As Kenya’s economy recovers from the global economic shocks, the government and policymakers should consider formulating policies that stimulate economic activities, restore confidence, and promote sustainable growth. The 2023 Finance Bill contains more contractionary measures that may see the economy shrink more. It may be of benefit to some parties, but to most Kenyans, it could be draining their pockets. Considering the recent 7.9% inflation rate and the rising cost of living, increasing taxes may not be the best policy to implement. Here are some effects it may have on Kenya’s economy.

Reduced disposable income. An increase in taxes will result in reduction of disposable income. The recent proposals on the NHIF rise to 2.75%, NSSF rise to 6% in addition to the now proposed housing levy of 3%; may be burdensome for employed citizens. This will see a reduction of consumer spending and saving. In return, producers will feel the pinch when the demand of the goods and services produced declines.

Impact on Small and Micro businesses. With the bill proposing an increase in gross sale tax to 3%, more SMEs will be affected. Higher Turnover taxes can reduce business profitability and cash flow, potentially limiting their ability to invest, hire new employees, or expand operations. This can have a negative impact on job creation and economic growth.

High cost of production. VAT is typically passed on to the end consumer. Therefore, when VAT of petroleum products is increased from 8% to 16%, there will be an immediate increase in prices at the pump. This can have a direct impact on household budgets, as higher fuel prices can increase transportation costs across all sectors and indirectly affect the prices of goods and services. This as a result will compress economic activities.

Reduced investment incentive. The growth of cryptocurrency business in Kenya has been notable in recent years. Kenya has a young and tech-savvy population that is receptive to new technologies many of whom have embraced cryptocurrencies as a means of investment, trading, and entrepreneurship. The 2023 Finance Bill proposes to introduce a 3% levy on transfer of digital asset transfers. In return this will increase the cost of transactions and reduce the potential returns for investors. This might result in decreased investor interest and lower liquidity in the digital asset market.

Financial Impact on Content Creators. The digital content creation industry in Kenya has provided opportunities for creativity, entrepreneurship, and income generation. It plays a significant role in the digital economy, contributing to job creation, revenue generation, and economic growth. The bill proposes a 15% tax on payments made to digital content creators. The high tax burden may discourage some creators, especially those who are just starting or operating on a small scale, from investing time, effort, and resources into content creation. It may stifle innovation, reduce economic activity, and discourage investment in the digital content sector.

Generation of more revenue requires that the government creates a conducive environment for businesses to thrive and consumers to spend and invest more. In my opinion, the government should focus on restructuring debt, paying recurrent expenditure such as salaries to civil servants and put on hold mega projects that may require big loans. Policymakers should carefully assess the potential trade-offs and consider the impact that the Finance Bill may have on various stakeholders.

Former US President Donald Trump had warned: “Our currency (US Dollar) is crashing and will soon no longer be the world standard, which will be our greatest defeat in 200 years.”

The imposition of economic sanctions on Russia by the Western block may have spurred many countries’ interest in going ahead with de-dollarization. Being one of the largest oil and gas exporters, Russia had to switch over to the use of the Russian Ruble for international trade rapidly strengthening the currency. Egypt, India, Turkey, and China, are among the expanding list of nations that have embarked upon the path of de-dollarization. 

Now, what is de-dollarization? What impact will it have on Low and Middle-Income countries (LMICs)? Let’s dissect this topic and find out if it is of any benefit to these countries.

De-dollarization refers to the process whereby countries reduce or eliminate the use of US dollars as a reserve currency, medium of exchange, and unit of account. The US dollar is the dominant currency in international trade and finance because of its wide acceptance and liquidity as well as the stability of the US financial system. Currency manipulation has been a problem in the past as most countries have over-relied on the US dollar as their reserve currency and succumbed to global economic shocks.

As we move towards globalization, world economies prioritize stability in financial systems. Reduced reliance on the US dollar is likely to provide advanced economies with greater control over their economic policies and reduce vulnerability to global economic shocks. It could also promote the use of local currency hence a higher demand for local goods and services, reducing unemployment and promoting economic growth.

