Investigating a More Efficient and Affordable Mechanism for Distributing Food Subsidies in Kenya
Category: Foodsubsidy
By: Fiona Okadia,
Despite the government’s stance on refraining from additional subsidies, its recent efforts to ensure the accessibility and affordability of food to its citizens, especially those in the low-income bracket, have involved the implementation of an indirect subsidy. This approach entails a one-year exemption of import duty on selected food items, including cooking oil, rice, beans, sugar, and maize. Apart from addressing the affordability issue, this Ksh. 24 billion program appears to be aimed at ensuring political stability and preserve social and political order. By guaranteeing the availability and accessibility of food, the government can pre-empt the likelihood of future food-related protests and potential civil unrest arising from elevated food prices. The quantities of the food commodities to be imported are in Table one below.
Table 1: Quantities of Food Commodities to be Imported
Source:As defined by the Collins Dictionary of Economics authored by Christopher Pass, Bryan Lowes, and Leslie Davies, a subsidy is the government’s allocation of financial and other resources to support a business or individual. This support can either be direct, through cash, grants, or interest-free loans or indirect, such as depreciation, write-offs, rent rebates, low-interest loans or tax breaks. Therefore, the exemption of import duty based on this source can be classified as a subsidy. Although subsidies can be used to correct externalities, by encouraging the production or consumption of goods or services that have positive externalities or discouraging those with negative externalities, they frequently disrupt market signals, prompting many economists to object to them.
An article by Gerald Andae reported that the government’s initial plan was to distribute these food commodities exclusively through 500,000 shops located in low-income areas. The rationale behind this particular figure, however, remains undisclosed. It is noteworthy that a subsequent article revealed that it will still maintain the number but will start with 120,000 first. While this adjustment signifies a reduction at the beginning of rolling out the program, it may still be considered relatively high, given the limited scope of the initiative in targeting solely low-income regions. To put the matter in perspective, India, with a population of 1.4 billion, operates a food and public distribution network spanning 550,000 shops. In light of Kenya’s smaller population of 50 million, and the narrower geographic scope of the project, it may be prudent to conduct a thorough mapping of low-income areas to determine the necessity of the 120,000 shops.
In the interest of promoting transparency, it was important that these retail shops already identified for the distribution of these foodstuffs be duly listed, with precise details of their respective locations disseminated to the public. The Ministry of Agriculture or Trade’s website could serve as a platform for this purpose, with a dedicated directory for this information. This directory would provide a structured and organized approach to accessing this information, making it easier for any user to find this information quickly and efficiently. This measure is necessary for preventing instances where shops are apparently listed but later found to be non-existent. Arbitrage may also arise whereby the goods originally designated for distribution in these shops were secretively redirected to other areas and resold at prevailing market prices, thereby negating any potential benefits for the intended consumer demographic.
In the same article by business daily, there is speculation that this move will effectively reduce the cost of essential commodities by at least 30%, although it is not clear how this figure was arrived at. It is possible that the estimate takes into account the reduction or elimination of import duty on the goods being distributed, which would lower their cost. However, without further information, it is difficult to determine the exact basis for the 30% reduction estimate.
The practice of employing retail outlets to distribute subsidized foodstuffs is used in other countries. For example, in India, such establishments are locally referred to as “ration shops.” Essentially, these shops function by distributing staple foods such as wheat, rice, and sugar across various areas, typically within low-income neighbourhoods, and selling them at a discounted rate relative to market prices in other areas. The government procures food grains from farmers at a minimum support price, which is often higher than the market price and distributes it through the Public Distribution System.
To purchase these items, one has to possess a ration card, which must be presented upon purchase. The Ration Shops acquire their stock of food and grains from government authorities and then sell them to consumers at a price determined by the government. While this system is intended to benefit the poor, it has been criticised for being inefficient and prone to corruption. Leakage of subsidized food to non-beneficiaries, low-quality food grains and administrative inefficiencies are some of the issues that have plagued the system. Additionally, the subsidy burden has resulted in significant strain on the government’s finances, and there have been calls for reforming the system to make it more efficient and effective.
