TaxPrism _ Issue 4 (3)

THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS ISSUE 004 • OCTOBER - DECEMBER 2020 Kshs 600 50 YEARS OF SELFLESS PUBLIC SERVICE & STILL GOING STRONG We understand life backwards but we live forward because learning never stops AMB. DR. FRANCIS MUTHAURA Board Chairman – Kenya Revenue Authority THE FUTURE TAX TALK BUSINESS HEALTH Frictionless e-commerce - Exploring fiscal policy - impact on Different personalities in the workplace map, analyse and implement economic growth and development Avoid cookie-cutter approach | THE RATIONAL VOICE ONATNAXO, CFUFSITCOMIASL&PFUISBCALLICPOALTICIOY MNATOTEFRTSHE KENYA SCHOOL OF REVENUE ADMINISTRATION (KESRA) October - December | 1



Content Business Wellness - Pg 5 Investment - Pg 22 Cover Story Managing different personalities Given personalities are diverse and Facilitating the Private Sector for Dr. Muthaura cuts the figure of unique, how well do leaders manage Faster Economic Growth a calm, solid, vastly experienced team members under them. The private sector plays a crucial role in the and deeply devoted servant of this economic growth of a country through job Country. As an accomplished public 8 Cross Border Trade creation, increased trading, diversification of figure, he has had opportunities Cumbersome systems, procedures, services to the various social stratas, amongst to serve Kenya and the global and poor infrastructure both other activities. community in various capacities. increase transaction costs and Read about his journey of 50 years lengthen delay to clear imports, 48 The Bar Effectiveness of of selfless public service and still exports and transit goods, at Enhancing the Promoting Fiscal going strong. Africa’s border points. Legal Frameworks Responsibility. The Future Frictionless e-commerce - 12 Managing the Fiscal Deficit Facts & Figures - Pg 55 map, analyse and implement in Kenya This article looks at Kenya’s Economic growth rate of EAC coun- Tax Talk fiscal deficit, what causes it, and tries, China, Russia, US, Germany, UK, Exploring fiscal policy - impact on outlines some recommendations and India economic growth and development and limitations geared towards Gross Domestic Product (GDP) is the monetary addressing the issue. value of all finished goods and services made within a country during a specific period. Pg 37 | Special Feature Performance of the Health Sector in Kenya - COVID-19 situation Business Health Different personalities in the work- place. Avoid cookie-cutter approach Pg 50 Book Review By Perez A. Mac’oduol Pg 36 | Influencer Pg 51 | Technology THE TRUTH Rose Chepchirchir Ronoh - Director How can Technology help beat Covid-19s ABOUT trade facilitation at KENTRADE Cross-Border Trade Disruptions? LEADERSHIP James M. Kouzes, Bassy Z. Posner Leadership and how certain aspects of leadership endure over time The Kenya Revenue Authority (KRA) was established by an Act of Parliament, Chapter 469 of the laws of Kenya, which became effective on 1st July 1995. KRA is charged with collecting revenue on behalf of the government of Kenya. Kenya School of Revenue Administration (KESRA) Kenya School of Revenue Administration (KESRA) is the Kenya Revenue Authority’s premier training school specializing in Tax and Customs Administration, Fiscal Policy and Management. The School is one of the only four World Customs Organization (WCO) accredited Regional Training Centres (RTCs) in Africa and the host of the African Academy for the OECD on Tax and Financial Crimes Investigations. @KESRA_KRA Kenya School of Revenue Administration schoolofrevenueadministration Kenya School of Revenue Administration (KESRA)

Editorial Letter from the editor economic threats. For example; the facets of fiscal policy exploring topics Kenyan government in a strategic such as; fiscal deficit, the shadow Ronald Reagan the 40th president move to stabilize the economy during economy, potential of the African of the United States of America the pandemic, has effected a spate of economy, strengthening of fiscal said, ‘We don’t have a trillion-dollar debt because measures adjusting the fiscal space policies, the role of the private sector, we haven’t taxed enough; we have a trillion- including; reduction of Corporate legal frameworks in promoting fiscal dollar debt because we spend too much’. It is a Taxes and Value Added Taxes responsibility amongst other pertinent statement that brings to question the amongst other actions. issues. issue of government spending and Various fiscal responses ‘The principle of spending money to be paid taxation, which are fiscal matters. notwithstanding, the rising fiscal by posterity, under the name of funding is but debt in Africa is a major concern swindling futurity on a large scale’. Thomas A mention on fiscal policy should for Africa’s fiscal landscape. It is a Jeferson’s therefore be understood as, a system of consequence of our growing appetite principles that guide in making fiscal for borrowing, associated high costs Wandiri Murithi, decisions, and usually implemented of borrowing, and in some instances, Editor, Tax Prism as a procedure by governments. unstable currencies among other While the motivation behind fiscal contributing factors. These factors policy formulation varies across further compound the challenges governments, application is always the continent faces, and contrasts focused on the overall economy. the effectiveness of fiscal response. It Notwithstanding the clear definition, is this economic state that amplifies it is primary to note that fiscal policy trepidations on government spending, and the monetary policy enjoy a and the fiscal health of economies. parallel but close relationship. I welcome you to the 4th issue of the Tax Prism. It is an issue focused COVID-19 pandemic has provided on fiscal matters and examines various many of us with an opportunity to observe how governments employ the two major fiscal policy tools (taxes and spending), as a response to To advertise with us Contact: Wandiri Murithi Email: [email protected] Invitation to Write Do you have an interest on tax, customs and fiscal policy matters? Write to [email protected] for an opportunity to get published The Team DISCLAIMER Chief Editor Dr. Fred Mugambi I Project Co-ordinator Eunice Njenga | Public Relations Officer/ Editor ALL RIGHTS RESERVED. Wandiri Murithi |Concept & Design Harris Mwongela | Assistant Designer Evalyne Awuor | Contributors Georgina Musembi, James Akhungu, Wangari Muikia, Amb. Dr. Francis Muthaura, Dr. Darshan Chandaria, The publisher assumes no respon- Grace Wandera, Issa Zubeir, (CPA, Cs), Rose Chepchirchir Ronoh, Dr. Mathew Muma, Derrick Vikiru, Vincent sibility for unsolicited material. No Mogire Okara, Dr. Ify Ogo, George Kagwe, Perez A. Mac’oduol, Jonathan Titus Limo part of this publication may be reproduced in any form without Publisher Printed by: written permission from the pub- The Kenya School of Revenue Administration (KESRA) Drewgraffix Limited lisher. The opinions expressed in the Podo Park, Westlands, P.O Box 30332 - 00100 - Nairobi Kenya P.O Box 6782 - 00300, Nairobi Kenya articles are those of the author(s), and the publisher will not accept liability for actions taken in view of the opinions. October - Deceember | 4 | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS

Business Wellness Managing different personalities By Georgina A cookie-cutter approach cannot be used on every employee. Therefore, if a Musembi leader is managing a group of around 20 or less he/she should be able to get a feel of each individual’s personality. Does this statement absolve leaders managing Author and Writer larger groups? No. Such leaders may not enjoy the benefit of interacting with all individuals, but they should identify and understand key player’s personalities. The value of this requirement is to help a leader discern what makes individuals tick, leveraging on their strengths. Personalities are diverse and flaws in the system, and will also play type. Do not waste your time chatting unique. It is this factor that calls the devil’s advocate. If you tell them about subjects of little importance – go for a change in the communication to do something they will ask, “why straight to the point. approach. Therefore, leaders should should we do it like that?”. This is adjust their approach to suit each sometimes a good thing because it Considerate personality, ensuring clarity in provides for better decision-making. communication. However, they can turn too critical The Considerate is calm, nice, and becoming a stumbling block to likes to think things through. They PERSONALITY TRAITS progress. As a leader learn to listen usually have an optimistic “glass half- to what they have to say, but if you full” point of view, and are agreeable. Now that we are in the clear, let’s have observe the conversation to be an Additionally, they might take a bit a look at some of the personality traits impediment, take their suggestions longer than others to get work done and ways to deal with them. and move quickly to the next subject. and might need some help in making Communication approach: This decisions. The good news with this Analyst personality is more of a “just the facts” personality is that their work often has negligible errors, and they can be The Analyst will always try to find | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS October - December | 5

Business Wellness not to infringe their privacy, or draw unnecessary attention towards them. Be calm and patient to receive a response, and remember not to make demands even when being direct. Aggressive The Aggressive one is quick and almost always takes control of most tasks. They are not afraid to make decisions for what they are good at and know, and tend to produce a lot of good work. Ideal tasks for the personality are those that require immediate attention. A little warning to the leader though, is to be careful not to be trapped under their control. Communication approach: Be straightforward, direct, and use a no- nonsense approach to business when dealing with this personality. Also, make sure they receive praise that is due, because when not received they get upset. The greatest undoing of a person with a loner character trait is Talkative they might end up not fully understanding group expectations. The Talkative tend to display more depended upon for long-term detail Communication approach: Get your emotion - positive or negative. oriented projects. point across by being direct, and stress the They have a strong interest in their Communication approach: When importance of the bigger picture. colleagues and are usually the social speaking to them, do it calmly but directly. butterfly of the company. Besides, While at it give a lot of encouragement Quiet they enjoy making decisions but and praise, to get the most out of them. require confirmation just in case. To The Quiet one rarely talks at get the most out of them let them help Results-Driven meetings, is sub-conscious of their in planning projects or events that actions, and appears to have a low self- require some animated personality. The Results-Driven tend to focus esteem - though this might not be the Communication approach: Leaders solely on targeted metrics, but case. This personality tends to prefer should try using a lightened-up approach sometimes lose focus on the bigger tasks that require minimal interaction and some humor to get their point across. picture. Further, they feel like they are keeping them in their shells. In most doing a great job when they meet an cases, people tend to ignore the quiet Mean-Spirited important target. However, they might and soft-spoken personalities, giving be succeeding on a target but perform more attention to the commanding. The Mean-Spirited makes it known poorly on other aspects of the same As a leader try to bring this person out that they are not happy with work task. It is a personality that is more of their shell, because more often than or colleagues around them. In many suited for simple straightforward tasks not they have brilliant and compelling cases, this attitude rides on problems that do not require thinking outside of ideas. that are not work-related. If a the box. Communication approach: Be cautious leader perceives that this is affecting employee morale, talk to them and make sure they understand the value of harmony in a team. Communication approach: Be direct but empathetic, and if any information October - Deceember | 6 | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS

Business Wellness making friends is not a mandatory Conclusion requirement in team effort. This will is divulged try and assist in the change of ensure they grow into reliable and We have not explored in-depth attitude. A good leader is one who is able supportive persons. these personalities. However, the to maintain focus, balance and still grow Communication approach: Be calm scratch on the surface is equally individuals in a team. and do not invade their privacy. Avoid a good starting point. being forceful but retain directness on the As a leader, always remember Sensitive value of teamwork which is the engine of that managing personalities is not an organization. easy but it is inevitable. A careful The Sensitive one takes all analysis of your environment, confrontations personal. They tend to Overly-Confident will help you identify these do as they are told because they are personalities. Can you identify not comfortable making decisions. The Overly-Confident feels like they some of these personalities right Additionally, they are pleasant and know everything and can do no wrong. now? If yes, note that you might nice but extremely delicate - feelings. They are capable of acting confident not change how they behave, but Want to get the most out of them? even when not sure of what they you can use tact to overrun the Assign more touchy-feely projects. are doing. In terms of tasks, assign odds and succeed. Communication approach: As a projects that can easily be tracked to One more very important leader try not to be too direct, and use an make sure they are moving towards component is ‘YOU’. As you encouraging approach when dealing with the right direction – control the high undertake a conscious journey any performance-related issues. possibility of digressing. towards analysing personalities Communication approach: A leader around you, forgetting ‘YOU’ Brainiac needs to get their point across by being is an error. Looking inward is very direct. You might also have to humble central to change, because to The Brainiac will use sarcasm, and this person every so often. cause change you have to be knowledge to get what they want. the change that you wish to see They will try, and dance around a basic Curmudgeon - Mahatma Gandhi ■ topic and also dance around making decisions. Make sure this person is A Curmudgeon does not take October - December | 7 kept on track as they can easily lose supervision well and thinks of everyone focus on the task at hand. Assign the but themselves as incompetent. They Brainiacs data-oriented projects. tend to be sarcastic, grumpy, and have Communication approach: Be direct, a pessimistic “glass is half-empty” point lay your facts on the table, and while at of view. Tasks that do not demand too it try some sarcasm. Remember to keep much creativity are most suitable for them in focus. them, because of intolerance to ideas emanating from other team members. Loner Communication approach: State facts and be direct, making sure to let them The Loner just wants to do the job know exactly what is expected of them. and not get involved with others This is a matter of fact approach. during break room conversations, or non-work-related activities. Simply Bad Attitude put they don’t like interactions, and the greatest undoing of this character This personality is a major problem. trait is they might end up not fully It’s the fly that spoils the broth and understanding group expectations. It halts progress. The greatest undoing is not unlikely to hear excuses such as of Bad Attitude is their ability to ‘I did not know what I was supposed influence the general employee morale to do’, ‘Nobody told me’ etc. As a which is unacceptable. leader try as much as possible to get Communication approach: Be the boss them out their shell, and if this fails and call out issues directly, demanding give them projects that require them change of attitude within a given timeline. to be engaged in a team. Further, talk to them about the reasoning and importance of being an active team member, reminding them that | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS

Unpacking Africa’s Informal Cross Border Trade: Strengthening Fiscal Policies By James Akhungu In the last one decade, countries in Africa imposed by customs and other agencies have come to a deep realization regarding are now seen as posing greater barriers to Head of Trade and the importance of trade to achieving trade than tariffs do. Cumbersome systems, Development, ADRES sustainable development growth. The Africa procedures, and poor infrastructure both Group Union (AU), through its Regional Economic increase transaction costs and lengthen delay Communities (RECs) has advocated for to clear imports, exports and transit goods, lowering of trade tariffs, establishing regimes at Africa’s border points. This has led to to encourage Foreign Direct Investments the thriving of the Informal Cross Border (FDIs) and pursuing opportunities for greater Trade (ICBT) which accounts for about regional integration. However, despite 30-40% of income for Africa’s population progress, trade facilitation in many African (UNCTAD, 2020). The major players in countries is hampered by high costs and ICBT – small unregistered traders who are administrative difficulties at the borders. often women and youth, are vulnerable to myriad challenges exacerbated by bribes, Overtime, outdated and overly sexual abuse, and confiscation of goods. bureaucratic border clearance processes October - Deceember | 8 | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS

Cross Border Trade discernible, as cross-border routes face permit lower tax rates, but will also closure and periodic opening, owing help in the creation of a “level playing THE INFORMAL CROSS BORDER TRADE to the fear of a sporadic spread of the field” for all traders involved in (ICBT) COVID-19 virus. The ICBT players export, import and transit of goods. who are majorly women and youth In a bid to increase the respective The ICBT as a form of trade, is have therefore had their source of Africa’s countries revenues, this article usually not captured hence no official livelihood continually obstructed. proposes the following fiscal measures statistics for the government in Africa to dealing with ICBT. to use to formulate appropriate The African Continental Free trade and macroeconomic policies. Trade Area (AfCFTA) has redeemed • Countries in Africa through ICBT has for a long time been the intra-Africa trade which currently respective RECs should characterized by under-invoicing, stands at a paltry figure of less than innovate ways to improve falsifying classification, under- 20% (AfDB – Economic Development the socio-economic cohesion reporting of trade commodities and in Africa Report, 2019). While the among border communities. use of unofficial routes by traders. In AfCFTA is an indication that a new The Common Market of Eastern and 2014, the African Development Bank dawn is upon Africa, it brings with Southern Africa (COMESA) and the (AfDB) statistics noted that ICBT its good tidings as well as challenges East Africa Community (EAC) have contributed indirectly to about 60% such as design of a tax system in pioneered the adoption of the Simplified of Africa’s regional trade. This has led the continent. Tax systems not Trade Regime (STR), as a tool of easing to great loss of revenue to the various only in Africa but across the globe, trade across its member states borders. governments through tax avoidance have undergone little changes in The STR is anchored on instruments of and tax evasion. The formal traders comparison with the metamorphosis custom documents, certificate of origin, participating in cross border trade in business, technology and trade. product list and consignment value. The have been disadvantaged through STR certificate targets small scale traders unfair competition for market of their FISCAL MEASURES – DEALING WITH whose transaction values are worth US goods which tend to be of higher prices ICBT $2,000 or less per each consignment. in comparison to ICBT counterparts. The use of STR is geared towards fast The efficiency of the safety measures When ICBT incidence of informality clearance at the border posts, reduced costs (Sanitary and Phytosanitary - SPS) and tax evasion is high, formal traders and time at border posts, reduction of has also been lowered due to poor carry the totality of the tax burden, informal and illicit trade and improved statistics on goods moving through reducing their incentives to invest collection of revenue and statistics. There unofficial routes. in the formal economy. This in turn is need for the other RECs to adopt it for leads to reduced longer-term aspects trade uniformity to be achieved in cross The year 2020 has spelt doom for for development in the Sub-Saharan border points in Africa. global trade since the occurrence of Africa, where ICBT has flourished the COVID-19 pandemic. Africa, as a over time. Bringing the informal • African countries through player in global trade as at the end of traders back to the formal economy the AU should create a unified 2019, contributed a meagre figure of will not only help broaden the tax platform for respective 3% (World Bank Statistics). As at today base and as a consequence potentially country revenue authorities. the adverse effect of the pandemic on Unification of taxes and systems is vital the continent’s economic status are for the AU Agenda 2063, as enshrined in the 12 flagship programs with focus The prominence of mobile on commodity trading. A unified tax banking should be adopted system closes the loopholes like transfer because of its low cost and pricing, under invoicing, misclassification safety measures to the traders. of goods, mis-declaration of country of Initiatives such as facilitated by origin, tax sparing and profit shifting. Sauti Africa, a Kenya based Overtime, a unified tax system for the firm, is empowering women revenue authorities translates to reduced to trade legally and profitably incidence of informal cross border trade. across the East Africa borders (Kenya, Uganda and Tanzania) • Renegotiating of tax treaties by use of mobile based trade among the Africa member platforms. states should be encouraged. Most of the tax treaties date back | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS October - December | 9

Cross Border Trade Increase of dialogue between custom authorities and traders at cross border areas should continue to be encouraged. to pre-independence and are outdated 20 countries in Africa were signatories operations for clearance of their goods at due to evolution of business models of the inclusive framework. More border points. and trade. Some of the tax treaties countries in Africa should participate should be reviewed or done away with. in the initiative to curb FHTP through The AfCFTA secretariat should Member states of the Organization for Mutual Agreement Procedure (MAP), continue to collaborate with other trade Economic Cooperation and Development peer reviewing and monitoring process. development partners, and champion for (OECD), have undertaken measurement • There is need for member states in creation of more OSBPs to reduce the and assessment to curb harmful tax Africa to create more One-Stop Border incidences of the informal cross border practices through the Forum on Harmful Posts (OSBPs). Trade Mark East Africa trade. Tax Practices (FHTP) for inclusive (TMEA) in 2016 through a baseline growth. Borrowing a leaf from OECD survey on time and traffic in East Africa, • Increase of dialogue between in relation to FHTP will cascade to found out that introduction of OSBPs custom authorities and traders member states reviewing their tax regimes, led to reduction in border crossing time at cross border areas should hence reducing incidences leading to poor by about 80% as compared to similar continue to be encouraged. A trade practices that have supported the period in 2011. This not only impacts gender balance mainstreaming approach thrive of ICBT. This can be achieved on traders but creates a win situation should be envisaged towards ICBT. The through Mutual Agreement Procedure for the revenue authorities because United Nations Conference on Trade (MAP). reduced time lag translates to less bribes, and Development UNCTAD (2019) extortions and more trade transactions. estimated that women accounted for 70% Out of the 124 members of OECD This encouraged the traders involved in of the traders in ICBT. There is need to and Base Erosion and Profit Shifting the informal trade to follow the formal convene more forums by various trade (BEPS), as at November 2018, only stakeholders to articulate challenges and aspirations, and also see how best revenue October - Deceember | 10 | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS

Cross Border Trade Conclusion informed decisions and inclusivity in the formulation of fiscal policies. authorities can be able to get revenues and ICBT is undeniably a source of Similarly, regulatory and institutional also the traders to be gainfully involved in employment and income for many frameworks should be reviewed formal trade. households across Africa. Women to support formalization initiatives who are the major players stand of ICBT activities. This will aid • There is need to leverage upon to gain if appropriate measures in channelling of these activities technology and innovation are undertaken to formalize the to mainstream trade, benefiting and artificial intelligence. The trade. Therefore, it is key that RECs respective country economies in the prominence of mobile banking should undertake continuous revision of long run ■ be adopted because of its low cost and data collection and monitoring tools safety measures to the traders. Initiatives in cross border trade, to ensure such as facilitated by Sauti Africa, a Kenya Based firm, is empowering A policy framework was formulated to guide informal trade activities women to trade legally and profitably where quality control and value addition issues took precedence to enable across the East Africa borders (Kenya, the traders to earn more revenue. Uganda and Tanzania) by use of mobile based trade platforms. The technology deployed, is the use of Unstructured Supplementary Service Data (USSD) and SMS information system in low technology cross border environment in East Africa. The same leaf in leveraging on technology, should continue to be spearheaded as a way of transforming informal cross border trade across Africa to a formal one, hence increased trade statistics for use in policy making and revenues for respective authorities. • Finally, Africa member states through the AfCFTA should emphasize the need of formalizing informal transactions of trade and incentivize informal traders to switch to formal trade. Policy and legislation approaches to formalization should be envisaged. In Uganda a survey on ICBT activities conducted by the Uganda Bureau of Statistics and the Bank of Uganda, led to establishment of special trade facilitation desks at border stations (UNECA, 2014). A policy framework was formulated to guide informal trade activities where quality control and value addition issues took precedence to enable the traders to earn more revenue. Apart from policy and legislation approach to formalization of informal trade, other approaches which can be adopted for use are: partnership–based approach, rights–based approach, and incentive & compliance-based approach (FAO, 2017, Formalization of in-formal trade in Africa). | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS October - December | 11

By Wangari Muikia CEO and Managing Director of Expertise Global Consulting Ltd. Considerations to Managing the Fiscal Deficit in Kenya Introduction // Spending more than you have in your pocket can be a sign of bad financial management. However, this is not always the case e.g. when you want to make a large purchase, the sum of which you can pay off over time, while the said purchase supports your ability to make those repayments. This is just as true in personal finance as in public finance. However, the problem comes in when one spends more than one earns, on things that do not earn the money to make those repayments. This article looks at Kenya’s covering debt. leave little space for the country to fiscal deficit, what causes it, and Other times, a fiscal deficit happens fulfil its budget priorities. outlines some recommendations and limitations geared towards addressing when a country wants to build large capital The annual public debt the issue. assets that will help facilitate economic management reports by the National growth. In Kenya, some of these have Treasury indicate that Kenya’s debt FISCAL DEFICIT included the Standard Gauge Railway repayments ratio to total budget stood (SGR) project which is expected to at 12% in 2018/19 expanding by A fiscal deficit occurs when the government reduce the cost of transportation of approximately 58% over the previous prepares a larger budget than it can finance goods from the port for Kenya and its three years. through its taxes, fees and charges. The neighbouring countries, or the various balance unpaid by such budgets is bypasses that reduce congestion in Besides other contributing factors, typically covered by debt that has to be the cities and allow for time and cost overreliance on commercial borrowing has repaid over time by the government to savings for businesses and individuals. also contributed to an increased cost its debtors. Capital assets reinforce economic of financing and the vulnerability of growth and can support financing the economy. Similarly, fiscal deficits Many times, a fiscal deficit is borne of needed to make debt repayments. can also widen due to low revenue collection imprudent spending - such as bloated on the part of government. Every year wage bills, irresponsible procurement DEBT REPAYMENT the government makes projections practices, and excessive travel and around what it expects to collect in per diem expenditures. These are If year on year the debt keeps revenues over the year. Many times, all examples of recurrent spending increasing, repayments start to become those projections are not met and that does not directly result in capital a big burden to the economy. Debt this can result in large pending bills investment for economic growth, nor repayments are always the first charge which directly affect the private sector. can it help generate repayments for on a country’s income, and they can Kenya has not been able to reduce its fiscal deficit consistently from before October - Deceember | 12 | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS

Managing Fiscal Deficit Amounts incl. grants As a % of GDP KENYA’S FISCAL DEFICIT AS A PERCENTAGE OF GDP HAS STAGNATED OVER THE YEARS 800 8.3% 8.9% 7.7% 10.0% 9.0% 700 470.5 7.6% 7.2% 8.0% 2014/15 7.0% AMOUNT. Ksh_ BILLIONS 600 492.1 683.1 631.3 721.1 6.0% PERCENTAGES 6.1% 5.0% 4.0% 500 3.0% 2.0% 400 1.0% 0.0% 300 507.7 2015/16 2016/17 2017/18 2018/19 200 100 0 2013/14 the onset of devolved government, in the Southern and Western regions which is a 6.3% (data according to the and in fact has resorted to higher (Nigeria and South Africa) and Debt Management Office of Nigeria Annual borrowing instead of expenditure comparing their performance, Kenya Reports and statement of Accounts, and restructuring. Yearly, the Controller of has a high fiscal deficit to GDP ratio. National Treasury of South Africa, Budget). Budget and Auditor General highlight According to data from National Treasury of According to the same sources, Kenya’s procurement anomalies and inflated recurrent Kenya Budget Review and Outlook Papers, overall deficit trends higher than both Nigeria expenditures, but no corrective recourse Kenya’s fiscal deficit is 4.3% - double that of and South Africa, and in 2016/17 it was is taken. Nigeria’s which is 4.2% and two percentage four times that of Nigeria, and has stayed points higher than that of South Africa consistently high. The rising trend Looking at the strongest economies TOTAL DEBT REPAYMENT HAS GROWN BY 58% OVER THE LAST 3 YEARS Total Budget Total Debts Service Total Debt Service as a %ge of Total Budget 3,500.0 11.8% 14% 3,000.0 12% 2,500.0 2,000.0 10% 1,500.0 AMOUNT. Ksh_ BILLIONS 1,000.0 8.1% 8% 2017/18 500.0 5.4% 6% - 2014/15 3% 2% 2% 2.6% 3.5% 3.7% 4% PERCENTAGES 2012/13 2013/14 2015/16 2016/17 2% 0% 2010/11 2011/12 2018/19 Source: National Treasury of Kenya Annual Public Debt Management Reports & Office of the Controller of Budget Implementation Reports | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS October - December | 13

Managing Fiscal Deficit of the fiscal deficit in all three Kenya South Africa Nigeria countries could be troubling, especially if there are no key infrastructure 10.0% 8.9% investments behind it. 9.0% 8.0% 8.3% 7.6% 7.7% 8.3% POLICY RESPONSE TO COVID-19 7.0% 4.2% 6.3% 6.0% 6.1% 3.9% 3.9% 3.4% 7.2% 3.9% 4.2% COVID-19 has made things 5.0% 4.0% 1.1% 2.1% 2.2% 4.3% imminently worse. In a bid to 4.0% 1.9% 2014/15 1.7% 2018/19 2019/20 support vulnerable populations and PERCENTAGES 3.0% 2013/14 2017/18 businesses, the government provided 2.0% for a spate of tax reliefs that will be 1.0% 2015/16 2016/17 sure to depress revenues for the last, 0.0% and this fiscal year. And not only that, due to a depressed economy, any tax Kenya’s fiscal deficit is double that of Nigeria’s while South Africa’s has grown significantly since 2018/19 collections over the next couple or more years will remain low as they are Domestic Debts External Debts Total Debts Total Debt Growth Rate primarily pegged on employment and trade (PAYE and VAT). Of note, VAT AMOUNT. Ksh_ BILLIONS 7,000.0 17.4 27.0 22.0 14.5 15.1 30 PERCENTAGES was reduced from 16% to 14% and 6,000.0 2014/15 2015/16 2016/17 2017/18 2018/19 25 PAYE from 30% to 25%. Individuals 5,000.0 20 earning Kshs 24,000 and below were 4,000.0 15 also given 100% tax exemptions (up 3,000.0 5 from approximately Kshs 13,000). 2,000.0 0 1,000.0 Haron Ng’eno of Expertise Global Consulting Ltd observed that, Kshs _ 122 billion was lost in revenue collection between April and June 2013/14 2020. Further, Kenya Revenue Authority (KRA) recorded that the Kenya’s external debt is slightly higher than domestic, and overall debt has increased since 2015/16 at government fell short of its Kshs a decreasing rate 1.5 trillion third quarter 2019/20 revenue target, by Kshs 212 billion. REDUCING THE FISCAL DEFICIT market to get loans. The first forays Notwithstanding, funding pressure in the form of Eurobonds performed reprieve coming in - International Opportunities to reduce the fiscal well, but over time, the appetite is Monetary Fund USD 739 million, deficit lie untapped within the private waning. Over the pandemic, the World Bank USD 1 billion, USAID sector. The private sector could play opportunities and terms are not USD 50 million, European Union a key role in providing financing for favourable for economies termed as USD 78 million, African Development government investments through the risky, such as that of Kenya. Bank USD 203 million and over Public Private Partnerships (PPPs). USD 26 million from corporates, However, the capacity to deliver is County governments are required to foundations amongst others - the underdeveloped and underutilized. have balanced budgets because at this economic effects of the pandemic will stage they are not allowed to borrow be felt for years to come. Furthermore, Kenya’s recent categorization as a without national guarantees; the tax revenue at the national level is middle-income country has worsened national government is not providing below potential due to weaknesses its debt position because, the country any at the moment. However due to in policy including a constrained is now ineligible for the concessional faulty revenue forecasting, the counties tax base, tax expenditures including terms previously afforded to it as a create unrealistic budgets, leaving exemptions management, primary low-income country. This means that significant pending bills in the hands focus on revenue targets and multiple Kenya now has to go to the open collectors of revenue. Revenue collection is further constrained by tax administration challenges such as low compliance, inadequate capacity and processes. October - Deceember | 14 | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS

