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East Africa’s Debt-to-GDP Ratio Remains Relatively Stable- Moody’s Report

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A Moody’s report titled: ‘East Africa: Institutional weakness and limited policy effectiveness constrain ability to manage higher debt burdens’ indicates that the growing debt burdens for East African countries are putting pressure on their financial strength and credit quality.

The countries, Kenya, Uganda, Tanzania, and Rwanda are at risk of their economies being exposed “to exchange rate troubles, deteriorating affordability and increasing reliance on non-concessional financing.”

“Such countries will be increasingly tested in coming years,” the report stated.

Moody’s, however, notes that the debt-to-GDP ratios for the four countries remains fairly stable with Uganda’s debt expected to increase by six per cent of GDP to 44 per cent in 2019. In the four countries, government debt surged by 13 to 21 per cent of GDP between 2012 and 2017.

East Africa’s Debt Situation

The report indicates that Kenya holds the highest government debt in the region due to infrastructure spending, the increasing cost of debt, and low revenue collection. Moody’s predicts that the debt will approach 60 per cent of GDP in the coming two years. Currently, Kenya’s public debt stands at 58 per cent of GDP.

On the other hand, Rwanda has the lowest government debt but has the highest rate of accumulating debt which signals “a transition in donor support from concessional loans and grants.”

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The report also indicates that Tanzania, Uganda, and Rwanda are experiencing a rising and significant share of foreign and external-currency denominated debt which exposes them to exchange rate depreciation risk.

“Increasing debt burdens and deteriorating debt affordability, even when linked with public investment aimed at enhancing growth, and generating foreign exchange to service outstanding debt, constrain fiscal space and weigh on our overall assessment of credit quality in Kenya, Rwanda, Tanzania, and Uganda,” Moody’s assistant vice president, analyst and co-author of the report David Rogovic said.

“Their ability to contain any further rise in debt burdens for the foreseeable future and direct limited domestic resources toward productive uses will be important credit considerations in all four countries,” he added.

In Rwanda and Tanzania, debt remains highly affordable due to a large share in concessional debt while in Kenya the high dependency rate on commercial borrowing has made debt affordability worse.

In Uganda, the shift to domestic borrowing costs and non-concessional external borrowing is deteriorating the country’s debt status.

The Strength of Policy and Institutional Frameworks in Managing Debt

Moody’s observes that limited policy effectiveness and the weakness of institutions will affect the ability of Tanzania, Uganda, and Kenya in managing high debt levels and credit levels. However, the policies and institutions of Rwanda are strong enough to manage the risk that comes with high debt.

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KRA must ease tax filing to boost revenues

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Nikhil Hira Independent tax consultant and Director Bowmans Coulson Harney (law firm). [Courtesy]

Anyone who has been following Kenya’s budgets over the last few years will recall headlines each year saying that the country has set its largest-ever budget. 

The upcoming 2021/22 fiscal year is no exception, with Treasury Cabinet Secretary Ukur Yatani announcing a budget of Sh3.6 trillion – yes, the biggest ever! A little over Sh2 trillion will come from government revenues, with approximately Sh1.8 trillion of this from tax revenues. 

The balance will be borrowed – another common feature of the last few years. 

This year’s budget comes amidst an economic crisis brought on by the Covid-19 pandemic, with the inherent assumption that the pandemic will come to an end before the start of the next financial year. 

Given surges in infections that are being seen globally, and indeed in Kenya, this assumption may well be the deal-breaker. 

The Ministry of Health has already said that Kenya may see another wave of infections in July, fuelled by the Indian variant. This could result in more lockdowns with the associated impact on the economy and indeed revenue collections. The lack of vaccines is an issue that the government must address as a matter of great urgency if the country is to get through the pandemic without further economic woes. 

While deficits in government budgets are not uncommon, Kenya seems to be annually widening the gap between expenditure and revenues. 

If one applies this model to their household budget, the upshot will almost certainly be bankruptcy. 

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What is actually required is curtailing recurring government expenditures, which is something that the government has acknowledged in the past with proposed austerity measures. 

The reality is that Kenya has not succeeded in doing this, and the pressure on revenue collection is exacerbated. 

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When you add to the high level of wastage and corruption we are witnessing, the deficit will almost certainly continue to widen. 

The responsibility for tax collection and enforcement lies with the Kenya Revenue Authority better (KRA). 

There is no doubt that the authority has improved significantly in this task since it was set up in 1995. 

The taxman estimates that 4.4 million tax returns were filed by June 30 last year, up from 3.6 million in the previous year.  While this is a significant improvement, when compared to the country’s population, this number of returns seems unusually low. 

The increase in the number of tax returns, is to a large extent, due to the online reporting system, iTax, and a major push by KRA through taxpayer education.

There is no doubt that the online system has made filing tax returns significantly easier and gone are the large queues of people witnessed at Times Tower on deadline day. 

That said, there is still much to be done to make filing returns a seamless and painless exercise. 

System downtime during filing periods is something that all of us will have experienced, although, in typical Kenyan fashion, we inevitably wait until the last day to file our returns as we do with most things! 

The spreadsheet that one uses to file a return is by no means the simplest to use.  One key issue seems to be that taxpayers are not alerted to changes in the model until they try to upload a return. 

The spreadsheet does not allow one to make it more relevant to their sources of income – in essence, it is too rigid and inflexible. KRA should be able to rectify this without too much effort.

Last year was unusual in that different rates of tax were applicable in the first quarter as compared to the rest of the year.  This followed the Covid-19 relief measures that were introduced in April 2020. 

There was much debate about whether the changes were meant to apply for the whole year or whether some form of apportionment was needed. 

In the end, the decision was made for apportionment. One can argue about what the correct treatment should be, but the issue was how long it took for the decision to be made and, indeed, to amend the iTax system. 

The age-old notion has always been that the more complex and difficult it is to file a tax return, the more likely it will be that taxpayers simply won’t file their returns. While the issue with the system has been resolved, there is an inherent administrative issue here that must be addressed. 

KRA has to be significantly more proactive in dealing with changes in rates and law to ensure the least inconvenience to taxpayers. 

The writer, Nikhil Hira, is the Director of Bowmans Kenya.

The views expressed in this article are the author’s and not necessarily those of Bowmans Kenya  

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Business

The age of gentrification is truly upon our country

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Never mind the businessmen outside Nairobi could be richer. Rural folks aspire to one day moved to a new county (city).

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The rise and fall of Trade Bank: A tale of the sleazy 90s

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It is where titans such as Equity Group boss James Mwangi, who now oversees an over Sh1 trillion asset-rich bank, cut their teeth.

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