Scrapping of tax subsidies to increase inflation, cost of goods

By Billow Kerrow

The International Monetary Fund (IMF) blokes are at it again. This time, they want the Government to scrap the duty waiver on maize and wheat flour as well as tax subsidies on diesel and kerosene. The Treasury and Central Bank have reportedly given written assurance to IMF that this will be done in the next Budget whose proposals are due in Parliament by April.

This IMF pressure could not have come at a worse time, when MPs have refused to pass the last year’s Finance Bill unless the minister includes provisions to control interest rates and the cost of fuel.

Analysts had warned the Government against borrowing from IMF because of its stringent conditions that often mitigate against fiscal measures intended to cushion the economy from external shocks. IMF knows that the elimination of the tax subsidies and duty waivers will have adverse impact on the cost of living of the poor, and raise social tensions.

They also know that the rich in our region have relatively less tax burden than the poor as their economic and political power often allows them to prevent fiscal reforms that would target them. Yet, IMF is only mindful about balancing Government books, not lives.

Kenya is not the only country with such subsidies. In 2010, it is estimated that tax-inclusive subsidies for petroleum products alone was above $740 billion globally, with 70 per cent of these being in the G20 countries. The figure is likely to be higher in the food sector as many countries took measures to cushion their citizens against the high cost of living.

Most of these countries are unlikely to reverse these measures as global prices of food and fuel remain high.

Treasury is very conscious of the unstable macroeconomic situation prevailing in the economy. High inflation, rising interest rates and the volatile exchange rate reflect policy failures by the Government in prioritising public expenditure, prudent control of the financial markets and enhancing productivity especially in agricultural sector.

The huge public spending has fuelled inflation, exacerbating the price-induced inflation already ravaging the economy.

It is inconceivable that CBK would support The Treasury in the IMF measures when it is struggling to control inflation. If the tax subsidies and waivers are scrapped, fuel and food prices will rise, leading to higher inflation and further depreciation of the shilling. Higher attendant transportation and electricity costs will increase cost of production that will reduce our competitiveness in the region whilst raising the cost of living locally. It is a sure recipe for social unrest that should best be avoided in an election year.

An ideal tax system should raise essential revenue from the citizens without excessive Government borrowing and without discouraging economic activity. Ours is borrow and spend culture, with no discernible fiscal responsibility. The Government has itself become a victim of the uncertainty in the economy.

The high interest rates by the commercial banks and other macroeconomic indicators have evaporated investor’s appetite for Treasury Bills and Bonds; consequently the Government has raised only about 12 per cent of the domestic borrowing it planned to get this year.

Next year’s General Election will be a milestone as it is expected to usher in a new system of governance structure that is likely to burden the exchequer. There will be a stampede at The Treasury’s feeding trough as competing interests jostle for the dwindling revenues from KRA.

The latter has slackened in recent years as shown by declining collections, and is in dire need of urgent reforms in its management team to give it fresher minds.

It would be irresponsible for The Treasury to remove the tax subsidies as it is likely to dampen economic growth and reduce tax collections. Perhaps, we should appease the IMF sharks by eliminating direct price controls to seek a breathing space on their loans.

The writer is a former MP for Mandera Central and political economist