Fuel taxes aside, we need to heed IMF debt advice

I am one of those who strongly believe in the common sense economics of not over-taxing economic inputs like fuels which energise growth of taxable incomes.

With the fuel VAT now “apparently” implemented, it is time to sincerely listen and analyse the International Monetary Fund (IMF) debt message. This may help us come up with our own solutions for the debt problem which may preempt IMF having to prescribe their conditions which more often than not touch on the raw nerves of our national sovereignty and dignity.

An oversize national debt is a structural risk that reduces our capacity to finance socio-economic development. It can dilute our ongoing efforts to negotiate foreign investments with bilateral and multilateral financial institutions which usually require government guarantees. Huge budgetary deficits and debt reduce capacity to issue such guarantees. The worst case scenario is what is happening in Argentina today with the debt overhang prompting accelerated currency devaluation.

We definitely know the reasons for our huge budgetary deficits, which is a good starting point. Corrupt tax exemptions, illegal tax leakages and avoidance all diminish the supply side of the exchequer. On the bloated expenditure side are corrupt deals, theft and runaway wastage of public funds. These are issues that only Kenyans, not IMF, can address.

We were exactly in this debt situation just before the National Rainbow Coalition(Narc) government came into office in 2003. Then President Mwai Kibaki systematically addressed the supply side through improved taxation systems, reforms and accountability. He did not increase taxes. Within a short time our treasury was healthy and borrowing through treasury bills reduced. The IMF budgetary support became unnecessary, and the lender’s visibility in Kenya decreased.

President Uhuru Kenyatta appears to fully understand where the IMF is coming from on the subject of debt. Further, he now has the national political support and international goodwill to wage a sustained assault on the bad national habits that sap the financial strength from the economy. He appears to be on course to rid public financial systems of irregularities.

The ongoing drive by the government to enforce tax collection especially in areas of contraband imports and corruptly authorised tax exemptions is in the right direction. Destruction of illegally imported goods last week was a strong symbolic message that it is not business as usual. Control of illegal imports will definitely protect local agriculture, manufacturing and trade which will in turn generate more taxable incomes.

If the ongoing war on graft maintains momentum, and I have no reason to doubt it will, the President will have earned increased public goodwill and understanding to enable him undertake other critical surgical actions and reforms to redress public funds wastage.

For a start, we need to see a shock therapy in the areas of public recurrent expenditure to re-establish discipline and accountability. It is not wild to suggest that the recurrent expenditure budget for 2019-20 financial years should be reduced by 5-10 per cent from the 2018/19 baseline. The cut should apply to all branches of the government (executive, parliament, judicially, counties and parastatals) and should be announced early enough to allow the shock to sink in and prompt a proactive approach in identifying areas of waste and discretionary spending. This process can be repeated in a reducing step in the subsequent financial years. I bet the outcome would be miraculous and unbelievable.

The President has already ordered a freeze on all new development projects in this financial year, except those with donor participation. This is a welcome opportunity to set new guidelines and processes for project identification, review, approval, funding and implementation. If correctly implemented this review will help preserve Treasury liquidity and reduce deficits. This will also help to disorient collusion among corrupt cartels.

Turning attention back to IMF, we should remember that “beggars cannot be choosers”. If we badly need the IMF to support our debt funding, then we should be ready to accept conditions prescribed by the lender. The VAT conditionality was probably an inevitable albeit bitter dose by IMF that could have been avoided if we had proactively developed a strategy to conclusively eliminate financial irregularities and wastage.