Fuel use dips in 2023/24 first quarter on VAT hike

Fuel consumption in Kenya dropped in the first quarter of the current 2023/ 24 financial year (FY ) as the doubling of value-added-tax (VAT) to 16 per cent in the Finance Act 2023 took effect under President William Ruto’s administration.

The decline in the volume consumed during that period highlight the reduced demand among consumers as the VAT, together with the weakening shilling, spiralled the cost of diesel, petrol, and kerosene.

Data from Kenya National Bureau of Statistics (KNBS) indicates that the volume of diesel, the most consumed of the three products and one that drives Kenya’s economy, declined to 557.62 metric tonnes (MT) by the end of September 2023.

That reflects a 2.3 per cent yearly drop compared to 57 0.7 MT diesel used in a similar period ending September 2022, while petrol consumption nosedived by 2.9 per cent to a volume of 359.7 3 MT.

Similarly, illuminating kerosene, which has seen the steepest increase in price among the three fuel products over the past year, was hit the hardest as its consumption was reduced by almost half to 12.04 MT in 2023 compared to 22.96 MT in the previous year.

Finance Act 2023 increased VAT to 16 per cent from July 2023 from the 8 per cent rate that existed in the previous Finance Act 2022 under ex-President Uhuru Kenyatta’s Jubilee regime.

“The prices are inclusive of the 16 per cent Value Added Tax (VAT) in line with the provisions of the Finance Act. 2023, the Tax Laws (Amendment) Act 2020, and the revised rates for excise duty adjusted for inflation as per Legal Notice No. 194 of 2020,” Energy and Petroleum Regulatory Authority (EPRA) Director General Daniel Kiptoo stated in the last price review note.

Energy prices have a direct impact on the country’s entire economy, with key sectors like agriculture, transport, and manufacturing always factoring in the changes in pump prices. This leads to heightened inflation as the cost of key items shoots up.

The increase in taxes has significantly contributed to the elevated pump prices, with a litre of diesel now retailing at Sh201.47 based on the last review in December.

The price of Super Petrol in Nairobi is now Sh212.36 a litre, whereas Kerosene now costs Sh199.05 per litre. Since the start of FY 2023/ 24, it was only in November and December that the prices of diesel and kerosene declined to the current rates. Petrol costs remained unchanged in December.

Kerosene’s steep price hike across the year has mainly been part of attempts to thwart fuel adulteration. However, the decline in the volume of Kerosene consumed in that period coincided with a rise in Liquid Petroleum Gas (LPG) usage, signalling that due to higher prices, more consumers abandoned kerosene as a cooking fuel.

Other than taxes, the rise in energy prices is equally compounded by the shrinking shilling, which has devalued over the past year by about 23 per cent to exchange at a current rate of about Sh157 per dollar.

It comes at a time when the National Treasury has still proposed to increase the VAT to 18 per cent to get more revenues while harmonising the rates with the East African Community (EAC).

Debt strategy

“VAT has been performing below its potential with a gap of 39.8 per cent in FY 2021/ 22. This is mainly attributed to both policy and compliance gaps in the VAT system,” the ministry says in the Medium-term Debt Strategy for the period 2024-25 and 2026-27.

“Currently, the VAT rate in Kenya is among the lowest within the EAC members,” Treasury adds.