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Why Uhuru’s bitter pill will not cure the high cost of living

By Vincent Achuka | Published Sat, September 15th 2018 at 00:00, Updated September 14th 2018 at 23:25 GMT +3
A deserted petrol station in Meru town an indication of the continued suffering of motorists, commuters and petrol station owners. Many vehicle owners have opted to park their vehicles due to the high fuel prices. [Olivia Murithi, Standard]

In summary

  • President Kenyatta rejects Finance Bill and proposes reduction of VAT on petrol from 16 to eight per cent and a reduction of expenditure by ministries, agencies and parastatals
  • The President resorted to what analysts call “short-term measures” aimed at partially appeasing Kenyans without providing any real cure for the effects of fiscal mismanagement

?Kenya has been thrown into a Catch 22 situation with the government struggling to dig itself out of a financial hole, provide services and appease citizens who are angered by the rise in the cost of living.

An opportunity presented itself Friday to President Uhuru Kenyatta to provide answers after his long silence, having rejected a Bill that proposed the removal of 16 percent Value Added Tax (VAT) on fuel on Thursday night.

ALSO READ: What next after Uhuru rejects 2018 Finance Bill?

Instead, the president resorted to what analysts have call “short-term measures” aimed at partially appeasing Kenyans without providing any real cure for the effects of fiscal mismanagement by the National Treasury, a factor that has brought Kenyans the pain they are feeling now.

Friday, President Kenyatta tried too hard to explain why it was necessary to increase taxes due to devolution, an increasing welfare State and the projects being carried out by his government that have become too expensive to implement.

“We have to pay for the new constitutional order, and the public services on which Kenyans depend alike. These cost money. Further delay in the implementation of the tax would compromise our ability to deliver,” he said.

“We will continue to protect and entrench devolution and the new constitutional order, notwithstanding the cost.”

With increased political representation and an ever increasing number of services that the government is providing for free or at subsidised costs, the president made it clear that the State had hit rock bottom on finances and is desperate.

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Since coming to power, the Jubilee government whose appetite for politically driven grand projects is huge, has borrowed a staggering Sh3.4 trillion, more than all the previous regimes combined.

While accusing MPs of practising “good politics but bad leadership” the president said his government had managed to achieve all it has without “any substantial increase in taxes”.

With the Big Four Agenda and a legacy at stake, the government’s appetite for huge loans has now come full circle.

ALSO READ: Treasury opposes halting of fuel tax

In the current financial year, for example, there is a budget deficit of Sh600 billion and tax revenues are expected to drop to Sh1.8 trillion from Sh1.9 trillion. It remains to be seen where The Treasury will get more money to replace what the president is proposing to lose by halving the tax on fuel.

Middle ground

Still, the halving of VAT from 16 percent to eight per cent as proposed by President Kenyatta depends on whether Parliament will cede to his proposals so that the Executive and Legislature can reach a middle ground.

The National Assembly and the Senate themselves are set to lose Sh5 billion, according to the president’s proposals that hope to save the country Sh52 billion.

Other departments that will lose out in the austerity measures include the Equilisation Fund that will lose Sh3.8 billion while repair of roads damaged by floods will lose Sh8.7 billion.

Further losses will be felt in the Last Mile Project (Sh1 billion), county allocations (Sh9 billion) and domestic travel (Sh4 billion).

ALSO READ: Rotich: Man on the spot

And although analysts have said the fuel tax would not have made any significant change on the budget deficit, they say the government is acting as if it has run out of options.

“What the president is trying to do is to appease disgruntled Kenyans, but he has said nothing. The eight percent is nothing better than the 16 percent,” observed Dr Samuel Nyandemo of the University of Nairobi’s (UON), School of Economics.

“There are two sides to this equation. The first side is revenues. Revenues are a big miss. The second side is expenditure. The gap between the two is a yawning chasm. The 16 percent VAT was necessary but by no means the silver bullet,” said Aly Khan Satchu of Rich Management.

Also at stake for the government is a decision on whether to reduce spending and seek more tax avenues in order to appease the International Monetary Fund (IMF) that has been pushing for better fiscal policy.

The IMF has been pushing Kenya to reduce its fiscal deficit without any success, leading to a loss of a Sh100 billion precautionary credit facility on Thursday.

After the loss, an upbeat Treasury Cabinet Secretary Henry Rotich said the government was still in talks with IMF, arguing that Kenya has strong reserves to cushion the economy against external shocks.

“We are able to go into the international markets and get funds because investors can look at us as individuals. We should not continue relying on the IMF programme,” he said.

Analysts have warned that it would be precarious for the government to imagine that the economy will be sound without the support of the IMF.

Already, the shilling had shown some vulnerability by tumbling to a five-month low of Sh101.9 to the dollar on Thursday just after it was announced that the IMF had not renewed its credit facility.

ALSO READ: President Uhuru to meet with team over new taxes

“I appreciate our reserves are at an all-time high but the IMF facility was worth its weight in gold. It was an important signal that kept our yields under control and supported the shilling. Today, the world is a much more dangerous place and policy making missteps are proving very expensive,” Satchu said.

Friday, however, the financial markets showed some recovery immediately after President Kenyatta’s speech, with the shilling closing the week at the psychological 100.9 to the dollar and the NSE 20 Share Index inching upwards to 2993.38. On Thursday it closed at 2990.02, offering relief to investors.

While appreciating the proposed 50 percent reduction on VAT on petroleum products, manufacturers said there is more to be done. The president has asked them to equally reduce the cost of products in tandem with the expected reduction in fuel prices.

Weary citizens

“Just as business owners took the new VAT rate as an opportunity to increase the cost of goods and services, I expect them not to take advantage of weary citizens, and to lower their prices commensurately and without delay,” appealed the Head of State.

Kenya Association of Manufacturers (KAM) manufacturing officer Abel Kamau said: “We expect a readjustment of prices downwards so as to reflect the 50 per cent reduction on the newly introduced VAT on petroleum products.”

Former Finance Minister Musalia Mudavadi lauded President Kenyatta for rejecting the Finance Bill and the proposed amendments.

Mudavadi said that the move was that of a statesman’s response Kenyans have been expecting from a listening president.

ALSO READ: Uhuru to meet with team over new taxes

“He has heard Kenyans and done one better than Parliament in the reduction of VAT to 8 percent. He even bettered my proposed reduction to either 10 percent or 12 percent,” Mudavadi said.

The Energy Regulatory Commission (ERC), which traditionally sets new fuel prices on the 14th of every month, was thrown into a spin not wanting to contradict their boss who in the late afternoon indicated that he wants the fuel prices to go down.

In the evening, the prices went marginally down (see separate story).

Public transport operators who have welcomed the President’s announcement have said fares will marginally come down.

“We will sit down and discuss on how to bring down the cost,” said Simon Kimutai, the chair Matatu Owners Associations.  

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