Kenya import prices impacted by Ukraine invasion

F

rom 2015 to 2019, Kenya’s economy achieved broad-based growth averaging 4.7% per year, according to the World Bank. In 2020, the COVID-19 shock hit the economy hard, disrupting international trade and transport, tourism, and urban services activity, in particular. Fortunately, the agricultural sector, a cornerstone of the economy, remained resilient, helping to limit the contraction in GDP to only 0.3%. In 2021, the economy staged a strong recovery and GDP growth is projected at 5.0% in 2022. But although the economic outlook is broadly positive, it is subject to elevated uncertainty, including through Kenya’s exposure (as a net fuel, wheat, and fertilizer importer) to the global price impacts of the Russian invasion of Ukraine. Critics argue that the wealth from the bounce back is not trickling down and this, coupled with onerous taxation laws, is creating a hostile business climate.

The Kenyan government expanded its tax programme in the last two years, aggressively going after tax in an effort to help solve the national debt problem. While this has brought many new customers to accountants, it has come at a high cost.

"Businesses seeking tax compliance advice have grown two-fold in the last five years," says George Itotia, partner at Kreston KM. "On the other hand, taxation has become a major trade dispute in Kenya arising from the interpretation of the tax laws. The authority has expanded the tax net but not without irking businesses. The accounting industry is critical in assisting businesses to navigate through dispute solving mechanisms such as Alternative Dispute Resolution (ADR), tax tribunals and the court of laws."

Cephas Osoro, managing partner at Crowe COR LLP, thinks the aggressive taxation is driving businesses to the wall. "Though the Kenya Revenue Authority has progressively met their revenue targets towards the fiscal budget financing, businesses in Kenya are negatively affected by some of the tax measures taken to broaden the tax base," he says. "This, coupled with a challenging business and macro-economic environment, has caused some major supply chain outlets to close shop."

Accountancy firms are also struggling in such an environment, despite the extra business the tax expansion programme has brought to their doors. Felix Kimoli, partner at MGI Alekim LLP, warns the economy is vulnerable and Kenya's national debt is in danger of getting worse. "Kenya has been hit hard by the COVID-19 pandemic," he says. "Despite a forceful policy response by the authorities, the socio-economic impact has been immense. The effect has also exacerbated the country's pre-existing fiscal vulnerabilities, pushing Kenya into high risk of debt distress. While the economy is now recovering, fiscal and balance of payments financing needs remain sizable over the medium term."

Francis Ugango, partner at Crowe Erastus, says at the moment there is a lot of undercutting going on in the market, putting a lot of pressure on mid-tier firms. "The market has experienced high competition among accounting firms, hence increasing pressure to reduce fees in subsequent periods," he says. "The mid-tier audit firms are particularly facing immense fee pressure due to under-cutting by the small firms (mostly run by individuals). This has in turn compromised the quality of services offered to SMEs. In an attempt to address this, the regulator has made proposals on minimum fees to be charged by different categories of staff in accounting firms though this has not been passed as law."

Like many of their counterparts around the world, Kenyan accountancy firms are also struggling with recruitment. "Following tough economic times, most small and medium firms have struggled to attract and retain well-trained auditors due to comparatively low remuneration and benefits offered by small and medium-sized firms," said Misheck Mwirigi, partner at Crowe Erastus.

It seems that with the impact of the Russian – Ukraine war and forthcoming general elections to be held in Kenya this year, the weakened economy is facing a long road back to health. Business uncertainty will act like a drag on growth and run the risk of increasing inflation.

"Kenya’s economic growth is vastly dependent on the development of SMEs and the initiative of entrepreneurs," says Kimoli. "Lack of investment and issues with financial access are the major barriers preventing entrepreneurship and in turn, nurturing prosperity. We have seen an increased number of financial institutions partnering with other key players in the financial market to develop loan products tailored at boosting entrepreneurship in the country. They will weed out any up-coming entrepreneurs who cannot provide strong financials and collaterals. The planned credit facility will focus on business idea, the target market and the viability of the venture, investing money in the entrepreneurs who are most likely to succeed. The development of a micro-loan program for SMEs has clear benefits and is expected to bring an additional $20 billion in revenues to the Kenyan economy."

