Treasury proposal dampens hopes of low consumer prices

By Ken Kwama and Reuters

Inflation rate is expected to fall to 9.16 per cent, returning to single digits for the first time in 16 months on the back of lower fuel prices and potentially paving the way for further monetary easing in the next two months.

However, the gains from the falling rate could be eroded if Parliament passes a proposed amendment to the tax laws seeking to make it mandatory for consumers to pay VAT on foodstuff and other basic commodities, which are currently zero-rated.

A Reuters poll of 10 analysts conducted on Friday forecast the annual rate of inflation would fall for an eighth straight month and gave a median estimate of 9.16 per cent, down from 10.05 per cent in June. The data will be released on July 30.

The lowest forecast was 8.25 per cent and the highest was 9.50 per cent and analysts attributed the decline to a sharp cut in retail fuel prices this month.

The Energy Regulatory Commission cut the maximum price of a litre of super petrol in the capital Nairobi by almost eight per cent to Sh108.39, and reduced the maximum price on a litre of diesel by the same margin to Sh97.42.

Revision downwards

“The revision downwards will obviously filter into the costs of transportation and food. That could also have had an effect on food prices,” said Duncan Kinuthia, head of trading at Commercial Bank of Africa.

Fuel and transport costs are major components of the index used to measure inflation and affect the prices of other goods and services.

A jump in prices of basic commodities last year, accompanied by a steep weakening of the Kenyan shilling against the dollar, provoked public anger and prompted the central bank’s monetary policy committee to adopt a very tight monetary stance in the fourth quarter of last year.

But a section of MPs and other stakeholders have warned that the same public anger could be awakened if Parliament approves the proposed amendments to the VAT laws. On Friday about 30 MPs, who met in Naivasha asked Treasury to withdraw the proposal to allow for adequate consultations.

If the proposals, contained in the Value Added Tax ( VAT) Bill 2012 sail through Parliament, Kenyans will also pay higher premiums for mobile phones, newspapers and books, which were previously zero-rated.