Managing Fiscal Deficit Goal PFMR Recommendations of businesses. While in this article we Tax revenue at the national • Monitor the performance of the tax policy and look at national fiscal deficits, many administration. of the recommendations also apply to level is below potential due to counties. • Enhance the Tax Policy Unit at the National Treasury. weaknesses in policy including • Rationalize tax expenditures including exemptions. There are several ways in which • Update, appropriate and consolidate the tax policy, the issues stemming from the a constrained tax base, tax fiscal deficit can be managed as legislative and administrative framework with KRA as listed in the following table. These expenditures including a single collector of national tax revenue. recommendations are attributed to the Public Finance Management Reform exemptions management, (PFMR) conducted in conjunction with the National Treasury and primary focus on revenue related stakeholders. targets and multiple collectors of Nevertheless, the technical recommendations as detailed above revenue. are not sufficient, and must also go hand in hand with administrative Credible fiscal frameworks • Forecast revenues using realistic economic assumptions and political dimensions of change. at the national level include and sound tools. To address this, a three-pronged realistic revenue and expenditure approach involving getting technical projections consistent with a • Ensure collaborative target setting between National solutions, reassessing for administrative reduction in the national fiscal Treasury & KRA with incentives for KRA to meet targets feasibility and political supportability must deficit over time. be adopted. • Ensure Parliament passes its Finance Bill at the same time or before its Appropriation Bill and ensure it is THE SOLUTION IS NOT ONLY TECHNICAL consistent with the Budget Policy Statement. In order to manage the fiscal deficit, The exposure of Kenya to shocks • Diversify borrowing instruments for domestic and apart for the technical considerations, is reduced as a result of the external financing that includes moving beyond a multitude of stakeholders involved have to reduced stock of debt due to commercial banks. This contributes to a reduced cost of be brought to the table and must be factored borrowing within fiscal targets borrowing. into the roll out of any strategy. This means consistent with a reduced fiscal consensus building, institutional deficit and reduced cost of • Enhance capacity to negotiate and manage public debt. strengthening, capacity support, and financing. sequencing. Mandates and functions are • Clean payrolls. During planning, resources and rationalised at the national • Rationalize and harmonize benefits & allowances. logistics must also be considered. levels and the growth in the • Expand the Contributory Pension System to limit the Further, players from the political side wage and pension bill is limited should be involved to ensure that the relative to other expenditure, growth of pension bills. outcomes for constituents are aligned, while maintained below 35% of otherwise they have power to block government revenues. any emerging remedial measures. To be clear, it is never an exact science. But the Private sector resources • PPP Act 2013 and guidelines amended to cater for good is always better than the perfect. This mobilized for delivery of devolution. takes a lot of time, and can take different appropriate investments and turns, but makes for very good, long-lasting services. • PPP Tool Kits in place and in use by MDAs (Ministries, outcomes ■ Departments, Agencies) for PPP Project Development and Implementation. While in this article we look at national fiscal deficits, many • Enhance institutional capacity for development and of the recommendations also efficient management of PPPs. apply to counties. • Policies and incentives that encourage private sector to participate in delivering policy priorities. | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS October - December | 15

Pictorial KRA TADAT Trained and certified team: L-R, Damacrine Masira -SIRM-RKM&CP, Jane Muguchu - DTD - P&TA, Commissioner DTD - Elizabeth Meyo (Mrs), Mr. Stephen Kyande DC- DTD MTO, Peninah Munga - DTD - P&TA (Policy and Tax Advisory), Desterious Shilabukha DTD - P&TA MV Ellie Lady discharging oil products at the Kipebu Oil Construction workers undertaking the final construction Terminal. works of the Lamu port office block, which will house Customs officers and officers from other agencies. Western Region PSD manager 2nd right Mr Richard Kipngetich poses for a photo with Vihiga County Chief Officer ,3rd right with KRA team. Ms Betty Kandie of Kerugoya Ag Regional Coordinator, Mr Jonah TSO (L) gifts a staff during a Ogaro (R) receives a gift hamper taxpayer visit at Thumaita Tea from the CEO KEPROBA, Dr Wilfred Factory Company Limited. Marube during a visit to the Isebania OSBP Mr Phelix Ochieng’ Ohato,supervisor exports and transhipment -right in branded yellow reflector serves Mr Boniface Akwiri, an Officer from Special Learners Primary school head teacher receives sewing ma- an American Tea logistics firm, Cargill shipping and warehousing. chines – Homabay. October - Deceember | 16 | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS

Cover Story H.E President Uhuru Kenyatta, H.E Deputy President William Ruto, C.S National Treasury, Board Chairman KRA, Board of Directors KRA, C.G KRA & KRA leadership during Taxpayers Day 2019 A Formidable Journey That Has Had Its Ups and Down’s But All The Same Fulfilling By Amb. Dr. Francis Amb. Dr. Francis Muthaura has a lot to smile about, recall and share. He chuckles Muthaura through the conversation as he recalls his earlier experiences with a deep sense of pride and modesty- a confirmation that hard work and trust are the drivers of success. Dr. Board Chairman - Kenya Muthaura cuts the figure of a calm, solid, vastly experienced and deeply devoted servant Revenue Authority (KRA) of this Country. Reflection As an accomplished public figure, he has & Head of Public Service) and regional had opportunities to serve Kenya and service in the East Africa Community “Life can only be the global community in various capacities. (Executive Secretary and later Secretary understood backwards; These include in diplomatic service (New General) He has also held numerous board but it must be lived York, Brussels and London), national public positions including his current role where forward” service (Permanent Secretary – Ministry of he serves as the Board Chairman of Kenya Søren Kierkegaard Information, Transport & Communication, Revenue Authority (KRA). Dr. Muthaura Ministry of Water, Natural Resources and is also a highly respected elder in his native Environment, Ministry of Internal Security Meru community. | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS October - December | 17

Cover Story Success entails teamwork ‘L-R: Commissioner General KRA (Githii Mburu), KRA Board Chairman (Amb. Dr. Francis Muthaura), Cabinet Secretary National Treasury (Hon. Amb. Ukur Yatani Kanacho), and KRA Board member Eng. Leonard Ithau during a leadership meeting at KRA’ Recently Amb. Dr. Francis Muthaura (i) Moderating the 2 blocs (NAM and for three years and was later posted spent time with the Commissioner/ Aligned) to adopt a more practical view on to London as the Deputy Head of Head of KESRA Dr. Fred Mugambi, matters, Mission, a position I held for eleven where he recounted his 5 decade-long (ii) Leveraging the third world to give the months. I was appointed as Kenya’s journey in the public service. continent a voice, and Ambassador to Brussels after which (iii) pushing for liberation of some I became Kenya’s representative to Looking at all the jobs you have African countries that had not yet attained the United Nations (UN) in New held, they all seem quite challenging. independence e.g. Mozambique, Angola, York. Later on my tour of diplomatic Which of them do you consider to Cape Verde, Guinea Bissau, Zimbabwe etc. duty took me to the East African have been the most challenging? Community (EAC) as the Secretary Negotiations for The Africa, General where we developed most Each one presented its fair share of Caribbean and Pacific Group of of the structures, systems and treaties challenges, but most importantly an States (ACP) and European Union that hold the Community as we know opportunity to learn and grow. (E.U) during the Lomé II Convention it today. as a 1st Secretary in Brussels, was also I recall my posting to New York quite an experience. There was never The Head of Public Service is immediately after my Post graduate a dull moment and each decision had perceived to be the most powerful training in Diplomatic studies in to be well informed to turn rising Civil Servant in the Country. Having 1975, as a 2nd Secretary. It was at a challenges into opportunities. held this position what is your view time when third world countries were on this perception? lobbying for the establishment of the Did you know that when the former new international economic order. President Daniel Toroitich Arap Moi Is it so? Well, in my view it is a The United Nations was also almost came to power I requested to return position without any detailed terms of paralyzed by the cold war, yet some of to Kenya? It was very important for reference, very interesting and equally the deliverables as a representatives of me to connect with the vision of the challenging. I think the associated the Non-Aligned Movement (NAM) new Government to ensure that I was power arises from the fact that the included; well informed on the operations of Government. I stayed in the country October - Deceember | 18 | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS

Cover Story Head of Public Service coordinates The most memorable achievement All through my service to the people Government business under the for any person holding this office is and the government, I have observed direct directive of the President. undoubtedly attached to economic that the government provides clarity. Also, attaining success in this position growth of the country. One of my It is this clarity through terms of is dependent on teamwork within most gratifying moments was during reference, regulations and laws in Government. Proper coordination the reign of former President Mwai place, and the opportunity to consult of Government business is therefore Kibaki when our economy grew from widely from a local and international crucial. If teamwork does not exist, 1% to 7%. It was during this time level, that make the environment proper execution certainly fails. that the Economic Recovery Strategy favourable for adoption of such values Policy was implemented, paving way and principles and encouraging others Did you know that the challenges of for Vision 2030, a vision that provided such as initiative and innovation in this role are parallel to the performance long-term development plans for the service. of the political leadership and the country. degree of political support? To date Politics seems to almost always be I strongly believe that these two The downside was when the country the next big thing for senior civil influencing factors determine the fell into the Post-Election Violence servants who exit public service. success of the office. (PEV) crisis in 2007. Observing Why have you never considered economic growth drop to about 3% going into politics? the Head of Public Service was heart-breaking, because it meant coordinates Government starting to rebuild the economy again The political arena is subject to business under the direct from the bottom. Gaining public frequent structural changes making directive of the President. confidence in Government during this it difficult to plan or project in the Also, attaining success in period was also an uphill task. Coming short or long-term. It is this particular this position is dependent on from these experiences, my big lesson element that I feel draws a line between teamwork within Government. was that difficult times like those we civil service and politics and the reason If teamwork does not exist, went through have silver linings and for my lack of interest in politics. I proper execution certainly that we must learn quickly from them. find satisfaction in the stability and fails We learnt many lessons and emerged predictability that is embedded in out of the experiences much stronger. the structures and systems of public What are your best and worst Look at Kenya today, still strong and service. The structures and systems moments during your tenure as growing economically despite the provide opportunities to plan and Head of Public Service? challenges that have engulfed our implement short and long-term My tenure was marked by some key economy in the past. We are a very initiatives for economic growth and transformations such as development resilient Country and we must remain development. of Key Performance Indicators so. (KPIs), assessment programs COVID-19 has interrupted economic and performance contracting in Every institution has principles and growth worldwide and even painted Government. All these were initiatives values that address various needs, a grim picture of our economic directed at supporting public service and this also applies to individuals. future, especially in the short to reforms, improving the morale of civil What values and principles do you medium term. What is your view on servants and adjusting the image of stand by that have facilitated your this? the public service sector which was growth? unattractive. I was privileged to work I recently had a conversation with Dr. with a team of Permanent Secretaries It is humbling to note that most of Manu Chandaria and he mentioned who were committed to this vision, the jobs I have held have been out that historically pandemics have thus the recognition accorded by of appointment. I barely recall being always been with us and will always be the United Nations Department of subjected to an interview process. a part of our existence. Meditating on Economic and Social Affairs – Public However, this honour is attributed to this fact, being prepared is the antidote Institutions, where we won the United certain personal values and principles to future pandemics. However, in this Nations Public Service Award. such as a positive perception on my particular case Self-discipline is the personality by others, my knowledge main remedy. of how Government works, hard work, teamwork, clarity of vision, Economic development depends trust and motivation, among others. | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS October - December | 19

Cover Story on human creativity, activities opportunities inbuilt within regional therefore a very important institution and interactions. Therefore, even as integration. for the Authority. the government ensures a dynamic response to prevent economic collapse Our focus should be on their The Government through the we have a major role to play. Our performance and success, a state that National Treasury is responsible for responsiveness towards maintaining can be achieved if we address the the development and implementation very high levels of self-discipline, will psychological barriers handicapping of fiscal policies. These policies are guarantee continuity of our economic many African countries e.g. over meant to enable economic growth. activities. dependency on imports yet we can KRA is at the center of this process. manufacture. We are determined to continue ‘Kenya Revenue Authority Board facilitating Government to deliver on Chairman & Secretary General Industrialization is a great its mandate by continuously enhancing World Customs organization’ opportunity for African countries collection of public revenue. I am and it’s as simple as adding value to happy that the current leadership is Trade is a key factor in economic everything we produce. This will working very hard to achieve this. growth. From your experience as release countries from a plethora The Board will continue to support Secretary General of the EAC, what of imports that have saturated the management through this process. is the role of trading blocs? market. Additionally, we need to be Within the mandate of KRA we shall Trading blocs are intended to proud of our products and work hard also continue to support and facilitate open up the economic and social to build-in competitiveness in these citizens and the business community space, facilitating socio-economic products. to achieve their goals. development. Additionally, they provide regional stability and Based of Africa’s Agenda 2063, The private sector is a key player in security as capital, services, and trading blocs should leverage economic growth. We shall continue people flow. The question of their on available regional and global working together with the private role is inarguably clear and in my opportunities and expand their sector as we continuously improve our opinion there is no alternative to production and trading capabilities. systems to create even more efficiency. trading blocs. Look at it this way, The EAC is well placed to succeed, but We are aware that a decline in business the potential for expansion of trade, to do so it must embrace dynamism for the private sector negatively increased attractiveness to investment, and creativity and take advantage of impacts the economic performance improved infrastructural connectivity the fact that it has been the fastest of a country and even reduces Foreign from a regional perspective are all growing in the Continent for many Direct Investment (FDI). We are years now. therefore continuously balancing all these parameters to create optimum If Africa is to compete with the tax models and systems. Our goal is world, then continental free trade area to help our Country to gain significant is not a choice but a requirement. financial and economic independence. As the Board Chairman of the Kenya In a nutshell we must provide the Revenue Authority what legacy do government with the means to execute you plan to leave behind and what is its mandate by growing revenue your vision for the Authority? collection, gain the trust of the private It’s very simple - leave the authority better and public sector by ensuring integrity than I found it. However, the question of staff and position the Authority is how? effectively to Kenyans by incentivizing free and honest remittance of taxes. The Board has a very ambitious plan aimed at expanding the tax base. Chairman, what is your final Additionally, we intend to bring message to Kenyans as the Chairman efficiency of service through adoption of the KRA Board? of information technology in at least Your taxes are very important in all our processes. However, the most financing provision of public services important focus is to develop staff and infrastructure. As we pay our capacity to ensure a skilled and efficient taxes we must all remember the workforce, and this is where the Kenya importance of security, education School of Revenue Administration for our children, health services and (KESRA) comes in. KESRA is October - Deceember | 20 | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS

Cover Story ‘Kenya Revenue Authority Board of Directors’ roads and airports, among many devote our remaining energy. We have PARTING SHOT others, which are all funded by your families that require our support and taxes. You must therefore be proud motivation. We also engage in a lot of The political arena is subject that you contributed in the growth community service and once in a while to frequent structural changes and development of your Country. As provide our wisdom to younger leaders making it difficult to plan or the Board and Management of KRA when it is sought. At the National level project in the short or long-term. we commit to serve this Country with we are elders and that is an important It is this particular element that dedication and diligence. role to play. Retirement is not the end I feel draws a line between civil of the road, it is just a turn. It is the service and politics and the As we bring to closure this greatest turn because you get to share reason for my lack of interest in conversation, what do you do with your wisdom and experiences making politics. your relaxation time? the world around you a better place Senior citizens have a lot to do, it just depends on where we want to We understand life backwards but we live forward because learning never stops ■ Higher National Diploma in Tax & www.kesra.ac.ke Customs Administration October - December | 21 Enhance your career in tax and customs by specializing the Higher National Diploma in Tax and Customs. » Email: [email protected] | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS

