Borrow and tax isn’t the way out for East African governments

This week, fuel retailers in Ugandan and Ethiopian towns bordering Kenya saw a sudden surge in activity at their outlets.

As pump prices for petrol hit the $1.3 mark, fuelling from across the border became significantly cheaper for those Kenyan motorists with access to these alternative markets.

The rise in pump prices from about $1.1 to $1.3, was the market’s response to a new 16 per cent levy on the commodity.

Although coming after Uganda’s introduction of a daily consumer levy for access to so called Over the Top services offered by telecommunication companies and a separate one per cent levy on mobile money deposits, Kenya’s fuel tax shares the common trend of increasingly beleaguered governments in the region reaching for low hanging fruit in their desperate search for additional revenue.

The primary justification for taxation is that governments need the money to fulfil the social contract. Yet as the actions of the Kenyan motorists, and the reaction of social media users in Uganda, who resorted to virtual private networks, citizens are not sold on the idea of additional taxation.

It is not difficult to see the source of the impasse. Saddled with low revenue bases, governments in the region have in recent years borrowed heavily to finance national priorities. In its long form, economists describe debt or borrowing as advance consumption.

In a business context, it means borrowing in the hope that the purpose to which the money is put will yield a positive return.

The problem for East Africa is that debt, both domestic and foreign, has been accumulating too rapidly for the economy to replace value.

This has resulted in huge domestic arrears that have starved local enterprises of capital for expansion, while government borrowing from the markets has also crowded them out of the competition for capital. This has stunted economic potential and in turn narrowed revenue sources.

With a combined public debt in excess of $10 billion, Uganda is this year spending roughly a quarter of budgeted resources on debt repayment. Kenya which has in the past borrowed to pay debt, will this financial year see nearly half of its tax revenues go to debt repayment.

Yet the appetite for grand projects has not abated. In addition to the standard gauge railway, Uganda and Kenya are also contemplating vanity projects such as high-speed highways whose very existence is likely to undermine the economics of the SGR because they run along the same corridor.

Short of an unexpected boom, East Africa is hurtling towards debt unsustainability, economic rebasing notwithstanding.

Coupled with fragile politics, the complications of managing huge domestic arrears amid servicing external commitments are likely to manifest in social unrest and general instability.

In the circumstances, there are few alternatives to austerity. The sensible thing to do now would be to review expansionary public policies and go slow on contracting additional debt.

Resources should be directed to productive enterprise while creating an environment conducive for private enterprise to thrive. Ultimately, those actions will broaden the tax base, removing the need to overstretch the few performing tax heads.

SOURCE – By The EastAfrican

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