Kenyans Rush to Open Dollar Bank Accounts - Money Weekly

Welcome to this week's Money Weekly roundup, where we are going to delve into the latest developments impacting various aspects of the financial landscape. 

In today’s edition, we'll explore why Kenyans are rushing to keep their money in dollar accounts, the effect of inflation and taxation on new vehicle sales, concerns over Kenya’s proposed tax reforms plan by a global credit rating agency, Kenya's debt load hitting the Ksh10 trillion threshold and many more.

As we do every Thursday, here's our weekly summary of the top news from the last seven days that are shaping the economic landscape and could impact your money.

Kenyans Rush to Dollar Deposits Amid Shilling Depreciation

July witnessed a substantial surge in dollar deposits within Kenya's commercial banks, climbing by a significant Ksh61 billion to reach an all-time high of Ksh1.246 trillion ($8.47 billion). This robust expansion in deposit value has been a recurring trend throughout the year, primarily fueled by the weakening of the Kenyan shilling.

According to the latest data from the National Treasury, as presented in the Draft 2023 Budget Review and Outlook Paper, these deposits have now exceeded their levels from a year ago by a striking 37.8%, marking a growth rate twice as fast as the one observed in the financial year leading up to July 2022.

Economists largely attribute this remarkable expansion in deposit value to the shilling's decline against the US dollar, which has depreciated by 18% over the past year. This depreciation effectively inflates the value of hard currency holdings when measured in shillings, even if the actual quantity of dollars held remains relatively stable.

The upswing in dollar deposits saw a noteworthy appreciation of Ksh61 billion, following a substantial increase of Ksh93 billion in June alone. Over the course of the year, these deposits have surged in value by Ksh325.3 billion, equivalent to approximately $2.2 billion.

Notably, corporations account for the lion's share of Kenya's dollar deposits, comprising about 70% of the dollar deposits, while the remaining portion is in the hands of households. 

Recent market dynamics have also seen significant players seeking to accumulate dollar reserves, a precautionary move prompted by a shortage of US currency in the first quarter of the year. This shortage resulted from disruptions in the interbank forex market, which had remained relatively inactive in recent years.

In addition to safeguarding against currency shortages, these dollar reserves serve as a hedge against potential forex losses, given the ongoing depreciation of the Kenyan shilling.

Contributing to the growth of dollar deposits is an improved current account balance, measuring the disparity between the country's forex inflows and outflows. Treasury data indicates that the current account deficit reduced by 20.6% to $4.63 billion (4.4% of GDP) in June 2023, compared to $5.83 billion (5.1% of GDP) in June 2022.

This reduction in the deficit can be attributed to several factors, including lower imports, increased exports of goods and services, and a boost in diaspora remittances. 

Read Also: 5 Things to Know Before Keeping Money in a Dollar Account in Kenya

New Vehicle Sales Hit by Inflation and Taxation

Recent changes in taxation and regulatory measures within the automotive sector have dealt a significant blow to vehicle sales, as indicated by the latest data from the Kenyan automotive industry.

According to the Kenya Motor Industry Association (KMIA), new vehicle sales have experienced a notable decline of 13% during the eight-month period leading up to August 2023. The industry attributes this decline to a host of challenges it has been grappling with.

Throughout the latter half of the year, Kenya has grappled with soaring inflation rates and increased taxes that have eroded the disposable incomes of its citizens.

Additionally, KMIA's data underscores a consistent monthly drop in the demand for vehicles displayed in showrooms.

For instance, in the month of August, local dealers managed to improve their sales figures slightly, with a total of 985 units sold. This comes after a dismal month of July, where only 144 units, including locally assembled vehicles, found buyers.

This represents a substantial dip from the 8,752 units sold during the corresponding period in 2022, highlighting that vehicle manufacturers moved 1,131 fewer units during this timeframe.

