AFRICA INVESTMENT-Weaning E.Africa from aid proving a taxing affair

NAIROBI, June 14 Fri Jun 14, 2013 9:39am EDT

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NAIROBI, June 14 (Reuters) - East Africa's economies - Kenya, Uganda, Tanzania and Rwanda - may need to do more than just present their budgets simultaneously if they are to draw the foreign investment they need to wean themselves off aid.

The countries are working towards a single currency to increase trade and harmonise their economies further under the East African Community, and the partner states agreed in 2005 to read their budget on the same day.

There has been some progress on a customs union, but the region remains administratively disparate with differing levels of population and wealth, but most enjoy political stability. The bloc is struggling to open up commerce among its member states due to red-tape at border points and lack of a common currency.

So for now, the four states are betting on the traditional African fallback of natural resources in the shape of huge discoveries of oil and gas to attract the higher foreign cash to boost economic growth rates presently around 5-7 percent.

The countries are striving to achieve double-digit growth in the short-term.

The oil money will come, but meanwhile growing popuations craving jobs and difficult lenders exerting political agendas mean there is a need for immediate cash if budget ambitions are to be met.

On Thursday, the four finance ministers sought even more taxes from investors, in a bid to reduce dependancy on fickle foreign aid.

"Foreign donors have a role to play in helping strengthen economic policies, which in turn help improve the private sector operating environment. Seeking to reduce donor budget assistance has implications," said Angus Downie, head of economic research at Ecobank.

Kenya's re-introduction of a tax on capital gains on real estate and marketable securities that was suspended in 1985 was the most direct hit on investors.

Kenyan stocks have drawn demand from yield-seeking foreign investors after March's presidential election passed off peacefully, lifting the main share index over 20 percent, making it the third-best performer in Africa after Uganda and Nigeria, up some 35 and 34 percent respectively.

"I think it will harm investment, especially in the short-term," said Melissa Verreynne, an economist at NKC Independent Economists.

"(But) given that there are a number of attractive investment opportunities in the country, the introduction of capital gains tax is not expected to lead to a substantially lower investment level in the medium- to long-term."

Kenya's Finance Minister, Henry Rotich, said the tax will mainly target 'wealthy' member of the society, referring to a growing middle class that has lifted investments in real estate and securities in the east Africa's biggest economy.

In Uganda, the withdrawal of donor funding during the 2012/13 fiscal year pushed Finance Minister Maria Kiwanuka to introduce an array of new taxes on petroleum products, financial services and telephony service to plug the deficit.

"The increased taxing of the telecom and financial services sectors makes sense given that these have been the fastest growing in the economy and the limits on raising direct taxes," Mark Bohlund, of IHS Global Insight, said.

ROYALTY TAX

Tanzania, a largely conservative country with stiff regulations on foreign investors and repatriation of earnings, plans to review mining taxes and royalties upwards.

Bohlund said tax exemptions for foreign investors in Tanzania has been a big issue and a review at a time when commodity prices are falling globally could lead to job losses, similar to the ones witnessed in South Africa.

"Falling commodity prices have already led to reduced production and job losses in the mining sector and this will be aggravated if sovereigns push forcefully to increase their take," Bohlund said.

Rwanda, which plans to finance 40 percent of its budget from external sources, also said it will introduce a new royalty tax on minerals to compliment its increased taxes on its fasted growing sectors, telecom and financial services.

The country successfully issued its first Eurobond in April after several donors withheld aid support over the alleged backing of rebels in the neighbouring Democratic Republic of Congo, a charge Kigali denies.

Finance Minister Claver Gatete told a news conference on Friday that although investors were clamouring for another debt offering, it would not issue one just yet..

Downie said increasing investment competitiveness meant improving the business climate, strengthening the rule of law, and reducing structural barriers to trade.

"Therefore, while it is positive to read EAC governments are seeking to improve their competitiveness, it may be too early to rely on the private sector paying more in taxes and levies before the improvements start to show, which in turn should make strengthen businesses operations," he said.

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