What next for Kenya’s tax regime after backlash?

The first step towards increasing tax revenues has to be rebuilding public confidence in the existing tax system and ensuring there is value for money, say critics.

In the aftermath of deadly riots in Kenya over President William Ruto’s plans to increase taxes on essential goods, Abebe Aemro Selassie, head of Africa at the International Monetary Fund (IMF), made a speech in Rabat which was probably more timely than he had originally expected it to be.

In the speech, Selassie talks at length about how African countries can best finance their development goals, and points to three main sources of financing: internal revenues that governments can raise, access to market borrowing, and financial aid. “By far the most important of these sources of financing public sector activities in practice are domestic (mainly tax) revenues,” he argued.

“Internal resources and taxation [are] by far the most enduring sources for countries addressing their development financing needs,” Selassie added. “But increasing tax mobilisation is, to put it mildly, a difficult endeavour.”

That is certainly the inescapable lesson of the riots in Kenya, which were sparked in June when the government put forward a Finance Bill including significant tax hikes. Ruto initially aimed to introduce a 16% value-added tax on bread and a 25% duty on cooking oil, and also proposed a new annual tax on vehicle ownership amounting to 2.5% of the value of the vehicle each year.

Other proposals included a 16% tax on some financial services and foreign exchange transactions, as well as an “eco-tax” on products deemed to be harmful for the environment, including personal hygiene items such as sanitary products, as well as technology products like computers and mobile phones.

Ruto brought forward these tax rises – which would have raised $2.7bn in revenue for the government – in a bid to ensure Kenya can meet its external debt obligations and satisfy the demands of the IMF.

Kenya and the IMF agreed to a $3.9bn package of financial aid in 2021, but the receipt of cash is subject to periodic reviews checking whether the Kenyan government is increasing tax, reducing subsidies, and cutting government spending as agreed – measures which the IMF believe are essential for Kenya’s economic security and future prosperity.

However, the proposals were deeply unpopular, particularly with young “millennials” in Kenya, who took to social media in huge numbers to encourage their peers to take to the streets. There were deadly clashes with the police and military, with human rights groups estimating that 39 people have been killed and 361 injured in relation to the countrywide protests.

The protests forced Ruto into retreat, firing all but one of his cabinet members as well as his attorney general, Justin Muturi, and dropping his deeply unpopular Finance Bill. Ruto has promised to bring forward new tax measures in due course and, while it is not yet clear what these will look like, analysts expect them to be significantly less stringent than the original proposals.

Africa’s low tax burden

But as the IMF’s Selassie suggested in his speech in Rabat, the recent turmoil in Kenya raises serious questions about how African countries are to finance their development goals. Most economists accept that tax receipts in Africa are far too low. In 2022, the United Kingdom had a tax-to-GDP ratio of 35.3% – but the highest ratio Kenya has reported since 2000 was 17.5% in 2017. Ruto has said that he wants the ratio to hit at least 20% of GDP by the end of his term in 2027.

Charlie Robertson, head of macro strategy at FIM Partners in London, tells African Business that “the revenue raising was less about funding development goals – Kenya is not in a position to fund development right now. There is pressure on Kenya to show it can reduce its budget deficit, and revenue rises were Ruto’s attempt to achieve that goal via taxation, rather than spending.”

“The IMF just wants to get paid back, so will accept any credible plan to cut the budget deficit, via tax hikes or spending cuts, and can probably accept a slower reduction that Ruto planning.”

Regardless, the question remains: how do African governments increase tax revenues – to help meet their short-term debt obligations, let alone their long-term development goals – without causing the kind of societal unrest Kenya has seen in recent weeks?

A development economist in Nairobi, who wished to remain anonymous given the fraught political climate in Kenya, notes that Kenyans were particularly aggrieved at the prospect of higher taxes because they do not receive much by way of public services in return.

It might be easier to persuade Kenyans to pay more tax if they were confident that they would see tangible improvements in their roads, schools, and hospitals, he suggests – but this is not what has traditionally happened.

“The problem is that the government’s taxation plans are predatory, and you get no services,” he says. “They are trying to formalise the informal economy, which accounts for 85% of employment in the country, and they are doing it harshly.”

“But whenever I look at the $80bn in external debt that Kenya is carrying, the first thing I think is where did the money go? I would just like to see some simple accounting of what the $80bn was spent on and what the plan is to pay back these 15% interest loans,” he says. “You cannot just keep refinancing, refinancing, refinancing when there is nothing to show for it. At some point your bonds become totally discredited – and Kenya’s are already in junk territory.”

Citizens want results

The economist suggests that the Kenyan public would be more open to the possibility of tax hikes if the funds were earmarked for meaningful investment rather than refinancing debts or supporting inflated government ministries.

“The government is spending prolifically and there is no accountability,” he tells African Business.

“If you look at budgets like the Ministry of Health for example, their budget primarily goes into salaries for public sector workers rather than into healthcare provision. There is a bloated bureaucracy that is totally unaccountable.”

Trimming this bureaucracy and bringing public sector pay under control are therefore essential if the government is to be able to persuade the public that higher taxes are in their best long-term interests – and to be able to do so with legitimacy. However, the economist also questions whether the government’s rush to raise taxation revenues could stunt longer-term growth and therefore ultimately undermine future tax take.

“Kenya’s tax policies are so unfriendly to business that it seems like they are just interested in getting revenue at any price. The government is not looking ahead and thinking about how to attract investment to create employment and ultimately growth. Making it difficult to invest in the name of increasing tax is counterproductive.”

The recent protests in Kenya are emblematic of an issue that many governments in Africa are likely to face in the months and years ahead. Raising tax revenues are essential if governments are to meet their external obligations and ultimately fund development goals without constantly refinancing their debts on capital markets at expensive rates.

But citizens are unlikely to be prepared to pay more tax if they feel their cash will be used to prop up inefficient public authorities and if they do not sense any improvements in the services they receive.

Miguna Miguna, a Kenyan opposition figure, summed this sentiment up when he said, “Kenyans are overtaxed, repressed, exploited, and abused […] you have no justification for planning to impose a 20-22% tax on Kenyans when we don’t receive even 1% worth of value from our taxes!”

The development economist in Nairobi believes that the first step towards increasing tax revenues therefore has to be rebuilding public confidence in the existing tax system and ensuring there is value for money when it comes to current government spending.

“There is nothing wrong with developing the tax base in theory, but the real problem is one of financial mismanagement.”

This article originally appeared on African Business.

Image source : Kabir Dhanji/AFP