Growing Inflation due to campaign cash

The government has conceded that too much money circulating in the economy could be partly to blame for pushing prices upwards.

In a major shift from past statements on the cause of the current soaring prices of consumer goods, the government said the inflow of campaign funds during last year’s general election has been cited as a possible source of the surplus money.

For the seventh month in a row, average prices increased in May bringing inflation to its highest level in 13 years – at 31.5 per cent, according to the Ministry of planning data.

“Our campaigns are very expensive and a lot of money was brought into the economy,” Planning PS Edward Sambili said yesterday. During the 2007 general election campaigns, billions of shillings were spent by the major political parties in one of the most expensive political campaigns on the African Continent.

“For the past few months I have been asking myself what could be causing our problems and I think this could be part of what is causing it,” added the PS.

The Central Bank in its first intervention this year to combat runaway inflation, on Tuesday evening moved to make it more expensive for people to borrow money to reduce excess funds in the country.

Sambili was reacting to the decision by the Central Bank to raise its lending rate by a quarter point to 9 per cent up from 8.75 per cent. This effectively means that all loans outstanding including those made to Safaricom IPO buyers will be adjusted upwards.

In an exclusive with the Star, eminent economist Professor Terry Ryan, had similarly pointed to the December election campaigns as a source of excess money.

“Every election year, money goes up,” said Ryan. “Also elections happen in December when there is a seasonal rise in money supply because you need to get your wife a present.”

When there is excess money chasing few goods, prices of those goods are likely to go up because too much supply of a good (money) brings down its price.

With prices of petrol hitting Sh100 a litre and a 2-Kg bag of maize going for Sh71 in most major supermarkets, up form Sh49 at the beginning of the year, the government has come under intense pressure to control the surge in prices which have forced consumers to rearrange their budgets.

But in response, the government has often said it is powerless to control the price increases because they are caused by global factors particularly high fuel and food prices which the country imports at prevailing world prices. Additionally, the post election violence has been a by-word for not only inflation but a host of other problems the country has been going through.

The Central Bank, the body mandated to control inflation, has continued to blame supply shortages which it could do little about for pushing prices up without mentioning the possibility of surplus money being a factor.

In its last monthly economic review, the Bank admitted to missing its target with money supply growth increasing from 21.9 per cent in the year to January, to 23 per cent in the year to February 2008.

“The 23 per cent expansion in money supply was well above the projected growth of 15 per cent for the first quarter of 2008,” the CBK said in the review.

However, the bank has continued to attribute inflation to external factors beyond its control. But on Thursday, CBK made its first acknowledgement of the excess money in the country by raising the bank lending rate by half a percentage point yesterday during the first ever meeting of the new Monetary Policy Committee, MPC.

“Economic and Financial developments since the beginning of the year led the committee to its decision to adjust the Central Bank Rate from the current 8.75 per cent to 9.00 per cent with immediate effect to allow room to deal effectively with excess liquidity in the market,” CBK governor Njuguna Ndungu, who also chairs the MPC, said in a press release.

The MPC is the successor of the Monetary Policy Advisory Committee which has since its 2005 inception offered non-binding advice to the Central Bank on money policy matters.

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