This article first appeared in my weekly column with the Business Daily on July 2, 2017
Kenya’s annual GDP growth rate has been ticking along steadily at between 4 to 7 percent over the past five years. At no point has it hit the Vision 2030 target of 10 percent. Why not? Was Vision 2030 a pipe dream littered with deliberately illusory goals and targets? Why has the 10 percent target not been reached, and how can this be changed? There are three factors that can unlock the country’s economic growth at a fundamental level in both the long and short term.
The first is the long term issue of agriculture. The agriculture sector is a conundrum; on one hand Kenya’s agricultural sector is very efficient and profitable. Kenya is one of the leading exporters of black tea in the world, and the country’s floriculture and horticulture sector are important economic players in the sector. On the other hand, the country continues to struggle with food security as the maize price dynamic has illustrated. The ILO makes the point that the agricultural sector employs 61 percent of Kenya’s workforce, yet only contributes 30 percent to GDP.
This conundrum can be rectified through a multi-pronged approach that links productive sectors to less productive ones, more effective deployment of agricultural subsidies to farmers (particularly small holder farmers), and the revival of technical skills transfers to farmers at county and ward levels. Doing so will allow the labour locked in the sector to enter profitable activity either in agriculture or other sectors.
The second factor is the interest rate cap which is an overarching, hopefully short-term, constraint to meeting the 10 percent target. Earlier this year the World Bank made the point that Kenya faces a marked slowdown in credit growth to the private sector. At 4.3 percent, this remains well below the ten-year average of 19 percent and is weighing on private investment and household consumption.
Part of this massive slowdown can be attributed to the interest rate cap which has compromised two fundamental levers that support economic growth: access to credit and monetary policy. The interest rate cap has engendered a contraction in liquidity to SMEs in particular, essentially slowing down the country’s economic engine. Due to the cap, SMEs are unable to get the liquidity they need in order to expand and generate more jobs as well as income. The second lever compromised by the interest rate cap is monetary policy, reducing its ability to buffer Kenyans from economic volatility. With inflation standing at 11.7 percent in May, the cap has made it almost impossible for the CBK to step in with remedial measures such as raising interest rates as the consequences of doing so are unclear. Thus, in the short term, the interest rate should be reversed so that monetary policy can play the role it ought to, and robust credit access is restored to Kenyans.
The third factor is the informal economy which is not only important for economic growth but also engendering equitable growth. 90 percent of employed Kenyans earn a living in the informal sector, yet it continues to be neglected. Too much of the country’s labour is locked in micro-businesses with low levels of productivity, too inadequately skilled and resourced to drive the country’s equitable growth. Thus financial, skills and technological resources ought to be directed to the sector to catalyse the ability of informal businesses to graduate into authentic profitability, sustainable job creation and robust income growth.
Anzetse Were is a development economist; email@example.com
This article first appeared in my weekly column with the Business Daily on May 28, 2017
The creation of high quality employment for Kenyans is a development priority for the country. Unfortunately, an increasing number of Kenyans are finding employment in the informal economy and there is growing informality in job creation. In 2015, 83 percent of employed Kenyans sat in the informal economy, in 2016 that jumped to about 90 percent.
According to the World Bank, labour productivity in Kenya is significantly higher in the formal than in the informal sector. Labour productivity, as measured by sales per worker, is higher in formal firms and thus unsurprisingly, more productive firms pay higher wages. This means the informal sector does not truly generate wealth for the 90 percent of Kenyans employed there. Additionally, in the formal manufacturing sector, job security is relatively high, with more than half of employees holding a permanent job. Contrast this with the informal sector where jobs tend to be seasonal with no benefits, poor working conditions, little social protection and low wages.
However it is important to note that within the informal sector, the manufacturing sector is the most productive. According to the World Bank, informal manufacturers register more sales per worker than both informal agriculture and services; the furniture industry performs particularly well. In terms of firm growth, again, informal manufacturing leads where 31 percent of manufacturing firms experienced expansion in the past 3 years, compared with 24 percent of services firms.
