By Janet Muchai

Kenya is among African countries with the highest debt-to-GDP ratio and was categorised as at high risk of debt distress by the IMF in 2020. In just ten years, the debt-to-GDP ratio has increased by 30 per cent, from 38 per cent in 2012 to 68 per cent in 2021. This has been attributed to resource demands for offsetting perennial budget deficits, largely occasioned by expansionist policy on infrastructure development, the weight of a bloated government, corruption and waste in the civil service. Consequently, the government’s ability to efficiently deliver essential public goods and services to its citizens has been substantially constrained.

In recent times, many developing countries including Kenya have demonstrated an increased appetite for commercial debt, preferring to borrow from private companies, local and international bond markets, or banks rather than relying on concessional loans. Kenya’s shift to commercial borrowing can be attributed to various factors, including ineligibility to access concessional funding due to its change of status from a low-income country to a lower-middle-income country following the rebasing of its national accounts. Additionally, loans from private creditors often come with less scrutiny and conditionalities compared to loans from multilateral financial institutions and traditional Paris Club lenders.

As a result, Kenya’s commercial/private debt component has significantly increased, accounting for more than half of total national debt. Between 2012 and 2020, debt from private creditors averaged 58 per cent, with the highest share recorded in 2014 (60.5 per cent), 2018 (62 per cent), and 2019 (62.2 per cent), which aligns with the periods when Kenya had Eurobond issues. The majority of Kenya’s private sector debt consists of loans from domestic creditors, accounting for an average of 81 per cent between 2012 and 2020. Domestic sources include debt instruments such as treasury bills and treasury bonds, while external sources mainly comprise loans from commercial banks. Some of the major commercial banks that have issued credit to Kenya include China Development Bank, Citigroup Global Markets, Erste Group of Banks, First Mercantile Securities Corporation, Société Générale, Standard Bank Limited UK and Trade plus Development Bank.

In 2019, half of total tax revenues were spent on servicing debt from both local and external private creditors. Existing scholarship indicates that debt from private creditors is associated with three major components that are detrimental to economies, especially in the developing world—high interest rates, shorter maturity periods and limited transparency in contractual agreements. Each of these components has its own repercussions, which are now manifesting in Kenya.

On transparency and accountability, debt from private creditors often lacks sufficient scrutiny due to limited public participation and availability of information regarding its acquisition and management. Private credit is also argued to have fewer conditions compared to concessional loans, leaving room for corruption and mismanagement of borrowed funds, especially where legislative oversight of debt management is weak. A notable example is the 2014 Eurobond issue, where KSh215.5 billion from the proceeds could not be accounted for, as revealed by an audit by the Auditor General. This involved alleged expenditure of the borrowed funds outside of the government’s Integrated Financial Management Information Systems.

On the cost of borrowing, private creditors generally offer loans at higher interest rates compared to the more favourable concessional loans offered by traditional multilateral and Paris Club creditors that are often below market interest rates. According to the National Treasury, the average interest for concessional external loans has never exceeded 4 per cent. In contrast, private sector debt, particularly in the form of Eurobonds, carries higher interest rates. For example, the 2018 Eurobond issue had an interest rate of 8.25 per cent, significantly higher than the rates for concessional loans. Interest rates for domestic-issued private debt have also been high. The average interest rates for treasury bills with maturities of 91, 182, and 364 days were 6.7 per cent, 7.3 per cent, and 8.4 per cent respectively in 2021. These rates are still higher compared to the interest rates for concessional loans. Generally, the higher interest rates have translated to greater debt servicing costs.

Are East African countries ready to face the next crisis or are they simply keen to go back to how things were? What does a new normal mean when speaking about public finance management (PFM)? In continuing the struggle for structural transformation, economic justice efforts must work towards developing a new citizen and preparing for unpredictable or unforeseen events, more so those with extreme socio-economic and political consequences. This is because, besides known challenges posed by existing inequalities, the COVID-19 pandemic has pointed out how “unusual circumstances such as man-made disasters, natural catastrophes, disease outbreaks and warfare … depress the ability of citizens to engage in economic activity and pay taxes as well as that of governments [capacity] to collect revenue [or] provide services”.

