Think tanks flag risks of President Ruto taxes on growth

CBK Governor Kamau Thugge. FILE PHOTO | NMG

World’s leading banks, consultancies and think tanks have flagged new tax increases and higher borrowing costs as downside risks to Kenya’s growth outlook for 2023 despite marginally raising economic prospects.

Panellists polled from 16 institutions have forecast economic activity to expand 4.7 percent, slightly improved from the 4.6 percent projection last month, citing improved agricultural output which is expected to help ease inflation.

The economists, some of whom work for the world’s largest banks, however, see growth softening this year compared with 4.8 percent in 2022, partly citing the negative impact of Finance Act 2023 on private sector investment and consumption.

Read: Depressed economy hits growth of tax collections

“GDP growth is set to slow in 2023 from 2022. Private consumption will likely decelerate, due in part to tax hikes. Moreover, public spending will ease amid fiscal consolidation efforts,” analysts at Barcelona-based FocusEconomics, which compiled the growth forecasts between July 11 and 16, wrote in the August consensus forecast report.

The economy grew 5.3 percent in the first quarter of the year, the fastest in four quarters, largely lifted by a rebound in farming activity after the prolonged drought showed signs of easing.

Economists, however, estimate the economic output to have slowed in the second quarter ended June, adding that the softening could persist for the remainder of the year.

They cite the depreciating shilling amid a short supply of dollars and increased taxation at a time salaries have stagnated below the inflation rate for three years as likely dampers of growth.

The 15.62 percent slide in the value of the shilling, while boosting the country’s earnings from exports, has raised the cost of goods in a net import economy.

The analysts are also concerned about the rising cost of credit following the increase in the benchmark interest rate by the Central Bank of Kenya to battle inflation as likely to weigh on private sector investment.

“Downside risks [to the growth outlook] include renewed drought, a worsening of the dollar shortage, additional social unrest sparked by tax hikes, unanticipated shilling depreciation and debt repayment difficulties,” FocusEconomics research analysts wrote in the outlook report.

The William Ruto administration is banking on the full enforcement of the tax hikes, including doubling value added tax on fuel to 16 percent, to narrow the fiscal deficit from an estimated 5.8 percent of gross domestic product last financial year ended June to a projected 4.4 percent in the current year.

CBK Governor Kamau Thugge warned on July 17 that Kenya has run out of room for spending cuts and that the success of the country’s fiscal consolidation largely hinges on the increased taxes which include a 1.5 percent housing levy on monthly pay for workers.

Read: KRA unlocks Sh15.2bn taxes from mediation

“The new tax hikes will drag down consumption and, ultimately, will lower the return on investment in businesses,” said Ken Gichinga, chief economist at Mentoria Economics.

→ [email protected]