The Sh263.8 billion programme between Kenya and the International Monetary Fund (IMF) is under threat after the two leading presidential candidates in the August 9 polls rejected the Bretton Woods institution-driven proposals contained in the Budget.
Both Deputy President William Ruto and ODM leader Raila Odinga have vowed to reject the proposal to introduce a 16 per cent value-added tax (VAT) on wheat flour, maize flour and cassava flour, which they say has made the Budget unfavourable to ordinary citizens.
IMF had expressed fears that with the country headed for elections, implementation of the 38-month programme would be frustrating.
“With general elections scheduled for August, tax policy is further complicated by resistance in Parliament to tax increases,” said IMF in its second review of the programme.
The Washington-based institution also criticised the Kenyan courts for taking “a more activist approach, striking down attempts to introduce a minimum alternative tax and even the regular inflation adjustment of excise rates.”
As part of its recommendation to help the government raise more revenues and wean itself from its high debt appetite, the IMF advised Kenya to reduce tax expenditures by removing some products from the zero-rating status.
“The government will continue to rationalise tax expenditures and retain those whose intention is to promote investments and ensure sustainability and value for money from our resources,” said Treasury Cabinet Secretary Mr Ukur Yatani in his Budget speech on April 7.
He said there was a significant decline in the level of tax expenditure from 5.17 per cent of Gross Domestic Product (GDP) in 2017 to 2.96 per cent as a per cent of GDP in 2020. “We shall continue to review the existing tax expenditure to boost the tax revenues,” said the CS.
Consequently, the cost of bread, ugali, chapati and mandazi is likely to go up should the National Assembly approve the proposal to introduce the 16 per cent value-added tax on the supply of wheat flour, maize flour and cassava flour in a bid to reduce tax expenditures.
However, both political camps - the Kenya Kwanza Alliance and Orange Democratic Party, a part of the Azimio la Umoja One Kenya Alliance - have vowed to reject the tax proposals as the Treasury moves to collect an additional Sh50.4 billion to fund a Sh3.32 trillion budget.
Speaking at a Kenya Kwanza rally in Kiambu County on April 10, Dr Ruto and his allies poked holes in the Finance Bill, 2022, arguing it did not reflect the current economic situation when Kenyans are grappling with a high cost of living.
They vowed to galvanise their MPs in the National Assembly to reject the Bill when it gets to the floor of the August House.
“In the recently read budget, some items like water, bread and flour will go up but we want to say that the Bill will be shot down in parliament,” said Ruto. He added that should the Bill sail through, they would change it three months after ascending to power by bringing a supplementary budget.
On Wednesday, ODM Chairman John Mbadi said members who served in the Budget and Appropriations Committee had been instructed to shoot down proposals in the Finance Bill seeking to increase the price of essential goods such as maize and wheat flour, milk and bread.
“Our members in the Finance committee have briefs that any proposal that would make any basic or essential commodity more expensive than it is today be done away with totally.
The government has for instance proposed to remove unga (maize flour) from zero-rating and this will definitely be rejected by us because this hurts the consumer,” said Mr Mbadi, who had earlier accused Ruto of playing populist politics.
In May, IMF is expected to complete the third review of a Sh256 billion credit facility it has with Kenya and will be looking at the country’s performance in the six months to December 2021.
Successful completion of the review will unlock some $244.9 million (Sh28.5 billion) from Treasury’s account at the Central Bank.
With President Uhuru Kenyatta’s term expected to end in August, the IMF expects the next administration to carry on with the plans it has with the current regime, including increasing tax revenues and reducing non-essential spending.
Treasury projects to increase the tax collection by nearly a fifth to Sh2.14 trillion in the next financial year, with a big chunk of the taxes coming from valued added tax (VAT), the 16 per cent sales tax that is levied on nearly all goods and service sold in the country, including textbooks.
In the current financial year ending June, the Kenya Revenue Authority (KRA) is projected to collect Sh1.8 trillion in taxes and other levies.