Kenya’s economy is on a drip and unstable. The prognosis isn’t rosy. The macroeconomic indicators are headed south. Interest rates are up, even for premium Treasury instruments, at 16 percent. The shilling is on a free-fall, with businesses buying US dollars at an average of Sh156 a piece.
Our trade imbalance is hugely negative as imports exceed exports by three times. Demand for goods and services is subdued as purchasing power is eroded. Unemployment is the highest in the region as businesses continue to shed jobs.
The high cost of living has defiled our dignity and the nation, including a government hooked on loans.
The government debt is now around Sh11 trillion. Commercial banks’ lending is about Sh4 trillion. Digital lenders, such as Fuliza, paid out nearly Sh1 trillion in the past year.
But the public debt remains the elephant in the room, driving the State’s high taxes policy, enhanced exchange rate risks and high interest rates.
Global increases in prices of raw materials, including oil, disruption of the food supply chain and high inflation mitigation measures have exacerbated the situation. The high cost of energy, power and high taxes have all contributed significantly to the worsening business environment in the country, which together with other constants, such as corruption and poor governance, have eroded our competitiveness in the region.
The Kenya Kwanza administration has placed tax collections as its priority, arguing that it will have more money to repay the public debt and invest more in development. A cardinal rule during an economic decline is to not raise taxes.
Employers struggle to keep their businesses in operation and pay their employees. Individuals are concerned about loss of income. When the economy is struggling, you cut taxes, when it’s booming, you raise them. More taxes will only increase the cost of living, and worsen the poor business environment.
The intense desire for trillions more in taxes will spur increased spending within the government in anticipation of increased revenue. However, revenue shortfalls will then inevitably lead to more borrowing.
Moreover, tax predictability is now a major concern to investors who are finding it difficult to plan appropriately.
But are we collecting less taxes? The best measure globally is the tax revenues as a percentage of our gross domestic product (GDP). This ratio for Kenya now averages 17 percent, more than the average for Africa of 16 percent.
In Egypt and Ghana, the ratio is 12.5 percent and 11.3 percent respectively. For Uganda and Tanzania, revenue collection is 11.4 percent and 11.7 percent, while Rwanda’s is 15 percent.
Kenya is more efficient in revenue collection than many countries in Africa. Our annual tax revenues are more than those of the other five East African countries combined, until last year when the depreciation of our currency reduced it marginally.
The ratio was highest in 2014 at 19 percent but reduced in subsequent years to as low as 14 percent as President Uhuru Kenyatta’s government rebased the economy by increasing the GDP by 30 percent during his tenure.
The growth of tax revenues moves in tandem with the growth of the economy. For instance, the Kenya Revenue Authority (KRA) collected Sh218 billion in revenue in 2002 but collected Sh845 billion in 2013.
And the reason is the size of the economy. In 2002, our GDP was Sh203 billion but by the time President Mwai Kibaki left, it was Sh707 billion.
Our corporate tax rate of 30 percent and taxes on employee income are among the highest in Africa. Comparative high corporation tax rates are South Africa at 28 percent, Egypt at 22.5 percent, Algeria at 26 percent, and Ghana at 25 percent. Besides the taxes, we have numerous levies the government collects, which in reality are taxes.
Do we need to review some of these taxes downwards? Yes! Especially those affecting food, fuel, industrial raw materials and inputs, including the construction industry. Recent reports indicate that revenue collections have declined as Kenyans reduced consumption.
The 16 percent value-added tax (VAT) on fuel has a profound effect on the cost of living and reduces our competitiveness and revenue collection. It should be removed.
The 17.5 percent Export And Investment Promotion Levy on steel and clinker will not boost local production, let alone exports, and shouldn’t have been introduced.
Moreover, the many direct taxes, including the Housing Levy, will reduce the disposal incomes of employees, hurt purchasing power, and erode the profits of businesses.
Do levies collected by the government help the relevant sector? Not all. Nine taxes and levies on fuel is a case in point although in recent years, Petroleum Development Levy was used to subsidise fuel prices.
The Railway Development Levy, charged at 1.5 percent on all imports of goods, increases the cost of all products. It’s like an additional duty or VAT on goods.
For how long? How much was collected to date? Over Sh300 billion? Was it used to service the SGR loan? Certainly not! Agricultural Food Authority charges a two percent levy on crude palm oil and all other oil seeds imported. Is it used to develop the sector? No!
