Third Eye

Budget must factor in prevailing economic conditions

Wednesday, May 18th, 2022 10:17 | By

At the heart of a nation’s prosperity is prudent public financial management, and this begins with a well-planned and balanced budget. 

Besides funding essential services such as health, security and education, the national budget makes a fundamental decision on the level of resources that the government will take from its citizens to finance itself. Therefore, governments must allocate resources judiciously, whilst bearing in mind a country’s economic performance and the most pressing needs of its citizens.  

Kenya’s prevailing economic situation is currently characterised by the high and rising cost of living, unemployment, rising trade deficit and the public debt burden. 

According to Kenya National Bureau of Statistics (KNBS), the overall year-on-year inflation rate as measured by the Consumer Price Index was 6.47 per cent in April 2022. This was mainly attributed to an increase in the price of commodities, among them food and beverages by 12.5 per cent and housing, water, electricity, gas and other fuels (5.47 per cent) between April 2021 and April 2022. 

The National Assembly Finance Committee of the has been engaging the public, to receive views on the Financial Year 2022/2023 budget proposals. Whereas the budget is themed, ‘accelerating economic recovery for improved livelihood,’ some proposals are set to achieve the opposite, by increasing the cost of some commodities. They will further put a strain on citizens as well as key economic sectors. 

An often-soft target for tax increases in the annual budget proposals is excise tax. Excisable goods include cosmetics, bottled water, juices, motorcycles, alcoholic drinks and tobacco products, among others. This is punitive since producers of excisable goods were adversely impacted by Covid-19 containment measures and are yet to recover. In addition, the majority of these industries procure raw materials from farmers who will be impacted by such tax policy measures. 

The Finance Bill 2022, proposes to increase excise tax from Sh121.85 to Sh134 per litre on beer, cider, opaque beer and mixtures of fermented beverages of alcoholic strength not exceeding six per cent. Data from the KNBS Economic Survey 2021 shows that beer’s contribution to excise duty revenue, has been declining over the years, demonstrating that tax rates have gone beyond revenue-maximising levels. Further increases will lead to reduced purchasing power, with some being forced to turn to illicit products. 

 Barley farmers will also be affected - they have been forced to cut down on production or incur significant losses. KNBS data has revealed that there has been a 6.5 per cent decline in barley production in the last 10 years, affecting farmers in Narok, Meru, Uasin Gishu and Nakuru counties. The proposed excise tax increase is projected to reduce barley production by 5,200 tonnes, translating to a loss of Sh1.2 billion in income for farmers. 

The Finance Bill also proposes to introduce excise duty on locally manufactured glass bottles. This demonstrates the relentless and unprincipled expansion of excise tax without rhyme or reason. Glass manufacturers are currently faced with high input costs, due to the cost of power and fuel. An additional excise duty of 25 per cent will increase operating costs and ultimately make local glass manufacturers uncompetitive in comparison to our main competitors - Egypt and Tanzania. 

Our Manufacturing Manifesto, launched earlier this year, gives proposals to resolve macroeconomic issues currently grappling the country. It highlights the need for both levels of government to adopt best practices in Public Financial Management, to enable credible budgeting and revenue projections. The government should also aim to reduce the fiscal deficit to  three per cent of the Gross Domestic Product between 2022-2027, in line with the East African Community monetary convergence criteria.  

We urge Parliament to consider views from all stakeholders, including citizens and the business community, before adopting the proposals in the Finance Bill, 2022. 

—The writer is chair of Kenya Association of Manufacturers —[email protected]

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