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High taxes and debt threaten EA growth

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Vendors sell food at Kalerwe Market in Kampala on December 14, 2023. PHOTO | FRANK BAGUMA

East Africa’s finance ministers on Thursday tabled a raft of measures for expanded expenditure plans for the 2024/2025 fiscal year with a keen eye on debt repayment and reliance on domestic revenues to run government operations. These measures effectively set the stage for increased taxation, which will potentially choke economic growth in the region.

East Africa’s economic growth is projected to pick up from 3.5 percent in 2023 to 5.1 percent in 2024 and 5.7 percent in 2025, according to the African Development Bank, buoyed by infrastructure development and increased regional trade.

But tax experts and industry players warn that the heavy taxation policies will hurt household and business spending and stifle the projected economic growth rates.

In their budget speeches, the region’s finance ministers allocated substantial amounts to key sectors of the economy -- roads and rail infrastructure, energy, health, security, education and agriculture -- to help sustain fragile economies weighed down by domestic and global shocks.

But the mounting debt burden, the high cost of debt repayments and fears of default have pushed monetary authorities onto domestic resource mobilisation through multiple taxation measures to shore up their cash flow positions.

Kenya’s Cabinet Secretary for National Treasury Njuguna Ndung’u presented a Ksh3.99 trillion ($30.75 billion) spending plan for the 2024/2025 fiscal year, with interest on debt repayment expected to take up Ksh1.1 trillion ($8.48 billion), a situation compounded with a fiscal deficit of Ksh597 billion ($4.6 billion).

These obligations have upped the pressure on the National Treasury to continue borrowing, at a time when public debt is at Ksh11.3 trillion ($87.11 billion) and revenue projections for the 2024/2025 fiscal year are Ksh3.34 trillion ($25.74 billion). The Treasury targets ordinary revenues of Ksh2.91 trillion ($22.43 billion) and Appropriations-in-Aid of Ksh426 billion($3.28 billion). Grants are projected at Ksh51.8 billion ($399.33 million).

The Treasury expects to finance the $4.6 billion budget gap through net external borrowing of Ksh333.8 billion ($2.57 billion) and net domestic borrowing of Ksh263.2 billion ($2.02 billion).

Prof Ndung’u is seeking to raise Ksh346.7 billion ($2.67 billion) from the East African Community (EAC) customs measures together with domestic taxation contained in the Finance Bill 2024 to finance part of the $30.75 billion budget.

Meanwhile, the EAC Finance ministers have agreed on the stays of applications of the existing EAC Common External Tariff (CET) not to change the rates and, where necessary, adopt higher rates of duty to encourage local production in the region. They have agreed on duty remissions on raw materials and inputs used by local manufacturers to facilitate EAC domestic production.

For instance, Kenya was granted an extension of the current stay of application to import rice at a duty rate of 35 percent or $200 per metric tonne, whichever is higher, for one year, instead of the EAC rate of 75 percent or $345 per metric tonne, whichever is higher, in order to meet local demand and enhance food security.

Kenya’s Finance Bill 2024, however, contains taxation that is billed to increase the cost of living and doing business by shrinking business and consumer incomes. These proposals include changing the VAT status for ordinary bread from zero percent to 16 percent.

Tax experts at Ernst & Young say increasing taxes could have adverse effects such as reducing consumer spending, discouraging investments and exacerbating poverty, if not implemented judiciously,

Consumer lobby, Consumer Federation of Kenya (Cofek) described the proposed taxation measures as “punitive” and counterproductive.

Manufacturers are also crying foul, recalling how, since last year, Kenya had continued to impose Export and Investment Promotion Levy (EIPL), excise duty on imported industrial inputs, with some companies opting to relocate to neighbouring EAC partner states.

“The erosion of Kenya’s competitiveness is forcing investors to reconsider their investment destination in favour of Uganda and Tanzania. Indeed some of our members have commenced relocation plans to both Uganda and Tanzania,” manufacturers said in a letter addressed to the Parliamentary Committee on Trade, Industry and Cooperatives.

Changes in the definition of royalty to include software-related fees will increase the withholding tax burden for international software companies. VAT changes, such as the increase in the mandatory registration threshold and new VAT exemptions, could streamline operations for some businesses but complicate tax compliance for others.

Harmonising excise duty rates and imposing excise duty on digital services offered by non-residents could make the Kenyan market less competitive for international service providers.

“However, the removal of excise duty on products imported from EAC partner states and exemptions for certain raw materials and machinery will likely facilitate regional trade and reduce costs for specific industries,” said John Kalisa, chief executive officer of the East African Business Council.

The cost of financial services is also expected to rise after the VAT status of these services is changed from exempt to the standard rate, subjecting them to 16 percent VAT.

Kenya expects its economy to grow by 5.5 percent in 2024, supported by the services sector, strong performance in agriculture and a decline in global commodity prices that is expected to reduce the cost of production.

