Inflation by fuel VAT, food tax won’t attract CBK attention

Central Bank of Kenya. When the Monetary Policy Committee of the Central Bank of Kenya meets this week, they are, as usual, not likely to paint any concerns on inflationary pressure in the economy — even after the recent introduction of VAT on fuel. PHOTO | FILE | NATION MEDIA GROUP

What you need to know:

  • We are no longer the country where the interests of the private sector are held in high regard by policymakers.
  • It seems that the policy has been reduced to tax and spend.
  • Despite the fact that even blue chip companies are struggling, the elite are obsessed with Chinese-funded mega infrastructure projects.

As I reflect on the recent tax increases and the controversies that have come up in the wake of the Finance Act, I am left with the distinct feeling that we are no longer the country where the interests of the private sector — individuals and companies who bake the national cake from where the taxes are collected — are held in high regard by policymakers.

It seems to me that we are going back to the days of oppressive taxation.

We chose the private sector-led development model, where tax policy was designed to support private sector productivity and recognise the segments of the economy which work and produce.

TAX AND SPEND

The shift may be slow and subtle. But it seems that the policy has been reduced to tax and spend: You tax the private sector as much as possible and give the money to the State to spend it as it chooses, even when most of that money is going to be spent on projects of no economic viability.

The government is under the illusion that by imposing higher taxes you collect more revenues; that by enriching the State you enrich the citizen.

Our policymakers still cherish the illusion that the private sector can be milked to an indefinite extent without negatively affecting economic activity in the macro economy.

OMINOUS MINDSET

But the recent increases in VAT on petroleum products and excise duty on hundreds of other goods and services across a broad range of sectors have displayed a more ominous mindset among those who design Kenya’s tax policy.

If you look closely at the range and scope of tax increases in the Finance Act, you get the impression that the taxes have been introduced by people who believe the State has the first claim to everyone’s income and that what you remain with after being taxed is just a gift out of its generosity.

Worse, the new regime of oppressive taxes is being introduced at a time when the private sector is not in good health. Corporate profits have basically flat-lined in the past five years. We might not readily admit it but we have gone through a crisis.

The upshot is a major slowdown in private sector investment as reflected in a slowdown in the uptake of commercial bank credit, an increasing number of retrenchments, frequent profit warnings by listed companies and a drastic fall in electricity consumption by industries.

COMPANIES STRUGGLING

The reason we do not discuss the problem of stagnant corporate profits is that policymakers do not respond to problems of the private sector promptly.

Despite the fact that even blue chip companies are struggling, the elite are obsessed with Chinese-funded mega infrastructure projects.

You will not hear them talking about policies to help to fire up creation of new businesses or reinvigorate business investment. You will not hear them talking about building strong venture capital companies to support business in new investment and ideas.

Mainly due to the Chinese-funded projects, we now have a situation whereby in excess of 90 per cent of the fixed capital investment in the economy is by the public sector.

We all know that a shilling of private sector investment is more efficient in terms of job creation than hundreds of shillings from the Chinese.

And, because the Chinese contractors are mainly paid by financial institutions based in Beijing, and since the money does not come into this economy, the mega public projects by the Chinese do not inject liquidity into the local system, and thus hamper its flow into the economy.

Which leads me to the subject of the impact of new tax measures on inflation and the level of prices in the economy.

CENTRAL BANK

When the Monetary Policy Committee of the Central Bank of Kenya meets this week, they are, as usual, not likely to paint any concerns on inflationary pressure in the economy — even after the recent introduction of VAT on fuel.

After all, the MPC mainly tracks and obsesses with non-fuel and non-food inflation.

Traditionally, our MPC only gets very concerned whenever there are upsurges in underlying inflation (jargon for inflationary pressures in the economy arising from factors other than increases in prices of food and fuel).

As a consumer, our MPC is no more than an ivory tower with little impact on the pressures in your pocket.

So, when you want to track inflation and assess the impact of the scourge, just look at your last monthly shopping bill at the supermarket for the indispensable staples — bread, milk, health and maize flour and then compare it with what you paid for the same items six months ago.

Track the movement of prices of paraffin, charcoal, matatu fares, bread, clothing and house rent and you have a clear picture of the damage inflation is doing to the pockets of the ordinary men and women in this country.