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Tax breaks amid restrictions won't lift economy, study says

By Frankline Sunday | May 7th 2020

As Covid-19 pandemic ravages the country, many businesses remain closed within Mombasa County. The government has since put a lockdown on Mombasa’s Old Town and Nairobi’s Eastleigh to curb the spread of the disease. [Gideon Maundu, Standard]

Tax cuts proposed by the Government amid a coronavirus-spurred economic downturn will be of little help to the economy if restrictions on movement are not lifted, a study shows.

According to the Stanbic Bank Kenya Purchasing Managers’ Index, falling demand, input shortages and lockdown restrictions through the month of April saw the headline index fall to a three-year low from 37.5 per cent to 34.8 per cent.

The index revealed that cuts on Value Added Tax (VAT), Pay As You Earn (PAYE) and Turnover Tax proposed by President Uhuru Kenyatta last month will not improve the business environment until movement restrictions are eased.

“Companies reported difficulties in obtaining inputs during April, mostly due to weaker supply of items and constraints on vendors amid curfew policies in Nairobi,” said the report.

“Delivery times lengthened while stock levels were curtailed sharply as firms noted that the duration of the pandemic remained unknown.” New orders for goods and services from both local and export markets fell to the lowest in the history of the Index, surpassing the economic uncertainty experienced during the 2017 general elections.

The slow economic pace has resulted in significant job losses with some companies struggling to meet overheads and credit obligations.

“Amid weaker sales in the Kenyan private sector, firms sharply lowered employment numbers in April,” explained the report. “In fact, the rate of reduction was the most marked since data collection began in January 2014.”

According to Jibran Qureishi, Stanbic Bank’s Regional Economist for East Africa, efforts by the Central Bank of Kenya (CBK) to boost liquidity as well as the proposed tax breaks announced last month will need to be sustained for longer to improve business conditions in the country.

“Because of the diversified nature of Kenya’s economy, the country appears more resilient to the impacts of coronavirus compared to other economies in the region,” explained Mr Jibran.

“However, this is very unprecedented and sectors like tourism will take longer to recover as travelers limit movement until a global vaccine is found or new infections and deaths go down to zero.”

“Banks are holding on to liquidity and giving credit depending on borrowers risk-profiles and going forward, some will have to increase provisions for non-performing loans,” he said.

Quresihi further noted with consumption suppressed due to lockdowns, tax reliefs introduced on VAT, PAYE and Turnover Tax might be ineffective.

“In the short term these tax breaks will widen the country’s fiscal deficit," said Qureishi. 

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