Budgets: Kenya May Raise Tax Rates

[Maxence Melo]

Kenya, east Africa's biggest economy, may raise its value-added-tax rate by two percentage points to fund increased spending on reconstruction after two months of post-election violence.

Finance Minister Amos Kimunya may increase the duty to 18 percent from 16 percent when he presents his annual budget in the capital, Nairobi, tomorrow, said analysts including Martin Kisuu, a partner at Deloitte in Kenya. The country is under pressure to harmonize the rate with neighboring Uganda and Tanzania, which also announce their budgets tomorrow.


At least 1,500 people died and more than 300,000 were forced to flee their homes when ethnic fighting broke out in Kenya after the disputed Dec. 27 election. The crisis erupted after President Mwai Kibaki won a second five-year term in the vote that his opponent, Raila Odinga, said was rigged.


``Certain commitments have already been made to internally displaced people that will have to be met,'' said Kwame Owino, a program officer at the Nairobi-based Institute for Economic Affairs, in an interview. ``I also think that other reasons include the size of the Cabinet and the institutions and commissions stated in the national reconciliation accord.''
The violence caused as much as 260 billion Kenyan shillings ($4.1 billion) of damage to the economy, the Kenya Association of Manufacturers said on Feb. 5. The two months of clashes ended after Kibaki and Odinga signed a power-sharing agreement on Feb. 28 that included the formation of a 40-member Cabinet.


Inflation Risk
Any increase in Kenya's value-added-tax rate may spur inflation, Rajan Shah, a partner at PKF East Africa, said in an interview today in Nairobi. Inflation surged to 31.5 percent in May, from 26.6 percent in April, the National Bureau of Statistics said last week.


``I will be happily surprised if he doesn't raise'' the rate, said Shah.
Tanzania's value-added-tax rate is 20 percent, while in Uganda it stands at 18 percent. The three countries are founding members of the East African Community, a regional trade bloc, and announce their budgets simultaneously each year as part of plans to harmonize their economic policies.


In Tanzania, Finance Minister Mustafa Mkulo is expected to announce measures to improve revenue collection and help reduce the country's dependence on foreign aid. Spending in the year to June 30 is expected to rise about 20 percent to 7.2 trillion Tanzanian shillings ($6.1 billion), according to a budget preview published on the ministry's Web Site on June 5.


About 37 percent of Tanzania's 2008-09 budget may be funded by foreign donors, compared with about 41 percent a year earlier, the Citizen newspaper reported on June 6, citing Mkulo.


Fighting Corruption
The exact amount of foreign aid that will be granted to Tanzania has yet to be determined as donors await ``further information on the work under way to tackle corruption allegations and improve governance,'' Bjarne H. Sorensen, the Danish Ambassador to Tanzania, said yesterday in an e-mailed response to questions.


Sorensen chairs a group of 14 national and multilateral donors, including the U.K. and the World Bank, who last year gave about $800 million in direct budgetary support to Tanzania.


Donors want the government to intensify its fight against corruption after an audit found $116 million from the Bank of Tanzania's external payment arrears account was paid to companies using forged or improper documents in 2005-06, Sorensen said.


Ugandan Electricity
Uganda is expected to increase spending on electricity provision to ease power shortages in the country and boost economic development, according to a supplementary budget report published by the Finance Ministry on May 20.


The country produces less than half of the 380 megawatts of power it needs after a drought last year reduced hydropower generation. The country produces 145 megawatts of hydroelectricity and 100 megawatts of thermal power.


Ugandan Finance Minister Ezra Suruma and his Kenyan and Tanzanian counterparts will present their budgets at 2.30 p.m. local time tomorrow.


To contact the reporters on this story: Eric Ombok in Nairobi via Johannesburg at pmrichardson@bloomberg.net; Sarah McGregor in Dar es Salaam via Johannesburg at pmrichardson@bloomberg.net

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