Fear of EAC higher debt burden caused by decline revenue streams

Monday January 1 2018

Public debt

According to the World Bank, EAC countries are expected to experience a slowdown in economic activities in 2017 with that of Kenya declining to its lowest in five years.. FOTOSEARCH 

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East African economies risk sinking deeper into debt after they failed to meet their revenue collection targets during the first three months of the 2017/2018 fiscal year.

But there are fears that increased borrowing from the domestic market through Treasury bills and bonds and from foreign creditors will worsen their debt positions and crowd out the private sector from credit.

A report from the Uganda Revenue Authority (URA) shows that the EAC countries performed below target, weighed down by the dismal performances of Customs and domestic taxes. The growth in revenue collection by URA was the highest in the region.

Operating environment

The EAC countries’ average revenue performance during the three months to September 30 2017 was 94 per cent. Their average revenue growth during the period stood at 13.88 per cent.

From July to September 2017 Uganda collected Ush3.14 trillion ($864 million) against a target of Ush3.27 trillion ($900 million) indicating a 11.77 per cent growth compared to the same period in 2016/2017.

Wholesale and manufacturing sectors collectively generated 61 per cent of Uganda’s total revenue during the period while information, financial, electricity, public and mining sectors all registered declines in their revenue collections.

Kenya’s total revenue collection including appropriations-in-aid fell by Ksh42.5 billion ($425 million) as the Kenya Revenue Authority collected Ksh345.6 billion ($3.45 billion) against a target of Ksh388 billion ($3.88 billion).

The National Treasury said the underperformance was mainly due to shortfalls in income tax and excise duty collections.

Kenya has witnessed several companies cut production and reduce staff to survive a difficult operating environment characterised by high cost of fuel, falling credit to the private sector, high inflation, reducing disposable income and politics.

The country’s private sector credit growth fell from its peak of about 25 per cent in mid-2014 to 1.6 per cent in August 2017 — its lowest level in over a decade, according to the World Bank.

Financing infrastructure

Also, despite the robust GDP growth in recent years, Kenya’s revenues have underperformed by an annual average of about 3.7 percentage points of GDP since the 2011/2012 financial year.

The financial, manufacturing, health and social work activities, account for 88 per cent of Kenya’s total tax exemptions.

“Without improving tax collection, East African countries will not be able to effectively finance the building of infrastructure and the provision of public services. We are seeing Tanzanian and Kenyan tax authorities take a more robust approach to registering tax payers and enforcing compliance to help the governments meet their tax collection targets,” said Nikki Summers, regional director for a consultant firm Sage Pastel East Africa.

According to Mr Summers, East African governments will strive to clamp down on non-compliance among businesses and individual taxpayers to raise more funding for public spending.

In Tanzania revenue collections during the same period stood at Tsh3.58 trillion ($1.59 billion) consisting of domestic revenue of Tsh 20.91 billion ($9.28 million), customs and Excise at Tsh1.44 trillion ($639.62 million) and Large Taxpayers at Tsh1.42 trillion ($630.73 million).

Political tensions

In the 2016/2017 financial year Tanzania also failed to meet tax revenue collections since the Tanzania Revenue Authority collected Tsh11.64 trillion ($5.17 billion) against a target of Tsh15.1 trillion ($6.7 billion).

In Tanzania, pay-as-you earn accounts for about 17 per cent of the total collection accounting for the largest share of tax revenues.

According to the World Bank, EAC countries are expected to experience a slowdown in economic activities in 2017 with that of Kenya declining to its lowest in five years.

Kenya’s economy is expected to fall to as low as 4.9 per cent 2017 compared to 5.8 per cent in 2016 while Tanzania’s growth is expected to decline to 6.5 per cent from seven per cent in 2016.

Uganda, Rwanda, Burundi, Somalia, and South Sudan will also face contraction in economic activities.

The World Bank cited drought, weakening private sector investments, declining credit to the productive sectors including insecurity and political tensions in Burundi, Somalia, and South Sudan as key risks to growth.