Tax hikes and rising fuel prices bite East Africans as Covid-19 lockdown persists
As the corona virus pandemic continues to ravage the world economy, East Africans are set to tread murky financial waters. Kenyans have been dealt with cumulative taxation in the past few years. Furthermore, a crippling debt pile and fuel prices are today at an all-time. On the other hand, Ugandans and Tanzanians are feeling the effects of inflation. For many East African countries, the cost of living is set to rise exponentially in the coming few months.
Pumped up fuel prices
Economists predict tougher living conditions for Kenyan households already burdened by the vagaries of Covid-19. In addition, 74% of Kenyans are struggling to afford basic needs as the current dusk to dawn curfew chokes small-holder businesses. In a bid to raise revenue and offset the continuously snowballing national debt, President Uhuru Kenyatta and Kenya Revenue Authority are hard pressed to collect more revenue. The recent 5% hike in fuel prices pushed Kenyan motorists to fuel in neighboring Tanzania where it is cheaper. Public outrage from Kenyans forced the President’s hand to retract the rise in fuel prices. The government will have to compensate oil marketers to stabilize fuel prices. Pump prices in Uganda have also gone up twice in four days with the trend expected to continue.
The Kenyan taxman has seen a significant decline in tax revenue in the past few years. The Covid-19 pandemic only adds to the authority’s woes. Experts also cite that Kenya’s unpredictable tax regime is at fault and argue that it’s inconsistent tax reforms raises production costs and locks out foreign investment. Despite the growing number of taxpayers, Treasury Cabinet Secretary Yukur Yatani predicts that tax collections will drop by almost Ksh. 100 billion in the 2020/21 financial year. This is due to slow economic growth spurred by curfews and movement restrictions in major towns. Massive company layoffs, business shutdowns and cuts on levies have further decreased KRA’s collections from sales and payroll tax. “The mission to hammer the new IMF programme is loaded with fiscal consolidation policies aimed at raising tax revenues,” Steve Biko, financial analyst at Genghis Capital says. “This has urged the government to reverse tax relief measures imposed on the onset of the Covid-19 pandemic.” he adds.
Non-compliance to tax obligations in Kenya usually attract punitive penalties. As Kenya Revenue Authority (KRA) struggles to meet its revenue collection targets, it hopes that more people share in easing the tax and debt burden. However, draconian policies hurt taxpayers. The solution seems to be adopting a minimum tax and fair tax obligations which will attract more investment and drive economic growth. Shoring up tax revenue and adopting a 1% minimum tax is sure to expand the tax remittance base and improve its revenue collection.
Trade and foreign investments drop
In addition, increased expenditure from the economic shocks has pushed Kenya’s trade deficit to grow to 13.4% in the first few months of 2021. The increased cost of shipping fuel and global disruption of supply chains has negatively affected the gap between imports and exports for most East African countries. If this trend persists in 2021, economists predict a massive drop in job openings and source markets for consumer goods. Subsequently, the Kenyan shilling is under pressure as it has significantly weakened against the dollar. Moreover, in a bid to diversify its exports, Kenya has inadvertently exposed local tea, coffee and horticultural farmers to stiff competition from international markets.
Since the beginning of 2021, Nairobi Securities exchange (NSE) has witnessed a withdrawal of over Ksh. 1.98 billion in foreign investments; an average loss of Ksh. 15 million every day. Setbacks from the pandemic have necessitated foreign investors to take new positions based on the bleak economic forecast. Additionally, Kenyans are feeling the heat of servicing its huge public debt to China, and has affected the country’s balance of payments. The government is in the process of appointing a Sovereign Debt advisory firm to manage the debt crisis. It is also inevitable that Kenya will take up cheaper loans in future and retire expensive loans from China. The country plans to borrow more in the coming years despite public discontent towards our borrowing spree. The government now looks to secure an upcoming Eurobond that will help roll-over repayments for the maturing 2014 Eurobond.
The political intrigues and the economic turmoil felt by East Africans may be fleeting. However, it remains to be seen how citizens will cope with the financial quagmire brought about by the pandemic. Increasing public debt, inflation and punitive lockdowns paint a bleak future for East Africans. Furthermore, these domestic throes are currently a global phenomenon. Economic crises are being felt all over the world with many countries reeling from economic shocks. We can only speculate what the future holds.
Featured image: Rolf Dobberstein /Pixabay