Paul Arithi 
PKF position on state of the economy
Economic Performance;
Real Gross Domestic Product (GDP) expanded by 5.6 percent in 2023 compared to a revised growth of 4.9 percent in 2022. The positive growth was notable across most sectors of the economy.
The Agriculture, Forestry and Fishing sector grew by 6.5 per cent in 2023, marking a recovery from the 1.5 per cent contraction recorded in 2022. This recovery was mostly attributed to favourable weather conditions that prevailed through most of the year.
Other key drivers of the growth included Information and Communication (9.3%), Transportation and Storage (6.2%), Financial and Insurance (10.1%), Real Estate (7.3%) and Accommodation and Food service activities (33.6%) sectors. However, the Mining and Quarrying sector recorded a 6.5 per cent contraction, largely attributable to a decline in production of most of the minerals such as titanium and soda ash.
In 2023, agriculture remained the dominant sector, representing 21.8 per cent of the total GDP. Combined, service activities contributed 61.3 per cent of the GDP while industry-related activities comprised 16.9 per cent of the GDP in 2023.
Nominal GDP grew by 12.0 per cent reaching KES 15,108.8 billion in 2023, from KES 13,489.6 billion in 2022.
Kenya’s economy is projected to remain resilient in 2024 mainly supported by a robust services sector, strong performance in agriculture aided by anticipated adequate rainfall and a decline in global commodity prices that is expected to reduce the cost of production
Real Gross Domestic Product (GDP) expanded by 5.6 per cent in 2023 compared to a revised growth of 4.9 per
Kenya’s public debt
As at 31 December 2023, Kenya’s total nominal public and publicly guaranteed debt was KES 11.1 trillion. Domestic and external debt stock accounted for 45% and 55% of total debt respectively. As at end of March 2024 the debt reduced to KES 10.4 trillion with domestic and external debt standing equally at 50%.
The reduction in public debt is mainly attributable to exchange rate fluctuations. As mentioned above, about 50% of Kenya’s debt is held in foreign currency (USD, Euro, Yen, Yuan and Sterling Pound) which exposes the country to financial risk in the event of depreciation of the Kenyan Shilling.
As at 31st May 2024 the Kenya Shilling had appreciated against major global currencies. Kenya’s currency strengthened mainly due to renewed confidence in the financial markets brought about by the part refinancing of the Kenya 2024 $2 billion Eurobond by virtue of a successful pricing of a new 9.75 per cent $1.5 billion Eurobond.
Immediately thereafter the Central Bank of Kenya(CBK) had a very successful issue of the Infrastructure Bonds where the bond was oversubscribed by 411% and the coupon on the successful bids attracted an interest of 18.4607%. Many local investors therefore switched their investment from foreign currency bank deposits to Infrastructure bonds hence releasing and increasing the supply of foreign currency in the market. The bond also attracted interest from foreigners as well.
Inflation rate trends
According to the Kenya National Bureau of Statistics the annual inflation rate as measured by the Consumer Price Index (CPI) was 7.7 per cent in 2023 as was recorded in 2022. The inflation was largely driven by increase in prices of Transport (12.2%); Food and Non-Alcoholic Beverages (9.7%); and Housing, Water, Electricity, Gas and Other Fuels (8.1%).
Interest rates
The Central Bank Rate (CBR) was raised to 10.50 per cent as at June 2023, and 12.50 per cent as at December 2023 compared to 8.75 in December 2022.
This was necessitated by the need to address inflationary pressures occasioned by depreciation of the Kenyan Shilling against major currencies and high global prices during the review period.
As a result, overall interest rates increased during the review period.
The 91-Day Treasury bill interest rate increased to 15.70 per cent in December 2023 from 9.33 per cent in December 2022. The Inter-bank rate rose to 11.65 per cent in December 2023 from 5.39 per cent. Average commercial banks interest rate for loans and advances increased to 14.63 per cent in December 2023 from 12.67 per cent as at December 2022.
Exchange rates;
In the year 2023, the Kenyan Shilling depreciated against major international trading currencies as reflected in the Trade Weighted Index (TWI) which worsened from 123.8 in 2022 to 138.3 in 2023. The Kenyan Shilling depreciated against the Japanese Yen, Swiss Franc, Euro, Sterling pound, US Dollar, UAE Dirham, and Deutsche Mark by 26.3 21.8, 21.8, 19.3, 18.7, and 18.7per cent, respectively.
