By Fadhel Kaboub

Climate finance requires a minimum of $2.4 trillion of transformative grant-based investment and transfer of technology for climate adaptation and mitigation by 2030. We are nowhere near that target at the end of COP28. Climate finance is a climate debt owed by the historic polluters of the Global North to Global South countries that are on the front lines of climate change. The Global North is in default and is refusing to pay its debt.Subscribe

If you owe me $100, you are supposed to pay me. Instead, you give me a $10 loan with conditionalities to control how I use my money. You give me another $10 in exchange for having control over my forests (aka carbon markets). You invest another $10 in green electricity that I must export to you on favorable terms. You outsource another $10 worth of low value-added added manufacturing to produce cheap consumer goods for you. None of this should count as climate finance. It is a climate debt default green-washed with neocolonial debt traps.

We can stop paying our debt too

If a Global South country defaults on its external debt, the Southern District of New York court will allow Wall Street private banks to confiscate any financial assets that country has in the US banking system including export revenues that pass through the US banking system. We need to establish a climate debt court in the Southern District of the Globe, staff it with the most qualified legal minds from the Global South, and start prosecuting climate debt cases using legal precedents that have been used to impoverish and abuse the people of the Global South.

We are owed at least $2.4 trillion in climate finance by 2030, so we need to withhold and confiscate the equivalent of that debt in cash and in-kind until the debtors come forward and pay their debts in the form of unconditional grants and transfer of technology. Unfortunately, the Global South has yet to build an unbreakable united front. Instead, we see countries settling for bilateral deals that amount to financial crumbs and structural traps. This must change now before COP28 goes down as yet another failed climate finance event for the Global South.

The biggest blind spot of COP28

The debate about reforming the global financial architecture to create a fit for purpose climate finance model is encouraging, but it needs to recognize that the financial architecture is a subset of a global economic architecture that also includes the international trade, investment, and taxation architecture. We are making some progress on transforming the global tax architecture thanks to a recent Global South victory at the United Nations general assembly voting overwhelmingly for a UN Tax Convention.

We are also finally having a serious discussion about transforming the global financial architecture. At COP28, Colombia, Kenya, and France announced the establishment of an independent expert review on debt, nature and climate. The expert group will examine the way sovereign debt is limiting the fiscal space needed to take climate action, decarbonize the economy, and protect nature. This is, of course, a promising initiative to help redesign the global economic architecture.

However, this leave the rules of international trade and investment as the main blind spot in the COP28. There is no mention of the World Trade Organization (WTO), no mention of unfair bilateral trade agreements that are unfavorable to the Global South, no mention of reforming the Trade-Related Intellectual Property Rights (TRIPS) in the context of transfer of technology for climate action on adaptation and mitigation, no mention of the need to overhaul the Investor-State Dispute Settlement (ISDS) mechanism or Investment Court System (ICS) through which Global South countries can be sued by foreign investors if the State takes action that interferes with the investor’s (extractive) business plans.

By Leonard Wanyama

Kenya’s tough economic situation needs significant creative thinking to take the country back towards prosperity.

The existing public finance management (PFM) system simply dwells on revenue cycle in a somewhat traditional way.

With constant reports of new revenue collection measures such as revised corporate taxes; reintroduced minimum taxes; reviews of value added tax (VAT); refocusing on education, insurance, petroleum, tobacco, alcohol; and introduction of vehicle plus carbon taxes, is it possible to think differently about how tax collection in public finance can be structured towards uplifting marginalised areas?

For instance, it is assumed that a high population should guarantee existence of more revenue potential hence the need for increased numbers of paramilitary agents to help in tax collection efforts.

In thinking about pathways for prosperity, the country’s PFM allocation priorities are geared towards the enhancement of service delivery and promotion of balanced development.

However, is there any possibility of including the promotion of local opportunities within this matrix?

Following taxation, revenue allocation in counties identify health services, agricultural features, population dynamics, urban amenities, basic portion, land area, rural access through roads, poverty levels as indexes of spending needs.

Yet, current circumstances demand additional thinking on how to spur enterprises, particularly in marginalised or peripheral areas.

This, as a key aspect of Kenyan policy imagination to encourage productivity that will uplift communities across the country.

This may require changes or improvements in language and definitions.

Marginalised areas should not only be understood in terms of geographical scarcity for reclamation, but also as spaces of prospected growth. 

Public finances can then be structured to propel structural economic advancement for the benefit of all by encouraging investment in distressed localities as means of dealing with questions concerning prevailing inequalities.