Such circumstances therefore demand more inclusion of human rights-based approaches in economic justice efforts to champion greater fairness within existing financial architecture. Disasters should, therefore, not obliterate human rights but should heighten the need to respect, protection, and fulfilment of obligations through prioritizing expenditure on service delivery, as well as all elements of Economic, Social and Cultural Rights (ESCRs) to “boost the capacity of residents to withstand shocks” by improving coping mechanisms. Promotion of fair taxes among other broader economic justice initiatives within PFM should consequently adapt towards championing ESCRS within the context of more disruptive and unexpected incidents. Crisis is constant in the new normal.

Fiscal democracy and civil protection: Recovery, resilience, and transformation Currently, conversations on recovery are focused on tackling reduced tax collection; slowed growth; depressed formal or informal productivity; exploding unemployment; diminished remittances; persistent poverty; decline in energy access; and escalating food insecurity. This emphasis seeks to reverse the effects of various lockdown policies that placed restrictions on businesses, mobility, movement within and across international borders, [plus] public gatherings. However, it speaks mostly of a desire to return to pre-COVID levels of economic activity while vital systems in tackling the next crisis such as water, education, or health remain unaddressed. Economic justice initiatives should therefore embrace fiscal democracy and civil protection as goals or appendages in achieving the structural transformation agenda. This will then speak to the resilience, and transformation needed to ensure PFM works for Africans in good times or bad.

Tax justice champions in Africa have been challenged to expand their research, advocacy, and mobilization efforts at continental, national, and community levels to accelerate the pace of domestic resource mobilization reforms in the continent.

During the meeting in Tunis, from 21st to 23rd November 2022, under the auspices of the Scaling up Tax Justice (SCUT) project, representatives from 5 national and regional tax lobbies noted that there was the need for joint coordination at regional and sub-regional levels to effectively advocate for fair taxation, as well as the efficient administration of tax incentives and Double Tax Agreements (DTAs) in Africa.

Speaking at the meeting, TJNA Executive Director, Alvin Mosioma, noted that tax champions in Africa must recognize the interconnectedness of the fight for tax justice in all spaces.

“The legitimacy of our tax justice network is to collectively work with our members, partners, and other stakeholders in order to change the perceptions of policymakers within Africa so that our taxes can benefit our continent,” Mr. Mosioma added.

The Scaling up Tax Justice (SCUT) project seeks to scale up tax justice by establishing and strengthening national coordination mechanisms for tax justice outreach to strengthen and promote the tax justice movement and campaign against illicit financial flows (IFFs). It is being implemented in Cameroon, Senegal, Tunisia, and East Africa.

SCUT is being implemented by Tax Justice Network Africa (TJNA) and its members; Le Centre Régional Africain pour le Développement Endogène et Communautaire (CRADEC) from Cameroon, Forum Civil from Senegal, Observatoire Tunisien de l’Économie (OTE) from Tunisia and East African Tax and Governance Network (EATGN). The project, which is in its second phase, is being supported by the Norwegian Agency for Development Cooperation (NORAD).

The meeting served as an end-term review session as phase 2 of the project ends in December 2022 and sought to achieve the following objectives;

• Track implementation of activities
• Outcome harvesting sessions
• Highlight success stories

OTE Executive Director Zoé Venin noted that despite the difficult global context occasioned by the COVID-19 pandemic, the reduction of public spaces, and the debt crisis, the project has achieved great success in its second phase.

The project has been renewed for the third phase which starts in 2023.

EATGN is pleased to share new publications and multimedia resources to build knowledge, change attitudes, impart skills, improve practice, and provide awareness on domestic revenue mobilization (DRM) issues within public finance.

New Publications on Tax

Delays by Ratification: Examining Regional Harmonization of the East African Community (EAC) Double Taxation Agreement

One of the tools most used in tax harmonization is the signing of DTAs. The purpose a DTA is to help two countries minimize instances of double taxation that may arise from existing overlapping tax laws. This discussion paper will attempt to identify some of the key issues that arise out of the ratification process of the EAC double tax agreement and why the EAC member states ought to ratify the tax agreement as one step towards attaining tax harmonization. It also suggests several recommendations that can be adopted to make the model DTA an effective tool for tax harmonization tool.

