All over the world, consumer oil prices are a summation of supply chain costs and government taxes and levies.
It is also customary, and indeed prudent fiscal policy, for countries to increase taxes on imported petroleum products when supply costs are inordinately low.
It is a way of encouraging energy use efficiency, while taking the opportunity to raise additional tax revenues for critical socio-economic development
In recent weeks, high energy prices (coal, oil , natural gas ) have caught many countries around the world unawares. The price surges can be attributed to several factors, which include a surprise increase in energy demands prompted by a global economy recovering from the Covid pandemic, and also a misaligned energy transition.
Kenya, which imports all its oil demands has not been spared from the oil commodity volatility which has seen prices climb from below $50 per barrel earlier this year to over $80 in the past week.
It is also important to note that in 2014 global prices suddenly dropped from over $100 per barrel to below $25 due to global crude oil overproduction. Prices remained below $50 until early 2020 when Covid-19 pushed prices even lower. The world, and indeed Kenya, had enjoyed low prices for about seven years in a stretch.
All over the world consumer oil prices are a summation of supply chain costs and government taxes and levies. It is also customary, and indeed prudent fiscal policy, for countries to increase taxes of imported petroleum products when supply costs are inordinately low.
It is a way of encouraging energy use efficiency, while taking the opportunity to raise additional tax revenues for critical socio-economic development. However, the caveat here is that flexibility should be there for the government to reverse such tax increases when oil costs increase .
During the period of low oil import costs, Kenya did implement a number of tax increases, but impacts on consumers were bearable. The current retail price crisis is because the government had no ready plan to reverse any of the taxes when supply costs significantly went up. With import prices now around $80, inflationary pressure on the economy has become a concern.
When the International Monetary Fund (IMF) came to town in 2019, taxes on consumer oil prices were a key target to raise cash to rebalance Treasury’s budget which was in urgent need of IMF support. This is when the 16 percent value added tax (VAT) in petroleum products was introduced. By definition, VAT has a huge compounding effect on consumer prices because it is levied on gross costs which include other taxes and levies.
When VAT on petroleum products was introduced, global supply costs were low enough, and the immediate impact on consumers was not as hostile. At current $80 imports costs, it is a different story.
In 2019 when oil costs were about $40, the petroleum authorities saw the need to introduce a Sh5 per litre consumer “self-insurance” (stabilisation fund) to reimburse consumers when oil costs would go up above $50. However, effective systems to trigger refunds were not implemented, nor safeguards created to ring-fence this fund from diversion to other uses.
I am quite cognisant of the enormous budgetary pressures, including debt servicing, facing the National Treasury and this places limitations as to how much petroleum taxes can be reduced. Every corner of the government is screaming for increased funding. Simultaneously, the prevailing high oil prices are negatively impacting all socio-economic sectors. Yes, a dilemma exists and doing nothing does not seem an option.
My opinion is that the most prudent tax easement is the withdrawal of the Sh5 petroleum development levy, including termination of the stabilisation fund concept. I consider the existing price formula sufficient enough to manage monthly cost fluctuations. It has been an effective, transparent, independent, predictable, and timely regulatory tool that has served well over the past 11 years. Obviously, it requires improvements as needs arise.
In respect of VAT, a precedent was created when the President gave a temporary Covid-19 reprieve by lowering the VAT rate to 12 percent. This shows that Executive prerogative exists to alter the rate in times of emergencies. However, I doubt we are currently in an emergency situation. Further, I believe VAT is a “don’t touch” IMF conditionality.
In respect of the pending inflation adjustment (4.97 percent) on petroleum excise taxes, I do not see the Treasury agreeing to any changes as this touches on other non-petroleum items.
Future global oil prices can go either way, and this is why petroleum taxation will remain a major dilemma for the government.
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Note: The results are not exact but very close to the actual.
