East African Community finance ministers face a tough task this week (Thursday) as they present their budget statements for the 2019/2020 fiscal year with a focus on bringing more people and businesses into the tax bracket to service the rising public debt and reverse the fall in revenue collections.
The ministers will also be looking to allocate the additional resources to the debt-servicing kitty through the Consolidated Fund Services.
EAC partner states are considering ways of widening tax brackets to boost revenue collections and channel more domestic resources towards repayments of interest on billions of dollars’ worth of loans procured to fund development projects.
The EAC has been trapped in the web of infrastructure development which has seen millions of dollars find their way into various projects such as pipeline, road, rail, airports, and ports development.
It is, however, argued that while infrastructure development is important to the economic development of a nation, funding for these projects is nudging the national economies into a debt overhang, with most of the expensive loans coming from China in exchange for project contracts.
In Tanzania, the government has disclosed that it aims to boost revenue collection starting July 1 by widening the tax base and enhancing voluntary tax compliance through public awareness programmes.
Tanzania Ministry of Finance and Planning says the revenue policies for the 2019/2020 would continue focusing on widening the tax base and strengthening management of existing revenue sources, especially by intensifying the use of electronic collection systems and other administrative measures.
In widening the tax base, Dar government will be looking to formalise the informal sector and improve investment environment to increase revenue collection.
The country’s debt service-to-revenue ratio has stood at a high of 49.6 per cent in the 2018/2019 fiscal year but it is hoped that with the proposed revenue enhancement measures and the recent gross domestic product rebasing, this proportion will decline to 38.1 per cent in the 2019/2020 fiscal year.
Tanzania also plans to roll over maturing principals for loans and pay interest through domestic revenues in the 2019/2020 fiscal year.
In March, Tanzania rebased its GDP with preliminary results showing that the economy had expanded by 6.3 per cent in 2018, higher than that of the previous base year.
However, data by the World Bank shows that Tanzania’s revenue collected as a proportion of GDP in 2018 declined to 14.4 per cent from 15.2 per cent in 2017.
Tanzania has relied on non-concessional loans to finance development projects due to declining resources from traditional creditors. Its share of concessional debt declined to around 61.2 per cent in June 2018 from about 79.1 per cent in 2012/2013, as the Government continued borrowing from non-concessional sources.
In Uganda, the government plans to allocate Ush431.26 billion ($113.62 million) to facilitate Uganda Revenue Authority efforts in enhancing tax administration, increasing tax compliance and widening the tax base.
The government also plans to allocate Ush10.69 trillion ($2.81 billion) for debt service, debt redemptions and the Contingencies Fund.
In Kenya, the public debt service to revenue ratio stood at 30.5 per cent in 2018 and is expected to increase to 33.4 per cent in 2019 compared with 16.5 per cent in 2012.
Traditionally, the taxman continues to miss revenue targets. The burden of funding public spending has mostly been borne by large corporates and workers in the formal sector, but now there are attempts by the government to clamp down on real estate developers and landlords who had been off the hook for so many years.
According to its Budget Policy statement (2019) Kenya is now seeking to use third-party information to identify non-compliant property developers and ensure they are included in the tax base.
It is hoped that by bringing more entities into the tax net revenues as a share of GDP will rise to 18.3 per cent in the 2019/2020 fiscal year from 17.3 per cent in the 2017/2018 fiscal year.
Kenya has faced shortfalls in revenue collection with income tax recording the highest shortfall on account of depressed performance in corporation tax.
According to the National Treasury, growing public expenditure pressures coupled with revenue underperformance could make it difficult for the government to actualise and sustain its macroeconomic policies.
The Kenya government has already increased allocations to the consolidated fund services to Ksh535.74 billion ($5.35 billion) in the 2019/2020 fiscal year from Ksh490.55 billion ($4.9 billion) in the current fiscal year.
Part of the funds will cater for the repayment of public debt and the rest for pension.
Kenyan lawmakers have already cautioned the national treasury against raising taxes arguing the move would be unsustainable and risky to the country’s growth prospects.
Instead, the Parliamentary Budget Office wants the Treasury chief to focus on measures to seal loopholes through which billions of dollars have been siphoned from public coffers through corruption and tax evasion.
According to the Parliamentary Budget Office, Kenya’s debt burden has also grown over the years largely on account of increase in debt service payments, yearly revenue shortfalls and weak commitment to fiscal consolidation. The country’s total revenue between 2015/2016 fiscal year and 2018/2019 fiscal year underperformed its target by an average of Ksh95.6 billion ($956 million) while ordinary revenue was below target by an average of Ksh56.2 billion ($562 million).
The high level of debt, together with rising reliance on non-concessional borrowing, have raised fiscal vulnerabilities and increased interest payments on public debt to nearly 20 per cent of the collected revenues.