Beneficial Ownership Laws Under the Kigali International Financial Centre

In recent years, there have been increased efforts to set up International Financial Centres (IFCs) in Africa as a means of attracting foreign investment. In East Africa, two IFCs have been established, namely the Kigali International Financial Centre (KIFC) and the Nairobi International Financial Centre (NIFC). This policy brief will focus on the KIFC, which has been hailed as one of the IFCs likely to become a significant African business facilitator in the next 2 to 3 years. It looks at potential areas of concern and provides recommendations to the Rwandan authorities to seal any loopholes for illicit financial activities.

Op-Ed

• CURRENT BUDGET LOSSES: Kenya should critically assess the foregone revenues in tax incentives

Multimedia

• Tax Incentives
  • DEFINITIONS – What is a tax waiver/incentive?
  • AWARENESS ON TAX INCENTIVES – Are you aware that the government loses tax revenues by offering tax waivers/incentives to certain individuals and businesses?
  • SPECIAL TAX BENEFITS – Do you think the benefits of export processing zones (EPZs) and special economic zones (SEZs) outweigh the amount of taxes that the government forgoes by issuing special tax treatments in such zones?
  • FAIR REVENUE COLLECTION – Are tax incentives/waivers fair?
  • ACCOUNTABILITY BY BENEFICIARIES – Which organisations do you think benefit from tax waivers/incentives? Are the beneficiaries of these tax expenditures (waivers) held accountable to requirements they are supposed to meet?
• Gender
  • UNPAID CARE WORK – Is unpaid care work (Domestic chores etc.) a burden with heavy implications on women requiring tax interventions or waives?
  • WOMEN’S INCLUSION IN DECISIONMAKING – Do you think women are excluded from public participation and decision-making spaces on processes concerning tax collection, allocation, expenditure, and accountability for domestic resources?
  • UNDESTANDING TAX BURDENS – Are current taxes having a heavier bearing on women than men?
  • KNOWLEDGE OF TAX FRAMEWORKS – Do you know of the existence of laws that guide the issuance of tax incentives/waivers? If yes, what are they? Is there a framework used to award tax incentives/waivers?

Check out more on Facebook| LinkedIn | Twitter or the EATGN website.

Open Ownership organised a workshop in Nairobi on 14 and 15 June 2022 to discuss the current state of beneficial ownership (BO) data in Kenya, and its connections to public procurement.

Co-organised with the Business Registration Service, which has responsibility for collecting BO information from companies in Kenya, the two-day hybrid workshop brought together over 40 participants from government, civil society, academia and the media.

Current situation

In January 2022, Kenya updated its legislation to allow beneficial ownership data to be published for the first time. Now, when bidding for public procurement tenders, companies must ensure the details on ownership and control are up to date on the central register. They must also consent to this information being published in the event that they win the contract. The information can then be released as part of the country’s open contracting data publications.

By

Lurit Yugusuk

Following the debt binge over the last couple of years, Kenya is set to spend KSh. 1.36 trillion towards debt repayment annually starting FY2022/23 going forward[1]. In light of this, debt repayments will consume approximately 65% of taxes. This signals that the country has a narrower fiscal space for balancing the budget and achieving equitable and sustainable economic development.

Nonetheless, it is notable that the Kenya government gives away or foregoes a lot of revenues that appears not to square out with its fiscal challenges. For instance, a 2021 Tax Expenditure Report published by the National Treasury highlights that Kenya has foregone on average Ksh383.9 billion worth of revenues between 2017 and 2020 to tax incentives. These revenue losses compare to equitable share revenues allocated to all counties in  FY2020/21[2]. Also, the report estimates that the country loses up to 6% of GDP through generous tax incentives. A 2017 publication by the IMF set the cost of tax incentives at KES 478 billion, a figure that accounts for 5.3% of the country’s GDP.

What then does this mean for fiscal justice in Kenya? At what cost is the government dishing out tax incentives for individuals and corporates established in Kenya? Is there room for better management and administration incentives/expenditures to ensure the economy reaps the most? Are tax expenditures as efficient as argued by the government?