Most developing countries rely heavily on international finance such as foreign aid and foreign direct investment to run their economies. This exposes them to increased vulnerability to global economic shocks. Fluctuations in global financial markets, changes in investor sentiment, or economic downturns in major economies can quickly transmit negative effects to these countries. This dependence can make developing countries’ economies more susceptible to crises and disruptions.

In recent years, the US dollar has appreciated significantly, currently standing at over 10 percent higher than its value at the start of the Ukraine invasion in February 2022 and 30 percent higher than a decade ago. This has a great implication for nations with dollar-denominator debts majority of which are emerging countries. It has translated to soaring debt values posing a challenge to these countries. In addition, the rise in the value of the US dollar has translated as a sharp increase in import bills hence becoming expensive for countries to import food and fuel.

Developing nations may face increased currency risk. They may experience currency instability and inflation as most such countries have weak currencies. The value of their local currencies may become more volatile, which can affect trade and investment flows, making it more challenging to access international markets. This may result in inflation and have a disproportionate impact on their population, the majority of whom live on the margin of the economy and are more vulnerable to the effects of inflation.

In summary, this transition may act as a threat to Low and Middle-Income Countries as it may sink them deeper into debt, poverty, and reduce their economic growth.

Over the past couple of months, the rising cost of living has been a global crisis given the ripple effects of Covid-19 and the Russia-Ukraine war invasion disrupting the global supply chains.

The Kenyan government has been taking substantial efforts to curb the rising cost of food. The unga subsidy last year was a great initiative but not sustainable as it cost Kenya sh7 billion, sinking the country deeper into debt. The current fertilizer subsidy coupled with the rains is likely to increase food production. However, the question remains, is this sustainable? In this article, I would like to give you my opinion on the matter, looking at possible solutions to the issue of the rising cost of living in Kenya.

A reduction in taxes on fuel, electricity, and food will go a long way in encouraging investment which in turn improves productivity. Investors are affected by unpredictable tax systems and multiple tax mechanisms that are imposed on commodities. Having surpassed the Two Trillion mark of tax collection for the Financial Year 2021/2022, Kenya Revenue Authority (KRA) looks to double that to Kshs. 6.831 Trillion by end of the Financial Year 2022/2023. This has called for improvement in tax collection. Rather than increasing taxes on food and essential commodities, the state agency should broaden the tax base by finding loopholes in its systems and improving tax administration. This way, the country can raise enough revenue to finance its expenditure and reduce its reliance on costly subsidies.

An increase in interest rates by the Central Bank. This has been evident over the past few months, now standing at 9.5%. As much as this is increasing the cost of borrowing making both credit and investment more expensive, it is a powerful tool to slow down the economy. The country has faced some substantial inflationary headwinds due to global economic shocks. March 2023 inflation rate stands at 9.2% which is close to double March 2022 inflation rate which stood at 5.6%. Kenya has recorded the highest cost of living since 2017. If the Central Bank increases the interest rates, the money supply will go down and commodity prices may go down as well.

The government should focus on increasing per capita income. This means that if Kenyans have more money in their pockets, we might just not hear so many complain about the rise in food prices, to say the least. Reports show that in 2022, 17% of Kenya’s population lived below 1.90 U.S. Dollars per day and 8.9 Million Kenyans lived in extreme poverty, the majority of whom live in rural communities. Considering the high rate of unemployment and underemployment, the government can create a favorable business environment, implement policies that encourage entrepreneurship, and invest in adaptability to the changing labor market need. This way, more jobs can be created and the economy can grow. It may not be an instant solution but it may get many Kenyans out of extreme poverty to earn a decent income.

Kenya, like many other countries around the world, is facing some tough economic times. If the government focused on curbing inflation, increasing per capita income, and reducing taxes on commodities to encourage investment, this will go a long way in ensuring that we get rid of extreme poverty and the cost of living becomes bearable such that ordinary Kenyans can afford the basic needs and live decent lives.