How businesses suffer when fuel prices shoot up

The increase in the cost of fuel has had an instant negative impact on businesses.

James Kariuki a fruit trader at City Park, Nairobi, on July 8 2018. PHOTO | MARTIN MUKANGU  

IN SUMMARY

  • From the transport costs, dwindling customer traffic, to rising prices of raw materials, businesses are in for a rough ride.
  • The impact was immediate upon implementation of the 16 per cent VAT on fuel on September 1.

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The increase in the cost of fuel has had an instant negative impact on businesses. From the transport costs, dwindling customer traffic, to rising prices of raw materials, businesses are in for a rough ride.

The impact was immediate upon implementation of the 16 per cent VAT on fuel on September 1. Ben Mutahi, a trader in downtown Nairobi says the number of customer traffic has dwindled, attributing to a sharp raise in matatu fares in the city.

“This has really affected the flow of customers in our premises most of which are located at the CBD and in neighbouring areas such as Kamkunji, Nyamakima and Nairobi West,” said Mr Mutahi.

The chairman of the Nairobi Importers and Traders Association (Nita), an industry lobby, says the drop in the number of customers has been occasioned by most customers opting not to come to town due to high fuel cost and fare hikes.

He cited fare hikes by matatus plying Kiambu Road which has shot up 40 per cent to Sh70 per trip, negatively impacting spending capacities of potential customers.

This coupled with last week’s fuel shortage at petrol stations following a boycott by independent fuel transporters, saw some motorists and Nairobi residents keep off the road.

For the common man, the upward trend on the cost of fuel represents a serious challenge and to stay afloat they have to balance their budgets with unparalleled dexterity. If it means reducing trips to towns to achieve that, they will precisely do that.

The Energy Regulatory Commission (ERC), acting on Treasury directive, raised the price of petrol by Sh14.07 a litre, diesel by Sh12.34 and Sh12.46 for kerosene on September 1.

Following the increase, independent fuel transporters barricaded roads preventing bigger marketers like Shell and Total from transporting in protest of the 16 per cent VAT on fuel. This led to fuel shortage that paralysed transport in Nairobi, adversely affecting many businesses in the city.

Nita boasts of over 1,000 members who are involved in a wide array of businesses including textiles, ready-made garments, beauty products, mobile accessories, electronics and shoes.

Small-scale vegetable vendors’ suppliers Twiga Foods said its operations within Nairobi were affected by last week’s fuel shortage. The tech-backed supplier ease distributes farm produce such as bananas, onions, tomatoes, potatoes, mangoes and cabbages to small-scale vegetable vendors in city estates.

“Lack of fuel in petrol stations has affected our distribution especially in Nairobi,” said Grant Brooke, the proprietor of Twiga Foods.

The firm has depots in several estates in Nairobi from where tuk-tuks (three-wheeler taxis), vans and canters pick the produce, for delivery to customers.

Away from Nairobi, businessman Solomon Karanja is considering increasing the price of the rubber fittings he supplies school, hospitals, offices and homes.

His enterprise, Solomake Ventures situated in Kisumu makes the fittings from recycled rubber and plastics at a plant in Nairobi’s Kariakor area.

“Since our production is based in Nairobi, we incur transportation cost. We are yet to take in new stock but if the fuel shortage or hike persists, we might have to increase the price of our fittings,” he said.

The Kenya Association of Manufacturers (KAM) already warned that the decision to charge 16 per cent VAT on all petroleum products will negatively affect the business environment and raise the cost of living among Kenyans.

KAM said the new levy is bound to lead to an increase in the cost of transportation of raw materials and finished products as well as a jump in the cost of power, among other overhead costs.

“The business environment in Kenya is increasingly becoming cost disadvantaged and a great disincentive for Foreign Direct Investment,” said Job Wanjohi, the Head of Policy, Research and Advocacy at KAM.

He said to stay afloat, business will have to make “very hard and drastic decisions “ on whether to shoulder the extra cost or pass over the tax burden to already overburdened consumers in order to meet their overhead costs.

READ: Business lobby calls for a lower VAT rate

Transporters and businesses people have sought to increase their margins to cover for increased fuel costs that have raised their operating expenses. For instance, the cost of moving cargo by trucks is set to go up by 15 per cent from as transporters pass the VAT charge on to consumers.

The Kenya Transporters Association (KTA), a lobby for truckers, resolved to review rates upwards starting to accommodate the implementation of VAT Act 2013 on petroleum products.

KTA chief executive officer David Abyiero said in a statement that the adjustments of rates by cargo transporters was inevitable and that they have been forced to raise their charges by 15 per cent.

The High Court sitting in Bungoma has since granted temporary orders stopping the levying of 16 per cent VAT on fuel products.

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