In this blog, the ICTD speaks with Jane Nalunga, Executive Director of SEATINI Uganda to learn about the organisation’s quest for tax justice and how it has enhanced the voices of citizens to demand accountability and effectively participate in fiscal policies.

Can you provide us with a brief background of your organisation’s work?

Nalunga: For over 10 years now, SEATINI Uganda has focused on promoting fair and inclusive fiscal policies and strategies for revenue mobilisation, allocation, utilisation and accountability for sustainable development.

The discourse on Domestic Revenue Mobilisation (DRM) is critical for low-income countries in Sub-Saharan Africa, including Uganda. DRM not only provides governments with funds needed to invest in development, alleviate poverty and deliver public services, but is also a critical step on the path out of aid dependence to sustainable development financing.

(PHOTO COURTESY)

In the 2021/22 budget statement, Treasury cabinet secretary noted that the country’s tax policies are spread across various statutes which are amended every year during the budget process creating uncertainty in tax legislation.

The cabinet secretary indicated that the government is in the process of developing a National Tax Policy Framework that would not only enhance administrative efficiency of the tax system but provide consistency and certainty in tax legislation and management of expenditure.

Taxes perform specific functions which include but are not limited to raising money to finance public services, providing economic stimulus, promoting equality in the society through redistribution of resources and encouraging changes of behaviour.

A tax system should generate sufficient revenues to enable the government to meet its objectives and improve the welfare of the citizenry. This is mainly achieved through introduction of new taxes, changes to tax rates and bands or reliefs. These are also geared towards provision of economic stimulus and making inflation adjustments.

Over the last decade there has been a mad rush by East African Economies to negotiate tax treaties. Whilst many of them are still under negotiation and therefore not in force, this signifies a change in fiscal policy.

The demand for Double Taxation Agreements (DTAs) has arisen because of various contexts in the region such as: constitutionalism plus demands to implement new public finance management principles; growth in trade and services across countries in the region or with other countries across the globe; discovery of natural resources requiring more inflows of foreign direct investments; and new economic visioning that was initiated at the turn of the 21st century e.g. the EAC Vision 2050, AU Vision 2063, Burundi Vision 2025, Kenya Vision 2030, Rwanda Vision 2050, Uganda Vision 2040 and Tanzania Vision 2025.

Kenya has the highest number of DTAs in the region It has a total of 15 tax treaties with 7 being ratified after the passage of the constitution of Kenya 2010 (COK 2010). The top ten countries in the world that have signed DTAs in the EAC region are as follows: in first place is South Africa which has 4 treaties in force; India, Zambia, Denmark, and Norway come in second place with 3 treaties each; China, Iran, Korea, Kuwait, Mauritius, The Netherlands, and Singapore all have 2 treaties each.

Aside from Tanzania, which has not ratified the regional DTA, all EAC countries are signatories of the treaty, which has not come into effect because of a lack of consensus. Once Tanzania ratifies the treaty it should be in force.

DTAs in the region still differ substantially regarding the permanent establishment, profits, dividends, interest, management or professional fees, royalties, capital gains, other incomes, and the elimination of the double taxation that are open to exploitation through tax evasion and avoidance. As a result, they are potentially harmful to capital importing countries involved.

By

Tom Odhiambo

Courtesy: https://www.oagkenya.go.ke/

If there is an institution in Kenya that actually plays its public watchdog role every year, then it is the Office of the Auditor-General. This is one of the few institutions in Kenya that releases what can be seen as objective and believable reports.

The Auditor-General’s office is an independent arm of the government, which is mandated by the constitution to evaluate how the government uses public resources.

This is what the Auditor-General says in the preamble to her 2019/2020 report about her office,

“The Auditor-General is mandated by the Constitution of Kenya, under Article 229, to audit and report on the use of public resources by all entities funded from public funds. These entities include; the National Government, County Governments, the Judiciary, Parliament, Statutory Bodies/State Corporations, Commissions, Independent Offices, Public Debt, Political Parties funded from public funds, other government agencies and any other entity funded from public funds. The mandate of the Auditor-General is further expounded by the Public Audit Act, 2015.”

