Uhuru stakes future on long-term plan

The budget was based on maintaining a stable macroeconomic environment, developing key infrastructure, promoting equitable development, investing in environment and food security and strengthening governance

A rising tide lifts all boats,” goes the saying. This is essentially the philosophy of the Kenya Budget 2009.

In the face of a firm commitment to a medium to long-term plan, there was little or no room for short-term, knee-jerk responses to current stimuli, although there was certainly a great temptation to do so.

The country’s future is in the hand of its long-term plan. And so the new Minister for Finance passed his first test; that of constancy of purpose.

Uhuru Kenyatta used the precise language of the 2008 budget strategy paper, issued a year ago; and explained that his framework for the budget was based on maintaining a stable macroeconomic environment, developing key infrastructure, promoting equitable development, investing in environment and food security and strengthening governance.

In his paper titled Overcoming Today’s Challenges for a Better Tomorrow, he made some points clear that some analysts and budget watchers had struggled with: “Raising taxes,” he said, “was not a prudent option under the current circumstances.”

The plan is to bring inflation down to 5 per cent — as stated in the Budget Outlook Paper issued in January this year.

Borrowing Ksh109 billion ($1.39 billion) from the domestic market will not crowd out private-sector borrowers, the worry that many have expressed already; our debt-to=GDP ratio, currently at 40 per cent is entirely manageable without risking short-term economic stability.

And the government is not keen on making tax adjustments on essential commodities that traders just suck up and fail to pass on to wananchi.

Mr Kenyatta then went on to make what he described as “bold” decisions. They hardly seem bold to observers outside government, although they certainly have a refreshing air of difference about them.

He cut back expenditure on various non-essential government procurements such as furniture, introduced fuel cards for government vehicles and restricted public servants to cars whose engine capacity did not exceed 1,800 cc.

This explained his arriving in a Volkswagen Passat, a car that, though eminently competent, certainly does not have the same cachet as the limousines in which his colleagues were conveyed to Parliament.

It’s a long overdue, but not really “bold” move.

More importantly, however, it is one that sets the right tone of earnestness in a government that has previously shown unbelievable chutzpah, arriving by helicopter or gliding in in gleaming 4WDs to inspect the latest scene of human suffering on several occasions during the past year.

He promised that no public official would be exempted. The proceeds on sale of the juggernauts hitherto in use will be used to further defray the costs of resettling internally displaced people.

There was good news on the law and order front. The courts are to be computerised and funds have been provided to hire an additional 20 Commissioners of Assize – a sort of judge. It would have been better still if the size of the police force were doubled or even trebled.

There were several allocations to infrastructural expansion, which had been mentioned prior to the budget.

A new standard-gauge railway to replace the current narrow-gauge one, an expanded rural electrification programme and various urban transport solutions were proposed.

There were some welcome and even, possibly ambitious proposals on IT: Ksh1.3 billion ($16.6 million) for Mobile Computer Labs for each constituency’s schools, “digital villages” in rural areas and the launch of a so-called One Million Laptop/Computer campaign to get students funding to help them buy computers.

At the end of the Minister’s speech, MPs seemed more than usually eager to congratulate him. As it turned out, a large chunk of expenditure will now be channelled to Constituency Development Funds (CDF).

Funds to be disbursed this way include rural road building money and special “Economic Stimulus” funds.
Each CDF committee will control approximately Ksh86 million ($1.102 million).

It was music to MPs ears since they control CDF funds via their proxies on CDF committees. More money to be used at local levels came in the form of funds for development of market centres, fish farming, jua kali sheds construction, the Youth Development Fund and the Women’s Enterprise Fund.

The tourism sector got a reprieve by being allocated Ksh800 million ($10 million) to bail out businesses in the sector that need financial aid.

But only Ksh400 million ($5 million) was allocated to marketing — meaning that it is clearly the government’s intention that the players do their own marketing. The minister went on to specify that the marketing was for the “high end of the market.”

The country has never been able to attract more than two million visitors — half the number of visitors to Johannesburg alone — despite its ample attractions.

Surely it makes sense to target all ends of the market considering that these “high-end” visitors have never really made a mark on our economy, if we are to be completely frank.

Assertions that Tanzania, for example, is receiving a much higher return per visitor are a distraction from the true position — the entire industry is unacceptably small and the focus should be on increasing the total number literally tenfold, before starting to be too choosy about who should be allowed to look at your attractions.

Away from industry and commerce, the minister extended the lower threshold for taxation of the disabled to Ksh150,000 ($1,923) per month (it is Ksh10,164 or $130 for everyone else), and thus operationalised a law that has in fact, been in place since it was assented to in 2004.

He extended a further deduction of up to Ksh50,000 ($641) on their taxable income for drugs, equipment, services and treatment.

A welcome change was the introduction of rules to limit the prices the public sector has to pay for the goods and services it procures.

A lot of miscellaneous changes to taxes followed, some understandable, others, like reduction of duty on cosmetics and jewellery, just puzzling.

The exemption from value added tax of mobile telephones will have no effect on the prices.

Vendors will resist any pressure to pass on the “benefit” because of the various things they sell, cellphones will simply be one against which their overall input VAT cannot be offset. It would have been better to zero-rate them.

A surprisingly generous subsidy equal to 50 per cent of the cost of investment is now available to those setting up industries adjacent to Nairobi, Mombasa and Kisumu. This subsidy can only be collected if the enterprises make profits as it consists of a tax reduction.

Investors are more impressed by functioning infrastructure than by attractive tax regimes so it remains to be seen how well this will work. But it is certainly a major point worth considering when making up a business plan.

Tax loss carry-forwards are now limited to four years, which might be rather inequitable if the tax losses came about because of tax treatment of investment, allowances for example.

But the changed section also says that companies that can show good cause can have their tax losses extended for more than four years.

Players in capital markets will now have to take professional indemnity insurance in addition to meeting more stringent capitalisation requirements and contributing to the current investor compensation fund.

And perhaps in a move targeting the new money transfer services provided by mobile phone companies, all financial services are exempt from VAT in the way banks are exempt.

Horticultural exporters will be delighted to hear that in future they will be able to access zero-rated supplies and thus not have to chase refunds.

In a move that follows new initiatives by banks to “outsource” their operations, they will be officially allowed to do their business through agencies.

Insurance company ownership will be roughly similar to that in the banking industry — a maximum of 25 per cent per individual — directly or otherwise — and no individual holding more than 20 per cent will be able to run the company.

It was a good budget, not because it made a wide-ranging difference in the lives of Kenyans but because it stuck to the script and demonstrated a willingness to think long term — something for which we should be thankful.

Joe Gichuki is a partner with PKF Kenya. E-mail: jgichuki@ke.pkfea.com