Maize price trends, Kenya

Source: FAOSTAT (2000–9) and KNBS (2007–11).

(p.204) The rise in maize price can be attributed to a less than optimal maize harvest for three consecutive long rains harvests during 2007–9.

The food price pressures in Kenya could also stem from price-induced consumption shifts from traditional food staples, such as maize, to other imported commodities such as rice and wheat which are readily available (p.205) on the international market. Between January and May 2008, international rice prices rose to unprecedented levels. Over the same period, rice prices in Kenya were lower than the global prices but also rose to reach their peaks three months later in September 2008. In the second half of 2008, international rice prices fell to stabilize in early 2009, a trend that has persisted throughout 2010 and well into 2011. In tandem with the global trends, rice prices in Kenya remain stable over the 2008–11 period.

On the other hand, wheat prices in Kenya rose sharply relative to the international wheat prices throughout 2009 and 2010. In the second half of 2010, international wheat prices began to climb and have been on an upward trend up to March 2011. However, domestic wheat prices within Kenya have exhibited mixed trends over the same period. Between 2009 and 2011, wheat prices in Kenya have been on a downward trend but have been characterized by high volatility as indicated by the frequent price swings. A key observation with regard to the domestic wheat prices within Kenya is that they increased at a higher rate than the international wheat prices, suggesting the existence of protectionist domestic policies.

During the period February 2007 to February 2008, the volatility of domestic food prices in Kenya, as measured by month on month percentage changes in the price indices, was lower than the volatility of international food prices (Figure 9.3). However, the food price volatility in Kenya over 2009–11 was higher than the volatility experienced in world market prices. The most volatile food prices in Kenya were those for wheat and maize while the price of rice was relatively stable. These food price trends indicate a (p.206) destabilizing food price scenario in Kenya, which could adversely affect the food security status of the country.

The Political Economy of Food Price Policy in Kenya

Figure 9.3 Percentage changes in food price indices, Kenya

Source: author’s computations.

Of particular concern from a food security perspective are indications that prices in Kenya remain persistently high in 2009 despite the precipitous decline in international prices. These persistently high food prices indicate a poor degree of price transmission from international markets to domestic markets in Kenya. Price transmission effects provide insights into the nexus between domestic and international food prices (Karugia et al. 2009). They indicate the extent to which domestic markets are integrated into global markets and therefore the degree to which changes in global prices might influence domestic prices.

The links between international prices and local prices are complicated; the first determinants of how international prices translate into site-specific prices relate to exchange rate movements and a country’s net trade position. Furthermore, the existing domestic trade policies, and the manner of their implementation, often determine the extent to which individual producers are able to respond to market signals. Local price movements, meanwhile, reflect a multitude of factors, ranging from weather conditions, shifts in local production, disease and consumption shocks, inflation, changing informal trading patterns among others. However, that said, a cursory review of monthly price movements in Kenya reveals a trend of puzzling persistently high and increasingly variable food prices, which have a negative effect on the country’s food security.

9.3.2 International Price Transmission

An enterprise content management of price transmission was estimated using monthly domestic wholesale maize prices for five markets (Nairobi, Mombasa, Nakuru, Eldoret, and Kisumu) and the South African Futures Exchange (SAFEX) white maize price for the period January 2002 to December 2011 (Table 9.1).

Table 9.1 Transmission of SAFEX maize prices to domestic prices in Kenya

Market

ADF

PP

  • (Co-integrated)

Speed of Adjustment

Short-run Adjustment

Long-run Adjustment

Nairobi

No

Yes

Yes

−0.305***

0.103

0.304***

Mombasa

No

No

Yes

−0.287***

0.114

0.287***

Nakuru

Yes

Yes

No

−0.428***

0.047

0.212***

Eldoret

Yes

Yes

No

−0.350***

0.253***

0.259***

Kisumu

Yes

Yes

No

−0.191***

0.024

0.368***

Note: ***significant at the 1% level.

Source: author’s computation from KNBS data (2006–11).

