Revenue generation

Revenue generation targets unrealistic

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This article first appeared in my column with the Business Daily on July 23, 2017

I am of the view that revenue generation targets are unrealistic, informed mainly by finding ways to cater to the government’s ballooning expenditure rather than any realistic economic dynamics. Over the past few years, revenue collection has fallen short of the targets, but it should be noted that the Kenya Revenue Authority (KRA) almost reached targets despite the constraints they face. For example, in the year just completed (FY 2016/17) total revenue collection stood at KES 1.365 trillion representing a performance rate of 95.4 percent. However, the shortfall in shillings was KES 66.64 billion- a significant number.

Although the inclination is to blame the KRA for under-performing, I am of the view that KRA is given unrealistic targets each FY. These targets seem more informed by aggressive increases in government expenditure and seem oblivious of the serious constraints that mute tax collection.

Image result for KRA Kenya

(source: kipepeo.biz/assets/images/photos/b95e6-Kenya-Revenue-Authority-career-graduates-vacancy-2017.png)

The first issue is that revenue generation targets tend to be revised upwards over the course of the year. KRA’s original revenue target for the financial year 2016/17 was KES 1.415 trillion which was revised to KES 1.431 trillion, an increase of KES 16.24 billion. This is a concern because motivations behind increases in targets are not clear. Is the increase due a realisation in Treasury that it cannot raise as much as anticipated in borrowing and thus they place pressure on KRA in the form of increasing revenue generation targets?

The second constraint is that the macroeconomic environment informs the extent to which targets deviate from forecasts. For example, it is estimated that a 1 percent point reduction in GDP growth reduces revenue by KES 13.4 billion. In terms of inflation, a 1 percent point increase in inflation requires that revenue targets be raised by KES 13.0 billion to cater for the value of money lost due to inflation. Thus macroeconomic dynamics inform the extent to which KRA can hit targets.

Thirdly, government policy decisions particularly those related to tax policy affect the ability to generate revenue. The non- implementation of tax policy in terms of the adjustment of specific excise rates in FY 2016/27 did not occur negatively impacting revenue generation by KES. 4.911 billion. Additionally, the duty free importation of essential foods (maize, milk, sugar) led to a revenue loss of KES 4.363 billion in the 4th quarter of 2016/17. Indeed, it is estimated that government policy decisions cost KES 13.006 billion in revenue generation in FY 2016/17.

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(source: https://www.dur.ac.uk/images/law/research/researchhub/Taxpolicybig4.JPG)

Fourthly, government itself is to blame; delays in remitting income tax from public institutions costs KES 823 million.

Finally, sectoral issues inform the ability of KRA to collect tax. For example, declining profitability among large firms where 16 NSE listed firms issued profit warnings in 2016, had an adverse impact on corporation tax. Additionally, the downsizing and shutting down of firms which resulted in over 7,000 staff lay-offs in various institutions, mainly banks, adversely affected PAYE performance.

It is time that revenue generation targets were informed by the dynamics elucidated above. If this does not happen, government will continue to be seen to be trying to buffer itself from its aggressive expenditure through creating unrealistic targets rather than submitting austerity budgets that limit unnecessary spending.

Anzetse Were is a development economist; anzetsew@gmail.com

 

 

TV Panel Interview: Analysis of the Kenya National 2017/18 Budget

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Wallace Kantai engages Anzetse Were- Economist and Business Daily columnist, Dennis Kabaara- Business Daily columnist, Peter Karimi- CEO mCHEZA, Phyllis Wakiaga- CEO KAM, Ashif Kassam- Executive Chairman RSM, Sachan Benawra- Consulting Manager RSM in debating the pros and cons of the 2017/2018 Kenya Budget.

Changes needed in National Fiscal Policy

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This article first appeared in my weekly column in the Business Daily on March 26, 2017

This week the National Budget for FY 2017/18 will be read, and being an election year this budget may indicate how fiscal policy will be approached post-election.

There are three issues with fiscal policy as articulated over the past few years. The first is sub-par revenue generation and unrealistic revenue targets. The economy grew at about 5.9 percent in 2016, yet the tax revenue forecast was raised by 8.7 percent. By December 2016, it was reported that the Kenya Revenue Authority (KRA) failed (once again) to meet its half-year target by KES 20 billion. This is not a new event; revenue targets are routinely not met begging the question as to whether or why unrealistic targets are set; this habit has to change in the upcoming budget. Kenya needs more realistic targets in order to more effectively anticipate debt requirements for the year.

