Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
Kenyan President Uhuru Kenyatta announced on 12 December that
the Kenya Revenue Authority (KRA) and the National Treasury will
"overhaul" the tax system to reduce the burden for micro, small and
medium-sized enterprises (MSMEs), which are deemed essential to
Kenya's flagship 'Big Four' agenda goal of generating more
private-sector employment. However, the government faces
significant fiscal constraints without new borrowing and tax
changes will not address other barriers to MSME growth, most
notably access to capital, delayed tax refunds, and government
payment arrears to local suppliers and contractors.
The tax review aims to reduce the overall burden on MSMEs in
line with the Kenyan government's goals of supporting job creation
and expanding the tax base under the flagship 'Big Four' agenda.
The announcement was made during Kenyatta's speech on Kenya's
Independence ("Jamhuri") Day, which is often used to outline the
government's policy priorities. MSMEs are significant contributors
to job creation and economic growth in Kenya (accounting for around
28.4% of GDP in 2018) primarily in the accommodation, food
services, manufacturing, and wholesale and retail distribution
sectors. The KRA is trying to increase the contribution of income
tax sourced through Pay As You Earn (PAYE) during fiscal year (FY)
2019/20. The Treasury estimated it would raise KES110 billion
(USD1.08 billion) in tax from wages in the first quarter of FY
2019/20 but missed this target by 12%.
The review probably will be expanded to streamline and reduce
presumptive and turnover taxes, and indicates further
inconsistencies in Kenya's fiscal policy during 2020. Most likely
to be streamlined will be the annual turnover tax charged at the
rate of 3% of gross receipts (for companies earning less than KES5
million) and the associated presumptive tax set at 15% of the value
of the cost of permit renewal for a business each year. These
measures were reintroduced under the Finance Act 2019, with the aim
of broadening the tax base. In addition to frequent changes in tax
policy, the Kenyan government's fiscal deficit target has changed
three times and the pace of fiscal consolidation has slowed since
Ukur Yatani Kanacho was appointed as the new finance minister in
July 2019.
Overall, fiscal constraints being faced in meeting the Kenyan
government's 2019/20 budget strongly indicate that MSMEs are
unlikely to benefit from any outright reduction in corporate tax,
with contractors involved in large development projects being
prioritised in clearing payment arrears. Based on prior discussions
in December 2018, the National Treasury and the KRA are likely to
consider reducing corporate taxes for MSMEs to 25% from 30%, but we
view actual reduction as unlikely. This is because a Supplementary
Appropriation Bill finalised on 5 December 2019 reduced the fiscal
space available for further tax reductions, and there is political
opposition to further increasing domestic or external borrowing.
The bill authorised USD530 million in net additional spending,
after the National Assembly - led by the Finance Committee which is
usually aligned with the Treasury - revised these outlays down from
USD720 million. The new budget revises the fiscal deficit target
for 2019/20 from 5.9% of GDP to 6.2%, with the Treasury describing
previous revenue projections as "unrealistic". An additional
KES12.61 billion (USD123.65 million) was allocated to projects
under the president's 'Big Four' agenda (especially universal
healthcare coverage) and KES23.997 billion (USD235.3 million) to
the Mombasa to Nairobi Standard Gauge Railway (SGR), with the next
debt payment, totalling USD498 million, on the SGR to the Chinese
state-owned Export-Import Bank of China being due in January
2020.
IHS Markit sees early signals of declining business confidence
in 2020 likely related to concerns over cash scarcity, and even if
fiscal changes are made, the MSME sector will continue to face
capital constraints and other barriers. IHS Markit's Kenyan
purchasing managers' index for December 2019 indicated that
business confidence in future output had reached its lowest level
since February 2017, just prior to the disputed August 2017
elections. The most important drivers are barriers to accessing
capital; delays in tax refunds from the KRA; government payment
arrears to local suppliers and contractors, which increased to 1.6%
of GDP in 2018 from 0.9% in 2016; rising rents (especially in
Nairobi); the existence of multiple business charges; and a
six-year low in cash circulation in November 2019 after the
KES1,000 note was banned two months previously. As a result, the
MSME sector is likely to continue facing a challenging environment.
Its severity is shown by the data-point that around 2.2 million
MSMEs closed from 2011 to 2016 because of high operating costs,
according to the most recent Kenya Bureau of Statistics report.
Another constraint has been a cap on the bank lending rate
introduced in 2016 and repealed in November 2019 for all new loan
agreements, which reduced financing to SMEs from commercial banks.
Although credit provision is likely to gradually improve,
lower-growth SMEs with capital requirements that exceed existing
loan products, especially in higher-value sectors such as
manufacturing and ICT, will continue facing cash flow problems
given the risk aversion of larger, foreign sources of
financing.
Indicators of changing risk environment
Decreasing
The Chinese state-owned Export-Import Bank of China takes the
unlikely step of extending the maturity period for its outstanding
SGR loan agreement, reducing pressure on Kenya's budget deficit and
increasing the likelihood of tax reductions for SMEs and clearance
of payment arrears to local suppliers and contractors.
The Kenyan government negotiates a new International Monetary
Fund (IMF) precautionary stand-by arrangement in early 2020,
improving foreign investor confidence and increasing the supply of
capital to MSMEs.
Kenyan SME prospects
The dry season from December to February 2020 is characterised
by persistent drought conditions that undermine agricultural output
(especially in the floricultural sector), contributing to economic
slowdown, reduced fiscal receipts, and lower provision of MSME
lending.
The government advances a popular referendum on proposed
constitutional changes, increasing the uncertainty for investment
and discouraging foreign capital inflows, contributing to a similar
downturn in economic activity to that recorded around the disputed
August 2017 elections.
Posted 24 December 2019 by Chris Suckling, Ph.D., Principal Analyst, Economics & Country Risk, IHS Markit