Likewise, the Kenyan Shilling deteriorated against the Ugandan Shilling, Tanzanian Shilling, and the Rwandan Franc by17.0, 13.7, and 5.9 per cent, respectively. Conversely, the Kenyan Shilling showed improvement against the Egyptian Pound, Pakistan Rupee, and Congolese Franc, strengthening by 25.7, 13.5, and 12.2 per cent, respectively.
As mentioned above in the year 2024 the Kenya Shilling has appreciated against major global currencies. Kenya’s currency strengthened mainly due to renewed confidence in the financial markets brought about by the part refinancing of the Kenya 2024 $2 billion Eurobond by virtue of a successful pricing of a new 9.75 per cent $1.5 billion Eurobond and the successful issue of Infrastructure Bonds.
Many local investors therefore switched their investment from foreign currency bank deposits to Infrastructure bonds hence releasing and increasing the supply of foreign currency in the market. The bond also attracted interest from foreigners as well.
PKF position on Taxation Measures
Time to ensure that the National Tax Policy is implemented
The National Treasury has finally published the National Tax Policy after consideration by the National Assembly. The National Tax Policy is part of the Government’s efforts to enhance predictability and transparency of tax policies. The Policy also provides guidelines to the tax systems and administration reforms.
Some of the policy guidelines include a comprehensive review of tax laws every five years to align with other Government policies and international best practice as well as aligning tax changes to the Medium Term Revenue Strategy. These policy guidelines are intended to improve the predictability of tax rates thus facilitating investment decisions.
We call upon the Government to immediately implement the National Tax Policy with the Finance Bill, 2024 and ensure that the proposed amendments are aligned with the National Tax Policy. To this end, the Government and the National Treasury need to consider some of the proposed amendments that are repugnant to the provisions of the National Tax Policy such as the proposed reduction in the time period of claiming realized foreign exchange losses from five years to three years.
If the National Tax Policy is well implemented, it will provide much certainty to investors as they make investment decisions and thus make Kenya an attractive investment destination.
Ensure ease of technology implementation to ease in tax collection
Recent technological advancements such as the introduction of the Electronic Tax Invoice Management System (ETIMS) and the establishment of a data management and reporting system by the Kenya Revenue Authority (KRA) will enable the Government increase tax collections and have increased visibility of taxpayers details.
The Government should also adopt technology aided data analytics tools to assist in tax compliance monitoring through automated cross-checks of the self-assessment tax liabilities against other data sources.
The Government however should consider rolling out mass public participation before rolling out any new technology to ensure that the public is well educated before the roll out.
This will alleviate challenges of slow uptake of the technology such as those that have been experienced with the ETIMS platform. Further, whilst the proposed amendment by Finance Bill 2024 to enable the KRA to request taxpayers to integrate their tax system with the KRA’s data management and reporting system is a demonstration of technological advancement, the proposed non-compliance penalties of KES 2 million per month are punitive and do not take into consideration the challenges taxpayers may face before integration.
Increased value of various non-taxable benefits and allowable tax deductions on employees a welcome move
The proposed amendments in Finance Bill, 2024 to increase the threshold of various non-taxable benefits to employees is a welcome move as it will cushion employees against the high cost of living and the effects of rising inflation.
These proposals include the increased threshold of non-cash benefits from KES 36,000 per annum to KES 48,000 per annum, the increase in the meal benefit threshold from KES 48,000 per annum to KES 60,000 and the change in per-diem allowance from KES 2,000 per day to 5% of the monthly gross earnings by an employee, provided that the employer has a policy on payment and accounting for the per diem.
Additionally, the proposal to increase the limit on the tax-deductible contributions to a pension scheme by employees to registered pension schemes and provident funds from KES 240,000 per annum to KES 360,000 per annum will also encourage employees to save for retirement in registered pension schemes while at the same time enjoy the tax breaks that are associated with such contributions.
