Protests over new taxes unnerve global investors

Investors are growing increasingly concerned about continued anti-government protests in Kenya amid legal hurdles in implementing new tax measures aimed at helping the country avoid a sovereign debt default.

Kenya’s opposition is planning a new wave of demonstrations from Wednesday through Friday to protest, among other grievances, the worsening cost-of-living crisis, exacerbated by tax measures to fund President William Ruto’s first budget.

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Economists say the expected turmoil is likely to reduce circulation of liquidity, hurt investments and put jobs on the line in a country that is struggling to create decent jobs for its growing population of skilled youth.

However, global analysts see the full implementation of the pain tax, which is expected to raise Sh211 billion in new revenue as necessary in “putting Kenya’s public finances on a sustainable footing”.

“The protests and the suspension of a range of tax hikes have made the Kenyan government’s task of avoiding a sovereign default even more difficult,” Jason Tuvey, vice president of emerging market economics at UK-based Capital Economics, wrote in a note on Kenya.

It remains to be seen whether these are bumps in the road to the government’s austerity plans or permanent roadblocks. Either way, investors have been spooked by recent developments with spreads on dollar bonds widening by 50 basis points over the past week or so as the path to avoiding default continues to narrow.”

Chief Justice Martha Comey appointed three justices on Tuesday to hear and decide several petitions challenging the 2023 Treasury Act that the Supreme Court stopped implementing on June 30.

The stand will be occupied by Judge David Maganga of the Commercial Court as Presiding Judge and Judges Christine Mioli and Lawrence Mugambi.

Attempts by Treasury Minister Nguguna Ndongo to lift the suspension, who ruled that Kenyans could be subject to unconstitutional law if the petitions were successful, were rejected by Judge Mugur Thandi.

At the same time, Attorney General Justin Motori has taken to the appeals court to seek the freeze lifted, arguing that the suspension affects government operations.

Among the cases the court will deal with first is a motion filed by Busia Senator Okiya Umtata seeking to punish the managing director of the Energy and Petroleum Regulatory Authority (EPRA), after the agency adjusted fuel prices despite receiving the court order.

Epra announced record fuel prices after the 2023 Finance Act doubled the Value Added Tax (VAT) on the commodity to 16% from 8.0%.

The court will also decide on requests by various parties to consolidate motions.

The Roto administration is counting on full enforcement of tax measures to narrow the fiscal deficit from 5.8 percent of GDP last fiscal year to 4.4 percent this year.

A lower fiscal deficit, amid increased mobilization of tax revenues, is expected to ease pressure on the Treasury to borrow beyond Sh663.50 billion in the current year ending June 2024, down from the estimated Sh824 billion in the year ending June.

The Central Bank of Kenya (CBK) said the government has little room to cut spending, meaning the success of fiscal consolidation in the country hinges largely on new taxes, which include a housing tax of 1.5 percent on workers’ monthly wages.

(On the new taxes), we’re just concerned about the impact of our higher debt levels. I know, sometimes, we think there’s a lot to cut in spending, but you’d be surprised to know… There’s very little room for sharp spending cuts, and we don’t want to cut development spending, CBK Governor Kamau Thug said on Monday.

“So it is very important that we mobilize revenues so that we reduce borrowing to stabilize our debt in the future.”

The Central Bank of Kuwait, the government’s fiscal agent, is staring at a 59.83 percent growth in external debt servicing costs to Sh622.47 billion, payments that global analysts fear Kenya will struggle to meet amid soaring interest rates in international markets.

It includes the repayment of Sh258.24 billion in first international bonds.

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“We argued a fortnight ago that the 2023/24 budget – which aims to narrow the budget deficit through a set of tax hikes – if fully implemented would go a long way towards putting Kenya’s public finances on a sustainable footing,” Tovey wrote.

But we also highlighted the risk that the (tax) measures could fuel unrest. This has been achieved over the past week, with protests taking place across major cities.”

Many businesses in most parts of the country, including Nairobi’s central business district, remained closed for the better part of Wednesday last week during the violent protests, which left more than a dozen civilians dead.

The UN human rights office said last Friday that it was concerned about “widespread violence and allegations of unnecessary or disproportionate use of force, including the use of firearms, by police during protests in Kenya.”

“Observation of protests should seek to facilitate peaceful assemblies, and any use of force should be guided by the principles of legality, necessity, proportionality and non-discrimination. Firearms should never be used to disperse protests,” the international organization said in a statement.

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