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Will Sh1,000 buy you more or less after Budget?

By Dominic Omondi | June 14th 2019 at 12:00:00 GMT +0300

Kenyan Shillings: stack of 10 x 10 x 1,000 note.The highest denomination in Kenya. [File, Standard]

It is too early to tell what the net effect of the new tax measures proposed by Treasury Cabinet Secretary Henry Rotich will be for most Kenyans.

But if the past can be our crystal ball, the situation will barely be favourable. This is because the few good tidings Kenyans have had recently were more from God’s favour rather than actions of the Government.

And if nature will not be as kind this year (the long rains have been disappointing) and Rotich’s taxes are punitive, the shiny new Sh1,000 banknote will not be worth much to consumers.  

Most Kenyans will be praying that even if the Government does make their lives better, it should at least not leave them more miserable.

For part of the 2018/19 financial year, good rains have only been blotted by the eight per cent valued added tax on fuel that Rotich introduced last year. Tax is one of the many cost components of a commodity or service.

So far, inflation - the rate at which the prices of goods and services increase - has been moderate, largely because of rain. Towards the end of last year, the skies opened up with the country’s silos filling to the brim.

This bumper harvest helped contain the prices of foodstuff.

And because food and beverage tend to take up a huge chunk of most households’ budget, spending on unga, sugar, milk and other essential products was not as prohibitive as it was in 2017 when the country experienced a debilitating drought.

Indeed, by end of May, for every Sh1,000 a typical Kenyan household earned, Sh360 went to food and non-alcoholic beverages, according to figures from the Kenya National Bureau of Statistics (KNBS).

And while the cost of food and beverage - and many other consumer commodity groups such as housing and electricity, communication and home furnishing- remained unchanged, the cost of transport went up. And the Government is to blame.

In the 2018/19 financial year, Rotich introduced an eight per cent value added tax (VAT) on petroleum products, which sent up the cost of transportation.

For every Sh100 a household spent in May 2019, Sh11 went to transport -  bus fares or fueling a car. This was an increase of 28 per cent compared to Sh8.60 that was spent in the same month last year.

Even more foreboding is that global prices of crude oil, currently at $76 (Sh7,600) per barrel, are likely to breach the $100 (Sh10,000) level by end of the year. This will seriously hit most Kenyans as petroleum products are critical for most sectors including agriculture, manufacturing and transport.

Scholastica Odhiambo, an Economics lecturer at Maseno University, says the prospects are no brighter in the coming financial year.

“The budget is likely to be incremental on normal taxes such as cigarette and beer. But the cost of living will generally be worse,” she told The Standard prior to the Budget Speech yesterday.

Dr Odhiambo says money circulation has been low as some people have hoarded cash. As a result, purchasing power also declined as businesses struggled from low demand.

Real wages

Figures from the national statistician, however, tell a different story.  In 2018, real wages were generally better for Kenyans, according to KNBS.  And thanks, again, to favourable weather which boosted the agricultural sector, the mainstay of the economy and the country’s biggest employer.

The 2019 Economic Survey showed that real wages – those which have been adjusted for inflation – increased by 3.2 per cent in 2018 compared to a decline of 2.7 per cent recorded in 2017 as the economy generated an extra Sh1.15 trillion in the 12 months. It was a major improvement in the cost of living.

But it would have been even better, were it not for the many taxes Rotich introduced in his last budget. Besides VAT on petroleum products, other levies the government introduced include increased excise duty on airtime, Internet data and other financial transactions.

Rotich also introduced presumptive tax on small businesses.

 


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