Read Also: Foreign-used vs Locally-used Car? 8 Things to Consider

Moody's Raises Concerns Over Kenya's Proposed Tax Reforms Plan

Global credit rating agency Moody's has joined the chorus of voices expressing reservations about Kenya's ambitious tax proposals for its medium-term plan extending to 2026.

In their recent analysis, Moody's highlights the potential for strong political and social resistance to these proposed tax changes.

Among the key tax changes outlined by the National Treasury is the plan to harmonise Value Added Tax (VAT) with Kenya's East Africa Community counterparts, increasing it from 16% to 18%. Additionally, there are plans to raise excise duties on high-alcohol content products to curb consumption.

Another noteworthy proposal is the introduction of new taxation measures affecting schools offering extracurricular activities, which could lead to higher costs for such services. The government argues that these changes are necessary due to variations in tax exemptions for educational services across different schools, stemming from differences in fees and services provided.

The government is also considering revising taxes on sugar-based non-alcoholic beverages as part of efforts to combat obesity and diet-related non-communicable diseases.

However, Moody's cautions that even if these proposals are successful, they will require time to improve the government's access to funding and enhance its liquidity profile, which is expected to remain weak in the short term.

The agency also points out that certain measures, such as an increase in the value-added tax on fuel, could keep prices high for essential goods.

Similar to other emerging and frontier markets, Moody's highlights challenges in Kenya's tax compliance enforcement due to the quality of tax administration, the significant size of the informal economy, and the complexity of the tax code. The introduction of tax waivers, exemptions, and incentives to promote investment has contributed to Kenya's historical difficulties in revenue collection.

Moody's sentiments echo those of the World Bank, which has cautioned that additional taxes could burden households, impacting their purchasing power. 

The proposed tax reforms in Kenya are poised to remain a topic of debate and scrutiny in the coming months.

Sasra Calls on Treasury for Support in Recouping Sacco Deductions from Government Bodies

The Sacco Societies Regulatory Authority (Sasra) is intensifying its efforts to recover over Ksh2.24 billion in non-remitted funds owed by various government entities, including counties, public universities, and state-linked organisations. 

Sasra Chairperson Jack Ranguma has proposed a framework that would enable the direct deduction of these outstanding amounts from the exchequer allocations to these entities. This approach aims to streamline the process and eliminate the challenges associated with recovering these funds, such as dependence on available funds and potential conflicts of interest.

If implemented, this new system would prioritise settling the non-remitted deductions as a first charge before these state-linked entities receive the remainder of their budget allocation.

According to Sasra's data up to December 2022, employer institutions owed saccos a total of Ksh2.67 billion, affecting 80 saccos and 66,452 individual members. Of this amount, Ksh2.02 billion, or 76%, was intended to repay members' loans, which means the failure to remit these funds has led to loan defaults within the sector.

County governments and their assemblies top the list of defaulters, owing Ksh1.35 billion, nearly half of the total non-remitted funds by the end of December. Public universities and tertiary colleges follow, with Ksh620.52 million in arrears, while state corporations owe Ksh143.1 million. Public sector companies, including water utilities, have withheld Ksh64.2 million.

National government ministries owe Ksh27.7 million, public school employees owe Ksh12.5 million, and constitutional bodies have a debt of Ksh24.36 million to saccos.

Sasra's proposed changes aim to address these long-standing issues and ensure that saccos receive the funds they are owed, ultimately safeguarding the financial health of both the saccos and their members.

Read Also: How to Build Wealth in Kenya Using Saccos

Kenya's Debt Load Reaches Ksh10 Trillion Amidst Borrowing Surge

Kenya's total debt has surged past the Ksh10 trillion mark due to increased borrowing, imposing greater financial responsibilities on taxpayers.

According to the latest data from the Treasury and the Central Bank of Kenya (CBK), Kenya's debt soared to Ksh10.189 trillion by the end of June 2023, a significant surge compared to Ksh8.579 trillion in June 2022.

