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Recovery of East Africa economy priority for 2021 budgets

Saturday May 09 2020
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A garments factory at an export processing zone in Kenya. The 2020/2021 budget will focus on reviving the economy. FILE PHOTO | NMG

By JAMES ANYANZWA

East Africa’s finance ministers are set to table spending plans for the 2020/2021 fiscal year this month and next, focusing on reviving economies and livelihoods battered by the Covid-19 pandemic.

Economists The EastAfrican talked to say that governments should be concerned with reconstructing economies through policy interventions that will give lifelines to entrepreneurs and businesses to resume operations.

These efforts include mobilising funds towards economic recovery efforts through delaying implementation of infrastructure projects, trimming of non-core expenditures such as travel, conferences, workshops and trainings, temporarily freezing public sector hiring and negotiating for debt relief with external creditors.

While regional governments have often prioritised taxation as the primary source of raising revenue to finance public development, experts say raising taxes during the pandemic will further stifle household and business spending and dampen economic recovery efforts.

“Taxes will definitely slump for all countries in the region, but to varying degrees. In my view, the 2020/2021 budgets will be recovery rather than growth focused budgets,” said Emmanuel Manyasa, the executive director of Usawa Agenda, a Nairobi-based non-governmental organisation championing for equitable access to quality education and lifelong learning opportunities for children in Kenya.

Limited options

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“The governments in East Africa have limited options. Their first option is to cut down their expenditure. This will not be enough, so they will try to borrow commercially because concessionary loans will be limited given the expected global financial situation post-Covid-19. The other option is to sell assets, or privatisation of state-owned companies. For Kenya, aggressive assets recovery from anti-corruption cases is an option,” he added.

According to Kenya’s Parliamentary Budget and Appropriation Committee, regional governments have few options for raising revenues for the next financial year due to turbulence in both local and external operating environments as a result of the pandemic.

“One of the avenues they should and must collectively pursue is debt relief. If they are spared their debt redemption and interest payments over the next two or three financial years, they will have the resources to jumpstart the economy post-Covid-19 and adequate resources to deal with the pandemic shockers,” said Kimani Ichung’wa, the chair of the committee.

“There could still be opportunities to raise some other taxes but, with the expected economic slowdown and possible recession, taxes may be a difficult avenue,” he added.

Kenya has instituted five taxation measures to cushion households and businesses from the negative impact of the pandemic: The measures have cost the exchequer an estimated Ksh122.25 billion ($1.22 billion).

These include 100 per cent Pay-As-You-Earn (Paye) tax relief for earnings below Ksh24,000 ($240), reduction of Paye for higher earners from 30 per cent to 25 per cent, reduction of Corporate Income Tax from 30 per cent to 25 per cent, reduction of Turnover Tax from three per cent to one per cent for micro, small and medium enterprises (MSMEs), and reduction of VAT from 16 per cent to 14 per cent.

“It would have been better to collect taxes and use them to cushion businesses in a targeted manner. Some measures like VAT reduction to 14 per cent were unnecessary as their effects are unlikely to be meaningfully felt by consumers,” said Mr Ichung’wa.

Nations classified as less developed countries like Uganda, Tanzania, Rwanda and Burundi could consider negotiating for debt relief from external lenders.

Kenya, which is classified as a lower middle income country, could negotiate for debt restructuring, including the lengthening of debt maturities to limit principal debt service pressure of its external loan portfolio.

“We expect development projects to be delayed and governments to reprioritise their spending. Cutting down on non-essentials such as international travel and channelling these resources to the heath sector is critical in jumpstarting the economy. We are spending a lot on debt repayment. We need to negotiate for debt relief and restructuring,” said Scholastica Odhiambo, a senior lecturer at Kenya’s Maseno University’s School of Business.

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