Kenya’s Budget To Weigh Revenue Growth Against Public Outrage

NAIROBI, Reuters: Kenya’s finance minister will present a budget on Thursday aimed at boosting revenues to service debt while avoiding tax measures that triggered the kind of deadly protests that rocked East Africa’s biggest economy last year.

President William Ruto’s administration has been struggling to narrow the fiscal deficit and govern under a heavy total debt-to-GDP ratio of around two-thirds, well above the 55% level considered a sustainable threshold.

The government is seeking new sources of funding after last year’s countrywide protests forced it to pursue austerity measures and scrap planned tax hikes worth more than 346 billion Kenyan shillings ($2.7 billion).

“Kenyans cannot bear more tax,” Finance Minister John Mbadi said on Wednesday. “For the first time, we have not added taxes in the current finance bill as has been the case before.”

Critics have accused the government of using the budget to increase indirect taxes and infringe on privacy by empowering the tax authority to spy on people’s bank accounts and mobile money transactions. But Mbadi said on Wednesday the revenue authority must be empowered to collect taxes to run the country.

In place of hiking individual taxes, Mbadi is looking to widen the tax base, improve compliance and cut spending, said John Kuria, a tax specialist and partner at Kody Africa.

“They understand that people are not very happy, especially with the government and how the taxes are being used,” Kuria said.

Despite government attempts to tighten expenditure and crack down on fraud, “I think we’re still going to have a significant funding shortfall,” he said.

While the proposed budget outlines credible measures to reduce the fiscal deficit, the challenge lies in implementation, which Kenya has struggled with historically, said Shani Smit-Lengton, Senior Economist at Oxford Economics Africa.

This often results in mid-year revisions through supplementary budgets, which erode fiscal credibility, Smit-Lengton told Reuters via email.

Kenya said in March it had applied for a new lending programme from the International Monetary Fund (IMF) after abandoning the final review on the previous IMF programme.

In February it joined a fast-growing club of African nations that have gone to the market to borrow cash to pay off maturing debts in a bid to smooth out liabilities and ring-fence critical expenditures like health.

“This year, the stakes are higher: the government must demonstrate improved budget discipline to bolster its case for a new IMF programme, while also managing public sentiment to avoid social unrest.

“Achieving this balance will be critical to maintaining both investor confidence and domestic stability,” Smit-Lengton said, adding that the government’s target of reducing the fiscal deficit to 4.5% in the next financial year was overly optimistic.