East African budgets are gearing for growth
EAST African governments have increased their annual budgets for 2015-16 with more spending directed towards security and key sectors expected to drive growth. According to East African news publications this comes against the backdrop of faltering revenue collection and declining donor support, creating a fertile ground for increased domestic borrowing.
The Kenya Budget and Appropriations Committee report on the 2015 Budget and Policy Statement of March 2015 raises concerns about the danger of ballooning public expenditure. Despite setting the target for total expenditure for 2014-15 at 28.4% of GDP in the 2014 statement, this appears to have increased to 33.1% of the GDP as per the Budget and Policy Statement 2015. The national treasury targets revenue to grow by 21.8% of GDP over the medium term, but the committee notes that there has been a continued tendency of laying ambitious targets which over time seem unachievable and with no clear measures as to how this is to be achieved.
The tax and revenue reform objectives set by the policy statement 2014 have also not been achieved. The simplification of the tax systems and enactment of modern tax laws through the submission of the Excise Duty Bill and Tax Procedure Bill to Parliament in 2014 were moved to 2015, the Income Tax Act that was to be completed in 2015 has been moved to 2016 and the reorganisation and operationalisation of the inter-dependent Inland Revenue Agency and the Customs and Border Protection Agency, which was to be achieved in 2014, has also been moved to 2015.
According to the committee it is not clear how some of these reforms will immediately affect or drive revenue collections. Rather, improved implementation of existing policies such as capital gains tax, value added tax and income tax could greatly enhance revenue collections during the coming financial year.
In a further bid to fund the expanding budget, Kenya’s Budget Committee is reviewing the proposal by the Kenya Revenue Authority to abolish certain tax incentives, including the 10-year tax holiday enjoyed by foreign investors in the export processing zones. According to the revenue authority “the effect of such concessions and incentives on investor confidence remains minimal”.
The 2015 Budget and Policy Statement promises to have a business regulatory reform strategy in order to improve Kenya’s global ranking under the World Bank Ease of Doing Business Indicators to not more than 60 by 2016. However, there is no clear strategy as to how this will be achieved. The 2015 statement also again refers to the need to establish technology-based green industrial parks as well as special economic zones and free trade areas to attract foreign direct investment and new technology. These targets were also contained in the 2014 statement.
In Rwanda, the 2014-15 revised budget of $2.46bn is projected to increase to $2.47bn for fiscal year 2015-16. Donor funding is expected to decline to 5.7% of GDP in 201516 from 7.3% in 2014-15 as development partners opt to channel funds directly to specific projects and non-governmental organisations.
Rwanda’s broader strategy to wean its economy off aid and speed up development includes the introduction of a new Investment Code, which was passed by the parliament in February, replacing the existing 2005 legislation.
The Investment Code aims to limit incentives to investors in priority sectors (such as energy, ICT, transport and logistics, improved agriculture, tourism, manufacturing, business process outsourcing and real estate) as opposed to the current blanket regime. The new legislation provides for a preferential 50% reduction in corporate tax for investments in priority sectors, increased from the current 30%. The new law also provides for clearly defined tax holidays of up to seven years depending on the sector and size of investment.
According to Tanzania’s budget estimates released in April, it plans to spend $12.31bn in 2015-16, compared to the current budget of $10.87bn. Its Parliamentary Budget Committee raised concerns over discipline in management of public funds and the ‘“unconvincing” trend in implementation of the 2014-15 budget.
Donors have withheld more than three-quarters of $558m of promised budget support to Tanzania (one of Africa’s biggest per capita aid recipients) in the 2014-15 fiscal year following allegations of high-level graft in the country’s energy sector. To offset reduced donor funding, the government plans to boost domestic revenue collection and implement a new VAT law.
The VAT Bill 2014 was approved by the Tanzanian parliament late in 2014, but still needs the president’s assent to be enacted and it is currently not known when the VAT Act will become effective. The VAT Bill 2014 aims to expand the tax base by capturing most economic activities, including cross-border operations of electronic and telecommunications businesses.
According to the 2015-16 Ugandan Budget Framework Paper, which was presented to parliament on 2 April, the government proposes to increase its expenditure by 19.3% to $5.9bn. In order to address the challenge of low tax to GDP ratio, key strategic interventions as per the 2015-16 budget will focus on expanding the tax base, reforming the structure of taxation and improving efficiency in tax collection and compliance. Initiatives include completing the National Identification Project, linking business registration databases to the Uganda Revenue Authority and also linking local governments and the Kampala Capital City Authority trade registration to the revenue authority.
Although Uganda abolished most tax incentives in the 2014-15 financial year (which was expected to increase revenue with $74.3m), it announced in April that it will be exempting operators in its oil and gas sector from paying VAT on upstream investments in an attempt to attract investors to this sector and to encourage growth.
The region’s final 2015-16 budget proposals are scheduled to be approved by the respective parliaments this month.
Budgets increased but spending plans still being rolled over from previous year
Celia Becker is an Africa Regulatory and Business Intelligence executive at ENSafrica.