It is evident that the Kenyan government’s proposed course of action is similar to the aforementioned model as KNTC, along with three technology firm distributors (Twiga Foods, Iprocure, and Market Force), will supply the commodities directly to these shops for consumer purchase. Partnering with these private sector companies to implement the program can help to increase the efficiency and effectiveness of the program as it is leveraging the private sector’s expertise in supply chain management and logistics. Private sector engagement can also help to reduce administrative costs as the government can outsource certain functions such as storage and distribution to the aforementioned distributors. Furthermore, the use of technology, in this case, is helpful as it will help in the monitoring of the distribution of the foodstuffs which helps to reduce leakages and ensure transparency. Nonetheless, it remains unclear whether the government will also ensure that the intended group of low-income earners possess ration cards. Since it is conceivable that individuals who are not qualified for the subsidy may try to obtain food items, identification may be necessary.
This import duty exemption policy raises certain concerns:
Firstly, goods imported under this exemption are given a competitive advantage in the market over those imported under the statutory tariff rate. This is because, when considering the quantities of principal imports against the total imports from previous years, the former constitutes only a small proportion. For instance, Kenya National Trading Corporation (KNTC) plans to import 50,000 tonnes of wheat, which is three per cent of the total wheat imports in 2021. The same pattern applies to rice, for which the planned import is 150,000 tonnes, which represents 24% of the total rice imports in 2021. This scenario is applicable to all other foodstuffs that are eligible for exemption. Under these conditions, it is probable that market distortion will occur since the quantity supplied through this program constitutes a significant portion of the country’s total imports, as is the case with rice, which will significantly affect prices. Additionally, this type of program may encourage rent-seeking behaviour as importing only a few tons of particular food items such as wheat benefits only a select few.
As a result of this competitive edge, it may lead to an increase in demand for these foodstuffs from shops. This will then lead to the quantities being depleted and therefore not serving the intended consumer demographic that was initially being targeted. However, it is not clear as to the total amount that will be imported at the end of the year and this may lead to further effects on the prices of all the food items.
Secondly, the matter of revenue is straightforward. As per the fundamental principles of economics, the provision of subsidies creates an opportunity cost. In the present case, the Kenyan government will forego potential revenues that it would have generated from the importation of the aforementioned food products to ensure their affordability to low-income Kenyans. This is because the government has committed to increasing its revenue to Ksh 3 trillion and would need to source funds from alternative avenues. For instance, it is estimated that the importation of 125,000 tonnes of duty-free cooking oil will cause the government to relinquish an estimated future income of around Ksh 3.5 billion. The combined opportunity cost value resulting from this import duty exemption may surpass the Ksh 8 billion that the previous administration spent on the maize flour subsidy in 2022.
In light of the significant volume of imported goods, particularly in food items such as rice, which constitutes 24% of imports, lower prices resulting from a subsidy would create two effects for consumers. Firstly, the income effect would mean that consumers would have more money at their disposal after purchasing rice at a lower cost. Secondly, the substitution effect would prompt consumers to switch from purchasing other expensive food items to rice due to the lowered cost. Additionally, the subsidy would enhance the welfare of citizens, which would result in an overall positive impact on their well-being and purchasing power.
Thirdly, it seems that the allocated amount for this program may not be adequate. To properly evaluate the program’s effectiveness, it is essential to have a comprehensive breakdown of how the funds will be utilized. For instance, suppose the Kenyan government intends to procure rice from a surplus country. In that case, it is estimated that the average international price of rice is fifty cents per kilogram, factoring in the highest price of United States long-grain rice, which is USD 728.25 per tonne, and the lowest price of rice from India, which is USD 413 per tonne, according to the FAO. When the total quantity of rice to be imported is multiplied by this average price, the Kenyan government would need to spend USD 85.6 million, equivalent to Ksh. 11.12 billion at an exchange rate of Ksh. 130 to the dollar. However, this cost is solely for rice imports. However, importing additional foodstuffs would entail further costs for the commodities, distributors’ commissions, transportation, and repackaging fees, among other expenses. This leads to the conclusion that the current allocation may not be adequate to cater for all the program’s requirements as advertised.
