Kenya 2022 elections: Taxes, costlier loans top concerns for businesses ahead of polls

Azimio La Umoja boss Raila Odinga is pitching a social-safety-net approach, while Kenya Kwanza Alliance leader William Ruto, who is also the current deputy president, is backing a pro-poor economic model.

Members of Kenya’s business community say they want the country’s new government to address regulation bottlenecks, complex taxes and tightening fiscal policy.

Starting a small business is time-consuming, cumbersome and expensive due to several requirements, including registration with the Registrar of Companies, Kenya Revenue Authority certification and the multiple licenses required. The situation has even been worsened by Kenya’s complex and bulky tax code, a core challenge to the manufacturing sector.

Cereal millers, for instance, are grappling with inter-county charges they have to pay whenever crossing counties outside the ones they are based in.

The multiple levies and charges, plus the current maize shortage, have driven up the price of maize flour, Kenya’s staple food, which has hit hard far-flung markets as millers shy off costly distribution routes.

Kenya’s unclear tax regime

Kenya Association of Manufacturers CEO Tobias Alando says that full compliance with Kenya’s unclear tax regime “requires that firms employ tax planners, tariff engineers, lawyers and specific accountants to render professional advice,” which adds pressure to their operational costs.

“We urge the government to put in place an effective and pro-industry national taxation structure that drives growth,” says Alando.

If the problem is addressed, according to Alando, Kenya can bridge its widening trade deficit through the manufacturing sector despite battling costly production on the back of the global surge in fuel prices.

The manufacturing sector’s contribution to gross domestic product (GDP) is on a downward path over the years, currently standing at 7.2% of GDP compared to 8.7% five years back, according to a 2022 economic survey.

Ballooning production costs and raw material shortages have shrunken Kenya’s shares of export markets, with the country slowly losing its place in regional trade in favour of its peers in the East African Community.

“The tax system should not impede productivity but be aligned with our economic goals and economic promise priorities,” says Phyllis Wakiaga, an industrialisation and private-sector expert.

She argues that increasing farm-level productivity will go a long way to reducing raw material and food shortages.

“There is room to improve this and produce more agricultural products locally. There is a need to address the under-capitalisation, low productivity and competitiveness of agriculture,” she tells The Africa Report.

Data from the Kenya National Bureau of Statistics (KNBS) indicates that the value of Kenya’s exports to its neighbour Tanzania hit 43.1% to KSh45.6bn last year compared to 2020. Tanzania’s exports to Kenya, on the other hand, more than doubled to KSh54.5bn last year compared to the previous year.

Tax time

Industry players say that the new Kenyan government should improve the national tax policy.

“The top [concern] of the business community should be a predictable tax regime. The national tax policy has addressed that, though its implementation falls squarely with the next regime,” said Churchill Ogutu, an economist at investment firm IC group.

The policy is touted to enhance tax efficiency while boosting revenue collection. It will, among other things, expand taxation on the country’s agriculture and informal business sectors.

“Whereas the informal sector is expanding, its contribution to revenues remains low as it is largely cash-based and characterised by poor record keeping. This has led to over-reliance on the formal sector for tax revenue,” the treasury noted in the draft policy.

Under the draft policy, the treasury is seeking to introduce a pre-emptive tax on agriculture – a levy on households whose income is low or those uncovered by usual tax, a move expected to target a big chunk of Kenya’s small-scale farmers who for long has not been paying income taxes on their earnings.

What the aspirants are promising

The two top presidential contenders – Odinga and Ruto – have both promised Kenyans numerous stimulus packages, favourable taxes and interest-free loans to support small and medium-sized enterprises (SMEs) and manufacturers.

Implementing a pro-industry policy could, however, produce headaches for the leading presidential aspirants who, on one hand, are promising populist interventions but, on the other hand, are exposing themselves to pressures from the International Monetary Fund (IMF) which warns against such interventions due to fiscal risks.

The informal sector, mainly dominated by SMEs, is also finding it difficult to access affordable loans with banks.

In March 2020, the national treasury launched credit guarantee schemes in collaboration with eight banks to boost financial access. But the SMEs have still been given a wide berth by banks.

The top presidential aspirants have tried to address this by supporting targeted low to cost-free loans to SMEs in their manifestoes.

But there is no cheap money for the Kenyan government, as foreign governments also hike interest rates. The yield on international bonds like the Eurobond has surged in Kenya following reports of forex decline which scared investors.

The issue of the eurobond

The eurobond market is now a front and centre issue for investors looking at Kenya and “until investors see a plan by the new incoming administration, inward investment is stymied,” argues Aly-Khan Satchu, an investment expert and CEO at Rich Management.

“The overarching issue for investors is the blowout in government spreads in the eurobond market. Essentially, Kenya has been shut out. This is now creating a contagion effect in the local currency Government of Kenya market with massive under-subscription of government bond auctions,” says Satchu.

The treasury suspended issuing eurobonds early this year due to high rates which hit 17% for the seven-year tenured eurobond, with neither of the two leading presidential aspirants stating clearly how to address the matter. Odinga is talking of negotiating with creditors while Ruto is saying no negotiations are required.

The global eurobond market is forcing the treasury to instead eye syndicated loans from banks. “The room for manoeuvre for the next government is constrained and will be a serious challenge,” adds Satchu.