Taxpayers queue outside the Kenya Revenue Authority’s head office in Nairobi to file their tax returns. TOfficial statistics show that the government got only Sh345 billion in revenues from taxes, grants and domestic borrowing against a target of Sh390 billion for the period under review that began in July. File
Tax revenues for the second quarter of the financial year were off target by a massive Sh45 billion, setting the Treasury up for a season of belt-tightening that is expected to put a number of development projects on ice.
Official statistics show that the government got only Sh345 billion in revenues from taxes, grants and domestic borrowing against a target of Sh390 billion for the period under review that began in July.
Public finance experts said the danger lies in the fact that the high cost of funds has made it more difficult for the government to borrow from the domestic market and donors remain tight with their funds.
Subscription for government paper has been dropping steadily since the beginning of the year as the Treasury balances its need for cash against the cost of public debt.
The outcome is expected to force the Treasury into crafting a new austerity plan four months after it cut spending on travel, furniture, cars and training to finance the war in Somalia.
That effort amounted to a Sh15 billion expenditure cut out of the Sh1.155 trillion budget for the current financial year.
Expenditure reduction was seen as the best way to cushion the economy from the interest rates rise shock that would have come with a sudden increase in government borrowing from the domestic market.
A Sh45 billion shortfall may force the Treasury to put government agencies on a fresh round of spending cuts with huge ramifications on the economy.
The Treasury’s latest data shows that taxes were Sh23 billion below target in the second quarter while donors failed to disburse Sh10 billion of promised funds leaving huge gaps in the budget.
A fragile economy, the recent increase in excise duty and challenges in the administration of value added tax are expected to continue depressing revenue growth in the medium term.
Last month, the Kenya Revenue Authority (KRA) said in a statement that the unfavourable macroeconomic environment was to blame for the less than expected outcome of revenue collections at the end of last year.
“The operating environment leading into and during the second quarter 2011/12 was not promising having been characterised by high inflation, rising interest rates, fluctuation of the exchange rate and high oil prices,” said Michael Waweru, the outgoing commissioner-general.
Mr Waweru said the unfavourable economic conditions were “likely to continue in the third quarter of financial year that ends in March.”
Nikhil Hira, a tax expert with audit firm Deloitte East Africa, attributed the poor revenue performance to the unstable macroeconomic conditions at the end of last year.
“High interest rates and inflation often means people cannot not spend as much as they would have in a stable macro-economic environment,” he said. “One can see from the malls that spending has slowed down and this will continue to affect tax collections,” said Mr Hira. KRA is expected to remain behind its revenue targets even after receiving the bulk of the collections in April this year, when many corporate citizens and individuals submit their taxes for the year ending December 2011.
Mr Hira added that some of the newly introduced tax measures such as the increase in excise duty on beer, wines and spirits had contributed to lower consumption cutting total revenue by large margins.
KRA collected Sh37 billion from the two areas of taxation or Sh7.2 billion below target. “An increase in taxes such as excise results in less consumption. People spend less when prices rise, especially if they are already spending more on other goods,” said Mr Hira.
Collections by government ministries and departments, also called local appropriations-in-aid also slid to Sh24 billion or Sh12 billion below target in the quarter ending December 2011.
It is not clear why donors are reluctant to release funds they promised the government but a recent failure by government ministries to meet the stringent disbursement conditions has partly been blamed for the stalemate.
“Kenya has not met many of the conditions it had agreed with the donors,” said John Mutua, the budget programme officer at the Institute of Economic Affairs.
Mr Mutua said some ministries have been slow in meeting the requirements for release of funds.
The requirements relate to auditing of previous projects, submission of designs for planned projects and proper accounting for ongoing spending.
“That leaves the government with the choice of spending cuts that may include delaying or deferring some projects or a cut in spending on items such as furniture, cars, training,” said Mr Mutua.
A steep rise in interest rates has made it difficult for the government to continue plugging its financial gaps with funds from the domestic market leaving foreign debt as the only viable alternative.
The government has gone to foreign markets to raise $600 million (Sh50 billion) to meet at least a portion of the planned domestic borrowing of Sh119.5 billion.
By the end of December 2011, the government had raised only Sh11.6 billion out of the Sh119.5 billion it plans to borrow from the domestic market by June.
Budget documents show that the government had actually planned to frontload the borrowing to finish ongoing projects as well as implement the constitutional reforms.
Economic performance in the first half of the fiscal year may also have played a major factor in revenue collections.
During the first quarter of the financial year, the gross domestic product grew by 3.6 per cent compared to 5.7 per cent of the same quarter the previous year.
