12 August 2018

Kenyans to Feel Pinch As Treasury Implements IMF's 'Painful' Reforms

Photo: Nation Media Group
A view of Nairobi.

Kenyan households face a further squeeze on their finances as Treasury moves to fully implement the International Monetary Fund (IMF)'s financial assistance programme and undertake 'painful reforms' such as hiking energy prices and removing interest rate caps.

The IMF completed reviewing the performance of its Sh150 billion forex insurance programme with Kenya a week ago ahead of expiry in September, piling pressure on Treasury to fast-track its prescription of bitter pills to bolster revenue generation.

The review was expected to see Kenya allowed or denied further access to the standby facility.

The facility, which allows Treasury CS Henry Rotich to access the funds in case the shilling is under pressure, is tied to the pledge by Kenya to cut back on the fiscal deficit through a raft of measures, including public spending cuts.

But in a statement issued on August 3 upon conclusion of its two-week review mission in Nairobi, the IMF did not mention the new status of the facility, leading to speculation Treasury must do more to qualify.

The team met Treasury and other State officials.

The Bretton Woods institution revealed this year that the credit had been suspended mid-last year before the March 14 expiry date because of failure to meet the agreed fiscal deficit reduction targets.

On Tuesday last week, Central Bank of Kenya Governor Patrick Njoroge said the Kenyan economy is well protected against capital outflows and does not need the IMF's precautionary credit facility.

Dr Njoroge said while the facility would be crucial to provide liquidity to the financial system if necessary, the country's external position was strong at the moment, underpinned by strong remittances and exports.

The IMF in mid-March approved Kenya's request for a six-month extension of the facility, which is due to expire in March.

Kenya, in return, promised to repeal the law that caps interest rates within the extended six-month window that expires in September.

"The IMF is in town and they are reviewing our performance. We are confident in terms of our objectives... but at this point, we don't need the money from that perspective. We have 5.9 months of import cover. We are pretty comfortable in that sense," Dr Njoroge had said.

Kenya's economy grew by 4.9 per cent in 2017, recording the slowest margin in five years amid prolonged electoral process and adverse weather.

But amid the assurance by the governor on the solid state of the economic fundamentals, President Uhuru Kenyatta's administration has moved to implement the IMF's raft of proposals which promise more pain on Kenyan households.

This came amid warnings from consumer lobbies that Kenyans are struggling under the weight of high cost of living and saddling with more taxes will cause more pain, especially for ordinary consumers.

Sh130.15 per litre of petrol

Already, Nairobi motorists are expected to pay a record Sh130.15 per litre of petrol or about Sh17.9 more beginning next month when petroleum products start attracting 16 per cent value added tax.

Treasury principal secretary Kamau Thugge confirmed on Thursday that petroleum products will start attracting the tax on September 1 in line with Kenya's promise to the International Monetary Fund two years ago.

At prevailing prices, diesel -- used to power commercial vehicles such as buses and tractors -- will cost Sh16.5 more to stand at Sh119.77 a litre after adding the tax.

The new tax burden will also be felt among consumers of Kerosene, who are mostly low-income households that use it for lighting and powering cooking stoves. A litre of kerosene will cost Sh99.44, a Sh13.7 increase from the current price of Sh85 per litre.

The increase in prices at the pump will not be limited to Nairobi but will be felt countrywide beginning September 1.

Earlier estimates showed that the 16 per cent tax charge on petroleum products could earn the Treasury -- which has continued to suffer perennial budget holes -- additional Sh71 billion a year.

But consumer lobbies and public transport sector players warned on Friday the new tax would be counterproductive. The Consumer Federation of Kenya (Cofek) secretary-general Stephen Mutoro said on Friday the new tax, if effected, would lead to a spike in the cost of living affecting low-income consumers the most.

"By dint of this proposed measure, the cost of travelling, transport of goods, food and general inflation will radically rise," said Mr Mutoro in a statement.

"Needless to mention, this would occasion shrinking of consumer spending and with it, unemployment and flooding of counterfeit goods shall be enhanced."

President Kenyatta has pledged to focus state resources on what he calls the 'Big Four Agenda' -- manufacturing, food security, affordable housing and healthcare -- in order to jumpstart the economy and grow more jobs for Kenyans.

Similar comments were echoed by Matatu Welfare Association chairman Dickson Mbugua who said operators would not be able to bear the burden of higher fuel prices.

"The commercial sector players will not be able to absorb this," Mr Mbugua said, noting that the players are already constrained in hiking their fares and any additional costs would make fares unsustainable. "Matatus are used by 80 per cent of our population. When you raise diesel prices, it means you are impeding the ability of ordinary Kenyans to put food on the table," Mr Mbugua said.

He asked Treasury to shelve the tax, warning if pushed to the corner, matatu sector players will ground their operations.

Input VAT

Dr Thugge had earlier on Thursday sought to downplay the looming impact of the new tax, insisting that producers will claim 'Input VAT' that was previously not-recoverable, easing their costs base.

"The ability of the VAT-registered taxpayers to recover input VAT will therefore lower their cost base and as such they should be able to retain reasonable margins on petroleum pump prices," said Dr Thugge.

The Treasury is expecting the supply of liquefied petroleum gas (LPG), which has been zero-rated and spared the VAT, to help cushion consumers from higher energy costs.

"Other items that have direct impact on the livelihoods of ordinary mwananchi remain zero-rated," Dr Thugge said, citing bread, milk and medicines.

The IMF has been pressing Kenya to do away with tax exemptions as part of a wider plan to grow revenues, reduce budget deficits and ultimately slow down the debt pile-up that has in recent months become a source of national concern.

VAT was first introduced on petrol, diesel, kerosene and jet fuel in the VAT Act of 2013, with a three-year grace period that would have seen it come into force in 2016 when it was once again deferred to September 2018.

Tax experts, however, warned that charging VAT on petroleum bears the potential of causing a general rise in prices of essential goods in all segments of the economy as it affects the cost of transport, which is ultimately passed on to the end users.

"The petroleum VAT is intended to boost government revenues to rebalance the public debt, while also providing essential funding for the Big Four socio-economic agenda," said Mr George Wachira, the director of Petroleum Focus Consultants, adding that the combined impact of higher import costs and VAT will be to increase producer and consumer prices.

Increased prices of sugar, petrol, electricity and health put pressure on households in July, pushing the inflation rate to a four-month high of 4.35 per cent.

Nikhil Hira, the Deloitte East Africa tax leader, reckons that the steep rise in fuel prices will raise the cost of transport, mechanised farming and manufacturing with the potential of cooling down activity in an already struggling economy.

"Treasury sits in a precarious fiscal space and could be banking on the extra collections to help narrow the fiscal deficit," he said.

Consumer Federation of Kenya has hit out at the impending increase in fuel prices, arguing that they are likely to hurt the poor most.

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