Above and beyond equitable contributions, marginalised areas can also be designated as ‘County Opportunity Zones (COZ)’ that serves as spaces through which investments are channeled to ensure employment creation is targeted towards low-income communities.

How different or unique would a COZ be different from other Special Economic Zones (SEZs) such as Free-trade zones (FTZ), Export Processing Zones (EPZ), Free Economic Zones (FZ/FEZ), Industrial Parks/Estates (IE), Free ports, Bonded logistics parks (BLP), Urban Enterprise Zones?

By LUKE ANAMI

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Somalia’s bid to join the East African Community seems to have come at the right time as the bloc also seeks expansion to include nearly everyone in the Horn of Africa. More than a decade since Mogadishu first filed interest, all indications are that Somalia could be the eighth member of the bloc by end of the year.

That has raised criticism as well, with some quarters terming the pace “too fast” (Somalia resubmitted the bid late last year) for a country still at war with itself and several other governance problems.

The EAC says it will not stop at Somalia and wants to have as many as 10 members by 2025, at the earliest, or before the close of the decade. This, officials say, will help countries in the region apply the rules of trade under the African Continental Free Trade Area (AfCFTA) agreement without worrying about concentric bloc memberships.

After Somalia, three more countries are expected to begin the admission process. They are all in the Horn. Ethiopia, Djibouti and Eritrea have been touted as possible candidates.

But while the desire is to encourage all countries in the neighbourhood to belong to one organisation, critics say the bloc is ignoring its basic principles.

Under Article 3 of the EAC Treaty, the criteria for the admission of new countries into the community include: Acceptance of the community as set out in the Treaty; adherence to universally acceptable principles of good governance, democracy, the rule of law, observance of human rights and social justice.

There are growing concerns that instead of strengthening and increasing intra-trade, the admission of the latest EAC partner states including South Sudan, the Democratic Republic of Congo and now Somalia is slowing down the integration process due to internal conflict in their respective countries.

By Janet Muchai

Kenya is among African countries with the highest debt-to-GDP ratio and was categorised as at high risk of debt distress by the IMF in 2020. In just ten years, the debt-to-GDP ratio has increased by 30 per cent, from 38 per cent in 2012 to 68 per cent in 2021. This has been attributed to resource demands for offsetting perennial budget deficits, largely occasioned by expansionist policy on infrastructure development, the weight of a bloated government, corruption and waste in the civil service. Consequently, the government’s ability to efficiently deliver essential public goods and services to its citizens has been substantially constrained.

In recent times, many developing countries including Kenya have demonstrated an increased appetite for commercial debt, preferring to borrow from private companies, local and international bond markets, or banks rather than relying on concessional loans. Kenya’s shift to commercial borrowing can be attributed to various factors, including ineligibility to access concessional funding due to its change of status from a low-income country to a lower-middle-income country following the rebasing of its national accounts. Additionally, loans from private creditors often come with less scrutiny and conditionalities compared to loans from multilateral financial institutions and traditional Paris Club lenders.

As a result, Kenya’s commercial/private debt component has significantly increased, accounting for more than half of total national debt. Between 2012 and 2020, debt from private creditors averaged 58 per cent, with the highest share recorded in 2014 (60.5 per cent), 2018 (62 per cent), and 2019 (62.2 per cent), which aligns with the periods when Kenya had Eurobond issues. The majority of Kenya’s private sector debt consists of loans from domestic creditors, accounting for an average of 81 per cent between 2012 and 2020. Domestic sources include debt instruments such as treasury bills and treasury bonds, while external sources mainly comprise loans from commercial banks. Some of the major commercial banks that have issued credit to Kenya include China Development Bank, Citigroup Global Markets, Erste Group of Banks, First Mercantile Securities Corporation, Société Générale, Standard Bank Limited UK and Trade plus Development Bank.

In 2019, half of total tax revenues were spent on servicing debt from both local and external private creditors. Existing scholarship indicates that debt from private creditors is associated with three major components that are detrimental to economies, especially in the developing world—high interest rates, shorter maturity periods and limited transparency in contractual agreements. Each of these components has its own repercussions, which are now manifesting in Kenya.

On transparency and accountability, debt from private creditors often lacks sufficient scrutiny due to limited public participation and availability of information regarding its acquisition and management. Private credit is also argued to have fewer conditions compared to concessional loans, leaving room for corruption and mismanagement of borrowed funds, especially where legislative oversight of debt management is weak. A notable example is the 2014 Eurobond issue, where KSh215.5 billion from the proceeds could not be accounted for, as revealed by an audit by the Auditor General. This involved alleged expenditure of the borrowed funds outside of the government’s Integrated Financial Management Information Systems.

