VAT fuel price crisis: Why IMF prescriptions cause governments problems

IMF Managing Director Christine Lagarde speaks during a press conference on "Joint Action Against Tax Fraud and Money Laundering-Transparency at the Global Level," during the IMF and World Bank Group 2016 Spring Meetings in Washington, DC. [AFP PHOTO / MOLLY RILEY]

The deal that Kenya signed with the IMF in 2013 in order  for the country  to enjoy the  fund’s  credit facilities entailed doing away with tax exemptions  in order to increase revenues, reduce budgetary deficits and ultimately reduce foreign debt.

The 16 per cent VAT effected on all petroleum products falls within this agreement since the products had been “un-VATble.”

IMF conditions have generally been criticized for being anti-poor because they invariably force governments to cut down on social spending while increasing taxes.

In January 14, 1998, the Los Angeles Times reported how IMF misadvised Indonesia by giving counterproductive recommendations, plunging the country into crisis in banking industry.

"The International Monetary Fund has conceded that some of its earlier prescriptions for rescuing the Indonesian economy backfired and inadvertently may have contributed to the collapse of the banking system here," reads an extract from the Los Angeles Times.

Similar flaws have been noted in West African countries, especially with regards to handling healthcare system. A study titled "How years of IMF prescriptions have hurt West African health systems" conducted by Committee of Abolition of Illegitimate Debt reveals that Ghana and Mali fell victims of counterproductive policies of IMF.

When Mali had reached 3 percent of GDP as their budgetary allocation for healthcare in 2005, IMF advised them for a reduction and this had adverse effect when Ebola hit the country in times of inadequate facilities.

 In the same period, Ghana lost a number of doctors due to poor remuneration as the country heeded to IMF's advice on curbing recurrent expenditure.

In the early 1990s Kenya was forced to charge fees on public universities and government hospitals in order to meet IMF/World Bank conditions.

Alternatives for Kenya

Amid public outcry and the resultant spike in cost of living, the VAT on petroleum products contained in Finance 2018 is economically and politically explosive.

But does the government have options to fill in the Sh70B hole likely to be punched in the budget if the VAT law is postponed? There are alternatives.

Sealing leakages of corruption

The government can seal loopholes where public funds are siphoned through irregular payments. An instance is where taxpayers lost Sh3.3B in irregular land compensations by the National Lands Commission for the Standard Gauge Railway.

A fresh report making headlines has exposed another SGR compensation racket for land between Tuala and Ngong which has  pumped up to Sh15b while a fresh valuation puts the real cost at Sh7.5b.

Another glaring evidence of wastage and misappropriation is the controversial Sh1.5B Ruaraka land compensation. This list is inexhaustible. Remember the Sh10b National Youth Service Scandal?

Cutting down unnecessary cost

A recurring cost-cutting argument has been the reduction of salaries and perks for MPs who are paid close to a million shillings. The reasoning is that elected representatives are in office to serve but not to make money having demonstrated they are not poor going by the millions of shillings they use in their campaigns.

Tax collection efficiency

Kenya Revenue Authority can increase its efficiency. Just a month ago, the Standard reported that the KRA lost Sh100b in tax evasions for imported goods in six months.