Opinion: Kenyas sky-high fuel prices will plunge country into financial crisis

By Desmond Boi

Kenya’s economic architects seem to have unreservedly resolved to leave the economy hanging in the balance by imposing the now infamous 16% VAT on petroleum products amid heated dissent and unfeigned public outcry.

The virtually forced law could not have come at a worse time, when there is economic turmoil in a country where the average Kenyan is finding it burdensome and back-breaking to make ends meet and the country’s sovereign debt is at an all-time high of Ksh.5 trillion.

Oblivious to the fact that this decision will not ease the burden of the consumer, Treasury has set in action a spiral web of economic quandary whose effects might hurt the economy more than its perceptibly well-intentioned VAT levy.

The effects of high fuel prices in an economy as Kenya’s are gruelingly dreadful and could stretch from unprecedented slowdown in the manufacturing sector to laying off human capital due to reduced profitability.

The grave we’ve been digging

By all measures, the economic woes and disorientation the country is experiencing and propagated by nearly desperate but seemingly detached state officials, did not start just this year, it has been a back and forth scuffle at the Treasury since 2011.

Whereas President Kibaki’s regime kept IMF at bay in most of its dealings, the current regime seems to have resuscitated the relationship.

When the Kenyan shilling hit a record low of 107 units against the dollar in October 2011,  the government resolved to approach IMF to acquire a precautionary or standby facility to cushion the country from the aftershocks.

The international lender, being acquainted with Kenya’s never-ending off target revenue collections, put forth some conditions that included reforms dealing with taxes – including income tax, excise tax and VAT.

This is where the recommendation to remove petroleum products from VAT exemption came into the scene late in 2013 after Parliament passed the 2013 VAT Act.

The law that slapped VAT on the petroleum products was not welcome from the onset as Parliament decided to give the country a 3-year transition period which brought us to 2016.

But in 2015, Kenya signed a binding agreement with IMF to impose VAT on the petroleum products just a week before the Ksh.69 billion precautionary facility was granted.

In 2016, during the budget discussion, the CS suggested it be moved by a year but Parliament pushed it by two years which brought it to September 2018.

What seems evident is that, Kenya is not yet ready for the law to take effect without hurting the citizens.

Kenya’s fuel prices now top in the region

Comparatively, the new oil prices in the country dwarfs those in Ethiopia, Tanzania, Uganda, Rwanda, Sudan and Somalia.

This will certainly create more cartels in the country and across our borders in search of cheaper fuel.

The new prices now have super petrol costing Kh.124.50 in Mombasa, Ksh.127.80 in Nairobi, Ksh.128 in Nakuru, Ksh.129 in Kisumu and Ksh.131 in Malaba.

It is recorded highest in Mandera at Ksh.141.61. Diesel on the other hand now averages at Ksh.116.50.

Petrol in our neighbouring countries of Uganda and Tanzania is retailing at Ksh.110 and Ksh.105 respectively whereas diesel retails for Ksh.95.

In Addis Ababa, Ethiopia, market reports early this week showed that petrol and diesel retails at Ksh.75 and Ksh.70 respectively.

More appalling is that Kenyan fuel prices now double that of Sudan and Somalia. In Sudan, petrol and diesel retail at Ksh.55 and Ksh.40 whereas in Somalia, retails Ksh.40 and Ksh.35.

The tax levy will invoke Black Market

It has already been seen that motorists at the Ugandan border now prefer to refill their vehicles in Uganda due to their low-priced fuel.

It should be noted, this will be the trend in the coming days and is likely to cause more harm than good.

In Somalia, for instance, we have had a porous border that has seen the infamous contraband sugar make its way to the local markets. What might really hinder the commuters from acquiring fuel from Somalia at the economical price?

Inherently, Somalia has been known for its widespread corruption scandals with infirm accountability and weak anti-corruption measures. There already is a fuel scandal that touches the biggest names in politics.

Consequences are potentially catastrophic

The narrative that is to be created by the fuel price hike is not of cheer but one of unprecedented gloom. Fuel is the main input in our energy-intensive sectors of the economy and this undoubtedly raises the cost of production.

Further, Kenya is likely to lose its competitive edge in the region as our goods and services will rise significantly.

Majority of the exports are price-sensitive and the aftermath of the fuel tax will have adverse effects. The increased cost of production will make Kenya unattractive to investors and trigger close-down of currently rickety industrial firms.

The catastrophic nature of the effects fueled by the fuel price increase call for a rethink around the paradigms of servicing our loans in measures that do not propel us to greater poverty and more intense economic turmoil.

Inflation is now set to rise beyond the levels noted last year, four months before the election (11.4%), and it won’t be a pleasant state to operate the country from.

Management of the available funds ought to be stiffened and enhanced to prevent loss through irresponsible hands and safeguard a better economy.

Otherwise, we may remain in a retarded state of affairs despite the ground-breaking projects such as those encompassed in the Big Four Agenda.

The writer is a Monitoring and Evaluation Specialist. Email: dboi@iasr.co.ke