Investment By Dr. Darshan Facilitating the Private Sector Chandaria for Faster Economic Growth Group CEO & Director, Chandaria Industries INTRODUCTION to regulate, monitor and supervise the other activities. Besides impact of on implementation of project agreements the fiscal health of an economy, a The government of Kenya through on infrastructure or development robust private sector plays a crucial the Public Private Partnership projects; and for connected purposes. role in attracting foreign investments. (PPP) Act, 2013 provides for It is on this constitutional backing Therefore, it is instrumental that participation of the private sector in that the invaluable role of the private governments through policy financing, construction, development, sector gains recognition. formulation and active Public Private operation or maintenance of Partnership frameworks, safeguard infrastructure or development projects The private sector plays a crucial role independence of the private sector of the government through concession in the economic growth of a country within efficacies of accountability and or other contractual arrangements; through job creation, increased legality. the establishment of the institutions trading, diversification of services to the various social stratas, amongst PRIVATE SECTOR IN KENYA The private sector plays a crucial role in the economic growth of a Kenya’s medium-term Gross Domestic country through job creation, increased trading, diversification of services to Product (GDP) is expected to rise the various social stratas, amongst other activities. to 5.9% in 2020 and 6.0% in 2021 underpinned by private consumption, October - Deceember | 22 | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS

Investment a pick-up in industrial activity, and Firms in Kenya pay high energy costs at $0.21 per kilowatt-hour (kWh) still strong performance in the services versus $0.18/kWh in Nigeria, $0.10/kWh in South Africa, and $0.08/kWh in China sector (World Bank Kenya, 2019). and India; with the electricity bill accounting for a disproportionate amount of total However, prospects for this year have operating expense deteriorated significantly amid the COVID-19 pandemic owing to slowed amount of total operating expense.” benefits to the populace! This is a economic growth. To have issues of volatility and high clarion call for all private sectors. prices addressed, other private sectors Notwithstanding current challenges, should be actively engaged in research, Logistics system, including physical several global indices on the country’s proposal of solutions, formulation and infrastructure and cargo lead times economic performance indicate implementation of policies seeking Kenya is blessed with a geographical that there is an opportunity to to stabilize prices, enhance reliability location ideal for business, and the further improve domestic and global and increase innovation through growing demand has created a vast investment attractiveness. However, diversification of energy sources. need for an effective infrastructure. leveraging on the opportunity All these activities can be achieved Nevertheless, high costs of transpor- necessitates strategic review of actions through provisions existing within the tation continue to build pressure on implemented towards increasing PPP Act. businesses. investment attractiveness and strengthening of the sector. Besides Kenya having built geothermal The main transport corridor serving review of actions, incentivising energy sources, is able to generate Kenya and most of East Africa as investment and innovation in the the most cost-effective power tariff well as the Mombasa Port, are both sector also calls for the unremitting in the region. The causal effect in still constrained and congested, identification of requirements, this case will not only be affordability, negatively affecting the movement review of policies and harmonization but also a positive impact on the of freight to and from the country. initiatives. Centring on harmonisation environment as our carbon footprint Constrained mobility not only impacts some of the areas requiring attention will lower. This directly guarantees trade but also inflicts significant to improve performance of the sector achievement of environmental goals, economic inefficiencies to major include; and the subsequent growth in tourism cities. Comprehending the value of - a sector that contributes 12.5% to infrastructure in facilitation of trade, Cost and reliability of energy our GDP (Research by University of the government has undertakenthe The energy sector is a key facilitator Nairobi, 2020). With this in mind, ambitious LAPSSET corridor of Kenya’s economy, with cost and re- visualise the far-reaching impact on program, which will become the liability of the various sources of ener- the manufacturing sector, and the second transport corridor. gy serving as critical input to business performance. The indisputable effect of the sector on other sectors and growing need for new energy genera- tion, has seen to advancement of its structure through the support of the government. It is this concerted ef- fort that has recorded the discernible upward trend in energy generation. Nevertheless, certain challenges linger such as frequency of blackouts and af- fordability, becoming a major concern for businesses. Based on a 2019 report by the International Finance Corporation, “Firms in Kenya pay high energy costs at $0.21 per kilowatt-hour (kWh) versus $0.18/kWh in Nigeria, $0.10/ kWh in South Africa, and $0.08/kWh in China and India; with the electricity bill accounting for a disproportionate | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS October - December | 23

Investment As Kenya continues to undergo of potential competition problems, through high corporate taxes. massive expansion in infrastructure, prioritising major input sectors and those The World Investment Report 2020 the importance of PPP Act intensifies. sectors with strong linkages to multiple Worth noting is the catalytic effect sectors; by United Nations Conference on of an improved and a cost-effective (d) mandating public disclosure of Trade And Development (UNCTAD), commuting facility i.e. growth of infrastructure tender submissions, to deter indicated that FDI flows in Kenya had satellite cities around the major misconduct and bid rigging during tender decreased by 18% to USD 1,3 billion cosmopolitan cities. In turn, this leads preparation process. in 2019 compared to USD 1,6 billion to reduction and spread of an ever- in 2018, despite several new projects increasing demand for infrastructure, Review of the tax system in information technology and health. drop in the cost of living, and increased Foreign investment in Kenya remains Such drops in performance can be opportunities for business. relatively weak considering the size contained through tax reforms, better of the economy and level of devel- investment policies, and improved A meaningful mention in logistics opment. Reforms will ensure sustain- macroeconomic conditions. systems, is the state of customs, ability of the system and resolve ex- and border-crossing procedures isting inequalities that lower local and Cost of borrowing capital which are still largely manual and foreign investment attractiveness i.e. The cost of borrowing in Kenya is comparatively complex. The impact high and the banking sector needs of this system is proportionate to the The cost of borrowing in Kenya to rework terms to make borrowing cost of doing business in the country is high and the banking sector attractive. In the absence of cheap- and foreign investment attractiveness. needs to rework terms to make er capital, institutes tend to use their This therefore necessitates for borrowing attractive. In the supplier’s resources. Where use of transformative initiatives towards absence of cheaper capital, supplier resources is not possible, the trade facilitation, a driver to robust institutes tend to use their high interest rates deter borrowing for economies. supplier’s resources. investment because investment has a higher opportunity cost. Besides the Reduce corruption, providing a cost of borrowing the willingness of transparent and fairly competitive banks to lend is an equal area of con- market cern. While Kenya has a growing entrepre- neurial middle class, its economic de- Formalisation of the informal sector velopment has been impaired by cor- Based on a report by Mercy Corps ruption. The country has ranked 94th for irregular payments and bribes, according to the World Economic Fo- rum Global Competitiveness Report 2017–18. Corrupt behaviour from both private and public representatives increases the cost of doing business, creates unfair competition, favours inefficient and larger firms to the disadvantage of smaller players, and generally obstructs investment. Some of the key measures that can help mitigate the consequences of this immoral practice include: (a) finalising and implementing the planned privatisation of state-owned enterprises; (b) revising the role of marketing boards to remove bottlenecks and address instances of market failure; (c) timely investigation and resolve October - Deceember | 24 | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS

Investment Youth Impact Labs 2019, “Kenya change in the populace ranging Conclusion has a large informal sector which ac- from an increase in disposal income, counts for 83.6 percent of the working urbanization amongst others; some of Close to 80% of our GDP is population, employing 14.9 million the opportunities for the sector that workers. The sector also referred to will boost investment attractiveness generated by Midsize Enterprises as ‘shadow economy’ is a key driver include; of the economy, a claim that is irre- (MSEs) and the informal sector, futable observing the current and • Active participation through PPPs direct impact of COVID-19 on the particularly in large infrastructural therefore understanding their needs economy. Formalisation of the sector projects. to increase local investment attractive- • Spearheading technological innovations and providing support is critical. ness can be achieved through creating in response to recognition of Nairobi city incentives, reviewing registration and as Africa’s technology hub, alongside In order to make the most out of taxation, social protection amongst Lagos, Cape Town and Accra. other avenues. However, this is not a • Keeping abreast with trends of a rapidly these sectors we must undertake one-time process due to the complex changing population with an increased nature of the sector. The government disposable income, to identify possible a detailed assessment of the should therefore engage players in the responses to demands – research based sector in development of mutually business operations. Under the current informal sector with an account of acceptable reforms that facilitate for- economic situation, this will require malization, ensure better controls and review of business models and innovative the drivers of informality, output increase revenue base. responsiveness towards the challenges introduced by COVID-19 pandemic. generated, the impact it has on OPPORTUNITIES FOR THE PRIVATE SEC- • Identifying prospects that respond to the TOR Africa Agenda 2063 ‘The Africa We our GDP, employment rate and Want’. Kenya’s diversified economy and long • Adopting value addition as an approach overall business environment in the history of private sector development, to business. ensures a wealth of investment country. The barriers of the informal opportunities. Observing the rapid sector must also be recognised and addressed effectively with nee policies developed and targeted programs designed to increase links among small and medium enterprises (SME’s) and larger companies. Ultimately all measures of growth and improvement should be tracked and reviewed for consistency. While Kenya National Bureau of Statistics (KNBS) collects comprehensive national statistics, there are gaps that make it difficult to fully understand the private sector. Therefore, improving the quality and quantity of collection of economic data will ensure that the sector is contributing optimally towards economic growth in Kenya. As the country’s performance gradually inches closer to better-performing economies, meaningful improvements and bolder approaches to reforms are necessary. Further, a well collaborated interaction between the government and development partners in policy formulation and implementation is essential. It is the shared participation and responsibility that will ensure investment attractiveness and increased opportunities for local and foreign investors ■ | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS October - December | 25

Potential for Africa’s rosy economic future lies within the continent By Grace Wandera Researchers and scholars around the world have described the African continent as the home of great opportunities. The said opportunities range from the already existing ones to the unexplored. Looking Deputy Commissioner back at the history of the continent, it must have been against this backdrop that colonial governments Marketing and pitched tent in Africa during the colonial period. Communications - KRA INTRODUCTION was moved by Kenyan innovations resources which then gives life to the such as Mpesa, My Orders, M-Farm old saying that necessity is the mother Although most African countries and Kilimo Salama. He admitted of invention. are still categorised as developing, that despite having come from one the economic potency in this region of the 10 richest countries in the THE AFRICA WE WANT cannot be overstated. When he visited world, he foresaw a future where the Kenya a few years ago, Alexander very countries that are considered Africa’s prosperity is pegged on Oswald, a renowned marketing developed will be visiting countries like the internationally recognised guru, was amazed by the level of Kenya to benchmark on innovations development blueprints like innovations in this country. During a such as mobile solutions. He the Sustainable Development 2011 presentation in Austria dubbed attributes the landmark innovations Goals (SDGs) and the African Why Kenyans do it better, Mr Oswald in developing countries to scarcity of Union’s Agenda 2063. It has been unanimously agreed that the Africa October - Deceember | 26 | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS

Africa’s Growth Lies Within The Continent we want is encapsulated in the Saharan African countries. Food Policy Research Institute, reports successful implementation of the two In the African economy, a significant improvement in the blueprints. The engine components value of intra-African agricultural behind the success of the two agriculture features significantly as trade over the years. According to development blueprints are the very one of the economic backbones. the survey, the value of intra-trade aspects that make Africa the land of Agricultural products are for both on agricultural products increased great opportunities. The economic local consumption and for exports annually by 12 per cent between 1998 muscles of the African countries are within African and beyond. The and 2013. Therefore, when we look both diversified and crosscutting. It mass and diversified production of at the factors that have the potential is an interplay of these diversified agricultural products in Africa is to uplift the African economy further, factors that will catapult the continent supported by favourable weather agriculture tops the list. to the desired levels. conditions. Statistics indicate that the mass production of agricultural TECHNOLOGY & BUSINESS Take agriculture for example. products in the region has led to an Agriculture is one of the most increase in the value of intra-African Business magnate and renowned common economic activities in agricultural trade thereby boosting software developer Bill Gates once Africa that continues to impact on Africa’s economy. said that if your business is not on many lives. As such, agricultural the Internet, then your business activities continue to command a Africa Trade Monitor survey will be out of business. True to this significant share of Africa’s aggregate released in 2018 by the International assertion, business models across economic performance output. Africa have been leveraging on A study conducted by the United Closer home, KRA already has modern information communication Nation’s Food and Agriculture in place a robust tax education technology platforms to align to the Organisation (FAO) in 2016 dubbed framework which aims at contemporary business landscape. Africa agriculture status report 2016 raising tax awareness levels in Thanks to the Internet, it is now indicates that on average, agriculture the country. possible for someone, say in Nigeria, accounts for 15 per cent of the Gross to order for goods or services from a Domestic Product (GDP) in most Sub- South African supplier conveniently. Internet accessibility has made the cost of doing business relatively cheaper because business persons do not necessarily have to travel from one country to the other sourcing for products. In Kenya, connectivity of the fibre optic cable has pushed Internet connectivity to new heights. According to the 2018 Kenya Vision 2030 Sector Progress Project Update, all major towns in Kenya had been connected through the National Optic Fibre Backbone Infrastructure (NOFBI) and Government Common Core Network by 2018. The potential in the fibre optic cable is immense and continues to provide a ground for enhanced technological penetration in the country. The monumental uptake of ICT has led to landmark innovations which continue to transform the way we do things. Look at the innovation behind Mpesa, for instance. Mpesa has, and continues, to put Kenya on the world map. It is an innovation that | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS October - December | 27

