East Africa budgets: ‘An optimistic mix of tax waivers and incentives’

The only exceptions to the regional tradition of presenting budgets on the same day were Rwanda, whose budget had not been approved by its Cabinet, and Burundi, which is mourning the sudden death of its long-serving president Pierre Nkurunziza.

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The budgets of the other three – Kenya, Tanzania, and Uganda -are an optimistic mix of tax waivers and incentives. They also indicate just how governments are bracing themselves for a longer period of declining revenue and expanding government expenditure.

The countries also intend to invest heavily in infrastructure projects to boost short term jobs for youth.

Kenya

Nairobi plans to start taxing loss-making companies, its Finance Minister Ukur Yattani said in his first budget speech.  The 1% gross turnover tax is among measures meant to expand the tax net as Yattani seeks to fund his $27bn budget.

As part of its COVID-19 economic responses, the East African country has reduced VAT, corporate, personal, and turnover tax which will cost the exchequer KShs172bn in forgone revenue.

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Kenya will also waive tax on critical healthcare equipment and services, such as inputs used in making personal protective equipment, as the region works on changing the law to support current and future efforts against epidemics and pandemics. Nairobi also waived tax on inputs used in the manufacture of baby diapers, and textile and apparel, as part of President Uhuru Kenyatta’s plan to boost manufacturing in the country. In his speech, Yattani added that Nairobi had waived landing and parking fees at its airports to facilitate cargo movement.

In January, Kenya estimated stronger growth and a lower fiscal deficit in 2020 on the back of “a strong revenue growth, reduction of non-core expenditures and a gradual slowdown in the growth of public debt”, according to budget estimates it issued at the time. Yattani now expects a fiscal deficit of 8.3% in the current financial year, and 7.5%   in the next one. To fund the budget, the country also intends to issue a Sovereign Green Bond.

Like its neighbours, Kenya is facing three ‘shocks’: COVID-19, floods, and locusts. President Kenyatta’s administration plans to make its way through the next year by investing in infrastructure projects to create short-term employment and giving targeted subsidies to its tourism and agricultural sectors.

Uganda

In Uganda, President Yoweri Museveni’s government intends to continue its tax waivers for a while longer. In his speech, Finance Minister Matia Kasaija proposed deferring payment of corporate tax, Pay As You Earn (PAYE) income tax, interest on tax arrears, and providing for tax deductibility of donations to COVID-19 response.

Kampala will also boost its agricultural sector, which is its economy’s mainstay. The international lockdown coincided with the harvest season of its produce such as coffee and tea. Like Kenya, Uganda also plans to invest in “intensive public works in urban and peri-urban areas to create jobs for the ‘vulnerable but able bodied’ people affected by COVID-19.”

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Uganda will also enhance its tax regime on imports, as it seeks to promote local production.

Kasaija plans to fund 72.5% of the budget from domestic sources, but lower tax revenues will force Uganda and its neighbours to depend on international lenders. President Museveni said in a follow-up speech that he would continue his fight on corruption: “Wherever there is corruption, we shall get you like we cleared the URA [Uganda Revenue Authority] crowd,”, referring to the abrupt resignations of the revenue body’s top commissioners in late May.

Tanzania

In Dodoma, Finance Minister Phillip Mpango’s budget came at a time when President John Magufuli’s government has downplayed the spread and effects of COVID-19 in the country. Days before the budget speech, President Magufuli told a church gathering in the capital that the pandemic had been eradicated from the country “thanks to God.”

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Unsurprisingly, Tanzania’s budget for the next year is the most optimistic in the region so far. Mpango’s plan is based on an assumption of economic recovery, starting from the idea that “the impact of COVID-19 on the country has been modest compared with most countries”, the Finance Minister said in his speech.

Tanzania also plans to take advantage of falling oil prices and an uptick in gold prices, as well as the new healthcare market for health products and services to combat the pandemic. The country recently received $14.3m in debt relief from the IMF, and Mpango said he was in talks with international institutions to access financing to “stabilize the economy.”

Tanzania’s opposition immediately called for a budget review to “reflect the current environment where government revenues have dropped – and are forecast to dwindle further if the pandemic persists.” With a firm majority and an election process set to begin next month, it is unlikely that President Magufuli’s administration will change its strategy in the short-term.

Bottom Line: As East Africa faces COVID-19, locust invasions and widespread flooding, it is unlikely that government revenues will rise in 2020 even as pressure increases to invest in social programmes and safety nets. Another complication may come from the looming elections in Tanzania and Uganda, with the fallout from the pandemic inevitably playing a role in the lead-up.