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(source: http://www.capitalfm.co.ke/business/files/2013/11/BUDGET-BRIEFCASE.jpg)

The second issue in fiscal policy is notable increases in expenditure.  Please note that according to the Budget Policy Statement 2017/18 released in November 2016, the government seeks to curb non priority expenditures and release resources for more productive purposes. The BPS states an expected overall reduction in total expenditures resulting in a decline of the fiscal deficit (inclusive of grants) from KES 702 billion to KES 546.5 billion, equivalent to 7.5 percent of GDP. This is positive in that this fiscal deficit should be lower than the 9.3 percent of GDP for 2016/17. However, two problems linger; firstly a deficit of 7.5 percent is still above the preferred fiscal deficit ceiling of 5 percent. Secondly, it is almost certain that supplementary budgets that ramp up expenditure will be tabled over the course of the fiscal year. Just last month the government proposed KES 75.3 billion of additional expenditure for various ministries and government departments. Government has the problematic habit of creating what seem to be artificially narrow fiscal deficits and borrowing requirements during budget reading, only for these to be revised upward significantly over the course of the fiscal year.

Finally, and linked to the point above, government has to rein in its debt appetite. Growing expenditure, partially attributed to a bloated devolution-related wage allowances and benefits bills has contributed to government borrowing aggressively for capital expenditure. The debt to GDP ratio currently stands at 52.7 percent, up from 44.5 percent in 2013 and above Treasury’s 45 percent threshold. To be clear, the debt to GDP ratio in itself would not be worrying if there were clear and demonstrated action to manage debt levels more aggressively. The World Bank puts the tipping point for developing countries at a 64 percent debt to GDP ratio above which debt begins to compromise economic growth. Thus while there is still wiggle room, continued debt appetite juxtaposed with (or due to) subpar revenue generation means Kenya is headed towards debt unsustainability in the near future.

It is hoped that the fiscal policy due to be read will provide detailed strategies on how revenue generated will be stimulated, expenditure cuts effected as well as the articulation of a clear and realistic debt management strategy.

Anzetse Were is a development economist; anzetsew@gmail.com

The Social Market Economy and Africa

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This article first appeared in my weekly column with the Business Daily on November 6, 2016


The social market economy is an economic system based on a free market operated in conjunction with state provision for those unable to sell their labour, such as people who are elderly, incapacitated or unemployed. The concept was originally promoted and implemented in Germany in 1949 designed to be a third way between laissez-faire economic liberalism and socialist economics. The foundation of the social market economy is a free market with the provision of a social safety net. Often the social element is conflated with socialism but as analysts point out, social market economics rejects the socialist idea that states can replace markets.

The social market economy is a model of economic structure and redistributive nature from which Kenya and Africa can learn. This is largely because economic structures in Kenya and Africa tend to be defined by economic dualism where there is a limited middle class and a growing chasm between rich and poor. The social market economy is a key means through which this chasm can be straddled, providing support to and pulling millions out of dire poverty. However, for an effective social market economy to work, specifically the social protection portion, three elements are required.

Image result for welfare (source: http://watchdog.org/wp-content/blogs.dir/1/files/2014/01/welfare-sign.jpg)

The first is robust revenue generation; in order to deploy effective social protection, the government must generate sufficient revenue to not only meet its direct needs but have enough money to allocate funds to welfare programmes. Social market economies cannot function via debt or credit financing as the welfare component is not directly economically productive but rather economically redistributive. Secondly, sound fiscal management is crucial. A social market economy can only truly work in the context of fiscal management where public finances are managed competently, efficiently and transparently. Finally, wealth redistribution must be done via a transparent and just redistribution model. The redistribution of funds via the welfare elements of the social market economy must be clearly guided by the concept of redistributive justice, fairness and the promotion of basic equity.

However, as it stands Kenya and indeed much of Africa cannot truly deploy social market economic social protection because all three components mentioned above are weak. Kenya does not have truly robust revenue generation partly informed by levels of poverty in the country which make tax extraction from a significant portion of the population difficult if not impossible. In terms of fiscal management, Kenya has well-documented weaknesses in this area with numerous massive public financial mismanagement scandals. Financial mismanagement renders intentions of social protection impotent. Sadly the third element, just and fair redistribution, is still weak in Kenya and much of Africa; most have not developed robust systems and formulae for wealth redistribution.