Africa’s Growth Lies Within The Continent has not only made money transfer In the Kenyan perspective, publication by the Organisation easier but also opened thousands of the technological advancements for Economic Cooperation and opportunities to millions of people. undertaken by the Kenya Development (OECD) dubbed Revenue Authority (KRA) are a Building Tax Culture, Compliance Adoption of Mpesa innovation hallmark of such changes. Take and Citizenship, the Nigerian taxman soured up right from the inception iTax, for example. The system has partnered with the media industry of the service. In a 2011 study titled has significantly revolutionised to enhance tax education in the four Mobile Banking - The Impact of administration and mobilisation of corners of Nigeria. This is done Mpesa in Kenya, Isaac Mbiti and domestic taxes in Kenya thereby through radio programmes, television David Neil report that over 8.5 million improving on efficiency. programmes and tax movies, among Kenyans had registered as Mpesa users other production avenues. by September 2009, barely two years is morphing from enforcement to after inception of the service. This facilitation. This change is anchored Closer home, KRA already has saw an aggregate transfer of money on reforms such as the use of modern in place a robust tax education to a tune of $3.7 billion, which was technology in tax administration. framework which aims at raising equivalent to 10 per cent of Kenya’s tax awareness levels in the country. Gross Domestic Product (GDP). In the Kenyan perspective, KRA is not only targeting current the technological advancements taxpayers in this framework but Innovations such as Mpesa have undertaken by the Kenya Revenue also future taxpayers like our high been pivoted by the vast penetration Authority (KRA) are a hallmark of such school and university students. The of mobile telephony across the region. changes. Take iTax, for example. The idea is to inculcate a culture of tax In 2017, CNBC Africa reported that system has significantly revolutionised compliance early enough to the future almost 76 per cent of the population in administration and mobilisation of crop of taxpayers. This saves the next Sub-Saharan Africa had subscription domestic taxes in Kenya thereby generation the shock that most of us to mobile telephony, an indication of improving on efficiency. Through had to contend with when our first pay how fast this technology is penetrating iTax, KRA receive real-time updates cheques came through. The ongoing in the region. on who is transacting where, with who integration of tax education in our and the amount of money involved. curriculum is also a monumental Another notable innovation in The iTax platform has also made it milestone in enhancing tax education. Africa is Egypt’s Dr. Diana Yousef ’s possible for taxpayers to access KRA “iThrone” portable toilet, an services virtually. FISCAL HEALTH innovation that has gone a long way in addressing issues of poor Improved tax compliance is directly The list of strategies tax sanitation and environmental proportional to better revenue administrators are implementing to degradation caused by raw sewage. mobilisation and collection. Research enhance revenue mobilisation can This innovation is reported to be shows that most taxpayers fail to go on and on. Although we might responsible for elimination of 95 per honour their tax obligations largely not yet have accomplished much cent of onsite sewage volumes, thereby due to lack of information. In light as far as the underlying benefits of doing away with the need for tanks, of this, most tax administrations in these strategies are concerned, the power and other peripheral plumbing Africa have made deliberate efforts shred of hope that is keeping Africa requirements (NewAfrican Magazine, to enhance tax education among the on the move is the rosiness of the 2018). With such innovations and taxpayers for enhanced compliance. future, which is clearly visible in the many others, which we cannot horizon. Notably, enhanced domestic exhaustively highlight now, Africa To rubber stamp their commitment revenue mobilisation will be one way will be on the map as an exporter of on tax education, some taxmen have to emancipate most African countries innovations that solve mankind’s daily even devised varied and creative from the web of foreign debts. This problems. ways to disseminate this education will translate to self-sustenance hence and make it more appealing to the improved economic growth. Effective TAX ADMINISTRATION LANDSCAPE target audience. The Nigerian Federal revenue mobilisation is one of the key Inland Revenue Service (FIRS), for focus areas in the African Union (AU) The changing tax administration instance, has leveraged Nigeria’s rich Agenda 2063. The underlying dream landscape is also playing a key role film production and consumption is to have an Africa that can feed in shaping the economic future of industry to take tax education to herself and feed the world. our continent. Africa’s taxmen are the next level. According to a 2015 now adopting new ways of mobilising The promising economic future of domestic revenues to support the Africa is also pegged on the enhanced economies of their respective regional integration and cross countries. Notably, tax administration October - Deceember | 28 | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS

Africa’s Growth Lies Within The Continent border trade within the continent. Business magnate and renowned software developer Bill Gates once The United Nations lists eight major said that if your business is not on the Internet, then your business will regional economic communities in be out of business. Africa, which include among others, the East African Community (EAC), Conclusion spending goes to education. the Common Market for Eastern Apart from the factors discussed, the and Southern Africa (COMESA), In his book, Seven Reasons Why realisation of “the Africa we want” the Economic Community of Africa’s Time Is Now, Jonathan dream is also anchored on the need to West Africa States (ECOWAS) and Berman foresees a bright star in formulate robust tax and fiscal policies Intergovernmental Authority on Africa’s economic future based on both at individual State level and Development (IGAD). Although the tremendous potential in Africa. regionally. Strong tax policies are a countries integrate for various reasons, Among the seven reasons Berman catalyst for economic growth. economic empowerment for member highlights in his book that are the key Above all, there is a need for Africans states is the denominator in most cases. to Africa’s economic future include a to believe in themselves. The underlying huge market opportunity due to the potential within the continent cannot Regional blocks play a key role growing population, increased stability be overemphasised. Take our country in promoting cross-border trade with no civil wars, intra-Africa trade for instance. In the African context, among the member states thereby as discussed earlier and a workforce Kenya ranks among the top ten fastest improving the economies of the large enough to serve not only Africa growing economies. Our Nairobi countries involved. In this case, trade but also the entire world. Stock Exchange (NSE) is the largest is promoted through preferential Berman further attributes the in capitalisation in Africa. If Kenya treatment of goods from member tremendous Africa’s economic future to has done this well so far, so can any states and reduced or removal of tariff the vast mobile penetration, availability other African country. Therefore, the rates on goods, among other trade of agriculture-rich uncultivated land potential for Africa’s success is barriers. and the keenness with which African right here in Africa ■ governments treat education. He notes One aspect of the regional that 20 per cent of most governments’ integration that is enhancing the economic wellbeing of most countries is what can be termed as “open borders”. This can be best explained by the One-Stop Border Post (OSBP) concept already in operation between Kenya and the neighbouring countries. Since its implementation at the various border points, the OSBP concept has simplified the access of goods and people from either side of the border thereby improving trade between Kenya and the neighbouring countries. Compared to the period prior to the inception of the OSPBs, it used to take a lot of time and resources to clear goods at these border points. Traders and travellers had to wait for hours on end to be cleared by the officials of the country they were exiting first before waiting longer to be cleared by officials of the country they were entering. Invaluable man-hours would be lost in the process. Perishable goods were also at risk of going bad and this was not very good for trade. Inception of OSPBs has therefore been a great game changer that has gone a long way in enhancing cross-border trade. | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS October - December | 29

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Africa’s Fiscal Landscape Introduction // Fiscal policy can be simply defined as the use of public expenditure and taxation to regulate the economy towards expansion or contraction, depending on the situation (IMF,2015). It is considered to be one of the strongest tools available to public authorities in intervening and influencing the general outlook of an economy from time to time. This article addresses critical questions on fiscal policy and financing of the SDGs in Africa, covering the nature and role of fiscal policy; the potential of fiscal policy, including tax and non-tax revenue, to enhance domestic resource mobilization; and the role of fiscal policy in macroeconomic management and achievement of the SDGs. By Issa Zubeir, In Sub-Saharan Africa (SSA), the general Committee of Experts of the Conference of (CPA, Cs) economic outlook in terms of fiscal policy African Ministers of Finance, Planning and operation differs significantly among the Economic Development that took place in Senior Tax Advisor, countries. This is due to distinct historical March 2019 in Marrakesh, Morocco, there Ernst & Young (EY) paths concerning the development of the was a strong appeal for African countries to improve Kenya policy which was mainly anchored on their fiscal policy and expand their tax base to enable colonial experiences. Taking into account them fund their developmental processes. In the October - Deceember | 32 slow economic growth and high levels of opening remarks, Economic Commission poverty within the region, prominence of this for Africa (ECA) Executive Secretary, Vera tool in the purview of recent developments in Songwe, indicated that the ability to increase Western countries and emerging economies revenue collection was key to the continent’s is perceptible. capacity to finance its development, in particular, Agenda 2030 for Sustainable During the 38th meeting of the | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS

Africa’s Fiscal Landscape favourable domestic conditions. Some of the cent, partly because of high income- continent’s largest economies (South related inequities in access to public services Development and Africa’s Agenda Africa, Angola and Nigeria) record an (World Bank). Income inequality is 2063. upward trend, but remain vulnerable also high, at 0.44, measured by the to shifting commodity prices especially Gini coefficient, despite being on the According to the United Nations today due to the antagonistic effects decline. Additionally, unemployment Economic Commission for Africa of COVID-19 pandemic on the stood just above 7 per cent in 2019 (UNECA) 2019 Economic Report economy. International Monetary and is projected to decline slightly on Africa, it is estimated that African Fund (IMF) June 2020 estimate, in 2020 (International Labour countries can boost their government indicates that Kenya’s economy Organization), because of COVID-19 revenue by 12–20 per cent of overtook Angola in dollar terms. The pandemic and uncertainty of the Gross Domestic Product (GDP) by contraction of Angola’s economy is virus’s duration, which could lead implementing countercyclical fiscal policy, attributed to declining oil output since the world plunging into recession. taxing hard to reach sectors, tapping non-tax 2016, and devaluation of Kwanza While growth is projected to pick up revenue, introducing e-taxation and fighting in 2019 against a steady Kenyan in the medium term, current growth tax evasion and avoidance, particularly shilling. The COVID-19 pandemic rate is not adequate in eradication in the natural resources sector. However, and restrictions to curb spread are of poverty or achievement of SDGs the financing needs to meet the likely to further contract Angola’s in Africa. Therefore, though growth Sustainable Development Goals GPD by 1.4% in 2020, while Kenya’s acceleration is vital it is not adequate, (SDGs) in the continent are huge, and is projected to grow by 1%. Although thus the significant role of fiscal policy. the gap wide. domestic demand, public investments and stronger trade between Africa Fiscal policy can be an anchor for Financing needs are estimated and global markets supported macroeconomic stability, and African to range from $614 billion to $638 growth, commodities remain a key governments need to harness the billion a year, with infrastructure, economic driver. It is such exposure fiscal instruments at their disposal food, security, health, education and of economies to volatile commodity in acceleration efforts towards climate change mitigation alone prices, that are detrimental to growth, achievement of SDGs. This calls for estimated at $210 billion (United impeding initiatives such as poverty rethinking fiscal frameworks as well as Nations Conference on Trade And eradication. rebuilding the fiscal space. Recalibrating of Development -UNCTAD, 2014). the fiscal policy requires that business Narrowing this financial gap requires Progress in poverty reduction cycles are taken into account during enhancement of Domestic Resource though steady has been slow, and implementation, to elude the adverse Mobilization (DRM) strategies all-inclusive growth leaving no one effects fuelled by ignoring this factor. through efficiency and efficacy of the fiscal behind remains elusive. Statistically policy. poverty rate dropped from 54.3 CORPORATE TAX REDUCTIONS per cent in 1990 to 36 per cent in This article addresses critical 2016. On the other hand, poverty In Africa, corporate tax reductions questions on fiscal policy and financing gap remains high, at 15.2 per cent offer little incentives for investment. of the SDGs in Africa, covering the nature against a global average of 8.8 per The 2019 Economic Report on and role of fiscal policy; the potential of fiscal Africa by UNECA, observed that to policy, including tax and non-tax revenue, to achieve a 1 per cent increase in total enhance domestic resource mobilization; and investment, governments could lose up the role of fiscal policy in macroeconomic to 20 per cent in tax revenue. African management and achievement of the SDGs. countries should thus avoid joining the race to the bottom and lowering GLOBAL ECONOMIC GROWTH & SOCIAL taxes to attract foreign investment, DEVELOPMENT since the gains will be insignificant in comparison to revenue loss. Global economic growth and favourable domestic conditions In contrast, fiscal policy is vital buttressed Africa’s economic for “crowding” in private investment performance, however progress on in Africa, and has a significant effect social development has been slow. on the Real GDP per capita. In the long run a 1 per cent increase According to UNECA 2019 in private investment could boost Economic Report, economic growth in GDP per capita by up to 1.6 per Africa moderated from 3.4 per cent in cent. Hence, the policy can speed 2017 to 3.2 per cent in 2018, and was supported largely by solid global growth, a moderate increase in commodity prices and | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS October - December | 33

Africa’s Fiscal Landscape up economic diversification and fiscal space for a majority of African costs by 22.4 per cent and lowered accelerate structural transformation. countries. Sources of this revenue compliance time to value-added tax An additional consideration is the include grants, property rents, fees and other by 21.8 per cent. These statistics full implementation of the African miscellaneous sources. However, political display the potential gains that can be Continental Free Trade Agreement capture is often an impediment to drawn from leveraging on information (AfCFTA), which will also increase non-tax revenue collection, especially technology. investment in Africa. for property rents. UNCTAD (2018) estimated that improving governance BASE EROSION & PROFIT SHIFTING INDIRECT TAXES frameworks and actively monitoring (BEPS) non-tax revenue would increase Indirect taxes are the highest revenue by as much as 2 per cent of Elimination of BEPS is one of the contributors to revenue in Africa. the GDP. major avenues of reducing revenue Nevertheless, the economy has a large leakage and enhancing tax revenue informal sector that presents difficulties LEVERAGING ON INFORMATION in Africa by an estimated 2.7 per cent in identification of its economic agents TECHNOLOGY of GDP (Solheim, 2016). UNECA to facilitate taxation. Governments 2019 Economic Report on Africa are observed to rely mainly on Tax administration reforms have highlights the avenues of tax evasion indirect taxes such as consumption been among the most successful fiscal and avoidance in the natural resources taxes, which generate more than 60 reforms in Africa over the last two sector in Africa, which include use of percent of tax revenue to reach the decades. Setting up semi-autonomous non-strategic tax incentives, loopholes in sector. Realigning fiscal instruments tax authorities, mainly in Anglophone double-taxation agreements, difficulties in to capture this informal economy, countries, and leveraging the use of applying the arm’s length principle effectively improving governance in revenue information technology has improved in regulating intra-company transactions, collection; bolstering accountability; compliance, lowered the costs of inclusion of fiscal stability clauses in and reducing inefficiencies, will compliance and tax collection and contracts, and a lack of coordination and increase revenue collection and tap widened the tax base. information sharing among government into non-tax revenue. agencies. The UNCTAD Annual Report NON-TAX REVENUE 2019, indicated that Rwanda increased KEY POLICY REFORMS revenue by 6 per cent of GDP by Non-tax revenue is an untapped introducing e-taxation, while South A typical economy in Africa, collects source of revenue that can expand the Africa e-taxation reduced compliance just about 16 percent of GDP in October - Deceember | 34 | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS

Africa’s Fiscal Landscape taxes, with the exception of countries Establishingstronginstitutions Tax administration options: like Morocco which collect at least with high levels of expertise, Reforming tax administration systems 25 percent. Conversely, South Africa building new infrastructure through digitization and other and Rwanda while leveraging on new and establishing effective information technologies will increase technologies have expanded revenue coordination between central revenue mobilization. Countries that collection (UNECA), confirming and local governments will have digitized their tax administration that technology can transform Africa support Non-tax revenue have increased compliance rates and by increasing competitiveness, promoting collection. saved on compliance costs. However, strong integration, reducing the cost of doing rollout of digital technologies requires business and strengthening trade, among on business by COVID-19 pandemic. capacity building for policy makers other things. Based on this, it is expected that and tax collectors to ensure that the economy will be high on the list generated data is effectively utilized. Africa is capable of increasing of many revenue authorities as an government revenue by 12–20 per untapped source of revenue. Further, Policy options for the natural cent of GDP through adoption of SSA countries must also reassess tax resources sector: African countries policy frameworks that strengthen incentives and drop those that do not should strengthen oversight of the revenue mobilization in the following serve the intended purpose. natural resources sector. Strategies areas; adopted can embrace equity and Non-tax revenue options: less administratively challenging Fiscal policy options: Anchoring Investing in improved data collection methods in assessment of the share of fiscal policy to national medium-term methods and implementation, will multinational corporations’ profits to financing strategies permits countries strengthen monitoring of non-tax tax (for example, based on the share to leverage the full potential of all revenue collection and non-reporting. of sales or other variables), or base revenue sources for government, for Establishing strong institutions with taxes on variables that are harder to accelerated and sustained growth high levels of expertise, building manipulate than corporate income. underpinned by macroeconomic new infrastructure and establishing At the same time, governments need stability. effective coordination between central to close loopholes to avert BEPS. and local governments will support Tax policy options: Tax base Non-tax revenue collection. Debt policy options: Dynamics of must be widened by including hard to public debt in Africa call for adapting tax sectors into the tax net, including debt sustainability strategies and agriculture, informal economy, digital frameworks to current debt portfolios. economy and natural resources sector. That includes improving revenue The e-commerce or digital services mobilization to enhance debt servicing sector seemingly operates relatively and reducing long-term borrowing. unscathed, despite the negative effects Conclusion the region also arises from lower fiscal capacities and inefficiencies in revenue The increasing use of information generation processes, which when technology including digitalization, has addressed will boost tax revenue. enhanced efficiency and effectiveness With just over a decade remaining to of tax administrations in the African achieve the SDGs, it is imperative that countries. the scope and mechanisms of DRM be At the core of global tax reforms is the revolutionized to bridge the financing shift from tax administration procedures gap, promote macroeconomic stability designed by and suited to governments and limit external borrowing by SSA and their tax collectors, to practices countries. This is because the potential of acceptable and convenient to taxpayers. Africa is and has always been promising, Interestingly, SSA countries have been and the continents transition to The Africa increasingly adopting tax reforms to we want within our reach ■ improve their tax collection (OECD, 2018). However, the low tax revenue in | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS October - December | 35

