Tax collections in July grew at the slowest pace in over a decade, excluding the Covid-19 pandemic period, signifying the effects of business disruptions following the deadly Gen Z protests, as the Treasury increased reliance on costly overdrafts.
Data released by Treasury Cabinet Secretary John Mbadi shows that tax collection in the first month of the fiscal year grew 2.87 percent to Sh159.51 billion compared to the same period last year.
The sluggish performance in July– compared with an 18.73 percent growth in the same month a year ago– prompted the Treasury to turn to expensive overdrafts to avoid defaulting on some of the domestic debt repayments.
The private sector activity dropped in July, according to a monthly business survey that illustrated the effects of the anti-government protests, which hurt confidence in the economy and disrupted business.
The Stanbic Bank Kenya Purchasing Managers’ Index (PMI) fell to 43.1 from 47.2 in June. Readings below 50.0 signal a contraction in activity, which has effects on tax collections on reduced sales.
The cash crunch during the month saw the Treasury resort to an emergency loan facility at the Central Bank of Kenya (CBK), tapping some Sh22.6 billion to pay off domestic debts which were due late July.
The Treasury’s overdraft facility is capped at about Sh97 billion limit, or the equivalent of five percent of the last audited revenues.
The State uses the facility to offset priority cash demands when it faces a cash shortage, including salaries and debt repayments.
“That [withdrawal of Sh22.6 billion] was majorly due to the settlement of Treasury bonds of Sh26.1 billion on July 22,” Treasury principal secretary Chris Kiptoo said on July 30. “As of July 29, we had utilised Sh60.5 billion [of the Sh97 billion limit].”
Businesses in July complained of an overall depletion of cash circulation in the economy, with demand for goods and services falling to levels not seen since the country emerged from Covid-19 economic hardships in 2020 and 2021.
Taxes on earnings by companies and individuals as well as consumption of goods and services suffered the most stuttering start to a financial year in recent history, an analysis of exchequer data over the last decade suggests.
The analysis by the Business Daily, which covered data dating back to 2014, shows the growth in tax collections in the wake of Gen Z protests-induced business disruptions was the softest.
The exception is July 2020 at the peak of Covid-19 shutdown when the KRA tax collections fell 12.02 percent year-on-year to Sh94.54 billion amid a dusk-to-dawn curfew and a raft of tax reliefs at the time. Thousands of youthful demonstrators poured onto the streets of Kenya’s major towns in June to oppose plans to impose tax increases in a now-shelved proposed law or Finance Bill 2024.
The youth-led protests prompted President Ruto to drop the Finance Bill 2024 and form a broad-based government that has included five members of the main opposition party, ODM.
The protests, which authorities alleged were infiltrated by criminal elements, paralysed businesses in major urban centres, with traders fearing a repeat of looting of retail stores witnessed at the peak on June 25.
“Protests in Kenya caused disruption to the private sector in July, leading to a marked deterioration in business conditions,” analysts at Stanbic Bank and American analytics firm, S&P Global, said in their PMI report earlier this month.
“Political instability led to a reluctance among customers to commit to new orders, while the protests themselves in some cases blocked access to businesses and prevented them from opening. These factors caused steep reductions in both output and new orders, while there was evidence of delays completing outstanding business and receiving purchased items from suppliers.”
The findings of the Stanbic Kenya PMI survey, based on feedback from about 400 panelists, suggested that the security fears in the wake of the protests hit activities in agriculture hardest, with wholesale and retail, construction, and services also being pounded in July.
The collapse of the Finance Bill 2024 has forced the Treasury to cut tax collection targets for the full-year period ending June 2025 by Sh270.15 billion to Sh2.48 trillion.
The projected savings are, however, not enough to cover the estimated budget hole, prompting the Treasury to raise the target for borrowing by Sh172.19 billion for the year ending June 2025 to Sh1 trillion.
To fill the estimated Sh344.3 billion hole left on shelving of the new and higher tax measures, the government cut the budget by Sh145 billion, while raising the borrowing goal by Sh172.19 billion to Sh1 trillion for the year ending June 2025.
