Multiple sectors have lobbied parliament against proposed tax measures in the Finance Bill 2024, but the feeling is that many, if not all, of the proposals will pass despite the legitimate countrywide concerns of its disastrous ripple effects.
While the legislature is meant to represent the people, providing crucial checks and balances, especially on the executive, it has become apparent that neither arm feels it has any power over the country’s economic policymaking. The real decision power rests elsewhere, as Kenya is currently under structural reforms by the World Bank and the International Monetary Fund (IMF).
It’s from these institutions that, if the Finance Bill 2024 passes without critical rethinking, the prices of cooking oil, bread, diapers, electronics, financial services, digital credit, and many other things will rise significantly.
“Kenya’s IMF Programme since April 2021 until March 2025 has been anchored on revenue-raising measures, so no surprise that IMF has had a hand in recent Finance Bills in Kenya,” Churchill Ogutu, an Economist at IC Group, told The Kenyan Wall Street.
On June 11th, the Kenya Association of Manufacturers (KAM) met with the IMF Kenya Resident Representative, Selim Cakir. The meeting was, surprisingly, to lobby against the Finance Bill on manufacturers, especially the eco levy, and a proposed amendment to remove the provision that allows manufacturers to offset the costs of their raw materials on excise duty. The lobby group identified that lobbying the legislature or Treasury would not move the needle, because Kenya’s economic policymaking even at the granular level is no longer made on Harambee Avenue.
For years, it was apparent that Kenya’s debt binge would rear its ugly head, forcing the country to return to where it was in the 1980s and the 1990s, when crucial, life-changing policies were determined by Bretton Woods institutions. The IMF’s policies delayed Kenya’s growth then, and the lingering effects of that structural adjustment phase are still clear.
“Introducing additional tax burdens on lower-income Kenyans, who already struggle with the high cost of living, directly impacts their means of livelihood and quality of life,” Faith Odhiambo, President of the Law Society of Kenya, said in a statement on 7th June, “This is in itself is an antithesis to the national goals and objectives.”
Impact on Financial Services
Implementing the IMF’s ideas on how Kenya’s economy should run decimated public services, led to widespread job losses and rapid inflation once before. The social carnage that followed the IMF’s prescriptions to developing countries is one of the most frequent criticisms against the institution, but it’s clear that the thinking in its boardrooms has not changed at all.
In a public statement, the IMF said the bill is an important step in “correcting course.” “A sizable and upfront fiscal adjustment in FY24/25 will be needed to correct the course,” the institution said, “…the authorities have taken decisive steps towards fiscal consolidation by introducing several measures in the context of the draft 2024/25 Budget and the 2024 Finance Bill.”
That the Finance Bill will, if passed as is, trigger economic and social distress is a foregone conclusion. Raising the price of bread and cooking oil will directly affect households, which are already dealing with loss of income as different sectors lay off staff. Raising the cost of financial services, including digital credit, will worsen the situation – destroying Kenya’s hope of advancing meaningful financial inclusion.
“Most of the proposals in the Finance Bill 2024 are indirect taxes. Taxes on business which ultimately move to the final consumer, “ Raimond Molenje, KBA acting CEO told The Kenyan Wall Street recently. “The transaction costs are going up significantly, from 15% to 40%. People will start looking for other options of moving out of the financial ecosystem.”
“Ultimately the government is going to lose because when people are moving out formal transactions, there’s loss of taxes,” Molenje added. Bankers have also pointed out that recent data is proving that lowering taxes boosted tax revenue collections because people made more transactions. In an ideal situation, such data would be sufficient to prove that the only way to achieve higher tax revenues is to lower the tax rate and bank volume.
Finance Bill 2024 will Trigger Job Losses
According to the ride-hailing sector, the implementation of the Significant Economic Presence Tax (SEP), the motor vehicle tax, and the tax on batteries will cost about 50, 000 jobs.
That’s before the additional proposal to raise the road maintenance levy on fuel, just a year after the Finance Act 2023 raised VAT to 16% and with it took fuel prices to unprecedented highs. Cab drivers already survive on razor-thin margins, and 70% of them owe money to financial institutions for the cars they drive. Making it more expensive for them to turn a profit will mean many will have to park or sell their cars, and the ripple effects on thousands of households will be affected.
“The government is shooting themselves in the foot because they increase the tax to increase their revenue. This will reduce the revenue that is already generated by ride-hailing companies,” George Abasy, the Public Policy Manager at Bolt, says.
Although the IMF has some good ideas about how Kenya’s economy should run, the social and political distance between the boardroom and the people impacted, and Nairobi’s unwavering compliance, mean that there is little adaptability to Kenya’s short-term economic growth needs. But it is more than that.
It’s always been clear that raising revenue requires a functioning economy that can afford to pay taxes. Higher taxes suppress demand, which leads to lower income and so lower tax collections. It is a simple truth that should be apparent to economists at the Treasury, but rational policymaking that balances both short-term and long-term social and economic needs does not seem to have any role in the current plans.
There are multiple examples of what happens in such situations, as Bretton Woods institutions have different priorities that weave geopolitics, globalization, and private interests into a country’s economy. Jamaica’s experience with the tariffs on dairy, for example, was a precondition to an IMF loan. While the country received the loan, the move ensured the decimation of its dairy industry and increased poverty levels among farmers who had been making a decent living before.
The Unintended Consequences of Good Ideas
On paper, combining well-meaning texts on structural adjustment with modern-day goals, like climate finance, looks like a good and necessary thing. In truth, some of the proposals will set Kenya back on climate goals, as it becomes harder to run a sustainable enterprise in the country, and the vicious cycle created by high and frequently changing taxes worsens.
The SAPs of the 1980s increased poverty levels, gutted public services such as health, and stifled economic growth. The same thing is already happening, and without any change in how the IMF adapts its internal thinking towards developing countries asking for its financial support, it will just get worse. It already is.
President Ruto’s recent State Visit to the United States, orchestrated by Amb. Meg Whitman announced billions in investment deals from both public and private sector forces in the US. Many of the deals announced, particularly those from the private sector, could potentially be put at risk given the uncertainty the bill introduces into the market and the negative economic impact it will have on local and international businesses.
Take, for example, the fact that imports of motorbikes and cars dropped last year. Motorbike imports dropped from a high of 342,200 in 2020 to just 73, 300 last year, with a 53.1% decline in just a year. The number of cars imported has been see-sawed since 2019 but was at its lowest in years in 2023. Increasing taxes, on both imports and fuel, have drastically increased the costs of these crucial means of transport that employ millions, in addition to other roles.
The same has happened with fuel imports, and, likely, the Finance Bill 2024 will just drive this artificial decline in economic activity further. Its net effect, across the board, is to gut the middle class, drive more people into poverty, and force the private sector to rethink its investment plans.
In the last lap towards Vision 2030 when Kenya should be planning its next three decades, this will stall economic growth and trigger many of the same political and social consequences of the last time Kenya needed the IMF this much. The havoc will mean yet another lost generation, forced to adapt to a rapidly hostile economy that is being redesigned with the sole goal of keeping Kenya credit-worthy.
“The ambitious fiscal deficit at 2.9%, lower than the East African Community (EAC) convergence criteria of 3.0%, also speaks to a fiscal framework that is aligned with the sunset date of the IMF program next March,” Ogutu added.
Even though the country is heavily indebted, still borrowing, and loses a large chunk of its budget to corruption, there must be room to balance the boardroom decisions of Kenya’s true policymakers with the needs and rights of its 50 million people. There would be no sense in waiting until the measures have caused economic and social havoc to try and reverse course because by then a lot that is irreplaceable will have been lost.
