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Acid test for ‘Yatanomics’ as national shocks triple

By XN Iraki | June 16th 2020

This year’s Budget was unique in addressing triple shocks - from Covid-19 to locusts and floods. Economists have their work cut out for them to model such a rare combination of shocks.

It was delivered by National Treasury Cabinet Secretary Ukur Yatani (pictured), a real baptism by fire.

So critical was this Budget that we are awaiting ‘Yatanomics’ - growth under triple shocks.

The speech was 86 pages long; much longer than previous speeches. It was simply written and an easy read for the curious. The Twitter generation would snore or yawn before getting halfway through.

The two Covid-19 stimulus packages were highlighted, together with Sh224 billion from various donors, and loss of Sh172 billion in tax revenues because of tax rate reductions or exemptions. The suggestion that underdeveloped countries will suffer less than developed ones is noted. Kenya’s Gross Domestic Product (GDP) growth is expected to hit 2.5 per cent this year, while developed countries will contract by 6.1 per cent.

Are developed countries paying the price of being too efficient? The speed at which Kenyans have returned to ‘business as usual’ despite Covid-19 makes a 2.5 per cent growth rate plausible. This Budget (with due credit) focuses beyond Covid-19 into Vision 2030, Sustainable Development Goals and Africa’s Vision 2063 that is rarely publicised.

Key areas targeted by the speech include the informal sector, debt, Big Four Agenda, infrastructure, youth, women and persons living with disabilities.

Structural reforms target e-procurement, empowering local contractors, State-owned enterprises and their pending bills, setting up the Nairobi International Financial Centre, assessment of money laundering and terrorism funding risk.

Others are setting up of the Kenya Mortgage Refinancing Company, and National Credit Guarantee Scheme.

Curiously, regulation of private equity and venture capital that have access to public funds by the Capital Markets Authority (CMA) is proposed, “thus, enabling Retirement Benefits Investment Schemes to invest in such companies.” I am watching that regulation keenly.

In addition, pensions reform are envisaged - because of an ageing population? Of keen interest is setting a micro pension scheme for the informal sector - long overdue. After all, 83 per cent of Kenyans are in this sector.

The speech highlights setting up a disaster management fund and floating a green sovereign bond – a reaction to climate change. More specifically, recurrent expenditure is Sh1.82 trillion, with development taking Sh633.1 billion. A deficit of Sh840.6 billion is expected, down from Sh842.7 billion in the previous financial year. Such a small difference?

The deficit is financed internally (Sh493 billion) and from external borrowing (Sh347 billion). Should it not be the other way round to reduce the crowding out effect? The once vibrant PPP could get a new lease of life.

Who will spend the money? The Big Four projects will take up Sh128 billion; infrastructure Sh172.4 billion. The Jubilee government seems determined to improve the future productivity of the nation beyond Covid-19.

Other big winners, out of necessity, include education (Sh497 billion) and security (Sh167.9 billion). Does this include money to make schools Covid-19 compliant? Other sectors get much less.

Other highlights include Sh17.6 billion for vulnerable members of society, which has been central to the Jubilee regime, and money for the Constituencies Development Fund (CDF), affirmative fund, equalisation fund and digitisation to include Konza technopolis. Curiously, Parliament got Sh37.3 billion and Judiciary Sh18 billion. Counties got Sh370 billion and Nairobi Metropolitan Services got Sh26.4 billion.

Did you know that in our original 1963 majimbo-based constitution, Nairobi was funded by the central government? We seem to have come back to where it all began.

Something caught my attention – the county government revenue-raising process Bill 2018 will be reintroduced. It aims to ensure that counties do not come up with laws or regulations that are prejudicial to economic growth.

Specifically “counties may not impose, vary or waive a tax, fee or any other charge in a way that materially and unreasonably prejudices national economic policies, economic activities across county boundaries and the national mobility of goods, services, capital or labour”.

Hidden in the speech are sectors enjoying protection from imports. Imported iron and steel products will attract 35 per cent duty, while imported paper and paper board products 25 per cent duty. Imported leather and footwear will attract 25 per cent duty. Electrical parts and accessories imports got 35 per cent duty

Inputs into diapers and textiles will be duty free. Why diapers? Inputs into mobile phones assembly are also duty free. No duty for inputs into Covid-19 equipment such as personal protective gear. To encourage more landlords to pay tax, the tax rate will remain 10 per cent for income up to Sh15 million.

To ensure enterprises pay some tax whether they make a loss or not, one per cent tax on gross turnover is proposed. For their use of public goods?

The digital tax of 1.5 per cent is envisaged. How will foreign firms like Google react? I am sure Americans will talk. They reacted when Europeans came up with a similar tax.

Maize seed and ambulance services are VAT exempt. And voluntary disclosure of tax for three years with no penalties in the first year is proposed. Kenya Police Service and Kenya Defence Forces products not to pay the Import Declaration Fee and Railway Levy for imported goods. Will other entities demand the same?

Is Finance Bill, 2020 not removing such exemptions? It seems toll stations will be back. Will they lead to traffic jams? Why not get that money through the fuel levy? It’s more efficient.

Please read Yatani’s speech together with Finance Bill, 2020 where proposals like VAT on liquefied petroleum gas, agricultural pest products, helicopters and more tax on alcoholic drinks are ‘hidden’.

As former Finance Minister Musalia Mudavadi noted, the Budget assumes politics will remain stable. We hope it will not be the fourth shock.


- The writer is an associate professor at the University of Nairobi

Covid 19 Time Series


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