Hard times lie ahead for EA citizens as states raise budgets to spur growth

East African governments this week presented their most expensive budgets yet, seeking to reinvigorate their economies, finance expanded government operations and repay ballooning debts.

Economists are warning the region’s citizens to brace for harder times as the fiscal measures proposed in the 2023/24 budgets are wont to further raise the cost of living, cause investor flight in some countries, and result in job losses.

Kenya, the region’s biggest economy, has proposed a $26.3 billion spending plan, while Tanzania has a $19.2 billion budget. The Democratic Repulic of Congo is planning to spend $16 billion, Uganda $13.9 billion, Rwanda $4.7 billion, Burundi $1.5 billion and South Sudan $1.4 billion.

The region’s taxpayers are facing more levies, with Kenya introducing measures to raid payslips of the working class to finance election promises President William Ruto made to his “hustlers,” to shore up forex reserves and spur growth.

In Uganda, the Museveni administration is seeking to borrow to finance some 18 big-ticket infrastructure projects while promising more on household incomes through the Ush1 trillion ($271.9 million) Parish Development Model, a programme the government launched in February 2022 to bring 39 percent of poor Ugandan households into the money economy.

Tanzania’s Samia Suluhu ’s regime has sought more cash to finance an economy shaking out of slumber, with Finance Minister Mwigulu Ncheba proposing to boost domestic revenue collection through a raft of measures while reducing domestic and external borrowing.

Reduced incomes

In Burundi, Finance Minister Audace Niyonzima presented a $1.4 billion budget against a struggling economy where spending will rise 65 percent and the budget deficit is expected to rise to BF728.9 billion ($258.3 million), from BF197.4 billion ($69.9 million) in the ending financial year.

South Sudan and DRC are yet to read their budgets but the estimates have already been made public.

In Kenya, Prof Njuguna Ndung’u, the Treasury Cabinet Secretary, on Thursday presented a Ksh3.68 trillion ($26.3 billion) budget whose implementation will involve raiding the wallets of salaried workers, increasing fuel costs and heavy borrowing.

Salaried employees will part with more to finance the National Health Insurance Fund (2.7 percent) and pay a 1.5 percent of gross salary to support the affordable housing programme in addition to a 35 percent income tax.

Prof Ndung’u proposed an amendment to the Income Tax Act to adjust Pay as Your Earn by introducing two additional tax bands: 32.5 percent for individuals earning monthly incomes between Ksh500,000-Ksh800,000 (($3,570- $5,712), and 35 percent for those earning more than Ksh800,000.

He said the two new bands will affect 26,676 employees, who constitute 0.8 percent of the employed workers.

“It remains to be seen how much additional tax revenue will be generated from the two new tax bands and whether the government will achieve its objective in making the tax system more progressive,” said Dr Benson Okundi, a partner at audit firm PwC.

Prof Ndung’u proposed to allocate Ksh35.3 billion ($252.3 million) to Dr Ruto’s pet project, the housing programme, to reduce mushrooming of slums and create more jobs for the youth.

He proposed to amend the Employment Act, 2007 to introduce a housing levy payable by employers and employees at 1.5 percent of an employee’s gross monthly.

Yet the minister hinted at a possible retrenchment of lower-cadre staff in state corporations. He said the State Corporations Advisory Committee will start “rationalising staff establishment to keep them lean.”

Kenya proposes an increase in VAT of petroleum products from eight percent to 16 percent; zero rating of liquified petroleum gas from VAT and increase of turnover tax from one percent to three percent, with the upper threshold lowered to 25 percent.

The doubling of VAT on fuel will see the cost-of-living skyrocket as fuel has a ripple effect on transport, infrastructure, energy, agriculture and food and housing.

PwC, in its budget review, observed that an increase on VAT on fuel will impact inflation.

“The inflation rate in Kenya rose to eight percent in May 2023, from a ten-month low of 7.9 percent in the prior month. Increase in VAT of petroleum products is likely to have far-reaching consequences,” PwC said.

Prof Ndung’u indicated that the National Assembly will formulate a county revenue bill to provide governance around revenue generation for counties.

The government is seeking to raise Ksh2.57 trillion ($18.4 billion) – the highest amount in its history – from ordinary revenue, amid opposition by lobbies and the opposition in parliament.

Investor concerns

Foreign businesses, through lobbies, have expressed their concerns. In a letter to the National Assembly, Maxwell Okello, CEO of the American Chamber of Commerce, asked legislators to remove several proposals deemed detrimental to business.

Foreign businesses have also taken issue with the digital content monetisation tax – which has now been reduced to five percent from the proposed 15 percent – saying it will put undue burden on digital service firms, which are mostly foreign multinationals.

