How short-term thinking is making life hard for Kenyans

The answer to most things these days is ... Google it!

This is exactly what I did when I sat to pen this article - Google the types of mentions Kenya is getting in the international news today.

On the positive, and as expected, we continue to read about the great feats of Kenyan athletes. On the negative side, we read a significant amount of news from Kenya on terrorist attacks, crime levels, travel advisories and their associated impact on our economy.

Clearly, economic conditions are nowhere as good as they might be with consumer confidence perhaps approaching an all-time low. The impact of travel advisories on our tourism industry is clearly making matters worse with low occupancies and job layoffs. The President’s bid to boost domestic tourism recently was clearly welcome but more on that later.

The economy has been sluggish for a while now and we haven’t witnessed the heady days of 2007 in the last seven years. Of course it is easy to simply blame factors that are supposedly beyond our control but those are not the answers. Our policy framework needs to be carefully looked at and we must start thinking more medium to long-term. To my mind, many of the policy changes over the last few years have been reactive rather than proactive and as a consequence suggest short-term thinking. Perhaps in the circumstances that is understandable but it certainly doesn’t make it right.

Short termism

What is imperative to kick start our economy is for us to tackle some key issues. Firstly, we need to address the issue of recurrent expenditure which continues to spiral out of control. The move to a devolved system of government, while a great principle, has perhaps exacerbated this issue. A clear demarcation between the centre and the counties is a must. Currently it would seem that we are paying twice for the same services at the expense of development.

Secondly, and perhaps a follow on from the first, is the need to develop our infrastructure. Economic growth is only going to be possible if we have the correct infrastructure in place. This of course needs a shift from recurrent to development expenditure.  Third, we need to address the matter of ease of doing business in Kenya. Despite many promises over the last few years, we continue to languish in the bottom quartile of world rankings in this area. Fourth, we must directly tackle the question of corruption, which is another dynamic where Kenya ranks near the bottom. It is time that we see some prosecution of corruption related matters rather than simply brushing them under the carpet.

Finally, there is taxation an area where I see the most short-term thinking. I believe that in some ways the short termism in this area is adding to the woes I have described above.

A tax policy that is not clear, concise and certain is never going to help expand the economy.  Let me turn to some of what I see as the short term thinking in our tax policy.  Perhaps a good place to start is the recent introduction of excise duty on bank charges.  Many of you will remember that excise duty was traditionally known as the ‘sin tax’ in that it was used to tax all those things that we like doing but really shouldn’t!  It was principally a tax on goods such as tobacco and alcohol but the trend seems to move towards taxing services.  However, when we consider excise on bank charges, we are apparently expecting to raise in the region Sh1 billion.  In the scheme of a Sh1.6 trillion budget this is probably a drop in the ocean.  What it has done though is increase the cost of doing business in a time when we are already struggling with high costs.

That Very Annoying Tax saw a radical change with the introduction of VAT Act 2013 last year.  I have had an occasion to comment on the new law before and continue to believe that it was imperative that we introduce it.  My concern, and here come the short termism, is that we have moved from one extreme to the other without looking for the middle ground.

 The move to tax basic food commodities was ill advised and indeed some changes were made to the Act recently.  The question must be why did we take this approach knowing full well that the changes would result in greater hardship for Kenyans.

Tough times

Continuing with VAT, I must comment on the measures that have been introduced on tourism.  Clearly, this sector is important to the wellbeing of the country and indeed the President himself made certain pronouncements recently to boost domestic tourism.  These announcements however, come at a time when we have amended the VAT Act to tax aircraft with an unladen weight in excess of 2,000kg.  The effect is an increase of 16 per cent on the price of the aircraft our national airline purchases and indeed on aircraft that are widely used in the tourism industry!

Notably, besides making it uncompetitive to do business in Kenya, the new VAT regulations do not conform to the East African Customs Management Act where purchase of aircraft parts are exempted from Tax and go against internationally recommended best practice by both OECD and ICAO policies and which Kenya is a member.

Indeed even aircraft engines and spares are subject to VAT at 16 per cent making maintenance costs higher and yet we seek to boost tourism.

 One could argue that an air operator can claim this tax back as input tax but we must not forget that domestic travel is exempt from VAT hence any input VAT is passed on to passengers through the air tickets while international travel is zero rated. The question on how soon a refund can be obtained raises its ugly head.

Turning to some of the measures that the President announced recently, perhaps the most interesting one was the deduction for employers paying for employees to go on vacation in Kenya.  A good idea that still needs legislative change but two questions immediately spring to mind – can employers afford this added expense in tough economic times and is the payment of a vacation for ones employees not a taxable benefit?  We appear to be robbing Peter to pay Paul here.