Disruptive digital economies and Monetary Policy: Re-Exploring Blockchain , Crypto Currency and monetary policy in East Africa-Are governments running late?

 The pressure to digitalize our economies and adopt a new generation of monetary policies may be legitimate but the risks are also real. How can governments navigate this delicate balance between digital economy penetration, financial inclusion and monetary policy? Can governments in East Africa continue riding behind the tide?

By Moses Kulaba, Governance and Economic Policy Centre

@digitaleconomies @cryptocurrencies @financial inclusion @mkulaba2000

Globally, there is a debate and desire for the adoption of blockchain technology and cryptocurrency as medium for financial transactions yet in East Africa, government uptake and regulation are moving at a snail’s pace. In this first of a two-part series of our short analytical economic policy and governance policy briefings, we re-explore and unpack the future of blockchain and crypto currency penetration and the risk considerations shaping debate and monetary policy terrain in East Africa. We will later discuss how the EAC governments can leverage monetary policy and regulation to harness the dividends of blockchain and cryptocurrencies to advance financial inclusion in the region.

Generally, there is limited understanding of blockchain and crypto currency technology. The debate on the risks that these new digital currencies portend to the public and national economies is ongoing. So far there is no consensus amongst citizens, economic policy makers and central banks on which directions governments must take. The common view is that adopting block chain and crypto as a form of legal currencies should be approached with utmost care and heavy regulation. It is argued that the risks are high if crypto is adopted as legal tender as some African Central Banks have attempted to do. Moreover, if crypto assets are held or accepted by the government as means of payment, it could put monetary policy and public finances at risk.

Despite, these reservations trading in crypto currencies has continued alongside the formal currencies and could become a major part of our global financial system in the future.

All over East Africa, digital currency platforms exist, despite the bans and young digital entrepreneurs have signed up, traded and transacted in crypto with some success, while others have equally horrendous stories to tell of failure, and counting losses.  According to global reports, so far Kenya, Ghana, Nigeria and South Africa are leading with Tanzania following closely along.

The driving factors crypto adoption and penetration among young people is widespread unemployment and joblessness pushing mostly young people and new unemployed graduates to look for a living online. For speculative investors the driver is that digital currencies have provided a seemingly a good alternative store of speculative value than local African legal tenders, as they experience inflationary and forex exchange pressures. Between 2020 and 2021 transactions increased by 567 percent to $15.8 trillion between before declining in 2022 after the largest crypto exchange FTX crush in 2022.

Despite the loses, the appetite to transact in crypto still continues. According to the online financial reporting resource, Statista, the Cryptocurrencies market in Tanzania is projected to grow by 10.36% (2024-2028) resulting in a market volume of €4.97m by 2028. With this trend, there are suggestions for governments to regularize and formalize crypto currencies as part of a new generation of monetary policy promoting digital economies, and advancing financial inclusion rather than banning their total use all together.

What is blockchain technology and cryptocurrency.

As a way of kicking off and unpacking this further, we will re-explore what is blockchain technology and crypto currency. Blockchain technology is an advanced database mechanism that allows transparent but secure information sharing within a business network. A blockchain database stores data in blocks that are linked together in a chain. Blockchain is a method of recording information that makes it impossible or difficult for the system to be changed, hacked, or manipulated and therefore provide the infrastructure on which crypto currencies are transacted.

The oxford online dictionary defines crypto as a digital currency in which transactions are verified and records maintained by a decentralized system using cryptography, rather than by a centralized authority. The Reserve Bank of Australia has defined cryptocurrencies as digital tokens. They are a type of digital currency that allows people to make payments directly to each other through an online system.

Cryptocurrencies have no legislated or intrinsic value; they are simply worth what people are willing to pay for them in the market. This is in contrast to national currencies, which get part of their value from being legislated as legal tender.

Cryptocurrency (or “crypto”) is therefore a digital currency that can be used to buy goods and services or traded for a profit. There are four major types of cryptocurrencies and these are; Payment cryptocurrency, Utility tokens, stablecoins and Central Bank Digital Currencies (CBDC). Bitcoin and Ether are the most widely used cryptocurrency.

How Cryptocurrency transactions operate.