Thus given that informal manufacturing is both the most productive and the sector expanding the fastest, why aren’t these features correlated with income and firm growth, and the creation of more jobs? This conundrum can be understood by unpacking three structural factors that work against the sector: capital, skills and business environment.
In terms of capital, internal funds serve as a source of financing for working capital for 86.8 percent of informal firms. Mainstream financiers, MFIs included, are reluctant to lend to the informal sector. Secondly, informal manufacturers tend to be inadequately skilled in terms of technical skills (i.e. carpentry, welding, use of technology etc), as well as financial and business management skills. Thirdly, informal firms work in a very difficult business environment. They have limited access to land and are targets for bribery and corruption; 60 percent of informal firms report harassment by government officials. The business environment is particularly onerous for informal manufacturers who work in very congested and dilapidated shacks with no protective gear, no water and sanitation systems, unreliable electricity and lighting, and no security provisions.
All these factors explain why many firms remain informal and never scale and formalise and thus are stuck in a rut of low productivity and profitability. That said, informal manufacturing is a bright spot in the informal economy and thus can be the starting point for interventions aimed at increasing profitability and productivity. By addressing the three factors of capital, skills and business environment, informal manufacturers which are already star performers in the informal economy, can be an avenue for creating better managed business that generate wealth and employment for the country.
Anzetse Were is a development economist; firstname.lastname@example.org
This article first appeared in my weekly column with the Business Daily on March 5, 2017
A few weeks ago, a local television station aired the story of a young man who is an orphan, had been admitted to some of the most prestigious learning institutions in the country but was now living the life of a pauper. Dishevelled and unkempt, he looked like he was living the life of a homeless man; yet when he spoke, his clarity of mind and intelligence were unquestionable. This week a video of African children in the Congo working in mines went viral. The two children in question were eight and eleven year old boys, working in awful and dangerous conditions, barely making income and living a life of destitution and hopelessness. Why are these stories important? They are important as they reveal the extent to Africa is mismanaging the potential and promise of young people on the continent.
The average age of an African is 19.5 years, yet the average age of an African leader is 65. Is there any wonder then, as to why Africa’s leaders seems to be chronically unable to catalyse a young labour force and apply it to the development of young people themselves, that of their countries and the continent at large? In fact, sometimes it seems youth are seen as a demographic liability, not asset.
In Kenya the rate of youth unemployment is dire; 80 percent of those unemployed are under the age of 35. There are several factors that contribute to this figure the first of which is poor education. The Brookings Institution points out that 62 percent of Kenyan youth aged 15-34 years have below secondary level education, 34 percent have secondary education, and only 1 percent have university education. Skills are a crucial path out of poverty; indeed education makes it more likely for Kenyans to not just to be employed, but to hold formal jobs that are more secure and provide good working conditions and decent pay. So the fact that the country is doing such a poor job in educating the youth translates to the relegation of those young people to the periphery of the promise of the country.
Secondly, even among those who are educated, most are ill-equipped to be absorbed into employment. A study by JKUAT made the point that the commercialisation of tertiary education in Kenya has led to overcrowding in the institutions due to the increase in enrolment. This ‘massification’ policy by universities is characterised by degree programmes that do not address the job market. As a result, millions of Kenyans are poorly trained and become frustrated graduates who cannot find employment. Another report released by the World Bank stated that tertiary education in Kenya is characterised by a persistent mismatch of skills between what is taught and the requirements in the labour market. Thus, even education itself does not guarantee employment in this country.
Thirdly, due to the aforementioned dynamics, most young people are left to fend for themselves, invariably in the informal economy. The informal economy employs 80 percent of Kenyans and yet this sector of the economy is grossly neglected. Sadly in many ways, the neglect of the informal economy is the neglect of the youth as it is only in this sector that most youth with limited resources are able to start ‘hustling’ and earn a living. The cost of formalisation from tax payments to compliance to minimum wage, means that the informal sector is the only choice, as it has the lowest barriers of entry for economic enterprise.
