Underperforming revenue: What are Kenya’s options?

There is non-contestable evidence that globally, no country has ever harnessed domestic resource mobilisation by raising tax rates.

When Mwai Kibaki (now deceased) got elected as president, the economy was growing at 0.5 percent and non-performing loans (NPLs) were at 35 percent. By 2006, the government was running a budget surplus. And by the time he left office in 2013, NPLs were at 5 percent but which currently stands at 17.4 percent with Sh717 billion as bad loans.

The World Bank Kenya Economic Update 2025 has cut Kenya’s growth forecast for this year to 4.5 percent, citing high levels of lending interest rates, high public debt and a decline in private sector credit. Not even austerity measures can resolve the debt overhang.

Statistics from the 2025 Economic Survey paints a gloomy picture. It shows a decline on economic growth from 5.7 percent in 2023 to 4.7 percent in 2024.

Although credit advanced by banks to national government grew by 13.9 percent, credit to the private sector declined by 1.1 percent, which implies crowding out private sector businesses.

Even with a depressed economy, the 2025 Budget Policy Statement targets an expenditure of Sh 4.3 trillion against a revenue collection of Sh3.4 trillion. But by the end of December 2024, all broad tax categories fell short of targets.

Value added tax (VAT) recorded a shortfall of Sh36.5 billion, income tax of Sh28.6 billion, excise duty of Sh13.7 billion and import duty of Sh6.1 billion. Appropriations in aid declined by Sh14.3 billion. It is therefore highly unlikely that the taxman will surpass last year’s revenue collection of Sh2.47 trillion.

Just like President Kibaki era, it is possible to raise sufficient tax revenues without raising tax rates. Kenya loses enormous financial resources through fiscal leakages emanating from tax avoidance, outright theft of public funds, bribery of tax officials to lower liabilities and mismanagement of parastatals which eventually require bail outs by the taxpayer.

Read: What it’ll take Treasury to get Sh95bn parastatals cash

The Auditor General and Controller of Budget have occasionally revealed systemic fraud, such as inflated procurement contracts, “ghost workers” on payrolls and unsanctioned off budget expenditures.

Kenya has 288 parastatals which instead of supplementing the National Treasury with tax revenues, some are a burden to the taxpayer.

For example, in 2023, KPLC recorded a net loss of Sh3.19 billion. Prior to 2024, Kenya Airways had continuously recorded a loss for a period of 11 years. Most sugar millers have been recording losses. Reforming the institutions through privatisation could enhance their performance.

The partial privatisation of Safaricom raised Sh108 billion. Other companies that underwent privatisation during Kibaki era are Kengen and Kenya Reinsurance.

The announcement by the National Treasury Cabinet Secretary that next year, the government will offload the remaining stake at Safaricom at Sh149 billion is timely, but this should be extended to KQ, KCB, Consolidated Bank and Development Bank of Kenya.

Read: Treasury to sell Safaricom stake in Sh149bn plan

British Airways is not owned by the UK government. Since the British Airport Authority was privatised in 1986, the state does not own any of the airports in the UK.

To mobilise more tax revenues, the government should ease the tax burden and increase incentives for businesses. Kenya has high corporate tax rate relative to her peers in Africa.

Egypt is at 22.5 percent, Ghana at 25 percent, Côte d'Ivoire at 25 percent, Zimbabwe at 24.7 percent and Mauritius at 15 percent. Corporate tax for manufacturing firms in Botswana is at 15 percent.

Mauritius offers various incentives including zero taxation of dividends and import duty exemptions for subsidiary firms located in the country.

High and multiple taxes reduce business growth at inception, reduce the chances of survival and for those that manage to survive, retard the growth. The high tax rates applied to SMEs constrain their growth and encourage tax evasion.

The Kenya Revenue Authority (KRA) should undertake comprehensive tax reforms to ensure simplification of the tax system in order to reduce the burden on businesses especially SMEs.

Although the informal sector in Kenya generates 83 percent of the employment opportunities, the high population of informal businesses is not commensurate with tax revenue generated. The unregulated nature of the sector and lack of business registration could increase the cost of tax collection and administration.

To close the tax gap and enhance revenue collection, each business should be issued with a unique Tax Identification Number to reduce multiple taxation and strengthen tracking tax payments.

KRA should establish a threshold for businesses to be tax exempt based on value of assets, turnover, or profit as well as tax breaks for specified number of years from the inception of the business.

Lessons can be drawn from the Ghana Revenue Authority’s collaboration with the National Identification Authority, an initiative that led to a threefold increase in total tax registrations in 2022.