Cryptocurrency transactions occur through electronic messages that are sent to the entire network with instructions about the transaction. The instructions include information such as the electronic addresses of the parties involved, the quantity of currency to be traded, and a time stamp. The transactions are run across multiple systems of computers using a blockchain technology, where data is stored in blocks linked together and securely shared across interlinked business networks for connected ‘miners’ to transact and trade.

How large is crypto in Africa and East Africa?

According to China Analysis reports, by 2022 Africa was one of the fastest-growing crypto markets in the world, with crypto transactions peaking at $20 billion per month in mid-2021. Kenya, Nigeria, Ghana and South Africa had the highest number of users in the region, with other countries following closely.  So far, some people have used crypto assets for commercial payments. It is not clear yet whether this number has increased since 2022 after the large crypto currency crush. However, it is evident that new platforms and mediums of exchange have emerged including the Tether USDT accepted by China and other major buyers.

The Tether (USDT) also known as a “Stablecoin” is a cryptocurrency designed to provide a stable price point at all times. The USDT cryptocurrency was created by Tether Limited to function as the internet’s Digital Dollar, with each token worth $1.00 USD and backed by $1.00 USD in physical reserves.  According to crypto traders, despite the controversy, Tether has become more popular because it is pegged to the dollar and fluctuating in value with the U.S. dollar and backed by Tether’s dollar reserves.

Who owns crypto in East Africa?

In 2021 market or financial research institutions estimated that the number of crypto owners in East Africa currently was almost 12 million.  A Singaporean cryptocurrency research firm, Tripple-A, estimated that 11.7 million East Africans owned cryptocurrencies. Out of these 6.1 million were in Kenya, 2.3 million in Tanzania and two million in the Democratic Republic of Congo.

The numbers are potentially higher given that many crypto owners and users are unreported or documented. The clampdown on crypto currency owners and traders in some countries pushed many under and away from advertising and transacting publicly. Bitcoin accepting points of sale closed shop and transactions became discrete.

Potential for new monetary policy in EA?

In 2017 the East African Community members were against digital currencies even as their appeal grew across the world. Kenya, Tanzania and Uganda governments said trading in cryptocurrencies like Bitcoin was illegal, for reasons ranging from whether they are commodities or money to being pyramid schemes that could plunge investors into losses. The Kenyan and Ugandan governments issued warnings.

The Bank of Tanzania said dealing in cryptocurrencies was tricky because they are not regulated and it was not clear who controls the market.  However, the Tanzanian government appears to have softened its stance when in 2023 announced a phased approach towards adoption of a Central Bank Digital Currency (CBDC).

A CBDC is a digital or virtual form of a country fiat currency (such as USD, EUR and TZS) issued and regulated by a central bank. Their value is based on the government’s ability to maintain its value by controlling supply and demand, are used as a medium of exchange in transactions, and are considered legal tender within their respective countries.

Therefore, when issued, CBDC becomes a legal tender, analogous to physical notes and coins. Based on the literature, CBDC is thought to offer a range of benefits to the economy and its adoption has been slowly garnering interest in many countries around the world.

What are monetary policy and socio-economic risks of crypto currencies?
  1. Lack of transparency and proper regulation and a high-risk potential for disruption of the financial system.

The International Monetary Fund (IMF) warns that crypto currencies expose users to cyber-risks such as hacking and loss of their assets. Governments are exposed to lack of transparency around issuance and distribution of crypto assets and this can be disruptive to managing monetary policy.

  1. Susceptible to fraud, and tax evasion as captured in the Nextflix true story documentary-Bitconed.

Cryptocurrencies can be conduits for fraud, tax evasion and illicit financial conduct. Because of their volatility their value is difficult to predict and store. In 2022 it was estimated that at least 12 million people in East Africa lost billions of dollars in the cryptocurrency market crush and a contagious series of ‘Bitcoin get rich’ schemes whose value disappeared overnight. The susceptibility to fraud and sudden fall from temporary economic opulence that may arise from crypto currencies has been well captured by Netflix in a true story documentary-Bitcoined.