The good news is that it is not too late to act, but the nature of action must be very different to ongoing activities. At the moment, most youth interventions either operate in silos with the limited creation of long lasting structures and partnerships; are funded unsustainably where programs end when donors pull out; or provide interventions that do not address the needs of the youth effectively (think Youth Fund). Youth need a combination of on-going employment opportunity; credit lines for enterprises through the deployment of blended financial vehicles (grants AND loans); skills upgrading (life, business, management, financial and technical skills) and mentorship. Only in doing this will the country, and indeed continent, leverage the demographic dividend that is the young people of Africa.
Anzetse Were is a development economist; email@example.com
This article first appeared in the Business Daily on February 12, 2017
The election year in Kenya is contextualised in two conflicting realities: on one hand the country is among those growing the fastest in Africa and the world and is successfully attracting mega investment. On the other hand, companies have shut down or left the country, poverty and unemployment levels remain high and cost of living continues to rise. How do we reconcile these two conflicting realities?
The first is to acknowledge that the economy is growing; by 6.2 percent in Q2 and 5.7 percent in Q3 of last year. Juxtapose this with an African GDP growth rate of about 1.4 percent and a global growth rate of about 3.4 percent in 2016. Analysts point to several sources for this growth; agriculture, forestry and fishing; transportation and storage; real estate; wholesale and retail trade as well as mining and quarrying. Kenya was not only buffered from the decline of commodities, Kenya saved nearly KES 50 billion in the first half of 2016 alone due to low global petroleum prices. Further, the Kenya Shilling remained steady with regards to major currencies, standing at around KES 100 to the US Dollar. This is important for Kenya which is an import economy; currency depreciation places upward pressure on inflation. With regards to inflation, the country remained within the Central Bank of Kenya’s (CBK) inflation target range of 5 plus or minus 2.5 percentage points; annual average inflation dropped from 6.5 percent in November to 6.3 percent in December, the lowest reading since November 2015. In addition, the country made progress on the Ease of Doing Business Index. Kenya ranked 92nd up from 113 in 2015; this is the first time in seven years Kenya has ranked among the top 100.
Further, Kenya’s profile as an attractive investment destination grew in 2016. FDI Markets ranked Nairobi as Africa’s top foreign direct investment destination with inflows surging by 37 percent in 2015. Indeed, reports indicate that Kenya recorded the fastest rise in FDI in Africa and the Middle East. The FDI intelligence website indicates that a total of 84 separate projects came into Kenya in real estate, renewable and geothermal energy as well as roads and railways worth KES 102 billion, all of which provided new jobs for thousands of Kenyans. Additionally Peugot announced a contract to assemble vehicles in the country joining Volkswagen which opened a plant last year, Wrigley invested KES 5.8 billion in a plant in Thika and a contract worth KES 18.74 billion was signed with the French government to build a dam.
However, the reality elucidated above seems theoretical in the minds of millions of Kenyans, most of whom are not feeling the positive impact of all these rosy statistics. Media reports indicate that that thousands jobs were lost last year due to company restructuring or company shut down altogether. 600 jobs were lost when Sameer Africa announced that it would shut down its factory. Flourspar Mining Company also shut down, leading to a loss of between 700-2000 direct and indirect jobs. Oil and gas logistics firm Atlas Development also wound up operations and the Nation Media group shut down three of its radio stations and one television channel. But perhaps it is in the banking sector where job losses were most pronounced. This paper reported that more than six banks announced retrenchment plans in 2016: Equity Bank released 400 employees; Ecobank announced it would release an undisclosed number of employees following a decision to close 9 out of its 29 outlets in Kenya; Sidian Bank, formerly known as K-Rep, made plans to release 108 employees, and the local unit of Standard Chartered announced plans to lay off about 600 workers and move operations to India.
Why is this happening? How can economic growth be juxtaposed with massive lay-offs and economic hardship? There are several factors at play here. With regards to the employment cuts in the banking sector, these are linked to two factors, the adoption of technology and the interest rate cap. Technology adoption has translated to the reality that millions of Kenyans no longer have to visit banks to access financial services as they can make financial transactions digitally, transactions that range from money withdrawals and transfers, to loan applications and disbursement, and the payment of bills. This automation has led to the attrition of jobs.
