The International Monetary Fund (IMF) has warned Kenya against cuts to key spending areas as it pushes for new tax measures as the best route towards fiscal consolidation.
The IMF has identified new spending pressures including carryover expenditures from the 2023/24 financial year, demands from the implementation of collective bargaining agreements (CBAs) and crucial areas which it says deem budget cuts unfeasible.
The multilateral lender instead sees new revenue measures as the soundest option to attaining fiscal consolidation and addressing Kenya’s debt vulnerabilities despite the rejection of its programme backed Finance Bill, 2024.
“The withdrawal of the Finance Bill, 2024 has necessitated spending compression to contain the fiscal deficit. While spending rationalisation will be important, including to restore public trust and tax morale, Kenya’s elevated debt vulnerabilities and large debt service obligations call for fiscal consolidation underpinned by additional revenue mobilisation to fund priority social and developmental spending needs while also ensuring debt sustainability,” the IMF says.
The fund views spending cuts attained in the first 2024/25 supplementary budget as a temporary measure/stop gap likely to be reversed as the government is for instance forced to honour CBAs.
The government has agreed to CBA demands from the security sector, teachers and civil servants with their implementation being expected to offset envisaged wage bill savings.
Funding for universities and technical and vocational training along with the carryover spending is also expected to be accommodated, resulting in higher spending pressures.
The IMF has cautioned against budget cuts affecting health and education funding and disbursements to the Kenya Revenue Authority (KRA) which it says would impact the taxman’s ability to implement tax reforms.
Cuts to education and health are for instance expected to adversely impact long-term economic growth and human capital formation.
“Staff has cautioned against deep cuts in development spending-bringing domestically financed development spending to the lowest level in the past two decades- that may not generate the envisaged savings should existing projects be affected due to the accrual of penalties and fees nor improve debt dynamics due to negative growth rates,” the IMF added.
Kenya has on the advisory of the IMF rekindled some of the abandoned tax measures in the Finance Bill, 2024 by proposing the Tax Laws (Amendment) Bill, 2024 which brings back most of the forgone taxes.
These include the implementation of excise duty on alcoholic beverages based on levels of alcohol content, higher duty for telephone and data services and the review of VAT zero-rating and exemptions.
The new tax measures are expected to generate revenues of about Sh137 billion or 0.9 percent of GDP.
The taxes are nevertheless seen as insufficient in offsetting the spending pressures, necessitating a second 2024/25 supplementary budget expected by the end of January 2025.
