Impact Of Macroeconomic Indicators On Revenue Performance

Revenue collection has not been optimal majorly attributed to external macroeconomic indicators which have been performing UNDER PAR.

Even though KRA has recorded growth in revenue collection, the indicators have caused a sustained downward performance since the beginning of the financial year. The effect of the variables on revenue is as explained.

Purchasing Managers Index (PMI): PMI has sustained below 50 points since February 2023 except in August 2023. The sustained dip in PMI implies a contraction of the performance in the country’s private sector, in manufacturing, agriculture, mining, services, construction, and retail sectors. This implies a decline in Revenue from the mentioned sectors which further affects VAT, PAYE, and Corporation among other taxes. In addition, a lower PMI leads to a decrease in investor confidence where lower confidence can result in reduced investments and capital expenditure, further affecting the revenue and growth prospects of companies.

Fuel Prices: Fuel prices (Petrol, Diesel and Kerosene) have been on an upward trajectory since the beginning of the year with the prices of Petrol, Diesel and Kerosene recording a high of Kshs 217.37, Kshs 205.47 and Kshs 205.06 The high pump prices have caused a reduced fuel consumption with the majority of people opting to use public means for transport. Furthermore, the transport index has also maintained a high of 13.3% in the period July-November 2023 compared to 9.6% same period last year hence affecting revenue negatively.

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Central Bank Rate and Lending Rate: The increase of the Central Bank Rate (CBR) to 50% from 10.50% implies an increase in lending rate. The continued increase in the lending rate currently at 13.98% as of September 2023 (the highest since January 2022) has increased greatly the cost of borrowing in the financial sector. This has led to low borrowing therefore affecting consumer/firm spending and investment capacity. Reduced spending and investments by firms lead to a reduction in revenue due to reduced business activities in capital-intensive sectors such as construction and manufacturing thereby affecting the amount of tax remitted such as Corporation tax, VAT, and PAYE taxes.

Exchange rate: The Kenyan Shilling has continued to lose value against major world currencies which has caused an upward pressure on domestic prices, thereby increasing the cost of living and reducing purchasing power. Moreover, depreciation affects the import demand due to high exchange rates incurred by importers which erodes their capital thereby reducing the quantities imported. 

NSE-20 share: the trend has experienced a continuous decline from the beginning of the year with a slight increase in June and July 2023. The reduced performance is attributed to a high outflow of investors from Kenya due to: continued negative investor sentiment on emerging and frontier markets; high cost of doing business; as well as depreciating Kenyan shilling against major world currencies. Kenya’s stock market continues to suffer steep losses, making it the worst-performing globally. In addition, NSE performance was affected by declines in Market capitalization, bond turnover, and Equity turnover. This in return hurts Withholding Income Tax and Capital Gains Tax which leads to reduced revenue collected. 

The increased cost of doing business has led to firms cutting down on expenditure through layoffs and tax planning by hiring staff on a contract basis.

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