A demand by the government on alcohol manufacturers to remit excise duty within 24 hours to the Kenya Revenue Authority (KRA) pushed East African Breweries PLC to rely on short-term loans from commercial banks to service up to half of its excise obligations.
This follows an amendment to the Finance Act 2023 on the Excise Duty Act that compelled beer manufacturers to remit excise duty collections to the taxman within 24 hours after moving goods from the stockroom.
This was a departure from the previous monthly remittance which had to be made by the 20th of every month.
EABL now says that it is being compelled to make borrowings of up to Sh2.2 billion monthly, owing to this change in the excise duty regime in the country, a reality that is adversely impacting the firm’s debt position, especially in an environment where interest rates are rising.
“You now have a whole army reconciling and correcting and because you don’t want to underpay and be hit by penalties, you are constantly paying ahead and then trying to get back and rebalance the numbers,” EABL Chief Finance Officer, Risper Genga Ohaga, told the Business Daily.
“So, it’s extremely administratively challenging. We sell on credit, we have 250,000 retailers out there, the distributors who buy from us do so on credit, sometimes 30 days and sometimes 45 days,” she said.
Last week, the firm reported a 22.1 percent drop in its net earnings to Sh6.8 billion in the six months to December 2023. This saw it slash its dividend to Sh1.0 per share down from Sh3.75 a year earlier, citing the need to preserve cash and wind down its debt amidst a tough operating environment.
EABL says that what the law change means is that it must now pay the tax the minute it takes any stocks from its stores, even before it reaches the distributor or the retailer from whom the customer will buy.
“So, I am pre-paying all of this and that means a hit on my working capital.”
Ms Ohaga further says that the switch brought about by the change in excise tax relating to alcoholic beverages has translated into significant challenges in tax compliance owing to the administrative burden it imposes on manufacturers with daily reconciliation being undertaken.
The brewer the tax changes are very problematic and the firm has already passed this feedback to policy makers.
“Administratively, it means we are reconciling our accounts daily. When we had it monthly, we’d close our books, reconcile the numbers, you are sure you have done the right submission and you can reconcile it to your general ledger and you are correct.”
“Now you are paying excise, which is a consumption tax, the minute you remove it from the store. You don’t know whether you have sold it or not. Next week when you sell it, you now start doing adjustments. It’s chaotic,” Ohaga says. Borrowing to deal with working capital was one of the reasons that pushed the costs of financing its loans up by 66 percent, on account of the sharp rise in Treasury bill rates across its operating markets in East Africa.
The company said that it spent Sh3.96 billion in finance costs in the period, up from Sh2.39 billion in the corresponding period a year earlier, even as its debt load fell by 5.4 percent or Sh3.28 billion to Sh57.4 billion.
Most of the company’s borrowings in Kenya, Uganda and Tanzania are pegged on six-month Treasury bills, with a premium on top, meaning that the recent rise in rates has exposed the company to higher charges from its creditors.
The firm also blamed its profit drop on higher finance costs, even as the company reported a 16.2 percent growth in net revenue —after indirect taxes— to Sh66.5 billion.
Kenya’s government securities have seen their rates go up sharply over the past year, with Uganda and Tanzania also recording higher yields in the period. The 182-day T-bill rate in Kenya rose from 11.9 percent in June 2023 to 16 percent at the end of December, while Uganda’s was up to 12.4 percent from 10.7 percent in the period.
In Tanzania, the 182-day paper saw a near doubling of yield to 9.4 percent at the end of the year from 5.8 percent in June 2023.
Meanwhile, Kenya adjusted its Central Bank Rate upwards by two percentage points to 12.5 percent within the period, affecting facilities whose interest is pegged on the rate.
EABL’s annual report for 2023 —covering the year ending June 2023— showed that the group held three facilities in Kenya pegged on the 182-day T-bill, with premiums of between 1.5 percent and 2.45 percent on top of the rate.
Two other facilities were pegged on the 91-day Treasury bill (plus 1.5 percent) and the Central Bank Rate plus one percent, while one was on a fixed rate. The facility pegged on the three-month T-bill matured in September 2023.
In Uganda, EABL held four variable rate loans pegged on the country’s 182-day T-bill, plus premiums of between 1.75 and 1.9 percent. In Tanzania, three loans were pegged on the six-month T-bill plus premiums of between four and 5.8 percent (one of these loans matured in August 2023), with a fourth being in the form of a bank overdraft.
EABL also has an outstanding medium-term bond listed on the Nairobi Securities Exchange (NSE), which pays a fixed rate of 12.5 percent.
The rise in interest on government securities and the CBR, apart from directly affecting the cost of pegged facilities, also filters through to bank loan facilities, since lenders adjust their charges to reflect the higher cost of money.
More companies are likely to report higher finance costs, eating into the bottom line and making it harder to take up new debt facilities for capital investment.
