Kenya budget: Limited support for Kenya Airways, ambitious tax targets

By Morris Kiruga
Posted on Friday, 8 April 2022 13:06

Kenya's Finance Minister Ukur Yatani presents the Government Budget for the 2022/23 fiscal year inside the Parliament buildings in Nairobi
Kenya's Finance Minister Ukur Yatani presents the Government Budget for the 2022/23 fiscal year inside the Parliament buildings in Nairobi, Kenya April 7, 2022. REUTERS/Monicah Mwangi

Kenya's latest budget has not quenched the thirst for borrowing to finance infrastructure, and proposes a contentious way to arbitrate tax disputes.

Kenya is projecting slower, but significant growth over the next year, its Cabinet Secretary for Treasury Ukur Yatani said during his budget speech on Thursday 7 April.

Yatani said that he expects the economy to grow by 6% between June 2022 and June 2023, citing “the prevailing stable macroeconomic environment, favourable weather conditions to support agricultural output and drive food processing (manufacturing) and the continued recovering in industry and services.” Kenya’s economy grew by an estimated 7.6% in 2021 on the back of rapid post-Covid recovery.

Election years are normally bad for economic growth in Kenya, which could mean even slower growth especially if the August 2022 elections are contentious. Other risks include continued inflationary pressures especially on the agricultural sector, where the Russia-Ukraine conflict and an uncertain rainy season have threatened to derail the country’s most important planting season.

In what is the last budget under President Uhuru Kenyatta’s administration, CS Yatani told parliamentarians that he expects the government will spend KSh3.31trn ($28.7bn) over the next financial year.

Revenue collection

The budget will be primarily funded from revenue collection, which is expected to grow to KSh2.14trn ($18.5bn), a figure experts and parliamentarians say is ambitious and hard to achieve. That leaves a fiscal deficit of over KSh800bn, which will mostly be filled from domestic borrowing.

Although the budget deficit has further increased concerns of Kenya’s growing debt pile and looming debt repayments, Yatani said it has reduced from the current 8.2% of GDP to 6% in the new budget.

Predictably, recurrent expenditure costs take two thirds of the budget, with development and devolution allocations taking 22% and 11% of the budget respectively. CS Yatani allocated Shs. 146.8 billion to support Kenyatta’s second term focus, the “Big Four Agenda”, with most of the money going to Universal Health Care and food security. He also proposed significant investment in exploring new energy sources, specifically nuclear power generation and coal mining.

The government will further support Kenya Airways, but with the caveat that the loss-making airline go through a restructuring that will see it reduce its fleet, route network, and personnel. The news comes when Kenya Airways and South African Airways are planning to create a combined airline group, and are in the process of looking for a majority investor.

The new budget also includes additional ‘sin taxes’ on beer, e-cigarettes, gambling ads, fruit juice and bottled water. It spared any additional taxes on petroleum products, instead adding KSh24.7bn to a fuel subsidy that has been in place for months, and which recently led to countrywide fuel shortages.

The budget also includes more funds for the fertiliser subsidy, a stopgap measure meant to reduce the cost of the vital agricultural input to farmers. CS Yatani proposed VAT and excise duty exemptions on locally manufactured motor vehicles and some pharmaceutical products.

Revenue raising

In addition to a cosmetic change of the name of Kenya’s tax agency to “Kenya Revenue Service,” CS Yatani proposed a change in law that will expand the range of assets the tax authority can freeze in tax disputes to include cars, planes, and ships.

Among the most contentious proposed changes to the tax collection system is a proposal that would see individuals and corporates in tax disputes forced to deposit 50% of the disputed tax sum at the Central Bank.

This proposal raises serious concerns, notably, the limitation of taxpayers’ access to justice and their right of appeal,

They would need to deposit the money in escrow if the tax tribunal makes a ruling in favour of the tax authority, but before appealing the decision. Experts predict the proposal will be contentious and will most likely end up in litigation if it passes in Parliament.

“This proposal raises serious concerns, notably, the limitation of taxpayers’ access to justice and their right of appeal,” accounting firm PWC said in its budget analysis, “Given that tax disputes can take several years to be resolved, the provision is likely to significantly affect the cash flows of taxpayers.”

Kenya’s budget expenditure has grown nearly three times in the last decade of President Kenyatta’s administration, with the increase primarily driven by heavy investment in infrastructure.

This has significantly grown Kenya’s appetite for debt, both domestic and foreign, as expenditure has outstripped revenue collection. With Kenyatta’s term set to end this August, the major work of implementing this last budget will fall on his successor.

Leading contenders for Kenya’s next president have promised to give significant focus to social and economic programs affecting common citizens, which could see some changes to the budget focus after August.

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