Secondly, the interest rate cap has placed pressure on the profit margins of banks leading to job forfeiture. The interest rate cap effected by the government stipulates that banks cannot charge interest rates above four percentage points of the Central Bank Rate (CBR). Interest rate spreads have several functions for banks, of which perhaps the most important is insulating banks from bad borrowers. There is an asymmetry of credit information in Kenya due to the fact that the creditworthiness of most Kenyans cannot be established. As a result, when banks make loans to Kenyans, they often do not know if the borrower will be a good or bad one. Thus to insulate themselves from the risk of lending to bad borrowers, interest rates are raised in order to ensure that the bank recovers as much money from the borrower in as short a time as possible. In removing this provision, the interest rate cap is essentially forcing banks to lend money to both good and bad borrowers at the same rate. This in turn threatens profit margins as there is a real risk that the bank now has no buffer against bad borrowers. As a result, some banks have responded to the interest rate cap by shedding jobs to cut down operating costs and safeguard profits.
However, the interest rate cap is having a more insidious effect on the economy. A report by the IMF released last month states that the interest rate controls introduced in Kenya could reduce growth by around 2 percentage points each year in 2017 and 2018. The IMF also expects a slowdown in the growth of private sector credit linked to the cap. Additionally, the growth of the economy has been revised downwards due to the cap. What does this mean for the average Kenyan? The interest rate cap means that SMEs and individuals who used to get loans, albeit at higher rates, are likely to get no credit at all. Banks will simply not lend to individuals and businesses whom they think cannot service the debt credibly at that capped ceiling. Sadly it is the most vulnerable who will be disqualified first as these are seen as high risk and high cost borrowers. As they are shut out of credit SMEs cannot implement growth plans and are unable to create jobs and wealth. The contraction in liquidity engendered by the cap may also mean there will be less money moving in the economy; Kenyans will feel that there is less money around and feel more broke as they cannot get loans to grow their business or meet personal costs.
However, one of the biggest factors behind why Kenyans don’t feel the rosy statistics is because most Kenyans operate in the informal economy whose performance is generally not captured in official figures. GDP growth and Ease of Doing Business data do not capture the reality of dynamics in the informal economy where over 80 percent of employed Kenyans earn a living. Therefore, one cannot extrapolate positive overall statistics as reflective of performance of the informal economy. Perhaps the incongruence Kenyans feel stem from the fact that the economy from which millions earn a living is largely ignored. The hardship and challenges of Kenyans living and working in the informal economy continues to be neglected and thus policies and action that could help most Kenyans are never developed or implemented. Until the gross negligence of the informal economy is addressed, one can expect the average Kenya to feel a disconnect between economic growth and their lived reality in the informal economy.
An additional factor leading to the disconnect between economic growth and the lived reality of most Kenyans, is that the country seems to be in a ‘jobless growth’ rut where GDP growth doesn’t lead to formal job creation. This is partly because Kenya’s economic growth is services driven, and services produces far less jobs than manufacturing. Until the manufacturing sector is given the attention it requires such that economy is driven by export-led manufacturing, the ‘jobless growth’ challenge will continue. Bear in mind that manufacturing in this country is under threat because the cost of doing business for manufacturers in Kenya remains high particularly with regards to electricity, transport, cross-county taxes and, frankly, corruption. Kenya is currently deindustrialising as the manufacturing sector grows at a slower rate the economy. The manufacturing sector grew 3.6 percent in the Q1 and at 1.9 percent in Q3 of 2016. Compare this with a GDP growth rate of 6.2 percent in Q2 and 5.7 percent in Q3 of 2016; this means the share of manufacturing in GDP is shrinking. This should be of concern because, as analysts point out, industrial development is crucial for wealth and job creation. Exacerbating the already slow growth of the sector this year are the drought and cheap imports. As the Kenya Association of Manufacturers points out, the drought is having an impact on raw materials in sectors that rely on agricultural products. The drought will also lead to a higher cost of goods and services for Kenyan as electricity tariffs are adjusted upwards. The manufacturing sector is also threatened by the fact that the country has allowed the entry of cheap goods, particularly from Asia, to flood the market; goods that benefit from protection and subsidies in their home economies which is not reflected here. These constrain the growth of the sector in Kenya.
