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June 20, 2018

Cost of unga, milk, drugs to go up in budget

Treasury Cabinet Secretary Henry Rotich displays the briefcase containing the 2017/18 draft budget policy statement outside the Treasury building, on his way to Parliament, March 30, 2017. /JACK OWUOR
Treasury Cabinet Secretary Henry Rotich displays the briefcase containing the 2017/18 draft budget policy statement outside the Treasury building, on his way to Parliament, March 30, 2017. /JACK OWUOR

The price of unga could go up from midnight after Treasury Cabinet Secretary Henry Rotich reads the budget.

You are also likely to pay more for medicine, gas and milk as the government executes measures to foot the Sh3.07 trillion budget for the 2018/19 financial year and finance the Big Four legacy agenda.

Among the proposals to fund the huge budget being tabled today, is a new policy that will see manufacturers of basic products like maize meal pass tax costs to consumers to recover their VAT.  

Read: Budget 2017: Lower prices for bread and maize flour

Also read: Huge infrastructure budget good for Kenya’s growth – CS

The current policy allows manufactures to claim VAT refunds on basic food items which have been zero-rated.

In the build up to today, the government has already shown clear intentions of passing the cost to citizens through a tax amendment bill that is likely to increase the price of basic household needs like food, fuel and medicine.

For instance, the proposed amendment to the Value Added Tax Act focuses on the exemption of various supplies of some medications, liquefied petroleum gas, milk, and maize flour.

In his Budget speech to be read this afternoon, Rotich is expected to announce measures the government will take to raise revenue to fund President Uhuru Kenyatta’s Big Four Agenda, at a time KRA has fallen behind in revenue collection.

In its sixth budget since assuming office, the Jubilee administration is expected to explain how it will address food insecurity, spur manufacturing, realize universal health care and increase housing units in the country.

Experts have already warned about Rotich's new proposal, saying it will overburden Wanjiku who is struggling to put food on the table.

“When you make goods exempt, the manufacturers cannot claim their input VAT which will see them put it in the pricing mechanism. That means an exempt item is going to be more expensive than a zero-rated item,’’ said Michael Mburugu, a tax partner at PKF.

Mburugu added that while VAT exemptions are easier to administer, they serve to increase the cost of production, which in turn leads to a higher cost of basic commodities.

Last week, the Kenya Association of Pharmaceutical Industry wrote to the National Assembly expressing fear that the Tax Laws Amendment Bill will increase the cost of medicine by 40 to 60 per cent if the Bill is passed in its current form.

Other areas that are likely to be hit by the tax exemption are hotel and housing supplies, supply of natural water, protective clothing, accessories and equipment used in hospitals and firefighting, and goods supplied to marine fisheries and fish processors.

Rotich on Monday defended the proposed amendment, saying tax breaks issued in previous budgets to manufacturers did not benefit consumers.

Rotich is also intending to slap high income tax on profit making companies, a move that has already received opposition from investors, with some threatening to cut on employment or relocate from the country.

The Income Tax Bill seeks to increase tax rates for companies earning a profit above Sh500 million and individuals earning at least Sh750,000 a month.

Although PKF experts have termed the government’s proposal on income tax as transformative in respect of the Big Four priority areas, they have cautioned that proposals to introduce a 35 per cent upper rate tax for both corporates and individuals will only serve to make Kenya a less popular destination for investors.

“This, together with elimination of 150 per cent investment deduction allowances will in the long term reduce the tax base and revenue, leading to job cuts. It is therefore short sighted,’’ said PKF in a statement.

Related: Nairobi to get lion’s share of county cash

Also see: Expert comment: Shall we increase our cloth or trim our coat?

BORROW SH562 BILLION

While Rotich is also expected to tell the country how the government will tackle the high public debt which is threatening to break Sh5 trillion ceiling, Kenya will have to borrow up to Sh562 billion internally and externally to fill the budget deficit.

Unlike other years where it has focused more on borrowing externally, in 2018/19, Kenya is targeting 50:50 borrowing, both internal and external. This means local banks will now prefer lending to the government and not common people.

 “The borrowing ratio of 50 per cent for external and 50 per cent domestic borrowing as contained in the proposed 2018-19 budget deviates from the initial borrowing ratio under the Medium Term Debt Management Strategy (MTDS), which proposes a ratio of 57:43 for external and internal borrowing, respectively. This implies an increasing focus on manageable domestic borrowing,’’ says the Budget and Appropriations Committee (BAC) in a statement.

According to the parliamentary budget committee report approved last week, at least 47 per cent of the total budget will be used to clear maturing debts, including the controversial 2014 Eurobond.

“Total debt service is expected to reach Sh870.6 billion, including repayment of Sh194 billion in the form of principal payments for the tap sale component of the 2014 sovereign bond and two syndicated bonds,’’ said BAC chairperson Kimani Ichung’wah.

In February, the International Monetary Fund (IMF) warned Kenya about its debt appetite, recommending a manageable budget.

“Kenya must aim for a lean budget in order to cut huge deficits that continue to plunge the country into unnecessary debt. Must cut on huge wage bill and up its domestic revenue collection,’’ said Jan Mikkelsen, IMF resident representative to Kenya.

His views are shared by Johnson Nderi, an economist at ABC Capital, who thinks that Kenya should go slow on capital intensive infrastructure projects.

Nderi said that infrastructure projects like the Standard Gauge Railway (SGR) have led to the growth of public debt exponentially, with feasibility of such projects in doubt.

Ken Gichinga, chief economist at Mentoria Consulting, however thinks that borrowing to improve infrastructure leads to social economic multipliers.

Kenyans will be waiting with abated breath to see how Rotich juggles between making life cheaper for them while creating necessary funds to spur Uhuru’s economic blueprint.

This year’s budget comes against the backdrop of an economy still struggling to recover from bruises of last year’s prolonged election cycle, negative effects of interest capping and ravages of climate change that saw the GDP drop to a five-year low of 4.9 per cent in the current year ending June 30.

Although the World Bank has projected Kenya’s economy to rebound to 5.8 per cent in the coming financial year, and 6.1 per cent in 2019, the growth is pegged on completion of ongoing infrastructure projects, resolution of slow credit growth and strengthening of the global economy and tourism.

Read: We can't borrow even for good projects - CBK Governor

Also read: How much will Kenya spend on debt repayment in 2018?

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