Polls, new taxes and Covid-19 to drive cost of living in new year

Besides price changes influenced by government policy, market forces of demand and supply will largely dictate the direction that the prices of commodities and services will take.

New taxes 

The Parliamentary Budget Office (PBO), in its analysis of the 2022 Budget Policy Statement, advised the government to tax some key products that are currently zero-rated in efforts to shore up revenue collection in the financial year 2022/23.

The government relies on tax revenue to fund the annual budget, with deficits being plugged by new loans, grants and aid.

The government announced Sh318.3 billion in tax exemptions last year, indicating it could tighten screws on tax-exempt and zero-rated products in the new financial year that starts in July.

“As at 2020, tax expenditure on VAT, i.e. lost revenue due to exemptions and zero rating, stood at Sh234 billion. Therefore, a review of the list of exempt goods outside agriculture coupled with limiting the number of zero-rated goods could generate an additional Sh68 billion and increase revenue as a share of GDP by 0.5 per cent,” said the PBO.

Introduction of new taxes could push up prices of commodities, as was seen in July last year when the government reintroduced 16 per cent VAT on cooking gas, which significantly raised its cost.

The cost of airtime, internet and betting also shot up following an increase in excise duty charged on the services. 

Covid-19

The Covid-19 pandemic continues to stifle production and has significantly disrupted global supply chains for two years now.

New variants such as the fast-spreading Omicron have led to reintroduction of new containment measures, further limiting importation and exportation of goods.

Cooking oil is among products whose prices have skyrocketed due to disruptions occasioned by the pandemic.

The prices of some products may, however, be positively affected by the pandemic, as was seen in 2020 when fuel prices hit a historic low, further cutting transport and electricity costs.

How the pandemic pans out may also determine the prices of products such as rice, maize and wheat, a good part of which Kenya imports.

The International Monetary Fund (IMF) has already predicted high prices of imported commodities and shocks due to lack of vaccines.

“…the Covid-19 pandemic, globally and locally, with limited availability of vaccines, could undermine Kenya’s nascent recovery and increase fiscal and external pressures. Terms-of-trade shocks from high imported commodity prices could widen the current account deficit and heighten price pressures,” said IMF last month during a review of its Sh256 billion 38-month loan facility to Kenya.

General Election

The August General Election is generating political heat with each passing day, which could also impact market forces. 

Cost of living is a major campaign factor, as was observed last year when politicians turned up the heat on the government to lower fuel prices that had hit a historic high, leading to a Bill that is currently in Parliament to lower fuel prices.

As such, lawmakers could pass laws aimed at lowering prices of goods and veto those that seek to raise prices to appease voters in the run-up to the August elections, which could in turn reduce commodity costs.

Political tension in an election year also tends to limit business activities, with some supermarkets closing, suppliers holding on to their stock and investors adopting a wait-and-see attitude. This could lead to shortages of goods this year, thus driving up prices.

Inflation

Inflation, which is caused by, among other factors, rising demand for products and services amid limited supply, as well as a weak currency, will also be a key determinant of the direction prices will take this year.

Last year, Kenya’s year-on-year inflation fluctuated between 5.69 and 6.91 per cent (September), driven by seasonal factors such as drought, which limited farming, rising import costs as well as a weakening currency.

In particular, food and fuel inflation constrained consumer spending, with food inflation hitting 10.6 per cent and fuel 9.6 per cent by October, indicating higher prices for various foodstuffs and fuel.

Fuel

The Kenyan economy heavily relies on fuel for transport, industrial use and cooking.

This means any upward or downward changes in the cost of fuel will trigger a similar effect on the cost of goods and services, including transportation, electricity production and cooking.

Fuel prices have risen significantly in recent months, forcing the government to subsidise the costs to ease upward pressure on the cost of living.

There is also a Bill in Parliament that seeks to lower taxes and charges on the commodity as well as supplier margins enjoyed by oil marketing companies.

If the Bill becomes law, it will significantly lower fuel prices and further ease the costs of goods and services.

Electricity

Electricity is a key factor in production of many goods as well as for household use.

The government lowered electricity tariffs last week, to the relief of many individuals and businesses.

Already, manufacturers have promised that prices of basic goods will come down following the reduction that will significantly ease their costs of production.

“The timing (of power prices reduction) is especially apt as the economy is experiencing the impact of the Covid-19 pandemic, including rising costs, supply challenges and lower purchasing power. Achieving overall sustainable and stable policies on the cost, availability and reliability of power is paramount for our economic growth,” said Kenya Association of Manufacturers chairman Mucai Kunyiha.

With a targeted 30 per cent reduction in the cost of electricity by March, it is expected that the prices of manufactured goods will be going down. [email protected]

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