WARNING

Moodys warns that fiscal measures set will increase government's liquidity risk

Larger fiscal deficits will add to Kenya’s already large gross financing needs, increasing liquidity risk.

In Summary
  • The fiscal stimulus package, which includes cash transfers to vulnerable groups and cuts to the corporate and personal tax rates, will support domestic demand and offset some of the slowdown in growth expected in 2020.
  • According to the New York based credit rating agency, the measures will increase the government's fiscal deficits which focus on tax cuts rather than spending means the fiscal impact will be felt over time.
Kenya's new bank notes.
Kenya's new bank notes.
Image: ENOS TECHE

Moodys has warned that fiscal measures set by the government to cushion the economy during this pandemic will increase the fiscal deficit and increase the government’s liquidity risks.

The fiscal stimulus package, which includes cash transfers to vulnerable groups and cuts to the corporate and personal tax rates, will support domestic demand and offset some of the slowdown in growth expected in 2020.

According to the New York based credit rating agency, the measures will increase the government's fiscal deficits which focus on tax cuts rather than spending means the fiscal impact will be felt over time.

“We expect the largest impact of the tax measures to be felt in the fiscal year ending 30 June 2021, when the deficit will widen to 8.9 per cent of GDP,” said Moodys in a statement.

Larger fiscal deficits will add to Kenya’s already large gross financing needs, increasing liquidity risk.

Before the intensification of the coronavirus and the containment measures put in place in March 2020, the firm had expected a gradual narrowing of the fiscal deficit that would stabilize debt at around 60 per cent of GDP.

The combined impact of the announced tax cuts and lower real GDP growth will reduce tax revenue by more than 1 per cent of GDP by the end of fiscal year 2021 compared with fiscal 2019.

The tax cuts will reduce an already narrow tax base, aggravating a decline in tax revenue that has taken place over a number of years.

Despite the measures being aimed at stimulating the economy and limiting the economic impact of the coronavirus, Moodys still expects a slower GDP growth.

“We expect growth to recover to 5.5 per cent in 2021, mostly as a result of the low base effect but there are several risks to our forecast as there is uncertainty around the duration of the outbreak,” the report said.