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Experts warn that Covid-19 fiscal interventions are inadequate to grow Kenya’s economy

NAIROBI, Kenya June 15 -While the Government has unveiled various measures to keep the country’s economy at bay during the COVID-19 pandemic, experts are now warning that such interventions are neither sustainable nor adequate to jumpstart the country which has not been spared by the global crisis.

Despite acknowledging the necessity and noble nature of the interventions, Economic and tax experts at the audit firm- Ernst and Young say that the measures are not adequate to grow all the key sectors that have been disrupted by the virus.

Due to the impact of COVID-19 shocks on the domestic economy, the National Treasury had revised the country’s economic growth which is now projected at a lower rate of 2.5 percent from the 5.4 percent growth in 2019 in the wake of the pandemic which has claimed 104 lives and infected 3727.

Christopher Kirathe, a tax partner at the audit firm pointed out that at least 4 percent of the GDP (393.7 billion) should be injected into the economy as opposed to the 2 percent of GDP which has been injected in form of foregone taxes and direct liquidity injection.

 “At least 4 percent of GDP is required to jumpstart a battered economy like ours. On the basis of this, the government intervention falls short by about Shs 170 billion,” he said.

Besides the tax measures which provide an intervention of Sh172 billion, the Government also introduced an 8 point stimulus package worth Sh53.7 billion meant to jump-start the economy.

Kiraithe  noted that  tax measures including the increase of excise duty on at least 31 goods by about 5.5 percent are weak and might not be sufficient to jump-start economic upturn

While presenting the budget statement in Parliament On June 11, Yattani noted that tax revenue is estimated to reduce slightly to Ksh1.621 trillion in FY 2020/21 compared to the target of Ksh1.64 trillion in FY2019/20.

In his address to the Nation on April 25, the President introduced various tax measures including the reduction of the income tax rate (Pay-As-You-Earn) from 30 percent to 25 percent and a hundred percent tax relief for persons earning a gross monthly income of up to Sh24,000.

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Value Added Tax rate was lowered from 16 to 14 percent, the  Corporation Tax was revised to 25 percent while the Non-Resident Tax on Dividends was adjusted from 10 to 15 percent.

Kenyatta also ordered the National Treasury to effect an immediate reduction of the VAT from 16 percent to 14 percent and and the reduction of turnover tax rate from the current 3 percent to 1 percent

Nonetheless, Kiraithe has predicted looming pressure from IMF and World Bank to reverse these measures, which he says will further pile uncertainty for businesses.

Senior advisor at Genghis Capital, Churchill Ogutu previously noted that the current tax projections are unrealistic under the COVID-19 environment which has been characterized by reduced income, disrupted business and job losses, factors that are expected to disrupt the government’s revenue streams.

Ernest and Young experts share the same concerns highlighting that Kenya’s volatile tax base which is mainly from primary tax revenue streams are from a range of income, property and consumption taxes are sharply disrupted by the virus.

 “The above matters, combined, project a period of higher spending and lower tax revenue, which has the potential to undermine Kenya’s fiscal balance and Kenya may suffer from a phenomenon known as “scissors effect”, he said.

In their proposals, the financial advisory fronted the need of  loan moratoriums – both principal and interest – in order to redirect these funds to local restarting of the economy;

“Serious cut-back of waste and largesse within the national and county governments and formulation of policies of how to live with and manage covid-19, rather than how to overcome,” were also listed as some of the reccomendations.

“Unless faced with bolder fiscal and monetary policies, this effect if sustained would result in a crisis and clawback of the interventions provided,” Kiraithe noted.

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