Influencer Influencer community on how to ready their businesses to take advantage of the agreement. Rose Chepchirchir Ronoh Further, she is the Chairperson of the Information DIRECTOR TRADE FACILITATION and Transparency Sub-Committee of the National Trade Facilitation Committee, which is the Kenyan Kenya Trade Network Agency (KENTRADE) implementation framework for the World Trade Organization - Trade Facilitation Agreement (TFA). Rose Chepchirchir Ronoh is a passionate International She upholds that implementation of the TFA by Trade Professional with over sixteen years work experience African countries will reduce non-tariff barriers by drawn from both public and private sector in Kenya. She is increasing transparency, eliminating bureaucracy, the Director of Trade Facilitation at Kenya Trade Agency thereby driving down the cost and time of cargo Network (KENTRADE), a Kenya Government agency that clearance in the logistics value chain. implements and manages the Kenya Electronic Single Window System (TradeNet System). The system has revolutionized the As an AfroOptimist she has contributed logistics value chain in Kenya saving the country upwards of significantly to trade facilitation reforms in the East Kshs 2.5 Billion annually according to the World Bank/IFC Africa Community through projects such as; One Stop Kenya Single Window Impact Study of 2018, an achievement Border Posts, Single Customs Territory, Mombasa she proudly associates following successful implementation. Port Charter, Non-Tariff barriers monitoring Further, she has led her team in the establishment of the committee amongst many others. Representation of first trade information portal of its kind in Africa – www. Kenya at the World Trade Organization Ministerial infotradekenya.go.ke – a portal that provides information on Conference in Nairobi, UNCTAD14 Nairobi how to trade with Kenya. Conference, the 6th TICAD Nairobi among many other bilateral negotiations, also underscore her Possessing an extensive experience in trade facilitation, trade invaluable contribution. policy, cross border trade, regional integration, ICT for trade, stakeholder engagement, change management, customer Recently she finds delight in observing how experience, marketing and communications, she is an enthusiast COVID-19 has driven many government entities of the Africa Continental Free Trade Area (AfCFTA). It is an and businesses to embrace ICT for trade practices, enthusiasm borne out of a strong believe that solutions to reinforcing reforms. Additionally, the upcoming problems plaguing Africa are within the concept of increasing project at the East Africa Community (EAC) aimed intra-Africa trade through the implementation of the AfCFTA. at integrating all customs related ICT systems and This has led to her active participation in negotiations for electronic single window for partner countries, adds the AfCFTA, development of the implementation strategy to the excitement. The EAC project will potentially for Kenya, and hands on capacity building of the business transform the trade facilitation landscape improving the trading environment, and transforming October - Deceember | 36 livelihoods. Other achievements: Trade Law Africa Centre (TRALAC) 2020 Fellow, a TRAPCA 2019 International Trade Law and Trade Policy Scholarship recipient and Australian Awards 2019 Fellow. Previous work experience: Corporate Communications Manager at The Catholic University of Eastern Africa, Regional Marketing Officer at Kenya Power, Brand Manager at the Standard Group (KTN/Standard) and Head of Marketing and Communications at Vaja’s Manufacturers Ltd. Academic qualification: Business Management PhD Candidate at Moi University, Masters in Business Administration (MBA), BSc in International Business Administration, an Executive Diploma in Marketing, Prince 2 Project Management Certificate, Professional Certificate in International Trade amongst many other certifications. Social responsibility: Actively supporting education of children in Elgeiyo Marakwet County in Kenya ■ | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS

Special Feature Performance of the This article summarizes; funding of the Health Policy, Health Sector in Kenya an analysis of the policy, the current challenges COVID-19 situation and opportunities of the policy under the Covid-19 pandemic, and the link between the Health Policy and Fiscal Policy. Finally, policy reform opportunities and recommendations are briefly made. By Dr. Mathew policy development, management of Policy 2014-2030, the Kenya Constitution Muma referral health facilities, assistance to 2010, Vision 2030 which is Kenya’s overall counties, and the development of health development policy, UN’s Millennium Senior Policy Analyst standards among others. The County Development Goals (MDGs) and – Kenya Institute For Governments are responsible for county Sustainable Development Goals (SDGs), Public Policy Research health services that include county among others have guided the sector since and Analysis (KIPPRA) health facilities and pharmacies, and the 1990s. The Health Act No. 21 of 2017 promotion of primary healthcare among and the Health Sector Strategic Plans have INTRODUCTION others. Further, the country’s health undergirded the legal framework. delivery system is hierarchical consisting In 2013, the Kenya of four levels since 2014. The system This article summarizes; funding of the Constitution 2010 provided begins with primary healthcare facilities at the Health Policy, an analysis of the policy, the for two levels of government community level to the apex delivery systems at current challenges and opportunities of the - the National Government referral facilities. policy under the Corona Virus pandemic, and the 47 devolved County and the link between the Health Policy Governments. The National The implementation of the Health and Fiscal Policy. Finally, policy reform government plays the main Policy takes a multi-sectoral approach opportunities and recommendations are role in leadership of health with key stakeholders in the sector briefly made. comprising of the Ministry of Health and Semi-Autonomous Government UNIVERSAL HEALTH COVERAGE Agencies (SAGAs) responsible for health, County Government Departments The Kenya Government is committed and entities responsible for health, to achieving Universal Health Coverage consumers, None-state actors and (UHC). It has committed to this by drafting development partners. These stakeholders the Kenya Health Financing Strategy and the Intergovernmental Relations which aims at ensuring that all citizens forum underlie the health institutional access quality health services without framework. Various health policy having financial difficulties. The strategy frameworks such as the current Health aims at addressing key health financing weaknesses through proposed reforms | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS October - December | 37

Special Feature focused on resource mobilization, Health spending or financing is still includes equal share, population and financial risk pooling, quality dominated by household financing poverty index among other criteria. assurance, purchasing mechanisms, (OOP) and external sources. Though Although national transfers to counties and regulatory frameworks. public financing has been increasing it have increased in absolute terms since has not reduced the burden of OOP 2013, they have remained constant as Taking note of growth of the spending, even as external funding a percentage of the GDP at 4 percent. economy above 5 percentage point has been on the decline from about annually since the last decade, Kenya 32 percent to 22 percent in 2017. The The devolved health financing has the opportunity to invest in better per capita health spending increased system allows for opportunity to cross- healthcare for her citizens. However, from about US$51 per capita in subsidize across poorer and richer the opportunity may not necessarily the last decade to about US$79 in counties through a poverty metric translate into more financing for 2015/2016. The increase is only partly weighted at 18 percent of a county’s health or UHC, without concerted accounted for by public funds which revenue share. Health shareable efforts by the Government to pool stagnated in relation to the GDP at revenues are at the discretion of a and target resources to meet the about 2 percent. Expenditures on county and a county can prioritize needs of especially the poor and Foreign debt, wages and infrastructure allocation according to its needs. impactful services. Also, the devolved investments increased much more. County allocations to health have more governments now have reasonably The annual government spending than doubled since 2013/2014 from free hand to decide on how they has averaged about 6 percent of total 21.5 percent of county expenditure to finance primary and secondary health expenditure for the last decade. 25 percent in 2016/2017. The county services. average expense masks variation across Households contribute to one third counties. Nevertheless, Counties also The National Hospital Insurance of the total health spending. This fund health from locally generated Fund (NHIF) which currently covers constitutes about 75 percent of private revenue and user fees generated from health insurance for 17 percent of health spending. A small amount of local public health facilities. Kenyans, is targeted to play a key private health spending (4 percent) role in UHC. Notwithstanding, the is mobilized through pooled pre- ANALYSIS OF THE HEALTH POLICY requirement of payment for health payment schemes. OOP expenditure Out-of-Pocket (OOP) to access declined slightly as a share of private The goal of the predecessor policy, health services has meant significant health spending from 77 percent the Kenya Health Policy Framework disparities in access of health services in 2001/2002 to 67 percent in adopted between 1994 and 2010 was especially among poor Kenyans, and 2005/2006 relieving financial pressure to ‘promote and improve the health of all informal sector workers targeted for on households. The government has Kenyans through the deliberate restructuring UHC. also reduced the burden of user fees of the health sector to make all health services for primary and maternal healthcare, more effective, accessible and affordable’. HEALTH FINANCING while public secondary care and The sector was guided by primary hospital facilities continue charging healthcare approach which is the Health financing in Kenya is sourced user fees. Further, the Government most efficient and cost-effective way mainly from; the government, transferred annually Ksh. 700-900 of organizing a health system. After external donors, and the private million to the public and private 2010, the main goal of the Health sector It is important to note that the facilities providing primary healthcare Policy 2014-2030 is to “attain the highest private sector funding is mainly from services and Ksh. 3.5-4.3 billion for standard of health in a responsive manner”. household spending. free maternal healthcare, respectively, totalling to Ksh. 3.4 billion and The gains made from In The goal of the predecessor 15.95 billion between 2013/2014 and implementation of the previous policy policy, the Kenya Health Policy 2016/2017. were consolidated into the current Framework adopted between 1994 policy. The current policy is to be and 2010 was to ‘promote and DEVOLVED HEALTH FINANCING achieved through implementation improve the health of all Kenyans of the following actions: appropriate through the deliberate restructuring According to the Kenya Constitution organizational arrangements for of the health sector to make all 2010, the National Government service delivery, health leadership and health services more effective, transfers resources to the 47 devolved governance, suitable health workforce, accessible and affordable’. Governments for the delivery of appropriate financial arrangement, devolved services which include health information system, health healthcare, through a shareable products and technologies, health revenue based on a formula which infrastructure and research and development. October - Deceember | 38 | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS

Special Feature The new Health Act No. 21 of 2017, of services at primary level and the faced with a dilemma as they need to establishes a rights-based approach to ongoing challenges with referral address the unsustainable staff wage health, defines the roles of National systems, causing individuals to seek bill and staff shortages. On the other and County Governments, establishes care at a higher level than necessary, hand, the country lacks a national new regulatory agencies, and guides on negatively impacting overall efficiency health staff capacity-building program various issues such as health financing of the health system. to support counties. The performance and private sector participation. of the policy in regard to funding is However, proposals on new regulatory HEALTH SECTOR CHALLENGES & already mentioned. bodies and institutional mechanisms OPPORTUNITIES have not been disseminated and fully The absence of a unified approach initiated. Therefore, there is need to The health sector in Kenya suffers to monitoring programmatic and strengthen institutions and systems a scarcity of health specialists, and sector performance within the health especially at the counties to address the available specialists are unevenly management information system a myriad of challenges constraining distributed across counties. This has (HMIS) has created duplication of their work which include; led to inequities in the quality and effort; inefficiencies; lagging capacity availability of specialized health in the analysis of health sector • Lack of clear, uniform management services, especially in northern performance and implementation systems, inadequate capacity to legislate Kenya counties. The country has also of a comprehensive HMIS; and a health laws and incorporate civil society experienced health service delivery weak culture of data demand and in policy decision-making processes. interruptions over the past five years the use of information for decision • Limited coordination between the owing to health worker industrial making. Countrywide use of the new National and County Governments due action, yet capacity to manage Demographic Health Information to weak linkages afforded by the Health industrial unrest is weak at both System2 (DHIS2) is limited by data- Sector Intergovernmental Forum. government levels. quality concerns and human and • Weak enforcement of laws and norms infrastructure shortages. There is a especially by the private sector. Human resource accounts for pressing need to develop a HMIS legal • Lack of clarity about the roles and the bulk of health expenditure and and regulatory framework to address importance of the proposed regulatory shortage of professional staff remains issues such as enforcement of private agencies including the health sector a major factor limiting access to sector reporting. professional organizations. healthcare. County governments are The Kenya Essential Package COVID-19 CHALLENGES & of Health (KEPH) defined by the OPPORTUNITIES Health Policy 2014-2030 is intended to ensure that clients who are in need COVID-19 has impacted the health of services can access them without sector significantly presenting a variety unnecessary financial difficulties. It is of challenges and opportunities. The meant to assist in achieving Universal challenges included; Health Care (UHC). However, its implementation is faced by challenges • Acute resource shortages of specialist such as; lack of adequate infrastructure staff, ICU beds, respirators, and funds for the delivery of health services and for allocation and buying of covid19 geographic inequities in accessing supplies such as PPEs, services, quality health services, and • Infrastructure shortage such as hospitals service utilization; lack of adherence (only 22 counties had at least one ICU to clinical guidelines affecting bed by March 2020), quality of services due to inadequate • Inadequate coordination and planning supervision; inadequate coordination between the National and County of the functions of regulatory agencies; Governments in the health sector and lack of standardized mechanisms for between public and private health services. guiding partnerships between the Besides, the economy was already in a public and private sectors within the downturn by the time the pandemic hit sector, and the perceived poor quality the country. • Containment measures that were not equally replicated in most counties | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS October - December | 39