“The additional administrative requirements and possible additional tax costs may discourage the use of content creators for advertisement and other digital campaigns and kill this budding industry in Kenya,” Okello said.

The proposal to raise income tax for those earning above Ksh500,000 ($3,575) may also discourage foreign investors and expatriates from working in Kenya due to the high taxes.

“We will lose business to other countries that position themselves as global business and lifestyle destinations. The founders of businesses and expatriates have the option of setting up in other markets such as Rwanda, Tanzania and South Africa, and those currently in Kenya may relocate to these destinations,” he said.

A top executive in a regional petroleum company who asked not to be named told The EastAfrican the rise in VAT on petroleum products will depress demand, impacting the entire economy.

“In the end it’s a zero-sum game,” he said.

“If demand reduces, the private sector will have to take measures to reduce their overhead costs, including by reducing their workforce. On the other hand, if revenue is not met, government will take austerity measures, and if the state doesn’t spend as it should, it will depress the entire economy.”

However, Prof Ndung’u said the move is meant to enable oil companies “recover the VAT credits that they have been carrying forward over the years.”

On the flip side, foreign businesses in Kenya will now pay a lower corporate income tax of 30 percent – like local firms – down from 37.5 percent, to eliminate ‘discrimination’ of non-resident businesses.

Uganda austerity measures

Uganda’s Ush52.7 trillion ($13.9 billion) is dedicated to poor Ugandans but does not address the high cost of living. Instead, Uganda will borrow more to finance infrastructure.

Finance Minister Matia Kasaija proposed austerity measures, including a freeze on new administrative units, domestic borrowing and rationalisation of agencies to save the government Ush1 trillion ($271.9million) annually.

The decision to look for more credit to fund 18 new infrastructure projects is raising fears of disrupting the country’s debt management, amid risks of aggressive behaviour by local lenders and the consequences of shor-term loans.

The 18 projects are valued at $3.344 billion and are scattered across transport, energy, agricultural, education and ICT sectors.

Uganda borrowed $1.26 billion in the 2021/22 financial year to finance nine projects in those sectors, according to the latest government report.

Some of the new projects are industrial parks, which require a $173.8 million loan, expected from the China Exim Bank; and an Industrial Transformation and Employment Project that bears a $150 million loan from the World Bank.

The Greater Kampala Metropolitan Area Project requires a $518 million loan expected from the World Bank, while the Climate Smart Agriculture Project also bears a $325 million World Bank loan request. In addition, upgrade of Kitgum-Kidepo road carries a loan financing burden of $117.7 million expected from Standard Chartered Bank.

Uganda’s overall public debt portfolio increased from Ush73.5 trillion ($19.6 billion) in June 2022 to Ush86 trillion ($22.8 billion) by end of March 2023, government data shows.

Its annual debt servicing bill is projected to expand from $500 million in 2022/23 to around $1 billion by close of 2024/25, with a debt servicing costs to revenue ratio increase from 25 percent in 2022/23 to 30 percent in 2024/25, according to Bank of Uganda (BoU) data. The debt servicing costs to GDP ratio is forecast to rise from 17 percent to 22 percent in the period.

“We are still examining the viability of all the selected projects together with different lenders but we are confident that all of them will receive funding in the next financial year,” said Patrick Ocailap, deputy secretary to the Treasury at Uganda’s Finance Ministry.

“We also expect debt servicing to GDP ratio to remain at less than 50 percent after absorption of the new projects in government’s infrastructure portfolio in line with strong economic growth patterns.”

Uganda’s top borrowing priority lies with concessional loans for certain projects in the education and health sectors, while commercial loans will be used for a few high-yielding projects, the Ministry of Finance said.

Massive government borrowing is blamed for aggressive investor behaviour in local debt markets and lukewarm short-term credit ratings.

“The government’s latest move appears very risky in the financial markets. Dollar borrowing is very costly today,” argued Allan Lwetabe, director for investment operations at the Deposit Protection Fund of Uganda.

A commercial dollar-denominated loan would cost eight percent per annum over a five-year period. It cost two percent per annum three years ago.

“Borrowing so much in US dollars would also require matching loan repayments with dollar supply flows anchored on export earnings from coffee, gold, tea and fish among others,” Lwetabe told The EastAfrican.

Uganda will need to manage the two issues, as it may require more dollars than the local market has.

Dar plans

Tanzania’s Tsh44.39 trillion ($19.13 billion) budget tabled by Finance Minister Mwigulu Nchemba is meant to boost domestic revenue collection through a raft of measures while reducing domestic and external borrowing.

Projected domestic revenue has been pegged at Tsh31.38 trillion ($13.52 billion), an increase of 12 percent from the 2022/2023 target of Tsh28.02 trillion ($12.07 billion). It will make up 70.7 percent of the total budget and includes Tsh26.73 trillion ($11.52 billion) from tax collection as new levies, which appeared to target middle-income earners , take effect.

