economics

Kenya’s Ability to Raise More From Taxes Likely Peaked, World Bank Says

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Kenya’s Ability to Raise More From Taxes Likely Peaked, World Bank Says

  • Ratio of tax revenue to GDP is at lowest in decade, bank says
  • Country at risk of diminishing returns, ICEA’s Kihanda says

An attendant fills plastic fuel containers at the Euro Petroleum petrol station in the Baba Dogo suburb of Nairobi, Kenya, on March 28. 

Photographer: Luis Tato/Bloomberg
Photographer: Luis Tato/Bloomberg

Kenya’s ability to generate higher revenue by introducing new taxes may have reached a peak, according to the World Bank.

Tax revenue as a ratio of gross domestic product fell to the lowest level in more than a decade in the fiscal year through June 2018 and the only way to turn this around is through reducing exemptions, improving collection administration and expanding the tax base, the Washington-based lender said.

“Given the continuous revenue decline at a time when nominal GDP is growing, the ability to raise more revenue could have plateaued and significant structural reforms may be needed to reverse this worrying trend,’’ the lender said in its economic update on Kenya released Thursday.

Declining Revenue

Kenyan tax revenue relative to the size of the economy is dropping

Source: International Monetary Fund

The government seeks to collect 1.69 trillion shillings ($16.8 billion) in the current fiscal year to help narrow the budget deficit to 5.9 percent of GDP from 6.9 percent. To do this, the Treasury has introduced measures including an 8 percent value-added tax on petroleum products and doubled excise levies on mobile-money transfers.

Diminishing Returns

“What is happening right now is that you are increasing taxes on an already-compliant population,’’ Einstein Kihanda, chief executive officer of Nairobi-based ICEA Lion Asset Management Ltd., said in an interview. “You can only mine so much and at some point you will start getting diminishing returns.’’

Lower profitability in the banking sector and an increase in the number of categories exempt from value-added tax contributed to a loss in revenue, according to the report.

The state plans to overhaul its income-tax law and will soon introduce in parliament draft legislation seeking to make collection more efficient, Treasury Secretary Henry Rotich said earlier this month. It may include a 35 percent corporate-tax rate.

“We are either at breaking point or very close,’’ Kihanda said. “If you look at revenue growth, it clearly shows there is a need to deliberately rethink how we go about levying taxes.”

Growth Forecast

While the World Bank expects slower economic growth in the second half, it raised Kenya’s 2018 forecast by 0.2 percentage points to 5.7 percent, citing rebounding agriculture and manufacturing, as well as a robust services sector. The fourth quarter 2017 expansion will be hard to replicate this year, it said.

The lender also forecasts growth at 5.8 percent in 2019 and to 6 percent in the following year as actual output catches up with potential and private-sector demand recovers.

“Kenya is like a Ferrari that’s going at 60 kilometers per hour, but is capable of doing 150 kilometers per hour, we need to do some structural reforms to get there,” said Allen Dennis, a World Bank senior economist.

(Updates with growth forecast from ninth paragraph.)