Effects of exogenous food and fuel price shocks and welfare implications in Kenya: a computable general equilibrium analysis

Abstract

This thesis investigates the likely effects of international food and crude oil price shocks on Kenya's domestic market prices and households' welfare amidst deepening international economic integration. These products constitute 60 per cent of commodities used to measure the consumer price index and Kenya is a net importer of both. However, very little hard information about the actual effects of international price shocks on domestic prices and how firms and households react to them appears to be available. The study used a CGE model constructed from the Global Trade Analysis Project (GTAP) model. The CGE model describes Kenya in 2007 and is integrated with the 2005/2006 Kenya Integrated Household Budget Survey data. The world price scenarios for food and crude oil products during the 2007 - 2008 periods are used to simulate the effects of the price shocks in the CGE model. The resulting effects endogenously model households' responses to production, consumption and income streams. The analyses indicate that elasticities of demand for imported food and crude oil products in Kenya are fairly elastic implying that when international prices fall, import demand rises by a more than proportionate amount and vice versa. However, the international price shocks are not fully transmitted into the domestic markets. Besides, crude oil price shocks depress urban and rural household incomes and are evenly spread. But the food price shocks raise the rural households' incomes and reduce the incomes for urban households. Furthermore, rural households accrue net income gains from simultaneous food and oil price shocks whereas urban households are net losers. The findings imply that changes in exogenous food and oil prices have potential to affect the county's balance of payments through import surges when international prices fall. Besides, there exists low transmission of external price shocks to domestic markets largely due to substantial government regulatory involvements in the two sectors. Most importantly, exogenous food and oil price shocks affect rural and urban households differently depending on whether they are net buyers or sellers as well as being owners of factors of production. The study recommends the removal of tariffs on staple foods and fuel products and enhancement of cash transfers to all poor urban households among other measures in order to build resilience at household levels.