By Njiraini Muchira
The chaotic management of the economy under the Jubilee administration is set to sink to new low if a 16 per cent Valued Added Tax (VAT) on petroleum products is introduced now or in 2020.
After plunging the country into an unprecedented deep hole of debt amid widening fiscal deficits, the government moved to further tax fuel products in a bid to raise Sh71 billion annually. The National Treasury had not contended with the public mood which Parliament read well in throwing out the proposal which could still be implemented by default if President Uhuru Kenyatta does not assent to the changes.
The measure, which is being pushed by the International Monetary Fund (IMF) so that Kenya can keep a Sh150 billion precautionary facility, is threatening to ignite an inferno capable of crippling the economy. However, the Central Bank of Kenya (CBK) has said that the country no longer needs this facility.
With majority of Kenyans struggling to make ends meet due to high costs of living, a fuel price increase would condemn many households to a life of penury, higher transport costs and general increase in the prices of basic goods and services.
“The macroeconomics of this government have failed. The cost of living is already too high and it is the worst mistake to introduce VAT on fuel which touches on all aspects of life,” said Mr Stephen Mutoro, Secretary-General of the Consumer Federation of Kenya.
Despite inquiries by TheSaturday Nation, the National Treasury opted to remain mum with principal secretary Kamau Thugge failing to return calls and respond to SMSs.
The Energy Regulatory Commission (ERC), which would adjust fuel prices taking into account the new tax, has said it is waiting for directions from the National Treasury. However, its boss was said to be out of the country yesterday and could not be reached for comment.
While the move to introduce VAT on petroleum products has received widespread opposition and condemnation, the government is determined to implement it after putting it on hold for two years. With the new tax, the government expects to increase its share of earnings from fuel from Sh40 per litre that it currently collects from petrol to nearly Sh60 per litre. This would push the cost of a litre from Sh112 to about Sh130.
Yesterday, fuel marketers were waiting for the ERC to communicate new fuel prices before making adjustments.
Ultimately, conservative estimates show the government will get an additional Sh70 billion annually in taxes from fuel, a huge chunk of which will be used to pay the runaway public debt that has hit a staggering Sh5 trillion.
The amount generated is also expected to set Treasury on a path to reduce the fiscal deficit to 7.2 per cent of gross domestic product (GDP) in 2017/18 financial year and further to 5.7 per cent in 2018/19 in line with IMF demands. It would also boost revenue collection for Kenya Revenue Authority which is struggling to meet targets at a time when it has been slapped with a target of Sh1.7 trillion in the 2018/19 financial year.
Although Treasury mandarins are concerned with addressing the fiscal imbalance, the anticipated impact of fuel VAT on the lives of ordinary Kenyans and the economy is sending shivers down the spine of wananchi. Already, transporters have warned that an increase in fuel prices will automatically increase the cost of public transport as well as the movement of goods.
In Kenya, petroleum is the most important form of modern primary energy, accounting for about 60 per cent of consumption followed by electricity at 28 per cent and biomass at 10 per cent.
A significant increase in prices will set in motion a spiral effect on the prices of basic goods and services like food, transport, healthcare, housing and all other aspects of life.
“Fuel being the main input in our energy intensive sectors, the projected rise in pump prices will result in an increase in the cost of production and manufacturing of commodities, an increase in cost of transport and an increase in cost of household consumption of goods and services,” said Ms Carole Kariuki, chief executive Kenya Private Sector Alliance.
According to analysts, this is the worst moment to further increase the costs of basic goods and services considering that Kenyans are feeling the adverse impacts of a severe drought and prolonged electioneering period last year, which saw GDP growth dip to 4.9 per cent compared to 5.9 per cent in 2016.
In the current environment, many businesses — particularly small ones — are struggling to remain afloat while huge companies have resorted to downscaling and laying off staff to cut costs.
This is evident from the fact that most of the Nairobi Securities Exchange-listed firms, which were posting astronomical profits during the Narc administration, are either reporting reduced profits or are in loss-making territory.
“Introduction of VAT on fuel is not a decision meant to grow the economy. This is a knee-jerk reaction from pressure that will only force businesses to contract further, lay off employees and instigate growth of the black market,” said Mr Victor Omondi, Viffa Consulting managing director.
Already, some unscrupulous traders have started hoarding consumer goods to create an artificial scarcity in the market before substantially increasing the prices.
“The new fuel prices will push Kenyans at the bottom of the pyramid who are already at the periphery to the brink. This will worsen insecurity and could instigate social unrests,” said Mr Ken Gichinga, the Mentoria Consulting chief economist.
He said it would be counterproductive for the government to tax Kenyans exorbitantly so as to repay debt instead of using the money to grow the economy.