Why Sh3.1trn budget won’t add up easily

Wednesday March 18 2020

The funding of the country’s Sh3.1 trillion budget remains unclear with court cases, public outcry and defiant Parliament standing in the way of funding options, about three months since the 2018/2019 financial year set in.

Today, the country’s attention is on the National Assembly as it breaks its four-week recess to begin a special sitting to address the pertinent issue of 16 per cent tax on petroleum products.

The MPs have an option to endorse President Uhuru Kenyatta’s recommendation of relaxing the tax to eight per cent or they could still choose to hold on to their stand of postponing it in entirety till 2020.

“I must balance between short-term pain and long-term gain. We have a country to transform, and we must make bold decisions to achieve our vision,” said the President last week pointing to a tough balancing act that is needed in the economy now.

With public debt having crossed the Sh5 trillion mark and the public calling for the government to slam brakes on borrowing, President Uhuru’s administration finds itself at a crossroads; having to eat the cake and still have it.

The cost of living is pointing north, companies are cutting jobs, others are defaulting on debt and shutting doors, as households find it difficult to repay their loans.

The tax office has missed revenue target, yet the budget has grown by about Sh500 billion, even as the President insists that sacrifices have been made to cut spending in areas such as hospitality, foreign and domestic travel, training and seminars.

In the eyes of the Kenya Revenue Authority (KRA) and National Treasury, MPs’ sitting today carries different implications for the economy. Having presented a budget of Sh3 trillion in June, that requires borrowing of Sh562.7 billion to fill the funding deficit, a reduction or total stoppage of the oil tax presents an additional headache for the economy.

Going by the average consumption figures for petroleum products from the Petroleum Institute of East Africa, KRA stands to miss between Sh35 billion and Sh70 billion, depending on whether MPs will listen to the President or press on with their recommendations.

“Further delay in the implementation of the tax would compromise our ability to deliver basic services to Kenyans, and to maintain the trajectory of our development,” reckons the President.

Contempt of court

With this in mind, the Treasury has been hesitant to stop the implementation of the tax despite a High Court in Bungoma issuing orders to temporarily halt the tax. It has now been sued by a lobby in Kisumu over contempt of court even as it denied ever receiving the order.

Should Treasury be lucky to be granted its way by MPs, another hurdle will be a case by activist Okiya Omtata who is challenging the manner in which the tax is being collected.

“The main problem is wrong implementation. They are implementing VAT on the transaction cost not on the base cost of the fuel. They are taxing a tax!” he argues.

Such hurdles may see KRA, with a target of Sh1.7 trillion revenue take further hit given the slowed activity in the private sector credit and rampant job cuts. Already, a recent report by the National Treasury showed that the taxman suffered Sh124.6 billion shortfall in the last financial year chiefly due to shrinking company profits and employee layoffs by struggling firms.

Treasury has already suffered a blow in the hands of MPs who voted to retain the controversial 2016 interest rate cap laws that took away banks’ free hand in pricing commercial loans. The law has seen banks pack billions of shillings in government paper as the rest of the economy faces credit crunch.

The impact of the decision by MPs was that Kenya failed to achieve its promise to the International Monetary Fund to remove or tweak the law. Last week, Kenya’s access to IMF’s $1.5 billion Standby Credit Facility came to an end piling pressure on the shilling.

“If the IMF allowed interest-rate controls to remain in place while approving a new program, the fund would have lost some credibility in future negotiations,” Jacques Nel, an economist at South Africa-based NKC African Economics was quoted by Bloomberg.

Already, KRA has lost a considerable amount of tax since July 18 when the 0.05 per cent on money transfers of Sh500,000 and above by banks and telcos was halted over what bankers’ lobby termed as lack of clarity.

The High Court yesterday started hearing the case after KRA and Attorney General filed and served replying affidavits on the matter that has so far delayed the implementation of the ‘Robin Hood’ tax by over 60 days.

More time could be lost since the Kenya Bankers Association is also seeking to be granted sufficient time for banks to alter computer systems to implement the charge of duty once a proper definition of the term “money transferred by banks” is provided.

“We are therefore seeking three months period to comply with the tax once the court gives us clear definition,” KBA chief executive Habil Olaka told Smart Company in a phone interview.

This means that from the time the clarity issue is solved, KRA may have to wait for a further 90 days to start collecting the tax. Added to the two months lost, that would amount to nearly half of financial year gone down the drain. This puts pressure on Mr Rotich’s projections that revenues will rise by 17.5 per cent to Sh1.94trillion (equivalent to 20 per cent of GDP) in the financial year 2018/19 to help narrow the fiscal deficit to 5.7 per cent of GDP from the estimated 7.2 per cent of GDP in the previous year.

But as the public feels the pinch of taxes, there is now a shift of thought from revenue raising mechanisms to the expenditure side, with the discourse of the impact of spending patterns coming to the fore.

Expenditure side

“Reaction to the Finance Bill that has been sent to parliament gives a wrong impression that it’s only VAT on fuel that is the issue; there is more to it. Nobody seems to look at the expenditure side of it,” said KBA Director of Research and Policy through his twitter handle.

Religious leaders under the National Council of Churches of Kenya umbrella want government to scrap projects such as the construction of the Mombasa-Nairobi express highway and the second phase of the Standard Gauge Railway, both which are to be built with Chinese debt.

MPs stood in the way of Mr Rotich when he proposed to slash county budget by Sh15 million. However, a section of them now wants budget cuts through supplementary budget to avoid more debt. Emgwen MP Alex Kosgey is also seeking an amendment to the Public Finance Management Act to provide for a specific limit of the amount that the government can borrow. This may reduce Treasury’s room for more borrowing.

Feeling the pressure of scarcity of resources, Treasury is hiring more staff to strengthen its debt management office. In addition, it is proposing the creation of an agency to be in charge of vetting and approving new public projects to curb rampant wastage of billions of shillings of taxpayers’ cash.

Currently, the country lacks proper methodological guidance on efficient public investments, and therefore the basis for consistent and comprehensive project appraisal is missing, according to Treasury.

“The result is a bloated project portfolio, unpredictable funding, stalled projects, and inflated costs contributing to the under-execution of budgets and delayed translation of the investment in projected economic growth,” says Treasury in the draft Public Investment Management guidelines.

While it ponders about this, it is certain that this year’s budget, themed ‘Creating jobs, Transforming Lives and Sharing Prosperity’ faces implementation hurdles.