IMF, World Bank at odds on tax Kenya policies

The World Bank and its sister Bretton Woods institution the International Monetary Fund are giving the Kenyan government contradicting signals on how to go about taxing Kenyans.

The World Bank has warned that Foreign Direct Investment in Kenya is being undermined by an unpredictable tax regime.

This is even as the IMF commended the government in the tax hikes it has proposed in the Finance Bill 2024, noting that the proposals would go a long way in widening the tax bracket.

Some of the proposals have been rejected by Kenyans who note they would further push many essentials beyond the reach of many Kenyans. 

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In its latest Kenya Economic Update, the World Bank says FDI inflows into the country as yet to reach pre-Covid levels due to “frequent and unanticipated tax policy shifts" which create a volatile business climate, erode investor trust and hinder strategic planning.

The warning coincided with the outrage sparked by proposals in the Finance Bill 2024, which players across various industries, including multinationals have warned will make the cost of doing business in the country much higher leading to staff layoffs and closure of industries.

According to the bank, due to the unpredictable tax regime, FDI inflows have been underperforming far beyond the country’s potential to account for 0.3pc of GDP in 2022 compared to Tanzania and Uganda who FDIs accounted for around 1.7pc and 6.5pc of GDP respectively in 2022.

"Frequent and unanticipated tax policy shifts create a volatile business climate, erode investor trust and hinder strategic planning. Such unpredictability, exemplified by abrupt tax rate changes or the introduction of new taxes, directly impacts the cost structures of businesses, especially those in the import-export sector. This instability not only discourages investment but also complicates tax compliance, which could lead to decreased government revenue,” stated the bank in the report.

The IMF however noted that the proposals in the Finance Bill would enhance revenue collection over the next financial year.  In a statement following a meeting between an IMF team and senior government officials, the IMF noted that the proposals in the Finance Bill 2024 would help the country

It noted that in the current financial year, there is a significant shortfall in tax revenue collection, which would result in further borrowing from the domestic market to bridge the shortfall.

IMF added that a sizable and upfront fiscal adjustment in FY2024/25 will be needed to correct the course.

“To this end, the (Kenyan) authorities have taken decisive steps towards fiscal consolidation by introducing several measures in the context of the draft 2024/25 Budget and the 2024 Finance Bill,” said IMF in a statement yesterday.

“Importantly, the Finance Bill centers on measures to broaden the domestic tax base through rationalisation of various tax expenditures, in line with recommendations in the Medium-Term Revenue Strategy.”

The lender announced it had reached agreement with the Kenyan government on policies and reforms, key among them "corrective measures" to safeguard debt sustainability including measures underpinning the 2024-25 budget. 

In the agreement that is yet to be approved by the IMF executive board, Kenya will unlock about Sh142 billion under several existing credit facilities with the global lender.

“Enhancing tax compliance and increasing the efficiency of expenditures through public expenditure and wage bill reforms, state-owned enterprise restructuring, rationalising unproductive current spending, and better targeting of subsidies and transfers while ringfencing social and development spending will be key to enhancing the credibility of the consolidation strategy in FY2024/25 and the medium term.

"Additionally, the social safety nets and the fiscal risk management framework need further strengthening,” IMF said.

The World Bank report notes that FDI inflows have been underperforming in the country reaching 0.3 per cent of GDP in 2022, which is far below the country’s potential; for example, neighboring Tanzania and Uganda have attracted FDI of around 1.7 and 6.5 percent of GDP respectively in 2022.

Although some manufacturing sectors have received FDI, including beverages, chemicals, and electronic components, overall investment levels remain negligible relative to the market size and Kenya’s strategic geographic location as hub and gateway to the wider region.

The report says the services sector has played a signifi cant role in attracting FDI to Kenya, outperforming industrial sectors in greenfi eld FDI attraction between 2018 and 2022.

"The majority of FDI stock is concentrated in fi nance and insurance (one-third of the total), followed by information and communication (16.1 percent), wholesale and retail (15.4 percent), and manufacturing activities (14.8 percent)," it adds.

To ensure sustained economic growth and jo creation, the World Bank advises on the need to draw in more FDI as a lever for optimising the role of trade integration.

"This will require a focus on improving the business enabling environment (including addressing trade facilitation issues) and strengthening Kenya’s investment policy and promotion efforts. It will mean drawing on riskbased approaches to improve the policy, legal and regulatory frameworks. It will also require streamlining procedures to reduce bureaucratic red tape that acts as an impediment. To realise this, coordinated and linkedup action will be required at the national, sectoral, and county levels," the update said.

For example, it notes that by working at both levels of government and in the prioritized value chains, Kenya could incrementally review the regulatory frameworks to address business entry, establishment and operation complexities, redundancies, and unpredictability.

Further, reviewing the investment promotion and facilitation regime to update existing statutes accompanied by institutional strengthening is vital. Building on gains already made, more targeted investor outreach, and enhancing ICT (enhanced interoperability) to ensure a seamless investor journey are key regarding the procedures and processes.