On the cost of borrowing, private creditors generally offer loans at higher interest rates compared to the more favourable concessional loans offered by traditional multilateral and Paris Club creditors that are often below market interest rates. According to the National Treasury, the average interest for concessional external loans has never exceeded 4 per cent. In contrast, private sector debt, particularly in the form of Eurobonds, carries higher interest rates. For example, the 2018 Eurobond issue had an interest rate of 8.25 per cent, significantly higher than the rates for concessional loans. Interest rates for domestic-issued private debt have also been high. The average interest rates for treasury bills with maturities of 91, 182, and 364 days were 6.7 per cent, 7.3 per cent, and 8.4 per cent respectively in 2021. These rates are still higher compared to the interest rates for concessional loans. Generally, the higher interest rates have translated to greater debt servicing costs.

The government is yet to adequately tackle pilferage and misuse of public resources to warrant an increase in the taxation, players in the civil society have warned.

The CSOs under the umbrella of Okoa Uchumi now want the state to review its expenditure before implementing the new taxation proposals in the Finance Bill 2023.

According to the CSOs the government will gain more by plugging leaking in various revenue streams and cutting down on expenditure than increasing taxes.

Among the measures the lobby want reviewed is the increase of Value Added Tax on petroleum products from the current eight percent to 16 percent saying this will further worsen the cost of living in the country.

They also objected the proposed increase to 35 percent Pay As You Earn for those earning a monthly income of Sh500,000 and above per month and instead want the tax band to be pushed to those earning over Sh1 million monthly

Kenya Human Rights Commission program manager Annet Nerima said that under the taxation proposals in the VAT category, the lobby rejected eight  out of the 11.

Okoa Uchumi says the proposal to remove the VAT exemption on the supply of maize (corn) flour, cassava flour, wheat or meslin flour and maize flour containing cassava flour will raise the cost of living for many Kenyans.

“The coalition members however oppose a number of the proposals that are problematic and inconsiderable of the  current economic situation,” said Nerima

Under the Excise Duty Proposed Amendments a total of eighteen (18) amendments were considered by members.

Out of these, the coalition endorsed thirteen (13) of them for ‘their consideration of the current cost of living in the county.

“Members oppose a total of five and recommend that the national assembly reject these.”

“The excise duty on Mobile money transfer services to be increased from 12% to 15% of the excisable value-members oppose this proposed amendment because it may lead to reduced transactions, thus reducing excise duty collection,” added Action Aid Kenya National Program Manager Lina Moraa.

In the Income Tax Proposed Amendments 13 out of 17 amendments were considered and endorsed by the Coalition.

They now want the legislators to reject the introduction of 10 percent PAYE tax on the first Sh24,000 without relief, recommends retaining but with 100 percent relief as it is currently with the justification that the relief will cushion low-income earners from the high cost of living.

Their objection to some of the proposals come at a time that the government is hard pressed to increase its revenues.

It is estimated that for every Sh100 the government collects as revenue, more than Sh65 goes to service the national debt.

This has further been worsened by the fact that for the first three quarters the Kenya Revenue Authority (KRA) in the revenue collection for the 2022/2023 Financial Year have been below target.

Out of the targeted Sh2.07 trillion for the current fiscal year, Sh1.57 trillion has been collected. Almost 25 percent below the target amount.

The CSO argue that The high debt burden, the unmet revenue collection and a large budget deficit require fiscal consolidation and revenue mobilisation.

By ANTONIO M.A. PEDRO

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The confluence of shocks – the cascading impact of the Covid-19 pandemic, the war in Ukraine and severe natural disasters – have eroded Africa’s development gains, resulting in a staggering 149 million previously non-poor Africans now facing the risk of falling into poverty.

The growing number of new poor and vulnerable people is making it harder to close the gap between the rich and the poor. Moreover, Africa currently accounts for the largest share of the world’s poor. This inevitably has a far-reaching impact on achieving the sustainable development goals and the vision of the Africa we want.

The crisis, however daunting, presents an opportunity for the African ministers of finance, planning and economic development assembling in Addis Ababa from 15-21 March 2023, to make concerted efforts on providing concrete solutions. The theme, fostering recovery and transformation in Africa to reduce inequalities and vulnerabilities, should yield long term actions to move the continent forward on a path of prosperity.

