East Africa Plans Heavy Infrastructure Spending

East Africa Plans Heavy Infrastructure Spending
East African Economies

AFRICANGLOBE – Faced with growing deficits, East African finance ministers resorted to new taxes to raise cash for a new slate of expensive but necessary infrastructure projects, while keeping soul and body together by keeping basic social spending intact.

The triggers may differ, but the region is fast realising that it can no longer depend on foreign funding for financing its economic programmes. And citizens will have to pick up the tab. The desire to wean countries off donor support, even at the risk of increasing the public debt burden, was evident.

In Uganda and Rwanda, donors recently pulled the plug on financing key budget expenditure, exposing the soft underbelly of these countries’ economies. Kenya, which boasts a relatively more efficient tax collection machine, has been flagging in recent times, making it hard to finance an expansionist expenditure bill.

Deepening revenue from local sources was an overriding theme in Dar es Salaam, Nairobi, Kigali and Kampala as the region’s finance ministers went through the budget ritual.

While spending priorities differed, there was a marked emphasis on infrastructure projects and social spending. The former will be music to the ears of traders in the region who continue to suffer from poor, unreliable and sometimes non-existent links.

Tanzania’s Ambitious Tax Reform

Parliaments are becoming increasingly assertive in the preparation of regional budgets, tinkering with proposed allocations while in some instances, cancelling some altogether.

Tanzania’s Finance Minister Dr William Mgimwa has launched probably the most ambitious tax reform in the region as he seeks to finance some Tsh11.145 trillion ($6.97 billion) of his Tsh18.2 trillion ($11.38 billion) budget from local sources, both tax and non-tax.

This constitutes 20.2 per cent of the country’s GDP, a material improvement on the previous level of 17.7 per cent. Domestic borrowing of as much as Tsh555 billion ($347 million) is also part of the internally sourced cash.

A major review of the country’s value added tax regime will see the discontinuation of exemptions on textile products and certain services in the tourism sector, with the aim of raising Tsh48.9 billion ($30.5 million).

Also likely to feel the brunt of Dar’s expansionist tax policy are players in the mobile telephone industry.

The country seeks to tax commissions on mobile money transfers, SIM cards and all mobile phone services. Other goods targeted by the taxman are petroleum products, soft drinks, beer, juice, wines, spirits and cigarettes.

Even then, a progressive one per cent reduction in income tax rate to 13 per cent was well received.

Roads, Railways and Ports

On the spending front, Tanzania has kept faith in infrastructure with a total of Tsh747 billion ($467 million) going towards building roads, railways, bridges and ports (air and water).

Kenyans will have to pay more new taxes to finance key infrastructure and social projects, while at the same time cushioning vulnerable groups in an expansionist Ksh1.6 trillion ($18.8 billion) budget.

Consumers, despite assurances to the contrary by Treasury Cabinet Secretary Henry Rotich on Thursday evening, are likely to take a hit from proposed changes to VAT, from which the government expects to raise Ksh10 billion ($118 million).

The aim is to claw back revenues lost in a slew of exemptions over the years. Even then, the full impact of these measures will only be known once the relevant Bills are published.

A new 1.5 per cent duty on imported goods was seen as a raid on the rich and the take from this, expected to be Ksh15 billion ($177 million), has been directly tied to the building of a new standard gauge railway line between Mombasa and Kisumu, a key infrastructure project.

A reintroduced capital gains tax will also affect the affluent.

In an attempt to fulfil the slew of promises made while on the campaign trail early this year, the Uhuru Kenyatta administration, in its first budget, also kept faith with the core constituency of women and youth, handing out a number of concessions to them, alongside other vulnerable groups.

Reading the budget as the first non-MP to do so, Mr Rotich faced an overall fiscal deficit of Ksh329.7 billion ($3.9 billion), which will be funded through Ksh223 billion ($2.63 billion) from foreign borrowing and Ksh106.7 billion ($1.26 billion) in local debt.

The heavy reliance on borrowing is largely the result of a tax collection machine whose performance seems to have hit a plateau, with apparently no new ideas on widening the tax net or increasing the take.

For example, in the third financial quarter ending March 31, the Kenya Revenue Authority had only collected Ksh560 billion ($6.8 billion), which was some Ksh27 billion ($317 million) off the initial government target for the period.

In Uganda, while unveiling a Ush13,169 trillion ($5.031 billion) budget, the finance minister revealed that donor funding of the budget had been whittled down to just 19 per cent of the total resource envelope, some five percentage points below the level predicted in the medium term expenditure framework.

Finance Minister Maria Kiwanuka intends to bridge the resulting gap by turning to “non-traditional financing sources,” such as “limited non-concessional borrowing and contractor-facilitated finance or suppliers’ credit,” as well as external and domestic debt markets.

Citing runaway graft and apparent lack of political will to tackle the vice, donors withdrew 93 per cent of the $289 million initially promised in direct budget support last year. But Ms Kiwanuka, who needs money to scale up investment in the transport, energy and water sectors, now says she will add external borrowing to the raft of new tax measures to maintain momentum.

“In addition to traditional grants and concessional loans, other non-traditional financing sources such as limited non-concessional borrowing, contractor facilitated finance or suppliers’ credit, and the external and domestic debt markets will be judiciously used to finance key infrastructure investments,” Ms Kiwanuka told parliament on Thursday.

She announced a Ush200 increase on the tax on kerosene, doubled tax on spirits to 140 per cent, added Ush30,000 to the cost of third party insurance, an addition Ush200,000 to the cost of registering motor vehicles and Ush70,000 on registration of motorcycles.

A new 10 per cent tax was introduced on mobile money transactions, and VAT will be charged on water for domestic use and wheat and flour. There was also a minimal Ush50 increase to the tax on each litre of petrol and diesel.

New levies were introduced on incoming calls, immigration fees and VAT on cosmetics.

In Kigali, Finance Minister Claver Gatete raised the budget by $158 million to $2.5 billion, which he intends to fund largely through domestic revenues, which will account for a whopping 60.2 per cent of the total budget.

External resources account for only 39.8 per cent.

A number of administrative measures were introduced to plug the loopholes in tax collection. These include the electronic single window — an IT device that eases Customs documentation — as well as the introduction of a system that allows taxpayers to file and pay taxes through mobile transfers.

Taxes on imported construction materials and telecoms equipment were increased. Real estate players protested the tax on construction materials, which they say will slow down growth in the sector as well as spark off price hikes in properties and rent in a country grappling with shortages of planned housing.

 

By: Washington Akumu