Treasury Cabinet Secretary Njuguna Ndung'u on Thursday read his first Budget speech that had fingerprints of the International Monetary Fund (IMF) and the World Bank, a signal that President William Ruto is keen to implement the stringent conditions that came with loans from the Bretton Woods institutions.
The 129-page Budget speech sought to explain the motivation behind the far-reaching revenue-raising plan that will see the State adopt various policies from the two Washington-based institutions that Kenya agreed to implement, including increasing value-added tax (VAT) on fuel to 16 percent.
Also, various items were removed from the zero-rating list, which means they will start being charged the 16 percent sales tax, a measure that has always been favoured by the World Bank.
Dr Ruto, whose first task after ascending to power was to phase out fuel subsidies in line with IMF’s conditions, has refused to back down on the proposal to increase VAT on petroleum products despite its widespread popularity.
“Mr Speaker, we are truly grateful as a nation to our development partners who have over the years provided financial resources to support the implementation of government programmes, policy and structural reforms,” said Prof Ndung’u in his speech that put the country’s total spending at Sh3.68 trillion for the fiscal year ending June 2024.
“In particular, allow me to single out the multilateral institutions, specifically the World Bank, the International Monetary Fund (IMF), the European Union, the African Development Bank, and the many bilateral donors, institutions and governments that have walked the journey of socio-economic transformation with Kenya.”
The government expects to collect an additional Sh50 billion from the eight percent VAT on fuel, helping it narrow the budget deficit to 4.4 percent of gross domestic product (GDP) as it had promised the IMF.
The programme, which is aimed at helping the country to reduce the country’s debt risk, has also roped in Kenya Power and national carrier Kenya Airways which are expected to undertake restructuring.
State corporations, which have had bloated payrolls, have also been on the IMF’s radar.
Prof Ndung’u noted the government would soon be rationalising the composition of the staff by reducing the number of support staff while increasing those in technical.
The government is targeting a ratio of 70 to 30 for the technical and support staff respectively.
“In addition, the National Treasury shall henceforth only approve budgets for hiring staff for only State corporations that have received approvals from State Corporations Advisory Committee, the Public Service Commission (PSC) and the Salary and Remuneration Commission (SRC),” he said.
The restructuring of Kenya Power and Kenya Airways is aimed at reducing the fiscal risk that these State corporations pose to taxpayers who are forced to bail them out.
The Finance Bill, 2023, through which the State intends to generate over Sh211 billion in additional revenues, has passed the second reading stage in the National Assembly amidst sharp differences between the majority and minority sides.
In total, the Kenya Revenue Authority (KRA) has been given a target of Sh2.57 trillion for the financial year starting July, an increase from Sh2.19 trillion in the current fiscal year.
Dr Ruto’s government seems to have been rewarded by both the IMF and the World Bank after he stuck to the two global lenders’ liberal policy of maintaining a lower fiscal deficit by cutting spending and increasing revenue.
Kenya is set to receive an additional Sh162.5 billion under the 38-month programme that it has with the IMF after Dr Ruto’s administration showed a firm commitment to implement the stringent tax policies agreed with the Washington-based institution.
In 2021, the IMF reckoned that Kenya should double the VAT on fuel from the current eight percent when crude oil prices fall, in a signal the multilateral financier was open to a delayed implementation to guard against growing public anger and pressure over soaring petroleum costs in the country.
“If needed to meet fiscal objectives, capitalise on lower fuel prices by aligning fuel VAT to the standard rate,” the IMF told the government in April last year.
In its last report released in December, the IMF noted that a draft action plan to restore Kenya Power’s medium-term profitability by the end of July last year was one of the conditions, known as structural benchmarks, that had not been met.
“To further enhance KPLC’s [Kenya Power and Lighting Company] financial sustainability, the government will restructure its balance sheet, mainly focusing on the huge loan balances, payables and receivables. This will in turn address the current huge liquidity gap at KPLC,” said Prof Ndung’u.
As part of the restructuring, a Sh19.4 billion debt owed to the Rural Electrification Schemes (RES) operations and maintenance cost would be settled by the government.
The government will also develop and implement a turnaround strategy that includes the reduction of system losses from the current 22.4 percent to 14.4 percent by end-June 2025 and establish a new governance structure at the utility firm to give private shareholders fair representation that reflects its shareholding structure.
The government is to also come up with a turnaround strategy to help Kenya Airways, known as KQ by its international code name, to become profitable.
Another agreement that Kenya had with the IMF was to roll out an e-procurement system that will be incorporated into the Integrated Financial Management Information System (IFMIS) to automate the application of the Procurement Act and regulations.
The Treasury also promised the IMF that it would change the country’s debt threshold from a ceiling into an anchor of GDP. The Treasury has already submitted the Bill to the National Assembly.