Further to the above, the proposals to have contributions by employees to the Affordable Housing Levy, Social Health Insurance Fund and Post-Retirement Medical Fund deductible for tax purposes on the employee are also a welcome move as they will cushion employees from the impact of such contributions.
Punitive motor vehicle tax
The proposed introduction of motor vehicle tax at the rate of 2.5%. on the value of the motor vehicle and payable at the time of issuance of the insurance cover is punitive and will have adverse effects on various sectors of the economy.
At the very start, the tax can be construed as a wealth tax since it is not proposed to be charged on any income but on the value of the motor vehicle.
This tax is against the tenets of Section 3 of the Income Tax Act of Kenya, which subjects Income Tax on the incomes of a person which is accrued or derived from Kenya. The tax will be an additional burden to taxpayers who also have to contend with a myriad of taxes and levies at the time of purchasing and fuelling the motor vehicle. The tax will also create an additional burden to taxpayers who will have to value the motor vehicles on an annual basis, which comes at an additional cost.
The tax has the potential of increasing the cost of living as well as that of business in Kenya through multiplier effect as it impacts on various sectors of the economy. These include an increase in the cost of transportation of goods and passengers, increase in the cost of production due to the increased cost of transportation of raw materials among others.
We implore on the Government and the National Assembly to consider dropping this punitive proposal to protect the common mwananchi from the high cost of living that would arise from the ripple effects of the tax.
Certain Excise Duty changes likely to hurt the economy and increase the cost of basic items
The Finance Bill, 2024 proposes to introduce Excise Duty at the rate of 25% on vegetable oils including palm oil, sunflower seed oil, cotton seed oil among others. Additionally, the Finance Bill, 2024 also proposes to repeal the provision that allows manufacturers to offset any excise duty that has been incurred in the production process against the Excise Duty payable on finished goods.
Resultantly, Excise Duty will be levied on both raw materials and finished goods, which will result in a price increase of various excisable goods including bottled water, juices and vegetable oil as proposed by Finance Bill 2024.
The above Excise Duty changes will lead to an upsurge in the cost of living and will make access to basic commodities like vegetable oil out of reach of many ordinary Kenyans.
We call on the Government and the National Assembly to consider dropping these Excise Duty changes and cushion Kenyans from a further increase in the cost of living.
Call to drop certain proposed VAT changes:
Some VAT changes proposed in Finance Bill, 2024 have the potential of negating the strides the country has made towards financial inclusion and accessibility.The proposals to introduce VAT on various financial services including issuance of credit and debit cards, foreign exchange transactions, cheque handling, processing, clearing and settlement among others as Proposed by Finance Bill, 2024 will increase the cost financial services to consumers and thereby locking them out of reach of many Kenyans.
The proposals to introduce VAT on services related to the insurance business including management and related insurance consultancy services, actuarial services and services of insurance assessors and loss adjusters will result in a hike in the cost of insurance.
Resultantly, insurance companies will shift the burden of the increased cost to the final consumer, which will likely reduce the number of insurance covers. This will be a blow to the steps the country has taken towards an increase in the level of insurance penetration.
Additionally, the proposed amendments to introduce VAT on the supply of ordinary bread will inflate the cost of bread, which is a basic food item in many households.
The proposed change the VAT status of agricultural pest control products and their inputs from zero-rated to exempt the same should also be reconsidered. The amendment will lead to an increase in the prices of agricultural products making them expensive to Kenyans.
Reconsider the proposed introduction of an environmental tax
The proposed introduction of an environmental tax in the form of an Eco Levy to be levied on 46 items and ranging from KES 98 per unit to KES 1,800 per unit should be shelved.
The Eco Levy is to be paid on either local manufacturers or importers of goods including rubber tyres, diapers, batteries, plastic packaging materials, smartphones among others. The Finance Bill, 2024 has provided that the rationale for the Eco Levy is to ensure that manufacturers and importers of the specified goods pay for the impact the goods have on the environment.
Whilst the Eco Levy is being levied as an environment tax, we note that the tax is discriminative as it does not cover all items that have a negative impact on the environment.
That notwithstanding, the tax has been structured as a levy without a commensurate enabling framework to ensure that the amounts collected are ring-fenced in a specific environmental fund and channelled towards projects that mitigate on the environmental impact.