  1. Potentially used for money laundering and terrorism financing:

Crypto currencies can be vehicles for money laundering and criminal financing. A report by American cryptocurrency market research firm, Chaina analysis says laundering of stolen funds through cryptocurrencies and scamming of users were the highest crimes in 2021 and 2022, accounting for over half of the illicit transactions. Moreover, a Reuters investigation report claimed that the world’s largest crypto exchange by volume was used by drug lords, hackers and fraudsters to move illicit cash.  According to Reuters, cryptocurrency-based crimes hit a record high in 2021, with illicit transactions rising 79.4 percent to $14 billion, from $7.8 billion in 2020.

Other crypto crimes that increased included financing of terrorism, ransomware, money laundering of child abuse material funds, cybercriminal administration and fraud shops. The US cryptocurrency exchange, Binance, was flagged out as one of the platforms used by criminals to lauder at least Sh274.4 billion ($2.35 billion) across the world in five years.  Binance has since denied the claims but the negative image of cryptocurrencies and some associated crypto exchange companies as conduits for crime still hangs on.

  1. Crypto contributes to climate change environmental damage:

Cryptocurrency activities have been associated with contributing to emissions affecting climate change and have come under criticism from climate change and environmental activists. As indicated cryptocurrency transactions and mining occurs across multiple computer systems running on blockchain technology constantly over time, using energy and emitting heat.

The environmental effects of bitcoin are significant. Bitcoin mining, the process by which bitcoins are created and transactions are finalized, is energy-consuming and results in carbon emissions as about half of the electricity used is generated through fossil fuels.

According to environmental reports by the University of New Mexico, an average of every $1 of bitcoin mined between 2015 and 2021 resulted in $0.35 of climate change damages.  Further studies show that the cryptocurrency industry, swiftly outpaced many of the traditional top-emitting sectors and significantly contributing to climate change.

The Cambridge Bitcoin Electricity Consumption Index, which tracks the real time impact of Bitcoin, in their short history shows that, Bitcoin mining alone had emitted nearly 200 million tons of carbon dioxide equivalent (CO2e). From an environmental perspective therefore scaling up wider use of blockchain technology and crypto is a danger to the environment and climate change, the report concluded.

Despite the risks and potential down side, a United Nations University (UNU) report suggests that the negative view could change as blockchain technology and cryptocurrencies percolate across from developed economies into Africa. The monetary policy and regulative landscape is evolving and governments must be aware and leverage the benefits of technology[1].

According to a commentary by the Brookings institute, indeed, many cryptocurrency fortunes have already evaporated with the recent plunge in prices.  But whatever their ultimate fate, the ingenious technological innovations underpinning them will transform the nature of money and finance.

Are East African governments running late? In the next issue we discuss how EAC can address the downside of the crypto economy, leveraging its monetary policy to harness its dividends.

[1] https://unu.edu/press-release/un-study-reveals-hidden-environmental-impacts-bitcoin-carbon-not-only-harmful-product

Tax and Fiscal Governance: Is VAT milking the broken tax cow dry? An analysis of tax trends and impacts on EAC small traders and citizens, with a case of the recent traders’ boycotts in Uganda

With dwindling foreign aid, it appears the governments in East Africa have resorted to squeezing everywhere to raise some dime. Taxation may be good however, when the extremes are beyond reasonableness, countries are bound to break the back of the economies they aspire to build. Could the recent demonstrations in Kampala show a mismatch of tax policy and that the tax cow may be now broken or is it a case of misunderstanding of the tax system and the dividends of taxation?

By Robert Ssuuna, Researcher, Trainer, and Consultant,

Governance and Economic Policy Centre

@ Tax policy @ Tax justice @africataxproffessionals @fiscalgovernance

KAMPALA, UGANDA – APRIL 17TH 2018.
People go about their everyday business in Kikuubo, one of Kampala’s busiest trading areas.

Recently media in Uganda has been inundated by the stand-off between the Government and traders in the Central Business District of Kampala’s Capital Uganda locally known as Kikuubo with traders choosing to close shops in protest. The protest which later spread to other cities like Jinja, Mityana, and Masaka was triggered by the implementation of the Electronic Fiscal Receipt and Invoicing System (EFRIS) by the Uganda Revenue Authority.