The results show that out of the five markets, only two (Nairobi and Mombasa) have a significant long-run relationship with SAFEX maize prices. This is expected given that Kenya is a net maize importer that regularly imports maize through the port of Mombasa that is well-connected to Nairobi by both road and rail. However, the transmission of international prices to other domestic markets might be hampered by infrastructural constraints. The elasticities of price transmission in these two markets were about 0.3 (Table 9.2). Although no significant long-run relationships existed between SAFEX prices and other market prices in Kenya, the elasticities of price transmissions were in the range of 0.2 to 0.3 implying that between 20 and 30 per cent of the changes in SAFEX maize prices are transmitted to Kenyan markets.

Table 9.2 Timeline of government responses to the food price crisis

Year

Policy Action

Remarks

2002–5

NCPB intervention in the operation of a strategic grain reserve

Stabilized market prices

2002–5

Import tariffs

Tariff reduction to increase import access

2002–5

Zero rating of imports from East African Community and Common Market for Eastern and Southern Africa

Deepening of regional integration

2008

Export ban on maize

Retaliation from neighbouring countries

2008

NCPB maize importation

Arrival of imports delayed by 3 months

2008

  • Kilimo pus

  • Kimlimo Biasha

  • Partners, Equity Bank, AGRA, FAO, IFAD

Fertilizer and seed subsidy

2008

Irrigation subsidy

Economic stimulus package

March 2008

NCPB procures 30% of national fertilizer requirement

Fertilizer subsidy

June 2008

Reduction of wheat import tariff from 35 to 10%

Prices rose owing to a surge in world prices

June 2008

Zero rating of maize, wheat, and milk

Prices rose owing to a surge in world prices

December 2008

Urban consumer price subsidy on maize meal (prime minister)

Poor targeting, inaccessible to the poor, food riots, flawed distribution

December 2008

NCPB producer price subsidy of KES 200/90 kg bag

Farmers decline to release stocks

February 2009

Consumer subsidy policy reversal

Maize meal subsidy withdrawn

February 2009

Food price taskforce formed

Multi-sector task force on food prices formed

March 2009

Cash for work programme launched by the prime minister

Poor targeting

March 2009

Fertilizer price subsidy announced by the president

Poor targeting

Source: author’s compilation.

(p.207)

(p.208) Similarly, the speed of adjustment of domestic prices to the long-run relationship across the five markets was in the range of 0.2 to 0.3 (Table 9.1). The implication that can be drawn is that domestic maize prices take about 3 to 5 months to fully adjust to changes in world prices. The findings of this study are comparable to earlier transmission studies undertaken in the country. Rapsomanikis (2009) finds a relatively slow adjustment of domestic food prices in Kenya to international prices with domestic prices taking 11 to 7.7 months for the SAFEX white maize price. While reliance on rain-fed agriculture and therefore, weather shocks, is one cause of price volatility, poor infrastructure is another contributing factor.

Poor roads especially, in isolated producing and consuming regions within a country lead to increases in price variability. It has also been argued that poor infrastructure may, however, insulate domestic markets from international shocks. Rapsomanikis (2009) shows evidence of a strong long-run co-movement between prices in major Kenyan markets with the international price. Maize price in Eldoret (the main producing market) and Kisumu at the western part of the country, strongly directly co-move with both the international yellow maize price and the SAFEX white maize price. Strong co-movement suggests that international maize upturns would, in the long run, likely affect white maize in these markets.

Apart from poor infrastructure, rapid international price transmission may be hindered by state involvement in the procurement of both domestically produced and imported maize, and the subsequent release of the same at predetermined price. This may partly be responsible for the weak relationship (moderate co-movement) between the SAFEX white maize price and the Nairobi and Mombasa maize prices.

9.4 Policy Responses

The government of Kenya has used a combination of policies to respond to the food price crisis. The policies pursued have included both supply- and demand-side policies. Table 9.2 provides a timeline of these policy interventions while the discussion that follows categorizes these actions into market-oriented interventions, safety nets, and supply response stimulation policies.

