Potential car owners dream meets policy change reality

By Steve UMIDHA

Potential car buyers spooked by Kenya’s decision to raise duty on motor vehicles under the East African Community – EAC common external tariff, have been left scratching their heads, and may be forced to spend more to motorize their dream.

Two weeks ago, Kenyan car dealers were hit by a 35 percent import duty after the EAC approved a surprise application by Kenya’s top leadership to review upwards the import levies from 25 percent, a – 10 percent adjustment rate which has since seen sharp increases of imported cars.

Effectively, this means that vehicles imported into the country will now fetch a higher price locally by an extra Sh100,000 for an automobile originally being imported at Sh1 Million for instance.

Meaning an import buyer will purchase the same car at an average price of Sh1.1 million or more – before selling it at an even higher price to the local buyer.

It also means that the same car price will now be 10 per cent cheaper in regional markets like Uganda and Rwanda who are also EAC member states.

Ordinarily, a change in import duty impacts the excise and value added tax (VAT) charges as the value is compounded for taxation purposes, including insurance and freight (CIF) charges as well as import declaration fees and railway development levy which are charged separately for the customs value.

At current market price of a popular car like Toyota’s vitz goes for about Sh1.3 million, if the additional 10 percent is effected, that price automatically climbs to about Sh1.41million.

Similarly, a local buyer keen on a Nissan’s note model which was being sold locally (at car yard prices) at an average of Sh950,000, will now sell at Sh95,000 more at Sh1.045million.

Toyota’s Harrier– another popular car brand among Kenyan motorists which was until recently selling at an average price of Sh3million, will now fetch in excess of Sh400,000 more with the new policy.

In a telephone interview Thursday last week, Charles Munyori, the secretary general of the Kenya Auto Bazaar Association, a lobby body for second-hand car dealers, said the new move will not only see a shrinkage in the volume of cars being imported in the country, but also push some importers out of the business.

Kenya imports an average of between 80,000 and 100,000 fully built vehicles every year and has an installed vehicle assembly capacity of slightly over 30,000 units – with the latter’s capacity believed to be held back by a deliberate delay by the Kenyan government to implement a national automotive policy whose creation was intended to localize its new cars.

“It will be left for those with the money. Assuming an importer who brought in 10 units before the new measure kicked in, based on that impact they will be forced to reduce that number to about 7 or 8 units, and this is going to affect buyers in the upper and lower end cadre.

The ripple effect will be massive,” offered Munyiri, who also said the impact will be aggravated by the strong dollar performance now, against the Shilling.

Nations like Kenya with a weak currency also have much higher levels of imports compared to exports, resulting in more supply than demand for such currencies on international foreign exchange markets—if they are freely traded.

When currencies weaken against the US dollar, local prices rise, as much of what people buy, including essential items like food, are imported.

In his view the new changes will not only affect the mitumba cars – as they are fondly known, but also new car buyers, since such vehicles attract excise duty ranging from 25 percent to 35 percent depending on the size of the engine and value-added tax of 16 percent, payable cumulatively and in that order.

“This will not only affect us but also new car buyers,” offered Munyiri.

Majority of Kenyan motorists prefer to import second-hand vehicles as they are cheaper compared to the ones in local car dealerships. By cutting out the middleman, buyers can save up to 25 percent in cost, even though the process of importing takes a bit more time and can be quite confusing for many first-time importers.

New car dealers have sold just 4, 803 total units between January and May 2023, according to figures by the Kenya Motor Industry Association (KMI) – a lobby for new vehicle dealers, or showroom cars.

Other challenges 

Pending bills by the national and county governments have sapped auto sales in as many months and a recovery will likely be slow, threatening job security.

Coupled with currency fluctuations and high-interest rates, auto executives are particularly concerned that continued inability by both sets of governments has already seen most of them ‘write off’ the year.

“This year is gone,” offered Dinesh Kotecha, the Group CEO of Simba Corporation – sellers of Proton vehicle brands, Mitsubishi, Fuso, Mahindra, and Same Tractors.

In a telephone interview recently Kotecha said the mounting pending bills and high-interest rates are the most pressing and lingering holdups, likely to see the industry perform dismally this year.

Since the beginning of 2020, the Kenya shilling has lost approximately 25 per cent of its value against the US dollar.

By November last year, the currency was trading at around Sh117 against the dollar – rising to over Sh140 this year. The shilling closed Monday trading at Sh138.45 against the dollar.

There is still a problem out there and until we are able to see some sort of stabilisation in terms of interest rates and exchange rates, we will end the year in the same way we did in 2022,” said Kotecha, who also predicted reduced pent-up demand from individual buyers.

Arvinder Reel, the managing director of CFAO Group which sells Toyota vehicles and Hino trucks, shares similar worries and is “hoping to do at least what we did last year.”

“Government is the largest buyer and with these challenges, we have already seen the market shrink by 13 per cent. And with high taxation we have also seen disposable income of would-be buyers limited as a result,” said Reel in an interview.

In the short term, both agree that fleet sales are not a major concern for automakers who are now focused on ramping up production to beef up lacklustre dealer inventories which have existed since the onset of Covid-19.

Counties’ nightmare 

Figures by the Controller of Budget (CoB), Margaret Nyakango shows that National and County Governments’ unpaid bills stood at Sh637.91 billion as of February 2023.

As of December, last year, ministries had pending bills of Sh80.2 billion, State co-operations had pending bills worth Sh400.6 billion, while counties had Sh157.91 worth of pending bills

 

This article first appeared on People Daily