Kenya President Halves Fuel Tax, Proposes Austerity Measures

(Bloomberg) -- Kenyan President Uhuru Kenyatta proposed a 50 percent reduction on an unpopular new tax on petroleum products and promised expenditure cuts across government departments.

The East African state introduced the 16 percent value-added tax on gasoline on Sept. 1 that it said would help raise 35 billion shillings ($345.8 million) to plug a budget deficit of 5.9 percent of gross domestic product in the fiscal year through June 30, 2019.

“I must make a delicate balance between short-term pain with long-term gain,” Kenyatta said in televised comments. “These budget cuts ask all of us in government that we tighten our belts.”

Gasoline will retail at 118 shillings per liter from 127 shillings should lawmakers accept his proposals, Kenyatta said. Diesel will sell at 107 shillings instead of 115 shillings, he said.

Kenyatta on Thursday rejected a draft law that wanted implementation of the VAT postponed by two years. The tax was initially legislated in 2013, but its introduction was blocked until 2016, and then again delayed until 2018.

‘Nice Dream’

Lawmakers will hold a special sitting next week to discuss Kenyatta’s proposals, according to Speaker Justin Muturi.

“A delay in implementation of the tax would compromise our ability to deliver services to Kenyans and derail the trajectory of our future,” Kenyatta said.

The reduction is a “good halfway point to appease both sides,” said Eva Wanjiku, an Africa strategist at Standard Chartered Bank Kenya Ltd., referring to the balance between raising revenue for the government, while avoiding a hike in living costs.

“It is a positive for the Eurobond market because it shows progress for revenue reform and fiscal consolidation, but we have a mixed outlook on local-currency debt performance because of the inflationary impact of the VAT and the reduction in supply pressures,” Wanjiku said.

Yields on 10-year Eurobonds fell 9 basis points to 7.545 percent by 4:57 p.m. in Nairobi, according to data compiled by Bloomberg.

Past plans to slash government expenditure have failed, according to Kenneth Minjire, head of equities at Nairobi-based Genghis Capital Ltd. The government announced this week that it wouldn’t renew an International Monetary Fund standby facility that is needed to reduce its budget deficit to 3 percent of GDP this fiscal year.

“Austerity is a nice dream, but even that 8 percent VAT on fuel, coupled with an increase in crude oil prices, mean a major hit on inflation, cost of production, and manufacturing has just been trying to recover,” Minjire said by phone.

©2018 Bloomberg L.P.