By setting a target rate, say 16% VAT on goods, if a product sells at KES 100, the government takes KES 16. However, due to inflation, if for instance, KES depreciates by 6.5%, the KES 16 the state collects will not have the same purchasing power 1 year down the line.
KRA’s proposal is to pass this inflation charge to the consumer to make sure the currency devaluation is loaded on the back of Kenyan workers who are already paying higher prices on all other products. The govt says it is under pressure from IMF to improve revenue collections.
How’s inflation calculated? A basket of commodities commonly consumed by the average household is weighed every month to estimate its change in price. The basket includes the average cost of food, energy, transport, housing, healthcare, and education.
6.3% inflation means that your budget on these items has gone up by 6.3% compared to the same period last year. This is an understatement and I don’t think they have an idea how these expenditures have skyrocketed. Real inflation is way higher.
Consider this, John Doe gets a salary of KES 30,000, he does a shopping of 22000 every month, inflation goes up and he is forced to spend 24500 a year down the line. On top of this, KRA adjusts its rates and he finds himself spending 25200 for the same monthly shopping.
John is the hustler who voted for Ruto and along came David Ndii. To survive this added pressure from the state, without a pay rise, he will be forced to forego critical expenditures such as savings, healthcare (NHIF is hiking premiums too), and food (buy cheaper less nutritious).
In summary, John will live a lower quality of life, will be unhappy, and will spend his money on cheaper lower quality products. The black market will find new demand from John as businesses get creative to survive and avoid the high taxes.
If John’s family survives on a sachet of 500ml milk per day, the milk company, in a bid to retain demand and not hike prices, will shrink the sachet to 400ml at the same price. John’s family will be forced to consume a smaller size hence lower nutrition.
At a macro level, overall demand will drop and production will drop as there will be no demand to supply. Our economy will slow down and we will come crawling back to the IMF for more loan-pium.
David Ndii and William Ruto should fix the country by supporting the supply side. Nothing good comes out of killing demand. Support production and stimulate growth. While at it, make sure the average Kenyan can buy. Make inflation your number 1 challenge and don’t look at anything else until it is resolved. Renegotiate our exports in the international markets.
You cannot debase the currency through printing and then charge us for that a second time. The current path that the state is taking will lead to demos and people taking one meal per day. Get reasonable people on those institutions: KRA, Treasury, and CBK or make them understand.
Written by Rufas Kamau a Research and Markets Analyst and Senior contributor at Forbes.
