The Treasury is under pressure from the International Monetary Fund (IMF) to double the value added tax (VAT) on all petroleum products in an effort to cut budget deficit and tame public borrowing.
The multilateral financier reckons that Kenya should impose a 16 percent VAT on fuels from the current eight percent when crude oil prices fall, signalling the fund is open for a delayed implementation to guard against growing public anger and pressure over soaring petroleum costs in the country.
Petrol is currently retailing at a level last seen in November 2011 while diesel is selling at the highest level since December 2018.
The IMF’s push for the fuel tax was revealed in an advisory to the government after the fund’s board approved a new loan for Kenya valued at $2.34 billion to help the country continue responding to the Covid-19 pandemic and address its debt vulnerabilities.
The introduction of the standard 16 percent VAT on fuels, which has been pushed back several times previously, is part of latest attempts to raise State revenues.
President Uhuru Kenyatta was in 2018 forced to halve VAT on fuel to eight percent after the introduction of the full tax prompted protests from motorists and business lobbies.
The tax was originally included in a law passed in 2013, but was postponed several times, amid complaints about its impact.
Now, the IMF is asking Kenya to consider the fuel tax at a time when the multilateral lender is expected to play a role in shaping policy that would require the government to implement tough conditions across many sectors.
“If needed to meet fiscal objectives, capitalise on lower fuel prices by aligning fuel VAT to the standard rate,” the IMF told the government.
“Oversupply and volatility in the oil market would be a positive shock for Kenya, easing potential external balance pressures from other sources.”
The IMF advisories come on the back of its multi-billion shilling loan facilities to Kenya where money flows straight into the budget to top up the public purse.
Under the administration of former President Mwai Kibaki, Kenya kept away from this type of credit, with most of the support from institutions like the IMF and the World Bank coming in the form of project support.
Kenya has recently faced a deteriorating cash-flow situation, marked by falling revenues, worsening debt service obligations, and the effects of the Covid-19 pandemic.
The sharp rise in fuel prices since the start of the year has shifted the spotlight on taxation of petroleum products, with Kenyans in border towns reportedly seeking cheaper fuel in the neighbouring countries of Tanzania and Uganda.
There are seven levies and two taxes that the Energy and Petroleum Regulatory Authority (Epra) takes into account when setting fuel prices, which have been blamed for the high cost of super petrol, diesel and kerosene.
Taxes and levies account for Sh57.33 for every litre of super petrol, and Sh45.47 and Sh39.55 per litre of diesel and kerosene respectively.
Excise duty accounts for the biggest chunk of the taxes and levies at Sh21.95 per litre in the latest prices followed by road maintenance levy (Sh18), VAT (Sh9.10) and the petroleum development levy (Sh5.40).
Others are railway development levy, anti-adulteration levy, merchant shipping levy and the import declaration fee.
Epra also considers the landed cost of petroleum imports, margins for the oil marketing companies, and storage and distribution costs when setting the fuel prices.
Kenya’s prices of diesel and petrol are the highest in East Africa, despite countries like Uganda and Rwanda that are landlocked relying on the Port of Mombasa to import their petroleum products.
Motorists in Nairobi are paying Sh122.81 per litre of super petrol from Sh115.18, representing a Sh7.63 increase, and Sh5.75 more for a litre of diesel at Sh107.66.
A check on GlobalPetrolPrices.com — a website that tracks fuel and electricity prices for over 150 countries — shows that a litre of petrol in Kampala is selling at Ush3, 960 (Sh118.90) while that of diesel is going for Ush3,700 (Sh111.10).
In Kigali, the capital city of Rwanda, a litre of petrol is retailing at 1,088 Rwandan franc (Sh120.26).
In Dar es Salaam, a litre of super petrol is selling at Tsh1,981 (Sh93.67), making it the cheapest in the region.
The record jump in the prices of super petrol and diesel in Kenya has piled more pressure on households because the cost of energy and transport has a significant weight in the basket of goods and services that is used to measure inflation in the country.
Producers of services such as electricity and manufactured goods will also factor in the higher cost of petroleum, unleashing pricing pressure across the economy with ramifications on the cost of living measure.
The majority of Kenyans rely on kerosene and gas for lighting and cooking, making crude price a key determinant of the rate of inflation.
The economy also uses diesel for transportation, power generation and running of agricultural machinery such as tractors, with a direct impact on the cost of farm produce.