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Kenya faces tripled borrowing requirements once petroleum tax is removed

Kenya may be forced to triple its borrowing requirements and at a much higher cost if it postpones imposition of the unpopular valued added tax (VAT) on fuel in the wake of ongoing dilution of its public finances, experts have warned.

Rating agency Moody’s says in a new analysis of Kenya’s fiscal position that annual borrowing could hit 20 per cent (Sh1.77 trillion) of the gross domestic product (Sh8.845 trillion) or triple the budgeted deficit of Sh559 billion if fails to implement key reform measures.

This, Moody’s said, would not only be because Kenya won’t be able to raise the Sh71 billion that it seeks to collect from the new fuel levy but also because a souring of relations with the International Monetary Fund (IMF) would weaken the country’s rating in global financial markets – significantly increasing the borrowing expenses.

“MPs’ unanimous vote to roll back on committed reforms weakens the government’s fiscal policy credibility, and risks exacerbating one of the sovereign’s main credit challenges – namely, its sizeable financing needs in light of the government’s recurring fiscal deficits and growing debt burden,” said Lucie Villa, vice president and sovereign analyst for Kenya at Moody’s.

The assessment comes in the wake of Parliament’s decision to amend the VAT law and postpone the new fuel tax that came into effect at the beginning of this month.

Parliament has, in yet another reversal of IMF-driven reforms, refused to amend the law capping lending rates, increasing the likelihood of the IMF pulling out its standby facility that has helped stabilise the country’s monetary position in the past couple of years.

Moody’s said that maintenance of the lending rate cap would amount to reversal of a commitment that Kenya made to the IMF at the time the stand-by precautionary facility was extended to this month.

“The removal of interest rate controls and tax base broadening were among Kenya’s key commitments to the International Monetary Fund (IMF) under the auspices of its Stand-By Arrangement (SBA), which expires in mid-September and is currently under review for an extension.’’ The IMF had earlier in the year suspended the facility, with Sh100 billion (out of the initial Sh150 billion external shocks precautionary loan) outstanding but later reinstated it to September 14, pending review of relevant policies.

There is concern that Kenya’s failure to accede to IMF demands could cause a further downgrading of its credit rating with serious ramifications on the country’s financial position.

Moody’s in February this year downgraded Kenya’s credit rating to B2 from B1, citing pressure from the rising debt burden that currently stands at just over Sh5 trillion.

Ms Villa said the latest revenue rollback will aggravate Kenya’s already high financing needs to slightly above 20 per cent of GDP in 2018/19.

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