Justification to Salary Increase Denial.

The economy barely grew in Kenya under the previous president in the 24 years he was in power. In fact, appointments to key institutions that dealt with trade and finance were never based on merit but rather as rewards to those loyal to the president. This meant that the on bilateral and multilateral deals signed by the government were never analyzed to determine how they would cost our country in real terms. With the advent of multi-party democracy in 1992, printing of money to bribe for these elections was seen as “genius” by the then administration. Of course inflation soon followed and saw the loss of value of the Kenyan Shilling to the major hard currencies. The period 1992 to 2002 saw the economy barely hanging on the edge of negative territory. However, people dare say that the times then were better than what we are experiencing today here in Kenya. In the recent past, Kenya has seen growth levels as high as 7 per cent. One then wonders why the comparison favours the former as opposed to the latter. The answer may well lie in the response given by an old man when the question regarding the economic growth was put to him by a reporter. He said, “When the economy was not growing, I could afford bread, now that the economy is growing, I cannot afford anything.” The trickle down effect that I would have explained to the old man given a chance lost its meaning, for he spoke for every Kenyan that is working and struggling to make ends meet.

These Kenyans are many as evidenced by the responses to and at times lewd epithets thrown at the Central Bank of Kenya (CBK) Governor for the remarks he made to the Kenyan employers. The CBK Governor, in recent forum advised employers against increasing their employee’s salaries. At the backdrop of inflation levels of 27%, the highest in Africa after Zimbabwe, the outrage generated was immediate and vicious. The common man is undergoing financial crisis similar to that in wall street. The high fuel prices drove up the food prices and thus made the day to day activities too expensive to bear. Most can no longer afford public transport and hence have to wake up at ungodly hours to start the long treks to their places of work. Food prices had shot up thus making certain food products beyond the reach of the majority of Kenyans. Others have had to ratio what they consume and are lucky to have two meals a day. Just the other day, things got worse when the electricity rates were adjusted upwards. All these among many others have seen the last coins of every common man and woman scratched from their shallow pockets. Therefore, to take the rope of hope that Kenyans were hanging on to and make a noose through denying Kenyans off their inflation premiums (Salary Increases) was interpreted as just plain malicious. My mother who was not expecting any salary increase anyway still got irked by the Governor’s remarks.

The existing financial turmoil that is biting into the Kenyan economy has its history in several things but the most significant being the post election violence that rocked Kenya earlier this year. In the first quarter, virtually no business was transacted, because most supply lines were cut, no wonder the economy grew in the negative, at -1.3% from 7% in the year before. After the peace deal was signed between the two parties party the conflict, the economy rebounded to grow at 3% in the second quarter, a significant rise in many respects. However, oil prices saw to it that the growth was reversed in the third quarter. Food prices did not help much when the shortages hit and consequent rise in prices caused riots across the globe. Kenyans did not riot, but that does not mean that they did not feel the full effects of the shortage and prices. That they were too hungry to riot might instead pass as a better reason for not rioting. The recent increase in electricity prices has increased the cost of doing business, and life, thus affecting the underlying inflation which is at 8.8%, down up from the desired target of 5%. Salaries these days disappear in the flame of bills, bills, bills.

Those like me who are usually bailed out by returns on investments, usually in equities are also facing hard times. The Nairobi Stock Exchange has seen a panic selling frenzy by investors who are offloading their shares and betting in lower risk securities whose returns are more or less guaranteed. The NSE share index and the NSE 20 Share Index have lost ground with latter losing 1200 points in the last quarter alone. The loss of demand has meant that the share prices have significantly slid to prices that imply losses to investors who are desperate to less for lack of other sources of money. Of course others will be quick to point out that this is indeed the best time to buy. The normal man or woman will then ask you, with what money? The Kenyan shilling has also lost value to the major currencies especially the US dollar, prompting the intervention of the CBK, who have recently let the free market run amok. There has been a serious balance of trade deficit due to a huge import bill which is obviously attributable to our need to import food, having destroyed ours in the fields and burnt those in the stores at the height of the post election violence. These are many problems and addressing them is a complex task, hence my opinions on the view that employers should not increase salaries for their employees.

There is economic sense in what the Governor advices. An increase of salaries in tandem with the inflation levels at a time when the economy is showing signs of picking up will have a counter productive effect. Knowledge of the economy dictates that liquidity be tightened and increase of salaries will do just the opposite. This is also the reasoning that informs the absorption approach to BOP and exchange rate determination. The policy implications on containing absorption (expenditure) while similar to that of containing inflation, also goes further to propose that redistribution of resources and income should favour those with lower propensity to consume ,(The Rich.) These while affecting the poor goes further to advance liquidity tightening procedure that the economy currently needs in order to stay on course towards alleviating the current inflation levels and economic downturn. The population reads malice in these corrective procedures by the CBK, but truth be told, it the best way forward. The poor in the economy are the one’s most prone to consume, maybe excessively with increase in salaries, and given that salaries are rigid downwards, the economy may not be able to handle upsurge of wage revenues when the inflationary pressures the preempted the increase in wages finally recede. Employers will hemorrhage money, in an unsustainable manner that may well affect employees in worse ways than the salary increase that we are currently crying about. Lay-offs will be obvious result, and would make economic sense.