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Vol 64 No 13

Published 22nd June 2023

The new age of austerity

Higher taxes will finance any extra spending as the region's finance ministers rein in borrowing and try to cut back the public sector

Copyright © Africa Confidential 2023

The headline figures that government spending in Uganda, Tanzania, Kenya and Rwanda, is set to increase by 10%, 7%, 6.5% and 5.65% respectively, suggested that little had changed when East African finance ministers unveiled their 2023/24 budget plans last week.

Those increases, combined with forecast economic growth ranging between 5.2% for Tanzania to Rwanda's 6.2%, do not point to a diet of budgetary austerity. The cost-of-living crisis is still hurting, particularly in the form of high fuel and staple food prices, but giveaways were conspicuously absent. Austerity and fiscal consolidation are the main priorities.

Unlike in previous years, new spending will be paid for by tax increases rather than borrowing. The new levies will fall not on the wealthy but, predominantly, on middle-income earners.

Economists are warning that the fiscal measures proposed in the 2023/24 budgets will further raise the cost of living, while business leaders say that tax increases will result in capital flight by investors, and result in job losses.

The traditional coordinated mid-June budget announcements agreed by the East African Community still survive – although Burundi and South Sudan are exempted, and Congo-Kinshasa has only just joined the bloc – but ministers across the region had gradually revealed most of the details of their tax and spending plans over the last couple of months.

In Kenya, President William Ruto argues that he was handed a dismal set of public accounts by predecessor Uhuru Kenyatta, marked by expensive infrastructure projects and a steeply rising debt burden. That is true, although as Kenyatta's Deputy President for ten years, Ruto can hardly be absolved of responsibility.

His first budget as president increases the annual spending budget by 300 billion Kenyan shillings (US$2.1 million) to KSh3.6 trillion ($25.7bn) for 2023/24, but the major changes lie in the raft of new or increased taxes expected to generate $2.1bn in revenue, which have already been outlined and adopted in a separate finance bill, and the scrapping – to the approval of the IMF – of the fuel subsidies introduced last year to help cushion the cost-of-living crisis (AC Vol 63 No 13, Spiralling prices dominate budgets).

Having struggled to meet debt repayments earlier this year – delaying wage payments for thousands of public servants – Ruto's chief economic advisor David Ndii has spent several months preparing Kenyans for new taxes and austerity.

External debt service is projected to increase to KSh475.6bn from KSh242.1bn, mainly reflecting redemption of the $2bn Eurobond. That means two years of austerity.

'We have to have some short-term sacrifices for us to achieve the long-term. We have to sacrifice for the future,' Finance Minister Njuguna Ndung'u told Citizen TV before giving his budget speech in the National Assembly.

Ndung'u, whose portfolio also includes Treasury and Planning, announced proposals to expand consumption taxes intended to raise revenue for the payment of the country's ballooning debt, mainly exacerbated by the depreciating shilling, consequently increasing the size of the public debt stock that is largely denominated in foreign currency.

The breakdown of how the budget will be paid spells out the scale of the belt-tightening, 79.3% of Kenya's budget will be financed through internal revenues, 15.9% from domestic financing, 1.1% from external grants, with foreign loans making up 3.6%. Last year, 30% came from external sources.

Those include doubling VAT on fuel to 16%, a 1.5% housing levy on workers' gross monthly salaries, and a turnover tax on small businesses, the latter of which is a blow to the 'hustler' narrative of Ruto's presidential campaign last year which promised tax cuts for small firms and sole traders (Dispatches 17/5/23, Ruto's budget hits his hustler supporters & 7/6/23, Ruto's housing levy is triggering mass dissent).

The Hustler Fund, the small business loan initiative that was once the centrepiece of Ruto's campaign, was allocated a meagre additional KSh10bn ($70m).

Opposition leader Raila Odinga's Azimio la Umoja coalition has described it as a 'punitive tax regime that seeks to impoverish Kenyans'. His members of parliament staged a walkout during Ndung'u's budget reading on 15 June.

Maxwell Okello, the chief executive of the American Chamber of Commerce, and others have also warned that Kenya, the main business hub in the region, is becoming less attractive to businesses and expatriates, many of whom have already moved to Rwanda, Tanzania and South Africa.

The government is claiming that the increases will hit the wealthy, pointing to income tax increases for all PAYE employers earning over $3,500 per year. In truth, the loopholes that the genuinely wealthy use to avoid tax, particularly through land, property and other capital gains, remain in place and the tax system will continue to hurt middle-income Kenyans disproportionately. So too, will the higher contributions for the national health and social security programmes.

Foreign businesses have been particularly critical of the government's new digital content monetisation tax – which has now been reduced to 5% from the 15% initially proposed – saying it will put undue burden on digital service firms, which are mostly foreign.

If new infrastructure spending is out in Kenya, neighbouring Uganda's USh52.74trn budget ($13.9bn) is up from the previous fiscal year's USh48.13trn ($12.7bn) and is dominated by Finance Minister Matia Kasaija's plan for 18 infrastructure projects ranging from new roads to industrial parks with a total value of $3.34bn.

Debt costs up
While Kenya's debt servicing difficulties have been well documented, $4.5bn of Uganda's budget – equivalent to one third – has been proposed to service the country's debt, up from $3.9bn. Interest payments are set to increase fourfold from $375m to $1.6m in 2023/24, a worrying picture which local economists say is likely to get worse since the bulk of the new infrastructure projects will be funded by borrowing and be dollar denominated.

With the cost of commercial dollar borrowing now over 8% following a series of interest rate rises by the United States Federal Reserve, economists say the government's plans risk creating unsustainable debt.

Analysts have also warned that the treasury's estimated receipts of $734.8m in foreign grants and loans – 21% of the proposed budget – are optimistic given the donor anger and threats of sanctions following President Yoweri Museveni's recent signing of new anti-homosexuality legislation.

Tanzanian Minister of Finance and Planning Mwigulu Nchemba has taken a similar approach to Nairobi and says that over two-thirds of his spending plan will be sourced domestically, targeting a 15% increase in the tax take. However, that is not as ambitious as it sounds since the 2022/23 tax revenue was itself 11% up on the previous year. 'The 2023/24 tax revenue budget whilst ambitious, does seem achievable,' reckons audit giant PwC.

At 4.13trn Tanzanian shillings ($1.78bn), Arusha's external debt repayments including principal payments and interest, are much lower than their neighbours. Even so, they amount to almost four times as much as the $491m which has been allocated to provide free primary and secondary school education and to subsidise university student loans.

Nchemba's budget of TSh44.38trn, up 7% from TSh41.48trn in 2022/23 will prioritise spending on railways, including $478m on its own standard gauge railway, Air Tanzania, electricity and natural gas production.

Rwanda is in a relatively stronger position than its neighbours in terms of borrowing: 63% of its budget is funded through domestic revenues, while external loans will constitute 24% and external grants 13%.

Even so, Finance Minister Uzziel Ndagijimana says that the budget, 'reflects the government's economic resilience efforts in the face of global shocks' and would prioritise fiscal consolidation and addressing inflation.

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