By Sachen Gudka
81% of local manufacturers have stated that they are hopeful that they will hold steady through the pandemic and continue to play their role in creating wealth and productive jobs for all citizens. This is according to a study conducted by Kenya Association of Manufacturers (KAM) and KPMG on the impact of COVID-19 on the manufacturing sector. However, in the face of harsh realities that the sector is grappling with, hope is not a strong enough anchor and we need to be practical about how we can help these businesses underpin a worthwhile economic rebound with minimal losses beyond the crisis.
Sure enough, some steps have been taken to try and keep businesses in operation since the economy slowed down significantly in mid-March 2020. Two weeks ago, KRA finally started to disburse KES 10 Billion to businesses as promised three months ago by the President. It has to be noted that the private sector was already slowing down pre-COVID, weighed down by the lack of liquidity and demand in the market. The time it has taken between the pronouncements and actual implementation of these measures has diluted the intended impact to cushion the economy by providing a vital lifeline to businesses.
There are several reasons for the lack of liquidity in the market. Firstly, the Government of Kenya does not pay its bills and VAT refunds on time. Secondly, County governments also do not pay their bills on time. Thirdly, the private sector, particularly large retailers, also do not pay their bills on time. This creates a deadly spiral of borrowing for working capital for most of the private sector, creating fewer transactions in the marketplace and perpetuating the liquidity issues.
Some of the major factors that have inhibited the easing of liquidity into the local economy have been due to the accumulation of VAT credits arising from Withholding VAT (WHVAT) and VAT refund formula, and pending bills. Businesses are ready to go the extra mile to tide the country through the shock of COVID, but they will need cash flowing and circulating in the economy to do so. And it can be done. Businesses now, more than ever need to be paid back what is owed to them to cater for the losses suffered and to implement their continuity plans.
Firstly, the Miscellaneous Amendment Act, 2019 was signed into law on 9th July 2019 and created a legal mechanism for offset or refund of WHVAT credits. To date, 11 months later, KRA is yet to create guidelines to guide taxpayers to allow the offset of these credits. It is critical that this is fast-tracked to enable an offset of almost KES 100 billion against other taxes. Whilst we appreciate the declining revenues at KRA post-COVID, there must be a policy in place to allow the offset of WHVAT against other taxes of say KES 10 billion per month, and KRA’s ITax system should be set up to allow for this offset immediately.
Secondly, there is an urgent need for a mechanism in place to compel the National Treasury to provide KRA with sufficient funds to enable automatic payment of VAT refunds within a specified time, say 60 days. This would reduce the rent-seeking opportunities that currently exist, and would inject much-needed certainty and liquidity to enable businesses to export. The delayed VAT refunds currently act as a complete disincentive to export, undermining the President’s Big 4 Agenda. This handbrake on the growth of exports must be released.
Thirdly, there is an urgent need for Prompt Payment Legislation to be enacted for the Kenyan economy, which will flatten the curve of rising liquidity challenges arising out of the National and County Government’s failure to settle bills on time, as well as to inject some sanity on payments within the Private Sector as well. It is high time this economy weaned itself away from the late payment cycles currently being experienced and stifling growth.
Last but not least, there is a very compelling case for an MSME Liquidity Fund, to help businesses survive the COVID crisis. Kenya Association of Manufacturers shared a proposal with the Ministry of Industrialization, Trade and Enterprise Development back in early April, and this would involve partial guarantees to the banking sector from the Government of Kenya as well as Development Financial Institutions to enable the private banks to perform credit checks and lend further to viable businesses, at preferential rates due to the reduced credit risk. This support package will be vital to get our economy back on track again.
However, action on all four fronts above is needed immediately to prevent irreversible damage to our beloved country’s economy. The National Treasury must ditch some previous orthodoxies, and be ready for Business Unusual, not Business as Usual.
The Writer is the Chairman of Kenya Association of Manufacturers and the Vice Chair, COMESA Business Council. He can be reached on firstname.lastname@example.org.