EDITORIAL: High fuel prices will hurt weak economy - Daily Nation

High fuel prices will hurt weak economy

Tuesday August 14 2018

By EDITORIAL
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It is the business of the government to cushion citizens against economic hardships and other adversities. If there was a moment that was critical, it is now.

We are saying so because consumers are staring at a major crisis arising from steep fuel costs as the government plans to introduce a 16 per cent levy on petroleum products, acquiescing to demands by international lenders.

Contrary to what the International Monetary Fund may have advised, introducing the levy may increase the government’s tax portfolio but it is likely to be very painful and create a major backlash.

Put simply, the whole effort may end up being counterproductive. Any increase in the price of fuel products triggers a chain reaction; it raises the cost of transportation and other levers of the economy.

Already, and even before the levy comes into effect, public service vehicle operators have signalled their intention to raise commuter fares by big margins.

HIGH COST OF DOING BUSINESS

Attendant to that, all other prices will rise and the end result will be high cost of doing business.

Experience has demonstrated oftentimes that the donor-driven prescriptions tend to be short-term and crucially painful.

They are oblivious of social risks and, worse, the impacts on the vulnerable lot.

For two years, the government has resisted the proposal to introduce the fuel tax and there is no reason why it should accede now, when it is bound to hurt the economy most.

Part of the reason the government is unable to meet its tax targets is that there are major loopholes that allow evaders to get away with taxes. These are the areas that the government should target and seal.

FUEL LEVY PLAN

It is not lost on us that the price of fuel has shot up drastically since beginning of the year. For example, the price of petrol has risen from Sh106.30 per litre in January to the current Sh112.20.

It is set to increase to Sh130 by September 1, when the levy comes into effect. Kerosene, which is the lifeline of many households, has similarly gone up from Sh74.78 in January to Sh85.94.

Also, this is bound to go up astronomically under the new fuel levy plan. Our argument is that this trajectory is not sustainable.

In this mix is the opaque formula used for computing the price of fuel. According to the Energy Regulatory Commission, the computation should be based on two variables: Level of depreciation of the shilling against the dollar and fuel levies.

In reality, that does not apply — which is a matter the ERC must urgently address.

But the point we are making is that the government should review the fuel levy plan because it has potentially high risks to the economy.