Why does Kenya's Finance Act ruling matter to the coffee industry?
Kenya's Supreme Court overturned a Court of Appeal ruling on August 20 and declared the 2023 Finance Act constitutional. The law doubles VAT on fuel, adds a housing levy and raises the top personal income tax rate. For the coffee industry, the ruling means higher production and transport costs and thinner margins on coffee beans production.
The EU Deforestation Regulation takes effect in January 2025 and could hit Kenya's coffee exports hard, since only about 30 to 40 percent of coffee is certified and smallholder farmers are poorly informed about compliance. Hearings on the act's constitutionality are set for September 10 and 11, and the government faces continued public anger over the 2024 Finance Act.
Kenya's Supreme Court overturned the Court of Appeal's ruling on August 20, finding the 2023 Finance Act constitutional, a move that had previously sparked large-scale protests in the capital Nairobi and other regions. The act doubles the VAT on fuel, introduces a housing levy, and raises the top personal income tax rate. The opposition and civil society groups expressed deep disappointment and fear that the cost of living will rise further. For the coffee industry, higher taxes push up production and transportation costs and squeeze profit margins; more seriously, the EU Deforestation Regulation (EUDR), set to take effect in January 2025, could deal a severe blow to Kenya's coffee exports. Currently only about 30% to 40% of coffee is certified, and smallholder farmers are generally poorly informed about compliance requirements. Front Street Coffee will continue to monitor developments in origin regions.
According to media reports, Kenya's Supreme Court overturned a lower court's ruling on August 20, declaring the controversial 2023 Finance Act constitutional, effectively upholding the legislation. But the legislation had previously triggered strong protests across Kenya.
It is understood that Kenya's Court of Appeal had previously declared the act unconstitutional on the grounds that the public participation process was flawed. However, the Supreme Court disagreed. According to its judgment, public opinion had been fully solicited during the legislative process and taken into account. Therefore, maintaining budget stability before next month's hearing is crucial, and hearings on whether the 2023 Finance Act is constitutional will be held on September 10 and 11.
This year, the 2024 Finance Act should have been implemented, but in June this year, President William Ruto and the government issued a new 2024 Finance Act. However, the act sparked public discontent, and protests erupted in Kenya's capital, Nairobi. During the protests, police clashed with demonstrators, causing multiple deaths and injuries, and the unrest later spread to other parts of Kenya, where clashes also occurred one after another.
This led President Ruto to implement a series of measures, including refusing to sign the new finance bill and dissolving the cabinet, but the public did not buy it and continued to protest. In the end, Kenya's parliament voted to delete all 65 clauses in the 2024 Finance Act. Because the new bill for this year was deleted, taxation can only continue under the 2023 finance law.
Regarding the Kenyan Supreme Court's ruling, the Kenyan government welcomed it, calling it a victory for its fiscal policy, but many Kenyans remain worried.
Opposition leaders and civil society groups expressed deep disappointment and concern. It was only after protests led by the opposition last year that the courts questioned it. This is because the 2023 Finance Act doubled the VAT on fuel, introduced a housing levy (House Levy), and raised the top personal income tax rate. Therefore, some opponents believe that this finance law imposes an undue burden on ordinary Kenyans, especially when the cost of living is high and the economy is difficult, and could trigger new protests again.
For the coffee industry, although the finance act is beneficial to commodity exports, the tax increase undoubtedly has a negative impact on the coffee industry, increasing production and transportation costs and reducing profit margins. At present, the price of green coffee beans is rising in tandem with lower output and higher international prices. Taxes may push up the prices of coffee and other products to offset the tax burden, and may also affect consumers' willingness to buy.
In addition, the biggest and most urgent problem at present is the implementation of the EU Deforestation Regulation (EUDR), which will officially take effect in January 2025. This will deal a severe blow to Kenya's coffee industry. This is because 70% of Kenya's main coffee market is the EU. At present, only about 30%-40% of Kenya's coffee industry is certified. Certification bodies such as the Rainforest Alliance are working hard to help uncertified farmers, but the remaining time makes it difficult to complete the remaining 60%.
In addition, because most Kenyan coffee growers are smallholders and are fairly scattered even within the same producing region, many farmers know nothing about the EU's new rules, and the cost of compliance is relatively high for some smallholders. Coffee industry insiders say the EU's new rules pose huge challenges to Kenyan coffee growers and are also a test for the entire supply chain. The Kenyan government needs to act quickly to incentivize coffee cultivation, but the current political situation is relatively chaotic, and the prospects for the coffee industry's development are unclear. If production cannot be increased, prices will rise sharply.
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The above content is compiled by CoffeeHunters, a coffee news website.