Just Tsh7.57 trillion ($3.26 billion) is expected from external sources, including grants and concessional loans (Tsh5.47 trillion, $2.36 billion) and non-concessional loans (Tsh2.1 trillion, $905.17 million), according to Nchemba.

Concessional borrowing will provide Tsh2.22 trillion ($956.9 million) for key projects compared with Tsh1.65 trillion ($711.2 million) in 2022/2023, while external commercial loans will drop by 30.8 percent from Tsh3 trillion ($1.29 billion) to Tsh2.1 trillion ($905.17 million).

The government expects to borrow Tsh5.44 trillion ($2.34 billion) from the domestic market. Maturing government paper is projected to yield Tsh3.54 trillion ($1.52 billion) while the remaining Tsh1.9 trillion ($818.56 million) will be canvassed from locals to help finance development projects.

Tanzania’s private sector is set to be fully incorporated into this fund-raising drive under a new public-private partnership law passed by parliament on June 13.

Some Tsh6.3 trillion ($2.71 billion) will be spent on servicing national debt which, by April 2023, stood at Tsh79.1 trillion ($34.09 billion), up 13.9 percent from Tsh69.44 trillion ($29.93 billion) in April 2022.

External debt stood at Tsh51.16 trillion ($22.05 billion) against a domestic debt of Tsh27.94 trillion ($12.04 billion), with concessional loans standing at Tsh37.69 trillion ($16.24 billion).

At least Tsh4.13 trillion ($1.78 billion) will go to external debt repayments including principal payments and interest. Nchemba said the concessional loans component in the new budget has been increased by 22.8 percent and non-concessional loans cut down by 14.4 percent.

The government’s spending plan also includes Tsh1.14 trillion ($491.37 million) to cover government subsidies in education (free primary/secondary school education and higher education student loans), Tsh1.5 trillion ($646.55 million) to complete the Julius Nyerere Hydro Power Project and Tsh1.11 trillion ($478.45 million) to the standard gauge railway project.

Other priority areas will include Air Tanzania revival, developing a special economic zone at the coastal town of Bagamoyo, and developing a Rare Skills programme aimed at increasing youth’s capacity for self- employment.

In Rwanda, Finance Minister Uzziel Ndagijimana proposed increased spending by six percent to Rwf5.03 trillion ($4.4 billion), from Rwf4.7 trillion ($4.1 billion) in 2022/23.

The government plans to finance 63 percent of its budget with domestic revenues while external loans would constitute 24 percent and external grants 13 percent.

“The budget reflects the government’s economic resilience efforts in the face of global shocks.

The government will continue to prioritise fiscal consolidation, ease inflation and invest in agriculture, scale up social protection coverage; improve the quality of education, create employment opportunities and support micro, small, medium and large enterprises affected by Covid-19 through the enhanced Economic Recovery Fund and Manufacture and Build to Recover Programme,” Dr Ndagijimana said.

Rwanda announced a 10 percent increase in customs duty on imported construction materials, including metal tubes, doors, windows, and their frames. Wheelbarrows, plastic bags, and cloth bags will also face a 35 percent import duty.

Import duty for second-hand clothes will remain at $2.5 per kilogramme, while second-hand shoes will be taxed at $5 per kilo. Under the EAC Customs act, import duty on second-hand clothes and shoes is $0.4 per kilogramme.

The government will allocate Rwf2.8 trillion ($24.7 billion -- 55.9 per cent of the budget) to the Economic Transformation Pillar.

These resources will scale up agricultural productivity, create jobs, support private sector development and strengthen climate change adaptation and mitigation measures.

It will also increase access to electricity and clean water, support urbanisation and settlement, improve the national road network, scale up the adoption of ICT, and implement agriculture de-risking and financing facilities.

Under the Social Transformation Pillar, the government will allocate Rwf1.5 trillion ($1.3 billion -- 30.4 per cent of the budget).

“Is government borrowing to invest or consume? And what is the actual return on investments on those projects?” pondered Paul Corti Lakuma, a senior research fellow at the Economic Policy Research Centre based at Makerere University.

On stays of application of import duty rates per the East African Communty Common External Tariff. Prof Ndung’u said it will apply for one year on rice (35 percent), imported iron and steel products (35 percent), vegetable products (35 percent), baby diapers (35 percent), leather and footwear products (35 percent), paper and paper products (35 percent).

It will also apply to timber (plywood and particleboard $120/MT – $200/MT), furniture (45 percent), plastic and rubber (35 percent), smartphones (25 percent), and billets (10 percent).

“Interestingly, one of the reasons for the introduction of a four-band EAC CET (version 2022) was to minimise the request for stays by partner states, but it seems this trend persists,” PwC observed.