Tax collections in July posted their slowest growth in more than a decade, excluding the Covid-19 pandemic, reflecting the effects of business disruptions in the wake of deadly Gen Z protests as the Treasury Department increased its reliance on costly overdrafts.
Data released by Treasury Secretary John Mbadi showed that tax collection in the first month of the financial year rose by 2.87 percent to Sh159.51 billion compared to the same period last year.
The sluggish performance in July — compared with 18.73% growth in the same month last year — prompted the Treasury to resort to expensive overdrafts to avoid defaulting on some domestic debt payments.
Private sector activity fell in July, according to a monthly business survey showing the effects of anti-government protests, which have hurt confidence in the economy and disrupted businesses.
The Stanbic Bank Kenya Purchasing Managers’ Index (PMI) fell to 43.1 from 47.2 in June. Readings below 50.0 indicate a contraction in activity, which impacts on lower sales tax collections.
The cash crunch during the month saw the Treasury resort to emergency loan facilities from the Central Bank of Kenya, drawing on about Sh22.6 billion to repay domestic debt due in late July.
The maximum treasury overdraft is limited to about Sh97 billion, or five percent of the latest audited revenue.
The state uses these facilities to meet priority cash liquidity requests when it faces cash shortages, including salaries and debt repayment.
“This (the withdrawal of Sh22.6 billion) was primarily due to the settlement of treasury bills worth Sh26.1 billion on July 22,” Treasury Principal Secretary Chris Kiptoo said on July 30. “As of July 29, we have utilised Sh60.5 billion (of the Sh97 billion cap).”
Businesses complained in July of a general drain on cash circulation in the economy, with demand for goods and services falling to levels not seen since the country emerged from the economic hardships caused by Covid-19 in 2020 and 2021.
Analysis of Treasury data over the past decade suggests that taxes on corporate and individual profits, as well as consumption of goods and services, suffered the worst start to a fiscal year in modern history.
Analysis by Daily businessA study by HSBC in the US, which covered data dating back to 2014, showed that growth in tax collections following the business disruptions caused by the Gen Z protests was the weakest.
The exception is July 2020 at the height of the Covid-19 lockdown when tax collections at the Kenya Revenue Authority fell 12.02% year-on-year to Sh94.54 billion amid a dusk-to-dawn curfew and a raft of tax exemptions at the time. Thousands of young protesters took to the streets of Kenya’s major cities in June to oppose plans to impose tax hikes in a now-delayed proposed law or Finance Bill 2024.
Youth-led protests prompted President Ruto to drop the 2024 Finance Bill and form a broad-based government that included five members of the main opposition party, the Orange Democratic Movement.
The protests, which authorities have claimed were infiltrated by criminal elements, have paralyzed business in major urban centres, with traders fearing a repeat of the retail looting that peaked on June 25.
“Protests in Kenya disrupted the private sector in July, leading to a marked deterioration in business conditions,” analysts at Stanbic Bank and US analytics firm S&P Global said in a Purchasing Managers’ Index report earlier this month.
“Political instability has made customers reluctant to commit to new orders, while in some cases the protests themselves have blocked access to businesses and prevented them from opening. These factors have caused sharp declines in both production and new orders, while there has been evidence of delays in the completion of outstanding work and the receipt of purchased items from suppliers.”
The results of the Stanbic Kenya Purchasing Managers’ Index (PMI) survey, which was based on feedback from about 400 respondents, indicate that security concerns following the protests weighed most heavily on activities in the agriculture sector, with wholesale and retail trade, construction and services also affected in July.
The collapse of the Finance Bill 2024 has forced the Treasury to cut tax collection targets for the full financial period ending June 2025 by Sh270.15 billion to Sh2.48 trillion.
However, the projected savings are not enough to cover the estimated budget gap, prompting the Treasury to raise its borrowing target by Sh172.19 billion for the year ending June 2025 to Sh1 trillion.
To plug the estimated Sh344.3 billion gap left by the new and higher tax measures, the government cut the budget by Sh145 billion, while raising the borrowing target by Sh172.19 billion to Sh1 trillion for the year ending June 2025.
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