September 20, 2018 / 4:11 PM / a month ago

Kenya assembly backs halving of fuel tax amid anger at living costs

NAIROBI (Reuters) - Kenya’s parliament on Thursday backed the halving of a new value added tax on oil products, bowing to complaints by Kenyans squeezed by high prices, but the move drew protests from some lawmakers who want the levy scrapped altogether.

An employee pumps fuel into a car at a Shell petrol station in Nairobi, Kenya, September 20, 2018. REUTERS/Baz Ratner

The government has faced a fuel dealers’ strike, anger among commuters and a lawsuit after transport and fuel prices jumped when the 16 percent value-added tax on all petroleum products entered into force on Sept. 1.

Some lawmakers opposed to the eight percent levy on the grounds it would hike living costs objected to its approval by acclamation, chanting “zero, zero”. But speaker Justin Muturi refused their demand for a formal vote on the measure.

“The clause which was under consideration at that point was carried,” Muturi said amid protests by lawmakers demanding the removal of the tax. Earlier parliament’s finance committee had backed the plan, proposed by President Uhuru Kenyatta, to halve the 16 percent tax.

Operators of public transport minibuses, locally known as matatus, said the new tax, even at eight percent, would hurt demand for their services, and called for its total removal.

“We can’t increase bus fare too much. No one will board the vehicle,” said Maxwell Njuguna, a driver who sat in his empty vehicle at a bus terminal in downtown Nairobi.

“The customers don’t understand and they quarrel with us. We are operating at a loss.”

The tax is part of a government bid to finance key priorities prudently while narrowing a fiscal deficit that the Treasury forecasts at 5.9 percent of economic output this year.

Like other frontier economies, Kenya has found it tough to secure external funding as emerging markets from Turkey to Argentina are buffeted by turbulence and tumbling currencies.

Kenya’s challenge was compounded by last week’s expiry of an International Monetary Fund stand-by loan arrangement for balance of payments support.

The fiscal deficit reduction targets were set by the IMF when it granted a precautionary credit deal two years ago that expired this month. Legislators must approve the VAT proposal before Kenyatta can sign this financial year’s budget into law.

INVESTOR CONFIDENCE

Foreign investors are watching the events keenly.

“Kenya should be a country of concern for investors at the moment,” Charles Robertson, chief economist at Renaissance Capital, told a conference in Nairobi on Wednesday.

He cited the challenging external financing environment for frontier African economies and the risk that the shilling currency could weaken steeply in the near term.

The finance committee said in its report on the president’s proposals that the VAT measure is consistent with the government’s aim to avoid a huge funding gap in the budget.

The finance ministry had budgeted for 35 billion shillings ($347.74 million), which it expected to collect through the tax in the financial year to the end of next June, the committee said, adding the halved rate will allow the Treasury to collect 17.5 billion shillings.

Kenyatta said last week that further delaying the tax, which was passed into law in 2013 but never implemented, would compromise the government’s ability to fund planned social welfare and development programmes.

The finance committee also supported Kenyatta’s proposal to increase taxes on some financial services.

GRAPHIC-Frontier market dollar market performance tmsnrt.rs/2lKanJE

($1 = 100.6500 Kenyan shillings)

Additional reporting George Obulutsa, John Ndiso and Humphrey Malalo, Editing by Maggie Fick, William Maclean

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