According to the Taxman, the solution is intended to address concerns related to Value Added Tax (VAT) fraud.  VAT is known as an indirect tax charged by businesses at each stage of the production and distribution chain up to the retail stage of goods and services. VAT was introduced in 1996 replacing the sales tax and has since proved a reliable source of revenue contributing 30% of Total Tax Revenues on average and 4.4% of GDP[1]. To understand how well the VAT regime is managed in the country we use two main metrics, these are;-

  • VAT productivity which is the VAT revenue yield to GDP divided by the nominal VAT tax rate. VAT productivity measures how much each percentage point of the standard VAT rate collects in terms of GDP as given by the following ratio.
  • VAT Productivity= VAT Revenue/ GDP (Standard VAT rate)
  • VAT C-Efficiency which measures the VAT revenue performance and overall efficiency of the VAT system in an economy. The efficiency ratio is given by VAT revenue yield to the approximated proxy (Final Consumption) divided by the VAT tax rat It follows that, if VAT compliance was perfect, actual revenue over potential revenue, would be one. C-efficiency ratio is given as:- 
  • VAT-C Efficiency = Actual VAT revenue/(Final Consumption)(Standard VAT Rate)

Where actual VAT Revenue implies Total VAT collections less VAT refunds.

Using the above indicators,  we establish that in 2023 Uganda registered VAT productivity of   22%  while the VAT C-efficiency ratio  stood at 21% way below the African averages of 27.6% and 37.8% respectively (ATO, 2023)

Lower VAT productivity and C-Efficiency ratios imply a higher difference between real and declared revenues and consequently few economic agents meet their VAT obligations.

From the simple results indicated above, one might argue that the Government is justified to institute both policy and administrative mechanisms to address the low VAT productivity and VAT C- efficiency. One such intervention is the introduction of the EFRIS.

The system manages business transactions, tracks stock movements, automatically applies VAT-inclusive taxes (which directly affect informal traders’ profits), issues precise and traceable invoices, and promptly reports sales data to the revenue authority in real time. Through automated cross-checks the URA can more effectively match buyer and seller invoices, thereby preventing taxpayers from claiming input VAT credits without corresponding reports from sellers. Theoretically, this system tackles tax evasion in two main ways: Firstly, by creating a more accurate digital trail, it enhances URA’s monitoring capabilities and raises the likelihood of detecting evasion. Secondly, by offering clearer transaction records and facilitating pre-filled tax returns, it encourages voluntary compliance by simplifying the tax filing process. So one wonders why traders and the Government fail to agree on such a solution given the associated benefits.

From the informal trader’s perspective,  EFRIS exposes them to the risk of “premature formalization,” where their tax compliance costs, including penalties for non-compliance, escalate faster than any benefits gained from their efforts to sustain themselves. Traders believe that any measure that decreases the amount of money they have to spend freely is essentially a tax.

The challenges posed by the EFRIS system stem from concerns about reduced incomes caused by lower sales due to increased prices resulting from VAT on purchases made by informal sector operators, particularly Kikubo Traders, from formal sector operators. Additionally, there’s a decrease in income from their imports. These worries are intensified by URA’s strict enforcement tactics and the looming possibility of facing full taxation scrutiny from tax authorities. Critical issues associated with EFRIS are:-

First, is the general lack of awareness among the trading community on what EFRIS is,  its objectives, benefits, and associated challenges despite URA’s investment in taxpayer education since 2021 when the solution was rolled out.  It is no surprise that some traders regard this as another tax. Some of the traders also clearly seem not aware of how the VAT mechanism operates especially the Input versus output approach.

The second factor is the mode of implementation and per-requisites for the EFRIS. Traders are worried about the costs associated with  EFRIS. These include among others, hiring accountants or at least personnel with electronic numerical literacy, purchase of software, internet, purchase of the EFRIS gadgets, etc. Although all these are allowable expenses under the Income Tax Act, in the medium term they eat into traders’ working capital. To curtail these, the EFRIS regulations prescribe penalties for non-issuance of receipts generated by EFRIS and nonuse of EFRIS gadgets. The penalties are from UGX 6,000,000 and  UGX 8,000,000 respectively ( USD1700&USD 2200).