9.4.1 Market-based Interventions

Market-based policies attempt to reduce the cost of food, and increase its availability. Such policies change the market conditions and therefore (p.209) potentially affect all households. Prior to the 2007/8 food price crisis, the government of Kenya intervened in markets through the operation of the NCPB and the imposition of import tariffs on food imports. Though charged with the responsibility of maintaining a strategic grain reserve, its food procurement activities have the effect of stabilizing market prices. On the other hand, the imposition of food import tariffs that were in the range of 25 to 50 per cent over the 2000 to 2005 period has the effect of limiting imports and increasing domestic prices.

After the 2007/8 food price crisis, the Kenyan government implemented export restrictions on maize in 2008 while at the same time embarking on an aggressive importation of maize through the NCPB to build up stocks for the national strategic grain reserve. At the start of 2008, the government had licenced large-scale traders to export maize to neighbouring countries such as South Sudan. Much of these maize exports were procured from trader stocks and the NCPB strategic grain reserve. On realizing that the national strategic reserve was depleted while supply was constrained by the impacts of the post-election crisis and a drought, the government imposed an export ban on maize. In response to the drought experienced throughout most of east and southern Africa, Kenya, Malawi, and Tanzania imposed maize export bans. The maize export bans in countries such as Tanzania and Malawi limited the country’s ability to increase supply and curb the price surge through quick imports.

As the crisis worsened, and the imports failed to arrive on time, the government turned to domestic procurement through the NCPB largely as a result of pressure being exerted by consumers following high maize meal prices. Although the government set a high price of KES 1,750 per 90 kg bag, farmers held on to their stocks in anticipation of higher market prices later in the season. They demanded a 20 per cent increase to KES 2,200 per 90 kg bag. The government over the same period increased the producer price from KES 1,750 per 90 kg bag to KES 1,950, but directed the NCPB to sell the same to millers at KES 1,750. This translated to a producer subsidy of KES 200 per 90 kg bag.

The government maize imports did not arrive until March 2009. Moreover, there were flaws in the distribution of the subsidized maize to millers. The NCPB imports were sold to briefcase traders posing as maize millers who were licensed to procure grain from NCPB in an effort to support a maize meal subsidy programme pioneered by the prime minister (see discussion under consumption subsidies). This undermined the effect of the subsidy programme. In addition, NCPB sold the subsidized maize only in bundles of 50 kilogrammes making it unaffordable to the poor.

The export restriction may have been ineffective given the existence of substantial informal cross-border trade with its neighbours. Despite the export (p.210) ban on agricultural commodities in Tanzania, substantial volumes of maize were exported into Kenya in 2009 (LEI 2008). Although export restrictions are aimed at protecting consumers by keeping the price low, they potentially increase transaction costs through the informal trade routes, effectively hurting the consumers. Jayne, Myers, and Nyoro (2005) observe that export bans increase smuggling costs, depress producer prices, and raise consumer prices.

Other trade policies that were adopted included the reduction of import tariffs and taxes on maize and wheat. In June 2008, import duty on wheat was reduced by 25 per cent (from 35 to 10 per cent) while that of maize was zero-rated following the intervention of the Ministry of Agriculture. Other fiscal measures included zero-rating value added tax on wheat and maize flour, and milk. Despite these efforts, the price of maize continued to rise and by October/November 2008, the government shifted its strategy to a direct protection of consumers through food subsides. This decision followed near food riots in Nairobi owing to pressure from urban populations.

9.4.2 Consumption Subsidies and Safety Nets

While universal food subsidies are ideal as a quick response in improving access to food and in mitigating the initial impacts of a price surge, they are costly and often fail to target those most in need. In December 2008, the Kenyan government adopted a direct consumer price subsidy by introducing a dual pricing system for maize meal. This urban maize meal subsidy programme was the brain child of the prime minister, whose urban constituency covers Kibera, the largest slum in Nairobi. The Ministry of Finance and Planning initially opposed the maize meal subsidy programme, but later on grudgingly accepted. A 2 kg packet of maize meal was supposed to sell at a commercial rate of KES 72 and a subsidized rate of KES 55. The latter was supposed to benefit the poor. The subsidy programme was largely supported by the milling industry that was licenced to procure maize from NCPB, mill it, and sell it at subsidized prices but later on apply for rebates from the Ministry of Finance and Planning.

