Treasury CS Hints at Another Spike in Taxes - Money Weekly

It is that time of the week again when we look at the news headlines over the last seven days and dissect those that can affect your money. 

Welcome to yet another edition of Money Weekly.

This week:

• The National Treasury Cabinet Secretary says that the current tax system is not sufficient to sustain the country’s expenditures and that there is a need for a redesign. This could lead to more taxes in the upcoming fiscal years.
• The Senate passed the Affordable Housing Bill, 2023, quashing all amendments put forth by Azimio affiliated senators.
• The Kenya Association of Manufacturers (KAM) has protested the regulations given by Interior CS Kithure Kindiki in a bid to curb the proliferation of illicit brew.
• Remotasks, a popular gig work platform, has closed down its operations in Kenya.
• The shilling has staged an impressive rally against the dollar, reaching an 8-month high this week.

For this and much more. Let’s dive in.

Redesigning the Tax System

To sum up his contributions at the 12th African Fiscal Forum, Treasury Cabinet Secretary, Prof. Njuguna Ndungú, said that the current tax regime has reached the end of the road. He emphasised that, in order to mobilise enough revenue, the tax policy has to be redesigned.

Here are some pointers from his discussion.

The tax regime as presently structured cannot deliver anything above 14.1% in tax revenue to GDP ratio. This is because the current tax structure fails to encompass many people but also creates an incentive for people to avoid taxes. He acknowledged that raising taxes is not the optimal way of increasing tax revenues; rather, focus should be on compliance and inclusion.

CS, Ndungú stated that the Medium Term Revenue Strategy (MTRS) plans to get the tax revenue to GDP ratio upwards of 20% over the next five years. Through the Public Finance Management Act, the Treasury is also pursuing removing the debt anchor from a nominal value of Ksh10 trillion to 55% of GDP. 

The CS elaborated that the approach to redefining the tax regime will be informed by the empirical studies being conducted by the Treasury. The three major objectives of the empirical studies include: 

• Optimising tax instruments to raise compliance
• Aligning what the government finances with the needs of the economy; also aligning with bottom-up economic agenda.
• Consolidating revenue collection to achieve the set goals.

The government also needs to take a look at the subsidy program to ensure it is serving its intended purpose. For instance, CS Ndungú gave the example of bread and milk subsidies. According to the CS, VAT makes up 40% of total revenue; 18% of that goes to tax rebates and 95% of the rebates go to bread and milk.

To address this, he floated the idea of personalised refunds, where they directly refund a consumer based on their receipts.

Furthermore, Professor Ndung’ú suggested a review of property taxes, stating that they were stuck in the 1970s. The updating of these taxes will increase property tax collection fivefold, as he puts it.

Finally, the CS emphasised on the importance of technology in redesigning and implementing a new tax regime. One that is geared towards optimal taxes and improved compliance.

Senate Passes Affordable Housing Bill

The Affordable Housing Bill, 2023, sailed through the Senate with a resounding vote of 27 votes from Kenya Kwanza Senators against 10 votes from Azimio Senators. Kenya Kwanza Senators voted to quash all the amendments proposed by their Azimio counterparts. These amendments included:

• Capping deductions at Ksh2,500
• Deductions to be 1.5% of net salary instead of gross salary
• Exemption of any person who enters under a subsisting mortgage, any person residing in a rural area and having a certificate of title registered in their name and any farmer or business person whose annual turnover is less than Ksh288,000 a year.
• Exemption of individuals over 50 engaged in informal business activities
• Exemption of persons with five years to retirement
• Money collected through the levy is to be given to county governments as conditional grants instead of to the Affordable Housing Fund Board.

However, there were some amendments pushed by the Roads, Transport, and Housing Committee. They include:

• A person is only eligible to one housing unit as long as they met the criteria
• Should a person who has saved miss out of a unit, they can withdraw their savings and accrued interest by giving a 90-day notice
• On the other hand, the person can apply for an affordable mortgage to develop a rural affordable housing unit
• A beneficiary of the housing project shall not sell their unit or any other interest in it unless with prior approval from the board.

Failure to pay the levy will attract 3% interest per month and will be recovered as a civil debt.

Manufacturers Protest Costly Crackdown as KRA Intercepts Illicit Products Worth Ksh897M

The fight against illicit brew continues. Last week, the Cabinet Secretary of Interior, Kithure Kindiki, issued new guidelines on the manufacture, distribution, and sale of alcoholic products in a bid to curb the proliferation of illegal manufacturing and consumption of illicit brews.

The Kenya Association of Manufacturers (KAM) has, however, protested some of those guidelines, terming them costly and punitive.

These are some of their objections.