Finally, financial mismanagement at both national and county levels is compromising growth. The top allegations of the financial mismanagement of public funds according to media reports include the laptop tendering debacle, NYS scandal, Ministry of Health and the GDC tendering scandal. It seems that government funds that are meant to be economically productive and generate economic activity do not reach intended projects. Thus the economic stimulus that ought to be garnered from public never happens because projects are either under-financed or not financed at all as public officials siphon money away from them. Further, business routinely complain that bribes have become a basic expectation of county officials around the country. A report released by the Auditor General last month revealed that Kenyans are asked to pay up to KES 11,611 by county officials; Mombasa County officials top the list of bribe-seekers followed by Embu, Isiolo and Vihiga. As long as this continues, jobs and wealth that government investment and financing could have created will not materialise.
So what should Kenyans demand from those vying for power in this year’s general election? The first and foremost is ending financial mismanagement where even opposition is culpable as counties under opposition engage in corruption as well. Kenyans must demand a clear plan that will take serious steps to make financial structures more robust and punish those engaged in the financial mismanagement of public funds. Secondly, Kenyans should push for the government to provide a detailed analysis on the impact the interest rate cap is having on Kenyans and the economy. If the analysis elucidated herein is anything to go by, Kenyans should also seek the reversal of the interest rate cap as soon as possible. Thirdly, Kenyans ought to demand the development of a policy aimed at supporting and developing the informal economy at both national and county level. The gross neglect of this sector must end given that it is in the informal economy where most Kenyans earn a living and are employed. Finally, Kenyans should push for a detailed plan on industrialisation for the country. While the Ministry of Industrialisation has developed the Kenya Industrial Transformation Programme, a detailed work plan and timeline of deliverables ought to be developed and shared so that Kenyans can reap the dividends that green industrialisation can create.
Anzetse Were is a development economist; firstname.lastname@example.org
This article first appeared in my weekly column in the Business Daily on November 20, 2016
I have been getting several questions pertaining to what is ‘really’ happening in the Kenyan economy. Many Kenyans see incongruence between economic growth statistics and their own lived experience. According to the World Bank the economy is expected to grow by 5.9 percent in 2016; the Kenya National Bureau of Statistics reported that Kenya’s economy expanded by 6.2 percent in Q2 2016. However, several companies have closed down operations in the country and thousands of jobs have been lost this year alone. There are numerous variables that may be informing why Kenyans do not seem to be feeling the positive effects of economic growth.
The first is that GDP growth and Ease of Doing Business data do not capture the reality of the growth and Ease of Doing Business in the informal economy where over 80 percent of employed Kenyans earn a living. Therefore, one cannot extrapolate positive overall statistics as reflective of performance of the informal economy. To what extent does Ease of Doing Business research reflect improvements in the business environment for informal businesses? Parameters such as increased ease with regards to tax compliance and business registration inform Ease of Doing Business performance, yet these are parameters with which informal businesses largely do not intersect. Thus, perhaps the incongruence stems from the fact that the economy from which millions earn a living is largely ignored by official data gathering and analytical efforts.
With regards to companies closing and job loss, several factors at play; I will focus on manufacturing and the banking sector. Manufacturing in this country is under threat because the cost of doing business for manufacturers in Kenya remains high particularly with regards to electricity, transport, cross-county taxes and, frankly, corruption. Additionally, the country has allowed the entry of cheap goods, particularly from Asia, to flood the market; goods that benefit from protection and subsidies in their home economies which is not reflected here. The combination of these factors is making Kenya an increasingly uncompetitive location for manufacturing which is diametrically opposed to the Government’s industrialisation agenda. With regards to the banking sector, job shedding seems to be informed by automation and the interest rate cap. Mobile and e-banking means that many customers do not need direct human contact to effect the transactions they require. The interest rate cap has removed a key risk management tool that banks used to manage information asymmetry with regards to credit worthiness. As a result, banks seem to have limited space to make numerous loans as the risk buffer is no longer present. Fewer loans means fewer staff are needed to monitor loan compliance.
