East African governments are grappling with the twin problems of sharp revenue shortfalls and spiralling expenditure, with difficult macroeconomic conditions being forecast for the medium term.

Revenue authorities in Kenya and Uganda have just announced that they missed their revenue targets for the past six months to December 31.

In Tanzania, things are looking up. The tax agency met its revenue targets for first five months of the current year, and in December even surpassed projections by five per cent by collecting some Tsh838.0513 billion ($524 million). This represented a jump of 30 per cent compared with the same period in 2011.

For Kenya, the situation was compounded by the fact that it must raise money to fund a General Election to elect an expanded government that will include a much larger parliament — including additional seats in the National Assembly and 47 members of the senate.

In addition, East Africa’s largest economy must fund a completely new system of devolved government composed of 47 county governors and county assembly representatives.

Kenya is the only country in East Africa with a modestly developed domestic credit market to borrow from.

But local borrowing is not much of an option right now because the government has almost surpassed its borrowing target for the financial year.

According to the latest numbers, cumulative government borrowing as at the end of the first six months of the fiscal year surpassed the target by Ksh31.8 billion.

The Kenya Revenue Authority said last week it had collected Ksh380 billion ($4.45 billion) in taxes in the first half of the current fiscal year, which ends in June –– a figure which is Ksh34 billion ($12 million) short for the period’s target and less than half of Ksh881.2 billion ($10.3 billion) KRA aims to collect by June.

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Figures from the Uganda Revenue Authority show that in the period between July and November 2012, the government collected Ush2.6 trillion ($985 million) against a target of Ush2.7 billion ($1.02 billion), registering a deficit of Ush103 billion ($39 million).

In its 2013 budget policy statement released last week, the Kenya government said it plans to lay off part of the civil service as it looks to cut the wage bill, which has risen steeply over the past year on account of increased salaries for teachers, lecturers and doctors.

“Choosing between competing objectives under tight fiscal strains will be needed at this moment. Therefore, difficult choices must be made to ensure that scarce resources are directed to priority areas of economic development,” said Treasury in the paper.

“Salary pressures will also impact on pensions, hence increasing the government contingent liability. Over the medium term, salary increases of all government employees will be given careful attention with emphasis on the principle of moderation,” it added.

The Ugandan taxman and Rwanda Revenue Authority are under pressure from their governments to raise extra funds after donor countries cut aid — estimated at $260 million for Uganda –– following accusations of corruption and supporting DR Congo rebels respectively. Rwanda has denied the claims of supporting the M23 rebels.

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“You all know what has been happening. Donors have been suspending aid and we have to cover that. And so we have a new revenue target. We are required to collect Ush34 billion ($13 million) more in addition to Ush7.2 trillion ($2.7 billion) earlier set for us,” said Sarah Banage Birungi, URA Corporate Affairs Commissioner.

But the country’s private sector has come out to oppose the move to increase the revenue target, arguing that it would negatively affect the economy and especially the small businesses who are URA’s primary target.

“Increasing URA targets is an artificial action that will not be sustainable; instead, what the government should do is to immediately cut back on the expenditures of the public sector because this is where the problem lies,” said Gideon Badagawa, executive director of the Ugandan Private Sector Foundation.

Rwanda targets Rwf641.3 billion ($1 billion) in tax revenues this fiscal year compared with the Rwf519.7 billion ($823.3 million) that was generated in 2011/12.

The IMF says the country, while it battled budgetary constraints due to budget cuts, needed to broaden its tax net.

“Strengthening the domestic revenue base and public financial management are important objectives, including for reducing aid dependency. The recommendations of a recent technical assistance mission on tax policy and revenue administration represent a good basis for broadening significantly the tax base,” said Naoyuki Shinohara, IMF deputy managing director, in its latest review of the Rwanda economy.

“Delays in budget support have required postponing some government spending, and fiscal policy during the remainder of the fiscal year will need to be carefully executed to minimise recourse to domestic bank financing and avoid crowding out the private sector,” he said.

The World Bank warned last week that EAC economies, while recovering, were facing shocks that could slow growth, especially in Kenya and Uganda, because of government action to curb spending.

The WB said in a report that Kenya’s economic growth for 2012 was estimated at 4.3 per cent, which is predicted to rise to 4.9 per cent this year.

