William Ruto hit by perfect economic storm

The sprawling Gikomba Market in Nairobi. Consumers are spending less due to rising prices and declining incomes. [Edward Kiplimo, Standard]

Kenya is facing a perfect storm of economic challenges. The country’s economy is slowing down, the Kenya Revenue Authority (KRA) is struggling to meet its revenue targets, and the private sector is freezing hiring and cutting jobs.

The economy’s slowdown is evident in the contraction of key sectors, such as construction and mining. This has led to a decrease in job opportunities and a decline in consumer spending.

KRA, on the other hand, is facing difficulties in collecting taxes due to low tax morale and high unemployment. This has made it difficult for the government to fund its ambitious development plans.

The private sector is also feeling the pinch. Businesses are struggling to cope with weak demand and rising costs.

As a result, they are freezing hiring and even laying off workers. This further exacerbates the unemployment crisis and contributes to the decline in consumer spending.  

Analysts warn that these challenges are interconnected and are likely to hurt each other. 

According to independent economist Ian Njoroge, “This is a perfect storm that requires a fresh rethink by the Treasury.” 

The Slowing Economy

He opines the government needs to take urgent action to address these challenges. This includes implementing policies to boost economic growth, improve tax morale, and support the private sector.

Analysts warn that failure to do so could have serious consequences for the Kenyan economy.  To be sure, the Kenyan economy has been experiencing a slowdown in recent months. This is reflected in the contraction of key sectors, such as construction and mining.

The construction sector, which is often seen as a barometer of the overall economy, contracted by 2.9 per cent in the second quarter of 2024. This is a significant decline from the growth of 2.7 per cent in the same quarter of 2023.

The mining and quarrying sector has also experienced a contraction, declining by 2.7 per cent. This is a setback for the government’s efforts to diversify the economy and reduce its reliance on agriculture.

While some sectors, such as agriculture, forestry, and fishing, as well as wholesale and retail, continued to show growth, their contribution to the overall economy was not enough to offset the declines in other sectors.

The slowdown in the economy is a major blow to President William Ruto’s administration, which has made job creation a key priority.

The slowdown in the economy poses a considerable challenge for President Ruto following the massive protests over the cost of living crisis and new taxes.

The younger generation, known as Generation Z, has been particularly vocal in demanding economic opportunities and improved living standards.

KRA’s Revenue Woes

The Kenya Revenue Authority (KRA) is facing significant challenges in meeting its revenue targets. This is due to a combination of low tax morale and high unemployment. Low tax morale refers to a widespread lack of confidence among taxpayers, which leads to diminished compliance. High unemployment, on the other hand, makes it difficult for individuals to meet their tax obligations.

The KRA has been struggling to collect taxes despite implementing various strategies to widen its tax base and enhance compliance. The Ruto administration has underscored the necessity for the KRA to improve its operations.

In the fiscal year 2025-26 and the medium-term budget, the government plans to adopt a fiscal consolidation strategy aimed at curbing the growth of public debt while promoting economic growth.

This strategy will focus on improving domestic revenue mobilisation and rationalising expenditures to protect priority government programs and social spending. To enhance revenue mobilisation, the government will implement a series of tax policy and administrative reforms.

These include strengthening tax administration to broaden the tax base, minimising tax expenditures, leveraging technology to modernise tax processes, closing revenue loopholes, and enhancing the efficiency of the tax system.

Despite an 11.1 per cent increase in overall revenue to Sh2.407 trillion, KRA fell short of its target, raising concerns among policymakers and industry stakeholders about the factors behind this underperformance.

KRA aimed to collect Sh2.768 trillion by the end of the financial year 2023-2024, but this was revised downward to Sh2.5 trillion, meaning it missed both targets.

The Treasury has set even higher goals for the KRA, creating additional pressure on the agency at a time when businesses are reporting worsening conditions.

President Ruto has publicly expressed frustration over KRA’s failure to meet these targets, urging the agency to combat corruption and leverage technology to enhance collections.

His administration has prioritised broadening the tax base and increasing revenue to fulfil commitments for the upcoming financial year.

Treasury Cabinet Secretary John Mbadi also recently urged KRA to adopt innovative and technologically advanced strategies to bolster revenue collection.

KRA recently faced renewed scrutiny after Auditor General Nancy Gathungu disclosed significant discrepancies in tax revenue collection, with outstanding refund claims amounting to hundreds of billions, exposing potential losses for the government. 

In her critical audit report, the Auditor General accused KRA of failing to collect hundreds of billions in tax revenue, depriving the government of essential funds. The report indicated that KRA under-collected income tax revenue by Sh147 billion in the 2022-2023 fiscal year. 

The Auditor General’s findings revealed that 1,486 taxpayers reported a gross turnover of Sh2.54 trillion under their VAT obligations but only Sh2.05 trillion under income tax, resulting in an under-declaration of Sh490 billion. 

“The under-declared turnover of Sh490 billion under the income tax obligation would have generated a corporation tax of Sh147 billion, which the Authority failed to collect,” the report stated.  In response, CS Mbadi urged KRA to embrace more innovative and technologically advanced revenue collection strategies. 

A press release from KRA following the CS’s meeting with its leadership emphasised the need for “continuous modernisation” in tax administration to streamline business processes, leverage advanced systems, and simplify tax transactions. 

“Our modernisation journey must align with our objectives and those of taxpayers. This approach will not only benefit taxpayers but will also significantly enhance our revenue mobilisation efforts,” Mr Mbadi stated. 

He highlighted that the National Tax Policy, which outlines the government’s tax expansion strategy, will support the enhancement of the tax base, promote fairness and equity in the tax system, and ensure predictability in tax rates and bases. 

“Through this policy, KRA must ensure higher tax compliance, improve taxpayer experiences, and reduce tax expenditures to minimise market distortions and tax refund pressures. As outlined in the policy, we will develop a framework for granting time-bound and growth-oriented tax incentives,” the CS concluded.

KRA earlier said it is planning to leverage Artificial Intelligence (AI) technology to bolster its efforts in catching tax evaders. 

The agency reckons the implementation of AI technology is expected to significantly improve its detection capabilities and end tax evasion. 

This is because AI can analyse millions of data points and identify complex patterns that would be challenging for human auditors to uncover. 

KRA Commissioner General Humphrey Wattanga reckons the implementation of AI technology is expected to significantly improve KRA’s detection capabilities, as the system can analyse millions of data points and identify complex patterns that would be challenging for human auditors to uncover.  

Struggling Private Sector

The private sector is also facing significant challenges. Businesses are struggling to cope with weak demand and rising costs. This has led to a decline in profitability and forced many businesses to cut costs.

One of the most significant ways that businesses have been cutting costs is by freezing hiring or laying off workers. This has led to a rise in unemployment and further exacerbated the economic slowdown. The decline in consumer spending is another major challenge facing the private sector. Consumers are spending less due to rising prices and declining incomes.

This has made it difficult for businesses to generate revenue. The outlook for the private sector is bleak.

Many businesses are pessimistic about the future and are expecting a further decline in economic activity.

This is likely to have a negative impact on the overall economy, with analysts calling for urgent intervention to save the economy.