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CBK unperturbed by VAT hike on fuel, predicts growth above 5pc

The Central Bank of Kenya (CBK) new governor Dr Kamau Thugge projects inflation rate to subside to within medium term target by end of the third quarter.

This is despite increases in Value Added Tax (VAT) on petroleum products from 8pc to 16pc by the government.

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During a post Monetary Policy Committee (MPC) on Tuesday, Dr Thugge was optimistic that inflation will ease to between 2.5pc-7.5pc by September 2023, supported by reductions in key levies charged on imports of the products.

“There are offsetting factors as you are aware that the Import Declaration Fee has been reduced from 3.5pc to 2.5pc and similarly the Railway Development Levy has also been reduced from 2pc to 1.5pc. These will mitigate any impact that may arise from VAT on fuel but we do expect some increase in July,” said Dr Thugge.

Non-food-non-fuel inflation continues to impact the overall rate of inflation, rising to 4.3pc in May from 4.1pc in May which according to the governor, indicates “persistent underlying inflationary pressures in the economy”, a move that has forced the committee to tighten its monetary stance.

The Finance Act which comes into force on July 1, 2023 will now see the Energy and Petroleum Regulatory Authority apply the new rate in its next review, setting consumers for possible higher transport costs.

The governor is also projecting Kenya’s real Gross Domestic Product (GDP) to register a growth of above 5pc this year from 4.8pc last year with budgetary allocations targeting key value chains.

Additionally, the Ksh 140 billion ($1b) Development Policy Operation (DPO) Kenya tapped from the World Bank last month to provide low-cost budget financing is projected to improve private sector cash flow and support growth with settling of pending bills to suppliers and in turn reduce non-performing loans.

“National Treasury will actually now spend and also transfer the resources that are required to the national and county governments. With national government and county governments paying (suppliers) we would expect the level of non-performing loans to decline,” Dr Thugge added.

During Monday’s sitting, the MPC hiked benchmark rate by 100 basis points-an 84 months high- from 9.5pc to 10.5pc. The next MPC meeting is scheduled for July.

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