Kenya warned against removing petroleum tax

Moody's says move poses danger to country's fiscal credibility.

Treasury secretary Henry Rotich. FILE PHOTO | NMG 

IN SUMMARY

  • Rating agency Moody’s says in a new analysis of Kenya’s fiscal position that annual borrowing could hit 20 per cent (Sh1.77 trillion) of the gross domestic product (Sh8.845 trillion) or triple the budgeted deficit of Sh559 billion if fails to implement key reform measures.
  • There is concern that Kenya’s failure to accede to IMF demands could cause a further downgrading of its credit rating with serious ramifications on the country’s financial position.
  • Moody’s in February this year downgraded Kenya’s credit rating to B2 from B1, citing pressure from the rising debt burden that currently stands at just over Sh5 trillion.

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Kenya may be forced to triple its borrowing requirements and at a much higher cost if it postpones imposition of the unpopular valued added tax (VAT) on fuel in the wake of ongoing dilution of its public finances, experts have warned.

Rating agency Moody’s says in a new analysis of Kenya’s fiscal position that annual borrowing could hit 20 per cent (Sh1.77 trillion) of the gross domestic product (Sh8.845 trillion) or triple the budgeted deficit of Sh559 billion if fails to implement key reform measures.

This, Moody’s said, would not only be because Kenya won’t be able to raise the Sh71 billion that it seeks to collect from the new fuel levy but also because a souring of relations with the International Monetary Fund (IMF) would weaken the country’s rating in global financial markets – significantly increasing the borrowing expenses.

“MPs’ unanimous vote to roll back on committed reforms weakens the government's fiscal policy credibility, and risks exacerbating one of the sovereign's main credit challenges – namely, its sizeable financing needs in light of the government's recurring fiscal deficits and growing debt burden,” said Lucie Villa, vice president and sovereign analyst for Kenya at Moody’s.

The assessment comes in the wake of Parliament’s decision to amend the VAT law and postpone the new fuel tax that came into effect at the beginning of this month.

Parliament has, in yet another reversal of IMF-driven reforms, refused to amend the law capping lending rates, increasing the likelihood of the IMF pulling out its standby facility that has helped stabilise the country’s monetary position in the past couple of years.

Moody’s said that maintenance of the lending rate cap would amount to reversal of a commitment that Kenya made to the IMF at the time the stand-by precautionary facility was extended to this month.

“The removal of interest rate controls and tax base broadening were among Kenya's key commitments to the International Monetary Fund (IMF) under the auspices of its Stand-By Arrangement (SBA), which expires in mid-September and is currently under review for an extension.’’ The IMF had earlier in the year suspended the facility, with Sh100 billion (out of the initial Sh150 billion external shocks precautionary loan) outstanding but later reinstated it to September 14, pending review of relevant policies.

There is concern that Kenya’s failure to accede to IMF demands could cause a further downgrading of its credit rating with serious ramifications on the country’s financial position.

Moody’s in February this year downgraded Kenya’s credit rating to B2 from B1, citing pressure from the rising debt burden that currently stands at just over Sh5 trillion.

Ms Villa said the latest revenue rollback will aggravate Kenya's already high financing needs to slightly above 20 per cent of GDP in 2018/19.

 

The World Bank has offered a similar assessment in its latest Country Policy and Institutional Assessment (CPIA) Africa report, which measures the progress of sub-Saharan African countries in strengthening the quality of their policies and institutions.

Kenya has dropped in the ranking in a shift that has been attributed to a weakening of fiscal policies as well as debt management. Kenya’s CPIA score now stands at 3.7, down from last year’s 3.8. The ranking drops Kenya to positon three alongside Cape Verde and Tanzania as Senegal jumped to second positon after Rwanda. Kenya was ranked second last year.

Kenya’s drop in ranking has been attributed to a weakening of its economic management arising from inadequate fiscal frameworks and rising debt risks.

It was among the few “non-resource rich countries” that experienced a weakening performance, according to the World Bank. The report offers a scathing assessment of the National Treasury’s debt management office describing it has having a weak capacity to handle the ballooning national debt.

“Without adequate staff and clear leadership and accountability, the [debt management] unit faces challenges in carrying forth its mandate. Reforms to strengthen the debt strategy have been pending implementation for several years,” the World Bank says. “Although on paper the Medium-Term Debt Management Strategy provides a framework for prudent debt management, it is not clear that it is being followed, considering the sovereign debt trajectory that has kept increasing at a sustained pace over the past years,” the report says.

The Bank further notes that Kenya’s publication of the monthly debt bulletins on the Treasury’s website appears not to be regularly updated, lowering the transparency of the debt movements.

Kenya last year managed to narrow the fiscal deficit to seven per cent of GDP in fiscal year 2017/18 from nine per cent the year before, although its track record of compliance with the Fund's targets is mixed.

At 7.1 per cent deficit, Kenya is still way above the three per cent desired under the east African monetary union convergence criteria. Besides the foreign exchange reserves that stands at nearly six months of import cover, the deficit was the only other condition that the Treasury managed to hit in the year that ended in June 2017.

Moody’s projection of higher borrowing to the tune of Sh1.77 trillion raises doubts on the ability of the Treasury to achieve the targeted fiscal deficit of 5.7 per cent the year ending next June.

girungu@ke.nationmedia.com and palushula@ke.nationmedia.com

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