Kenya sees decline in tax revenues due to COVID-19

Kenya's total tax receipts in the first month of the financial year have experienced a significant decline, reflecting the harsh economic repercussions of the COVID-19 pandemic. The Kenya Revenue Authority collected approximately $876 million in taxes in July, a stark contrast to the $995 million collected in the previous year, marking the lowest receipts since 2017. The impact of the pandemic has been profound on the economy, affecting various sectors such as consumption, investments, and job creation. Churchill Ogutu, Head of Research at Genghis Capital, delved into the details during an interview with CNBC Africa. Ogutu explained that while historically July has been a slow month for tax collection, the current figures still fall short even when compared to previous years' trends. The average tax collection in the second quarter, a period severely impacted by the pandemic, was around $1.1 billion. This decline to $904.5 million in July underscores the strain faced by the Kenyan economy. The ripple effects of job losses and reduced economic activity due to COVID-19 have directly impacted tax revenues, painting a grim picture for the upcoming months. If the trend continues into August and September, it would indicate a prolonged battle for the Kenyan economy against the pandemic's effects. One of the observations made by the National Treasury was the significant shortfall in domestic borrowing targets. Despite being a prominent domestic borrower, Kenya only achieved 44.9% of its borrowing target, raising questions about the accuracy of the reported figures. Ogutu expressed surprise at this anomaly, suggesting a potential discrepancy in the data provided by the Treasury. The discrepancy in reporting poses challenges in understanding the true state of the economy's financial health. The rising public debt ratio in Kenya, with debt obligations consuming a significant portion of revenue, is another concerning factor. The current ratio stands at 48.8%, nearing the 50-52% threshold considered risky by institutions like the World Bank and IMF. The impact of COVID-19 is expected to further strain this ratio, potentially pushing it beyond the recommended threshold. With limited room for development expenditure and a focus on servicing debt obligations, the economy faces challenges in funding vital sectors and stimulating growth. Ogutu emphasized the need for prioritizing sectors that can bolster revenue generation, especially amidst the ongoing economic challenges. Despite a modest 1.1% dip in the Kenyan Shilling, the currency has fared better compared to its regional counterparts. While some currencies experienced declines as high as 5.4% or 8%, the Kenyan Shilling managed to maintain relative stability. The demand for dollars drove the dip in the local currency in July, signaling external factors influencing the exchange rate. Ogutu highlighted the importance of monitoring currency fluctuations and addressing underlying demand dynamics to ensure a stable economic environment. In conclusion, Kenya's economic landscape faces turbulent times amid the COVID-19 crisis, reflected in the dwindling tax revenues and mounting debt obligations. The road to recovery will require strategic planning, targeted investments, and a cautious approach to fiscal management to navigate through the challenges posed by the pandemic.