Kenya warned against re­mov­ing pe­tro­leum tax

Moody’s says move poses dan­ger to coun­try’s is­cal cred­i­bil­ity

Business Daily (Kenya) - - FRONT PAGE -

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 nances, ex­perts have warned. Rat­ing agency Moody’s says in a new anal­y­sis of Kenya’s scal po­si­tion that an­nual bor­row­ing could hit 20 per cent (Sh1.77 tril­lion) of the gross do­mes­tic prod­uct (Sh8.845 tril­lion) or triple the bud­geted de cit 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 nan­cial markets – signi cantly 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 standby 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 Sen- egal 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.

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Geo rey Irungu and Pa­trick Alushula WARN­ING Trea­sury sec­re­tary Henry Rotich.

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