The force behind Uhuru’s calls for removal of interest rate caps


Kenyatta on peace and unity

In Summary

  • While the penned down reasons for the late call on the Finance Bill, 2019 have largely been pinned on alleviating the dire credit crunch in the private sector experts see the move as the government last resort at engaging the fiscal consolidation high gear.
  • The observed credit crunch in the economy has proved the greatest challenge to greater revenue collection as the slump of key growth segments deny the Kenya Revenue Authority (KRA) its expected collection targets.
  • By lifting the caps, the State aims to push out the blocked liquidity to boost output, a measure which will have the reverse effect of boosting paid taxes.

President Uhuru Kenyatta’s rate interest cap repeal call to Parliament has been enforced, financial allied sector stakeholders now reckon.

While the penned down reasons for the late call on the Finance Bill, 2019 have largely been pinned on alleviating the dire credit crunch in the private sector, experts see the move as the government last resort at engaging the fiscal consolidation high gear.

According to Research Analyst Victor Koech from AIB Capital,  the rate cap repeal makes for the most informed switch to the much desired consolidation by government as the State suffocates in a severe fiscal strait jacket defined in falling revenue mobilization against rising public debt.

“President Uhuru Kenyatta is prepared to lose his political capital to salvage the economy. This is the only way to the reduction of the budget deficit and freeing up funds from bi and multilateral institutions who have been hesitant at funding government,” said Koech.

The severe void to financing is visible in the recently presented budget to the National Assembly which mirrored the tough expenditure financing options.

While Ksh.3.02 trillion net spending has been proposed in the current 2019/20 financial year, projected domestic revenue mobilization accounts for only Ksh.2.1 trillion leaving a deficit of nearly Ksh.1 trillion to be filled through borrowing.

The National Treasury proposed new tax proposals amount to a mere Ksh.37 billion in new revenue streams leaving further debt accumulation as the only option.

The observed credit crunch in the economy has proved the greatest challenge to greater revenue collection as the slump of key growth segments deny the Kenya Revenue Authority (KRA) its expected collection targets.

KRA’s dry-spell in collections continued in the past year as the agency fell short of its expected Ksh.1.77 trillion target by 11 percent.

By the tax man’s own admission, job losses resulting from firms’ rationalization programs, automation and reduced investments have weighed down targets.

Both Corporation taxes and Pay as You Earn (PAYE) shrunk significantly in the last year on the back of a 2.8 percent slack in formally created jobs according to provisional data from the Kenya National Bureau of Statistics (KNBS).

Similarly, new tax policies in the year failed to gather steam as the tax man blamed betting firms for the non-remission of withholding taxes on customer winnings, a factor quoted as the key reason behind the missed Ksh.21 billion in new collections.

Subsequently, the growth of the economy has evolved towards lesser tax yielding segments such as agriculture to put a further dampener to revenues.

Agriculture as a share of Gross Domestic Product (GDP) has risen to 34.2 percent from 27.5 percent in five years while the manufacturing sector’s contribution has fallen to 7.7 percent from 10 percent over the same period.

The decline in the high yielding economic segments is attributable in great part to the starving of private sector credit which has effectively wiped off working capital for local businesses.

Economist Ramogi Odhiambo describes the credit crunch as falling dominoes where the denial of funding to one segment has reverberated throughout the entire economy.

“Money is essentially passed down from one hand to another. While bigger banks may not necessary fund individuals and SMEs, the same funds lend to smaller banks who serve the segment,” he said.

By lifting the caps, the State aims to push out the blocked liquidity to boost output, a measure which will have the reverse effect of boosting paid taxes.

Ultimately, greater collections will serve to plug the widened budget deficit correcting the undesired fiscal slippage in recent years.

To prop up the quest, Acting Treasury Cabinet Secretary Ukur Yatani has moved to revise the public debt ceiling to Ksh.9 trillion creating room for the replacement of expensive commercial debt with cheaper concessional funding.

Further, Yatani has moved to rope in recurrent expenditure in ministries and state departments, from the freeze on foreign bench-marking trips, the slash of ministry officials travelling entourages to the recent extreme of blocking the funding of office tea from state coffers.

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Story By Kepha Muiruri
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