Economy

Uhuru summons KRA boss as tax revenue shortage bites

Kenya Revenue Authority (KRA) Commissioner-General John Njiraini was Monday summoned to State House to explain the agency’s failure to collect taxes that has left the Jubilee government without money to meet its financial obligations.

Senior Treasury officials also attended the meeting with President Uhuru Kenyatta at State House where they were expected to agree on a common narrative ahead of Thursday’s appearance in Parliament. Tax revenues fell behind targets in the first three months of the fiscal year that began in July, plunging the Treasury into a cash crisis that has left many government workers without pay and disrupted budget plans.

Mr Kenyatta has been under pressure in the past two weeks as the cash crunch hit key government departments, delayed payment of teachers’ September salaries and occasioned non-disbursement of money due to the county governments.

People familiar with the ongoings at the meeting said Mr Kenyatta wanted a substantive briefing on the state of public finance ahead of his address to the nation during this morning’s Mashujaa Day celebrations.

“The President is expected to address the cash crunch issue in his Mashujaa Day speech and this meeting was to deepen his understanding of the matter,” said the sources, adding that Mr Kenyatta also wanted to have his ducks in a row by the time the Treasury and the KRA officials return to Parliament on Thursday.

Mr Kenyatta’s meeting with the taxman came in the wake of Mr Rotich’s responses to MPs’ queries on the state of public finance that appeared to blame the KRA for the cash crunch.

The KRA had called a Monday press conference to release official revenue collection data for the first quarter of the financial year (July-September) but pushed the event to Wednesday after Mr Njiraini was summoned to State House.

The KRA collected Sh152.7 billion in the first two months of the financial year, an amount that Mr Rotich described as unsatisfactory.

“This performance for tax revenues is still below the expected average for the period, raising doubts as to whether the government will be able to meet its targets for the year,” the Parliamentary Budget Office (PBO) said in a report two weeks ago.

It has not helped that there is little room for government to borrow from the domestic market given the high interest rates investors are demanding for their money.

Kenya collected Sh182 billion in total revenues, including domestic borrowing and foreign loans in the two months.

That was way below the Sh210 billion that was collected in the first two months of the previous financial year. It also helped that the first quarter of that proceeds of the Eurobond were also received during the same period, helping boost the government’s finances.

The KRA has an annual tax target of Sh1.2 trillion this year and failure to hit the number means the government will have to expand its borrowing plan and at a high cost.  

The cost of borrowing for government rose astronomically in the past two months to stand at 20 per cent for short-term government paper, forcing the Treasury to look beyond the borders for funds to keep the country running.

Syndicated loan

The Treasury last week announced plans to go for a Sh77 billion ($750 million) syndicated loan from several banks to ease the cash shortage but the pricing of the cash is likely to be higher given the more negative outlook that rating agencies have recently given Kenya.

Standard & Poor’s last week lowered Kenya’s credit rating to negative from stable, citing the widening budget deficit two months after Fitch downgraded the country over the same issue of mounting debt.

“The negative outlook reflects our opinion that Kenya’s fiscal position is structurally weakening and that this will feed into a mounting debt stock, which could also increase external vulnerabilities,” the New-York-based rating agency said in a statement.

The Controller of Budget has also raised alarm over Kenya’s growing debt, which increased by a fifth to Sh2.84 trillion in June, up from Sh2.36 trillion in the similar month in 2014.

The increased borrowing, especially from the local market, will put pressure on interest rates as the banks opt to lend to the government at the attractive terms instead of lending to the private sector.

Lower tax revenues are also likely to lead to the suspension of development projects with adverse impact on economic activity.
Reports for the first quarter of the 2015/16 financial year show that critical sectors of the economy did not received a single cent, meaning the country’s development plans are on hold.

The list of stalled projects includes those in the departments of internal security, science and technology and rural electrification as well as job-creating industries like fisheries, tourism and mining.

Failure to spend on projects means key infrastructure development plans remain on ice with a possible knock-on effect on employment and consumer spending.

Key players in the economy such as cement firms that have recently benefited immensely from government are also expected to see demand for their products decline with adverse effect on their profitability.

The state of government’s finances has been worsened by the high debt repayment obligations that continue to rise in tandem with the depreciation of the shilling against the US dollar.

In the three months to September, the Treasury released Sh132.6 billion to service public debt — an amount that was more than the Sh117 billion recurrent spending during the same period.

Although the government has released funds for several functions, including salaries, some public finance obligations remain unmet more than a month since they were due.

Last week, the Treasury released Sh11.2 billion for free primary and subsidised day secondary education programmes — an amount that should have been released by end of August.

Teachers are also yet to get their September pay and have reportedly been on a go-slow despite having lost the first five weeks of the third term to a strike.
Pressure will continue to mount on Mr Njiraini to collect more money to make up for the lost time.

Mr Rotich told MPs last week that they are working to reduce graft at the revenue authority which affects the amounts collected.

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