Anti-budget push could yield fruits that poison Ruto, IMF relationship

Mombasa residents hold a peaceful demonstration against the Finance Bill 2024 on June 19, 2024. [Kelvin Karani, Standard]

President William Ruto’s retreat on some tax measures could put him at loggerheads with the International Monetary Fund (IMF).

Although the National Treasury had expected to raise Sh346 billion in 2024/2025, the shelving of some of the proposals in the Finance Bill, 2024, could increase the deficit.

The controversial taxes were meant to enable the Kenya Revenue Authority (KRA) meet its Sh2.9 trillion target and significantly reduce borrowing. It might, however, come up short following the concessions that saw the National Assembly’s Committee on Finance and Planning drop some of the proposals. 

IMF has been pushing the government to grow tax revenues and reduce the Budget deficit.  

Kenyans and organisations, including businesses and civil societies, have in recent weeks pushed the National Assembly to stop passing tax proposals that would stagnate the economy, raise the cost of living and leave Kenyans poorer.

This culminated in street demonstrations in Nairobi on Tuesday and Mombasa on Wednesday. Other countrywide protests are planned for today. 

Among the proposals that have been dropped include the 2.5 per cent annual motor vehicle tax, the 16 per cent Value Added Tax on bread, 25 per cent excise duty on cooking oil, eco-levy on locally manufactured products and excise duty on locally assembled motorcycles. 

The concessions are likely to result in a higher Budget deficit than Treasury had anticipated.

In the 2024/2025 plan, the government has been working with a deficit of Sh597 billion, a highly ambitious figure compared to this year’s deficit, which is expected to be in the region of Sh920 billion when the year closes in about two weeks. 

The IMF had last week given a thumbs up to the Treasury, noting that the new tax measures were necessary as they aimed to grow the tax base and increase revenues.

This, the Bretton Woods institution had noted, would help correct the significant shortfall in revenue collection and deterioration in the primary fiscal balance. 

Increase taxes

The IMF noted that to correct the under-performance in tax revenues, Kenya would need a sizeable and upfront fiscal adjustment, which analysts took to mean as IMF signalling the government to increase taxes. 

“The authorities have taken decisive steps towards fiscal consolidation by introducing several measures in the context of the draft 2024/25 Budget and the 2024 Finance Bill,” said the IMF following a recent review of Kenya’s economic programme. 

“Importantly, the latter (Finance Bill) centres on measures to broaden the domestic tax base, through rationalisation of various tax expenditures, in line with recommendations in the Medium-Term Revenue Strategy.”

Kenya and IMF entered into a $3.6 billion (Sh468 billion) deal in April, 2021, which was aimed at helping Kenya address its debt vulnerabilities and supports its response to shocks including Covid-19 and other global shocks.

IMF had, however, set tough conditions and periodically reviews if the country has met them before releasing funds. 

The latest review, undertaken in April and May, was the seventh under the programme.

It is this deal with the IMF that saw Kenya do away with subsidies on petroleum products, which resulted in pump prices rise to a historical high of Sh217 per litre of super petrol in Nairobi in November.

The conditions also include parastatal reforms that are set to see some state corporations privatised, others merged while some will be shut down.

This has caused jitters that some people within the public service will lose their jobs, reminiscent of the Structural Adjustment Programmes of the 1990s that were also instigated by the IMF.

Despite the pressure, it appears the government could not have ignored the pushback at home. 

Other tax measures that the government dropped include the proposal to allow KRA to have unlimited access to personal data for tax assessment purposes.

The Finance and Planning Committee noted that this could be unconstitutional, with the Constitution guaranteeing the right to privacy.

It, however, noted that there are provisions in the Data Protection Act and the Tax Procedures Act that give KRA such powers in instances where there are grounds to undertake such assessments. 

The committee has also spared Kenyans a hike in the cost of mobile money transactions. The Finance Bill had proposed increasing the excise duty to 20 per cent from the current 15 per cent.   

It has also done away with certain aspects of the Eco Levy. The levy will now apply to all finished goods being imported while locally manufactured goods will be exempt.  

The committee has also exempted locally made motorcycles from excise duty in what it hopes would reduce imports and boost local production.

“The proposals that were brought to the National Assembly and the ones that we are proposing to the house are two (different) documents. The exercise we did on public participation was not in futility,” said Kuria Kimani, the committee chairman on Tuesday. 

Bu there are still many painful proposals that are likely to see the cost of living go up and a pointer that perhaps the IMF could be getting its way, after all. 

The team recommended hiking of the road maintenance levy, which would lead to an increase the cost of fuel and in turn the cost of transportation.

Kenyans have in the past raised concerns about the level of taxation of petroleum products, which account for about 40 per cent of the pump price.  The committee also retained the proposal to increase the Import Declaration Fee to 3.5 per cent from 2.5 per cent.