First, there is need for real action on reducing the high cost of trade. This can ease the burden on access to affordable goods for poor, hard-hit households that are losing out on health, education, and meaningful opportunities. It is also time to expedite the implementation of the African Continental Free Trade Agreement (AfCTA) as a powerful lever for poverty reduction.

The AfCFTA’s promise cuts across all economic sectors, presenting a new pathway for broad-based growth. In the agri-food sector, which is critical to overcoming vulnerabilities associated with food insecurity for the over 300 million affected Africans, ECA estimates show that the sector will yield additional US$ 43.3 billion in trade revenue by 2045 if the agreement is expedited.

Additional opportunities abound in sectors such as pharmaceuticals, vehicles and transport equipment, metals, and textile, apparel and leather products.

 Second, climate action must be mainstreamed in policy development and implementation.  We are living through the devastating impact of climate events that have led to the migration and displacement of some 85 million people in the region.

Increasing temperatures have already contributed to a reduction by a third in average agricultural productivity growth, while the continent’s 38 coastal countries are facing climate-related threats to their blue economies.

The climate crisis is not a fringe issue. It accentuates poverty through its impact on lives, livelihoods, and economies. Governments can finance development through innovative green financing, such as investing in nature-based sequestration which can provide up to 30% of the world’s sequestration needs. At 120 USD per tonne of carbon, up to US$ 82 billion per year can be mobilized from nature-based carbon credits in Africa.

Financial inclusion refers to all initiatives that make formal financial services Available, Accessible and Affordable to all population segments. This requires particular attention to specific portions of the population that have been historically excluded from the formal financial sector either because of their income level and volatility, gender, location, type of activity, or level of financial literacy. In so doing, there is a need to harness the untapped potential of those individuals and businesses currently excluded from the formal financial sector or underserved and enable them to develop their capacity, strengthen their human and physical capital, engage in income-generating activities, and manage risks associated with their livelihoods.

What we mean by financial inclusion of women throughout the decade is to seek strengthened financial services and capacity building, especially for women living in rural areas, to gain access to technology and to use it to increase productivity in all industrious sectors and with tailor-made financial products for the women and have access to formal as well as reliable means to save, access and borrow money. Studies have shown that women invest 70 percent of their financial resources in the social welfare cost of the family, particularly education and the health of children, while human investment ranges from 30 percent to 40 percent.

Going forward, women and girls are keen on not only managing funds at the various public and private institutional set-ups but also owning the funds. There is nothing small about women, therefore, we are thinking big and looking at how women can have more control over their earnings and savings as well as managing and owning large amounts of funds.

We must be able to make significant progress in improving the lives and livelihoods of millions of women and young girls around the continent, and that means that we are leaving no one behind because when you empower a woman, you empower the family and the community at large. There is evidence of that trickledown effect. For that reason, in February 2020, African Women Leaders Network launched the African Women Leadership Fund, demonstrating their commitment to move from commitment to action. With a target of $100 million, the launch pooled over $20 million from the leaders present, the private sector, and more commitments will see that fund grow.

According to the World Bank, more than 70 percent of African women are excluded by financial institutions or cannot receive financial services, such as a savings or current account, loans, credit and other institutional services, with adequate conditions to meet their needs.

The overall goal of this new African Women’s Decade is that every woman must be able to work, be paid and participate in her country’s economy. This will involve examining the regulatory, legislative and policy context to determine the changes needed to foster the financial inclusion of women and assist financial institutions in adopting approaches tailored for them as a separate market segment.

Furthermore, as declared by the AU Heads of State and Government during the 33rd AU Summit in February 2020, one of the main objectives of this new African Women Decade is the development of market access by enhancing new credit solutions for women, generating access to infrastructure in downstream processing and distribution, and training them in agro-industrial technology.

Finally, in addition to access to financial products, technologies and services, achieving financial inclusion for women would require overcoming sociocultural norms and gender barriers.

EATGN is pleased to share new publications and multimedia resources to build knowledge, change attitudes, impart skills, improve practice, and provide awareness on domestic revenue mobilization (DRM) issues within public finance.

New Publications on Tax

Delays by Ratification: Examining Regional Harmonization of the East African Community (EAC) Double Taxation Agreement

One of the tools most used in tax harmonization is the signing of DTAs. The purpose a DTA is to help two countries minimize instances of double taxation that may arise from existing overlapping tax laws. This discussion paper will attempt to identify some of the key issues that arise out of the ratification process of the EAC double tax agreement and why the EAC member states ought to ratify the tax agreement as one step towards attaining tax harmonization. It also suggests several recommendations that can be adopted to make the model DTA an effective tool for tax harmonization tool.

