DO NOT MESS WITH THE LAWS OF SUPPLY AND DEMAND

It was interesting how the problems surrounding Kenya’s fuel pump prices have gone largely uncovered in the Uganda press.

Ahead of the last election the government of Uhuru Kenyatta, in a populist move to win votes for Raila Odinga, decided to hold the fuel prices at a certain level. Pump prices were rising very fast.

At the time the war in Ukraine and the hangover from the Covid lockdown, which had disrupted global supply chains, was pushing up pump prices all around the world.

Nairobi decided that they would pay the oil companies for any cost incurred above the price they had fixed.

There were snide remarks from our side of the border, with people saying that that is how real governments work to cushion their people from bad things. I was not one of them and in fact predicted in this column that it would end in tears. 

It is a common saying in the market that the market will remain irrational longer than you can be liquid...

It was not long before government was reneging on the deal or rather, they run out of money to pay the oil companies to hold the price stable.  The oil companies responded by turning off the taps, until their bill was met.

Soon there were fuel lines in Nairobi – but not in Kampala, where government had wisely let the pump prices find their level.

A few weeks ago the Kenya government issued the fuel companies a bond in lieu of cash payment. The bond would ensure a regular payment from government and could be used as collateral for alternative financing, that is if the market trust the Kenya government.

And finally last week it was reported that Kenyans have decided to leave their cars at home as in September fuel consumption had fallen to its lowest level in five years.

There is a famous experiment of about boiling a frog. That if you threw a frog in a pan of boiling water it would jump out immediately, unable to stand the heat. On the other hand if you put the frog in a pan of cold water and continued to heat the pan slowly, it will take longer to feel the heat and jump out.

When you try to hold prices artificially, its like boiling the water before throwing the frog in. When you can no longer hold the subsidy (read the frog has to be put in the pan) the price will jump or fall dramatically, making adjustment all the more painful. Kenyans were shocked when the prices jumped to the real level earlier this year and have responded by parking their cars.

Ugandans on the other hand, while they complained about fuel prices crossing the sh5000 liter mark last year, adjusted to the price adjustments the best way they could, and for a brief moment earlier this year prices dipped below sh5000 again. Of course, no one reported that. Now that they are climbing back up above sh5000 the chattering masses have gone into overdrive.

The naysayers will say that even the more developed economies provide subsidies for certain essential goods and services. Two wrongs don’t make a right and no one talks about the cost of these subsidies...

The trillions of shillings the Kenya government owes the oil companies will come the expense of health and education services, infrastructure development and other public goods, denying the majority of Kenyans the chance to climb the social ladder by improving their living standards.

Interestingly at the heart of every subsidy there are a few connected people who make disproportionate profits from them. So the biggest beneficiaries are not the little man as the politicians would like us to believe.

Our politicians are not stupid. They know the way to tackle market imbalances is by addressing the supply-demand equation. If prices are too high, look to increase supply. If prices are too low, look to increase demand.

The problem of course is that these interventions could take time and not convenient for the politicians. Even when subsidies are used to boost production instead of consumption, they distort the market – pushing legitimate businessmen out and developing interest groups which will fight to sustain the subsidy, regardless of the economic case against it. And the day of reckoning will eventually come around.

We get around this by keeping in my that adhering to the law of supply and demand is least painful remedy. And in the event that we choose to flaunt or ignore it that we will pay the price. But what do the politicians care they will have moved onto the next flavour of the month.