Financial services topple manufacturing as top source of tax revenue

The financial and insurance sector has for the first time overtaken manufacturing to become the largest source of tax revenue for the Exchequer, shinning the spotlight on the dwindling competitiveness of Kenyan factories.

Statistics from Kenya Revenue Authority (KRA) show tax receipts from the financial services sector, dominated by risk-averse banks, grew Sh17.29 billion or 11.64 percent to nearly Sh165.84 billion in the fiscal year ended June 2019 compared with a year earlier.

The faster growth helped the sector to narrowly dislodge manufacturing from the top of the list of largest revenue contributors after the latter’s tax receipts expanded by Sh10.05 billion, or 6.52 percent, to Sh164.30 billion.

The slowdown in growth of tax revenue from factories reflects the shrinking contribution of manufacturing to Kenya’s Gross Domestic Product (GDP).

Manufacturers have in the past largely blamed inefficiencies, higher levies, taxes and energy prices for ramping up cost of production, cutting the competitiveness of Kenyan factories by about 12 percent compared with global average.

The manufacturing sector’s share of Kenya’s GDP has steadily dropped to 7.51 percent (Sh712.34 billion) in the year through June 2019 from 7.92 percent (Sh674.86 billion) a year earlier and 8.61 percent (Sh659.19 billion) in the 29016-17 fiscal year.

“The manufacturing sector which is tax-rich…has seen its share of GDP decline, undermining the overall tax effort in the country,” the taxman says in sectoral contribution to taxation report. The dwindling weight of the sector to the economic output continues even after President Uhuru Kenyatta made manufacturing a key pillar of s “the Big Four Agenda” economic transformation plan by 2022.

The President is banking on modernisation and development of new factories largely in agro-processing, leather, textiles and fish-processing subsectors to help generate targeted 800,000 new decent jobs for Kenya’s rapidly expanding unemployed graduate youth.

Findings of a research by Strathmore University and global business management software firm Syspro showed in July that half of Kenyan factories operate at suboptimal capacity. The survey which sampled nearly 100 manufacturing firms across 12 sub-sectors in Nairobi, Kiambu and Machakos further suggested that 54 percent of factories operate less than eight hours a day.

About 54 percent of the plants cited cost of energy as a damper to optimal business operations, while 43 percent cited high taxes and cheap imports (40 percent).

An analysis of latest full-year financial performance statements of eight publicly-listed firms under manufacturing sector also shows that only two have posted modest growth in sales revenue since 2016, with the remainder suffering a dip in turnover.

The two are East African Breweries whose full-year revenue for the period through June 2019 stood at Sh82.54 billion compared with Sh64.32 billion through June 2016, and Unga Group’s Sh19.98 billion for the period through June 2018 from Sh18.95 billion in June 2016.

Other manufacturing firms whose shares are publicly traded on the Nairobi bourse, such as BAT Kenya, BOC Kenya, Carbacid Investments, Flame Tree and Kenya Orchards have reported less sales revenue in latest financial performance filings compared with two years ago.

Troubled Mumias Sugar Company, on the other hand, has seen revenue plunge to Sh1.38 billion for the year ended June, 2018 from Sh6.29 billion two years earlier.

The sector’s contribution to the national wealth is now at half the 15 percent target under the “Big Four” Agenda strategy, an underperformance that has fed into tax receipts.

“Our economic structure has a growing agricultural sector and a declining manufacturing sector,” KRA’s deputy commissioner for strategy and innovation Joseline Ogai said in August.

“(As a result), we are now seeing the sectors where we traditionally get tax revenue from showing signs of weakness and the sectors where we don’t get a lot of tax revenue beginning to dominate the economy.”

Disjointed informal industries coupled with low investment and high cost of business has stifled job creation in the Kenyan manufacturing sector, a review showed.

A policy review by the State-run think-tank, Kenya Institute for Public Policy Research and Analysis (Kippra), says the manufacturing sector has continuously missed its jobs target over the years despite its potential as key contributor to the national economy.

The sector created some 700,000 jobs in the four years through 2016 against a projected 1.1 million, an equivalent of a 36.6 percent underperformance. Projections for formal manufacturing were 338,000 but only 30,000 jobs were created. Informal manufacturing—popularly known as jua kali— was projected to create 770,000 jobs of which 670,000 were realised.

This represents job creation of 8 and 87 per cent respectively for formal and informal manufacturing.

“The manufacturing sector is key in the creation of job opportunities. The sector is, however, plagued by growing informality that contributes close to 90 percent of all the jobs,” the paper reads in part. The contribution of farming activities – which are not largely taxed because the produce either goes into home consumption, exported or form raw materials for industries – to Kenya’s GDP has been rising in recent years, hurting tax revenue receipts.

The contribution of agriculture to GDP has risen from 33.84 percent (Sh2.59 trillion) in year ended June 2017 to 34.48 percent (Sh2.93 trillion) in 2017-18 and 35.37 percent in the one ended June 2019, estimates by the Treasury shows.

The sector’s share of government revenue, however, remained at a lowly 2.58 percent (Sh23.30 billion) of the Sh901.55 billion total domestic tax receipts from the private sector, the KRA data shows.

This is barely unchanged from 2.38 percent (Sh19.94 billion) of the total Sh836.58 billion in 2017-18 and 2.28 percent of the Sh790.05 billion private sector receipts the year before.

The low contribution of agriculture to revenue has partly helped pull down Kenya’s revenue to GDP ratio steadily from a high of 18.09 percent in financial year ended June 2014 to 17.47 percent (2014-15), 16.88 percent (2015-16), 16.33 percent (2016-17), 15.83 percent (2017-18) and 14.70 percent in 2018-19 fiscal year. “A combination of structural and administrative issues has caused revenue/GDP to stagnate in recent years. Some of this is the result of agriculture being a large component of the economy and most of the non-export agricultural output coming from untaxed smallholders,” Fitch analysts wrote in the report published on April 30.

“In addition, weak tax compliance and the expansion of tax exemptions have muted domestic revenue growth.”

The ICT sector, however, experienced the largest growth in tax receipts of 15.47 percent to Sh134.61 billion in the year through June 2019 compared with Sh116.57 billion the year before. This makes the sector the third largest source of tax revenue for the government, pushing the sector’s tax to GDP ratio to 103.4 percent. This is because its share to Kenya’s economic output was estimated at Sh122.36 billion (1.29 percent), according to KRA data.