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Reversal of corona tax to aid Kenya’s IMF funds request

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National Treasury building. FILE PHOTO | NMG

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Summary

  • Last year, Moody’s put Kenya B2 rating on a negative outlook citing huge external debt, lower revenues and currency risks.
  • The ratings firm now says the return of income and value added tax to pre-Covid rates will reverse the trend where revenues had fallen to a five-year low and help seal a deal for cheap concessional debt.
  • The IMF has been keen on Kenya to address its widening fiscal deficit, which has caused the country to borrow ever increasing sums that have worsened its debt sustainability position.

Kenya stands a better chance of getting a financing deal with the IMF following this month’s reversal of corona tax subsidies that has signalled that the National Treasury is committed to improving its fiscal position, global ratings agency Moody’s has said.

Last year, Moody’s put Kenya B2 rating on a negative outlook citing huge external debt, lower revenues and currency risks.

The ratings firm now says the return of income and value added tax to pre-Covid rates will reverse the trend where revenues had fallen to a five-year low and help seal a deal for cheap concessional debt.

The IMF has been keen on Kenya to address its widening fiscal deficit, which has caused the country to borrow ever increasing sums that have worsened its debt sustainability position.

“Restoring the previous tax rates on corporate and personal income taxes will prevent a further decline in Kenya's revenue/GDP ratio, a challenge that predated the coronavirus and reflects weak fiscal policy effectiveness,” the ratings firm said.

“An IMF programme, if secured, would support fiscal consolidation efforts and provide important liquidity relief given the government’s large gross financing needs, which will remain above 20 percent of GDP, and would support fiscal consolidation over the medium term.”

Kenya needs to secure more tax revenues, reduce debt service and expand the economy and exports to recover from the impact of the coronavirus on the economy.

The National Treasury revised the tax subsidies including the top personal income and corporate tax rate, both reverting back to 30 percent from 25 percent, effective 1 January 2021.

Additionally, the value-added tax (VAT) reverted to 16 percent from 14 percent.

The Treasury has also introduced a digital tax and a minimum tax, the latter which will see companies remitting one percent of their gross turnover every month to the taxman.

The government is also eyeing a debt service holiday. This week, the Paris Club of countries handed it a Sh32.9 billion loan repayment break to use revenues for tackling the coronavirus pandemic. It is seeking an additional Sh40.6 billion debt repayment freeze from non G20 countries.