Image result for fiscal management (source: http://inthedriversseat.org/wp-content/uploads/2014/08/fiscalmgmt.jpg)

However, it must be pointed out that while the concept of the social market economy has its strengths it has weaknesses. The first of which is that it is a type of ‘first aid’ where one part of the system, free markets, create negative externalities such as income inequality that are then sought to be corrected by the other part of the system, social protection. Additionally, social market economies can engender dependency in some and if not, often those who are on public social protection programmes are stigmatised and labelled lazy, unintelligent and ‘living off those who work hard’. Thus another conundrum arises where the intention to promote human dignity through social protection is erased by the lived social stigma associated with being on welfare.

However, in my view the biggest risk the social market economy poses to Africa is its potential to destroy social capital. It can be argued social capital is generated through the culture of dependency that defines Kenya and Africa at the moment. Saving up to lend money to your brother or take your niece through school creates social ties and bonds that arguably improve the quality of life of all involved. Would the implementation of a social market economy make such relations unnecessary and destroy this social capital?

Anzetse Were is a development economist; anzetsew@gmail.com

Unrealistic domestic revenue numbers in annual budgets dangerous for Kenya

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This article first appeared in my weekly column with the Business Daily on July 3, 2016


Last week it emerged that Treasury had overshot its domestic borrowing target. Net domestic debt hit KES 446.6 billion in May, one month before the end of the fiscal year, against the annual target of KES 397 billion. That is an overshoot of KES 49.6 billion. To make matters worse, the accelerated domestic borrowing has been mostly used to fund the recurrent budget. The root of this problem is multi-layered but a key element of this overshoot is that when developing the budget, Treasury uses overly generous domestic revenue numbers. In the analysis of the FY 2016/17 budget the Parliamentary Budget Office (PBO) made an important point; to avoid a big financing gap during the budget approval process, domestic revenues are nudged to their limits so as to accommodate excess spending plans and curb debt financing.

We have seen that revenue collection repeatedly falls short of the target year after year. FY 2015/16 was no different; the KRA had in the 11 months to May collected KES 987 billion, more than KES 200 billion below the annual target of KES 1.2 trillion. Although the inclination is to blame the KRA for under-performing, I am of the view that KRA is given unrealistic targets each FY. These targets seem more informed by ballooning government expenditure and seem oblivious of the serious structural constraints that mute tax collection such as a sizeable informal economy largely out of the tax net. The bottom line however is that there should be far more concern that government seems to have the habit of using overly generous domestic revenue numbers when formulating the budget hiding the eventuality of having to increase borrowing during the course of the FY. There are several implications of this problematic habit.

(source: http://aa.com.tr/uploads/Contents/2015/12/08/thumbs_b_c_e8fd349e2614822b5d973b294371b9cc.jpg)

Firstly, when the annual budget is announced, fiscal deficit figures are artificially low. Because government uses such generous domestic revenue numbers, it artificially narrows the gap between revenue and expenditure. This creates an inaccurate perception of just what the real budget financing shortfall is. As a result, Kenyans and those interested in the country are given the impression that the fiscal deficit is not as large as actually would be the case if the more realistic revenue numbers were used. From where I sit, the use of these inaccurate numbers comes across as a PR strategy by government to make it look as though the budget is more sustainable than is actually the case.

Secondly, due to artificially narrow fiscal deficit numbers, the budget then sets out lower numbers for debt financing needs than what emerges in reality. As a result Kenya’s debt seems more sustainable than is the actual case hiding the fact that Kenya is more leveraged than formal figures used in the budget suggest. As is the case this year, because those domestic revenue numbers were too generous, government has had to finance the deficit created by this shortfall through further borrowing; pushing up the GDP to Debt ratio. Although it must be said that Kenya’s GDP to Debt is still manageable, a continued trend of increasing borrowing in supplementary budgets is worrying as government then has to put even more of future budgets aside to service this ‘unforeseen’ borrowing, increasing the debt burden on a relatively poor economy.

(source: https://saylordotorg.github.io/text_world-regional-geography-people-places-and-globalization/section_10/8f8aef9223c1ff538aed3242447d29b8.jpg)

Finally, the government invariably goes to domestic sources to finance this funding gap which is problematic for several reasons. Not only does government crowd out private sector in the domestic borrowing space, substantial increases in domestic borrowing by government invariably places upward pressure on domestic interest rates making credit even more unaffordable for millions in Kenya. And although domestic borrowing conditions are more expensive than foreign borrowing and often have no grace period, government does this ‘emergency borrowing’ in local markets because they are guaranteed that they will get access to the funds and within a reasonable time period. As a result all government proclamations, strategy and intent to ensure foreign borrowing preponderates so as not crowd out the domestic space do not truly materialise and this has a negative knock on effect on economic growth.

