Oil price rebound raises spectre of rise in inflation

Motorists at a petrol station in Nairobi. The rising price of global oil has raised concern the cost of living will rise as local regulator plans to pass extra costs to consumers. PHOTO | DIANA NGILA 

By CHARLES MWANIKI, cmwaniki@ke.nationmedia.com

In Summary

• The price of oil has rebounded sharply over the past one month, gaining nearly $10 per barrel to $41.50 from $31 in mid-February.
• The Treasury’s intention to introduce a 16 per cent value added tax (VAT) on all petroleum products starting September will add further cost at the pump.

A sustained rebound in the price of oil poses an inflationary risk in the economy during the second half of the year with a spin-off expected in transport costs at a time when tax on petroleum products is set to rise.

Inflation in Kenya has been tracking downwards this year due to lower fuel and food prices, standing at 6.84 per cent in February from 7.78 per cent in January and 8.01 per cent in December 2015.

The price of oil has rebounded sharply over the past one month, gaining nearly $10 per barrel to $41.50 from $31 in mid-February.

“Countries such as Kenya have instituted more taxation on petroleum products, mitigating the cushion that would have existed prior to the new laws. There is a likely risk that the upward movement (to $50-60) would increase inflationary pressures,” said Genghis Capital macroeconomic analyst Kevin Tuitoek.

The Organisation of the Petroleum Exporting Countries (Opec) has this week said it expects a moderate rebound in prices.

According to Mr Tuitoek, the inflation picture for Kenya will also ride on the whether there are good rains this year—otherwise there would be a double risk of food- and transport-driven inflationary pressure later on.

Lower transport and household energy inflation in the second half of last year helped balance out a spike in food inflation during the El Niño rains.

The Treasury’s intention to introduce a 16 per cent value added tax (VAT) on all petroleum products starting September will add further cost at the pump.

READ: Petrol price increase looms in Rotich's new September tax

Consumers are already shouldering the Sh3 increment on the road maintenance levy that came into effect in July last year and an additional excise duty of Sh2.061 on diesel starting last December.

The Treasury and the Kenya Revenue Authority (KRA) have been under pressure to raise more cash to fund a Sh2.2 trillion budget, as recurrent expenditure and debt repayment strain public coffers.

The VAT Act 2013 gave a three-year transition period, up to September 2016, when the tax on all petroleum products would start to apply.

Parliament can however defer the tax when the Finance Bill 2016 comes up for debate after presentation of the budget in June.

The Energy Regulatory Commission (ERC) has already cautioned that the prices of petroleum products will start rising on the back of costs in line with a global perception that the crude prices have bottomed out at the January low of $29.

“The resurgence in the price of crude oil in the international market will influence future pricing of petroleum products locally… the fuel to be consumed over the next month is based on crude at $33 (Sh3,352) per barrel,” said the ERC when announcing the March price review last week.