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Kenya’s ‘unrealistic’ revenue targets sets stage for increased borrowing

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Kenya’s National Treasury Cabinet Secretary Henry Rotich last week outlined ambitious taxation measures which he hopes will collect Ksh2.1 trillion ($21 billion) in revenues to fund part of the government’s Ksh2.8 trillion ($28 billion) budget for the 2019/2020 fiscal year.

But the viability of the proposed revenue targets remains to be seen what with the persistent failures by the Kenya Revenue Authority to meet its collection targets, forcing the government into increased borrowing to bridge the widening fiscal deficit.

Kenya’s Parliamentary Budget Office (PBO) says the stock of debt reached Ksh5.6 trillion ($56 billion) by the end of September 2018, and is projected to hit Ksh6.5 trillion ($65 billion) at the end of this year.

It is argued that such a level of public debt could put the government’s entire fiscal framework at risk due to rising cost of debt service estimated at Ksh775.6 billion ($7.75 billion) in the current (2018/19) fiscal year, a figure expected to remain above Ksh800 billion ($8 billion) in the next two to five years.

According to the lawmakers, revenue underperformance has been linked to a number of challenges including revenue leakages due to existing loopholes, unnecessary incentives, waivers and exemptions to large businesses and companies as well as lower-than expected economic growth.

Last year, Mr Rotich set a revenue target of Ksh1.9 trillion ($19 billion) to finance the Ksh2.55 trillion ($25.5 billion) budget, but after the first six months (July-December) of the 2018/2019 fiscal year, the taxman had fallen short of the target by Ksh53 billion ($530 million).

Data from the National Treasury shows that the government’s cumulative revenue collection, including appropriations-in-aid for the period July-December 2018, amounted to Ksh794.7 billion ($7.94 billion), against a target of Ksh 855.7 billion ($8.55 billion), mainly due to shortfalls in income tax and excise duty. Ordinary revenue collection was Ksh722.3 billion ($7.22 billion) against a target of Ksh775 billion ($7.75 billion).

Revenues from import duty, excise duty, Pay As You Earn, VAT and Import declaration fees were severely affected.

Although the National Treasury introduced a raft of financing measures that were deemed to have increased the general tax burden in the country — with expectations of generating an additional Ksh27.5 billion ($275 million) in new taxes — KRA said it expected to miss the annual tax collection target set by the Treasury by Ksh110 billion ($1.1 billion) by the end of June.

These taxation measures included 8 per cent value added tax on petroleum products, Ksh18 (US cents 18) adulteration fee per litre of kerosene (in addition to the VAT) as well as a 1.5 per cent National Housing Development Fund on gross monthly earnings of employees (matched by the employers).

Other revenue measures are the doubling of duties on money transfers to 20 per cent and higher taxes on mobile phone calls, Internet usage and mobile phone cash transfers.

The PBO however said increasing taxes without assessing the sector-wide effects could discourage investment.

“Many businesses tend to view higher taxes as an additional cost to their businesses that is likely to narrow their profit margins,” said PBO

“When these higher taxes target consumers, the result is a reduction in the purchasing power of those consumers which leads to lower aggregate demand. Such an outcome will invariably lead to lower-than-expected GDP growth rendering the move counterproductive in the short run.”

In the next fiscal fiscal year (2019/2020) the government faces a deficit (including grants) of Ksh607.8 billion ($6.07 billion) that it intends to plug through a mix of foreign debt ($3.24 billion) and domestic debt ($2.89 billion).

Although Mr Rotich set his revenue targets based on the improvement of economic activities this year, the global risks to this outlook include an escalation of trade-related tensions, a rise in oil prices and weather-related shocks.

“Should these risks materialize, Kenya’s growth forecast could be constrained,” said Mr Rotich

The government forecast economic growth in 2019 to remain at 6.3 per cent same as 2018 helped by strong performance in non- agricultural activities such as tourism and construction.

It is estimated that Kenya’s cumulative revenue collection shortfall hit Ksh 185 billion ($1.85 billion) in the three years to June 2018.

KRA expects to expand the tax base by about 3.06 million taxpayers by June 2021 from 3.94 million in June 2018.

During the 2019/2020 budget the government introduced new taxation measures with hopes of raising Ksh37 billion ($370 million). These include a 10 per cent duty on betting services, increase of specific rates of duty on spirits, wine and cigarettes by 15 per cent, increased in railway development levy on finished products from 1.5 per cent to two per cent and increase in import declaration fee on finished goods from two per cent to 3.5 per cent.

The government also increased duty on liquid petroleum gas cylinders from 0 per cent to 25 per cent and duty on paper and paperboard from 10 per cent to 25 per cent.

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