COVID-19 BITING HARD ON KENYA’S ECONOMY, UNEVEN RECOVERY
Kenya, the East African nation, continues to recover gradually from the pandemic amid much uncertainties due to the third wave of the pandemic in the country. Recovery remains uneven as some sectors, especially tourism, continue to wallow in the effects of the pandemic. The World Bank projected Kenya’s Gross Domestic Product (GDP) to grow by 4.5% in 2021, signaling a partial recovery from the COVID-19 pandemic which caused growth to decline last year.
Economic activity is estimated to accelerate to above 5% in 2022 and 2023, according to the latest World Bank analysis. However, a slower deployment of vaccines due to supply challenges, logistical impediments to domestic distribution, and vaccine hesitancy, could weaken the recovery. Also, external factors such as the resurgence in infection rates could adversely impact the projected recovery in Kenya’s goods exports, tourism, and capital inflows, the World Bank warned. “The outlook remains unusually uncertain and contingent on the course of the pandemic.
We expect that Kenya’s economy will continue its recovery, albeit unevenly and for some sectors only gradually, supported by the government’s plan to vaccinate the entire adult population by mid-2022” - Keith Hansen, World Bank Country Director for Kenya. Meanwhile, Kenya continues its fiscal consolidation efforts amid pragmatic efforts to improve revenue mobilization.
As a result, the fiscal deficit is projected to shrink from 8.7% of GDP in the 2020/21 fiscal year to 4.2% in 2023/24. Unemployment rate remains high as young Kenyans urge the government to devise a social safety net to mitigate this demographic from the negative effects of unemployment. According to International Labor Organization (ILO) statistics, the unemployment rate for young people aged 18-35, who make up 35% of Kenya’s population, stands at 7.27% in 2020. Also, inflation rose to 6.44% in July 2021 driven by rise in prices of commodities especially food and transport
COVID-19 REMAINS A THREAT TO KENYA’S TOURISM
The tourism sector has suffered renewed setbacks due to a surge in COVID-19 cases and the recent warning issued by the United States urging its citizens against travelling to the Kenya-Somalia border and some coastal areas due to the risk of terrorism. The recent surge in infections is threatening to dim the hopes of hotels in the second successive main tourism season, beginning July. Kenya received 305,635 international visitors between January and June this year and is focusing its efforts to revive the sector on visitors from the US, the UK and China.
The industry was largely dependent on the forward bookings from both domestic and international travelers in pre-pandemic period. According to the Central Bank of Kenya (CBK) CBK, hotels were taking forward bookings for three months. This, in turn, saw them report maximum bookings of over 90% in the holiday season, generating significant revenues. Average forward booking in 2019 was 50.2% in November and 31.5% in the low season in February.
A survey by the CBK showed that overall early bookings in July, August, September, and October were at 19.4%, 17.5%, 8.5%, and 6.8% respectively in 2020. However, travelers are now scared to make such bookings over heightened uncertainty around the virus. The drop in the anticipated check-ins underpins a weaker second half of the industry even as the government ramps up vaccination exercise.
The booking rates remain below 15.9% and 13.4% recorded in November and December last year respectively. However, the Tourism ministry and the International Air Transport Association(IATA) expects travel levels which translate to high hotel occupancy, especially by international clientele, to fully recover by 2023.
SLOW PACE OF VACCINATION
In the interim, the travel and hotel business sector remains at risk due to the Delta variant of the coronavirus which is now dominant in Kenya and contributing to the recent spike in infections. The new variant is feared to spark a fourth wave against a slow vaccination. Over 1.74 million doses have been administered out of which 670.2 thousand people are fully vaccinated as of August 4, 2021. Early on, in August, Tourism Cabinet Secretary, Najib Balala, set out new directives for bars and hotels to curb the spread of the virus. He ordered that guests and visitors be registered and their records kept including mobile contacts and physical addresses to ease contact tracing.
Also, restaurants and eateries serving tourists have been directed to adhere to laid down protocols including staff vaccination, guests not being allowed to serve themselves from buffets, and the inclusion of electronic menus on sanitized tablets, fixed board, or printed single-use disposable menus. The fears of the virus have led to a drop in the optimism of recovery among operators. The recent CBK survey saw 13% of hotels saying they expect to resume normal levels of operations of Pre-COVID-19 by the end of 2021.
