Kenya assembly reduces fuel tax in a bid to address high living costs

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Bowing to complaints by Kenyans squeezed by high prices, the country’s parliament backed the halving of a new value added tax on oil products. The move however drew protests from some lawmakers who want the levy removed.

When the 16 percent value added tax on all petroleum products entered into force on September 1, 2018, the government faced a fuel dealers’ strike, anger among commuters and a lawsuit after transport and fuel prices jumped.

Some lawmakers reacted to the passage of the eight percent levy by chanting “zero zero”. They were opposed to the levy on grounds that it would push up living costs, but the Speaker Justin Muturi refused their demand.

The parliament’s finance committee backed President Uhuru Kenyatta’s plan to halve the 16 percent tax. Amid the heated protests by lawmakers demanding the removal of the tax, Muturi said “the clause (Kenyatta’s proposal) which was under consideration at the point was carried”.

Matatus, the operators of public transport minibuses said the new tax even at 8 percent would hurt demand for their services. The operators called for total removal of the tax. Maxwell Njuguna, a driver at a bus terminal in downtown Nairobi said “we can’t increase bus fare too much. No one will board the vehicle. The customers don’t understand and they quarrel with us. We are operating at a loss”.

Like other frontier economies, Kenya has found it tough to secure external funding. The tax is part of the government’s bid to finance key priorities prudently while narrowing a fiscal deficit that the Treasury forecasts at 5.9 percent of economic output in 2018.

The fiscal deficit reduction targets were set by the International Monetary Fund (IMF), when it granted a precautionary credit deal two years ago that expired in September 2018.

Foreign investors are watching the events. Charles Robertson, Chief Economist at Renaissance Capital said “Kenya should be a country of concern for investors at the moment”. He noted investors should be wary of the challenging external financing environment for frontier African economies and the risk that the shilling currency could weaken in the near future.

President Kenyatta revealed that further delaying the tax, which was passed into law in 2013 but never implemented, would compromise the government’s ability to fund social welfare and development programmes.

 

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