An article in last Thursday’s Business Daily titled IMF pushes for higher prices for maize flour and cooking gas was a less than welcome respite from the teeth grinding electoral focus that the media seems to have moved to. Disclaimer: I am not an economist.
But reading the article, one would be hard pressed not to adopt a healthy disregard of the IMF for their supposedly sage words of advice from the pinnacle of global economic planners. Maize flour, wheat flour and bread are all items that form the average shopping basket for the ordinary mwananchi with basic purchasing power.
While it may make economic sense to levy 16 percent VAT on these extremely fast moving consumer goods due to their ubiquity in the mwananchi’s diet, it would make zero political sense for an anti-corruption battle scarred government. But the IMF is not about making political decisions, it’s about what’s “best” for a Third World country that’s spending much of its tax revenues funding recurrent expenditure and debt repayment.
According to the Business Daily article, “The KRA cites tax expenditures as a major impediment to its ability to meet revenue targets with tax expenditures estimated at Sh 478 billion in 2017 against a shortfall in budgeted collections of about Sh 300 billion,” the IMF said.”
The same report notes that in 2013 there were 40 exempt goods and 18 exempt services but by last year, 104 goods and 31 services were tax exempt. Eight items were zero-rated in 2013, which has grown to 17 items by 2019. In short, all these items which do not attract the 16percent VAT rate upon sale are creating an opportunity cost running in the Sh400 billion area code.
So let’s take a walk in Dreamland for a minute: if the government were to swallow the IMF’s poison pill and levy VAT on bread, maize and wheat flour, it could raise, for argument’s sake, Sh50 billion. So a loaf of bread would move from say Sh50 to Sh 58 rounded to Sh 60 and a packet of ugali flour would move from Sh120 to Sh139.20 rounded to Sh140 as retailers never lose an opportunity to take price during tax increases. The fatal assumption being made here is that Anyango and Juma who have been purchasing the bread and the flour all this time will have an expanded wallet to afford the new price. But they don’t.
So they may choose to buy fewer loaves per week or just none at all. The same can be said about the flour. So what happens next? The bread bakeries and flour millers start to see a downturn in sales, leading to drop in revenues, leading to drop in profits, leading to drop in corporate tax, leading to downsizing of operations, leading to layoffs, leading to drop in Pay As You Earn(PAYE)….you get the dropping picture here by no. That Sh50 billion that’s been touted as the potential mouth-watering opportunity cost exists only so long as purchasing power moves in tandem with price elasticity.
But it doesn’t. In 2004 the government provided a leading brewery with an excise tax remission of 100percent as they produced a brand new sorghum based beer product in the market. The product would be priced fairly low and would provide a dignified beer to thousands of consumers who were falling ill with illicit alcohol in the market.
Long story short, the product ended up uplifting not only the consumers, but an entire value chain of distributors and beer outlets. In October 2013, in a bid to raise taxes based on similar “get rich or die trying thinking”, a quick back of the envelope calculation was done and it was perceived that if that remission was reduced by 50 percent instead of 100percent, then about Sh6.2 billion could be raised.
The fatal assumption was that the beer drinkers would continue drinking. At whatever cost. Unfortunately the drop in the excise duty remission led to a 25percent price hike and, naturally, a drop in consumption. Massive drop.
What was expected to be Sh6.2 billion in the tax kitty only yielded up about Sh800 million or 13percent of target. But the effect was astounding. 7,500 out of 12,000 of the Senator beer outlets closed. Assuming that one outlet supports one family of five, that is thousands of individuals affected, not to mention the raw material growers and their families.
“Bread riots” are any political leader’s worst nightmare, and if in doubt, ask the ousted Sudanese strongman Omar El Bashir. Adding VAT to basic food basket items is not the kind of “low hanging fruit” we expect the IMF to recommend. Just get us to tighten our corpulent government spending belts and swallow the slightly easier political pill of embedding operational efficiencies within the public sector.