Third, is the VAT threshold. Currently, EFRIS is a requirement for only VAT-registered taxpayers with annual gross sales of UGX 150,000,000 (USD 42000).  The initial registration threshold was set at shs.20 million, and then increased to shs.50 million in November 1996, following a strike by traders. The threshold was further increased to shs.150 million in 2015, and it was argued, that including small businesses in the tax net by setting a very low VAT registration threshold can drain the limited resources available to the tax authority for administration, and yet the revenue potential is insignificant because of the low turnover and low-value addition. This is because VAT tends to impose high compliance costs on small informal traders who generally do not have sufficient resources to keep proper records of their transactions and comply with accounting rules.

With the depreciation of the UGX against the dollar since 2015, traders argue that the VAT registration threshold should be increased at least to UGX 1Bn to reflect current economic trends. Traders are also concerned that non-VAT qualifying suppliers are being denied by large supermarkets and departmental stores if they do not prove adherence to EFRIS requirements. This locks small-scale traders out of the supply chain affecting their earnings.

Finally, we note that traders are using the demonstration on EFRIS to buttress other perennial issues affecting their operations and contributing to taxpayer apathy. These include unclear application of import duties and valuation for used clothing (a blend of advalorem and specific duties), protracted VAT refund processes, general poor public service delivery, and glaring corruption scandals by politically exposed persons.

It must however be noted that the issue of VAT has been a concern of small traders across the East African Member states. The recent Ugandan demonstrations perhaps are a manifestation of the weaknesses and challenges of Tax policy and administration across the region.VAT is generally considered a regressive tax and one whose implementation has always been a source of concern and perhaps should be evaluated. 

VAT protest trends across East Africa

A man protesting Kenya’s Finance Bill 2023 is tackled by security outside Kenya’s Parliamentary Buildings in Nairobi, June 13th 2023. Courtesy Photo-Bizina

The litany of small traders’ strikes started last year (May 2023)  in Tanzania when the traders in Kariakoo, Tanzania’s, and perhaps East, Central, and Southern Africa’s largest commercial hub locked up their shops in protest over what was considered as taxation. Among the multiple taxes and levies protested was VAT. The traders wanted this reduced to 16% among others.   This later picked momentum with strikes and protests in Kenya, when the government proposed in its 2023 Finance Bill to increase the VAT, particularly on fuel products from an earlier 8% to 16%. To date, the Kenyan business community is not happy with this increase and has been complaining that a higher VAT increases the costs of living to the citizens,  doing business in Kenya and is detrimental to Kenya’s industrialization agenda.

In its 2024 Finance Bill,  the Kenyan government has proposed to introduce VAT on bread, which is largely viewed as a staple breakfast food for Kenyans.  If the proposal sails through parliament, bread, which is currently on a list of items that are zero-rated for VAT purposes— including flour, milk, and sanitary products— will attract the 16 percent tax that will see the commodity increase by at least Sh10 for 400-gram loaf. The government argues that levying bread with VAT is necessary because its zero rating was misplaced since it benefits the middle class who shop in supermarkets rather than the targeted low-income households.

Kenyans are generally not happy with this and if it is passed there could be another round of protests from different sections of what is already considered an ‘over-taxed’ Kenyan taxpayer.

Therefore the following measures should be taken to ensure that the Governments continue to milk the cow without breaking it,

  1. Invest in Taxpayer education and awareness should be a continuous process
  2. Improve accountability for the use of taxpayer money by improving the quality of public services and apprehending the corrupt to encourage voluntary compliance.
  3. Improve tax administrative efficiencies by continuously equipping URA staff with skills and ensuring that the staff numbers are adequate to manage the tax register.
  4. When introducing new systems such as EFRIS, tax administration should invest in reasonably wider consultation and ensure the participation of all those likely to be affected by the system from the design stage.
  5. Invest in agricultural commercialization, productivity, and industrialization to ensure that the majority of the agricultural sector actors are within the money economy to broaden the tax base.
  6. The government must develop a proper Tax policy to guide taxation and predictability of tax administration

 

Forthcoming Expert Webinar on Taxation and Tax Policy in East Africa

To discuss  and dissect this further we have organised an expert webinar on this subject will be coming up on the 30th May, 2024.  Please register to attend via the links below:

Title: Tax and Fiscal Governance: Is VAT milking the broken tax cow dry? An analysis of tax trends and impacts on small traders and citizens in EAC

Date: 30th May, 2024

Time: 11:00 AM to 12:30 PM EAT/ 10AMCAT
 
Meeting ID: 857 8760 2335
Passcode: 897276

[1] Author computation based on Revenue Statistics from the URA

Solar and Energy Transition: Good policy intentions but less progress: Assessing Tanzania and EAC’s Utility scale solar energy potential and policy gaps to fix

Governments are struggling with little success to attract and retain utility scale solar projects and many have died in their nascent stages. Yet utility scale solar projects could be a significant contributor to resolving the regions power shortages and increased energy access by sizeable proportions. So, what is holding back utility scale solar projects and how can governments maneuver to attract and retain more investors. 

