Raise in Fuel Tax Will Slow Kenya’s Economic Growth, Analysts Think Otherwise

Kenya’s current fiscal year growth projections of 6.2 percent according to the Central Bank might be curtailed with the re-introduction of 16.0 percent Value Added Tax (VAT) on fuel.
The Kenya National Chamber of Commerce and Industry in a statement Friday that the imposition of the tax on petroleum products that came into force on September 1, would have a ripple effect to the economy.
“We believe that the recent resurgence of the economy will be negatively impacted by this move and this will reverse any growth we have seen in the past year,”  said Kiprono Kittony, National Chairman, KNCCI.
“As the business community, we are asking the government to re-think its options for financing its development and recurrent expenditure instead of overtaxing various products that already bear large tax burdens,” he added.
The implementation the tax is inline with the International Monetary Fund (IMF) pre-conditions to extend the Stand-By Arrangement (SBA) with a repeal of the interest rate capping and the implementation of the 16.0 percent VAT on fuel with an aim of reducing the large deficits over the last few years.
The facility was extended to Kenya on 14th March 2016.
However, the National Assembly voted to retain the capping of  loans at 4.0 percent above the Central Bank Rate, as well as adjourning the implementation of VAT on fuels by another 2 years to September 2020.
Analysts from Commercial Bank of Africa (CBA) brief after August’s inflation slightly declined to 4.04 percent from 4.35 percent in July say “Implementation of the tax will exert considerable pressure on commodity prices across the spectrum in coming months. However, a two-year delay in effecting the tax as recommended by Parliament could see inflation worries
Abate.”

According to CBA Analysts, note that Kenya’s economic expansion has been largely fiscal led and a reduction in spending might put a break to the strong momentum of recent years.  “The risk of reverting back to the domestic market as external environment tighten could see the fiscal side dominate monetary policy in offering direction to interest rates.”
“The government is banking on its combination of tactful spending cuts and higher taxation to help reduce the deficit to 3.0 percent of GDP in three years and stabilize debt below 50 percent of GDP. However, the unpopularity of tax increases is likely to undermine government’s new revenue raising initiatives. Parliament last week shot down most of the tax proposals aimed at mobilizing new revenues.”
This could leave a bigger funding hole in the budget, compelling the government to either borrow more, contrary to its debt stabilization plans or significantly reduce spending with considerable consequences for growth,” adds  Faith Atiti and Stephanie Kimani, Analysts from CBA.
Economists are of the view that the country  would continue to have pending bills, and they are going to borrow more because of not amicably addressing its fiscal policy changes.
The country has projected the fiscal deficit to narrow to 5.7 percent of GDP in 2018/19 from the estimated 7.2 percent of GDP in the 2017/18 financial year and further to around 3.0 percent of GDP by FY 2021/22.
According to Henry Rotich, Treasury Cabinet Secretary,  “The deficit of Ksh 558.9 billion (equivalent to 5.7 percent of GDP) will be financed by net external financing amounting to Ksh 287.0 billion (equivalent to 3.0 percent of GDP) while other domestic financing will amount to Ksh 271.9 billion (equivalent to 2.8 percent of GDP).”
Kwame Owino, the Chief Executive Officer of the Institute of Economic Affairs (IEA-Kenya), in an interview with Africa Uncensored he said “We are going to pay anyway, and their argument is that it is hurting Kenyans. I don’t know why they (Members of the National Assembly) think in 2020 it would not hurt Kenyans. That is why I called it being disingenuous, they are not being honest.” 
“This is the third time we have deferred it. My view is that they need that fix,” Kwame adds.
David Ndii, Managing Director of Africa Economics in an interview with Kenya Television Network vehemently said.”Kenyans are going to feel a lot of pain, they haven’t felt anything yet. We want to have our cake and eat it… We have gotten to this culture of doing things without consequences but unfortunately Economic things have consequences.”
Stanbic Bank Kenya Purchasing Managers Index (PMI) for the month of August says the impact of recently implemented 16 percent VAT on petroleum products is seen as a headwind to the private sector in the near-term.
On the other hand, Cytonn Investments in their weekly investor brief state the IMF  facility “Would be essential to Kenya as it would enhance fiscal discipline due to the attached pre-conditions that the program comes with. As such, this would reduce the risk perception of the country while improving investor sentiments as signing up to undertake the fiscal policy measures in order to be granted access to the facilities would provide reassurance to investors of expected improvements and stability in the macroeconomic conditions of the country.”
The government’s debt has soared to over 60 percent of GDP, raising concerns over the country’s fiscal sustainability and broader medium term macroeconomic stability, making restoration of fiscal balance a policy priority for the government.
The Central Bank of Kenya has also warned  that the headroom for further borrowing had declined remarkably and that the country could not continue on the recent borrowing path.
“The headroom (for borrowing) has now decreased. We cannot continue borrowing for spending on even the good projects. We need to move into the non-debt financing of our development projects,” said Dr. Patrick Njoroge, CBK Governor.
Similar warnings were echoed by the Kenya Institute for Public Policy Research and Analysis (Kippra)  Kenya Economic Report 2017 that the country increases its vulnerability to fiscal risk in the event of any urgent need for borrowing.
On Thursday, the High Court temporarily suspended the implementation of the 16 percent VAT. 
This is after the Energy Regulatory Commission (ERC) readjusted the maximum pump prices upwards taking into account the 16.0 percent VAT charge.
Super Petrol, Diesel and Kerosene prices have gone up by 12.4 percent, 12.0 percent and 14.7 percent, respectively to Kshs 127.8, Kshs 115.1 and Kshs 97.4 from the earlier published prices on 14th August where Super Petrol, Diesel and Kerosene prices were retailing at a maximum price of Kshs 113.7, Kshs 102.7 and Kshs 85.0, respectively.