E Africa states up taxes to fund budgets

Nairobi - Kenya will ask for more cash from its wealthy citizens through a capital gains tax while Uganda will increase taxes to make up for falling donor support, the finance ministers of both states said in budget speeches.

East African states have attracted higher foreign investments in recent years due to robust economic growth rates, but decades of bad management of public resources have left them struggling with rampant poverty and unemployment among citizens.

Henry Rotich, the Kenyan cabinet secretary for the national Treasury or finance minister, on Thursday said the government plans to enforce capital gains tax to boost revenue.

"This will allow wealthier members of our society to also make a token contribution toward our national development agenda," he told lawmakers in his budget speech for the 2013/14 (July-June) fiscal year.

In the budget, the minister set the fiscal deficit at 7.9% of the gross domestic product or 329.7bn shillings ($3.86bn), slightly higher than markets expected.

He said the gap would be filled by net foreign financing of 223bn shillings and 106.7bn net borrowing from the domestic market.

Analysts said the deficit was on the higher side of expectations, adding that it had the potential of supporting the shilling currency at the expense of economic growth.

"The deficit financing requirement will likely lead to interest rates being higher than they would otherwise be, which will constrain private sector growth," said Angus Downie, head of economic research at Ecobank.

Rotich said he expected inflation to remain within the government's target of 5% to 7%, amid stable lending and foreign exchange rates.

"There is a need to examine non-traditional sources of financing in light of declining budget support," she told parliament.

Stephen Kaboyo, the managing director of Alpha Capital Partners, said the minister should have explored the possibility of borrowing funds from international debt markets, to plug a 3.6trn shillings ($1.4bn) deficit.

"Heavy reliance on domestic borrowing potentially crowds out the private sector through increased interest rates and high debt service costs," Kaboyo said.

Out in the streets of the capital Kampala, residents expressed anger at the budget, especially the taxes.

"It's very unfortunate that Ugandans are being squeezed both ways," Simon Mpagi, a 27-year old mobile phone-based money transfer agent, told Reuters from his retail shop in Kampala.

"They steal our taxes and donor money... leaving public services to near-collapse and now when donors get angry and cut them off, then they come to us and punish us again by raising taxes to grab even the little income we struggle to make."

In Tanzania, Finance Minister William Mgimwa raised spending by 21% to 18.25trn shillings ($11.13bn) while maintaining the deficit at 5% of the annual economy.

Rwanda raised its spending by 6.6% to 1 653bn francs ($2.6bn) and said it will introduce a new loyalty tax on minerals.