Price hikes beckon after Kenya tax regime stings

The possibility of a rise in the cost of petroleum products and other consumer good is looming large in Uganda following the coming into force on July 1 of Kenya’s Finance Act 2023.

The Act raised the Value Added Tax (VAT) on petroleum products in Kenya from eight percent to 16 percent. Consequently, the country’s Energy and Petroleum Regulatory Authority (EPRA) announced a new price regime that saw the pump prices of a litre of petrol increase from Kshs182.04 (Shs4,701) to Kshs195.53 (Shs5,050); that of diesel increased from Ksh167.28 (Shs4,320) to Ksh179.67 (Shs4,640); and that of kerosene increased to Ksh173.44 (Shs4,479) up from Ksh161.48 (Shs4,170).

Private Sector players in Uganda are now warning that the development is going to drive up the cost of petroleum products and other imported goods.

Mr Julius Mukunda, the executive director of the Civil Society Budget Advocacy Group (CSBAG), says the developments in Kenya are going to directly impact Uganda’s transport sector and its attendant attractions.

“That more than 90 percent of our international cargo needs are met by road is an indication that definitely the prices of goods and services is going to increase,” he predicted, adding, “More than half of the fuel that you will need to bring in goods from Mombasa will be bought in Kenya, which will not be on the cheap. There will definitely be a ripple effect.”

Mr Thadeus Musoke Nagenda, the chairperson of the Kampala City Traders Association (Kacita), said traders are anticipating an increase in the cost of bringing in imports.

The vast bulk of Ugandan traders use the Northern Corridor, which straddles nearly 1,700km from Mombasa port through Kenya, Uganda, Rwanda, Burundi and the eastern Democratic Republic of the Congo. 

The cost of transporting goods is expected to increase from its current minimum of $2.35 (Shs8,535) per kilometre for transit goods and $2.25 (Shs8,171) for local cargo on account of higher fuel prices.

It costs $3,050 (Shs11m) to bring in a 20-foot container, but the cost is expected to increase.

“They (transporters) have not yet increased the cost of transport,” Mr Musoke said, before adding that “since the cost of fuel has increased, it means the cost of transport is automatically going to increase.”

Tough times
The pump price of both petrol and diesel that had in recent times dropped below Shs5,000 are widely expected to shoot up, much to the chagrin of many inflation-weary Ugandans. The inflationary effects of increase in pump prices is well-documented, with Mr Mukunda warning that, among others, “transport fares [will] also … increase.”

He said: “I will not be surprised if the fuel prices increase majorly because our fuel also comes in from Mombasa and by road.”

Rev Frank Tukwasibwe, the commissioner for Petroleum Supply at the Ministry of Energy and Mineral Development, however, believes developments in Kenya will not have a significant impact on the pump prices in Uganda.

“If it (pump price of petroleum products) is to increase, it will not be increasing in isolation in Uganda alone,” Rev Tukwasibwe told Sunday Monitor, adding that any fears of fuel shortages in the hinterland are highly unlikely.

He proceeded to note thus: “The cost (of transport) does not affect the supply, the transportation cost does not affect the supply. Supply can only be affected by demand… if demand has gone down or if demand just shoots up all of a sudden.” 

Mr Stephen Asiimwe, the executive director of the Private Sector Foundation of Uganda (PSFU), is not as sanguine as Rev Tukwasibwe.

“It is going to impact on the cost of logistics, transport, but also it is going to impact, especially people who are producing with lots of diesel mainly to power production,” Mr Asiimwe said of the ripple effect of increments in pump prices in Kenya.

Cost of business
While the Government of Uganda has made clear that it intends to reduce the cost of doing business this financial year, Mr Musoke is not holding his breath. 

“The cost of transportation of imports, both raw materials and finished products, is going to increase. If it is industry, it means the cost of production is going to be higher. All that is going to affect the cost of doing business,” Mr Musoke told Monitor, adding that the government cannot do much to insulate itself against the impact of tax policies passed in Kenya.

As things are, Mr Musoke added, the developments in Kenya will translate into an increase in the cost of doing business. This, he proceeded to note, will make the business landscape more cost disadvantaged than it has been. That, he said, makes Uganda unfavourable for foreign direct investment.

Mr Mukunda believes this makes a case for harmonisation of tax policies across the region.

“That serves to underline why it would have been very important that East African tax harmonisation was done. That would ensure by the time one increases taxes on anything, you should have been able to know the ripple effect on other actors in the region,” Mr Mukunda reasoned.

What next?
Mr Musoke told Monitor that local businesses now have to choose between shouldering the extra costs that will come with the expected increments in the cost of doing business or pass over the burden to consumers, who are already buckling under a high cost of living. On his part, Mr Asiimwe is not in doubt as to what will happen. He said chances of the importers and manufacturers passing on the cost to the consumers are high. The net result of this is an increase in commodity prices.

“We are going to see a price rise, especially commodities made in Kenya. Usually, the consumer pays the price in order for the manufacturer and the importers to meet the overheads,” Mr Asiimwe predicted.

According to the United Nations Comtrade database on international trade, Uganda’s biggest imports from Kenya include cement, palm oil, coated flat-rolled iron, precious stones, salt, petroleum products, plastics, and pharmaceutical products. The prices of all the above categories of products are expected to rise in the course of the next few months.

Efect on Utilities
The increase in the cost of fuel across the border is also likely to have an impact on the cost of utilities like water. Last July, for example, National Water and Sewerage Corporation (NWSC) announced a six percent increment in water tariffs. This rose the tariff for government institutions from Shs3,558 a unit and Shs71 per 20 litres to Shs3,771 per unit and Shs75 per 20 litres and the tariff for commercial institutions, which consume less than 1,500 litres per month to Shs4,473 up from Shs4,220. 

Mr Samuel Apedel, the senior manager, corporate affairs at NWSC, attributed the revised price structure to, among others, imported inflation.

Mr Stephen Asiimwe, the executive director of the Private Sector Foundation of Uganda  nevertheless, believes there are opportunities that Uganda could do well to pounce on.

“All of that is going to have an impact on productivity in Kenya and this is an opportunity for us. If we play it strategically, that is something we can take advantage of. Our thinkers and policy people should be following such a movement, including taxation with keen interest,” he opined.