Inside Kenya’s unprecedented high cost of living regime

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BY GILBERT NG’ANG’A

This was meant to be a year when Kenyans would begin enjoying the raft of economic promises made by President Uhuru Kenyatta’s regime last year as the Jubilee government sought re-election.

As imagined by many, going with the Jubilee manifesto and campaign statements, the country would usher in an era of economic prosperity, anchored on lower cost of living and increased business and job opportunities.

However, nearly a year since re-election, that is not to be the case. Kenya is staring at an era of high cost of living in the coming months, which could trigger mass unrest and political turmoil over increased prices of basic goods.

We systematically take a look at what exactly is changing, how it will impact Kenyans and what informs the changes.  

For starters, the basis of the current predicament is Kenya’s dalliance with the International Monetary Fund (IMF). Treasury is keen to fully implement the IMF financial assistance programme, which comes with a series of fiscal reforms to boost government revenues. In August, the IMF completed reviewing the performance of its Sh150 billion programme with Kenya, which came with the demands.

Top among the changes is a plan to impose a 16 % VAT on the price of fuel, a move that could push the inflation rate by over 4%.  Other commodities such as sugar, electricity and healthcare products and services have been on a sharp rise.

The country is currently experiencing increasingly high taxation through the recent introductions such as VAT on previously exempt goods; Exercise Duty on increased number of goods and financial transactions; Fuel Levy; Railway Development Levy; Capital Gains Tax; Rental Income Tax; among others. 

In July, the Kenya Revenue Authority (KRA) increased excise duty chargeable on a wide range of goods, including juice, water and beer, setting the stage for higher retail prices. Other items that are set to attract higher taxation include cigarettes, wines and spirits, which previously had a fixed excise rate. Excise tax on mobile money transactions went up to 12% from 10% while sugar confectionery and chocolate bars are attracting excise duty at the rate of Sh20 per kilogramme.

Importers of private vehicles with engine capacities above 2500cc are now paying higher excise duty of 30%, a 10% rise from the previous rate.

Energy Regulatory Commission (ERC) has released a new electricity billing structure that will see monthly power bills nearly double for most consumers.  Consumers of 50-kilowatt hours (kWh) of electricity per month will pay Sh1, 247 compared to the Sh691 they have been paying. Those taking over 200 units of power will be billed at Sh4, 988, up from Sh4, 106 in June.

Consumers are not taking this lying down. Towards the end of August, the Motorists Association of Kenya, a lobby which champions interests of private vehicle owners, vowed to mobilize car owners to protest over the new fuel price regime. The Matatu Owners Association and the Matatu Welfare Association have threatened adjustment of fares to cushion the industry from the higher taxes.

Fuel, being the main input in Kenya’s energy- intensive sectors, the projected rise in pump prices will result in an increase in the cost of production and manufacturing of commodities by both small and big businesses, a surge in the cost of transport and household goods and services.

“By dint of this proposed measure, the cost of travelling, transport of goods, food and general inflation will radically rise. Needless to mention, this would occasion shrinking of consumer spending and with it, unemployment and flooding of counterfeit goods shall be enhanced” said the Consumer Federation of Kenya (Cofek) in a statement late August.

The new tax, which is set to kick in from September 1, would effectively push up fuel prices by up to Sh17 per litre, taking petrol prices to more than Sh131.93 in Nairobi, diesel and kerosene to highs of Sh119.38, and Sh98.54, respectively.

This, analysts and industry players say will also have a great impact on production and service sectors of the governments Big Four agenda.

“The country will not be in a position to attain the anticipated two-digit GDP growth, generate jobs and create wealth as envisioned in our development blueprint,” said the Kenya Private Sector Alliance (KEPSA), an industry lobby in a protest statement over the pump prices. “The increase in cost of doing business will not only impact the local investors but also render our economy uncompetitive and repel investors who would invest directly in our economy including the Big Four opportunities,” said KEPSA CEO Carole Kariuki. “While the private sector acknowledges the revenue value government receives from taxation, it also envisions a growing economy where the living standards for every Kenyan grow in tandem with the economy,” she said.

The rising cost of living comes at a time when the economy is struggling to get back into a growth trajectory. Kenya’s economy grew by 4.9% in 2017, recording the slowest margin in five years on the back of prolonged electoral process and adverse weather conditions during the period. The inflation rate in July surged to a four-month high of 4.35%, with projections showing it would rise further over increased prices of basic commodities.

In August, cooking gas prices hit a 25-month high, returning to levels seen before the government removed (VAT) on the clean fuel. The cost of a 13-kg gas cylinder stood at Sh2, 176, up from 2, 170 in June and Sh2, 073 in July last year.

This trend of increasing taxes, manufacturers say, is likely to affect the gains made in the ease of doing business as a country and competitiveness of made-in Kenya products both locally and in overseas markets. This could lead to a slowdown in business and investments, loss of jobs and a negative impact on Kenya’s GDP.

According to World Bank’s Ease of Doing Business 2018 report, it is estimated that Kenyans pay an average of 37.4 % in taxes as a percentage of profits.

“As a country, we must strive to remain competitive in order to remain an investors’ destination choice, a position that we have worked hard to attain. The government should reconsider the VAT on fuel, and instead consider pro-business strategies that strike a structural fiscal balance, address the inefficiencies with our tax collections systems, and increasing the tax bracket to avoid tax fatigue by a few tax payers” said Ms Kariuki.