Tax cut on wheat imports good for Kenyans

The past few weeks have witnessed a flurry of activity with farmers and some MPs expressing outrage over Finance minister Uhuru Kenyatta’s decision to lower import duty on wheat from 25 per cent to 10 per cent instead of commending him for taking a bold step to make food more affordable for the Kenyan consumer.

This reveals the sad irony of the country’s food security policy which has led to exorbitant prices through imposition of high import duties on wheat and other cereals despite the fact that local production does not satisfy millers’ demand.

Indeed, a major disparity exists between the amount of wheat produced locally and the country’s demand.

While Kenya’s annual wheat requirement is about 900,000 metric tonnes, farmers produce 300,000 metric tonnes.

To bridge the gap, the remaining 600,000 tonnes are imported.

The farmers are entirely dependent on local millers since, unfortunately, Kenya’s wheat is not competitive enough to penetrate the regional market.

The country’s installed milling capacity is 1.5 million metric tonnes per annum but only 60 per cent is utilised.

This is due to various reasons, key among them is the 25 per cent duty levied on imported wheat.

It is sad that although Kenya relies heavily on imported wheat, the country’s policies make it expensive to buy the grain because of high tariffs which in turn drive food prices up.

The same case applies to maize and rice — Kenya’s staple cereals.

Over the recent past, the country has encouraged high wheat prices partly by paying farmers rates that are above world market prices and compounding this with a 25 per cent duty levied on imported wheat.

Any policy that raises prices above market levels hurts the poor most.

This is why wheat flour prices are beyond the reach of the majority of Kenyans.

Mr Kenyatta’s decision is beneficial to consumers who have borne the burden of high food prices.

Indeed, he is to be commented for being mindful of the plight of poor Kenyans — rather than being vilified.

The move will bring food prices in Kenya to the same level as in other East Africa Community partner states.

Considering that Tanzania and Uganda are currently charging 10 per cent duty on imported wheat, Kenya had no choice but to align itself with her counterparts. 

Furthermore, operating under a full customs union demands that all partner states have one economic boundary with a common external tariff for all imports into the customs territory, and zero duty on trade among them.

It is a pity that when the common external tariff (CET) was set in 2004, the EAC states set the rate for wheat at 35 per cent despite the fact that the entire region does not produce enough for its consumers.

It was a policy decision that would have to be quickly reversed when faced with high food prices.

Stay of execution

The partner states have applied for a stay of execution to either zero per cent or 10 per cent in keeping with the desire to their nationals more cheaply.

It is time Kenya too took steps to reduce the price of food for its citizens.

In addition, there’s danger in having different duties in the EAC.

A scenario where Kenya charges 35 per cent duty while her neighbours charge zero per cent or 10 per cent creates an environment for illicit trade.

This would lead to millers in partner states importing the grain at 10 per cent duty and milling and exporting the flour to Kenya duty free, resulting in an uneven playing field for local millers who would be put out of business.

Ultimately, this would result in serious ramifications including disinvestment and capital flight as Kenyan millers relocate elsewhere within EAC, while farmers would have either limited or no markets for their wheat.

It was therefore imperative and a good move for Mr Kenyatta to lower duty on imported wheat to match that of other EAC partners. 

Until recently, Kenya had an asymmetrical arrangement with other EAC partners where selected Kenyan products attracted duty on a reducing basis when sold in Uganda and Tanzania.

Under the arrangement, while the other EAC countries sold their wheat flour and by-products into Kenya duty free, Kenya paid duty on its wheat flour exported to Tanzania and Uganda, in addition to non-tariff barriers.

Consequently, this policy resulted in high consumer prices for Kenyan wheat products with cheaper Tanzanian wheat flour getting into the local market.

In addition, under the Comesa trade regime, wheat from Egypt and Mauritius is imported into Kenya duty-free, a factor that is disadvantageous to our millers since it makes them vulnerable, exposing them to unfair competition because wheat grain is imported with duty pegged on it while wheat flour is imported duty free. 

As a result of these disparities, large quantities of flour have been imported into Kenya from neighbouring countries resulting in disinvestment in the milling industry and eventually loss of major export markets such as Rwanda, Burundi and Eastern Democratic Republic of Congo.

This trend has negatively affected Kenyan millers resulting in a decline in capacity utilisation and relocation to Tanzania, Uganda, and Rwanda.

Relies on imports

In view of the foregoing, it is the opinion of the Kenya Association of Manufacturers that tariff reduction on wheat is good for local consumers as our country relies a lot on imports.

The government should actively pursue policies that make food more affordable.

Kenyan consumers should thank Mr Kenyatta and urge him to remain steadfast in the quest for cheaper food.

This does not, however, mean that we are insensitive to the needs of farmers and their desire for higher farm-gate prices in an environment of high farm input and operational costs that make it expensive to produce crops.

We recognise this fact, but it should be remembered that the price of grain makes up 70 per cent of the price of flour.

Care must be taken to reduce the price of flour by reviewing factors that make grain production in Kenya expensive. 

Imported wheat is not one of the causes of high production costs.

It will be myopic of the government to reintroduce high tariffs on wheat because the taxes hurt the poor most.

Maina is chief executive, Kenya Association of Manufacturers.