The World Bank has issued a stern warning to President William Ruto’s administration, advising against the frequent introduction of new taxes. This approach, according to the international lender, is discouraging investment and hindering Kenya’s economic potential.
In its latest Kenya Economic Update report, the World Bank highlighted that foreign direct investment (FDI) inflows into Kenya have been significantly underperforming. In 2022, FDI reached only 0.3% of the country’s GDP, starkly lower than neighboring countries like Tanzania at 1.7% and Uganda at 6.5%. This underperformance is particularly concerning given Kenya’s strategic position as a commercial hub in the East African region.
“Frequent and unanticipated tax policy shifts create a volatile business climate, erode investor trust, and hinder strategic planning,” the World Bank report stated. These abrupt changes in tax rates and the introduction of new taxes are causing instability in the business environment. This volatility impacts cost structures, especially for businesses involved in the import-export sector, making it difficult for them to plan and operate efficiently.
“New taxes will end up hurting the tax base. Foreigners will exit and invest in other countries,” Kamau noted. He further explained that excessive regulation and high taxes often lead to the emergence of black markets. “If a good is heavily taxed in Kenya and the prices are lower across our borders, it incentivizes people to create a black market to cash in on the arbitrage opportunity,” he added.
President William Ruto has consistently emphasized the necessity for Kenyans to pay taxes, but the World Bank’s report suggests that a more strategic approach is needed. Instead of frequent tax changes, a stable and predictable tax environment is crucial for fostering investor confidence and encouraging long-term investments.
The report also noted that while there has been some FDI in manufacturing sectors such as beverages, chemicals, and electronic components, overall investment levels remain negligible relative to Kenya’s market size and strategic location.
The instability brought about by frequent tax changes is not just affecting investors but also the banking sector. A recent report from the Central Bank of Kenya (CBK) indicated that commercial banks are suffering as Kenyans struggle to repay loans due to heightened interest rates, which are partly influenced by the country’s fiscal policies.
For Kenya to realize its economic potential and attract more substantial foreign investments, it is imperative that the government adopts a more predictable and investor-friendly tax policy. This shift will not only boost investor confidence but also stabilize the economic environment, ultimately leading to increased revenue and economic growth.