Businesses across Kenya's key economic sectors faced significant challenges in 2024, with sales declining in January, March, June, July, and September.
This was attributed to reduced cash flow and weakened consumer demand, according to the Stanbic Kenya Purchasing Managers Index (PMI).
The economic downturn was exacerbated by new statutory deductions, including the 1.5% housing levy and 2.75% Social Health Insurance Fund (SHIF), which have pushed total payroll deductions to between 40-45% of workers' gross pay, significantly reducing disposable income and purchasing power.
The Federation of Kenya Employers (FKE) reports that these increased deductions have led to a 15-20% decline in sales across retail and fast-moving consumer goods sectors.
A JULISHA MEDIA Economist notes that some businesses have reported sales drops of 35-50%.
The situation has created a vicious cycle of reduced consumer spending and business contraction, leading to job losses and decreased tax revenue, with the Kenya Revenue Authority (KRA) noting a shortfall in Pay As You Earn (PAYE) taxes from the private sector as companies trim average monthly pay and increasingly seek tax refunds to offset payroll taxes.
KRA has recorded its first VAT collection decline in over a decade, dropping 1.11% to Sh151.33 billion in July-September 2023, despite the implementation of eTIMS, while individual earnings tax rose 24% to Sh152.58 billion.
The decline reflects diminished consumer purchasing power amid increased payroll deductions and economic challenges.
The decline in VAT collections reflects eroded consumer purchasing power, attributed to increased payroll deductions including the new affordable housing levy and Social Health Insurance Fund, which now account for 40-45 percent of gross pay according to the Federation of Kenya Employers.
The situation has been further exacerbated by high loan obligations and reduced money circulation, leading to weakened business sales and delayed consumer spending, as evidenced by the Stanbic Kenya Purchasing Managers Index (PMI).
Despite KRA's efforts to make VAT its primary source of new tax revenue, experts suggest the need for practical reforms, including collecting VAT at import or manufacturing points, revising the VAT threshold from Sh5 million to Sh8-10 million, and reconsidering eTIMS requirements for small businesses.
The trend indicates that economic growth, rather than compliance measures alone, may be key to increasing tax revenues in Kenya's largely informal economy.
In other News, Financial transactions and investments across East African Community (EAC) member states have surged to $81.7 billion in 2024, up from $74 billion in 2023, while investment loans from EAC banking sectors increased to $66.6 billion from $60 billion during the same period, reflecting growing economic integration in the region.
The growth is attributed to multiple factors, including the removal of tariff and non-tariff barriers, which helped boost intra-regional trade by 12.6 percent in 2023, while global trade involving the EAC rose from $65.3 billion in 2017 to $109.4 billion in 2023.
Despite these positive developments, including the success of One-Stop Border Posts which have reduced border crossing times by 70 percent and generated annual savings of over $63 million, the timeline for achieving a single EAC currency has been pushed back to 2032.
According to EAC Secretary General Veronica Nduva, the East African Payment System remains a top priority, with monetary integration discussions dominating EAC forums as the region continues to work toward enhanced economic growth, social development, and deeper integration within an expanded community.
The region must address persistent challenges including regulatory fragmentation, macroeconomic harmonization towards the 8% headline inflation target and 3% fiscal deficit ceiling, and market distortions caused by frequent stays of application to the Common External Tariff.
To truly achieve deeper integration, the EAC must prioritize not only structural reforms like the East African Payment System, but also address underlying political and economic disparities that hinder true convergence.
This requires strong leadership and a commitment to shared prosperity, ensuring that the benefits of integration are felt by all citizens, not just a select few.
Only then can the EAC truly unlock its full potential and become a globally competitive economic bloc.