The Finance Act 2023, which came into effect on July 1, 2023, increased the Value Added Tax (VAT) on petroleum products from 8.0% to 16.0%. This was a controversial move that sparked public outcry and protests, as many Kenyans feared the ripple effects of higher fuel prices on the cost of living and economic activities.
The impact of the VAT hike on fuel consumption and the economy can be seen from the data released by the Kenya National Bureau of Statistics (KNBS) for the first quarter of the fiscal year 2023/24 (July-September 2023).
According to the data, the consumption of petroleum products (Super Petrol, Diesel, Kerosene) declined by 3.58% year-on-year (y/y) in Q1 2023/24, compared to a growth of 4.32% y/y in the same period of the previous fiscal year.The decline in fuel consumption was mainly driven by the sharp drop in kerosene demand, which fell by 47.6% y/y in Q1 2023/24.
Kerosene is mainly used by low-income households for cooking and lighting, and the VAT hike made it unaffordable for many of them.
Some households may have switched to alternative sources of energy, such as charcoal, firewood, or liquefied petroleum gas (LPG), while others may have reduced their consumption of kerosene.The consumption of Super Petrol and Diesel also declined by 2.83% y/y and 2.29% y/y, respectively, in Q1 2023/24.
Super Petrol is mainly used by private vehicles, while Diesel is mainly used by commercial vehicles, such as buses, trucks, and tractors. The VAT hike on fuel increased the transportation costs for both passengers and goods, affecting the mobility and purchasing power of consumers and businesses.
The decline in Super Petrol and Diesel consumption was most pronounced in July 2023, when they fell by 10.29% y/y and 13.04% y/y, respectively, before recovering slightly in August and September.The decline in fuel consumption had negative implications for the Kenyan economy, as it reduced the economic activity and growth in various sectors.
According to the KNBS, the real gross domestic product (GDP) grew by 4.7% y/y in Q1 2023/24, compared to 5.6% y/y in the same period of the previous fiscal year.
The sectors that recorded the slowest growth or contraction in Q1 2023/24 were:
- – Transport and storage: -1.2% y/y (compared to 7.1% y/y in Q1 2022/23).
- – Manufacturing: 1.9% y/y (compared to 4.2% y/y in Q1 2022/23).
- – Agriculture, forestry and fishing: 2.5% y/y (compared to 4.8% y/y in Q1 2022/23).
- – Electricity and water supply: 3.1% y/y (compared to 8.4% y/y in Q1 2022/23).
These sectors are heavily dependent on fuel for their operations, and the VAT hike on fuel increased their production costs and reduced their profitability and competitiveness.
This in turn affected their investments, employment, and output. The decline in fuel consumption also reduced the tax revenues for the government, as the VAT collections from petroleum products fell by 9.8% y/y in Q1 2023/24, according to the KNBS.
The VAT hike on fuel was intended to raise additional revenues for the government to finance its budget deficit and debt obligations, as well as to comply with the conditions of the International Monetary Fund (IMF) loan program.
However, the adverse effects of the VAT hike on fuel consumption and the economy may have outweighed the benefits of the increased revenues, as it eroded the welfare of the citizens and hampered the economic recovery from the COVID-19 pandemic.