Chart 1: International Rice Prices in USD per Tonne
Source: Food and Agricultural Organization of the United Nations
Alternatively, the government of Kenya can leverage the Population and Housing census data for 2019 to identify the number of households in dire need of assistance. The data provides the government with insights into the socioeconomic profile of households, their geographical location, and their sizes, facilitating targeted assistance to drought-stricken or low-income areas. This could be accomplished efficiently through a cash transfer system, which is a cost-effective alternative, using existing facilities such as the ones established during the COVID pandemic. The cash transfer system ensures that low-income earners can purchase foods, improving their daily caloric intake.
According to the 2015/16 Kenya Integrated Household Budget Survey, an estimated 36.1% of Kenya’s population is living below the poverty line. As a result, there are 4.38 million households living in poverty, with 1.461 million (one-third) considered extremely poor. To assist this group, the government could evenly distribute the Ksh. 24 billion allocated for this program among these households. This would result in an annual cash transfer of approximately Ksh. 16,427 per household, or Ksh. 1,368 per month. It is worth noting that this option provides households with the autonomy to purchase what they prefer to consume, such as sorghum or millet, instead of being restricted to rice and maize. This alternative is also beneficial since it increases the funds available to these households by this amount (Ksh 1,368) to meet their daily average recommended calorie intake, depending on whether they reside in urban or rural areas.
Top of Form
Bottom of Form
Conclusion
Subsidies can be an effective tool to ease economic burdens and provide relief during times of crisis but have also proved difficult to remove once implemented. However, in order for government policies to use resources in an efficient and cost-effective means, careful consideration of available options is essential. In this case, the government’s objective is clear. However, the option of providing import exemption for only a percentage of imports to make affordable food available may create an unfair competitive advantage for the importers who receive the exemption. To minimize pilferage, costly government intervention, and transportation expenses, the government could consider two alternatives: entirely waiving import duties on these food items or adopting a cash transfer program. Considering the allocated funds appear to be limited, and the government currently facing financial constraints, it is crucial to employ a targeting system that is cost efficient to reach the most vulnerable members of society.
Key Words
Arbitrage, Import duty exemption, subsidy, 500,000 shops, Kenya National Trading Corporation (KNTC)
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Investigating a More Efficient and Affordable Mechanism for Distributing Food Subsidies in Kenya
| Post date: Thu, Apr 20, 2023 |
| Category: Foodsubsidy |
| By: Fiona Okadia, |
Despite the government’s stance on refraining from additional subsidies, its recent efforts to ensure the accessibility and affordability of food to its citizens, especially those in the low-income bracket, have involved the implementation of an indirect subsidy. This approach entails a one-year exemption of import duty on selected food items, including cooking oil, rice, beans, sugar, and maize. Apart from addressing the affordability issue, this Ksh. 24 billion program appears to be aimed at ensuring political stability and preserve social and political order. By guaranteeing the availability and accessibility of food, the government can pre-empt the likelihood of future food-related protests and potential civil unrest arising from elevated food prices. The quantities of the food commodities to be imported are in Table one below.
Table 1: Quantities of Food Commodities to be Imported
As defined by the Collins Dictionary of Economics authored by Christopher Pass, Bryan Lowes, and Leslie Davies, a subsidy is the government’s allocation of financial and other resources to support a business or individual. This support can either be direct, through cash, grants, or interest-free loans or indirect, such as depreciation, write-offs, rent rebates, low-interest loans or tax breaks. Therefore, the exemption of import duty based on this source can be classified as a subsidy. Although subsidies can be used to correct externalities, by encouraging the production or consumption of goods or services that have positive externalities or discouraging those with negative externalities, they frequently disrupt market signals, prompting many economists to object to them.
An article by Gerald Andae reported that the government’s initial plan was to distribute these food commodities exclusively through 500,000 shops located in low-income areas. The rationale behind this particular figure, however, remains undisclosed. It is noteworthy that a subsequent article revealed that it will still maintain the number but will start with 120,000 first. While this adjustment signifies a reduction at the beginning of rolling out the program, it may still be considered relatively high, given the limited scope of the initiative in targeting solely low-income regions. To put the matter in perspective, India, with a population of 1.4 billion, operates a food and public distribution network spanning 550,000 shops. In light of Kenya’s smaller population of 50 million, and the narrower geographic scope of the project, it may be prudent to conduct a thorough mapping of low-income areas to determine the necessity of the 120,000 shops.
