Opinion
Kenya’s new president looks to widen tax revenues, reduce public debt
By XN Iraki
In the run-up to Kenya’s 2022 polls, economic issues, particularly public debt, and joblessness, took center stage. The Kenya Kwanza team led by William Ruto suggested that Kenya had over-borrowed, a habit they pledged to stop. Ruto’s rivals defended the debt, insisting investment in infrastructure would spur economic growth.
Kenya’s current overall debt stands at US$87.4 billion, or 62.3 percent of the gross domestic product (GDP). At an official borrowing limit of KSh10 trillion (US$100 billion), Kenya, which had a nominal GDP of US$140 billion in 2022, would have a debt-to-GDP ratio of 71.4 percent. A debt limit of no more than 64 percent of the national GDP is recommended for developing countries such as Kenya. Almost half of Kenya’s debt, 49.8 percent (US$47.2 billion) is owed to foreign interests.
Global institutions like the International Monetary Fund (IMF) and the World Bank are concerned about Kenya’s debt sustainability.
Aside from the sheer amount being borrowed, there are fears that the debt has been funding recurrent expenditure, mostly government salaries. It’s true, though, that big projects like the standard gauge railway and the expressway have been partly funded by debt.
Debt politics has further been fuelled by the narrative that by saddling Africa with debt, China is able to call the shots on trade, investment, and even geopolitical issues.
Ruto is now in power and seems determined to reduce public debt. The government still has to rely on domestic and foreign borrowing, but Ruto wants to reduce it. He intends to do that by collecting more taxes and using national savings to pay for what the country needs.
The Kenya Revenue Authority has been given new revenue targets – US$10 billion more to raise in one year, an almost 50 percent increase. It is expected to double current collections in 5 years to US$48 billion by 2027, an election year.
The targets seem too ambitious under the current socio-economic circumstances. In trying to achieve the target, the formal sector is likely to be the hardest hit as its revenues are public and hard to hide. Higher taxes could depress demand too, leading to lower tax revenues and job losses.
What should be done
But increased tax collections could benefit everyone if the taxes are put to good use. Here are seven ways Ruto’s government can raise tax collection and cut reliance on foreign debt:
Of late, economic growth has been lower than expected, and is projected to slow from 5.9 percent in 2022 to 5.7 percent in 2023.
The economy grows when we invest or consume more. Ruto should make Kenya a more investment-friendly country by looking at business regulations and laws. Higher taxes eat into investors’ profits and could discourage investment. Kenyan entrepreneurs should be able to start businesses without worrying about the taxman closing their premises.
What encourages economic growth is offering quality goods and services that are globally competitive. The economy should reward innovators and those who go the extra mile. Providing services like roads, sewers, power, and security will attract investors. Giving citizens confidence creates demand and economic growth.
Once the economy grows, tax revenue grows, whether it’s value-added tax or income tax. So, before setting a tax revenue target, Kenya should start with an economic growth target like the 10 percent rate envisaged in Kibaki’s Vision 2030.
Collecting more tax should be coupled with prudent government spending. That has political implications; it could lead to job losses in the public sector, but create efficiency – which is good for the economy in the long run.
XN Iraki is an Associate Professor at the Faculty of Business and Management Sciences, University of Nairobi. This article is republished from The Conversation under a Creative Commons Licence. Read the original article.
