The current state of the Kenyan economy although much better improved after the handshake deal has faced a lot of ups and downs. Corruption has eaten away nearly a third of the national reserves while a bloated budget has caused the treasury to scratch its head as to where to raise the revenue from. This is particularly because 3 years ago the Kenyan Government made a promise that has come back to bite us. How exactly did we get here?
In 2013, succumbing to IMF conditions, Parliament passed a new law on Value Added Tax in which it put in a three-year grace period exemption for VAT on petroleum products. The exemption was to be extended by a further two years from September 1, 2016. In September 2016, Parliament extended the exemption for VAT on petroleum products again for two years to August 31, 2018. In 2018 through Suna East MP Junet Mohammed’s motion to extend the exemption yet again, Parliament passed the Finance Bill 2018 pushing the slapping of 16 per cent VAT on petroleum products to September 1, 2020.
Now whether the VAT is introduced now or in 2020 this calls for a deeper analysis into the effectiveness of the government’s financial and fiscal policies. After plunging the country into an unprecedented deep hole of debt amid widening fiscal deficits, the governments’ move to further tax fuel products in a bid to raise Sh71 billion is not a very smart move. This is because the state of the economy of a country is not only based on the infrastructure development in the country but also on the welfare of the citizens of that country.
It is worthless for a country to get more loans to finance infrastructure projects when the average Kenyan is unable to go to work because of very high fuel prices. Now given this is a hyperbolic example but the truth is that a good government seeking to improve its economy must not only focus on the new structures it has built but on the standard of living of its individual citizens. This is partially what makes the Scandinavian countries a better place to live in than the United States.
With majority of Kenyans struggling to make ends meet due to high costs of living, a fuel price increase would condemn many households to a life of penury, higher transport costs and general increase in the prices of basic goods and services. It is indeed true that the macroeconomic policies of the jubilee government have drawn warranted opprobrium. With the cost of living at the level it is, it is a mistake to add the 16% vat.
If the government wants to raise revenue there are other numerous ways to do it. One of which is to introduce a constitutional referendum to reduce the number of political offices within the republic. The offices of nominated Senators, Mps and MCAs should be abolished with political parties being regulated into considering gender, regional and other special interest factors when nominating persons to vie for political posts.
Secondly, salaries and allowances for persons elected to office should be slashed by 50% starting from the President to the MCAs. This is to create a balance in the economy and to make it such that public office becomes less of a profit making venture and more of an entrance into service. This would benefit us in two ways; it would greatly reduce the number of people who enter into politics because of the money and not because of service while also at the same time neutralizing the wage bill. This should only be the beginning as all high earning civil servants should get a pay cut. Everyone earning a salary of about 400,000 should take a pay cut of at least 20% in order to reduce the wage bill even further.
Private corporations should also face a profit based taxing regime where the more profits a corporation makes the more tax they pay, the less profit the less tax. This will both raise the needed revenue and also serve as an impetus to growing firms that are yet to start making huge profits. This means that bigger firms like Safaricom will be taxed more than small start up telecommunications firms. If the VAT tax is implemented the amount generated is also expected to set Treasury on a path to reduce the fiscal deficit to 7.2 per cent of gross domestic product (GDP) in 2017/18 financial year and further to 5.7 per cent in 2018/19 in line with IMF demands. It would also boost revenue collection for Kenya Revenue Authority which is struggling to meet targets at a time when it has been slapped with a target of Sh1.7 trillion in the 2018/19 financial year.
Although Treasury mandarins are concerned with addressing the fiscal imbalance, the anticipated impact of fuel VAT on the lives of ordinary Kenyans and the economy is sending shivers down the spine of wananchi. A significant increase in prices will set in motion a spiral effect on the prices of basic goods and services like food, transport, healthcare, housing and all other aspects of life.
According to analysts, this is the worst moment to further increase the costs of basic goods and services considering that Kenyans are feeling the adverse impacts of a severe drought and prolonged electioneering period last year, which saw GDP growth dip to 4.9 per cent compared to 5.9 per cent in 2016. In the current environment, many businesses — particularly small ones — are struggling to remain afloat while huge companies have resorted to downscaling and laying off staff to cut costs. This is evident from the fact that most of the Nairobi Securities Exchange-listed firms, which were posting astronomical profits during the Narc administration, are either reporting reduced profits or are in loss-making territory. Introduction of VAT on fuel is not a decision that will grow the economy instead it will force businesses to contract further, lay off employees and instigate growth of the black market.