Harsh economic realities of 2021 wipe earnings with new taxes and less income
Tuesday January 12 2021
The celebratory New Year mood did not last long for many citizens of East Africa.
Individuals are facing the tough economic realities of 2021, weighed down by weakening macroeconomic indicators and depletion of disposable incomes, signalling difficult times ahead.
With 2020 going down in history as a year of shattered dreams triggered by the Covid-19 pandemic, many people ushered in 2021 with hopes of economic recovery and improved livelihoods following good news of available vaccines.
However, a review of the macroeconomic situation in some East African economies paints a gloomy picture, not fitting those expectations.
In Kenya, individuals and companies started the year on higher taxation after the government abolished the tax relief measures it had issued to cushion the public and companies from the adverse effects of Covid-19 pandemic lockdowns. Meanwhile, the 10pm to 4am curfew remains in force until March 12, 2021.
National Treasury Cabinet Secretary Ukur Yatani reinstated the value added tax to the full rate of 16 per cent from 14 per cent, and income tax to 30 per cent from 25 per cent effective January 1, 2021, effectively eroding household incomes amid the rising cost of goods and services in the country.
Mr Yatani also raided corporate earnings by reverting corporate tax rate to 30 per cent from 25 per cent.
Kenya’s overall inflation increased to 5.6 percent in December from 5.3 percent in November, the highest in eight months.
The National Bank of Rwanda Monetary Policy report for November 2020 indicates that inflation in five of the East African countries is projected to average 4.7 percent in 2020 and continue to go up in 2021, but will remain below the EAC ceiling of eight percent.
More than 1.7 million Kenyans have lost their jobs due to Covid-19, according to the Kenya National Bureau of Statistics while the majority of salaried workers are struggling to make ends meet after their pay was reduced.
Last week, Kenyan banks were allowed to start listing thousands of loan defaulters with credit reference bureaus (CRBs) following the expiry of the three-month notice period for blacklisting borrowers of unpaid credit.
The lenders offered defaulters 90 days, from October 1, 2020, to start repaying their loans after the Central Bank lifted the six-month freeze on listing borrowers who had failed to pay loans.
In Tanzania, January marks the start of a tough all-round slog at individual, household, corporate and national levels to recover from the economic disruptions of a hectic election year that was further complicated by the global coronavirus crisis.
There is still general apprehension about what President John Magufuli’s second term in office could entail as it gets underway in earnest to complete large infrastructure projects. The country’s economic indicators remained modest going into the new year, with official government-approved estimates making it the least affected of the EAC countries by the pandemic.
The inflation rate continued to drop, standing at three per cent in November 2020, down from 3.7 percent in February 2020. According to the Bank of Tanzania, inflation is projected to remain “in the range of three per cent to five percent for the rest of 2020/21, against the country’s own medium-term target of five per cent.
The Tanzanian shilling remains relatively stable against major global trading currencies, and commercial bank credit extended to the private sector is back on track with interest rates on loans and deposits on the decline, reflecting adequate liquidity levels despite a rough 2020.
On the government side, revenue performance is still broadly in line with 2020/21 fiscal year target expectations.
In December, the Tanzania Revenue Authority broke its monthly revenue collection record for the third month running, at Tsh2.088 trillion ($900 million). The upward trend may be further augmented by the expected introduction of a tougher tax regime in the 2021/22 budget to be tabled in June.
According to TRA, the average monthly revenue collection went up by 11 percent between July and December last year, totalling Tsh9.83 trillion ($4.24 billion) against a 2020/21 fiscal year revenue collection target of Tsh20.3 trillion ($8.75 billion).
The agency’s strategy to meet the target — which would necessitate collecting an average of Tsh1.7 trillion ($733 million) per month up to June — includes enforcement, starting this month, for all formal cash purchases and transactions to be accompanied by tax receipts printed through Electronic Fiscal Device machines.
“We have been working on directives and advice from the government and experts on how to collect taxes more smartly. This has been instrumental to our achievements thus far. And we intend to go even further,” TRA commissioner general Edwin Mhede said last week.
In Uganda, analysts seem undecided on the performance of the government’s economic stimulus packages introduced last year in an attempt to mitigate the negative impact of pandemic lockdown measures on several businesses and households. However, there is optimism about financing opportunities for the 1,445 kilometre Hoima-Tanga Port East African Crude Oil Pipeline (EACOP) project backed by Uganda and Tanzania.
“Reaching a Final Investment Decision in Uganda’s oil and gas sector during 2021 would practically render our commercial production project bankable. This will make it attractive to both investors and lenders on the international market, and also unlock significant financing opportunities,” said Denis Kakembo, the managing partner at Cristal Advocates, a Kampala law firm.
“One needs about six months to one year before they can trace the impact of those stimulus measures in the real economy,” said Paul Corti Lakuma, a senior research fellow at the Economic Policy Research Centre based at Makerere University
So far, the government has invested Ush1 trillion ($269.2 million) in Uganda Development Bank and Ush500 billion ($134.6 million) in the Microfinance Support Centre for disbursement to enterprises most affected by lockdown measures brought about by the coronavirus pandemic.
Another Ush100 billion ($26.9 million) has been allocated to the “Emyooga” fund, for the informal sector.
By James Anyanzwa, Bob Karashani and Bernard Busuulwa