Kenyan budget funding queried

June 11, 2010
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, NAIROBI, Kenya, Jun 11 – As Thursday’s Sh1trillion budget continues to elicit mixed reactions, many people have begun questioning the government’s ability to raise the funds to finance all the outlined projects.

Finance Minister Uhuru Kenyatta did not raise any major tax, but announced plans to collect a massive Sh688.5 billion in ordinary revenue which Atul Shah, a partner at PKF Kenya, said would only be possible with efficient tax administration reforms and increased corporate earnings.

“The minister is banking on raising a lot of these revenues from increased corporate taxes largely through increased profitability of corporates for example in the banking sector, companies like Safariciom and the like,” he said.

He acknowledged that it would be challenging given that the Kenya Revenue Authority (KRA) had continued to miss its tax collection targets in the current financial year which might force the government to re-instate the capital gains tax from where it can collect additional funds.

“It’s a fair comment to say that he is running out of options and its therefore important to recognise that important taxes like capital gains need to be brought in some small form so that there’s a boost in revenue collection,” he added.

Capital gains tax is levied on the sale of any investments but was suspended 25 years ago to make the country an attractive destination for investors to put their money. An attempt to re-introduce the tax, which would mostly affect the rich, was shot down by Parliament in 2006.

The streamlining of customs and port procedures will also be stepped up to seal loopholes through which the government loses billions of shillings in revenues to unscrupulous businessmen who evade taxes. This was also seen with the minister’s directive to the Central Bank of Kenya and KRA to carry out an audit of forex bureaus operations where money laundering and tax evasion are said to take place.

The enforcement of these tax administration and procedures will be important so that the government is not forced to borrow more from the domestic market, a move that could destabilise the macroeconomic environment.

However Mr Shah reckoned that the low interest rates and easing inflation are signals that the government plans to rely less on Treasury Bills and Bonds.

This leaves the government with the option to look for funds from outside the country in concessional loans, donor aid or ‘friendly’ nations that are prepared to lend to Kenya.

The country has in the last few years largely relied on locally generated funds but with the continued heavy infrastructure spending the experts agree that it has to re-engage with the donors.

PWC Country Partner Kariuki Mucheru concurred, adding that the market was likely to see a re-balancing of the budget where some of the expensive medium term or long term debts will be replaced by foreign financing.

“What he (Mr Kenyatta) is saying is that, “why should I be borrowing from the Kenyan market at 14 percent which is what happened last year with infrastructure bond when I can go and get concessional lending at one percent from the development partners?” Mr Mucheru added.

He however expressed concern about the country’s capacity to absorb development budget and especially in infrastructure.

“When we talk about capacity, it’s all the way from contractors, engineers, architects and government machineries to absorb those funds. We have not invested in this sector in a long time and therefore we have not got the numbers of companies or experienced people to implement these projects,” he said.

The PWC Manager was however optimistic that the private sector driven strategy that the government has adopted would eventually lead to economic improvement enable the country to achieve its four to five percent growth target.
 

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