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IMF, World Bank to conduct an assessment of Kenya’s financial sector

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Discussions have begun with the authorities about the possibility of
the International Monetary Fund(IMF) and the World Bank conducting a
comprehensive Financial Sector Assessment Program (FSAP) of Kenya in 2020.

This FSAP will review potential vulnerabilities in both commercial banks and other financial institutions including Savings and Credit Cooperative Societies, Insurance and Reinsurance Companies and the Stock Exchange.

According to a Fiscal Transparency Evaluation Update on Kenya prepared by the IMF, recent events in Kenya’s economy and banking sector have contributed to the deterioration in Kenya’s financial soundness indicators.

It mentions that intervention was required to cover deposits in three
commercial banks which defaulted in 2015 and 2016. These are Dubai Bank,
Imperial Bank and Chase Bank.

The update notes that Kenya’s banking sector has performed comparatively worse than other East African Community(EAC) member states, excluding Burundi. It attributes the higher non-performing loans ratio relative to other countries, to the interest rate cap that was imposed on Kenya’s banking sector in September 2016.. This law has since been repealed.

According to the Kenya Financial Sector Stability Report, there was an increase in Gross Nonperforming Loans (NPLs) by 19.69 per cent to  KSh.316.7 billion in December 2018 from KSh. 264.6 billion in 2017.

As a result, the ratio of gross NPLs to gross loans rose from 12.3 per cent by end  2017 to 12.7 per cent by the end of 2018. 

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Banks tightened lending standards and increased investment in government securities to mitigate credit risks. Automation of operations and the adoption of financial technologies elevated operational risks and increased the vulnerability of the banking sector to fraud and cyber-crime in 2018.

Banks tightened internal control systems, sensitised customers on fraud and undertook ICT vulnerability assessments and penetration tests to mitigate operational risks. The CBK has also strengthened the AML/CFT risk assessment frameworks to address this risk.

While state-owned National Bank of Kenya(NBK) has been acquired by
Kenya Commercial Bank(KCB) Group, the IMF report indicates that the
deteriorating financial condition of NBK had strained the aggregate position of
the banking sector.

At the height of its financial woes, NBK was the second-highest contributor to non-performing loans (NPLs), accounting for more than for 12 per cent of total NPLs.

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Corona tax cut to cost KRA Sh1.3 billion daily

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Economy

Corona tax cut to cost KRA Sh1.3 billion daily

Kenya Revenue Authority headquarters
Kenya Revenue Authority headquarters. FILE PHOTO | NMG 

The proposed income and corporate tax cuts aimed at protecting the economy against the effects of the coronavirus pandemic will cost the Kenya Revenue Authority (KRA) Sh1.3 billion daily over the next three months, Parliament’s budget office has warned.

The Parliamentary Budget Office (PBO) — the unit which advises lawmakers on financial, budgetary and economic matters — said revenue collection will drop by Sh122.2 billion between April and June if lawmakers adopt the tax cuts.

Parliament was to convene yesterday to debate the proposals but the debate was put off over coronavirus fears.

Now, the budget office has warned that the lower revenue collection will compromise the State’s ability to deal with emergencies given that civil servants’ salaries, debt payments and allocation to counties already eat up 94 percent of government revenue.

Government spending on development projects like roads, power plants and water infrastructure will be reduced too, further hurting the economy given that State spending puts money in the pockets of workers as well as private firms linked to infrastructure works.

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This will in turn affect suppliers and subcontractors down the value chain.

The reduced revenue will leave little room for maneuvre and with expected revenue underperformance, the country does not have much by way of available resources to cater for emergencies, PBO has said in its report to lawmakers ahead of the debate on Tax Laws (Amendment) Bill 2020.

“National savings are not adequate,” the report warns. “As a result, the country is not financially in a position to offer an elaborate stimulus package as other countries have done.”

About 23 percent of government revenue was already earmarked for repayment of public debt, which has ballooned in recent years, while 71 percent had been allocated for recurrent spending and allocation to counties.

Treasury has reduced Value-Added Tax (VAT) from 16 to 14 percent and has proposed that corporation tax be reduced from 30 to 25 percent under the plans scheduled to come into force this month once approved by Parliament.

The raft of tax changes are geared at lowering the cost of basic goods while providing workers with additional income for spending to boost consumption and sales of traders.

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Lower taxes are also expected to increase tax compliance. However, the PBO has advised MPs that the cuts will hurt tax collection, prompting the need for the government to borrow more in what will further add to the already large public debt.

For instance, the PBO says the proposed 100 percent tax relief for workers earnings up to Sh24,000 will leave a Sh19.84 billion hole for the remainder of the financial year until June if the measures, yet to be debated and approved by lawmakers, are backdated to April.

Reduction of pay-as-you-earn (PAYE) tax for top-bracket workers (those earning from Sh57,333 and above) to from 30 to 25 percent will cost the Exchequer another Sh7.08 billion, while reduced corporation tax is estimated at Sh45.69 billion in three months.

The biggest revenue loss will, however, comes from reduced VAT, which was enforced on April 1, setting back State revenues by Sh49.6 billion. Revenue collection is also likely to take a bigger beating should more businesses, especially those in the crucial services sector, shut down as health authorities tighten the sanitary measures to stem the spread of the death-threatening coronavirus.