In Uganda, growth rates fell back to 3.4 per cent last year but are expected to recover to 6.2 per cent this year.

In Tanzania, strong growth rates have been maintained, with 6.5 per cent growth recorded for last year and 6.8 per cent expected for 2013.

Tanzania’s 2012/13 Tsh15.12 trillion ($9.4 billion) budget requires the country to raise domestically some Tsh8.7 trillion ($5.5 billion) in tax and non-tax revenues. The rest will come from borrowing and grants from development partners.

READ: Tanzania to raise $4.9bn from taxes next year

“Delays in budget support have required postponing some government spending, and fiscal policy during the remainder of the fiscal year will need to be carefully executed to minimise recourse to domestic bank financing and avoid crowding out the private sector,” said the IMF’s Mr Shinohara, in a review of the Tanzania budget released in late December.

In Rwanda, the withholding of aid by donors will further put pressure on the local tax authority, especially as the government needs the money to support infrastructure plans centred on propelling the country to middle-income status by 2020.

Currently, about 40 per cent of Rwanda’s budget is donor funded, down from about 63 per cent five years ago on account of increased revenue collections arising from improved efficiency at the Rwanda Revenue Authority.

The need to bridge the gap left by the withdrawal of some donors has seen Rwanda turn to its citizens, asking them to donate funds to the government; so far, the government has raised about $20 million towards the sovereign Agaciro Fund.

Kigali has also had to increase returns on its Treasury bills, raising the yields from eight to 12.28 per cent in order to increase investor appetite as well as stabilise the franc.

If the taxmen don’t meet their revenue targets, governments will be forced to either borrow or cut down on spending, both of which are likely to affect regional economies currently trying to shake off the effects of high interest and inflation rates that slowed growth last year.

Uganda, for example, grew at 3.2 per cent — the country’s lowest growth rate in over 25 years — with the central bank estimating that the current aid crisis could slash economic growth by 0.7 per cent to 3.5 per cent in 2012.

This raises the heat on the government, as reducing spending will slow growth further; meaning that the only viable way is to increase government borrowing.

But with interest rates already averaging 25 per cent in Uganda, increased government borrowing from the local market through Treasury bills will push up the rates farther, leading to reduced borrowing and by extension slowing down the economy.

The Uganda government is thus turning to the private sector to finance these investments. Currently, the government says it is evaluating bids from 46 contractors interested in developing projects under a public private partnership.

“We shall resort to contractor financing, which is one of the best ways of implementing projects. It is a very reasonable source of money, but people must be ready to pay road tolls on all major highways. These are simple things we must do if we are to find alternative funding for infrastructure,” said State Minister for Investment Gabriel Ajedra Aridri.

Meanwhile, as the KRA gives up hope of meeting revenue targets, KRA commissioner-general John Njiraini said, “A number of factors have adversely impacted the prospects of realising the projected figures, and many of the factors are unlikely to change direction within the next half of the year, which ends in June.”

The shortfall was a result of a decline in revenues in all the major tax divisions, including value added tax, domestic excise duty, trade taxes and petroleum taxes.

The increased pressures to meet targets has pushed KRA to adopt such innovative strategies such as setting up new units to net tax evaders. The taxman is setting up a unit with 300 officers to eventually police water and juice products for tax compliance as it introduces new-generation tax stamps.

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In a sweeping measure aimed at raising an extra Ksh6 billion ($51 billion), which could particularly hit non-compliant vendors of non-alcoholic drinks, the KRA has competitively procured the services of a Swiss security print firm, SICPA, for the five-year programme.

KRA has cited the delay in passing the Value Added Tax Bill, 2012 as well as increased beer consumption patterns — more people are opting for keg, which is not taxable, as opposed to the normal beers. Delays in enacting the VAT Bill will cost the taxman Ksh11 billion ($129 million) in missed taxes.

“Taxes on alcohol and tobacco account for over 90 per cent of the total domestic excise taxes, but the exemption of keg beer from excise tax continues to undermine growth in consumption of other taxable beers,” Mr Njiraini said, and hinted that they would ask the next parliament to reverse the law and ensure that keg is taxed to avert future revenue losses from the segment.

The Kenyan taxman has also introduced new taxes, for example, those targeted at the country’s landlords.

Reported By Peterson Thiong’o, Halima Abdallah and Dorithy Ndeketela