Kenya will reinstate taxes on grains and fuel by the end of its fiscal year 2011/12 (July-June) as global crude prices ease, a move analysts said risked fuelling inflationary pressures and sparking discontent.
Kenya scrapped all taxes on Kerosene and removed the import duty on wheat and maize in April last year to cushion low income families after rising consumer prices sparked widespread frustration in the region’s biggest economy last year.
"We plan to phase out these (tax) measures by the end of the fiscal year and instead scale up targeted interventions," Finance Minister Uhuru Kenyatta and central bank Governor Njuguna Ndung’u said in a letter to the International Monetary Fund.
The letter, dated November 18, was made public late on Wednesday.
Analysts said the move would increase the cost of living at a time when the Central Bank is battling to rein in inflation and stabilise the local currency.
Consumer prices in Kenya surged last year, driving inflation to a high of 19.72 per cent in November.
The inflation rate inched lowerlast month and analysts said they expected the year-on-year rate of inflation to ease further, thanks to an aggressive cycle of monetary policy tightening in the final quarter of last year, and heavy rains which are seen easing food prices.
"If they return the taxes and international oil prices rise, fuel prices will rise again putting upwards pressure on inflation," said Evans Mugi, an analyst at Genghis Capital.
"Grain is the most important item when calculating food inflation and any increase in prices will push it up," Mugi said.
The letter also stated Kenya aimed to bring the inflation rate down to seven percent by end of this year. When contacted by Reuters, Ndung’u declined to confirm if seven per cent remained the year-end target two months on.
"(Central Bank of Kenya) will follow the policy path outlined in the letter of intent," the governor said, referring to the authorities’ ambitions to stem inflationary expectations and build up hard currency reserves, among others.