Rebalancing Fiscal Policies to Enhance Kenya’s Regional Trading Competitiveness

Executive Summary

The 2024/2025 Finance Bill has elicited substantial debate among Kenya’s economic sector stakeholders over its potential ramifications on the country’s economic landscape and competitiveness in the region. Since 2017, tax-raising measures in Finance Acts have retarded investment and job creation, reduced earnings, and lowered incentives for informal businesses to formalize. The 2024/ 2025 Bill will continue this trend, impacting Kenya’s trade relations and positioning within the EAC and COMESA trading blocs. While Kenya’s GDP has shown resilience amid global economic challenges, the Treasury’s ambitious increases in revenue collection raise concerns about over taxation. Comparative to the projected economic growth of 5% in 2024, the 12% increase in revenue collection is expected to burden businesses and households that are grappling with high production and capital costs and reducing disposable incomes respectively. The proposed fiscal measures, like an increase in RDL, EIPL, and eco levy levies, will worsen the uncompetitive agricultural and manufacturing sectors. This will resultantly accelerate the relocation of investment and production firms to neighbouring EAC and COMESA countries where the investment environments are more conducive. To this end, Kenya’s budgeting process must evolve from being a predominantly political exercise to one that is guided by social, economic, and regional trading realities. A balanced fiscal approach coupled with constructive and formalized dialogue with the private sector will spur the local operating environment, making it attractive to investors and job creators. Leveraging trade agreements with AGOA and the EU is important in diversifying the market of Kenyan products from the vulgarities of regional trade dynamics and competition. Moreover, harmonization and enactment of the tax policy, and encouraging investment in production infrastructure are essential strategies to enhance Kenya’s competitiveness in the local, regional, and continental marketplace.