Shady parallel economy where tax-free billions roam

Rohinton Mistry an Indian-born Canadian writer may have had Kenya in mind when he wrote in his 2001 novel, Family Matters: “Black money is so much a part of our white economy, a tumour in the centre of the brain — try to remove it and you kill the patient.”

Since the partnering of the Kenya Revenue Authority, the Kenya Bureau of Standards and Anti-Counterfeit agency to stamp out a secret economy run by powerful individuals out to cut corners, a lid has been lifted offering a sneak preview into the shadowy dealings estimated by the Kenya Association of Manufactures at Sh200 billion.

Usually described by government officials as cartels, they are roaming free in almost all sectors of the economy jeopardising the effectiveness of policy planners.

Illegal imports are circulating freely in the economy, many companies are facing survival battles and standards of goods having been compromised as some of the very officials employed to guard against such economic crimes look the other way.

“I wish the government could sincerely talk to us, especially us who have been victims,” Jackson Mutua managing director of Eveready told Smart Company.

“There is a booming underground economy in almost all sectors. If you do a fact check on how many containers leave, say China, destined for Kenya, and how many are registered at the customs department for tax, you will begin to understand the enormity of the rot.” Once among the most loved stocks on the Nairobi Securities Exchange (NSE), Eveready’s share price has plunged in the recent past as cheap imports forced it to close its battery-manufacturing plant, sending home hundreds of workers.

Sameer Africa, another listed company had to shut down its tyre making factory pointing fingers at uncontrolled import of cheap products from China and India. Like Eveready, it now imports to sell. But even on this, cartels still have the last laugh.

According to Mr Mutua, with many firms bringing in substandard goods and at the same time evading taxes, reviving manufacturing may remain a fanciful hope.

“A lot of local companies both at SME level and even larger organisations have had to either close down or shift manufacturing to other countries and produce at low quantities,” said Mr Mutua.

This, he added, has triggered a negative multiplier impact where job losses not only happen in manufacturing firms but also service providers such as those in transport that serve goods makers.

And the impact of the rot extends beyond the two companies. Commodities such as sugar, maize, water, rice, vehicles, fish, hospital drugs, fuel and fertiliser have all found their way into the country by faceless importers, denying the country revenue and putting the lives of Kenyans at risk.

On September 6, 2018, KRA destroyed 728 bags of illicit sugar that had been intercepted in Wajir. It said the sweetener was part of a larger consignment of 1,584 bags worth Sh2 million intercepted by customs officials at the border.

Officials had also intercepted 30 boxes of milk powder from Denmark and another 30 boxes of cooking oil manufactured in Malaysia valued at Sh180,000 and Sh29,700 respectively.

A businessman identified as Hassan Noor was fined Sh2.2 million for transporting the goods whose taxes had not been paid. But the real importers remain at large.

Parliamentary inquest

This came two months since Interior secretary Fred Matiang’i said 1,365 bags of illegal sugar that had been confiscated from warehouses in Nairobi contained mercury, copper, yeast and moulds.

An inquest by Parliament into this claim has only yielded into another -that of finding out the claim that MPs were paid as little as Sh10,000 to shoot down the report. No one has been arrested over the contraband import.

The unfortunate scenario is that this business has brought aboard employees of the very agencies supposed to protect consumers.

In August, three KRA customs officials- Vivian Moraa Rioba, Monica Waceke Kiarie and Stephen Ochieng Onditi- were charged in court for clearing 500,000 kilogrammrs of substandard sugar. This, added to the many other similar cases, makes cartels roam easy.

Robert Waruiru, an associate director of tax and regulatory services at KPMG says the fact that out of 9.9 million registered taxpayers, only 2.9 million filed their returns for financial year ended June 2017, shows a rampant underground economy.

“There is a big underground economy. There are 19 million registered voters but only 9.9 million registered for tax. About 17 million people want to determine who governs us but have no business paying taxes,” he says.

He said the extended tax amnesty period on “don’t ask, don’t tell” basis is only an avenue that may advance further the interests of black economy by cleaning money generated from terrorism, poaching and drug trafficking.

Another playing ground for black economy actors is in agriculture, with focus now on last year’s maize imports.

It all started with 2017 drought, then high prices in an election year. And the government decided to import maize.

Over a year later, the government has no clear idea how many bags of maize found their way into the country. The source of the first batch of 450,000 bags also remains a mystery.

As importers enjoyed a window of tax free imports, local farmers also supplied their limited produce to government. But local producers are still waiting for their pay even as it emerged that powerful individuals pocketed Sh11.3 billion meant to pay genuine growers who sold their produce to the government.

That presents tax free billions of shillings that are circulating in the economy yet those in possession did not break a sweat for them.

Kipkorir Menjo, director of Kenya Farmers Association told Smart Company that the imports have distorted the market and put farmers at the mercy of such cartels. He says it is ironical when the government also complains of cartels running the show.

“We are always told of cartels who are nameless and faceless. They seem to scare government. It is almost like another parallel government we don’t know yet,” said Mr Menjo.

Poverty

Development economist Anzetse Were says underground economy is rampant because the government has fundamental capacity constraints.

“Companies know they can get away with it by compromising the already weak and understaffed institutions. The big losers are consumers who end up paying for substandard goods,” says Ms Were.

She said this has diluted the effectiveness of the many policies announced by government since such are treated as suggestions and not a law to bring a level playing ground.

With about 70 per cent of consumers being price sensitive, Ms Were said, this pushes them to buy the cheapest available goods, further advancing the interests of the faceless cartels.

Last month, Central Bank of Kenya Governor Patrick Njoroge reckoned that even as the economy is projected to recover and expand at 6.3 per cent in 2018, not so many people may feel it.

“It's important for us to have much more inclusive growth. If we agree on higher and more inclusive growth then we will be in the right quadrant. You cannot eat GDP,” he said.

The latest World Bank data on poverty shows that 36.8 per cent of the total population or at least 17.4 million Kenyans are living below Sh92.4 per day. This is way below the International Poverty Line set at Sh191.33 per person per day.

This even as Wealth-X, the firm that publishes the annual World Utra-Wealth Report showed that number of Kenya’s ultra-rich — defined as people worth $30 million (Sh3 billion) or more — grew by 11.7 per cent last year.

This points to the widening inequality as many activities bypass the tax basket, leaving KRA struggling to raise revenue.

Eveready’s Mutua says, the war on underground economy may never be won without removing the tumour in the very agencies supposed to keep cartels at bay.

“Dealing with systemic failure of these institutions build around individuals who are compromised or also in business calls for complete restructuring of the systems,” he says.