Kenya is heavily dependent on donor aid. As a middle income country there is concern of decrease in foreign aid and thus need for Domestic Resource Mobilization (DRM). My target audience are the citizens of Kenya as well policy makers and the donor community. DRM is a reliable and sustainable source of development finance. Raising more revenue from internal sources helps countries devote needed resources to reduce poverty and hunger, bridge infrastructure gaps and provide public services. DRM fosters the social contract between people and government, facilitates a virtuous cycle of transparency, accountability, efficiency and strengthens democratic engagement and institutions.

1. TAXATION FOR
DOMESTIC RESOURCE
MOBILIZATION
(DRM)
IN KENYA
In Partial Fulfillment for the Financing for Development Course
(November 17th to December 14th, 2015)
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Submitted by Salome S. Andere

2. ABSTRACT
Kenya is a country of 44 million people and one most vibrant economy in Sub-Saharan
Africa. According to the World Bank Estimates of Gross National Income per capita
(GNI), Kenya continued to show improved performance. Her economic growth in
recent years averages 6% per annum, and in 2014 Kenya had crossed from a ‘low
income country’ (LIC) to a ‘middle income country’ (MLC) joining those with annual
incomes of $1,046 to $4,125. Despite this success, there is need to put more efforts to
ensure that available opportunities to raise resources are adequate and sustainable.
Despite this there is low compliance levels and tax evasion creates a narrow tax base
and high enforcement costs.
The private sector has an important role to play, but this paper focuses on Kenya’s
public sector and its role in generating taxation and public revenue in the country for
effective development. have chosen Kenya for this project firstly because she is heavily
dependent on donor aid and ODA. Secondly, having moved to a middle income country
(MIC) there is concern of decrease in foreign aid.
At the end of this paper, it proposes policy options that could be exploited to ensure
Kenya adequately exploits the domestic revenue potential. Thus enhanced DRM can
help to reduce the external resources (in the form of grants and loans) required to
achieve the Sustainable Development Goals (SDGs)
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3. DEFINITION OF
DOMESTIC RESOURCE MOBILIZATION
According to North-South Institute (2010), DRM refers to savings and investments
generated by both the public sector (primarily through taxation) and the private sector
(as a channel for private savings by households and domestic firms.) There are three
main revenue sources for the government; tax revenue, non-tax revenue and
borrowings (Singh, 2004).
Domestic Resource Mobilization (DRM), whose instruments are public revenues and
public spending, has gained prominence internationally especially after the
international economic crises in 2009 when external resource inflows, Official
Development Assistance (ODA), Foreign Domestic Investments (FDI), Diaspora
remittances and domestic revenue generation in developing countries faced big
threats. Sub-Saharan African countries in particular will need to mobilize resources to
cover gaps in infrastructure, health and education. This created the need for
predictable public revenue generation.
#Fin4Dev
Source: Self, 2015