• Protested suspension of alcohol manufacturer licensing, citing loss of revenue and increased cost of doing business.
• Installing quality control laboratories for licence reinstatement is expensive.
• Acquiring gas chromatography machines is punitive due to high costs and the reconfiguration of existing production plants.
• New minimum packaging of 750ml from 250ml would lead to losses as current plants and machinery become obsolete or unproductive.
• Requested state clarification on the definition of second-generation alcohol.
• Advocated for appointment of one legal reference point for prescribing hours of operation.
• Argued against the restriction on alcohol distribution after 6pm, citing impacts on bodaboda last mile deliveries, inter-county trade, and e-commerce platforms.
• Raised concerns about excise duty taxation in the alcoholic subsector being at peak levels.
• Protested ban on alcohol businesses or outlets in residential areas, seeking government specification of residential areas.
• Advocated for exclusion of clubhouses in residential areas, wholesalers, and distributors in mixed-development buildings from the ban.

In joining the fight against illicit brew, KRA has also stated that they have intercepted illicit products valued at Ksh897 million.

Remotasks Ends Operations in Kenya

Remotasks, a popular online work platform, is reported to have ended its operations in Kenya. Kenyans took to social media to share that they are no longer able to access the site.

Some shared an email from the company stating, “We are reaching out with an important announcement regarding Remotasks operations in your location. We are discontinuing operations in your current location effective March 8, 2024.”

However, those who have pending pay for projects completed will still get remunerated. “As part of this change, you have been off-boarded from your current project. You will receive payments associated with your work completed via the payment account set up on your profile.”

This comes a  few weeks after the story of Brian Kipchumba hit the airwaves after he was seen explaining to President Willian Ruto how the site works and how much he makes. This elicited mixed reactions online. The President used Brian’s story to illustrate the power of the digital revolution while speaking at the World’s Leaders Summit.

This is a massive blow to unemployed Kenyans who earn their bread from doing tasks on the platform.

Shilling Rallies to 8-Month High

The Kenya shilling has been staging a stable comeback since January this year. This week, the shilling reached an 8-month high to trade at Ksh138 against the dollar as it clawed back its value against the greenback.

The recovery of the Kenyan shilling can be attributed to foreign inflows and the resolution of the Eurobond, which is supposed to mature in June.

Earlier in the year, Kenya received two massive foreign inflows from the IMF and World Bank.

• On January 18th, the IMF disbursed $684 million.
• On January 24th, the Trade Development Bank disbursed $385million

In addition, the Central Bank, through Governor Thugge, indicated that they would support the shilling to reduce its volatility since it had overshot the equilibrium rate.

Other Major Money News;

Power Prices Drop in March

Electricity consumer prices have dropped by an average of Ksh1 per unit, marking the second consecutive drop in power prices. The Energy and Petroleum Regulatory Authority (Epra) lowered the price of electricity from Ksh4.14 per kilowatt hour in February to Ksh3.64 per kilowatt hour in March. 

Kenya Power increased the purchase of cheaper hydropower, easing pressure on bills. Power prices remain high compared to the same period last year due to new tariffs implemented by Epra in April last year.

State-backed Guarantee Scheme Lends Ksh6.2 Billion to SMEs

The state-backed credit guarantee scheme, aimed at enhancing loan access for micro, small, and medium enterprises (MSMEs), has disbursed a cumulative Ksh6.2 billion by December 2023 since its launch three years ago.

The scheme shares default risks with banks to increase funds available for lending, with Ksh5.8 billion disbursed as of June 2023. Initially, Treasury provided a seed capital of Ksh3 billion, expecting total lending of Ksh12 billion, with a scheme to absorb up to 25% of the principal in case of default.

Disbursements by the scheme so far only represent just 0.79% of active MSME loan accounts (Ksh783.3 billion) in the banking industry as of December 2022.

Challenges hindering the success of the scheme include, 

• The informality of MSMEs in Kenya 
• Low awareness of the scheme
• MSMEs not meeting the requirements for beneficiary registration
• Misclassification of businesses
• External shocks, like supply chain constraints

However, the Treasury has proposed remedial measures, such as 

• Onboarding additional financial intermediaries. Currently, only seven banks are in the program, Absa, Co-operative Bank of Kenya, Credit, DTB, KCB, NCBA, and Stanbic.
• Formalisation of MSMEs
• Reviewing business classifications

Kenya Improves Four Points to 90 In Global Hunger Ranking

Kenya's hunger ranking improved to 90 in the 2023 Global Hunger Index (GHI), down from 94 the previous year. Despite improvement, the hunger situation is still deemed serious due to unbalanced food access.

Approximately 27.8% of the population faces severe food insecurity.

Factors contributing to increased hunger include food inflation, high import costs, and extreme climate events like locust invasions and droughts. Although hunger levels have improved since 2000, some regions, especially in North Eastern Kenya, still report worrying levels of malnutrition.

Central Bank Raises Ksh34 Billion From Reopened Three-year Bond

The Central Bank of Kenya (CBK) accepted Ksh34.2 billion from investor bids in the reopened three-year bond sale. The bond was oversubscribed, with investor bids reaching Ksh43 billion against a target of Ksh40 billion, representing a 107.69% performance rate.

