IMF warns Kenya against budget cuts, says new tax proposals not sufficient

The International Monetary Fund (IMF) has cautioned the Kenyan government against making big cuts on development spending, citing that it could slow down economic growth and make it harder to manage debt.

In a detailed report highlighting Kenya's economic status, the IMF listed reasons for approving the Ksh.78 billion loan for Kenya during its seventh and eighth reviews that occurred on Wednesday, October 30, 2024.

The Fund acknowledged that Kenya needs to strike a balance between introducing new taxes to raise revenue while at the same time managing debt levels. 

IMF also lauded Kenya for implementing austerity measures after the controversial Finance Bill 2024 was withdrawn in a bid to cover the Ksh.346 billion deficit.

However, the Fund cautioned that reducing the budget for development expenditure could harm existing projects which would then stall.

Also, the government may incur penalties and fees due to the stalling of the projects; hence leading to the said projects costing more than the original amount.

"Staff has cautioned against deep cuts in development spending, bringing domestically-financed development spending to the lowest level in the past two decades, that may not generate the envisaged savings should existing projects be affected due to the accrual of penalties and fees nor improve debt dynamics due to negative growth effects," the report read in part.

"With development spending accounting for about 60 percent of the unfunded spending carryover from FY2023/24, clearing this through further cuts would affect existing projects and would not be sustainable."

Similarly, IMF addressed the recent tax proposals drafted by Treasury Cabinet Secretary John Mbadi that seeks to reintroduce some of the measures contained in the repealed Finance Bill 2024.

Some of these measures include withholding tax, Economic Presence tax, taxing interest on infrastructure bonds among others. 

According to IMF, the new measures won't be sufficient to offset the fiscal deficit and avert the current economic pressure.

To address this, IMF pointed out that President William Ruto's administration should implement a Supplementary II budget for the Financial Year 2024/25 in order to provide additional fiscal measures if necessary.

IMF noted that the government finds itself in a tough predicament in attempting to introduce tax measures and carefully avoid negative pressure from the public. 

"Resuming efforts to widen the tax base and strengthen tax compliance as envisaged under the Medium-Term Revenue Strategy (MTRS) would need to be supported by adequate economic impact assessment of the policy choices, including on equity, and their political and social feasibility, while also further streamlining recurrent spending and enhancing its efficiency," the IMF stated. 

The IMF also noted that Kenya remains at high risk of debt distress as public debt increased to 73.1 per cent of Gross Domestic Product (GDP) in 2024, adding that the country faces large external and domestic obligations owing from the debt levels.

"Kenya has one of the largest interest bill to revenue ratios in the region," IMF added.