Fuel tax to raise oil exploration costs, inflation
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.
An oil exploration site in Turkana, northern Kenya.