By Yvonne Mhango
June 24, 2015

Kenya appears poised for “a one-off lift in inflation” and a shift in the country’s GDP growth drivers from a consumption to an investment-led growth model if the continued scaling up of infrastructure investment and the proposed increase in excise taxes that’s currently being tabled in the parliament is passed.

Analysts at Renaissance Capital see a positive here and say once the consequences of the “one-off lift in inflation” slows down, “assuming all things remain equal,” the effects would be moderate and would help firm the Kenyan Shilling.

While a tax hike (excise taxes) on goods such as motor vehicles, fuel, beverages and cigarettes means higher prices for Kenyan consumer, softer import demand on the back of escalating prices would help firm the Shilling- which in recent months has come under stronger depreciation pressures owing to the widening deficit- and in return may help constrain the current account deficit.

According to Renaissance Capital’s sub-Saharan Africa brewers analyst, Omair Ansari, “a firmer shilling would help mitigate the impact of imported inflation, which would be positive for East African Breweries Limited (EABL)”- East Africa’s largest alcohol beverage company which imports c. 25 percent of its raw materials.

The last time Kenya experienced a tax hike that impacted prices of consumer goods was in September 2013, when the new VAT Act was implemented and previously exempted commodities became subject to 16 percent VAT. This resulted in inflation accelerating to 8.2 percent Year-on-Year (YOY) in September 2013, from 6.6 percent YoY in the previous month and 5.5 percent YoY a year earlier. When VAT was imposed, the policy rate was at the bottom of a nine-month 9.5-ppt rate-cutting cycle. As the jump in inflation, post-VAT hike, proved to be temporal, the central bank did not change its policy stance.

This time around, an excise tax hike, if effected in the short term, would come during a hiking cycle. Although an excise duty hike would add to inflationary pressures stemming from a dry spell and soft shilling, the central bank is not expected to tighten more aggressively, unless the excise duty hike had durable secondary effects.

However, analysts still think there may be a small risk of this. The initial rate hikes are positive for the banks, particularly margins which have recently hit historical lows, according to banks analyst, Soji Solanke. However, sub-Saharan Africa cements analyst, Roy Mutooni, thinks rate hikes are negative for cement, as they would hurt construction activity, especially home building. But it would have limited impact on government-related projects.

The opinions expressed are that of Renaissance Capital team. Yvonne Mhango is an analyst at Renaissance Capital, a leading emerging and frontier markets investment bank. For additional information about the firm’s latest research on Africa’s markets, or other emerging/ frontier markets, you can contact the Renaissance Capital team via or write the writer at This article was edited by Kemi Osukoya.

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