Already, tourist hotels have closed down while restaurants are operating at below capacity. Airlines like Jambojet have also halted all flights, meaning that taxes from ticket sales in the industry will generally decline.

Restrictions imposed on businesses like schools and colleges, retail outlets and entertainment spots will also hurt sales as well as jobs and further erode opportunities for tax collections.

The Markit Stanbic Bank Kenya Purchasing Managers’ Index (PMI) for manufacturing and services fell to 37.5 in March from 49.0 in February. Readings above 50.0 signals growth in business.

Kenya’s readings already indicate that businesses are not doing well, meaning that the readings for April are likely to be much lower compared to March.

“Kenyan firms saw a marked drop in business activity during the month, which was widely linked to the impact of the Covid-19 pandemic on consumer demand,” the Stanbic said in its report.

‘’Businesses consequently reduced activity and employment, while demand for inputs fell at the quickest pace since late-2017.” The budget office has already indicated that slugging tax collections has made it difficult for the State to unveil an expenditure-driven stimulus package akin to bailouts in the developed world, including offering a financial package to struggling business and workers being laid off due to the pandemic that has left 1.3 million people infected and over 77,000 dead.

On the brighter side, over 294,000 have recovered after being infected, signaling optimism that the pandemic can be contained.

To mitigate against the adverse effects of the virus in Kenya, the budget office has asked the Treasury to borrow Sh150 billion to offer emergency bailouts to the hardest-hit sectors such as aviation, tourism and horticulture as well as offer social support to the poor and vulnerable.

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World Bank Gives Financial Aid to More African Countries

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The World Bank has approved different amounts of loans to various African countries, to help them mitigate the adverse impacts of the COVID-19 pandemic.

Democratic Republic of Congo (DRC)

The World Bank Group, through the International Development Association (IDA), has approved $47 million for DRC’s emergency response to the pandemic.

The funds will be used to implement containment strategies, train medical personnel, and distribute equipment to ensure rapid testing of potential cases and contact tracing.

Senegal

On the other hand, Senegal will receive a total of $20 million credit from the International Development Association (IDA) to help it strengthen health systems and disease surveillance as part of the national COVID-19 response plan.

Sierra Leone

Sierra Leone will receive a $7.5 million International Development Association (IDA) grant to help them strengthen national systems for public health preparedness.

According to the Bank’s press release dated 2nd April 2020, in order to provide broader support to meet country needs, they will deploy up to $160 billion over 15 months to protect the poor and vulnerable, support businesses, and bolster economic recovery.

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World Bank COVID-19 Funding. Image Courtesy; The Telegraph

International Finance Corporation (IFC), the private sector arm of the World Bank, is contributing $8 billion in financing aimed at helping businesses affected by the pandemic and protecting jobs.

See Also:

African Economies Suffer $29 Billion Hit Due to COVID-19

Afrexim Bank Unveils Emergency Fund for African Countries

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Carrefour records Sh18.7bn sales in Kenya

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ANNIE NJANJA

By ANNIE NJANJA
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French retail chain Carrefour recorded sales worth Sh18.7 billion from its Kenyan outlets last year, the company has disclosed in its annual financial report.

Majid Al Futtaim, the exclusive holder of Carrefour’s franchise in Kenya, announced the 28 percent jump in sales from Sh14.6 billion recorded in 2018 indicating that its aggressive expansion bid across major towns in Kenya was paying off.

The retailer said since launching in Kenya four years ago, the franchise of the French hypermarket chain had grown faster than expected, attracting a strong clientele base among the country’s expanding middle class.

The retailer announced plans to continue the expansion of its retail and entertainment business across key markets, including in Africa.

“In 2020, Majid Al Futtaim Retail will open its first store in Uzbekistan, with plans for further expansion to new markets in Central Asia and Africa and scale up its e-commerce capacity to meet growing online demand, through innovative fulfilment solutions,” the group said in the report.

The retailer has been expanding its presence in Kenya after taking over spaces previously occupied by struggling supermarket chains, including Nakumatt and Uchumi, as well as opening new outlets to cash in on the underserved market.

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The retailer has seven branches in Kenya with the eighth one set to open on Uhuru Highway near Nyayo roundabout-taking over space previously occupied by the collapsed retailer Nakumatt.

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The branch, which was set to be opened before the end of March, has faced delays due to the current Covid-19 pandemic.

The retailer’s other branches are also strategically located at the Hub in Karen, Village Market, Two Rivers Mall, Thika Road Mall and Sarit Centre in Westlands.

One-time market leader Nakumatt, now under administration, and cash-strapped Uchumi, have shut the majority of their branches.

The gap left by the collapse of the two retailers has created a void in the sector that has local and international chains scrambling to fill.

The spirited entry into Kenya by multinational chain stores like Game and Shoprite is stiffening competition, pitting new players against the local family-owned retailers.

French firm Amethis recently bought a 30 percent stake in Naivas to back the expansion of the retailer.

Majid Al Futtaim made public its Kenya annual sales in a newly-released financial report that also puts its local assets as of December 2018 at Sh7.2 billion, up from Sh4.3 billion in December 2018.

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