By Vipul Shah, Chairman & Founder, Grant Thornton Kenya
Kenya has continuously stood out as the place to invest in in Sub Saharan Africa in spite of the challenges that it faces. Investors continue to be bullish about the economy because of Kenya’s importance to the regional economy and its focus on investments around the Big 4 Agenda. As we look forward to the reading of the Kenya Budget 2019/2020, our attention is drawn to the outlook on the Kenyan economy.
The macroeconomic environment
Kenya’s economy was forecast to grow at 5.9 per cent earlier this year. This has been brought down to 5.8 per cent due to the failed long rains. Kenya is an agricultural economy which is mainly rain-fed meaning any changes in rainfall patterns are definitely going to have an impact on the economy.
Kenya still has an interest rate-cap on commercial bank lending rates in place which will dampen its ability to renew the Standby Credit Facility from the International Monetary Fund (IMF) later this year. This is a short-term balance of payment financing facility. Its significance will be felt, if the government seeks financing from additional taxes within the year.
The private sector’s contribution to GDP growth is likely to be depressed with commercial banks withholding credit (as a result of the interest rate cap) in favor of less risky government securities. This is having a direct impact on exports which are not where they need to be while the import bill keeps rising. This is likely to continue in the near term until the interest rate cap is removed and appropriate measures for banks to be more proactive in avoiding predatory lending.
Kenya’s Big 4 Agenda is still on course with various projects targeted at manufacturing, housing, healthcare and agriculture in various stages of implementation. GDP growth is expected to come from the Big 4 Agenda projects with public infrastructure projects contributing the highest percentage of growth. Budgetary allocation for road construction is expected at Kshs 87.5 bn (domestically financed) and Kshs 34.2 bn (foreign financed).
The Kenyan Shilling is expected to remain stable going forward with a projected high of KSh 101 and a low of KSh 104 to the US Dollar. Inflationary pressure will be felt from the rising cost of living which is driven by increases in the cost of food and basic commodities – a high of 7.5%. Interest rates are expected to rise marginally owing to pressure from the need to meet fiscal targets through domestic borrowing.
The public policy environment
Kenya’s involvement in China’s Belt & Road Initiative has been received with uncertainty over how Kenya will repay the loans involved in the infrastructure projects it is pursuing. So far, the project has had a positive impact on the Kenyan economy with developments happening in trade, manufacturing and growth in domestic tourism.
Further, Public debt will continue to grow as the government of Kenya seeks to finance the Big 4 Agenda. Ksh 460.2 billion has been budgeted for the Big 4 Agenda. However, Kenya’s public debt is still within sustainable levels. For Kenya, the Present Value (PV) of debt to GDP ratio as at June 2018 stood at 49%, well below the 74% global benchmark for lower middle-income countries (LMICs). Also, China does look at the country’s ability to pay before giving out loans. It is in their best interest to advance loans to countries that have the ability to pay.
The first phase of the Standard Gauge Railway (SGR) project has eased the flow of goods and people between the Port of Mombasa and Nairobi. Though teething problems are there with regards to the movement of containers, the SGR will prove itself to be the most efficient means for commercial transport with time.
Kenya’s relationship with China is deepening with more private enterprises setting up locally. We continue to see more Chinese construction companies setting up in Kenya with a view to participate in the endless opportunities presented by a focus on infrastructure and real estate. These firms are employing Kenyans at all levels and continue to play a role in bringing down unemployment.
The fact that they are also involved in private infrastructure projects has seen the growth of investment-grade infrastructure projects. Investors want to see consistency in quality and developments that could be sitting in any of the world’s major capitals right here in Kenya. These projects have brought a lot of foreign capital into the country seeking a return in this market.
In the past year, we have had several amendments to tax legislation in a bid to offer a push to the Government’s “Big Four Agenda”. The Kenya Revenue Authority (KRA) has seen its collection target exponentially increase over the last decade. This has required them to change tact and year on year they keep adopting new and advanced revenue collection measures. Audits have come back in full swing and controls to enforce compliance are at their most technologically advanced level.
Over the years, enforcement has been used as a primary tool for driving the tax compliance agenda home in most of the tax administrations across the world. This probably explains why the tax collectors have never been the favorite public officers among the people in their jurisdictions. The KRA has tried to change tact in the recent past by using facilitation rather than enforcement.
Kenya reviewed its revenue target downwards for this fiscal year by 5% to KES 1.61 trillion. This is the second year in a row that Kenya is cutting its collection targets. This, tied together with the fact that the revenue authority has missed its target over the past five years, is indicative that the collection targets have been continuously overambitious.
The reduced collection targets have sparked fears that the country may not be able to curb its reliance on debt. The KRA has doubled up on the use of technology in ensuring compliance and this is already bearing fruits. With the introduction of presumptive tax, the collector will be able to net in many taxpayers in the informal sector and also those who’ve been filing nil returns.
It is also anticipated that the long awaited overhaul of the Income Tax Act, that has been in force for over four decades, will come to fruition this year. The new Bill is envisioned to simplify the computation and administration of income tax, hopefully increasing the collections for KRA.
The change in
tact from enforcement to facilitation to ensure taxpayers are aware of their
obligations, while ensuring compliance is made as easy as possible, will go a
long way in securing KRA’s increasing targets.*