This is a decline from the 18% recorded in May, with the businesses attributing the fall to the persistence of the pandemic. “The level of uncertainty has increased among all hotels across the country due to discovery of new strains of the virus, rising cases of infections, effects of recent lockdowns, and slow rollout of the vaccine” - CBK While Covid-19 vaccination is ongoing in Kenya, only 9 percent of hotels have pre-conditioned their return to normal operations on vaccinations.
The hotels across the country said that the current 7pm closure time for bars had affected operations of the sector, while the 10pm curfew time had affected other sectors that previously operated for 24 hours, according to the CBK survey. According to Statista, travel and tourism contributed US$4.2 billion to Kenya's Gross Domestic Product (GDP) in 2020, nearly a-50% decline in comparison to 2019 where the value added by the tourism sector to the economy reached a peak at US$8.1 billion.
KENYA TARGETS ONLINE PUBLIC TENDERING SYSTEM
Whilst the COVID-19 continues to affect the tourism sector, the government is also stepping up its efforts to explore other avenues to boost domestic revenues. The government has started the search for an online platform that will process all public tenders and linking them to the Kenya Revenue Authority (KRA) in a policy shift aimed at enhancing transparency and nabbing tax cheats.
The government has already invited foreign and local firms to bid for installation of the e-procurement system. The e-system will help the KRA to clamp down suppliers earning billions of shillings from counties and State tenders without paying their share of taxes. “The National Treasury invites sealed tenders from eligible candidates for the design, development, customization, supply, installation and maintenance of an electronic government procurement (e-Gp) system for the government of Kenya”, the Treasury said in a public notice. Aside the KRA, the system will be linked to the Integrated Financial Management Information System (IFMIS), Registrar of Companies and the National Council for Persons with Disability for faster verification and flagging of corrupt dealings.
Already, the KRA enforcement team has stepped up analysis of companies’ financial dealings, especially firms doing business with the national government and counties, to unearth tax cheats by matching their payments and income declared to the authority. According to the authority, tax evasion by county and State suppliers is mainly done through faking invoices to inflate cost in a bid to cut duty obligations and failure by county governments to submit taxes withheld from the suppliers and employees.
Moreover, the KRA noted that some government suppliers have also been filing nil returns even after earning taxable income. The completion of the online system will be a departure from the present tendering system, mainly paper work, which makes the taxman lose track of the billions involved in State tenders.
THE TAX AMNESTY SCHEME
The KRA has so far collected about Sh1 billion from the expected Sh2.7 billion already declared in the first seven months of the year through an amnesty program that grants businesses and individuals relief on penalties for unpaid taxes. The amnesty which started in January this year, is a three-year program in which the KRA has offered up to 100 percent interest and penalties waiver on taxes that have not been paid in five years.
Meanwhile, the taxman is hopeful that the Voluntary Tax Disclosure Program (VTDP) will bring more individuals and firms to the tax bracket as the war on tax evasion intensifies. “More than 300 applicants had applied for relief under the VTDP. The total revenue implication from the applications received amounted to more than Sh2.7 billion, with a collection of around Sh999 million” - Commissioner for Domestic Taxes, Rispah Simiyu The KRA is leveraging digitization to improve its revenue collection, allowing businesses and individuals to apply for the relief through the iTax portal.
Under the amnesty program, taxpayers, who declare their pending liability and pay within one year, shall enjoy a 100 percent interest and penalty waiver. On the other hand, those who voluntarily disclose and pay the pending tax liability within the second year of the program will receive remission of 50 percent while payments in the third year will attract a 25 percent relief. The KRA raised Sh1.67 trillion in the year ended June and is banking on the amnesty to collect Sh1.9 trillion by next June.
KENYA ANNOUNCES NEW TAXES EFFECTIVE OCTOBER
The prices of at least 31 goods, including beer, fuel, bottled water and juice, are expected to increase effective October 1, 2021 as the KRA moves to effect an annual inflation tax adjustment on excise duty charged on the products. Excise duty on the products will increase by 4.97% in line with average annual inflation. This will further compound the plights of most households that are yet to recover from the effects of the COVID-19 pandemic, which triggered layoffs, pay cuts and business closures.
The adjustment is in line with the law that demands that excise duty be revised upwards in tandem with the cost of living measure or the average rate of inflation in the 12 months through June. However, the KRA will for the first time be required to get parliamentary approval to effect the new rates following changes to the law that came into effect last year.