In the interest of promoting transparency, it was important that these retail shops already identified for the distribution of these foodstuffs be duly listed, with precise details of their respective locations disseminated to the public. The Ministry of Agriculture or Trade’s website could serve as a platform for this purpose, with a dedicated directory for this information. This directory would provide a structured and organized approach to accessing this information, making it easier for any user to find this information quickly and efficiently. This measure is necessary for preventing instances where shops are apparently listed but later found to be non-existent. Arbitrage may also arise whereby the goods originally designated for distribution in these shops were secretively redirected to other areas and resold at prevailing market prices, thereby negating any potential benefits for the intended consumer demographic.
In the same article by business daily, there is speculation that this move will effectively reduce the cost of essential commodities by at least 30%, although it is not clear how this figure was arrived at. It is possible that the estimate takes into account the reduction or elimination of import duty on the goods being distributed, which would lower their cost. However, without further information, it is difficult to determine the exact basis for the 30% reduction estimate.
The practice of employing retail outlets to distribute subsidized foodstuffs is used in other countries. For example, in India, such establishments are locally referred to as “ration shops.” Essentially, these shops function by distributing staple foods such as wheat, rice, and sugar across various areas, typically within low-income neighbourhoods, and selling them at a discounted rate relative to market prices in other areas. The government procures food grains from farmers at a minimum support price, which is often higher than the market price and distributes it through the Public Distribution System.
To purchase these items, one has to possess a ration card, which must be presented upon purchase. The Ration Shops acquire their stock of food and grains from government authorities and then sell them to consumers at a price determined by the government. While this system is intended to benefit the poor, it has been criticised for being inefficient and prone to corruption. Leakage of subsidized food to non-beneficiaries, low-quality food grains and administrative inefficiencies are some of the issues that have plagued the system. Additionally, the subsidy burden has resulted in significant strain on the government’s finances, and there have been calls for reforming the system to make it more efficient and effective.
It is evident that the Kenyan government’s proposed course of action is similar to the aforementioned model as KNTC, along with three technology firm distributors (Twiga Foods, Iprocure, and Market Force), will supply the commodities directly to these shops for consumer purchase. Partnering with these private sector companies to implement the program can help to increase the efficiency and effectiveness of the program as it is leveraging the private sector’s expertise in supply chain management and logistics. Private sector engagement can also help to reduce administrative costs as the government can outsource certain functions such as storage and distribution to the aforementioned distributors. Furthermore, the use of technology, in this case, is helpful as it will help in the monitoring of the distribution of the foodstuffs which helps to reduce leakages and ensure transparency. Nonetheless, it remains unclear whether the government will also ensure that the intended group of low-income earners possess ration cards. Since it is conceivable that individuals who are not qualified for the subsidy may try to obtain food items, identification may be necessary.
This import duty exemption policy raises certain concerns:
Firstly, goods imported under this exemption are given a competitive advantage in the market over those imported under the statutory tariff rate. This is because, when considering the quantities of principal imports against the total imports from previous years, the former constitutes only a small proportion. For instance, Kenya National Trading Corporation (KNTC) plans to import 50,000 tonnes of wheat, which is three per cent of the total wheat imports in 2021. The same pattern applies to rice, for which the planned import is 150,000 tonnes, which represents 24% of the total rice imports in 2021. This scenario is applicable to all other foodstuffs that are eligible for exemption. Under these conditions, it is probable that market distortion will occur since the quantity supplied through this program constitutes a significant portion of the country’s total imports, as is the case with rice, which will significantly affect prices. Additionally, this type of program may encourage rent-seeking behaviour as importing only a few tons of particular food items such as wheat benefits only a select few.
As a result of this competitive edge, it may lead to an increase in demand for these foodstuffs from shops. This will then lead to the quantities being depleted and therefore not serving the intended consumer demographic that was initially being targeted. However, it is not clear as to the total amount that will be imported at the end of the year and this may lead to further effects on the prices of all the food items.
