On October 5th the finance minister imposed a series of new taxes, including a 10% levy on all money transfers, in a bid to raise an additional KSh40bn (US$470m) for the budget, primarily to cover recent pay awards to teachers and doctors amounting to KSh25.5bn.
The 10% levy on money transfers, included as an amendment to the Finance Bill 2012, will apply to mobile-phone operators (and their telemoney operations), banks and other money transfer agencies. In addition, a 10% levy will also apply to fees charged by banks and financial institutions. The two measures are expected to raise about KSh4.5bn, but could have a damaging impact on financial services, especially telemoney operations such as M-Pesa, which have boomed in recent years. The latest official data show that, in the year to June, the number of telemoney subscribers jumped by 12.1% to 19.5m (half the population), while the amount deposited soared by 38.1% to KSh672.3bn. The government expects companies to absorb the full levy, but it seems likely that consumers will share the burden; overall, therefore, the move looks likely to dent corporate profits, reduce aggregate household spending and inhibit economic activity.
The government has also imposed a 20% capital gains tax on the sale of assets or shares in the oil and mining sectors, which could raise an additional KSh1.5bn. However, this risks undermining confidence in the natural resources sector at a time when investor interest has been rising steeply. On the plus side, the government opted against a rise in domestic borrowing, or in income tax or VAT rates, and will raise the bulk of the shortfall from non-taxation measures such as cutting non-priority spending (KSh12.5bn) and ordering all public entities to return their financial surpluses to the Treasury (KSh8bn). In addition, the government expects to receive about KSh14bn from donors to cover the costs of operations in southern Somalia. In a further positive move, the president, Mwai Kibaki, rejected another amendment to the Finance Bill awarding legislators a large, end-of-term package that would have cost KSh2bn in total.
Impact on the forecast
The switch of resources from development spending to the recurrent budget will be detrimental for growth in the medium term. The imposition of new taxes, just over three months into fiscal year 2012/13 (July-June), highlights uncertainties facing business and will damage the investment climate. Our budget deficit forecast for 2012/13 will remain unchanged at 6.5% of GDP.