Uganda

The changes in tax rates carry a slightly mixed bag filled with harsh consequences for Ugandan businesses engaged in regional trade and a glimmer of hope in the Kenyan market.

Controversial tax increases applied on Ugandan fuel imports could raise the cost of doing business for many enterprises operating in a landlocked economy while an increase in excise duty on local cement products poses risk to commercial competitiveness in regional markets.

The excise duty rate charged on petrol was raised from Ush1,450 ($0.38) per litre to Ush1,550 ($0.41) per litre while excise duty levied on diesel was increased from Ush1,130($0.29) per litre to Ush1,230 ($0.32) per litre. Excise duty on cement products has been raised by Ush500 ($0.13) per bag.

A fresh excise duty tax of Ush2,500 ($0.66) per kilogramme has been introduced on supplies of powder meant for conversion into beer, a move that promises to raise production costs incurred by alcohol producers. This raw material previously enjoyed a tax exemption. In contrast, government offered a reduction in excise duty on bottled drinking water. Under the new measures, manufacturers will be subject to excise duty of Ush75 ($0.02) per litre or 10 percent, whichever is higher.

In comparison, an increase in Kenya’s VAT threshold from Ksh5 million ($38,489) to Ksh8 million ($61,583) is likely to free several small businesses from the VAT compliance burden. Whereas this decision is expected to minimise Kenya Revenue Authority’s administration costs incurred on small taxpayers, an increase in the VAT threshold could translate into lower operating costs, higher business incomes and a stronger capacity to expand market presence across East Africa. But figures on the number of beneficiary firms were not available by press time.

The excise duty exemption targeted at eggs, imported onions, potatoes, potato crisps and potato chips exported to the Kenyan market but sourced from EAC member states is likely to boost regional trade in consumer goods after years of sporadic bickering over non-tariff barriers witnessed between Kenya, Uganda and Tanzania.

Jet Tusabe, tax director at BDO Uganda, said the new excise duty rates introduced across East Africa do not mean well for regional trade.

“Harmonisation of domestic taxes is yet to materialise. Whenever you ask Uganda Revenue Authority staff about this issue, they tell you they are still discussing it. But what we are seeing is a common tendency by EAC member states to harmonise tax administration practices instead of harmonising domestic tax rates. This means Uganda is willing to adopt something that Kenya is doing in matters of tax administration and the other way round,” he said.

Ian Mutibwa, managing partner at Kampala-based Signum Advocates, said that VAT and withholding tax rates across the region appear stable at this time, but steep increases in excise duty rates pegged to “sin tax” on items like beer and cigarettes are likely to affect certain firms engaged in regional trade.

“But selective taxation criteria that offers tax exemptions to strategic commodities, such as coffee, which can be traded across the region might ease the burden of pursuing harmonisation of domestic taxes across the EAC bloc,” the lawyer told The EastAfrican.

“Difficult policy choices include maximisation of tax revenues and securing more money from the World Bank to fund government programmes. This directly ties in with ongoing discussions related to the Electronic Fiscal Receipting and Invoicing System (Efris) and the anti-homosexuality law. That aside, Moody’s downgrade offers a tough wake-up call to government over fiscal health matters,” observed Allan Lwetabe, investment director at the Deposit Protection Fund of Uganda.

Uganda’s budget resource envelope has increased from Ush52.736 trillion ($13.9 billion) in the financial year 2023/24 to Ush72.13 trillion ($19.1 billion) for the financial year 2024/25, according to parliamentary records.

Tanzania

Tanzania's Tsh49.35 trillion ($18.98 billion) budget for 2024/2025 tabled by Finance Minister Mwigulu Nchemba outlined several new Common External Tariff (CET) incentives agreed by EAC member states under the bloc's Customs Management Act of 2004. These included duty exemptions or remissions on imports such as lithium-ion electric accumulators and inputs for mobile phone assembling or manufacturing, production of yoghurt, powdered or UHT milk, fibre-optic cables and mosquito repellents.

Import duties on foods, beverages and three-wheel motorcycles were reduced, and application of EAC CET rates will continue to be stayed on imported cash registers, electronic fiscal devices and point of sale machines; second-hand clothing and footwear, iron and steel products, paper and paper products, safety matches, mineral water, gypsum powder and pneumatic rubber tyres for motorcycles.

Tanzania has, however, chosen to stay its application of EAC CET rates on inputs for domestic glass manufacture, ceramic tiles, corrugated iron sheets, salt, vegetable oils, refined industrial sugar, cotton yarn, horticultural products, materials for issuance of national identification smart cards, imported vitenge, buses for its rapid transport project, imported cane sugar, soya beans, groundnuts, coconuts and "other inputs/raw materials for manufacturing capital goods and equipment across various sectors," the latter measure intended to reduce the production costs of such materials within the country.