Special Feature through the COVID-19 task force. and maternal health and child • Enforcement of laws and norms should • Hospital beds were occupied by covid19 nutrition were prioritized, the expenses be improved for the private sector through patients and affecting basic health on curative health services outpaced the partnership system involving all services. that of preventive health services. regulatory bodies. • In-access to adequate food and nutrition However, health policy emphasizing • Tax collection should be improved owing to movement restrictions, primary care is encouraging the overall and this includes increasing county • Challenges of food supply to populated provision of health services at minimal capacity to collect locally generated and areas due to restrictions on movements. costs and efficiently. high OOP pooled to insurance. Besides, • Inability of households to pay for health should be prioritized in shareable primary healthcare as a result of The government, initially revenue allowing counties to meet their reduced incomes to household following earmarked Ksh. 40 billion (0.4 unique health priorities. lockdowns. This may have caused some percent of GDP) for Covid-19-related • Provide expansion of community level of vulnerability to individuals. expenditure as part of the FY2019/20 health services by continuing needs- The opportunities for the sector budget, including health sector based investment and allocating adequate during covid19 are: prioritizing (enhanced surveillance, laboratory resources to reach underserved and health budget and focusing on services, isolation units, equipment, difficult-to-reach populations. Improving primary healthcare which influence supplies, and communication); social the effectiveness of referral systems should infectious infections; utilizing grants protection (cash transfers and food continue enabling patients to access and loans for COVID-19 prevention relief); and funds for expediting specialists. effectively and efficiently; employment payments of existing obligations to • Minimize shortages and disparities of primary healthcare staff to maintain cash flow for businesses in availability of specialists by educate communities on COVID-19 during the crisis. These measures in incentivizing specialists through sharing prevention, studying if measures taken addition to the others in the health and coordination of states. Build the are working and why and investing in sector and social protection seem to capacity of National and County human, regulation and infrastructure have contributed to the flattening of Governments leadership on industrial development. the curve beginning at the end of relations settlement, conflict management August 2020 and a gradual recovery and dialogue. Initiate a standardized LINK BETWEEN HEALTH POLICY AND of the economy. capacity-building programme linked to FISCAL POLICY overall health system priorities. The link between health policy • Establish a clear Health Management Resource mobilization for health and fiscal policy is well-aligned in the Information Systems (HMIS) legal services is directly linked to the Counties. However, since 2013/2014, and regulatory framework including a Government’s ability to raise taxes. allocation to health services has been comprehensive legislation to facilitate For example, the total tax revenues increasing at the counties averaging implementation of the Health Act grew from Ksh. 673 billion in about 18 percent as already mentioned. and enforce reporting from all delivery 2010/2011 to Ksh. 1.5 trillion in The average figure masks variations units. Strengthen HMIS leadership by 2015/2016. At the same time, public in allocations over time and across institutionalizing Health Information health resources have been increasing the counties, with Kilifi, Makueni, Systems Interagency Coordinating but have not reduced the burden of Nandi, and Nakuru Counties having Committee (HISSIC) at National and OOP expenses as external resources an annual rate of catastrophic health County Government levels. The Kenya have been declining. spending of 4 percent. Government and key service delivery stakeholders should provide enough The health policy has a target RECOMMENDATIONS HMIS budget. of allocating at least 15 percent • Because pandemics are becoming of the total public expenditure on The following key recommendations a permanent feature of the globe, an health services by about twice the will facilitate the achievement of elaborate strategy (with institutional annual allocation of 6-8 percent responsive service delivery: location, mandate etc.) addressing total government expenditures for viral pandemics in general rather than healthcare. The gap in the target • The sector management structures covid-19 specifically should be elaborated spending on health services indicates a should be strengthened in general and at and addressed in terms of research, lack of fidelity between the fiscal and the county in particular through; building infrastructure development, funding, health policies at the National level. In the capacity of the counties to legislate surveillance, and collaboration ■ this policy period, although primary laws and collaborate with the civil society in policy advocacy. This will enhance effectiveness of the coordination bodies such as Intergovernmental Relations. October - Deceember | 40 | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS

By Derrick Vikiru Hiding in the Shadows Content Writer & Communications Editor INTRODUCTION 36.24 percent in 1998. The latest economy in the shadows; placing the value for 2015 is 33.43 percent - an tax burden on a small percentage of It is difficult to accurately gauge indication that this is a complex the working population. In the long the size of shadow economies (also problem for Kenya. run, this results in massive shortages known as the underground economy of annual revenue collections leading or the black market) because, by According to an article published in to increased taxation rates to cover nature, they are not subject to the Kenya Revenue Authority (KRA) the fiscal deficits. Heavy taxation in governmental oversight. This means blog titled “Tackling Challenges of turn breeds non-compliance in the that such economic activities neither the Shadow Economy in Kenya”, the formal sector thus encouraging more generate any tax returns for the number of registered taxpayers in individuals and businesses to join the government nor are they captured Kenya is about 4 million against an shadows. in the country’s tax statistics and estimated working-age population of reports. Shadow economy, thus, refers over 31 million Kenyans. This is an UNDER-THE-TABLE TRANSACTIONS to economic transactions that are indication of the depth of Kenya’s deemed illegal, either because the The list of activities deemed to be goods or services traded are unlawful According to an article underground economic transactions in nature, or because transactions published in the Kenya Revenue varies, depending on the laws of a fail to comply with governmental Authority (KRA) blog titled given jurisdiction. For instance, in reporting requirements. “Tackling Challenges of the some countries, alcohol is prohibited, Shadow Economy in Kenya”, while in other nations they encourage On average, a third of the world the number of registered legal brewery, distillery, and economy is in the shadows, with taxpayers in Kenya is about 4 distribution. Similarly, while drugs are the highest incidence being in Sub- million against an estimated illegal in most countries, some nations Saharan Africa, where the weighted working-age population of over have legalized the use of some drugs average size of the shadow economy (as 31 million Kenyans. including cannabis. a percentage of GDP) is 37.6 percent. According to TheGlobalEconomy. That notwithstanding, some com, in terms of percent of GDP illegal activities fit the bill of shadow from 1991 to 2015, data for Kenya’s economy activities. They include non- shadow economy averages at 33.18 registered businesses, under-reporting percent with a minimum of 28.68 of business income, unreported percent in 2014 and a maximum of sources of income, inflation of costs such as tax-deductible expenses, | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS October - December | 41

Effects of Underground Economy identity fraud to avoid tax liabilities economy has nonetheless, been demonetization. This is according to or to claim refunds, and creation constantly adapting and finding new a February 2015 report by Europol of phoenix companies that become and diverse ways to grow. This has Financial Intelligence Group entitled insolvent before paying tax. been exacerbated by modern changes Why Is Cash Still King? A Strategic in ways of working (remote working), Report On The Use Of Cash By Others include moonlighters, the growth of the gig economy, the rise Criminal Groups As A Facilitator For ghost workers, cross-border fraudsters of the digital economy, among other Money Laundering. who exploit taxation gaps of tax wider social changes and globalization administration, employer fraud, which have given rise to more activities It is estimated that there are over money laundering, VAT fraud, illicit that fall in the shadow economy. 500 billion banknotes in circulation trafficking or smuggling of goods globally, and an increase in demand to avoid duty, and distance selling Increasingly, the sophisticated use can be attributed to shadow economy to evade payment of VAT by selling of technology within the shadow activity. In Kenya, cash payment online into one country from another economy has posed a major potential remains high despite growth in without registration. threat to the tax base through the FinTech solutions. A report by opportunities it offers. The Kenyan Financial Sector Deepening (FSD) Legal products/services can also government for instance, has had shows that 96 percent of businesses in slip into the shadow economy to evade a difficult time nabbing and taxing Kenya receive their payments in cash. some taxes. For instance, according to online businesses as they potentially Now that is staggering! an article on CNN Business, although continue to undermine tax compliance tobacco is legal in New York City, without any legal ramifications. This could only have two forms of an estimated 60 percent of cigarette explanation: One is the fact that 95 sales are facilitated through under- CASH IS STILL KING percent of the country’s SMEs and the-table economic transactions since workers operate within the informal the product carries an exorbitant sin The ballooning shadow economy economy and form a large percentage tax. Thus such transactions where is not just caused by sophisticated of the unbanked population of participants fail to report their income technology or taxation loopholes. Cash informal business owners. Only 34.4 are technically considered to be transactions are the center-hold for percent of business owners in Kenya shadow economic activities. which this economy is firmly anchored. own a bank account to run a business. Despite trendsetters in finance circles The second explanation is the THRIVING UNDERGROUND ECONOMY predicting the imminent demise of preference for cash transactions with cash, its demand has been on the no receipts as a way of evading tax - Shadow economy has been a long- rise globally. The demand, especially which is supported by low detection standing problem for decades now, for high denomination notes such as rates of cash transactions. but according to Organisation the EUR500 note and the USD100 for Economic Co-operation and bill have been sustained despite Cash by nature is generally Development (OECD), many tax different quarters calling for their untraceable. The Central Bank administrations have been able to of Kenya (CBK) has anti-money strengthen their efforts to identify The list of activities deemed laundering rules that require financial and tackle the different aspects of the to be underground eco- institutions to report suspicious shadow economy with some notable nomic transactions varies, transactions and transactions over a successes in the past decade. depending on the laws of certain amount. However, this rule a given jurisdiction. has no means of checking smaller Through a 2012 Information transactions or those taking place Note on Tax Administration titled outside of the banking system making ‘Reducing opportunities for tax non- the bulk of transactions in Kenya compliance in the underground entirely invisible. economy’, OECD gave sound advice to tax administrators on curbing the This only means one thing; that burgeoning shadow economy. The cash will continue to facilitate the Information Note stressed on the shadow economy and illegal activity importance of tax administrations whether in paying traders, businesses, to have multi-faceted strategies that employees or in carrying out criminal cover the wide range of shadow activity. economy activities. EFFECTS ON ECONOMIC GROWTH However, despite many tax administrations adopting the Theoretical and empirical studies multifaceted strategy, the shadow conducted do not conclusively explain October - Deceember | 42 | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS

Effects of Underground Economy how an increase in the shadow in the shadow economy will stimulate shared economy. economy affects economic growth. overall economic growth. Effective identification and However, some sentiments COMBATING THE SHADOW ECONOMY registration: Given the extensive use indicated that the shadow economy of fake IDs in the shadow economy depresses the growth of overall GDP. OECD, in a 2017 report titled Shining and the importance of effective They imply that shrinking the shadow Light On The Shadow Economy registration, tax administrations economy will increase tax revenues. - Opportunities and Threats gives should further explore best practices That it will enable administrations recommendations on how to combat in the identification and registration of to meet their revenue targets. That it the shadow economy. These include: taxpayers and secure authentication, will consequently stimulate a rise in including the use of biometrics. public spending on infrastructure and Sharing of intelligence: Tax developmental projects – leading to administrations should share Reinforcing social norms: As a rise in the overall economic growth information on the developing risks part of multifaceted strategies, tax rate. in the shadow economy, including administrations should explore further on cross-border aspects, as well as on the most effective mechanisms to They argue that on top of shortfalls effective countermeasures. influence taxpayer behaviour. in revenue collection to fund public services, the shadow economy has Effective use of different data Whole of government other wider effects that magnify its sources: It could be useful to look approaches: Actors in the shadow economic and social impact such further at the available data sources; economy will often be involved in as; undermining public trust in the - internally generated, domestic and social security fraud, failure to comply tax system and the social norms international, including bulk data with regulations, and in some cases, supporting voluntary compliance and sources; how exchange can best be serious crimes. Tax administrations exploitation of workers which include facilitated; and how data sources should work with other parts of the underpayment or lack of contractual might be used most effectively to government to tackle these issues. protections. Such activities, they minimize opportunities for carrying Successful whole of government believe, can also contribute to wider out shadow economy activity. approaches could help improve overall illegalities such as illicit trafficking, effectiveness. money laundering, and also fund Collective action on the sharing serious crimes. and gig economy: While the sharing Measuring impact: While the and gig economy can have positive shadow economy is, by definition, The dissenting opinion holds benefits for the wider economy, difficult to measure, it is seen as a the view that the shadow economy they also risk expanding the shadow significant tax gap in most countries. increases a country’s competitiveness economy. It is therefore worth Measuring its impact is important since the informal sector is more considering the possible creation of a for decision-making on resources, competitive and efficient than the Task Force to examine the options and investment, strategies and combating formal sector, and thus an increase to propose solutions for taxing gig/ its growth. Conclusion therefore be left alone. The downside of entrepreneurship, and eradicating it will doing nothing though, is that the hidden stamp out precisely the entrepreneurship Dealing with the shadow economy is a enterprise culture will negatively impact and enterprise culture that is needed for rather complicated issue; very elusive, on legitimate businesses and governments economic development and growth. borderline unethical and difficult to term with issues such as over-taxation, unfair A third policy option, which needs a it legal or illegal. This issue thus presents competition and government missing out workaround at legislation and policy three options that can be used to deal with on revenues. formulation level is to facilitate the it and I will let you be the jury on this one. A second option is to stamp it out. Treat legitimisation of work in the shadow The first option is do nothing about it! Just shadow labour force and businesses as economy. But this will take a great deal of let the whole shadow economy issue be. economic actors who evade tax, thus, compromise of a country’s set standards Don’t try to destabilise the status quo in the should they be caught, they will receive for both monetary and fiscal policy economy. The rationale here is that if a third a befitting punishment, penalties and redesign. It will need understanding of the global economy is in the shadow, sanctions for tax evasion. The downside the relationships between underground then this sphere is a principal breeding of such an eradication approach is that output/income and other macroeconomic ground for new enterprise creation, and underground economy is a seedbed for variables. So what will it be? ■ for the micro-enterprise system and should | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS October - December | 43

How Effective is Kenya’s Fiscal Policy Response to COVID-19? By Vincent Mogire Introduction // The COVID-19 pandemic has extensively restricted economic activity in the Okara world, if not ushering in apocalypse. Reputable economic policy think-tanks have continued to analyse economic performance, publishing several statistics on the impact of the virus on economies. This is Intelligence Management besides offering advisory support on possible policy responses to cushion from economic meltdown. Division - KRA For example, the International Monetary Fund (IMF) estimates that the sub-Saharan economy will contract by 1.6 percent in 2020, a downward revision of 5.2 percentage points compared to six months ago. Additionally, it is envisioned that COVID-19 impact will outweigh the 2008/9 financial crisis, where the world economic output contracted by 1.7%. Evidently, it is an unprecedented economic catastrophe. October - Deceember | 44 | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS

Kenya’s Fiscal Policy Response to Covid-19 The economic impact of the for tourists, namely the UK (21 percent), Amendment bill to the Finance Act pandemic on Kenya is being Germany (14 percent), the US (10 2020. The turnover tax rate will be transmitted through external supply percent), Switzerland (8 percent), Italy reduced from 3 percent to 1 percent, and demand shocks, as well as the (7 percent), and China (6 percent) are while the upper limit for corporation dampening effects on domestic all grappling with COVID-19 and have tax reduces from 30 percent to 25 activities. Although the Kenyan issued strict travel advisories (KNBS, percent. The government has also economy is remarkably resilient, Kenya Economic Survey 2020). implemented significant parametric measures adopted to contain further iv. A drop in diaspora remittances changes to individual income taxes spread of the COVID-19 virus, will which had doubled since 2014, because (offering 100 per cent tax relief for weigh heavily on economic growth. of comparable effects of COVID-19 those earning gross salary of Kshs. pandemic on those economies. Kenya 24,000 and below and reducing the Costs of care to the patients and recorded remittances of KES 290 billion upper limit to 25), and Value Added associated costs of containing spread (USD 2.9bn) in 2019 accounting Tax (reducing the VAT rate from 16 are increasingly overwhelming the for 2.9 percent of GDP. The bulk of per cent to 14 per cent). health system. Further, the litany of remittances come from the UK at 34 measures in place to slow down the percent, and the US at 30 percent, after The downward revision of rate of infection, including home which country contributions drop off corporate and individual income tax confinement, travel restrictions, sharply (KNBS, Kenya Economic Survey rates is projected to reduce revenue closure of schools and entertainment 2020). by about KES 68.1 billion (0.68% of spots, suspension of public gathering v. A slowdown in revenue collection, GDP), while the cut on VAT rate will and conferences, and a nightly curfew, since some tax bases are likely to contract shrink revenues by KES 49.3 billion have affected both production and much faster than the slowdown in (0.49% of GDP). This is expected to consumption. Significant declines in nominal GDP in the face of an economic result in a cumulative revenue loss of asset prices and high financial market downturn. Tax revenue growth from about KES 117 billion (or 1.2 percent volatility will also affect real economic imports, profits, and consumption are all of GDP) per year (World Bank report activities via credit and investment expected to decrease. This also limits the on Kenya’s economic update, 2020) channels. number of interventions the government can fund using its own revenue, without Underscoring the importance ECONOMIC SHOCKWAVES affecting essential service delivery. of maintaining debt sustainability while addressing the need to support The Kenyan economy is exposed to Owing to the aforementioned businesses and households, the economic shocks in a number of ways, reasons, the World Bank projects that reduction of tax expenditures and tax and these include; Kenya’s GDP for 2020 will grow by exemptions to compensate for revenue 3.1 percent from an initial projected lost is key. To this effect, the finance i. Reduced availability of intermediate rate of 6 Percent. act of 2020 has removed the following and capital goods, as global supply chains items from the Exemption Schedule are disrupted by shutdowns in source POLICY INTERVENTIONS countries and transport disruptions. Aluminium pilfer proof caps Kenya’s monthly imports, notably from The government remains focused with EPE liner, Helicopters of an China, shrunk sharply in the months on maintaining fiscal sustainability unladen weight not exceeding 2,000 of January and February 2020. Such and reducing debt-to-GDP to about kg, Aeroplanes and other aircraft, shortages associated to declining imports 50 percent over the medium term. of an unladen weight not exceeding could significantly raise consumer prices. However, policy responses to counter 2,000 kg, Other parts of aeroplanes ii. Decline in the external demand for COVID-19 endures fiscal costs. helicopters, Aircraft launching gear and exports, which can be observed in the parts thereof; Air combat simulators country’s horticulture, tea and coffee The exogenous shock imposed and parts thereof, Other ground flying exports. Notably, the hardest hit has been by the COVID-19 pandemic makes trainers and parts thereof, Specialized flower exports. fiscal consolidation considerably equipment for the development iii. A nosedive in tourism earnings more difficult. World Bank estimates and generation of solar and wind owing to travel bans and a grounded a preliminary baseline-financing gap energy, Tractors other than road hospitality industry. The direct earnings of about KES 139 billion (or 1.7% of tractors for semi-trailers. Pneumatic from tourism totalled to KES 160 billion GDP). Tyres, Taxable goods purchased by (USD 1.6bn) in 2018, accounting for manufacturers or importers of clean 1.8 percent of Gross Domestic Product To support businesses and increase cooking stoves, Stoves, ranges, grates, (GDP). Today, the top six source countries households’ income, several tax cuts cookers, barbeques, braziers, gas-rings, have been effected through the Tax plate warmers and similar | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS October - December | 45

Kenya’s Fiscal Policy Response to Covid-19 The stabilization aspect of the fiscal policy will require substantial budgetary adjustments. The source of funds is again a great concern for already debt-burdened economies - it is time to bite the bullet. nonelectric domestic appliances, One crisis, the government is expected bankruptcy; and third, to adjust personal motor vehicle, excluding buses to intervene by providing economic aggregate demand to stay as close to and minibuses of seating capacity of relief to firms and households to help the optimum output as possible. In more than eight seats, imported by a them weather the crisis. implementing this, attention to the public officer returning from a posting informal sector is very important, as it in a Kenyan mission abroad and Fiscal policy is a critical intervention is the largest source of livelihood, and another motor vehicle by his spouse tool in sustaining productivity growth a key pillar of the economy. However, and which is not exempted from Value and in averting stagnation traps. In developing economies have limited Added Tax under the First Schedule. this period of crisis, the composition of fiscal space and may not achieve the fiscal policy matters the most, bringing three objectives at once. Additionally, This is aimed at constricting to question the type of expenditure implementation of these interventions exemptions to essential goods and government makes. is a delicate and expensive process services only. requiring funding which is already In the short run, large public significantly constrained. This brings GOVERNMENT SPENDING investment programs may not to focus government spending and be feasible and necessary since the need to utilize public funds, in On the expenditure side, emphasis they generate large and extensive response to the three objectives. has been laid on strengthening the economic multiplier effects. Professor health system to withstand a potential Olivier Jean Blanchard (2020) advised The significantly enabling spike in the COVID-19, and addressing that fiscal policy must focus on condition for economic recovery the associated economic and financial three things during this crisis; first, is containing the pandemic, and crisis. Beyond the public health fighting the virus; second, cushioning it must be the primary fiscal goal. vulnerable segments of the society Cash transfers, incentivizing firms against hunger and firms against October - Deceember | 46 | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS

Kenya’s Fiscal Policy Response to Covid-19 producing essential goods, tax breaks, economy is largely informal. However, Conclusion wage subsidies to private companies, banks can be of help in determining asking firms to advance funds to who deserves what from the financial How fast and smooth the economy their affected staff and renegotiating records in their possession. As Olivier bounces back largely depends on employment contracts, are essential Blanchard (2020) observes, it is better effective policy interventions. A measures that the government should to err while giving too much than supply-demand doom loop is likely pursue. doing nothing at all or giving too little. to drive the economy into stagnation if policy intervention is poorly In pursuit of a suitable economic The stabilization aspect of the coordinated. This fact amplifies the recovery strategy, small and medium- fiscal policy will require substantial crucial role that monetary and fiscal sized enterprises (SMEs) should be budgetary adjustments. The source policies play in combating the impact given priority. The 2018 SME Finance of funds is again a great concern for of COVID-19 on the economy. Whilst Survey Report indicates that SMEs already debt-burdened economies - it the Monetary policy safeguards constitute 98 percent of all businesses is time to bite the bullet. As Abebe financial sector stability and averts in Kenya, create 30 percent of the jobs Aemro Selassie (2020), the Director demand-driven recessions, fiscal annually, contributing substantially to of the IMF’s African Department policy must facilitate the fight against the GDP. stated, necessary fiscal response for the virus, cushion affected groups, developing economies will require and manage aggregate demand. Direct cash transfer and support generous external financing on grant We shall overcome! ■ programs are difficult to administer and concessional terms. Therefore, because of the lack of a reliable it is time to relax fiscal rules for the database for locating the neediest sustainability of the upper bound. entities. This arises because our | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS October - December | 47

The Bar Enhancing the Effectiveness of Legal Frameworks Promoting Fiscal Responsibility Contemporary efforts to entrench fiscal responsibility through legal frameworks emanates from the experience of African countries in the debt crises of the 1980s. Economic contractions were attributed, in part, to the irresponsible use of public resources by governments legal frameworks. corporate income, value added tax or National constitutions other types of tax. Across board, legal characteristically take precedence in frameworks for fiscal responsibility the supervision of fiscal responsibility, will typically outline the duties of after which instruments emanating institutions, standards of behaviour, from the executive and legislative levels processes and methods in the of government are implemented. To utilisation and management of public illustrate, the national legal framework funds, as well as tests and remedies for for fiscal responsibility will stipulate breach of responsibility. the processes and calendar for the formulation of national budgets. Contemporary efforts to entrench By Dr. Ify Ogo Annual budgets as approved by fiscal responsibility through legal national parliaments or similar bodies frameworks emanates from the Legal Economist and will state the expected sources and experience of African countries in the Trade in Services Expert levels of revenue, allocation to public debt crises of the 1980s. Economic institutions and undertakings, and contractions were attributed, in part, INTRODUCTION modalities for disbursement. Legal to the irresponsible use of public resources by instruments supervising national debt governments. In contrast, deploying legal Legal frameworks promoting fiscal will state the authority of institutions instruments to aid the responsible responsibility are concerned with to borrow, the nature of undertakings utilisation and management of public the proper use of government revenue, for which debt finance may be finance aids accountability, predictability, and often take the form of legislation, obtained, the types of borrowing fosters a structured approach in the use of regulation and other instruments to which may be requested, as well as public finance, and sets out clear terms of foster and supervise the responsible modalities for repayment. Similarly, engagement between public institutions. use of public finance. Procurement, the instruments will determine the However, there are issues which can borrowing and taxation, amongst thresholds and process for taxation, limit effectiveness of legal frameworks other areas are typically governed by whether these relate to personal and and detract from the achievement of the intended purposes. October - Deceember | 48 | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS

The Bar This article considers some of Decades of promotion of institutions working in silos, and thus a the issues which may constraint the rule of law and good reformist section may be unaware of the effectiveness of these legal governance have led to the the substance of existing frameworks, frameworks for fiscal responsibility, widespread adoption of legal especially where authority to make and potential approaches to enhance frameworks as the managing regulation is dispersed across various their effectiveness. Additionally, it instruments of public finance. levels of government. points to the intellectual underpinning for legal frameworks as managers of issues deemed to be globally important. A ENHANCING EFFECTIVENESS fiscal responsibility, and the need to cursory review of legislation supervising build upon existing efforts to enhance procurement, tax, fiscal/budgetary, Decades of promotion of the rule the effectiveness of legal frameworks and public debt enacted within the last of law and good governance have supervising public institutions in two decades in Africa will highlight led to the widespread adoption of finance. similarities in structure, tone and legal frameworks as the managing substance. Draftsmen will typically instruments of public finance. While EFFECTIVENESS OF LEGAL FRAMEWORKS look for inspiration in international there is no perfect law, it is possible ‘best practice’ and similar legislation in to aim for instruments which can, to Issues which can inhibit effectiveness other jurisdictions, and then ‘transplant’ a significant extent, adequately enable include; into national legal frameworks. the functions of public institutions Transplantation can range from the entrusted with fiscal responsibility. i. Circumstances in which a second wholesale adoption of entire systems Legal frameworks may be instituted tier instrument, e.g. where a regulation of law to the copying of a single rule on a proactive basis to drive changes in of the executive arm of government (Kanda & Milhaupt, 2003. Re- institutional behaviour, performance or an Act of Parliament purports to examining Legal Transplants: The and enable the achievement of contradict a primary instrument, such Director’s Fiduciary Duty in Japanese economic objectives. Similarly, these as a constitution. Contradiction of Corporate Law. The American Journal frameworks can be reformed to legal instruments can also occur where of Comparative Law, 51 (4) 887- capture evolved objectives, practices comparable instruments or institutions 901). Legal frameworks will thus meet and ideologies. create conflicting benchmarks or the standards of international best obligations for economic actors. practice, but may not effectively account In the enactment and reform of ii. Where an instrument does not for the political economy and institutional these legal frameworks, it would be adequately enable the achievement of landscape of countries. useful for draftsmen to consider the stated objectives. For example, provisions Challenges can be attributed to a following elements in the formulation within an instrument to manage public variety of causes such as government and reform of legal instruments for debt might stipulate that external fiscal responsibility: borrowing will be for the purpose of national development, without a (i) Clearly identify the objectives to be definition or reference to clarify the achieved. It may be the case that there nature of undertakings which qualify as will be separate but related objectives to developmental. Other scenarios include the be achieved through a legal instrument. obfuscation of processes and thresholds Legal frameworks determine the which supervise public finance, as well relationship between public institutions, as insufficient provision for monitoring, government and the citizens, as well reporting, and enforcement. as external actors. Accordingly, it is iii. Where an obligation is created important to identify a correlation upon a public sector institution without between the objectives to be achieved corresponding provisions and modalities and the assignation of responsibility, as to ensure compliance, or the absence of they are translated into duties, functions, associated consequences for breach of obligations, and powers of institutions. obligation. iv. Poor benchmarking - draftsmen may (ii) Thoroughly map the legal and adopt ‘standard’ or ‘ideal’ strictures institutional landscape – powers, of law, benchmarked against a set of responsibilities, functions which exist. Within government, wide-ranging consultation is necessary to avoid the enactment of instruments which create conflicting or overlapping functions, | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS October - December | 49

The Bar powers and obligations for economic Currently, legal frameworks Bank and other international finance actors. are widely embraced as the institutions were heavily influenced by ideal management systems for NIE. For example, Douglass North’s (iii) Account for the dynamics of the public finance. seminal piece emphasised the role of political economy in the assignment institutions in establishing the ‘rules of functions. It is useful to ascertain from the good governance and rule of of the game’ and moderating the the capabilities and competencies law movement, itself rooted in the law relationship between economic actors of institutions in the assignation of and development school of thought. (North, Douglass. 1995.The New functions. Furthermore, measures for Institutional Economics and Third monitoring and enforcement of the duties In the contemporary era, law as World Development in Economics of institutions need to be practicable and a driver of development gained a and Third World Development. actionable. foothold in the decolonisation era. Harris et al). In the 1960s, newly independent (iv) Ensure the capacity of public countries deployed legal instruments By the 2000s, this thinking was institutions to perform duties. For such as the Resolution on Permanent operationalised in the form of example, if a government institution Sovereignty over Natural Resources technical assistance and reform is responsible for monitoring, reporting 1962 to assert ownership over programmes of international finance and compliance of obligations placed and the right to control natural institutions. Legal reforms related upon a sister-institution, it should have resources (United Nations General to fiscal responsibility of public corresponding powers and resources to Assembly resolution 1803 (XVII) institutions were especially included fulfil its functions enshrined in law. of 14 December 1962, “Permanent in packages for debt relief. Currently, sovereignty over natural resources). legal frameworks are widely embraced (v) Anticipate the emanating effects While this is a soft law instrument, as the ideal management systems of the instrument upon various economic it highlights the willingness of for public finance. It follows that actors and interests. In taxation for governments to ensconce economic it is necessary to foster maximum example, the procedures and duties of management within legal frameworks. effectiveness of their operation public institutions should facilitate the The following decade saw the through the institutions mandated fulfilment of obligations placed upon proliferation of legislation to entrench and empowered to implement their citizens. government participation in national provisions. economies, especially through state (vi) Locate the instrument in the broader owned enterprises and monopolies. An Conclusion economic and developmental agenda. interlude in the 1980s was caused by Legal instruments for fiscal responsibility the debt crises which was precipitated Legal frameworks guide public enable the proper use of public finance. by the sharp reduction in the price of Accordingly, there should be alignment commodities traded by developing institutions in the management with the principles and direction provided countries. The focus of legal by the national development agenda. instruments for economic direction of public finance. Effectiveness moved to promote investment, Issues challenging effectiveness of reduce government participation in of these frameworks will be legal frameworks can be attributed to the economy and protect investors. a variety of causes such as government The rise of the New Institutional enhanced where drafting institutions working in silos, and thus a Economics (NIE) school of thought, reformist section may be unaware of sometimes described as the second considers the capacity of the substance of existing frameworks, wave of contemporary law and especially where authority to make development returned the focus to the institutions to function, the regulation is dispersed across various public sector. In 1992, the World Bank levels of government. published a report titled ‘Governance practicality of enforcement of and Development’ which traced a THE NOTION OF LEGAL FRAMEWORKS AS direct link between the economic crises provisions, and the dynamics FISCAL MANAGERS faced by developing countries and the poor quality of rules/institutions of the environment in which The notion that law should regulate responsible for public finance. The the institutions responsible for the legal instruments will operate. management of public finance stems Enhancing effectiveness requires deep reflection to identify strategic approaches which will direct legal frameworks towards supporting the achievement of broader economic and developmental objectives ■ October - Deceember | 50 | THE RATIONAL VOICE ON TAX, CUSTOMS & FISCAL POLICY MATTERS