By Moses Kulaba, Governance and Economic Policy Centre

@energypolicy @cleanenergy @solarafrica @energytransition

Multiple studies have concluded that the Eastern Africa region has the highest technical potential for solar power technologies, with estimates of 175 PWh and 220 PWh annually for Concentrated Solar Power (CSP) and Photovoltaics (PV) respectively. African countries with the highest CSP and PV potentials are Algeria, Egypt, Namibia, South Africa, Sudan, and Tanzania.  The annual technical solar power potential in Tanzania is estimated to be 31,482 TWh for CSP technology and 38,804 TWh for PV technology. Despite this potential, Tanzania and EAC lags behind its peers such as South Africa, Algeria and Egypt. Besides the technical aspects as earlier discussed, the policy terrain in East Africa has been largely zig zag and therefore not coherent enough to support investment.

In this second part of our analytical series on solar as a clean energy source, we attempt to shade some light on the policy terrain in Tanzania and East Africa generally and how this is contributing towards holding back large-scale investment and utility scale solar penetration.

Policy and investment terrain

Generally, the policy and investment landscape in East Africa has been evolving at a snail pace. Both Tanzania, Kenya and Uganda have renewable energy policies in place however these are not backed up by adequate promotion, implementation and funding. The regulatory terrain has also been discordant.  For the region to benefit, the policy and investment trajectory will have to align and move faster, catching up with the global trends and the drive to clean energy.

Tanzania’s policy terrain.

The government passed a National Energy Policy (NEP) in 2015 with a commitment to increase the share of renewables in its energy mix. The NEP 2015 seeks to facilitate improvement of investment environment to promote and support private sector participation. The policy further commits to scaling up utilization of renewable energy source by among others introducing a.. feed-in-tariffs for renewable energy technologies and structure power purchase agreements for renewable energy.  

It further commits to facilitate integration of renewable energy technologies in buildings and industrial designs and establish frameworks for renewable energy integration into the national and isolated grids; an Promote sustainable biofuel production and usage.

However, actualization of this has been slow. To date contribution of renewables to Tanzania’s energy mix remains low at 1.2 %. By 2021 Tanzania’s electricity generation came mostly from natural gas (48%), followed by hydro (31%), petrol (18%) with solar and biofuels contributing a mere 1% each. The National energy consumption balance is still dominated with biomas (charcoal and firewood) use at around 85%.

Tanzania government admits that that solar utilization is constrained by high initial costs, poor after sales services, insufficient awareness on its potential and economic benefits offered by solar technologies plus inappropriate credit financing mechanisms.

Previous policies, particularly the 2003 was successful in the establishment and operationalization of Energy and Water utilities regulatory authorities, the Rural Energy Agency (REA) and the Rural Energy Fund, However, it fell short of making advancements on the renewable energy, particularly by not creating a designated and operational Renewable Energy Fund. By design it is implied that funding of the renewable sector would come directly from the consolidated Energy Fund. However, with conflicting priorities and government’s focus on increasing energy access to hydro and gas fired electricity, much of the available funding was channeled towards rural electrification.

In 2012 Tanzania was one of the pilot countries selected to prepare the Scaling Up Renewable Energy Program (SREP). The chief objective of this plan was to transform the energy sector of Tanzania from one that is more dependent on fossil fuels to one that is more diversified with a greater share of renewable sources contributing to the energy mix through catalyzing the large–scale development of renewable energy.