Other than transporting the subsidized meal to the informal settlements and other low-income neighbourhoods, there were no other targeting criteria. Furthermore, the subsidized pack was retailed in 5 kg bags which made it inaccessible to the poor. Within a short period, the urban maize meal subsidy programme became untenable owing to financing and distribution bottlenecks and was eventually discontinued. The subsidy programme raised some political overtones given the composition of the grand coalition government where the prime minister, who supported the programme came from one wing of the coalition while the minister for finance, who came from another wing of the coalition, opposed it.

(p.211) The cost of the scheme was estimated at KES 23.4 billion (US$334 million) in subsidy and tax foregone in the fiscal year (FY) 2008/9. After a critical analysis, the cabinet withdrew the scheme in February 2009 and a commitment was made to develop an alternative, more effective scheme. In the meantime, the price was left to market fundamentals. In addition, the cabinet directed the relevant ministries to work with interested donor agencies to develop a comprehensive food subsidy programme.

Consequently, a multi-sectoral taskforce was formed in February 2009 to facilitate this process. The membership of the task force covered the Ministry of Agriculture, Ministry of Finance and Planning, Ministry of Livestock Development, Ministry of Special Programmes, Kenya Federation of Agricultural Producers, Parliamentary Committee on Agriculture, and various lobby groups on maize, wheat, and livestock. The taskforce designed a cash transfer programme initially targeting the poor informal settlements in Nairobi on a pilot basis. Where improved access to food is the objective, cash transfers would work efficiently where food markets function well. The implementation of this initiative was, however, shelved by the cabinet due to design flaws.

Another initiative implemented by the government was a cash-for-work programme named Kazi Kwa Vijana (KKV) that was mooted by the prime minister. In an environment of increasing food prices, such public work programmes increase the income of the poor and improve their access to food. The large number of unemployed youths made such an intervention very attractive. The KES 15 billion (US$214 million) KKV programme was launched in March 2009 and aimed at creating 300,000 jobs within six months of its launch. The programme engaged the unemployed youth in infrastructure works (mainly roads) and environmental conservation exercises such as tree planting and river cleaning efforts. The programme, although bedevilled by payment problems, was successful in building some assets, notable being the clean-up of the Nairobi river.

9.4.3 Stimulating Food Supply Response

During the post-liberalization period, the government through NCPB, entered into farm inputs (fertilizer, maize seeds) markets in the year 2000 with an aim of boosting the board’s revenue and stabilizing the fertilizer prices in the local market. However, following the surge in fertilizer prices in 2008, the government undertook to procure 163,000 MT or 40 per cent of the national fertilizer requirement at a cost of KES 6.2 billion (US$89 million). This excluded the tea fertilizer bought by KTDA worth KES 1.6 billion.

In March 2009, the president announced that diammonium phosphate fertilizer would be sold at a reduced price of KES 2,500 while calcium ammonium (p.212) nitrate fertilizer would retail at KES 1,650 per 50 kg bag from a high of KES 6,000. The price of seed was also reduced by KES 50 and KES 10 per 10 kg packet and 2 kg packet, respectively. Just like the interventions in the maize market, the implementation of the input subsidy also encountered governance challenges. Once again, some unscrupulous traders procured the fertilizer from NCPB, repackaged it and sold it to unsuspecting farmers at higher prices than those recommended by the government. This was in addition to the potential disruptions of the fertilizer business. Smuggling was rife at the Kenya–Uganda border as fertilizer prices were higher in Uganda than in Kenya.

In realization that resource poor farmers, especially those in the lowlands may not have the know-how or cannot afford purchased inputs, the Kenyan government embarked upon a National Accelerated Agricultural Input Programme. The programme was aimed at promoting food security and poverty reduction. Initially planned to subsidize fertilizers and maize seed for a limited number of districts, it was subsequently expanded to national coverage with plans to provide 2.5 million farmers with maize seed and fertilizers for one acre each, with vouchers issued to targeted farmers (with less than 2.5 acres) and subsequent redemption through private input sellers who would also be eligible for trade credit guarantees. Farmers under this input grants popularly known as Kilimo Plus.

