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PKF has released its detailed analysis of Kenya’s economic landscape, reflecting on key performance indicators, public debt, inflation, interest rates, and exchange rate trends. The report highlights a notable economic recovery in 2023 and sets the stage for anticipated resilience in 2024, driven by robust sectors and prudent financial management.
Economic Performance
In 2023, Kenya’s real Gross Domestic Product (GDP) expanded by 5.6%, up from a revised growth of 4.9% in 2022. This positive trajectory was evident across most sectors. Notably, the Agriculture, Forestry, and Fishing sector rebounded with a 6.5% growth after a 1.5% contraction in 2022, thanks to favorable weather conditions. Other significant contributors included Information and Communication (9.3%), Transportation and Storage (6.2%), Financial and Insurance (10.1%), Real Estate (7.3%), and Accommodation and Food Service Activities (33.6%). However, the Mining and Quarrying sector saw a 6.5% contraction due to a decline in the production of key minerals like titanium and soda ash.
Agriculture remained the dominant sector, accounting for 21.8% of the total GDP. Combined, service activities contributed 61.3% of the GDP, while industry-related activities made up 16.9%.
Nominal GDP grew by 12.0%, reaching KES 15,108.8 billion in 2023, up from KES 13,489.6 billion in 2022. Looking ahead, Kenya’s economy is projected to remain resilient in 2024, supported by a strong services sector, improved agricultural performance due to anticipated adequate rainfall, and a decline in global commodity prices, which is expected to reduce production costs.
Kenya’s Public Debt
As of December 31, 2023, Kenya’s total nominal public and publicly guaranteed debt stood at KES 11.1 trillion. This comprised 45% domestic debt and 55% external debt. By the end of March 2024, the debt had reduced to KES 10.4 trillion, with domestic and external debt evenly split at 50%. This reduction is mainly attributable to exchange rate fluctuations.
Approximately 50% of Kenya’s debt is held in foreign currencies, exposing the country to financial risk in the event of Kenyan Shilling depreciation. However, by May 31, 2024, the Kenyan Shilling had appreciated against major global currencies. This appreciation was driven by renewed confidence in financial markets, bolstered by the partial refinancing of the Kenya 2024 $2 billion Eurobond with a new $1.5 billion Eurobond at 9.75%. Additionally, the Central Bank of Kenya’s successful issuance of Infrastructure Bonds, which were oversubscribed by 411% and attracted significant interest from both local and foreign investors, further increased the supply of foreign currency in the market.
Inflation Rate Trends
According to the Kenya National Bureau of Statistics, the annual inflation rate in 2023 remained steady at 7.7%, the same as in 2022. Inflation was primarily driven by increases in the prices of Transport (12.2%), Food and Non-Alcoholic Beverages (9.7%), and Housing, Water, Electricity, Gas, and Other Fuels (8.1%).
Interest Rates
The Central Bank Rate (CBR) was raised to 10.50% in June 2023 and further to 12.50% by December 2023, compared to 8.75% in December 2022. This hike was necessary to address inflationary pressures caused by the depreciation of the Kenyan Shilling against major currencies and high global prices. Consequently, overall interest rates increased. The 91-Day Treasury bill interest rate rose to 15.70% in December 2023 from 9.33% in December 2022, while the Inter-bank rate increased to 11.65% from 5.39%. Average commercial banks’ interest rates for loans and advances also rose to 14.63% from 12.67% over the same period.
Exchange Rates
In 2023, the Kenyan Shilling depreciated against most major international trading currencies, with the Trade Weighted Index (TWI) worsening from 123.8 in 2022 to 138.3 in 2023. The Shilling fell against the Japanese Yen, Swiss Franc, Euro, Sterling Pound, US Dollar, UAE Dirham, and Deutsche Mark by 26.3%, 21.8%, 21.8%, 19.3%, 18.7%, and 18.7%, respectively. It also declined against regional currencies such as the Ugandan Shilling (17.0%), Tanzanian Shilling (13.7%), and Rwandan Franc (5.9%). However, the Shilling strengthened against the Egyptian Pound (25.7%), Pakistani Rupee (13.5%), and Congolese Franc (12.2%).
As noted, the Kenyan Shilling appreciated in 2024 due to increased confidence in the financial markets and successful bond issuances, which increased the supply of foreign currency in the market.
PKF’s Position on Taxation Measures
National Tax Policy Implementation
PKF emphasizes the urgent need for the Government to implement the National Tax Policy with the Finance Bill, 2024. This policy aims to enhance the predictability and transparency of tax policies, providing guidelines for tax systems and administrative reforms. Key aspects include a comprehensive review of tax laws every five years and aligning tax changes with the Medium Term Revenue Strategy. Proper implementation will provide certainty to investors, making Kenya a more attractive investment destination.
Ease of Technology Implementation in Tax Collection
PKF supports the adoption of recent technological advancements, such as the Electronic Tax Invoice Management System (ETIMS) and the Kenya Revenue Authority’s (KRA) data management and reporting system. However, PKF urges the Government to ensure mass public participation before rolling out new technology to ensure the public is well educated, preventing slow uptake issues as seen with ETIMS. Additionally, while the proposed amendment for KRA to request taxpayer system integration demonstrates technological progress, the punitive non-compliance penalties need reconsideration.
Increased Value of Non-Taxable Benefits and Allowable Deductions
PKF welcomes proposed amendments in the Finance Bill, 2024, which increase the threshold for various non-taxable benefits to employees. These include raising the non-cash benefits threshold from KES 36,000 to KES 48,000 per annum, increasing the meal benefit threshold from KES 48,000 to KES 60,000, and adjusting the per diem allowance. These changes will help cushion employees against the high cost of living and inflation. Additionally, increasing the limit on tax-deductible contributions to pension schemes and making contributions to various funds tax-deductible will encourage savings and provide tax relief to employees.
Opposition to Punitive Motor Vehicle Tax
PKF opposes the proposed introduction of a 2.5% motor vehicle tax on the value of the vehicle payable at insurance issuance. This tax, seen as a wealth tax, burdens taxpayers without aligning with income tax principles and could increase living and business costs through a multiplier effect.
Concerns Over Excise Duty Changes
The Finance Bill, 2024’s proposed Excise Duty on vegetable oils and the repeal of offset provisions for excise duty on raw materials are concerning. These changes could increase the cost of living by making basic commodities like vegetable oil more expensive.
Call to Drop Certain VAT Changes
PKF urges the Government to reconsider VAT changes that could hinder financial inclusion and accessibility. Proposed VAT on financial services, insurance-related services, and essential items like ordinary bread and agricultural pest control products could inflate costs and negate progress in financial inclusion.
Reconsideration of Environmental Tax
PKF recommends shelving the proposed Eco Levy on items like rubber tyres and plastic packaging until a comprehensive framework ensures collected funds are used effectively for environmental mitigation.
Conclusion
PKF’s report underscores the need for balanced economic policies to maintain growth momentum while ensuring the well-being of Kenyan citizens. Implementing fair taxation measures, leveraging technology for efficient tax collection, and fostering an investor-friendly environment are crucial for sustainable economic development.
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