Beneficial Ownership Laws Under the Kigali International Financial Centre

In recent years, there have been increased efforts to set up International Financial Centres (IFCs) in Africa as a means of attracting foreign investment. In East Africa, two IFCs have been established, namely the Kigali International Financial Centre (KIFC) and the Nairobi International Financial Centre (NIFC). This policy brief will focus on the KIFC, which has been hailed as one of the IFCs likely to become a significant African business facilitator in the next 2 to 3 years. It looks at potential areas of concern and provides recommendations to the Rwandan authorities to seal any loopholes for illicit financial activities.

Op-Ed

• CURRENT BUDGET LOSSES: Kenya should critically assess the foregone revenues in tax incentives

Multimedia

• Tax Incentives
  • DEFINITIONS – What is a tax waiver/incentive?
  • AWARENESS ON TAX INCENTIVES – Are you aware that the government loses tax revenues by offering tax waivers/incentives to certain individuals and businesses?
  • SPECIAL TAX BENEFITS – Do you think the benefits of export processing zones (EPZs) and special economic zones (SEZs) outweigh the amount of taxes that the government forgoes by issuing special tax treatments in such zones?
  • FAIR REVENUE COLLECTION – Are tax incentives/waivers fair?
  • ACCOUNTABILITY BY BENEFICIARIES – Which organisations do you think benefit from tax waivers/incentives? Are the beneficiaries of these tax expenditures (waivers) held accountable to requirements they are supposed to meet?
• Gender
  • UNPAID CARE WORK – Is unpaid care work (Domestic chores etc.) a burden with heavy implications on women requiring tax interventions or waives?
  • WOMEN’S INCLUSION IN DECISIONMAKING – Do you think women are excluded from public participation and decision-making spaces on processes concerning tax collection, allocation, expenditure, and accountability for domestic resources?
  • UNDESTANDING TAX BURDENS – Are current taxes having a heavier bearing on women than men?
  • KNOWLEDGE OF TAX FRAMEWORKS – Do you know of the existence of laws that guide the issuance of tax incentives/waivers? If yes, what are they? Is there a framework used to award tax incentives/waivers?

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By Zephania Ubwani and Gadiosa Lamtey

National debts are overwhelming the economies of the East African Community (EAC) member countries even as they are yet to recover fully from the impacts of Covid-19 pandemic.

While Kenya is planning to enact a law on debt ceiling, Tanzania intends to borrow a whopping $2.34 billion to finance the $18.1 billion budget for 2022/23. National debts, which is money owed to the country by domestic and foreign lenders, now account for a significant portion of the gross domestic product (GDP) of the six EAC countries.

Kenya has the highest ratio of national debt to its GDP, estimated to be 64.2 percent in September 2021 compared to Tanzania’s present value of public debt to GDP which was at 31.0 percent in April 2022, less than a threshold of 55.0 percent. This is as the government (Tanzania) plans to borrow at least $2.34 billion from foreign financiers to finance its budget for the coming financial year. According to Finance and Planning minister Mwigulu Nchemba, the national debt has reached Sh69.44 trillion this April from Sh60.72 trillion in 2021.

He told Parliament in Dodoma last week that the government borrowed Sh8.7 trillion in the past year which is equivalent to 14.4 percent increase. The increase in national debt is largely attributed to the receipt of soft loans for financing development projects and release of special bonds worth Sh2.18 trillion for the funding of the Public Service Social Security Fund (PSSSF).

Although rising national debt has been a matter of concern, the Tanzania government maintains that it was still “sustainable in the short, medium and long run based on the international measures”.

National debts are there because governments the world over do borrow because of inadequacy of revenue from their own sources like tax to finance public goods and services.

Inflation is a process of sustained increases in the general price level over a period of time, typically 12 months.

Inflation can be calculated for a country, for specific regions in a country and for different income and demographic groups, for instance, pensioners.

These different calculations are important because the spending patterns of regions and groups differ. That means that their rates of inflation also differ. It is therefore important for each household to have a clear understanding of its own inflation rate.

A number of countries allow for the development of this improved understanding. For example, South African households can use an Internet tool such as the personal inflation calculator of Statistics SA. A personal inflation calculator, based on the spending patterns of households, is also available for the Euro

The phrase describing inflation as ‘enemy number one’ is borrowed from the research done by South African businessman Dr Anton Rupert on the worldwide inflation problem suffered in the 1970s.

He described inflation this way due to its distortive impact on the economies of countries and the wealth and financial well-being of households.