How proposed private sector 2020/21 budget stimulus packages will lessen Covid-19 impact

Minister for Finance and Economic planning Uzziel Ndagijimana. / Photo: File.

The regional private sector body has proposed economic stimulus packages to mitigate Covid-19 impact, which it hopes will be considered when four EAC Partner States jointly unveil their budgets for the new fiscal year, next week.

Next week on Thursday, June 11, Rwanda, Kenya, Tanzania, and Uganda are expected to jointly unveil their respective national budgets for the fiscal year 2020/2021.

 

The EAC partner states – except for Burundi and South Sudan – usually unveil their budgets on the same day in June every year after holding pre-budget consultations by their respective Ministries of Finance and Economic Planning.

 

During pre-budget consultations, ministers agree on the tax measures each country will implement. Things are tougher this time because of challenges posed by the ongoing Covid-19 pandemic; now regarded both as a health crisis and an economic crisis.

 

According to Peter Mathuki, the Chief Executive Officer of the East African Business Council (EABC), this financial year, some partner states have reviewed their targeted economic growth downward by nearly 50 percent.

Mathuki said: “In the region, the impact of the pandemic has been felt differently across sectors depending on the measures instituted to contain the spread of the pandemic as well as the linkage of the particular sector to the global economy.”

Mathuki stressed that the expectation of the regional private sector is that EAC budgets for the next fiscal year will contain economic stimulus packages “that will mitigate the impact of the pandemic on businesses and east Africans, stimulate economic growth and recovery.”

On May 21, Rwanda's Finance and Economic Planning Minister, Uzziel Ndagijimana, presented the Budget Framework Paper to Parliament and said the Government plans to spend the biggest share of the 2020/21 budget on activities that will boost the economy as part of a broader plan to respond to the impact of Covid-19. Rwanda's 2020-2021 budget will focus on implementing the government’s economic recovery plan, Ndagijimana said.

The Government of Rwanda also put in place an Economic Recovery Fund (approximately Rwf186 billion) aimed at shoring up business in the post Covid-19 period.

The EABC’s budget proposals which are fiscal and monetary measures include change of customs duty, domestic taxes, and expenditure measures.

Customs duty

Since partner states have not finalized the comprehensive review of EAC Common External Tariff (CET), the regional private sector body is proposing changes of customs duty in order to promote local production and make locally manufactured products more competitive.

The first change of customs duty should be through, Mathuki said, extending duty remissions to inputs that are not available in the region.

He said: “Duty remission will enable manufacturers to import inputs that are not available in the region at a competitive price.”

Inputs which manufacturers are seeking for duty remission include: Completely Knocked Down (CDK) kits for motor vehicles and motorcycles; sugar for industrial use; wheat grain, inputs for manufacturing of beverages and food, inputs for the manufacture of baby diapers, steel alloys for manufacturing of leaf spring, inputs used in the manufacture of energy-saving stoves and ribbons as well as some paper and paper products.

Others include inputs to manufacture textile and leather products and plastics. Some are used in the manufacture of Personal Protective Equipment (PPEs) used in the fight against Covid-19.

“Other changes of Customs duty are through some partner states applying for stay of applications on the EAC CET and applying higher tariffs on products that are facing unfair competition from cheap imports or where particular Partner States have the capacity to produce sufficiently,” Mathuki said.

“These include ranges of products from iron and steel products and ceramic tiles, Portland cement and fishing nets.”

Domestic Taxes

The EABC is also proposing a raft of changes on domestic taxes that “will go a long way to sustain businesses” during the pandemic period and offer room for recovery later.

They include reduction of the existing Value Added Tax (VAT) rate from 18-16 percent to at least 14 percent.

Mathuki said this will “stimulate local consumption” of goods and services as well as cushion consumers during the period of Coyvid-19.

Another proposal is a zero rate VAT for essential goods, to encourage the manufacturing of essential products.

“Most manufacturers have repurposed their manufacturing to produce products of high demand during Covid-19 pandemic which include PPE, sanitizers and face-masks.”

In addition, governments are also urged to set aside enough funds to repay VAT refund claims in order to improve the cash flows for businesses in the region.

Maintain or decrease excise taxes

On Excise duty, the EABC is proposing that governments in the region refrain from increasing excise duty for both petroleum products and non-petroleum products.

“Maintaining or decreasing current excise taxes on petroleum products and non-petroleum products will control inflation and hence cushion East Africans and businesses from the impact of this pandemic,” Mathuki said.

On employer taxes, EABC is proposing that Governments reduce the Resident Income Tax

(Corporation Income Tax-CTI) rate from 30 per cent to at least 25 per cent percent so as to cushion companies and businesses against challenges of liquidity.

“The funds saved from the reduced tax would be used by companies to sustain the business and boost their working capital.”

Also, it is noted, lower Corporate Income Tax will attract more businesses and investment in the region.

In addition, the regional body says, governments should abolish other taxes on employers such as Skill Development Levy and turnover tax rate in order to provide tax relief to employers so that they can continue to retain existing employees and sustain their businesses.

The EABC is also proposing the Partner States reduce Income Tax Rate (Pay-As-Earn-PAYE) from 30 per cent tax to at least 25 per cent.

In addition, they propose that EAC governments, “at this time of economic crisis”, should give 100 per cent tax relief for persons or employees earning a gross monthly income of $250.

“These measures will increase the net income of employees which in turn will enable workers to have more disposable income to spend during this period of the pandemic.”

Expenditure measures

For the tax measures to yield the intended outcome, the EABC is urging governments to complement them with injecting more money in the market through government spending and adoption of monetary measures.

Mathuki said: “EAC governments through 2020/21 budgets should unveil a stimulus package aimed at injecting money to the sectors which are adversely impacted by the pandemic.”

He singled out sectors including tourism, agriculture, manufacturing, health, education and infrastructure as among those that need attention.

“The stimulus package should also target to boost the liquidity of Micro, Small and Medium Enterprises (MSMEs) which have been adversely affected by the pandemic.

The EABC is proposing the allocation of a specific fund for the SMEs Credit Guarantee Scheme which will provide affordable credit to MSMEs.

Instead of applying austerity measures, Mathuki said, EAC Governments should efficiently target their expenditure to areas or sectors which have more impact in terms of stimulating the economy, cushion special groups, retain jobs and businesses.

In order to acquire enough funds to finance these expenditure measures, the EABC is proposing that EAC governments negotiate with development partners on debt relief or rescheduling of debt servicing.

As explained, money saved from debt relief should be used in fighting the disease as well as mitigating the impact of the pandemic on EAC economies.

jkaruhanga@newtimesrwanda.com

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