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Kenya’s painful surgery picks up where IMF left off

BUSINESS
By Dominic Omondi | April 10th 2021

A petrol station attendant at Total petrol station in Nakuru. [Kipsang Joseph, Standard]

The International Monetary Fund (IMF) is a doctor of countries in critical condition, some comatose.

And like a good doctor, the global lender studies the patient’s history, starting the treatment where it had stopped. 

Thus, when Kenya sent out a distress call after being severely battered by the Covid-19 pandemic, IMF reminded the government of some unfinished business of slapping petroleum products with a standard valued added tax (VAT) of 16 per cent.

It is an agreement the lender had struck 10 years ago with former President Mwai Kibaki.

Currently, petroleum products such as diesel, kerosene, petrol and aviation spirit attract VAT, or sales tax, of eight per cent.

But even before the Bretton Woods institution made a grand return after a three-year hiatus, Kenyan authorities had already hastily crafted some of the policies that the global lender had earlier recommended, adding to the litany of IMF-driven measures that Kenya has adopted in the last decade.  

In January this year, as talks between the National Treasury officials and IMF over the recently approved Sh253 billion programme continued, the payslips of civil servants were also undergoing some changes due to an extended credit facility (ECF) that started in the second term of President Kibaki.

Civil servants have started contributing for their retirement under a new pension scheme, the Public Service Superannuation Scheme (PSSS). This saw their take-home salary reduced marginally.

“It (PSSS) would reduce government contributions by an equivalent of 22 per cent of GDP in present value terms over the medium term,” said then Finance Minister Uhuru Kenyatta and Central Bank of Kenya Governor Njuguna Ndung’u in a letter of intent to IMF Managing Director Dominique Strauss-Kahn.

When the IMF Executive Board approved the three-year arrangement in January 2011 under the ECF amounting to about $508.7 million (Sh40.7 billion at then exchange rates), one of the conditions for Kenya was to modernise the VAT Act.

Top officials at the Treasury and Central Bank told the IMF that the VAT Act would be reviewed in the 2011-12 financial year to “remove ad-hoc exemptions and zero-rated goods” which had undermined revenue collection.

With the VAT Act of 2013, exemption of the tax on petroleum products was removed.

Motorists were to start paying 16 per cent of VAT on fuel but legislators kept deferring the implementation of this provision until September 2018 when it became operational.

The Finance Bill of 2018 was passed in the National Assembly acrimoniously. However, President Uhuru was forced to half the levy after public outcry.

Kenya thought they had outwitted the IMF. They were wrong.

Even as Uhuru shelved plans to slap motorists with 16 per cent VAT, the government introduced other IMF-driven tax measures.

It proposed punitive taxes on critical products such as mobile money, cash transfers, salaries and kerosene to raise Sh67.5 billion for the 2018-19 financial year.

For most Kenyans, it became painful to withdraw cash from an ATM, transferring money from bank account to mobile money wallet or just depositing a banker’s cheque for school fees after the government proposed doubling taxes on the transactions.

In the third review of the 2011 programme, Kenyan authorities promised the global lender to make the excise tax on mobile transactions operational.

IMF is back with its painful prescription, which will include primarily that Kenya Revenue Authority collect more taxes.

National Treasury Cabinet Secretary Ukur Yatani has promised the IMF to “expand the VAT base by removing the exclusion of excise duty and levies from taxable value of petroleum”.

Should the global prices of crude oil drop, the IMF has advised Kenya to take advantage of this to align VAT to the standard rate of 16 per cent - at a time when fuel prices have already gone through the roof.

But IMF’s legacy in Kenya is not just on fuel, neither has its impact always been negative. It has also helped the country set the ground for improved fiscal discipline.

In its first review of the 2011 programme, the government began the implementation of the Integrated Financial Management Information System (Ifmis), even as it laid the ground for the unveiling of a robust Public Finance and Management Act.

With the country’s borrowing going offtrack, IMF and its sister Bretton Woods institution, the World Bank, pushed for the strengthening of the National Treasury’s Debt Management Office.

It was also the IMF that pushed for the rollout of the Single Account Window Module to enable automation of cash planning and exchequer release process, and consolidation of the government bank account balances at the CBK on a daily basis.

Under pressure from the IMF to contain the run-away spending on salaries and allowances, the government promised to weed out all the ghost workers under the Capacity Assessment and Rationalisation of the Public Service Programme.

It was the IMF that pushed for the appointing of a Tax Reform Commission to simplify the tax code. It was also under IMF’s programme that the Government set up the Tax Appeal Tribunal to exclusively deal with tax-related disputes.

The building of iTax, revamping of the Public Financial Management Act and the roll-out of electronic cargo tracking system were other developments that happened under the oversight of IMF.

In the 2011 plan, the government also amended the Customs and Excise Act to introduce a Railway Development Levy of 1.5 per cent on all imported goods.

The money would be used for the construction of the Standard Gauge Railway from Mombasa to Kisumu.

Even though the railway never reached Kisumu but terminated at Naivasha, Kenyans are still paying the levy.

In addition, landlords have not known peace due to an IMF deal that saw the government unveil a 12 per cent tax on gross rental income.

After the 2017-18 budget, the government began the process of mapping out rental properties in urban areas using technology to ensure landlords pay taxes.

With the IMF pressure, the government also introduced a levy on identity verification queries to the Integrated Registration System.

The merger of parastatals that has been planned for years was started during the 2011 programme. The process, which was financed by the IMF, is set to proceed in earnest in the current arrangement.

Covid 19 Time Series

 

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