During last week’s acrimonious Parliamentary session, Majority Leader Aden Duale was at the forefront pushing for a ‘yes’ vote on President Uhuru Kenyatta’s memorandum to the Finance Bill, 2018 proposing new taxes.
“The Kenyan economy can only be compared to our peers, South Africa, Ghana, Nigeria,” he said. “In South Africa, they charge 14 per cent VAT and 15 per cent in Ghana and in Nigeria they charge five per cent,” explained Duale.
This argument is based on a flawed analysis of Kenya’s comparator countries. The World Bank uses an intricate formula to create economic comparator index for more than 121 countries in the world including Kenya. This index factors in countries’ export basket composition, GDP per capita, population human capital and physical capital to make comparative pairings between related economies.
“This methodology aims at identifying countries that are similar in economic development or size, competitors with a similar position of the export basket or “neighbouring” countries within the region, by means of quantitative analysis,” explains the World Bank in a note preceding the index on its website.
According to the index, Kenya’s comparator countries in Africa are Benin, Cameroon, Cote D’Ivoire, Ghana, Senegal, Tanzania, Uganda and Zimbabwe. Outside the continent, Kyrgzstan and Vietnam also feature as Kenya’s comparators. South Africa and Nigeria are not Kenya’s comparator countries as Mr Duale claimed. This is primarily because the two economies are largely resource-driven, posses much larger population human capital and physical capital and hence much larger export baskets. Comparing the two and citing the VAT paid by the economies as justification for introducing the same in Kenya is inaccurate. Moreover, using the real comparator countries defeats Duale’s justifications for the fuel VAT.
In East Africa, neither Uganda nor Tanzania have VAT on petroleum products. Mr Duale further stated that Kenya is the only economy that does not rely on donor funds for budget support.
“This is the only economy that our budget is funded 99 per cent by the domestic revenue we collect from the people of Kenya,” he said. “We don’t beg the IMF, we don’t beg the World Bank. We don’t beg any other.” This is inaccurate. Development loans and standby facilities from the World Bank, IMF and other bilateral sources form a major part of Kenya’s budget without which most development and recurrent expenditure would not be possible.
“The key external official multilateral sources in the past have been World Bank and African Development Bank, through the concessional windows of International Development Association and African Development Fund,” said the National Treasury in the latest medium debt strategy document.
Treasury estimates indicate Kenya will procure Sh2.9 trillion in development loans and grants from external sources of which Sh1 trillion will be sourced from the World Bank and related institutions.