KRA should also leverage on digital tools such as AI-driven automated fraud detection. Notable lessons can be drawn from South Africa where in 2023, the South African Revenue Services (SARS) used AI, data analytics and machine learning to enhance tax compliance. SARS achieved a 15.8 percent increase in compliance.

The problem of tax avoidance by multinational corporations (MNCs) continues to rob the country of valuable resources. MNCs frequently engage in aggressive tax planning strategies, for base erosion and profit shifting.

Due to their complex accounting processes and expertise, MNCs, exploit skills inadequacies at KRA and loopholes in existing tax laws to siphon resources out of the country, by assigning profits to branches located in lower tax jurisdictions and transfer pricing manipulation through export value underreporting or overcharging intragroup services to distort taxable income.

Such schemes can result in larger tax revenue losses because of weak tax administration capacity. There is a need for specialised unit at KRA to deal with MNCs.

Double taxation agreements offer multinational companies a powerful way to avoid paying corporate taxes to KRA. South Africa and Rwanda successfully renegotiated their double taxation treaties with Mauritius in 2013. Zambian government decided to terminate its double taxation treaty with Mauritius, effective January 2021.

Tax exemptions to some large corporations for example NCBA in 2019 and high net worth individuals (HNWIs) remains a challenge. Despite legal provisions for taxing HNWIs, compliance has generally been low since it’s politically sensitive, lack of dedicated tax administration structures and weak enforcement. Uganda, South Africa and Mauritius have established specialised HNWI tax units to improve compliance and expand the tax base for enhanced revenue collection.

In Uganda, the unit which was introduced in 2015, achieved significant levels of tax compliance within its first year of operation, increasing HNWI tax return filings from 13 percent to 78 percent.

This boosted revenue collection by $5.5 million. In 2023, SARS registered $145 million in tax collections from the efforts of its specialised HNWI, representing a growth of 7 percent over the previous year.

Kenya has put in place Integrated Financial Management Information Systems (Ifmis). However, Ifmis system does not fully capture the financial activities of government embassies, state-owned enterprises, and agencies implementing government projects.

Read: Treasury targets Sh42bn from regulators

This leads to expenditure misallocation and inefficiencies. Inefficiencies in public financial management systems, allow for procurement processes to be bypassed or manipulated through unregulated “single sourcing”, enabling wasteful spending, through overpriced contracts, and resource misallocation.

KRA can learn from Rwanda’s e-Government Procurement System to automate and streamline procurement processes, and the use of electronic platforms such as eTender Publication Portal and the Central Supplier Database in South Africa.

The 2025 Budget Policy Statement indicates that the government will adopt zero-based budgeting approach. But the country is yet to transition from traditional line-item budgeting to programme and performance-based budgeting.

Programme and performance-based budgeting links fiscal resources to specific, measurable goals, making it easier to assess the impact of public spending and to prioritise projects and programmes based on their effectiveness in achieving set objectives.

As per the 2025 Budget Policy Statement, the government intends to finance the Sh877 billion fiscal deficit by borrowing. In 2021, I took part in research into the public debt threshold in Kenya that was published in a well-regarded scientific journal. The research established a debt threshold at 55 percent of Gross Domestic product (GDP).

When the current government came to power, it adopted our study findings and anchored the 55 percent into the last two Budget Policy Statements including the 2025.

To date, public debt stands at 70.3 percent of GDP (Sh11.4 trillion) which is way above the target. Almost half of Kenya’s external public debt is commercial.

Eurobonds have shorter maturities, higher interest rates and higher coupon payments. They are therefore more expensive than concessional loans.

Due to poor governance and accountability, excessive issuing of Eurobonds contributes to fiscal indiscipline which aggravates the debt situation. Issuing Eurobond to fund poorly selected and executed projects contributes to recurring borrowing.

Tapping into diaspora bonds could diversify long-term borrowing at below-market rates. The government can raise money for infrastructure due to the patriotic ties to diaspora bond issuance.

Although several African countries have attempted to utilise diaspora bonds, only two countries — India and Israel — have established multiple successful rounds of diaspora bonds.

Of the African countries that have experimented with diaspora bonds, most have only gone through one successful round (Kenya, Nigeria) or the funds have failed to attract much interest.

The risk of defaulting on diaspora bonds, due to lack of transparency and confidence in domestic financial markets, have decreased diaspora interest in these instruments.

Finally, the government should aim at boosting non-tax revenue sources such as tourism. Although the average non-tax revenue to GDP ratio in Africa stands at 5.8 percent, Kenya is at 2 .0 percent, while Ghana is at 11 percent, Rwanda at 7.7 percent and Egypt at 6.5 percent.

The writer is a consultant policy analyst and a lecturer of Finance and Economics at the University of Nairobi.