This debt accumulation rate has exceeded earlier forecasts by the National Treasury, which estimated the country's debt to be at Ksh9.412 trillion by the end of June 2023 in its 2023 Budget Policy Statement. 

The current debt level has already surpassed the projected Ksh10.13 trillion for June 2024, highlighting the faster-than-expected growth in public debt and borrowing.

In terms of debt distribution, external borrowing takes the lead at Ksh5.452 trillion, with domestic debt standing at Ksh4.736 trillion. External debt now constitutes 53.51% of the total debt, while domestic borrowing accounts for 46.48%. This represents a shift from the previous year when foreign loans made up 50.01% of the debt, while domestic loans comprised 49.98%.

The faster growth in external borrowing is partly attributed to the weakening exchange rate, with the Kenyan shilling losing nearly 20% of its value against the US dollar year-to-date. Despite challenges in international capital markets, Kenya has maintained access to financing from multilateral institutions such as the World Bank and the International Monetary Fund (IMF), which have been essential for budget support.

The Treasury is expected to continue leveraging concessional funding from multilateral institutions to bridge the financing gap in 2023/24 fiscal year. This increased access to concessional financing has prompted the Treasury to revise its estimate for net foreign financing to Ksh449 billion, up from Ksh131 billion. 

Consequently, the reliance on domestic financing is expected to decrease, with the target now lowered to Ksh415.3 billion from the previous estimate of Ksh587.4 billion.

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Other Money News

• A new study conducted by Price Waterhouse Coopers (PwC) suggests that in Kenya and the broader East African region, traditional TV and home video will maintain their stronghold in the advertising arena until the year 2026. However, a noteworthy shift is anticipated beyond that point, with internet advertising poised to surpass traditional TV in terms of revenue. The PwC Entertainment & Media (E&A) Outlook report provides insights into the advertising landscape, forecasting that traditional TV and home video will still command a significant share, with an estimated value of Ksh63.25 billion ($430 million) in 2026. Meanwhile, internet advertising is on a rapid ascent and expected to narrow the gap, reaching approximately Ksh63.11 billion ($429 million) by the same year. What's intriguing is that by 2026, internet advertising will be trailing traditional television and home video by Ksh176.8 million ($1.2 million). This presents an intriguing opportunity for internet advertising to establish dominance in the market in the subsequent years. This has the potential to revolutionise the way businesses and brands connect with their desired audiences.

• Google has reported that search interest in Artificial Intelligence (AI) has reached an unprecedented peak in Kenya, with a strong emphasis on job-related inquiries dominating the digital landscape. According to the tech giant, Kenyan users have been searching for AI-related topics more frequently than ever before, with search volumes surging by a remarkable 270% compared to 2022. Over the past five years, this interest has skyrocketed by an impressive 400 percent, underscoring the growing curiosity and relevance of AI in the Kenyan context.

Read Also: AI Revolution: How AI Can Make Money Management Easier for You

• In its medium-term revenue strategy, the Treasury aims to leverage the Kenya Revenue Authority (KRA) for specialised collaborations with international counterparts. This partnership will focus on accurately assessing the true value of imports originating from China, a significant source of Kenya's imported finished goods, spanning a wide range from electronics to clothing. Kenya's reliance on Chinese imports has been substantial, but the government has become increasingly concerned that the declared values of many of these products, particularly in high-value sectors like electronics, such as mobile phones and computers, may not reflect their actual worth. This discrepancy has led to substantial revenue losses through tax leakages, potentially amounting to billions of shillings 

Read Also: Govt Proposes More, Higher Taxes  - Money Weekly News Roundup 

• In the month of August, the remittances from Kenyans living and working abroad did not provide significant support to the country's foreign exchange reserves, which once again showed signs of weakening. According to the weekly data released by the Central Bank of Kenya (CBK), Kenyans living abroad sent home a total of Ksh51.5 billion ($354.3 million) during the month. This figure represented a 6.4% decrease compared to July.