Kimoli is concerned that, with Kenya entering an election season culminating in the August 2022 General Elections, investment in the SME sector will slow. " Election periods in Kenya are typically characterised by intense political campaigns often leading to high political temperatures that cause uncertainty," he says. "These uncertainties may result to a slump in economic activity and investments as investors conserve financial reserves awaiting the outcome of the elections and resumption of ‘business as usual’. Consequently, election years tend to witness reduced growth in GDP as compared to non-election years."

Itotia is concerned that the next 12 month are going to be extremely challenging for the accounting industry. "The 2021 Economic Survey released on 5th May 2022, reported that Kenya had achieved a 7.5% GDP growth in 2021, the fastest economic growth in a decade," he says. " Businesses have not felt the GDP growth due to the increasing cost of living exacerbated by an electioneering year, the effects of covid 19 and the impacts of the Russia-Ukraine war. The Kenyan elections which happen every five years tend to unfortunately slow investments as businesses adopt a wait and see strategy. The industry hopes that this year’s elections will not be a facsimile of the previous ones, otherwise, the already fragile economy is yet to see its worst! The proliferation of money laundering into the Kenyan financial system is also another challenge which has led to increased collaboration by local and international players to curb the vice."

Kenya has been ranked among several countries including Morrocco, Nigeria, Ghana and Benin where money laundering, terror financing and finance fraud are rife. According to the March 2021 International report on Narcotics Control Strategy Report, tabled before the US congress, criminals are using the unregulated networks of hawaladars and other unlicensed remittance systems to facilitate cash-based, unreported money transfers.

The report further notes that Kenya’s vulnerable banking system, wire service, mobile money platforms and an unregulated mobile-lending industry were at the heart of the laundering schemes. It recommends the implementation of good governance and anti-corruption measures to deal with the vice. It also said Kenya’s anti-corruption commission, despite making headway in prosecutions and assets seizures was still a long way in terms of technological support and training to handle more complex money laundering operations.

While the country has a big task ahead to stamp out money laundering, Kenya has seen significant regulatory development in the last 12 months. One of the most notable is The Finance Act, 2021 introduced the Country-by-Country reporting (CbCR) requirement for Kenyan headquartered multinational enterprise groups (MNEG). CbC reporting requires MNEGs to file a report to the Commissioner General providing a breakdown of the amount of revenue, profits, taxes, and other indicators of economic activities for each tax jurisdiction in which the MNEG operates. To increase transparency among multinational enterprises (MNEs), it is proposed that the Income Tax Act be amended so that MNEs with operations in Kenya can comply with the CbCR reporting requirement for their activities within Kenya and in other jurisdictions.

The government has also established the SMEs Credit Guarantee Scheme (CGS) to expand access to affordable credit to SMEs and support their recovery from the adverse impact of the COVID-19 Pandemic. As of December-2021, the scheme had disbursed over KES 2.2 billion to SMEs in 45 counties across 11 sectors. The improved liquidity in the money market resulted in stable commercial bank lending rates, estimated at 12.1% in 2021.

There are quite a number of proposed changes in the 2022 Finance bill. Perhaps one with the greatest impact on business is some proposed changes under the Tax Procedures Act. It will be amended so that if a taxpayer is dissatisfied with the decision of the Tribunal in relation to an appealable decision, they may appeal the decision to the Higher court. However, with the proposed changes, the taxpayer will be required to deposit with the commissioner 50% of the disputed tax in a special account at the Central bank of Kenya.

Once the court has ruled in favour of the taxpayer, the commissioner shall refund the money within 30 days after the determination of the court. This is likely to cause cash flow problems for businesses considering the amounts required and the time taken for the appeal process to be concluded. Additionally, the proposed bill has widened the scope of the property that the commissioner may subject as security for the unpaid tax to include land or buildings, aircraft, ship, motor vehicle or any other property the commissioner may deem sufficient to serve as security for the unpaid tax.

Main image credit: Miaron Billy