The 0.2 percent Standards Levy charged on a turnover by the Kenya Bureau of Standards is a similar burden for businesses with no direct benefit accruing to businesses. Many more levies and charges by counties make the cost of doing business very high and worsen the cost of living.
There is an urgent need to review hundreds of levies charged by both levels of government and eliminate those that are unnecessary burdens on the economy.
Budget Deficit
The budget deficit has averaged nine percent in the past decade, up from 4.2 percent in 2012. We must reduce it by committing to live within our means. It all starts with the budget! Rationalisation of public expenditure is critical in containing the deficit and borrowing. The focus on revenue alone is misplaced. Spending is the problem.
In 2022/23, our expenditure was Sh3.3 trillion. This year, it has been raised to nearly Sh4 trillion against an unrealistic revenue estimate of Sh3 trillion, setting the stage for more loans. Fidelity to budget appropriations approved by Parliament in Exchequer releases is critical, a matter that the Controller of Budget should take seriously.
Ministries and State agencies often hold paper budgetary allocations, with no exchequer. Yet, Parliament approved appropriations that the Treasury ignores with abandon.
Public Finance Management Act has adequate provisions to guard against unapproved expenditure and unauthorised /unbudgeted activities both of which contribute to the huge pending bills.
Public debt
Given our fragile economy and the rising poverty, the government must focus the attention of Kenyans on the real possibility we may soon default on our debt. We are in a debt trap, simply rolling over debt for lack of ability to repay, or taking a new loan to service a maturing one. A default would make the country descend into a financial abyss.
We must have a national conversation about debt. Period! It is urgent. The government’s continued borrowing as if it is business as usual, or because we have a rapport with the International Monetary Fund is dangerous.
Binge borrowing to finance consumption is a bad habit, and unsustainable. Further, it is fraudulent when the government borrows big time but camouflages its actions to avoid public scrutiny.
Parliament has the singular mandate to demand that it must approve all loans before the Treasury signs on to it as required by the Constitution. It must act now.
Those who commit the State in loans not meant for development must be held accountable. This requires commitment and political goodwill from the Head of State.
In the medium term, the government has indicated in budget policy papers that it will increase debt by a net Sh5 trillion. This assumes the KRA will meet its targets on revenue.
If it doesn’t, which appears to be the case, new loans may be significantly higher over the next five years.
The government should use all its influence on the global stage to urgently seek rescheduling of debt.
Misplaced priorities
Misplaced priorities in government spending are our Achilles heel!
Why do you build houses when schools require over 10,000 classrooms for a competency-based curriculum? Or when the Higher Education Loans Board cannot finance university students? Or when the Education ministry cannot find money for school capitation?
We live large. Conspicuous consumption is the trend. No amount of revenue will satisfy a government that treats extravagant spending as a sacred duty! If our expenditure is not prudently managed, we shall continue to impoverish Kenyans with debt and high taxes
Of nearly 250 State corporations, about 50 are commercial. Many are unnecessary burdens on the exchequer. For a long time, various commissions have recommended that these corporations be merged, privatised, leased or closed down.
However, such reports have been ignored for political expediency. The consequence is the Treasury bailing out many, providing statutory guarantees or borrowing money for them, with total commitments in all amounting to nearly Sh3 trillion. The rationalisation of State corporations is critical.
Is it necessary for the government to continue engaging in businesses when it is making losses through the State corporations? For instance, over Sh24 billion approved by this administration for duty-free imports through Kenya National Trading Corporation was utterly misplaced as it did not achieve its stated objective of price stabilisation.
Although markets are imperfect sometimes, it is more efficient than the State. The government should let markets be!
I also believe the decision to tax Kenyans to fund the construction of housing is misplaced. It would be foolhardy to suggest that the government will efficiently absorb more than Sh300 billion the fund will raise over the next three years.
The numerous attempts to change policy and legislative framework in various sectors in the short term are proving to be an economic burden to the taxpayers and cost of living.
Devolution
Quite often, a perception is created that the Constitution is to blame for the huge budget deficit. Devolution and independent offices and commissions are cited as examples. Nothing could be further from the truth.
The total budgetary allocations to devolved county governments and these independent offices and commissions are less than 10 percent of the current total budgeted expenditure.
The independent offices and commissions are necessary for good governance, which is the bane of our leadership. These watchdog institutions, where independent, provide relevant checks and balances that are necessary for accountability.
The writer is former Mandera Senator and chairperson of the parliamentary Finance, Commerce and Budget Committee.
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