Proceeds from the bond sale will be used for budgetary support.

Investors demanded a higher premium on government securities, with the three-year bond returning an 18.4222% weighted average rate of accepted bids. 

Two other bonds were auctioned alongside the three-year bond: a re-opened five-year bond and a new 10-year bond. The re-opened five-year bond and the new 10-year bond will remain on auction until March 20, with the CBK aiming to mobilise a combined Ksh40 billion from the three bonds.

Cma Locks Speculators Out of Margin Trading In Draft Rules

The Capital Markets Authority (CMA) has opened a window for Kenyan companies to issue bonds to investors across East Africa to diversify the investor base and strengthen regional financial integration. Companies can raise funds by issuing bonds without restriction on the use of proceeds.

The minimum size for regional bonds is about Ksh122 million ($850,000) and companies can choose the currency for the issue. Companies can raise additional capital in any jurisdiction with updated disclosures in the regional information memorandum.

On the other hand, the CMA is drafting regulations to restrict margin trading to seasoned and professional investors, barring speculators. Margin trading involves investing in shares using borrowed funds from a lender, usually a stock brokerage or investment bank.

The draft regulations aim to limit participation to investors with sufficient experience and financial capacity. Speculators, typically retail investors, are being sieved out to protect them from the risks associated with margin trading.

More News in a Snapshot

Credit support plan for small traders: The Kenyan Government, via the Kenya Development Corporation (KDC), has launched the Supporting Access to Finance and Enterprise Recovery (SAFER) Project to aid micro, small, and medium enterprises (MSMEs) post-Covid-19.The initiative aims to dismantle financial barriers for MSMEs through policy reforms and innovative financing by offering loans ranging from Ksh7,000 to Ksh250,000 with flexible terms. 

Sale of stake in five top hotels: The Kenyan government has initiated the sale of its stakes in five hotels, including Kenya Safari Lodges, Mombasa Beach Hotel, Ngulia Safari Lodge, and Voi Safari Lodge, and Golf Hotel Limited. The move aims to decrease government exposure in hospitality while supporting the recovery of the tourism sector. This aligns with previous approvals for 17 government-owned entities to be privatised.

Two ministries reallocate Ksh10bn: The Treasury faces scrutiny for permitting two State departments to reallocate Ksh10 billion for pending bills. Ksh9.8 billion intended for National Housing Corporation (NHC) was redirected to the State Department for Housing, Ksh217 million meant for development was reassigned to settle pending bills at the State Department for Correctional Services and Ksh75 million from the State Department for Crop Development's development budget to fight locusts. 

Dairy imports from Uganda nearly tripled: Kenya's dairy imports from Uganda surged nearly threefold by June 2023 due to increased production in Uganda and heightened demand from Kenyan processors. Dairy products imported include butter, cheese, ghee, UHT milk, yoghurt, and milk powder

Tea export costs nearly triple: Tea export costs via Mombasa port have tripled due to a shortage of ships caused by Red Sea attacks. Exporters face delays of up to three weeks and heightened expenses due to longer routes. Shipping a 40-foot container to key markets like Russia has surged from Ksh339,418.27 ($2,442) to Ksh904,764.78 ($6,513). 

High earnings grow pyrethrum output: Pyrethrum farming in Kenya is experiencing a resurgence, supported by county government initiatives. Over the past six years, production has grown fivefold, its value eightfold, and its price has increased by two-thirds. Although land under pyrethrum cultivation decreased, the price of flowers delivered to factories rose steadily. 

StanChart’s Ksh11bn dividend: Standard Chartered Bank Kenya has increased its dividend payout by 32% to Ksh29 per share, totaling Ksh10.96 billion, following a 15% rise in net profit to Ksh13.8 billion for the year ended December 2023. The announcement led to a 5.7% surge in share price at the Nairobi Securities Exchange. 

Banks face higher costs: Kenya's recent inclusion on the FATF grey list for money laundering risks will negatively impact local banks' credit ratings, causing higher compliance costs and the potential loss of correspondent relationships. Moody's warns of delays in transaction settlements and increased scrutiny.

Digital lenders hit 51: The Central Bank of Kenya has licensed 19 additional digital lenders, bringing the total Digital Credit Provider (DCP) licensees in Kenya to 51. With over 400 pending applications, DCPs have surpassed the number of licensed traditional banks in Kenya. Newly licensed lenders include Lipa Later, Azura Credit, and Pi Capital.

No surveillance cameras in Airbnbs: Airbnb will prohibit surveillance cameras inside rental properties worldwide from April 30, prioritising customer privacy. Previously allowed in common areas with disclosure, cameras won't be permitted anywhere now. Outdoor cameras, noise monitors remain allowed but must be disclosed before booking.