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Living cost or legacy? Uhuru’s fuel dilemma

President Uhuru Kenyatta faces a hard decision with a new fuel tax: approve it and boost living costs, or rescind it and risk undermining infrastructure plans that are key to his legacy.

Introduced on September 1 against parliament’s wishes and in the absence of Kenyatta assenting to a bill that proposes postponing it for two years, the 16 per cent levy has already provoked public outrage. Fuel traders went on strike, public-transport workers blockaded key roads and motorists rushed to fill up at gas stations across the East African nation.

The new tax could bring in $705 million (Sh71 billion) a year – a sum the region’s biggest economy badly needs to shore up faltering revenue collection and fund projects ranging from expanding a high-speed railway to building a new highway from the capital, Nairobi, to the Coast. Kenyatta also has his Big Four agenda, a programme to boost agriculture, manufacturing, healthcare and home construction.

“The President has a difficult decision because the Big Four agenda needs to be funded from somewhere,” said Jibran Qureishi, regional economist for Stanbic Holdings Ltd in Nairobi. If there’s no solution, “it will be shelved and pushed forward, which means no Big Four and no legacy.”

Stanbic warned this week the levy could drive inflation to 7.5 per cent in October, from four per cent in August, with prices of goods expected to increase for a minimum of six months.

Existing exemption

The fuel tax came into effect after Members of Parliament failed to factor in enough time to vote on extending an existing exemption from the levy until 2020 and have it included in proposed legislation, the Finance Bill 2018. The tax was first legislated in 2013, but its introduction was postponed until 2016 and then again delayed until this year.

A High Court in western Kenya suspended the tax on Thursday, pending the September 12 hearing of a challenge to its legality brought by a youth group. The energy regulator had not adjusted prices by Friday evening, saying it had not yet been served with the court order.

Another element of the Finance Bill that Kenyatta will have to consider is whether to back lawmakers’ proposals to maintain a two-year-old law that caps the rate banks charge borrowers. The measure exacerbated a slowdown in credit growth, with banks including KCB Group Ltd citing their inability to compensate for riskier customers by charging higher rates for the slump.

The International Monetary Fund has said the ceiling is damaging Kenya’s economy and insisted it be scrapped in return for new funding. Kenya’s access to a $1.5 billion (Sh151 billion) standby loan expires on September 14.

If Kenyatta does as lawmakers wish by exempting fuel from tax and retaining the rate cap, it would be seen as “a complete failure by the presidency,” according to Jacques Nel, an economist at South Africa-based NKC African Economics. The potential loss of the IMF facility has made investors jittery and forswearing the extra revenue would be a further knock for the nation’s finances, he said.

While repealing the rate cap would please Treasury Secretary Henry Rotich, making fuel exempt from tax again is a step he’s less likely to welcome.

Revenue collection is lagging, with Kenya netting Sh99 billion in July, but spending Sh121 billion for recurrent expenditure and debt payments. While that’s the first month of the financial year, before tax measures take effect, if those kind of figures were projected for the rest of the year that would mean Sh1.2 trillion shillings in revenue – Sh600 billion less than planned.                        –BLOOMBERG