Kenyans are also concerned that economic growth is not associated with job creation; the country seems to be stuck in the ‘jobless growth’ rut. Again, this is informed by several factors. Firstly, Kenya’s economic growth is services driven, and services produces far less jobs than manufacturing for example. The main services sub-sectors that are labour intense are health, education and hospitality; sub sectors such as telecoms and financial services need far less labour. It is no secret that tourism in the country has been hit leading to job losses; and even when there is marginal recovery, a limited number of jobs are created and those are seasonal. Until the manufacturing sector is given the attention it requires such that economy is driven by export-led manufacturing, the ‘jobless growth’ challenge will continue. Finally, the education system in the country is doing a gross disservice to the youth by making millions of young people essentially unemployable. 62 percent of Kenyan youth aged 15-34 years have below secondary level education. Further, Kenya is characterised by a persistent mismatch of skills between what is taught and the skill requirements of the labour market. Thus most youth are poorly educated and those who are well educated are not trained in skills the labour market seeks.
Finally, financial mismanagement at both national and county levels is compromising growth. It seems that government funds that are meant to be economically productive and generate economic activity do not reach intended projects. As long as this continues to occur, jobs and growth that could have been created by government investment and financing will not materialise.
All these factors inform the disconnect between rosy economic statistics and the reality Kenyans feel on the ground; and these will persist if there is no change in financial management and economic development strategy going forward.
Anzetse Were is a development economist; email@example.com
This article first appeared in my weekly column with the Business Daily on October 30, 2016
Last week the Kenya National Bureau of Statistics (KNBS) released the National Micro, Small and Medium Establishment (MSME) Survey. KNBS defines micro-enterprises and having less than 10 employees; small enterprises having 10 to 49 employees and medium sized enterprises as having 50 and 99 employees. In terms of licensed versus unlicensed business, the survey found that there are 1.56 million licensed MSMEs and 5.85 million unlicensed businesses. With regards to employment, number of persons employed by MSMEs is approximately 14.9 million with the unlicensed enterprises contributing 57.8 per cent. Overall, micro sized enterprises accounted for 81.1 per cent of employment reported in the MSMEs. The value of the MSME’s output is estimated at KES 3,371.7 billion against a national output of KES 9,971.4 representing a contribution of 33.8 per cent in 2015. In terms of distribution of MSMEs by sex of business owners, the survey found out that 47.9 per cent of the licensed establishments were owned by males and 31.4 per cent were owned by females. Further, 60.7 per cent of unlicensed establishments were solely owned by females. In terms of type of activity, repair of motor vehicles and motor cycles accounted for more than half of the total persons working in MSMEs.
Unsurprisingly 80.6 per cent of establishments reported family/own funds as the main source of start-up capital while 4.2 per cent of business owners got loans from family and/or friends to start their business. What was interesting however is how income generated was used. Micro establishments reported spending 44.4 percent of income on household and family needs. Medium and small establishments spent significantly high part of their net income on investment at 63.4 and 69.5, per cent, respectively. 93.8 percent of the unlicensed businesses reported a monthly turnover of less than KES 50,000 and none had a turnover above KES 1,000,000. Licensed establishment with a monthly turnover between KES 50,000 to KES 200,000 constituted 31.3 per cent. More than half of the licensed medium establishments recorded a turnover of more than KES 1,000,000.
While useful there are several gaps in the survey. The first and most obvious is a failure of analysis with a focus on the informal sector. The survey used the terms licensed versus unlicensed, with no clear focus on whether the unlicensed segment is considered informal. All the survey has in terms of registration data is that 78.9 per cent of the businesses were not in the registers maintained by the counties. However, the KNBS also makes the point that a county license (also referred to Single Business Permit) is a requisite for all enterprises. Licensing is not a sufficient indicator form informality, as there may be licensed enterprises that still operate informally with regards to tax compliance, adherence to minimum wage, and submission of statutory payments.
