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Kenya Risks Deficit Target After Bowing to Anti-Tax Protests - BLOOMBERG

JUNE 20, 2024

BY David HerblingBloomberg News

(Bloomberg) -- Kenyan authorities bowed to public protests and pledged to walk back a raft of tax proposals, jeopardizing President William Ruto’s plans to reduce the nation’s budget deficit.

Proposed levies on the purchase of bread, motor vehicles, mobile-money transfers and banking services will be shelved, Kimani Kuria, the head of parliament’s finance and planning committee, said in a statement on Tuesday. The concessions followed anti-government demonstrations in the capital, Nairobi, that led to skirmishes with the police and the arrest of more than 300 people.

The demonstrations against the measures, known as the Finance Bill, spread to the port city of Mombasa on Wednesday.

Kenya’s government has proposed a raft of aggressive tax measures aimed at generating an additional 302 billion shillings ($2.4 billion) of revenue in the fiscal year that begins on July 1. It’s targeting a budget shortfall equivalent to 3.3% of gross domestic product, compared with 5.7% in the current fiscal year.

Kenya is trying to stabilize its finances to fulfill a key objective of an International Monetary Fund program. Earlier this month, the authorities reached a staff level agreement with the Washington-based lender to unlock more funding subject to the state implementing fiscal adjustments.

“Balancing the budget in accordance with IMF directives presents a challenge for the government, which must navigate the intricate interplay between heavier tax burden and socio-political pressures,” Jervin Naidoo at Oxford Economics Africa said in a note. “The government is now compelled to reassess these taxes, raising concerns about potential repercussions from the IMF.”

To plug the gap authorities may need to resort to borrowing more than budgeted for, particularly from domestic investors, Omobola Adu, an economist at BancTrust & Co., said in an emailed response to questions. The budget shortfall may end up being about 5% of GDP in the coming fiscal year because of lower revenue collection and spending pressures, he said.

Alternative taxes may be introduced to replace those that have been scrapped. Measures suggested by the parliamentary finance committee include increasing a levy on fuel used to fund road maintenance, as well as hiking a tax on imports that finances the operations of a Chinese-built railway.

“The staff level agreement reached last week was pegged on front-loading revenue mobilization,” Churchill Ogutu, an economist at IC Asset Managers, said by phone. “There may be a push for some corrective measures.”


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