The SREP–Tanzania Investment Plan was prepared by the Government of Tanzania, through a National Task Force led by the Ministry of Energy and Minerals (MEM) with support from the Multilateral Development Banks (MDBs). However much of this plan is yet to fully takeoff and its translation into actual deliverables yet to materialise

Cognizant of the significant gaps that exist, in 2023 the Minister of energy at time, Hon January Makamba revealed that the government was developing a new Renewable Energy Policy to further enhance investments in renewable energy. This policy would capitalize on the substantial financial resources, capital markets, and advancements in new technologies dedicated to renewable energy globally. He also announced ongoing efforts to identify areas with renewable energy resources and prioritize native investments in wind and solar projects. The government would provide support in this regard and establish guidelines for project implementation.

In 2023 Tanzania entered into an agreement to construct the Country’s first-ever solar photovoltaic power station to feed into the national electricity grid. According to the Ministry of Energy, the project is part of a larger initiative of installing 150 MW of solar energy in the Kishapu district of the Shinyanga region. The first phase of the project to be constructed by Sinohydro Corporation from China was estimated at TZS 109 billion and was scheduled for completion before end of 2024.

According to the Minister, the implementation of the solar project reflected the government’s commitment to establishing a diverse mix of electricity sources in the national grid, incorporating water, gas, wind, and solar power. This approach aims to ensure a continuous supply of electricity, even in the event of a failure in one source.

There are also several large-scale solar power projects under development, including the 30 MW Singida project and the 50 MW Nyumba ya Mungu project. In addition to government efforts, there are also private companies and organizations working to develop renewable energy projects in Tanzania.

Similarly, Zanzibar, the semi-autonomous Island of Tanzania, also signed in 2023 an agreement with a Mauritius-based Generation Capital Ltd and Tanzania’s Taifa Energy to build its first large-scale 30MW solar PV power plant, as it seeks to become energy independent. The plant will cost $140 million. The Power Purchase Agreement (PPA) between the state-owned Zanzibar Electricity Corporation (Zeco) and the two companies to develop the 180 megawatts plant will be implemented in phases, according to Zanzibar’s Ministry of Energy and Minerals.

Kenya’s solar terrain

Garissa Solar Farm

So far, Kenya is leading in large solar projects.  There are at least 10 large solar farms in Kenya. The Garisa solar farm, is the largest in East and Central Africa, with 55 MW generation capacity. The solar farm sits on85 hectares (210 acres) and consists of 206,272 265Wp solar panels and 1,172 42kW inverters owned and operated by Rural Electrification and Renewable Energy Corporation. Others already operational or proposed include; Malindi Solar (52MW), Alten Kasses (52 MW), Kopere Solar Project (50MW), Eldosol Solar Project (48MW), Radiant (50MW), Rumuruti (40 MW), Nakuru Solar project (40MW), Witu (40MW) and Makindu (40MW).

Kenya has buttressed its renewable energy credentials with a new Energy Transition and Investment Plan (ETIP) launched in 2023. The ETIP spells out Kenya’s road map to delivering a 100% clean energy driven economy by 2050. The country is however yet to figure out how it will fund this ambitious plan. Over the past recent years Kenya has been facing significant budgetary constraints affecting funding of its major national development plans. Even when the government has committed to achieving 100% clean energy by 2030, it bets heavily on funding from external donors. With the recent trend in aid inflows and if they remain unchanged in the short and medium term, it will be a tall order Kenya to meet this target.

Uganda’s solar uptake

Uganda has been slowly catching up with its peers. Uganda’s policy commits to make modern renewable energy a substantial part of the national energy consumption. To increase the use of modern renewable energy, from the current 4% to 61% of the total energy consumption by the year 2017[i].

The policy terrain has been zigzagging and investment in renewables is still low but the government has blended its focus on hydropower generation with small investments in solar projects as back up for its hydropower. There was a big growth in 2021, reaching 92 MW, followed by a significant increase of around 6.9 MW, reaching a total of 98.9 MW Uganda’s installed solar energy capacity in 2022.

Some of the projects contributing to this growth include Kabulasoke Solar PV Park is a 20MW solar PV power project, located in Central, Uganda, Bufulubi solar project in Tororo and Access solar plants in Soroti.  New pipeline projects include the Amea West Nile Solar PV Park, a ground-mounted solar project, whose construction was expected to commence from 2024 and subsequently enter into commercial operation in 2025. The power generated from the project will be sold to Uganda Electricity Transmission under a power purchase agreement. 