EAC partner states meeting the Community's rules of origin criteria have also been exempted from a new Industrial Development Levy on select imported goods such as beer (10 percent), non-alcoholic beer (five percent), energy drinks (5 percent), detergents (10 percent), detergent liquid (10 percent) and wire rods (10 percent).

Mr Nchemba's budget allocated 31.9 percent (Tsh15.74 trillion/$6.05 billion) of recurrent expenditure totalling Tsh34.59 trillion ($13.3 billion) to servicing the public debt and other consolidated fund expenses. The government debt stock stood at Tsh91.71 trillion ($35.27 billion) as of March 2024, including a Tsh60.95 trillion ($23.44 billion) external debt, which was up almost 9 percent from Tsh55.52 trillion ($21.35 billion) in March 2021 and a domestic debt of Tsh30.75 trillion ($11.82 billion).

The government has also reduced the royalty rate for gold supplied by local producers to the Bank of Tanzania from six to two percent and removed VAT on such transactions in a bid to woo more local producers into selling straight to the BoT.

As of April 2024, the central bank had purchased gold valued at $26 million for its reserve, which was set up in October 2023 with a target to reach six tonnes worth $400 million.

The government is proceeding with a plan to cover at least 67.4 percent or Tsh33.25 trillion ($12.79 billion) of its budget costs through domestic financing and has given the Tanzania Revenue Authority a collection target of Tsh29.41 trillion ($11.31 billion) for the fiscal year.

Domestic and external non-concessional loans will be restricted to Tsh9.6 trillion ($3.69 billion) and development partners have pledged Tsh5.13 trillion ($1.97 billion) in grants and concessional loans, down from Tsh5.46 trillion ($2.14 billion) in 2023/2024.

Rwanda

In Rwanda, newly appointed Finance Minister Yusuf Murangwa will have his work cut out, as he faces an uphill task of overseeing a vigorous domestic tax collection drive to fund 60 percent of the country’s budget for the 2024/2025 fiscal year. The proposed budget has increased by 11.2 percent to Rwf5,690 billion ($4.3 billion) from Rwf5,116 billion ($3.8 billion) in the previous year.

The government is banking on its robust domestic tax collection system which is highly digitised through the use of Electronic Billing Machines (EBM), and widening the tax base to fund 60 percent of its budget in the fiscal year which begins on July 1.

While presenting the budget to Parliament, outgoing Minister of Finance and Economic Planning Uzziel Ndagijimana said priorities include strengthening the health system, supporting agriculture and livestock productivity, scaling up social protection coverage, improving the quality of education and creating employment.

“Our economy is forecast to grow by 6.6 percent in 2024 and 6.5 percent in 2025. We also project that it will maintain an increasing trend to 6.8 per cent in 2026, and 7.2 per cent in 2027, especially following global political and economic issues,” Mr Ndagijimana said.

The government will also prioritise the reduction of the fiscal deficit from 6.7 percent of GDP in 2023/24 to 5.2 percent in 2024/25, 3.4 percent in 2025/26 and 3.1 percent in 2026/27. Although analysts have described Rwanda’s debt as manageable, it continues to rise, and will grow further in the coming fiscal year.

“Our public debt to GDP stood at 73.5 percent in 2023 and is expected to rise to 78 percent in 2024 before decreasing to 77.2 percent in 2025, 74.8 percent in 2026 and 73.9 percent in 2027.

This will require rationalisation of spending such as adoption of online meetings and reduction in travel expenses,” Mr Ndagijimana said.

Headline inflation is projected to decline to 5 percent in 2024, from 14 percent in 2023.

Burundi

In Burundi, the budget will rise 15.9 percent to BIF4.4 trillion Burundi ($1.5 billion) in the 2024/25 financial year starting in July, largely because of the unfreezing of civil servants’ salary bonuses, Finance Minister Audace Niyonzima said.

The economy is expected to grow 5.4 percent, from 4.2 percent in 2023/24, boosted by government investment programmes and improved cooperation with the country’s development partners, Mr Niyonzima said.

Burundi, a landlocked country of 13.2 million people, where 80 percent of the population is employed in the agricultural sector, has a rosy outlook underpinned by favourable rainfall, a gradual resumption of investment in the mining sector, strategic public investment, and the knock-on effects of fiscal, monetary, and foreign exchange policy reforms, the World Bank says.

Salaries were frozen in 2015 by the government after donors slapped sanctions on the East African country following political turmoil. The sanctions were lifted in 2021.

“The priority allocations retained in this draft budget, which are at the origin of the budget increase, include salaries and bonuses which have increased significantly,” Mr Niyonzima said.

The budget will be funded equally from internal and external revenues, leaving a forecast deficit of BIF 441.9 billion next financial year, up from BIF 426.5 billion in 2023/24.

This story was first published by Nation Africa (James Anyanzwa, Bernard Busuulwa, Bob Karashani, Luke Anami, Moses Gahigi and Reuters).