Kenya: New Taxes to Worsen Fuel Price Nightmare for Kenyans

16 September 2021

The fuel price nightmare for Kenyan consumers will worsen further in just two weeks, when the government's new tax rates kick in beginning October 1.

Despite the Energy and Petroleum Regulatory Authority's (Epra) Tuesday announcement that increased fuel prices in the country to a historic high - closing in on Sh140 for a litre of petrol in some regions across the country, the Kenya Revenue Authority (KRA) has also announced plans to increase excise duty rates for the commodity by 4.97 per cent.

The increase in Excise Duty on fuel, among other products - subject to approval by Treasury CS Ukur Yatani - will be in order to cover for the inflation witnessed in the Financial Year 2020/21, KRA stated in a public notice on August 10.

"Kenya Revenue Authority would therefore like to inform manufacturers and importers of excisable goods falling under the specific rate category and members of the public that the Commissioner General will adjust the rates of excise duty using the average inflation rate for the Financial Year 2020/2021 of 4.97 per cent, as determined by the Kenya National Bureau of Statistics," the authority stated.

Excise duty

As a result, excise duty for regular petrol will increase from the current Sh21,522.68 to Sh22,592.36 per 1,000 litres, or by Sh1.069 per litre, while that of premium petrol will rise by Sh1.091 per litre, as duty rates for 1,000 litres of the product increase by 4.97 per cent to Sh23,044.09.

A litre of illuminating kerosene -- a product used by many poor households for cooking and lighting -- will also, from October cost Sh0.565 more per litre, at least judging by the additional excise duty proposed for the product. Excise duty for 1,000 litres of the commodity will rise to Sh11,936.12, up from the current rate of Sh11,370.98, while diesel oil used to power heavy industrial equipment will record a rise from the current Sh4,082.74 per 1000 litres, to Sh4,285.65.

This increase on taxes for the commodities will be added to the just recently reviewed fuel prices that have left petrol retailing at a high of Sh147.75, diesel at Sh128.64 and kerosene at Sh123.86 in Mandera.

Impact on economy

When these changes come to effect, their impact on the economy will be huge, hitting almost all economic sectors as transportation and production costs shoot, increasing prices for many commodities, a factor that will yet again see Kenyans face even tougher economic times.

Businesses have always passed costs on to the consumer, meaning that when the taxes come into play, prices for commodities will effectively go up by Sh1.069 per litre of regular petrol, Sh1.091 per litre of premium petrol, Sh0.565 per litre of kerosene and for diesel oil -- heavily relied by manufacturers to power heavy equipment and machines -- prices will rise by Sh0.20 per litre.

At this rate, a litre of petrol in Mandera could cost up to Sh148.84, kerosene up to Sh124.42 and Diesel Sh128.84.

The frequent increase in the fuel prices, which has driven the cost of living in the country sharply over the past few years, is already irritating the public, as many continue facing tough economic times and reeling from the effects of the Covid-19 pandemic.

Lack of compassion

Kenyans spent the better part of Wednesday complaining of the government's lack of compassion, as others trained their guns on Parliament and the Executive for failing to contain the worsening economic conditions.

"Kenyans must demand immediate dissolution of the Energy Committee of the National Assembly, stop the Fuel Development Levy Fund and halt Ministry of Petroleum micro-managing the regulator, Epra, and place a consumer representative on Epra board," Consumers Federation of Kenya (Cofek) Secretary-General Stephen Mutoro said.

The Cofek official complained that the fuel prices announced on Tuesday would drive inflation in the country up, which would have the effect of increasing cost of food, transport and production, and could lead to loss of jobs and loan defaults by many.

Kenya's fuel is, by far, the most expensive across East Africa, with petrol retailing at Sh123.83 in Uganda (average retail prices by Total Uganda) and Sh115.18 in Tanzania (according to Energy and Water Utilities Regulatory Authority) in its latest fuel price reviews.

In Uganda, however, there was a public outcry in April when prices shot to a high of Sh128.76 for petrol and Sh115.11 for diesel, which later came down.

The Tanzania government also suspended fuel price reviews announced on August 31, which had increased commodity prices in the country, leaving the market operating with prices announced on August 4.

Cost of products

Players in the private sector have also warned that the increasing fuel prices is the reason behind an increase in cost of products in the economy, since production costs have been rising.

"We are now set to see an increase in the prices of commodities and other sectors such as transport, as the cost of production goes up," said Kenya Private Sector Alliance (Kepsa) Chairperson Flora Mutahi.

In July, the government announced that it had activated a programme to retail subsidies on fuel prices, to cushion Kenyans from shocks of the rising crude oil costs.

Mining and Petroleum CAS John Musonik told Parliament that the ministry would rely on the Petroleum Development Fund -- a special scheme created to cushion motorists, businesses, and households from high petrol, diesel and kerosene costs, whenever global oil prices go beyond the $50 (Sh5,486) per barrel mark.

"From April we have been using the fund. For now, we are going to stabilise the prices as we look at all the other components in the pricing," Mr Musonik told the Senate Committee on Energy.

Epra Director-General Daniel Kiptoo Bargoria said the jump in prices was due to the lifting of the stabilisation fund that had cushioned consumers from previous increases.

"The stabilisation process for the pump prices has not been effected this pricing cycle," he said.

Weak shilling

The authority also reported that prices for the commodity had been affected by a weak local currency, which depreciated by 1.11 per cent in August, from Sh108.26 in July to Sh109.46 per dollar.

Free On Board (FOB) prices for crude oil rose in August rose to $72.34 per barrel in August from $66.7 per barrel in July, an 8.46 per cent increase. It is not clear why the government did not tap into the fuel subsidy programme to cushion consumers, despite the July promise that it would come in whenever crude oil prices hit the $50 per barrel mark.

Critical sectors

Any shift of fuel prices always has a ripple effect on the economy, since petrol, diesel and kerosene are widely used by critical sectors of the economy, ranging from thousands of motorists across the country who consume millions of litres of petrol and diesel on a daily basis and the many poor households that use kerosene widely as a source of lighting and cooking. Any change in the product's prices hits low-income earners heavily.

Fuel also has an impact on the cost of electricity production, with increases in prices increasing the cost of production for manufacturers who rely on electricity, and increasing prices for commodities.

This happens even as Kenya's year-on-year inflation rate remains on a rising trend since April when it was 5.76, closing at 6.57 by the end of August. This is the highest inflation rate since February 2020 when it had risen to 7.17.

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