This however falls short of achieving the targets as stipulated in Uganda’s Renewable Energy policy. Uganda’s renewable energy policy commits to establish and maintain a responsive legislative, appropriate financing and fiscal policy framework for investments in renewable energy technologies. It mentions forms of financing such as strengthening the Credit Support Facility and Smart Subsidies which are intended to scale up investments in renewable energy and rural electrification.

Moreover, a special financial mechanism, a credit support facility known as the Uganda Energy Capitalisation Trust, was instituted to help realise the policy but this expired in 2012 and had never been renewed[ii]. Uganda lags in meeting its policy targets as only 10 solar projects had been completed by 2022[iii].

What is the current market and investment size?

According to global energy reports, there is a substantive market size of solar photovoltaic (PV) in East Africa and Africa generally. The Middle East & Africa solar photovoltaic (PV) market size was valued at USD 5.00 billion in 2022. The market was projected to grow from USD 6.93 billion in 2023 to USD 37.71 billion by 2030, exhibiting a cumulative Average growth rate (CAGR) of 27.4% during the forecast period.

Despite its immense solar power potential, East Africa and Africa generally continues to lag behind other continents when it comes to building up utility scale grid and off-grid solar capacity, in part due to a stagnant policy regime, overlapping institutional roles, limited research, technical capacity and lack of appropriate financing facilities for investment.  Some proposed projects have failed to take off.  As a consequence, the total investment share of utility scale projects into East Africa remains comparable low.  

So, what can EAC governments do to make utility scale solar markets attractive?

Recommendations

# Governments must make policy switches from paper to aggressive attracting of investment into the solar PV East African markets. The policies may exist but the implementation gap is too big. Policy interventions and a national course-correction is urgently needed to effectively overcome structural barriers and create local value in the emerging solar market many of which is still left behind in this progress.

# Decentralization of energy generation away from vertically integrated power monopolies such as TANESCO and Kenya power could be a game changer.  De regulation and introduction of net metering by independent Solar PV power producers to directly generate and sell to customers could improve profitability of solar projects and attract new investments.

# Financing institutions must scale up project financing of renewable energy projects.  Solar projects are still expensive and funding is difficult to come by. Kenya’s Garisa solar project required an investment of KSh13. 7 billion ($135.7 million) and was funded by the Exim Bank of China. Other projects have required substantive investment with funds generated from private developers and energy venture capitalists. The existing financial institutions are yet to master tailing project financing to utility scale solar projects.

# Addressing land rights and underlying injustices. Large solar farms require large tracts of land and these can be a source of land grabbing, land deprivation and injustice, generating conflicts and endless litigation between potential investors and the communities. The renewable policies and investments have to sit well with land rights, guaranteeing free prior informed consent, fair compensation and equity,

# Socio-economic: Identifying and prioritizing suitable areas for building large-scale solar power plants is a complex problem. In contrast with the simplistic view, identifying appropriate geographical areas for solar power installation is not only linked with the amount of received solar radiation, but there are many other technical, economic, environmental, and social factors that should be considered like: alternative land uses, topographical characteristics of the land, conserving protected areas, potential environmental impacts, water availability, potential urban expansion, proximity to demand centers, roads proximity, and potential for grid connectivity.

# Solar technology firms must address intermittence and storage of renewable energy. Solar power is generally reliant on the availability of sunshine. Depending on the weather and hours of the day and night. Unfortunately, the technology has not advanced far enough and made cheaply available to East for storage of solar power. For solar power users the days are hot and the nights are cold.

# Government leaders must have a unified political will to support renewables as part of the master energy mix and regional energy power pool. So far there is a divided political opinion on what solar power can do in helping the governments to meet their national energy demands. While Kenya is a front runner, other countries are still focused on hydro and gas. The future of distributed solar therefore depends largely on good political will driving favorable polices and changing mindset to embrace solar power as a new source of energy. This could be reflected in new generation policy drivers such as requirement for solar considerations in building designs and integrated power systems.

[i] Renewable Policy for Uganda; https://s3-eu-west-1.amazonaws.com/s3.sourceafrica.net/documents/118159/Uganda-Renewable-Energy-Policy.pdf

 

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