It is time that Treasury used more realistic domestic revenue figures when developing the budget. The continued use of overly generous figures is not only imprudent, it’s dangerous.

Anzetse Were is a development economist; anzetsew@gmail.com

This is how to get the informal economy into the tax net

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This article first appeared in my weekly column with the Business Daily on June 19, 2016


The informal economy has been a theme of mine this year and since the budget speech, even more so. The government seems to have caught on to the financial potential of tapping into this sector for revenue generation purposes, and understandably so. The informal economy is estimated to contribute to 34 to 35 percent to the country’s GDP and currently generates over 80 percent of jobs created in the country on an annual basis. My concern is that what will happen is a heavy handed reflex from government to over-regulate and intimidate informal economy players into paying taxes. I think this would be the wrong approach due to several reasons.

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(source: http://cteast.co.nz/wp-content/uploads/sites/12/2015/05/pay-income-tax-online-02.jpg)

Firstly, the Kenya Revenue Authority (KRA) has already taken a step in the right direction by introducing itax and making it easier for individuals and businesses to pay taxes. As a result, some informal economy players who found the tax process too difficult to comply with voluntarily registered and started paying taxes. Another useful initiative the KRA is doing to facilitate tax compliance is working with county governments to recruit informal economy businesses who have established business premises such as in malls or office buildings, to pay taxes. To be clear, there is a difference between facilitating compliance and intimidating people and businesses into it. Thus I think the KRA should continue to focussing on facilitating tax compliance and scaling up their efforts on sensitising the general public on how to file taxes as well the benefits of doing so; benefits such as having a paper trail of tax compliance that make it easier for small businesses to qualify for financing or become suppliers for government contracts.

Secondly, there should be a distinct effort by government to improve the efficiency, productivity and profitability of the informal economy. As it stands, informality tends to overlap with poverty and low income. Due to the fact that it is often the poorly skilled who find themselves stuck in the informal economy as the qualifications for employment in the formal economy often serve as automatic disqualifiers, informal economy players need to be supported in building their ability to manage and scale up their businesses, as well as making their businesses more profitable. Therefore, government bodies should work with county governments to seek input from informal economy players on the factors they think constrain the growth of their informal businesses. There is already a sense that training in areas such as bookkeeping, business management, and market access strategies would be valuable for this sector. Thus rather than aiming to squeeze out as much as possible from a sector that is still largely defined by poverty, government should support informal businesses to become more profitable. This would likely then make more in the informal economy willing to pay their share of taxes because as it stands, most feel they are too broke to pay taxes as they are already struggling to get by.

Finally, the government should give tax amnesties to informal businesses that register and start the journey towards tax compliance.  Government should give such business at least a three to five year tax amnesty period. The reason why this amnesty is so important is that it not only allows small businesses to develop the capacity to comply, it also provides a time period over which support to the informal businesses, such as that detailed above, can be deployed. This amnesty would also allow government to collect much needed information and data on the informal economy that can be used to better support the sector. Government could then, for example, use such data to establish realistic tax bands for small businesses.

(source: http://cdn.theglobalist.com/wordpress/wp-content/uploads/2014/10/Jua_Kali_0008-resize.jpg)

In short, the informal economy is too valuable a sector of the economy to me intimidated out of existence or pushed further underground by threats of punishment for failure to comply with tax obligations. The priority should be for the KRA to continue facilitating tax compliance as other arms of government work to support players in the sector to become more profitable. Only then can a realistic conversation about more robust tax compliance occur.

Anzetse Were is a development economist, anzetsew@gmail.com

Interview with CNBC Africa on Kenya’s Fiscal and Monetary POlicies

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Kenya’s monetary management has been under scrutiny for mismanagement due to poor strategies and policies to guide spending. I joining CNBC Africa to discuss more on Kenya’s fiscal and monetary policies.

http://www.cnbcafrica.com/video/?bctid=4649814496001

The foundation of my insights are from a piece I wrote on Kenya’s fiscal and monetary policies>> https://www.academia.edu/19288762/Kenyas_Fiscal_and_Monetary_Policies_Is_government_getting_it_right