This archive report was first published on 4 November 2019.
Kenya's Revenue Collection Target Faces Uncertainty ¶
Published on November 4, 2019
The World Bank has cast doubt on Kenya's ability to meet its ambitious Sh1.8 trillion revenue collection target, citing an expanding informal sector and declining traditional tax-rich economic segments such as manufacturing.
According to the Bretton Woods institution, the Kenya Revenue Authority (KRA) has consistently fallen short of collection targets, forcing the government to either cut back on expenditure or borrow more to finance its projects.
The World Bank argues that the structure of the economy has changed in favour of non-tax revenue-rich sectors such as agriculture, which has expanded as a share of GDP from 27.5 per cent in 2014 to 34.2 per cent in 2018.
However, while agriculture accounts for about 34.2 per cent of nominal GDP, its contribution to tax revenue is just about 2.6 per cent. This contrasts with manufacturing, which accounted for 7.7 per cent of nominal GDP but about 18.2 per cent of tax revenue.
Kenya has witnessed a structural decline in tax revenues as a share of GDP, falling to 15 per cent in financial year 2018/19 from 16.8 per cent in financial year 2013/14.
The World Bank now wants the elasticities and tax bases used to project revenues to be reviewed and updated to better reflect the changed economic structure.
“Such updates would introduce much-needed realism in revenue projections which are needed to better anchor spending decisions over the medium term,” the World Bank advises.
Revenues have declined consistently over the last five years in major tax heads, including income tax and value-added tax.
The result is that the Treasury is struggling to contain the gaping tax deficit, which has seen it soak in more debt.
Central Bank of Kenya Governor Patrick Njoroge has faulted the structure of Kenya’s economy for delivering growth in GDP amid rising cash crunch and job losses among Kenyans.
“It is true you have GDP numbers but you can’t eat GDP. At the end of the day, what is needed is specific income. That is what anybody else wants plus jobs,” said Dr Njoroge.
Kenya is also grappling with an informal sector, which has proved problematic to measure and tax.
About 70 per cent of Kenya’s economy is defined as informal, but the World Bank warns that this status could be preferred and abused by firms that want to stay out of the KRA radar.
The IMF is holding a statistical forum mid-November to review the definition of “informal economy” and explore new technologies that can capture the true size of this economy.