Starter kits are supposed to be linked to extension, cereal banks, warehouse receipts, and participation in farmer groups. These farmers are supposed to graduate after two years into another programme: Kilimo Biashara (farming as a business). The expected graduation is yet to successfully materialize due to the poor harvest in late 2007 and 2008. The programme received a financial boost from Food and Agriculture Organization (FAO) and the World Bank in 2008 in response to the high food prices. Kilimo Biashara was launched in May 2008 as a US$50 million (KES 3 billion) loan project. Probably encouraged by the Malawi successful experience with fertilizer and seed subsidies, the Kenyan government in partnership with the Alliance for Green Revolution, International Fund for Agricultural Development and Equity Bank launched the project with the aim of targeting small-scale farmers and enterprises in the agricultural value chain.

The Alliance for a Green Revolution in Africa (AGRA) catalysed the project by setting up a US$5 million (KES 400 million) ‘cash guarantee fund’. The fund buffers the Equity Bank’s risk of lending money to farmers and small agricultural businesses with little or no collateral. The loans carry a 12 per cent interest rate applied when the loans fall due, a rate well below the bank’s standard lending rate of 18 per cent (as per 2008). Under the programme, farmers also receive training on improved farming techniques and business management in addition to government vouchers that enable them to purchase new farming inputs. Another government response came in the form (p.213) of an economic stimulus to agriculture through revival of the stalled Hola irrigation scheme in the lower Tana Delta. In September 2008 the president and the prime minister launched a KES 2 billion National Economic Stimulus Programme on food production in the irrigation scheme. However, there seems to have been no plans to market the output as extensive post-harvest losses were recorded in February 2010.

9.5 Conclusions and Policy Recommendations

Over the last four years, international food prices have witnessed unprecedented increases. FAO’s FPI rose by 57 per cent between March 2007 and March 2008 as compared to an increase of 9 per cent in 2006 (FAO 2008). However, food prices began to fall in July 2008 and trended downwards until the start of 2009 when food prices began to rise again albeit marginally but surged throughout 2010 to reach an unprecedented peak in January 2011. In contrast, food prices in Kenya rose gradually when global food prices surged in 2007, but defied the global food price trends to continue rising in the second half of 2008 and throughout 2009 to 2011.

Of particular concern from a food security perspective are indications that prices in Kenya remain persistently high despite the precipitous decline in international prices. These persistently high food prices might be indicative of a poor degree of price transmission from international markets to domestic markets in Kenya. The findings of a market integration analysis seem to suggest that domestic food markets in Kenya are highly integrated. Markets close to each other, such as Eldoret and Kisumu, show higher correlation coefficients, as do markets that are connected by better transport infrastructure, such as between Nairobi and most of the other markets. The results seem to support the generally accepted notion that shorter distances and improved infrastructure among markets lead to lower transaction costs, making arbitrage profitable and thus enhancing integration of such markets.

Moreover, price transmission analysis finds that about 30 per cent of the changes in world market prices are transmitted to domestic markets in Kenya. However, the study finds a relatively slow speed of adjustment of domestic food prices in Kenya of between three to five months to their long-run relationship with international prices. The results of the econometric analysis do not give a clear picture to explain why market prices in Kenya remain high, the evidence of highly integrated markets and a slow speed of adjustment to the world prices notwithstanding. The political economy approach adopted offers better insights.

In response to the food price crisis, the government of Kenya implemented both supply-side and demand-side policies. However, the design and (p.214) implementation of these policies has not been fully institutionalized and relies mostly on the executive. This is best illustrated by the 2009 reversal of the 2008 urban maize meal subsidy programme and the challenges facing other subsidy programmes. These political economy findings lend credence to the calls to institutionalize and strengthen the policy-making process in Kenya while the slow adjustment of domestic markets to international markets could best be addressed through infrastructure developments.

References

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