President Uhuru Kenyatta and economist Iraki [Photo: Courtesy]

Eminent economist, XN Iraki speaks to The Nairobian about why fuel tax will be painful but inevitable, why President Uhuru should cut taxes to milk more money and why Turkana oil won’t be saving us soon.

President Mwai Kibaki seemed to have left a fairly stable economy. Where did President Uhuru Kenyatta go wrong?

How did Uhuru go wrong? Uhuru built on the legacy of Kibaki. He has continued with Kibaki projects, continued facing East and borrowed from the East. He also inherited less political power.

 His apparent inaction results from competition for power from too many centres and the fact that the 2010 Constitution gave too many people access to public funds. No wonder, so much is being stolen.

 Kibaki benefited from the feel-good effect that resulted from the end of the Kanu era. It should also be noted that since Uhuru is not looking to be re-elected, this can be the base for his success.

Kibaki tried to get our taxes, and he got them. He reduced interest rates to stimulate the economy; we borrowed more and the economy did very well, except that sad period of post-election violence.

The increase in fuel prices was instigated by the International Monetary Fund (IMF). Why tax fuel which hikes up the cost of everything?

It’s easier to get and collect tax from fuel. You can’t escape going to work or fuelling your car. Get money from those who have it.

Taxes from other sources might not be that reliable, like the jua kali sector for instance. Fuel tax is a low-lying fruit.  

The negative part is the cost of living going up, which is not good politically. Could we reason that since this is politically not popular, the alternative is to borrow money from IMF? Just thinking loudly.

Conspiracy theorists argue in whispers that taxing fuel will make Kenyans angry and change the voting patterns in 2022 and punish those who have faced East (China).

President Uhuru is in a Catch-22 situation: The IMF wants his government to honour a promise to tax fuel, while Kenyans are up in arms over the same. How did President Kibaki navigate around the boys from IMF?

He collected more taxes and reduced corruption, almost made IMF irrelevant and made us patriotic.

Remember the Najivunia Kua Mkenya rally? Kibaki also reduced the interest rates which stimulated the economy.

Uhuru does not have that luxury; the extra or marginal tax he can collect might not be that much.

He has more projects, more debts to pay and a good name to keep. He is still young compared to his predecessors.

President Uhuru is damned if he signs the Bill that postpones the 16 per cent VAT on fuel into law and damned if he doesn’t. Which is the best way forward?

If he signs, we shall soon forget and go on with our lives. National amnesia is now our way of life.

The best option is to reduce corruption and save money. Bring more taxpayers into the bracket and reduce the bloated workforce, which takes a huge chunk of taxes.

Reducing the public wage bill in a country with such high levels of unemployment is politically not popular.

Such reforms will take time, but fuel tax will start generating money immediately. Those opposed to fuel tax are not giving practical alternatives.

If you were the Finance CS, what would you tax without touching on fuel?

A better question would be what else can you tax and get the same amount of money? In 2014, we consumed about 800 million litres of petrol; a 16 per VAT will raise Sh12 billion in a year.

The alternative is to tax everything else with a small percentage, say one per cent. There is even a better alternative; reducing taxes, which can lead to more money in government coffers.

How? There will be more compliance, less evasion and higher consumption, which generate more VAT.

If tax on fuel reduces, we shall travel more, stop leaving our cars at home and eventually, give the government more tax from volume. Why not try it and see.  

Taxing fuel is slowly becoming a socio-political hot potato. Do we always have to bend backwards to the IMF whose policies most times end up in a mess?

 If you do not like IMF, raise your own money from taxes. We can float sovereign bonds, which have lower rates than those given through treasury bills and bonds.

But memories of such bonds are not pleasant. The problem is not IMF, it’s us living beyond our means.

The Uhuru presidency has no flagship project. It had no legacy project until fighting corruption was turned into one. How will increased fuel prices affect his Big Four agenda?

I thought SGR was Uhuru’s project? If money from fuel tax is used to implement the Big 4, a legacy of suffering and success will be built.

There is a risk of a slowdown in economic growth, which will lead to even less money available for his projects. 

In which areas can the government tighten its belt to bridge budget deficits and relax foreign debt burden?

Bloated workforce and other wastes. There is a lot of duplication of roles between national and county governments.

Lots of departments can be merged. Remember, most of the tax revenues go to paying wages and salaries, not development to create more jobs in the future. Can government officials start driving Vitz like me? 

In the private sector, many functions are outsourced. Can some of the government functions be outsourced with the lowest bidders getting the jobs?

Retired President Moi once told the IMF and the World Bank to go to hell. Can Uhuru pull such a stunt?

That’s unlikely. Uhuru seems to be too diplomatic to do that. More importantly, his economic background probably informs him of the unintended consequences of such a move. My hunch tells me that he will try and benefit from the West (IMF and other related parties) and the East (China).  

Kenyans always refer to the oil find in Turkana. At what point will it reduce local fuel prices?

When we start refining it and getting it into the local market in large quantities. It is funny that we can complain about fuel price rises when we are mining oil.

It takes time and investment to produce enough oil to affect prices. We could give tax incentives to fuel-efficient cars and machines like electric cars.  

Why is Jubilee unable to fulfil all the things they promised - employment, increased agricultural production and housing and what can the incoming government do in 2022?

Like marriage after the wedding day, promises and reality are different. The incoming government will make new promises!

 Economists are predicting economic gloom. How bad can things go from here? 

I am not getting onto that bandwagon. Why are the Chinese, Americans, French, Turkish and South Africans coming here if it’s all gloom?  Remember, the old name of economics is dismal science?

The doom is from borrowing. Suppose that money is put into productive use? Suppose new fuel tax makes us work harder? 

How about the innovative capacity of our youth? We should see the economic problems from fuel tax and debt as opportunities to right the wrongs.

After all, is our life expectancy not going up? How can we be gloomy when our parents made Britain lower the Union Jack? 

How can we be gloomy when we are riding on the crest of new innovations and possibilities: from M-Pesa, Facebook, cars, internet to GMOs?

How can it be gloomy when we are bored with the Earth and now want to visit other planets? I am willing to risk being the only optimist!

Why do Kenyans never consider the economy a priority when electing leaders?

Because we have never understood that even politics is economics. But that is changing, albeit slowly.

By our nature, we prefer short-term solutions. Politicians know that. That is why he will buy you mandazi instead of teaching you how to grow wheat.

Our attachment to nature through agriculture has stopped us from appreciating the intricacies of economics.

We have focused too much on consumption instead of wealth creation, which is hard. Why else is betting so popular? As the economy modernises, economics will take centre stage …

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