Easing pain of high fuel prices should be a priority

Thursday, April 15th, 2021 00:00 |
An attendant fuels a car at a petrol Station.PHOTO/COURTESY.

Norman Mudibo

We have been forewarned of more pain. The International Monetary Fund wants Kenya to stop playing ping-pong with Value Added Tax.

The IMF now wants Kenya to double VAT on petroleum products to 16 per cent as promised years back.

It is dawning on many Kenyans a deal had been struck a decade ago. The government passed it in 2013 but was shelved after public outcry.

And now, IMF wants Kenya to impose the new VAT. The multilateral lender is keen for Kenya to tame its deteriorating cash flow problems, curb against debt distress and enable the fight against Covid pandemic.

Indications are that we will continue to experience fuel price surges. The black gold price has risen more than 50 per cent in the past few months. Quick flashback.

When Covid struck, economic activity worldwide slowed sharply. Demand for petroleum and petroleum products plummeted.

A price war that broke out between Saudi Arabia and Russia did not make matters easier.

As uncertainty reigned and the tussle persisted, demand reduced. Meanwhile, there was an unexpected supply increase which led to a collapse in crude oil prices and subsequent impact on prices for refined petroleum products, among others. Fast-forward.

The pre-pandemic realities are beckoning each day. A sharp upturn in expectations for economic and oil demand recovery is fuelled by the virus vaccines.

Saudi Arabia is mulling over how to wean itself off the dependency on crude as its revenue raising strategy.

It needs higher oil prices and output curbs. A Reuters report quoted an official saying Saudi Arabia and members of the 60-year-old-plus club of oil producing nations — OPEC — are determined to maintain stable oil prices “for the benefit of all concerned”. 

High oil prices greatly concern consuming nations. No wonder OPEC’s every move is closely watched by investors, traders, policymakers, governments and consumers.

The differences in prices across countries are due to the various taxes and subsidies for fuel.

Locally, prices at the pump have reached the highest levels in 11 years. 

In 2021, as economies reopened, the initial price downturn gave way to reduced oil production and renewed demand. Consequently, prices for oil products have partially recovered.

In fact, to put it bluntly, the onset of the pandemic led to price drops for petroleum-based products, and then suddenly there was a sharp rise as producers limited production and demand increased.

In its April 2021 Short Term Energy Outlook, the US Energy, and Information Administration projects that with lower global oil production, markets will be ‘’somewhat tighter in the second quarter than previously forecast.” This will contribute to some upward price pressures, it says. 

Kenya, just like the rest of the world, has access to the same petroleum prices of international markets. Countries then decide to impose various taxes.

As a result, the retail price of petrol is different. Kenya went on a spree with a series of taxes and levies — the railway development levy, merchant shipping levy, petroleum regulatory levy, petroleum development levy, road maintenance levy, excise duty, import declaration fee and value added tax.

The taxes dominate the pricing formula the Energy and Petroleum Regulatory Authority uses in determining the retail pump prices.

It is anchored in the Energy (Petroleum Pricing) Regulations, 2010). Unless and until taxes are reviewed, EPRA can’t do much. It means the tax-laden formula will continue to the chagrin of consumers.

For every Sh100 you pay for a litre of petrol, more than Sh57 are taxes 60 per cent of which is used to repay loans.

The taxes have repercussions across sectors, impacting heavily what we pay for transport, basic commodities, electricity, etc.

MPs raised taxes in 2018. They supported the eight per cent VAT on fuel, passed the legislation that increased VAT to 16 per cent and introduced the Petroleum Development Levy. They also supported the rolling back of the Covid tax relief measures.

Kenyans are reeling from the ravages of the pandemic – job losses, closure of small businesses, depressed income levels or none and depression. We are in dire straits.

The stabilisation fund, running into billions of shillings, to cushion Kenyans from high pump prices, awaits a legal framework to operationalise it. 

Petroleum CS John Munyes told Parliament the draft regulations will be ready this month.

In the meantime, the joint committees on Energy and Delegated Legislation were tasked to come up with actions to ease the pain. 

Kenyans wait to see how the subsidy would help reduce the pain of fluctuations in global prices to them.

Easing the devastating inflationary impact of high fuel prices should be government’s priority.  — The writer is a Strategic Communications Consultant — [email protected]

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