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Few options to finance budget as growth slows

By By JAMES ANYANZWA | May 3rd 2014


National Treasury Cabinet Secretary Henry Rotich faces a hard task of financing the ambitious Sh1.8 trillion budget with signs that the struggling economy may dampen revenue collection targets.

This comes amid growing concerns that the Kenya Revenue Authority (KRA) is unlikely to meet its targets for the current financial year (2013/2014) with the economy registering 4.7 per cent growth from the previous year’s 4.6 per cent.

Revenue collection fell below target by Sh28.6 billion during the first six months (July-December) of the current (2013/2014) financial year.

And with uncertainty surrounding the issuance of an estimated US$2 billion (Sh172 billion) sovereign bond after parliamentarians resisted payments to the Controversial Anglo Leasing contracts, tax experts are warning of tough times ahead.

 “The outlook is not good in terms of revenue collection. So to me it is difficult to see where they are going to get this money from if the economy is not going to pick up,” said Nikhil Hira, Head of Tax Practice at Deloitte and Touche East Africa.

“Our economy has stagnated in terms of growth and the economic prospects are not that good also. If the economy is not growing then it means consumers are not spending and large taxpayers are not making profit either. My personal view is that KRA may not achieve the revenue targets for the current financial year. In the first six months we didn’t meet the targets. If we assume the economy is not picking up then clearly they won’t have collected that much,” he said.

According to Mr Hira the Government faces limited options of funding its historic budget with fears that the National Treasury could be tempted to raise taxes and intensify borrowing from the domestic market.

Another possibility, he said is re-introducing the capital gains tax and increasing VAT to 18 per cent from 16 per cent though, he said, this form of taxation may not be sustainable in an economy where the cost of living has hit the roof.

“The main option to me is to increase the tax net to include the informal sector,” Hira told The Standard on Saturday yesterday.

“We can’t continue to finance the budget by debt because that is squeezing the private sector out of credit. But if you start increasing prices for the common people who are already suffering then it means there is a problem,” he said.

Spending plan

The National Treasury is juggling with the idea of issuing a sovereign bond to fund the country’s infrastructural projects and use part of the proceeds to repay a syndicated loan of a 2-year US$ 600million from Citi Bank (London), Standard Bank (South Africa) and Standard Chartered Bank (London) repayable from around mid this year (2014.).

But there are fears that the proceeds of the bond issue could be attached due to the failure of by the Government to pay off Sh1.4 billion to Mercantile Securities Ltd and Universal Satspace, the two companies that went to court to demand payment for services rendered between 2002 and 2004.

President Uhuru Kenyatta’s administration tabled yet another mega spending plan for the next financial year (2014/2015) with a bulk of it going towards payment of salaries and wages, purchase of goods and services and operations.

The 2014/15 Budget Estimates, which were tabled before Parliament on Wednesday show that the National Government plans to spend a massive Sh1.13 trillion on ministries and departments and Sh226.66 billion on the devolved units.

A total of Sh 19.24 billion and Sh18.54 billion have been set aside to fund operations of the Parliamentary Service Commission (PSC) and the Judiciary respectively, while Sh362.5 billion has been allocated for the Consolidated Fund Service (CFS).

According to the 2014/2015 Budget estimates the Government targets revenue collections including appropriations-in-aid of Sh1.18 trillion during the next financial year beginning on July 1,underpinned by the on-going reforms in tax and customs administration.

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