However, what was useful in terms of extrapolating informality, is that the survey noted that all unlicensed businesses in the MSME sector are micro- establishments. It would not be a stretch to assume that unlicensed businesses are informal, but as mentioned, licensed business can also operate informally. The important point here perhaps is that informal firms tend to be micro in size.
The second concern with the survey is the paltry data on tax compliance. The survey makes the point that licensed MSMEs pay a monthly average of KES 33.8 billion in taxes compared to KES 294.0 million paid by unlicensed businesses. Again other features of formality are not clearly delineated thus one can only extrapolate that a significant portion of income earned by unlicensed establishments is not taxed.
Finally, the issue of productivity was not addressed in the survey. There is no indication as to whether licensed enterprises are more productive than unlicensed ones, or which of the micro, small or medium enterprises are the most productive.
In short this MSME survey is a step in the right direction however it is a shame that KNBS did not use this opportunity to truly delineate between formal and informal economic activity. This can be seen in the fact that the Economic Survey released by KNBS this year indicated 82 percent of employed Kenyans are engaged in the informal sector. Yet in this survey unlicensed enterprises account for only 57.8 percent of those employed. In the future, it would be useful for KNBS to focus on formality versus informality more so than licensed versus unlicensed.
Anzetse Were is a development economist; firstname.lastname@example.org
This article first appeared in my weekly column with the Business Daily on October 23, 2016
Last week I participated in a panel discussion at the KRA Tax Summit on tax policy and economic development. Current fiscal policy is defined by a widening gap between expenditure and revenue generation putting a spotlight on the country’s tax regime and how to expand tax collection. While there are steps that can be taken to generate more revenue more effectively, several issues have to be acknowledged first.
Firstly, Kenya’s low GDP per capita means that incomes for millions are so small that tax cannot be effectively extracted from them. Linked to the poverty issue is dependency where those who are financially able often voluntarily support friends and relatives who are not because Kenya does not have a robust welfare system through which taxes are redistributed to those who need support. Thus the reality is that those who are taxed actually have low lived disposable income which presents a moral dilemma because in other countries taxes paid provide welfare services. In Kenya not only do millions pay tax, they are also the welfare system for millions of others. These high levels of dependency can be argued to be a form of tax that Kenyans pay for living in a country with no welfare system.
Secondly, the focus on the need to expand revenue generation needs to be coupled with pressure to reduce public expenditure. The fiscal deficit is not narrowing and is above the preferred government ceiling of 5 percent. It is crucial that government recurrent expenditure and excess spending is curbed so that less debt financing is required in annual budgets.
Additionally, one cannot make plans to expand the tax base in Kenya without addressing concerns around the management of public finances. There is little incentive for Kenyans to be tax compliant because of the reality that many feel that the management of public funds is wanting.
Finally, many feel they do not receive services from government commensurate to taxes paid. So until Kenyans feels public finances are being managed responsibly and there is a clearer link between taxes paid and services rendered, tax compliance will not be a priority for many.
That said there are steps that can be taken to generate more revenue and indeed it is important that more revenue is generated to narrow fiscal deficits. A key strategy that has to be developed is structural and should target the informal economy. The aim is not to tax informal businesses but rather support their growth and development. At the moment the informal economy is defined by many micro-firms making micro-profits. I do not think the KRA has the muscle required to extract taxes from so many businesses; the effort would probably not justify the amounts extracted from the informal economy.
Thus government should develop a strategy focussed at making informal businesses more productive and profitable. Key elements of this support would be to provide the sector with proper transport, energy and water infrastructure, technical and business management training, and financing. Once informal firms are more profitable a conversation then can start about formalisation and pulling them into the tax net.
Indeed what I have found is that when informal firms grow in size and profits there is a tipping point that is reached that creates motive to formalise. The motive to formalise is usually rooted in the need to access larger investment and contracts, and grow profits more aggressively. Thus it is possible that if government supports the growth and development of informal firms, many will reach that tipping point, self-formalise and become tax compliant.
Government should not view informal businesses as mischievous tax evaders, rather they should view these businesses as future tax payers. Target the informal economy with support and the sector will not only be an important employer, it will become a key source of revenue the government is so eagerly seeking.
Anzetse Were is a development economist; email@example.com