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Why the Uhuru rescue plan may not help Wanjiku

BUSINESS
By Dominic Omondi | Mar 27th 2020 | 5 min read
By Dominic Omondi | March 27th 2020
BUSINESS

A Jua Kali artisan eking out a living at Kibuye market in Kisumu town. President Uhuru Kenyatta’s bailout measures may not trickle down to him. [File, Standard]

President Uhuru Kenyatta’s tax cuts, which are aimed at cranking up an economy that has been ravaged by the coronavirus pandemic, might not benefit the ordinary citizen after all.

Instead, experts have argued that the prescription would only benefit a fraction of salaried Kenyans and big companies, leaving out millions of citizens who ply their trade in the ubiquitous informal sector.

According to analysts, a lot of enterprises in the Jua Kali sector have lost their businesses as the economy slowly shuts down after the country reported cases of the novel coronavirus.

Extreme poverty

A 2016 report by the Kenya National Bureau of Statistics (KNBS) showed that there are about 1.56 million licensed micro, small and medium enterprises (MSMEs), and 5.85 million unlicensed ones.

They employ about 14.9 million people, many of whom live a day at a time. This means any shock is likely to drive them into extreme poverty.

The Central Bank of Kenya has projected that the virus will devastate the economy this year, slowing its growth down from 6.2 per cent to 3.4 per cent.

The sectors that have been hit hard include tourism, aviation and exports, which heavily rely on the European market.

Fearing that the pandemic might snowball into a full-blown health crisis, President Kenyatta has instituted stringent measures, among them, the imposing of a 7pm to 5am curfew, which starts tonight.  

Schools, pubs, nightclubs, and other entertainment joints have since been closed. Workers have been forced to work from home, leaving matatus and restaurants without customers.

Around the country, open-air markets, where most poor people buy their food, are increasingly being closed by county governments who see this as a means to arrest the spread of coronavirus disease, Covid-19.

These measures have seen a lot of Kenyans lose their source of income. Yet, rather than address their plight directly, the president, according to economist David Ndii, decided to give them tax breaks.

“I am at a loss as to how this is a rational response policy for a government that was in a fiscal crisis before the Covid-19 shock, or how tax breaks translate to food on tables of ordinary people who have lost incomes and jobs,” said Dr Ndii in a tweet.

He faulted the decision to slash taxes as an intervention, saying there would be no taxes to be paid anyway as businesses would have shut down.

“For the duration of the crisis, their (MSMEs) income/turnover tax returns will be nil, VAT returns nil. I doubt they have cash reserves for salaries – PAYE returns nil,” said Ndii, adding that the government should have slashed its spending.

Indeed, by the time Uhuru unveiled the stimulus package, one of Wanjiku’s main sources of livelihood in Nairobi, Gikomba Market, had already been stifled by the virus.

Gikomba, a leading open-air market for second-hand clothes in the region, will remain partially closed after Trade and Industrialisation Cabinet Secretary Betty Maina directed that the importation of second-hand clothes be stopped.

Shut down

Other open-air markets such as Wangige in Kiambu, Kibuye in Kisumu and Daraja Mbili in Kisii have also been shut down, rendering hundreds of thousands of people jobless.

Official figures show that nine in every 10 Kenyans earn their living from the informal sector.

Yet, other than a reduction of value-added tax (VAT) from 16 per cent to 14 per cent, there was not much that Kenyans in the informal sector received from the bailout measures.

Uhuru also directed the Treasury to come up with a mini-Budget that would see turnover tax (ToT) slashed from three to one per cent.

The tax was introduced in January and is levied on businesses with annual revenues of less than Sh5 million.

However, not very many informal enterprises had started paying this tax, so in a way, it is not a relief.

Wohoro Ndoho, the CEO of Euclid Capital and a former director of general public debt management at the Treasury, agreed that the tax “measures were focused on a small part of the economy.”

He, however, noted that it was the only thing the government could have done given its meagre resources.

He also thinks the government is only testing the waters and might return with more comprehensive measures.

Those earning a gross salary of up to Sh24,000 a month were granted full tax relief on their salary, also known as pay as you earn (PAYE). The rest will benefit from a reduction of PAYE from 30 per cent to 25 per cent.

Corporations will also see the tax on their profits, corporate tax, reduce from 30 per cent to 25 per cent starting April, as the government seeks to ease the cost of doing business for firms that have started catching the virus’ fever.

The confirmed cases of people infected with Covid-19 had hit 31 as on Thursday.  

Moreover, while a reduction in consumption tax would help ease the cost burden with lower VAT, the poor might not benefit from the measure as most of the items they spend money on have already been either exempted or zero-rated.

For a poor person in Nairobi earning less than Sh24,000, almost half of their income goes to food.

While supermarkets are almost the only place where middle-income Kenyans in Nairobi can buy food from, they are anathema for the poor who buy most of their food from open markets and eat from their local kibanda, or food stall. Food from a kibanda does not attract any tax, while deli products attract a levy of two per cent.

Additionally, flower farms and tea and coffee plantations used to employ hundreds of thousands of poor Kenyans. Now, without a market, most of them are closing their businesses. There are no new foreign markets. Almost every nation in Europe is on lockdown or has issued travel restrictions.

No fiscal space

Economists like Ndii insist that no amount of tax relief will help the majority of Kenyans. Instead, he proposes a lifeline fund, which would see both business owners and workers feed their families.

It is what is being done in a number of developed countries that have put together stimulus packages.

However, Mr Ndoho noted that the government does not have the fiscal space to undertake such measures, saying Uhuru has found himself in a ‘prisoner’s dilemma’ of sorts.

“He can’t cut taxes completely because the government needs those taxes for medical costs,” he said, adding that the country is wary of sliding into the Italy situation where thousands of people have died from the disease.

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