The report further clarifies that constitutional mandate and its public significance by explaining why and when the report should be ready,

“The Constitution requires the Auditor-General to audit and submit the audit reports of the public entities to Parliament and the relevant County Assemblies by 31 December, every year. In carrying out the mandate, the Auditor-General, is also required by the Constitution under Article 229 (6) to assess and confirm whether the public entities have used the public resources entrusted to them lawfully and in an effective way.”

One may ask, but isn’t the report really about just evaluating whether public officers and institutions have used money allocated to them appropriately?

Yes, but the (in)correct use of public resources has wide constitutional implications. It affects the rule of law, democratic principles, and the sovereignty of the country, according to the Auditor-General.

Consequently, the Auditor-General is legally mandated by “… the Constitution, under Article 252, to conduct investigations, conciliations, mediations, and negotiations and to issue summons to witnesses for the purposes of investigations.”

In other words, the Auditor-General has the authority, on behalf of Kenyans, to demand that a state officer accounts for the money allocated to her or his office in a given financial year.

Which is why all Kenyans probably need to read the annual report by the Auditor-General. This report generally begins with an analysis of how the government projected its budget for the year under review and how it reported its expenditure for that year.

Thus, for tax paying citizens, this is the section where one gets to know – assuming one didn’t read the budget estimates – the amount of money the government had planned to spend and the percentage of it that it actually spent.

One of the surprises here, for instance, is that the government always falls short in its absorption of its planned expenditure. In other words, the government isn’t spending all the money it projected to spend in the financial year.

Indeed, the Auditor-General reports that the government has failed to absorb about 8.2% of its projected budget in the past 5 years.

Why would the government not spend money it had planned to? Would this mean that some development projects of social services were not delivered as planned?

Or did the government not have the correct data and information when planning the budget? Could this be one of the reasons why some government projects stall for years after they are initiated?

The Auditor-General’s report says this about the government not spending the money it should,

“Low absorption of the development budget will affect the rate of development and sustainability of services in the country while low absorption of the recurrent expenditure implies that citizens are denied requisite services which had been budgeted for. It may also imply that budgeting for expenditure may not be taking into consideration revenue collection or cashflows as informed by prior years.”

What this means for the public is that ordinary Kenyans need to participate in the budget making process but also be concerned about how the government spends public resources.

Why? Because, as the Auditor-General shows, often the government proposes projects without due consideration of the resources available for the implementation of the projects.

If one considers that even when the development projects are planned by the government, politicians claim to have influenced the initiative, then it is urgent that ordinary citizens be knowledgeable about such projects in their constituencies.

All projects have a cost implication – immediate or deferred. Indeed, the Auditor-General criticizes the government when she notes that “The projected expenditure seems to drive the revenue collection projections as opposed to actual revenue collections driving the projections of expenditures.”

In other words, the government often plans to spend money that it doesn’t have.

Consequently, it can’t deliver projects or services. Yet, when it finds itself in financial difficulties because of bad planning it sometimes increases taxes, which makes life difficult for the workers and the poor.

In some cases, because of poor planning, the government commits itself to a project, gets a contractor on site but abandons the works.

The contractor may end up suing to be paid the original quoted cost of the project despite not having completed it, citing the government not keeping part of its bargain.

Who pays for it? The taxpayer, and this is a double cost. First, the project is incomplete or may actually have to be demolished or will never be completed, for one reason or another.

Which is a loss of the already invested money but also a loss of the benefits to the would-have-been users.

Yet, secondly, it is still a significant financial loss should the government be compelled to pay the contractor (or funder) plus interest on the money invested so far. That is taxpayers’ money poured down the drain of financial incompetence and wastage.

And the Auditor-General flags such cases annually. For this reason alone, considering how there are so many such unfinished (white elephant) projects, all Kenyans need to read and discuss the Auditor-General’s report, all the way from the National Assembly to the County legislatures to the village baraza.

The writer teaches at the University of Nairobi. Tom.odhiambo@uonbi.ac.ke