Kenya Says New Excise Tax Won’t Cause Inflation Resurgence

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  • Falling food prices could slow rate of inflation further
  • Central bank sees current-account deficit at 5.5% this year

Kenya’s central bank doesn’t anticipate a resurgence in inflation when the government introduces a new excise duty on selected goods and services this year, Governor Patrick Njoroge said.

Instead, the central bank sees a decline in food prices exerting further downward pressure on inflation in coming months, Njoroge told reporters in the capital, Nairobi, on Tuesday. The Monetary Policy Committee cut Kenya’s benchmark rate by 100 basis points to 10.5 percent on Monday, the first reduction in three years, saying a drop in consumer prices had given it room to start easing.

“We are not concerned that it will lead to a resurgence in inflation,” Njoroge said, adding that the excise tax raise would increase prices by 0.3 percentage points. “It’s well accommodated.”

The rate of inflation slowed to 5.3 percent in April from a peak of 8 percent in December, following two rate increases of a total 300 basis points last year. Inflation is now within the government’s 2.5 percent to 7.5 percent target band.

The inflation base effect might be amplified by the tax increases in July, according to Jibran Qureishi, an economist at Nairobi-based CFC Stanbic Bank. The government is also likely to borrow more ahead of elections next year, he said.

Fiscal Risks

“We wouldn’t be surprised if the government doesn’t cut expenditure,” Qureishi said. “Monetary and fiscal policy consistency is the question now.”

Increased government borrowing would put pressure on interest rates in an environment where businesses will reduce activity as the political temperatures rise ahead of the election scheduled for August 2017, according to Faith Atiti, a research analyst at Nairobi-based CBA Capital. One person was shot dead on Monday during opposition protests demanding changes to the electoral body, according to the government spokesman, Eric Kiraithe.

“Risk comes from the fiscal side, debt absorption is still high, we may head to a situation where monetary policy is subordinate,” Atiti said. “You can have a monetary policy that looks to easing without commensurate support from the fiscal.”

The central bank expects Kenya’s current account deficit to widen to 5.8 percent of gross domestic product in 2017, from a projected 5.5 percent this year, Njoroge said.

The central bank revised its current-account deficit outlook downwards to 5.5 percent this year, from a previous projection of 6.3 percent. The gap in the broadest measure of trade in goods and services came in at 6.8 percent in 2015 from a revised 9.8 percent a year earlier, Njoroge said.

“The biggest risk is the fight on fiscal consolidation,” Gareth Brickman, an Africa analyst at ETM Analytics, said by phone. “If they don’t cut spending, it will raise pressure on shilling and rates.”