The government is between a rock and hard place over the implementation of the 16 per cent Value Added Tax on fuel.
On one hand it is grappling with public outrage over the tax while on the other it not only risks losing a Sh150 billion IMF loan facility but the Sh5.7 billion it expects to raise monthly from the tax too.
The IMF will be calling in less than 10 days with good or bad news on whether Kenya can access the loan aimed at cushioning our foreign exchange reserves.
Read:
The tax on fuel was one of the conditions for the country: to cut on borrowing and raise revenues locally.
On Monday, Equity Bank chief executive James Mwangi said
the postponement of the levy as is being advocated by a section of politicians will only serve to widen Kenya’s revenue deficit by an extra Sh79 billion and inflate its public debt.
"A lot of wisdom will be required for the country to resolve the VAT on fuel the right way. Kenyans need to put emotions aside and look at the long-term benefits of the tax," Mwangi said.
In March, IMF approved Kenya’s request for a 6-month extension of the stand-by arrangement to allow additional time to complete the outstanding reviews of its monetary policy.
The international lender approved the $1.5 billion facility on March 14, 2016, for a period of 24 months. It is precautionary insurance that Kenya could draw on should the economy be in distress.
Although the facility was to expire on March 14, 2018, IMF revealed that the credit had been suspended mid-last year before expiry date because Kenya had failed to meet the agreed fiscal deficit reduction targets.
Read:
IMF CONDITIONS
While applying for the facility, the Jubilee administration consistently promised to shore up its domestic revenue collection, cut on recurrent expenditure, lower the budget deficit and cut on debt exposure.
In March, besides promising to effect 16 per cent VAT on fuel as a condition to access the Sh150 billion insurance, the National Treasury and Central Bank of Kenya (CBK) promised IMF that they will either remove or modify interest rate caps and delay the implementation of some development projects.
Although President Uhuru Kenyatta in July issued an executive directive freezing all new government projects until the ongoing ones are completed, the government is yet to scrap the interest cap law that limited lending rates at four per cent above the CBK rate.
IMF also wanted Kenya to cut its borrowing appetite. Even so, Kenya’s budget deficit has been increasing, forcing the government to go on a borrowing spree and further pushing public debt to the current Sh5 trillion from Sh1.62 trillion in 2012.
In February, IMF expressed concern over Kenya’s excessive borrowing in the midst of a huge revenue deficit.
Senior IMF representatives for Kenya Jan Mikkelsen, Ben Clements and Nike Hobdari told the National Assembly’s Budget and Appropriations committee that the debt which hit Sh4.6 trillion in November last year would be unmanageable if borrowing continued.
The government will this year spend Sh870.52 billion on debt repayments, a half of Sh1.74 trillion KRA targets to collect from taxes.
Early this year, global rating agency Moody’s downgraded Kenya’s credit score to B2 from B1, citing pressure from rising debts.
"Debt affordability is deteriorating as reflected by the increase in government interest payments as a share of revenue to 19 per cent in Financial Year 2017/18, from 13.7 per cent in Financial Year 2012/13," Moody’s reported.
Read:
See also:
Speaking on a local television station on Monday, Institute of Economic Affairs chief executive Kwame Owino said Kenya’s debt burden of almost 60 per cent to Gross Domestic Product is dangerous.
He cautioned President Uhuru Kenyatta to resist the temptation of signing up for more loans.
The President is in China, where he is expected to entered more financial agreements.
Last week, he met in Washington DC with US President Donald Trump before returning to Nairobi to host British Premier Theresa May.
Yet the government has failed to keep its promise on budget deficit targets.
In financial year 2016/17 it had 9.1 per cent budget deficit compared to a target of seven per cent.
Last year, it had a budget deficit of 7.8 per cent from a target of 6.1 per cent. This year, it has set an ambitious target of 5.7 per cent, lower than the current 7.2 per cent.
Projected spending has gone up from Sh1.6 trillion in 2013/14 to Sh2.29 trillion in 2017/18 and now to Sh3.1 trillion for 2018/19.
Kenya also committed to cutting down on recurrent expenditure, promising to adhere to the fiscal responsibility principle which requires 30:70 ratios of development and recurrent expenditures in the total expenditure, respectively.
This year, the country’s development budget of Sh625.1 billion is
only 24 per cent of the total budget
of
Sh3.074 trillion. That is below the 30 per cent threshold with recurrent at about 60 per cent and transfers to counties 15 per cent.
Watch:
ECONOMY EXPOSED
Although the IMF review team that visited the country last month gave positive sentiment about Kenya’s economic growth, it left without saying a word on the new status of the facility.
"Discussions focused on fiscal policies to achieve the authorities’ fiscal deficit target of 5.7 per cent of GDP in financial year 2018/2019, interest rate controls and structural reforms aiming to ensure the sustainability of investment-driven, inclusive growth," said IMF.
Loss of the IMF facility will have serious implications on the economy.
"Without it, the Kenya shilling will be exposed and depreciate. This will lead to a high import bill, forcing traders to hike prices of all commodities," said Kwame Owino, adding that debt repayment will be expensive and the country’s creditworthiness will be downgraded.
He added that the government needs to come up with solutions the country can commit to in order to qualify for the International Monetary Fund precautionary facility.
"What will be different when the tax is reintroduced in 2020? They need to provide alternative solutions to meet requirements," Owino said.