Kenya needs a predictable tax regime - Treasury told

Kenya needs a predictable tax regime to foster economic growth and mitigate a looming external debt default situation, according to tax experts.

In  a mock budget report, released on Wednesday ahead of national budget in June, the Institute of Public Finance–Kenya and Oxygène Marketing Communications called for urgent  economic and fiscal management recovery strategies to avert a financial crisis.

''The Shadow Budget 2021 proposes freezing all new projects during the recovery year while rescheduling debt repayments to free more money to finance development and recurrent expenditures, says the report titled Road to Recovery"

The country's debt obligation for the financial year starting July 1 is expected to reach Sh1.023 trillion, representing about 60 per cent of the taxes collected.

Kenya's total debt obligation is currently at Sh7.26 trillion with the country expected to accrue more loans in coming days to clear maturing ones. 

It is for instance planning to return to the Eurobond market to raise capital to clear loans due end of this financial year, moving closer to the debt ceiling limit of Sh9.1 trillion by end of 2023. 

Speaking at the launch of the reportt, the Institute of Public Finance–Kenya CEO  James Muraguri said the country has breached all three public debt sustainability thresholds for overall debt and two out of four in external debt.

Such breaches, he said, places the country on a sloppy path that necessitates the adoption of recovery plans and calls for the urgent operationalisation of a robust Debt management policy spearheaded by an independent debt management directorate.

Persistent fiscal deficits in the government budget, the report notes, is due to excessive expenditure pressures coupled with falling revenue to GDP levels have been the key drivers of growth of public debt stock, as the government continues to borrow to finance the fiscal deficit.

It therefore  proposes that the government should publish a comprehensive review of proposed tax measures to maintain a predictable tax environment.

Experts expressed concern that the International Monetary Fund (IMF) has downgraded Kenya’s debt carrying capacity from strong to medium signalling increased liquidity risks due to the government spending a larger share of the country’s taxes on debt repayment at the expense of provision of critical services.

According to the report,  the actual fiscal deficit, including grants, has averaged eight per cent in FY 2016/17 to FY 2019/20 compared to an average target of seven  during the same period

This, Muraguri said, points to the inability of the National Treasury to realistically forecast future revenues and fiscal deficits, implying that the decisions in the overall budget are not fully guided by reality but rather by the need to indicate a favourable budgetary position.

Considering the adverse effects of Covid 19, the Shadow Budget notes that the National Treasury ordinary revenue collection target of Sh1.78 trillion in FY 2021/22, which is higher compared to Sh1.57 trillion collected in FY 2019/20 and Sh1.59 trillion anticipated in FY2020/21 is overly ambitious.

''Pre-Covid-19 historical trends reveal gaps in how the government sets its projections and collects this revenue while also showing declining tax-to-GDP ratios,'' says the report.

The 2021/22 Shadow Budget for Kenya is the first  and has been prepared against a background of declining engagement between the state and non-state actors in the budget process, reduced access to budget information particularly on public debt contracting and service repayments.

Oxygène's head of Public Policy & Regulatory Affairs  Magdalene Kariuki said through the analysis, it is hoped that a more conscientious approach would be adopted in engagement between state and non-state actors in the joint review and debate over national fiscal policy.