Risk Category- Political Risk
Introduction
Nationwide protests erupted in Kenya against a finance bill proposing tax hikes. The demonstrations turned violent on Tuesday, in the capital city of Nairobi. More than five people were shot dead and around 31 injured after Kenyan police fired at the demonstrators. Kenya’s Parliament was set ablaze as protesters stormed the building. Nairobi’s city hall, the office of the governor of Nairobi, and vehicles parked at Supreme Court were also set on fire. Kenya has deployed military to support police in order to quell the protests. The tax proposals were part of the Kenyan government’s efforts to raise an extra $2.7 billion in domestic revenue. According to the claims made by the state, the changes were necessary to pay interest on national debt, reduce the budget deficit and keep the government running. If violent demonstrations persist, there could be a large economic impact on the Kenyan economy, and Indian trade and businesses.
Analyst Comments
- The original finance bill proposed taxes on basic items such as 16% sales tax on bread and 25% duty on cooking oil. The bill also proposed taxes on financial transactions, annual tax on vehicle ownership, products that contribute to waste and environmental harm including digital products such as mobile phones, specialized hospitals, and higher import fees. Although some of the most contentious measures of taxes on basic items, waste products, and financial transactions have been dropped, the Kenyan Parliament passed the controversial bill with measures of higher import tax and healthcare tax. The protesters demand the bill to be scrapped in its entirety.
- The internet monitoring site NetBlocks reported a major disruption to connectivity amid the ongoing protests. The outages have also impacted neighbouring countries of Burundi, Uganda, and Rwanda.
- While the President has expressed his intention to decline signing of the bills, Kenya would have to raise revenue through either taxes or borrowing in the short-term due to financial compulsions of the Kenyan government. Kenya’s public debt stands at 68% of the GDP, higher than the standard 55% recommended by the World Bank and the International Monetary Fund. With an existing high deficit, borrowing seems economically unwise in this scenario.
- Raising taxes would have economic repercussions on the Kenyan economy. Even as Kenya’s economy has been one of the fastest growing in Africa with a growth rate of around 5%, additional taxes on critical services like healthcare and import products can impact the growth rate (with a direct impact on purchasing parity and consumption) and investments in an import-dependent economy.
- The Indian High Commission has issued an advisory to exercise utmost caution, restrict non-essential movement and avoid all areas affected by protests and violence. While the advisory has been issued to Indians residing in Kenya, tensions can also impact Indian business and trade interests.
- India is one of the largest trading partners of Kenya and trade volume amounts to more than $2 billion. Kenya is one of the few countries with which India has trade surplus. Indian exports to Kenya include petroleum products, pharmaceuticals, steel products, machinery, yarn, vehicles, and power transmission equipment. India is the second largest investor in Kenya as well. Large number of major Indian companies have invested in various sectors including manufacturing, real estate, pharmaceuticals, telecom, IT & ITES, banking, and agro-based industries. Higher taxes on imports and healthcare would hurt large-scale Indian export interests in Kenya as the country undergoes a cost-of-living crisis while the persistent violent protests are bound to damage Indian investments in the country.
