Tax pain signal in new Sh78bn IMF loan deal

This refers to imposing new taxes through amendments to tax laws, prosecuting tax evaders and fraudsters, and cracking down on traders and workers in the informal sector.

The Washington, D.C.-based bank approved new payments worth 78.3 billion shillings ($606.1 million) to Kenya on Thursday, even as it called for new tax reform measures to address debt vulnerabilities.

Kenya’s mounting debt has meant it has to commit more than half of its tax revenues collected annually to pay down public debt, leaving little money for projects.

The IMF board’s decision paved the way for the cash-strapped government to access a multi-billion dollar loan tranche.

The Fund’s support is seen as critical for Kenya to overcome its current liquidity challenges, mainly due to high debt interest payments.

“Performance has weakened since the last reviews of these arrangements. Although foreign exchange reserve accumulation and inflation were better than expected, fiscal performance was well below targets. Weak revenue and export performance led to This led to increased debt vulnerabilities while the implementation of many reforms was delayed.

In this context, a difficult path of adjustment awaits us. A credible fiscal consolidation strategy remains a key element in addressing debt vulnerabilities while protecting social and development spending. Reforms aimed at making the tax system more efficient, fair and progressive as well as enhancing accountability, transparency and efficiency of public finances will help mobilize political and societal support for the reforms.

The IMF approved new disbursements despite Kenya’s failure to meet revenue and fiscal deficit targets in December last year and in June 2024, with the government promising to reduce the deficit and appetite for borrowing while increasing revenues.

However, the approved amount is less than the Sh113 billion expected by the Treasury, indicating a decline in the combined seventh and eighth review of the programme.

However, the IMF kept the total expected disbursements until the end of the program in April next year at 466.3 billion shillings ($3.61 billion).

The government prepared the first supplementary budget for the 2024/25 fiscal year, cutting overall spending for the period in an attempt to save the IMF program after the finance bill was rejected.

Treasury Minister John Mbadi has already hinted at new tax proposals in the near term, including reintroducing some provisions of the rejected bill but not reintroducing the legislation in its entirety.

The Treasury Department is targeting producers of products such as milk, bread and cornmeal in a review that would deprive companies of billions in tax refunds while leaving retail prices of goods unchanged.

The products will remain VAT-exempt (VAT exempt), but their producers will not have the opportunity to request refunds to recover input VAT.

“If there’s one thing I’m passionate about it’s the tax expense (refunds). I know a lot of people who say zero tax is cheaper than relief, and I agree with that, but the benefit doesn’t pass on to consumers. The reality is that when you allow these labeled goods Zero, these people will demand money they shouldn’t even be claiming: “You will hear some say you shouldn’t even hire bakers, you should hire accountants to cook your books and go to the KRA (Kenya Revenue Authority) to get their money,” Mbadi said last month. “.

The government lost Sh119.9 billion in 2022 on zero-rated goods and services meant for domestic consumption.

In order to support revenues, Kenya has deepened its campaign against tax fraud, and is expected to be more aggressive after the withdrawal of the finance bill, which included a series of tax increases.

KRA has begun integrating its system with banks, money transfer companies and payment service providers such as M-Pesa in new efforts to weed out tax evaders and raise revenues by billions of shillings.

It also seeks to broaden the tax base and expand its reach into more small businesses and the informal sector to raise additional revenues.

The government has been caught between the competing demands of hard-pressed citizens and lenders such as the International Monetary Fund, which are urging it to cut the deficit to get more financing.

After dropping the finance bill, the government reduced spending and expanded the fiscal deficit.

Officials indicated that Kenya will seek another program with the International Monetary Fund when the current program ends next April.

However, imposing new taxes increases the risk of social unrest.

The IMF has asked the government to be prepared to advance alternative reform measures even when it is required to communicate effectively the desired outcome of the new proposals.

“Given the high risks surrounding the fiscal strategy, policymaking must be flexible. Contingency planning remains critical, with policies adapting to evolving outcomes to protect stability and ensure continued achievement of program objectives,” Ms Gopinath added: “Clearly articulating the necessity of reforms Its benefits are crucial.”

Despite missing revenue targets, the IMF highlighted tailwinds for Kenya, including the resolution of the massive 258.3 billion shillings ($2 billion) Eurobond issue, noting that this had revived market confidence, supported shilling stability and facilitated Faster revenue accumulation. Foreign exchange reserves.

The IMF expects Kenya’s real GDP to grow by 5.0 percent in 2024 and in the medium term, with inflation expected to hover around 5.0 percent during this period, maintaining the government’s target range of 2.5 to 7.5 percent.