Secondly, the matter of revenue is straightforward. As per the fundamental principles of economics, the provision of subsidies creates an opportunity cost. In the present case, the Kenyan government will forego potential revenues that it would have generated from the importation of the aforementioned food products to ensure their affordability to low-income Kenyans. This is because the government has committed to increasing its revenue to Ksh 3 trillion and would need to source funds from alternative avenues. For instance, it is estimated that the importation of 125,000 tonnes of duty-free cooking oil will cause the government to relinquish an estimated future income of around Ksh 3.5 billion. The combined opportunity cost value resulting from this import duty exemption may surpass the Ksh 8 billion that the previous administration spent on the maize flour subsidy in 2022.
In light of the significant volume of imported goods, particularly in food items such as rice, which constitutes 24% of imports, lower prices resulting from a subsidy would create two effects for consumers. Firstly, the income effect would mean that consumers would have more money at their disposal after purchasing rice at a lower cost. Secondly, the substitution effect would prompt consumers to switch from purchasing other expensive food items to rice due to the lowered cost. Additionally, the subsidy would enhance the welfare of citizens, which would result in an overall positive impact on their well-being and purchasing power.
Thirdly, it seems that the allocated amount for this program may not be adequate. To properly evaluate the program’s effectiveness, it is essential to have a comprehensive breakdown of how the funds will be utilized. For instance, suppose the Kenyan government intends to procure rice from a surplus country. In that case, it is estimated that the average international price of rice is fifty cents per kilogram, factoring in the highest price of United States long-grain rice, which is USD 728.25 per tonne, and the lowest price of rice from India, which is USD 413 per tonne, according to the FAO. When the total quantity of rice to be imported is multiplied by this average price, the Kenyan government would need to spend USD 85.6 million, equivalent to Ksh. 11.12 billion at an exchange rate of Ksh. 130 to the dollar. However, this cost is solely for rice imports. However, importing additional foodstuffs would entail further costs for the commodities, distributors’ commissions, transportation, and repackaging fees, among other expenses. This leads to the conclusion that the current allocation may not be adequate to cater for all the program’s requirements as advertised.
Chart 1: International Rice Prices in USD per Tonne
Source: Food and Agricultural Organization of the United Nations
Alternatively, the government of Kenya can leverage the Population and Housing census data for 2019 to identify the number of households in dire need of assistance. The data provides the government with insights into the socioeconomic profile of households, their geographical location, and their sizes, facilitating targeted assistance to drought-stricken or low-income areas. This could be accomplished efficiently through a cash transfer system, which is a cost-effective alternative, using existing facilities such as the ones established during the COVID pandemic. The cash transfer system ensures that low-income earners can purchase foods, improving their daily caloric intake.
According to the 2015/16 Kenya Integrated Household Budget Survey, an estimated 36.1% of Kenya’s population is living below the poverty line. As a result, there are 4.38 million households living in poverty, with 1.461 million (one-third) considered extremely poor. To assist this group, the government could evenly distribute the Ksh. 24 billion allocated for this program among these households. This would result in an annual cash transfer of approximately Ksh. 16,427 per household, or Ksh. 1,368 per month. It is worth noting that this option provides households with the autonomy to purchase what they prefer to consume, such as sorghum or millet, instead of being restricted to rice and maize. This alternative is also beneficial since it increases the funds available to these households by this amount (Ksh 1,368) to meet their daily average recommended calorie intake, depending on whether they reside in urban or rural areas.
Top of Form
Bottom of Form
Conclusion
Subsidies can be an effective tool to ease economic burdens and provide relief during times of crisis but have also proved difficult to remove once implemented. However, in order for government policies to use resources in an efficient and cost-effective means, careful consideration of available options is essential. In this case, the government’s objective is clear. However, the option of providing import exemption for only a percentage of imports to make affordable food available may create an unfair competitive advantage for the importers who receive the exemption. To minimize pilferage, costly government intervention, and transportation expenses, the government could consider two alternatives: entirely waiving import duties on these food items or adopting a cash transfer program. Considering the allocated funds appear to be limited, and the government currently facing financial constraints, it is crucial to employ a targeting system that is cost efficient to reach the most vulnerable members of society.
Key Words
Arbitrage, Import duty exemption, subsidy, 500,000 shops, Kenya National Trading Corporation (KNTC)
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