The new Finance Act 2023 has left the government caught between contrasting positions of a restless public opposed to higher taxes and the International Monetary Fund (IMF), which has called for enhanced revenue mobilisation in its credit arrangements with Kenya.
The government is bracing for three days of opposition protests that have been framed around the high cost of living, with the Finance Act 2023 being cited as one of the grievances.
On the other hand, the IMF, in a statement following the fifth review of the extended fund facility and the extended credit facility arrangements (EFF/ECF), backed the Act, saying its approval—and that of the Budget— is critical to reducing the country’s debt vulnerability.
The Bretton Woods institution has been pushing the government to cut tax leakage and subsidies to bring down the country’s fiscal deficit.
One of the tax subsidies the government has removed via the Finance Act is on fuel VAT, which has gone up to 16 percent from eight percent.
“The approval of the 2023/24 fiscal year Budget and Finance Act 2023 are crucial steps to support ongoing consolidation efforts to reduce debt vulnerabilities while protecting social and development expenditures,” said Antoinette Sayeh, deputy managing director and acting chair of the IMF.
“However, recent challenges in resource mobilisation and elevated uncertainty call for contingency plans that can be quickly deployed to ring-fence fiscal performance going forward.”
The IMF and the World Bank have become key sources of external debt funding for the government, at a time when commercial borrowing has become difficult due to the high cost of risk aversion by lenders spooked by an unstable global economy.
Following the latest review, the IMF has now approved the disbursement of Sh58.8 billion ($415.4 million) to Kenya under the medium-term programme.
The new deal is expected to raise the multilateral lender’s cumulative funding to the country under the programme to Sh288.6 billion ($2.04 billion) since its approval in April 2021.
It has also approved the disbursement of a further Sh78 billion ($551.4 million) under the resilience and sustainability facility (RSF) to support Kenya’s efforts to fight climate change.
Domestically, however, the government’s enhanced taxation measures have left it facing pressure from a public that has been hit by a high cost of living.
Following last week’s demonstrations, which resulted in clashes between police and protestors, the Opposition has this week called for three days of protests starting on Wednesday.
The destruction of infrastructure and disruption of business activities has seen the business community pile pressure on the government and Opposition to negotiate a settlement, saying the economy is losing more than Sh3 billion every time there is a protest.
Others calling for dialogue on Tuesday included the Law Society of Kenya (LSK), religious leaders and foreign missions.
“We recognise the daily hardship faced by many Kenyans and urge all parties to table their concerns through a meaningful dialogue and resolve their differences peacefully to build the nation together, ensuring no further loss of life,” read a joint statement issued by ambassadors and high commissioners of 11 European countries, the US and Australia.
