You should brace yourself for tougher times with commodity prices expected to rise further while incomes drop, as the government’s pocket-raiding proposals start to take effect in a week’s time.
This follows Parliament’s move to pass the Finance Bill, 2023, which has proposed the raising of Value Added Tax (VAT) on fuel products from eight per cent to 16 per cent, and the introduction of a 1.5 per cent housing tax on employees’ basic salaries — charged on employer and employee.
The two key proposals, which will take effect on July 1 once the Bill is signed by the President, will have far-reaching implications on households across the country due to their effect in raising the cost of production and transportation of goods, even as they reduce salaries by adding deductions to the payslip.
A Daily Nation analysis shows that the doubling of VAT on fuel will see Super Petrol, Diesel and Kerosene prices jump by over six per cent from the current prices.
A litre of Super Petrol, which currently retails at Sh182.04 in Nairobi, will sell at Sh193.77, a litre of Diesel from the current Sh167.28 to Sh177.99, and Kerosene will sell at Sh171.71 from Sh161.48 currently.
This would raise the cost of living as Petrol and Diesel affect both goods and people’s transportation costs, Diesel also affects manufacturing costs for goods, and household costs for poor homes that rely on Kerosene for cooking and lighting would also go up.
The ripple effect would be high inflation that would further worsen the economic situation for households that have already suffered over the past year.
Already, businesses are preparing to pass on any costs brought to them through the new government levies and taxes to consumers, the clearest indication that it is Wanjiku who will bear them.
“The production costs will go up but they will mostly affect the end user, the mwananchi, because production companies will claim input-output VAT. Our concern is that it will hit Wanjiku hard but organisations will be affected indirectly because of inflation and erosion of purchasing power,” says Kenya Association of Manufacturers CEO Anthony Mwangi.
He, however, said businesses would also suffer since when commodity prices rise and consumers lose purchasing power, they will constrain spending to only essential items.
Mr Nicholas Kihumba, a boda boda rider in Nairobi, also observes that a rise in fuel prices presents a tricky balance for him since he must increase fares for his customers, but also knows that many would not afford and will thus leave.
“When fuel prices go up, a customer who now pays Sh200 from one point to another will have to pay more. But that also means that the customer will suffer since their salary remains the same and so they are likely to adjust and prefer walking or using matatus which means lost work for us,” Mr Kihumba says.
He says fuel costs for his boda boda business have increased by 50 per cent over the past two years, which has eaten much into his daily revenues.
And yesterday, ride-hailing firm Uber also said it was making “an in-depth assessment” of how its drivers and riders will be affected, to consider whether it will communicate a price adjustment
“We are making an in-depth assessment of the impact this could have on users of our platform if assented to by the President. Drivers and riders are at the heart of everything we do and as a global company that operates locally, we are constantly monitoring various macroeconomic dynamics to ensure that we are able to continue providing a platform where drivers can earn sustainably and riders are able to access a safe and reliable mobility option,” said Mr Imran Manji, Uber’s Head of East Africa.
“For us in public transport, fuel is our big raw material; we are the biggest consumers of fuel. Every vehicle consumes an average of 60 litres of fuel daily. We can't provide subsidy; we are too small and so we will have to pass on the costs to customers. For essential services like transportation of goods and public transport, they should be exempted from this. This is a service that builds the economy,” says immediate former Matatu Owners Association Chairman Simon Kimutai.
On the other hand, the government’s proposals targeting the payslip will see workers’ take-home reduce by a considerable margin if implemented, which will reduce people’s disposable incomes and by extension the vibrancy of businesses that survive on such incomes.
Other than the housing levy proposed in the Finance Bill, the government has also proposed a change in the National Health Insurance Fund (NHIF) contribution system that would see the current plan where formally employed workers contribute between Sh150 to Sh1,700 depending on one’s salary scale, to adopt a system where a worker will contribute 2.75 per cent of their salary.
While the proposal on NHIF is not in the Finance Bill, if implemented, it will further trim workers’ take-home. For example, if you earn a Sh50,000 basic salary, you will lose a further Sh1,541 (3.7 per cent) of your take-home, while those who earn a Sh100,000 basic salary, will take home Sh4,412 less.
Currently, a person earning a Sh50,000 basic salary takes home Sh41,457 after statutory deductions. This will come down to Sh39,916 when the housing levy and proposed NHIF contribution are implemented.
A person with a Sh100,000 basic salary, who now takes home Sh75,957 after statutory deductions, will be left with Sh71,545 (less 5.8 per cent).
The proposal on NHIF does not take effect in July, however, since it is not in the Finance Bill, 2023.
Mr Mwangi, the KAM CEO, warns that the proposed housing levy and NHIF contributions, introducing new payroll costs, are likely to trigger job losses in the economy, as employers balance to maintain manageable payrolls.
“When you put all that together, the cost of maintaining employees goes up by up to five per cent. Some of our textile companies have 15,000 people and so the impact of the action we see as marginal will be huge,” Mr Mwangi said.
He estimated that the manufacturing sector could lose up to five per cent of jobs. Kenya’s manufacturing sector (private) employed 329,600 people last year, according to the Kenya National Bureau of Statistics, which would imply over 16,000 workers losing jobs.