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July 2003

Budget to spur economic growth

The National Rainbow Coalition's first budget was packed with fiscal and monetary policies aimed at revitalising all sectors of the economy.
Zachary Ochieng

Still riding on a wave of popularity, the National Rainbow Coalition (NARC) government unveiled mid June a budget hailed by analysts as the best Kenya has ever had. The budget speech, read simultaneously with that of the other East African Community member states, was generally aimed at reviving the ailing economy through employment creation and encouraging investments.

Significantly, Finance Minister David Mwiraria unveiled bold tax policies aimed at spurring economic growth. Consequently, duty on capital goods, plant and equipment for investment - including equipment for generation and distribution of electricity - was removed while the Value Added Tax (VAT) was lowered from 18 to 16 per cent.

Specifically, the local motor industry received a major boost, with the elimination of 10 per cent excise duty charged on locally assembled vehicles. The measure, according to Mwiraria, was aimed at cushioning the local motor industry against stiff competition mounted by importers of second hand motor vehicles, besides generating employment.

The budget, which also factored in donor support as the government has met most of the donor conditionalities, raised the investment allowance from 60 to 100 per cent to attract more investment and revive the flagging economy, expected to grow at the rate of 4 per cent, up from a dismal 1.1 per cent growth rate recorded last year.

In order to make Kenyan goods affordable and competitive in the regional market, excise duty on fuel oil to generate power was reduced by 50 per cent. Excise duty on aviation fuel, especially that used by light aircraft was also removed to encourage local pilot training and spur growth in the tourism sector.

Overall, the budget made consumer goods cheaper, boosting consumption demand in the economy, especially with the lowering of the VAT. On the other hand, luxury goods and other elements of conspicuous consumption became more expensive. And in a bid to check tax evasion, a specific duty regime was levied on cigarettes at a rate of 110 per cent.

A tax was introduced on gambling and casinos while excise duty on mobile phone airtime was raised from 5 per cent to 10 per cent. The move on mobile phones, however, did not go down well with a number of people, least of all MPs, who accused Mwiraria of stiffling an industry that is still in its infancy stages in Kenya. While Mwiraria justified his action on the premise that all the three East African countries had agreed to levy a similar rate, Tanzania refused to play ball and instead levied a rate of 7 per cent.

Standing at KES 240 billion (US$ 300 million), the total revenue target remains the highest in independent Kenya, a fact which has won praise from economic analysts. The budget had a deficit of KES 62 billion (US 77.5 million), which is to be bridged by borrowing KES 32 billion locally and KES 30 billion from donors.

The huge expenditure target was occasioned by the implementation of the free primary education policy introduced early in the year, harmonization of teachers' and doctors' allowances as well as a pay rise for the legislators. But it was the education budget that received a hefty boost - from KES 2.8 billion (US$ 35 million) to KES 9 billion (US $ 112.5 million).

However, the banking industry, seen for a long time as a very arrogant industry, bore the heaviest brunt of Mwiraria's whip. Known for charging exorbitant interest rates on loans and advances and levying abnormal bank charges, while paying out measly interest rates on deposits, stakeholders in the industry will now be required to seek the Treasury's approval before imposing their charges.

It is an open secret that banks have been reaping supernormal profits even in a stagnating economy like Kenya's. But that may now be a thing of the past. According to the budget proposals, banks are to maintain positive savings interest rates and submit minimum and maximum lending rates to the Central Bank of Kenya (CBK) for publication in the local press. The move will certainly give depositors a chance to choose their bankers, depending on the charges.

Banks are also to stop charging interest on loans when signs emerge that a borrower is distressed. Consequently, no bank will be allowed to demand interest payments and penalties beyond the original sum borrowed. This move was seen by financial pundits as the reintroduction of the Central Bank of Kenya (Amendment) Act, 2000, popularly known as the Donde Bill.

But the banks did not lose out completely. A major boost to the industry was the reduction of the minimum core capital requirement from KES 350 million (US $ 4375000 million) to KES 250 (US $ 3125000 million). The upshot of this will be a revival of a number of banks, which were pushed into liquidation after failing to meet the then minimum requirement.

It is also worth noting that the daily cash ratio requirement has been reduced from 8 per cent to 6 per cent, a move that will leave banks with more cash available for lending. Banks had always grumbled over the huge deposits that they had to place with the Central Bank, and which never earned any interest.

Whereas, the budget has been praised from various quarters, the leader of official opposition Uhuru Kenyatta had a few holes to punch in it. Said he after the budget speech: "In certain sectors he has done well but in some areas it was wanting, such the agricultural sector, where there were not enough incentives. The budget never touched on the livestock sector".

Other critics argued that the Finance Minister ignored the sugar sub-sector, which has suffered for a long time due to importation of cheap sugar by parastatal fat cats and other well connected individuals, thereby stiffling the local sugar industry.

Carefully implemented, though, the budget is set to take Kenya to greater heights of prosperity.

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