How rampant graft increases inflation rate

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This article first appeared in my column with the Business Daily on May 11, 2015

There appears to be an on-going assumption in the country that once oil prices drop, inflation drops as well. However, despite lower oil prices, inflation hit an eight-month high in April.

Data from the Kenya National Bureau of Statistics shows that inflation rose to 7.08 per cent from 6.31 per cent in March, pushing close to the upper limit of the 2.5 to 7.5 per cent preferred inflation bracket. In fact, despite low oil prices, the cost of living measure increased for three months in a row since February.

Clearly, other factors apart from oil prices inform inflation rates. However, there is one pervasive factor rampant in the country that informs inflation that often is not associated with it: corruption. Corruption here refers to the misuse of public power for private gain where individuals engage in a non-transparent and illegal activity; in short, the institutionalised personal abuse of public resources.



Several studies have shown a significant positive relationship between corruption and inflation particularly in countries with higher graft levels such as Kenya. One study reveals that corruption pushes up inflation. How? Well, if corruption persists it tends to increase government spending. This encourages more rent-seeking, which can trigger a budget deficit and an increase in money supply — and thus push up inflation.

Increasing government spending is one of the direct effects of corruption on inflation rate. So it is important to consider that, as analysts point out, an increase in spending and budget deficit causes money supply to increase and probably hyperinflation. Kenya qualifies both in terms of ballooning government spending and budget deficits — both of which increase through corruption and cause an oversupply of money leading to inflation.

To make matters worse, some studies indicate that inflation can encourage further corruption. The surveys have found that rises in prices increase corruption as the applicable purchase price in public procurement becomes ambiguous. The reasons why are not clear although one can postulate that inflation lowers currency value and thus more corruption is required to accrue the equivalent value of money for the participants. Further, inflation makes it easier for corruption to occur because public officials can invoice more than normal.



The reason why inflation is so important in developing countries such as Kenya is rooted in the reality that high inflation is akin to a tax on the poor. Indeed the World Bank makes the point that when low-income households are exposed to high inflation, they often have no choice but to cut down on food or other expenses, many of which are vital, such as school fees or health care.

Given the relationship between corruption and inflation, it is a travesty that factors that are within the control of humans — namely, the choice to shun corruption — continue to push up inflation to the detriment of Kenyans, particularly those in the low income band. It is unjust that the poor shoulder the burden of the personal greed of public officials.

In short, it is pretty obvious that there is strong evidence that elucidates the harmful effects of corruption on the economy. The relationship between corruption and inflation adds yet another compelling reason to rein in this monster for the benefit of all Kenyans.

Ms Were is a development economist., twitter: @anzetse


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