Fuel tax to raise oil ex­plo­ration costs, in­fla­tion

The East African - - THE MARKET WHISPERER -

Oil ex­plo­ration firms in Kenya are ad­just­ing their op­er­a­tional costs af­ter the gov­ern­ment im­posed a 16 per cent value added tax on re­fined fuel on Septem­ber 1, re­duc­ing the gains ex­pected from the projects.

But on Fri­day, Pres­i­dent Uhuru Keny­atta an­nounced that he had rec­om­mended that the tax be re­duced to eight per cent.

Fuel costs are a big part of op­er­a­tions, from run­ning ma­chines to power gen­er­a­tion and trans­port. The ad­di­tional cost must be ab­sorbed by the op­er­a­tion. The over­head costs for trans­port­ing crude by road from Turkana to Mom­basa for stor­age pend­ing ex­port are ex­pected to rise.

Lina Omole, a tax man­ager at fi­nan­cial con­sult­ing and au­dit­ing firm Deloitte & Touche Kenya, said that while the in­crease in the unit cost of pro­duc­tion per bar­rel may be min­i­mal, “any cost in­crease is un­de­sir­able for the in­vestor and the coun­try, as it re­duces the prof­its to be shared.’’

Kenya has made a com­mit­ment to re­duce the cost of do­ing busi­ness to spur growth, but the coun­try risks join­ing the list of ex­pen­sive in­vest­ment des­ti­na­tions due to its tax poli­cies.

The Kenya Na­tional Cham­ber of Com­merce and In­dus­try has warned that the VAT for jet fuel and avi­a­tion gas will re­verse the gains made by local air­lines.

“It is un­fore­see­able how Kenya Air­ways will re­main com­pet­i­tive against car­ri­ers from oil-rich na­tions, with in­creased costs on jet fuel and avi­a­tion gas,’’ said KNCCI chair­man Kiprono Kit­tony.

Jam­bo­jet Ltd has an­nounced that it is con­sid­er­ing rais­ing air­fares from Oc­to­ber. Other low­cost air­lines are ex­pected to fol­low suit.

The tax is also ex­pected to drive up in­fla­tion in the re­gion. Ac­cord­ing to the rat­ing agency Fitch, Kenya’s in­fla­tion is likely to rise to­wards the end of this year. An­a­lysts at the global re­search firm Stratlink Ltd say rein­tro­duc­tion of VAT on fuel will drive up prices of hous­ing, wa­ter, elec­tric­ity, gas and trans­port.

While the re­gion’s in­fla­tion for Au­gust dropped marginally, economists at Cit­i­group say there are still con­cerns about weather and food price in­fla­tion, which is im­pact­ing low-in­come house­holds. Citi said in­fla­tion has gen­er­ally been on an up­ward trend in sub-sa­ha­ran Africa since 2015, and food price in­fla­tion re­mains an is­sue par­tic­u­larly in East Africa.

Kenya and Rwanda re­ported de­clines in over­all monthly in­fla­tion for Au­gust. Kenya’s rate fell to 4.04 per cent from 4.35 per cent in July while Rwanda’s rate de­clined to 2.1 per cent from 2.2 per cent.

In Tan­za­nia, in­fla­tion stag­nated at 3.3 per cent while Uganda’s rate in­creased to 3.8 per cent from 3.1 per cent. The Bank of Uganda said the key risk to the in­fla­tion out­look is the de­pre­ci­a­tion of the shilling while in Kenya, VAT on fuel has im­pacted all sec­tors of the econ­omy.

Re­search shows that a 10 per cent cur­rency de­pre­ci­a­tion pushes the in­fla­tion rate up by one to 1.5 per­cent­age points.

In Rwanda, fuel prices and the dev­as­tat­ing ef­fects of heavy rain­fall on food sup­ply pose a risk to the county’s in­fla­tion prospects.

Pic­ture: File

An oil ex­plo­ration site in Turkana, north­ern Kenya.

Newspapers in English

Newspapers from Kenya

© PressReader. All rights reserved.