4. IMPORTANCE OF DOMESTIC RESOURCE
MOBILIZATION (DRM)
DRM at a significant level is essential to solidify ownership over
development strategy and to strengthen the bonds of accountability between
governments and their citizens. In effect, DRM provides policy space to
developing countries which is often constrained under the terms and
conditions of external resource providers.
Foreign aid comes with conditionality or policy strings attached, not to
mention procurement restrictions that accompany tied aid.
Foreign aid also tends to be pro-cyclical and volatile. Foreign direct
investment (FDI) typically flows into sectors and projects dictated by the
commercial interests of the foreign investors - for example, natural resource
extraction.
Moreover, developing governments that are heavily dependent on foreign
aid, or on sharing the profits of foreign investors, have less incentive to raise
taxes and less reason to pay attention to the demands of taxpaying citizens.
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5. CHALLENGES FACING
DOMESTIC RESOURCE MOBILIZTION IN KENYA
Taxing the Informal Sector
The informal sector is profitable but tax evasion by the sector
remains particularly high. Populist politics tend to shield some of
these potential taxpayers from paying taxes.
Tax Administration Capacity and Cultivating Tax Morale
Administrative capacity constraints are generally known to be major
obstacles to improving tax policy in Africa. The administrative
constraints are such that they limit policy options. Many governments
often cite the lack of skilled staff as a major impediment to tax
collection. Furthermore, despite great progress in adopting
information and communication technology, as has been done by the
Kenya Revenue Authority (KRA) through its Itax system to increase
revenue collection, more can still be done in Kenya. It is therefore
important that for governments to strengthen national and local tax
administration and policies.
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6. CONT…
Corruption
The issue existence of corruption has over the years led to great loss of the
country’s revenue and other useful resources and has also resulted in citizens
being denied some of their basic rights. Transparency International rank Kenya
145 out of 174 countries in its 2014 Corruption Perception Index. Bureaucracy and
corruption are identified as barriers against entering the formal sector. In
Complex tax legislation, difficult to understand even by the educated tax payer
and discretion on the part of tax officials which leads to corruption. Kenya’s
informal entrepreneurs state that complex registration procedures impede their
entering the formal sector.
Illicit Flow of Funds
A report released by Mr. Thabo Mbeki's team earlier this year (2015) shows that
Africa loses in excess of US$50 to US$60 billion every year through illicit
outflows. Kenya on its part has lost an estimated Sh160 billion up to the year
2011. Mr Mbeki, who heads the High-Level Panel on Illicit Financial Flows from
Africa, said African countries also need closer collaborators and coordination in
efforts to deal with the problem. Poor governance, weak regulatory structures
and involvement in corruption by top government officials remains a challenge in
the fight against the illicit practice.
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7. CONT…
Rationalizing Tax Exemptions.
Such incentives create distortions and result in the loss of tax
revenues.
Regional Common Markets
Kenya is a member of two regional blocks, the East African
Community (EAC) and Common Market for Eastern and Southern
Africa (COMESA), which have not harmonized their tax regimes. The
main problem is the comparability and ability of revenue authorities
in member countries, and their capacity to enforce compliance. There
is also the issue of exemptions granted under the EAC Customs
Management Act to promote the development of infant industries,
which are not effectively monitored.
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8. CONCLUSION
Kenya has built its experience from the implementation of the Millennium
Development Goals (MDGs) thus should pay special attention to the fundamental
Sustainable Development Goals issues that seek to address and transform issues
concerning domestic resource mobilization that cut across the social, economic
and environmental dimension of development that were left out of the MDG
Framework.
His Excellency Honorable Uhuru Kenyatta, President of the Republic of Kenya
during the General Debate of the 70th Session of the United Nations (UN) General
Assembly on 28th September, 2015 emphasized that domestic resource
mobilization remains key in raising required resources for developing states.
DRM should be channeled to productive sectors so as to complement current
investments and attract new investments.
Policies and institutions (both public and private investment) should be
strengthened.
Placing DRM and public financial management at the centre in an effort around
good governance. This is because good governance remains one of the most
important challenges facing developing countries as the citizens’ demand
increased accountability.
Where the government cannot reach the civil society through grass root levels
should create awareness about DRM to the citizens.
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9. REFERENCES
Abay, T.W. (2010), Domestic Resource Mobilization in Sub-Saharan Africa: the Case of
Ethiopia, North-South Institute, Ontario, Canada.
African Development Bank Group, Domestic Resource Mobilization for Poverty
Reduction in East Africa: Kenya Case Study.
Daily Nation Newspaper Kenya: African countries losing billions through illicit financial
flows: Mbeki. September 15, 2015.
Development Initiatives to End Absolute Poverty by 2030. www.devinit.org.
Google Search Engine: www.google.com
Singh. S.K., (2004), “Public Finance in Theory and Practice”, S. Chand and Company Ltd,
India, pg.90 and 255.
Tax Justice Africa, Raising Domestic Resources to Finance Development in Africa
Transparency International, Corruption Perception Index, 2014.
2014 Human Development Report:
http://www.undp.org/content/undp/en/home/presscenter/events/2014/july/HDR2014
.html
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10. THANK YOU