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 Nov. 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 in 2011, driving inflation to a high of 19.72 percent in November.
The inflation rate inched lower in December 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 7 percent by end 2012. When contacted by Reuters, Ndung'u declined to confirm if 7 percent 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.
The bank changed its fiscal year inflation target in November to nine percent from the previously held target of 5 percent.
The letter also said the government remained committed a free market regime with no controls on prices, interest rates and exchange rate.
"What this means is that Kenyans should be prepared to live above the 20 percent inflation rate," said Steve Mutoro, secretary general of the Consumers Federation of Kenya.
"They should expect a lot of angry reactions from the people. May be we may go the Nigerian way," Mutoro said, referring to civil unrest that has paralysed Nigeria after it removed fuel subsidies.