Treasury jitters as debt gobbles up 84pc of tax in two months

Treasury CS Njuguna Ndung'u. [Wilberforce Okwiri, Standard] Kenya spent 84 per cent of tax collections in the first two months of the current financial year to repay its creditors, pointing to an elevated risk of debt distress, it has now emerged. Debt servicing costs amounted to nearly Sh267 billion in July and August against a record Sh317.58 billion in tax receipts, the latest Treasury data shows. This came as the Treasury warned that the slowing economy and global factors are pushing Kenya on the fringe of debt distress. "The debt sustainability analysis shows that Kenya's public debt remains sustainable as a medium performer in terms of debt carrying capacity," said Treasury in the draft 2023 Budget Review Outlook Paper published yesterday. "However, there is a high risk of debt distress as a result of global shocks, leading to a slowdown of economic growth." Separate Treasury data published Friday in the Kenya Gazette indicates that for every Sh100 netted by Kenya Revenue Authority (KRA) in the last two months, an average of Sh84 went into repaying debts procured from local and foreign creditors. Kenya's sovereign loan repayments have been rising faster than tax revenue in recent months, signalling the country could be headed for a fresh debt crisis. The lagging revenues against the pending urgent debt obligations highlight mounting concerns about the strength of the economic recovery and the government's ability to sustainably service upcoming debt repayments, including the $2 billion (Sh288 billion) Eurobond. "To reduce debt vulnerabilities, the government has committed to a fiscal consolidation programme and optimising the financing mix in favour of concessional borrowing to finance capital investments," said Treasury. "Additionally, a steady and strong inflow of remittances and a favourable outlook for exports will play a major role in supporting external debt sustainability." The William Ruto government is also betting on the new managers at KRA to ramp up collections to support debt servicing alongside the daily running of crucial programmes such as health and education or building new roads. KRA under the new Commissioner General Humphrey Wattanga has announced a tax amnesty for taxpayers who have accrued interest and penalties on their tax debt up to December 31, 2022. The amnesty will run from September 1, 2023, to June 30, 2024. Repayment headache Broadly, the government is confronted with a Sh1.25 trillion debt repayment headache in the current financial year in a move expected to pile pressure on the taxman to raise funds for servicing public debt. "The economy faces two extreme constraints: financing constraints as tax revenues generated cannot finance the development we wish to have, and on the other extreme we have limited headroom for debt," said National Treasury Cabinet Secretary Njuguna Ndung'u. "We are choked with inherited debt that must be paid." There have been concerns that rising debt servicing costs are squeezing funding for economic development, hindering the Kenya Kwanza administration from implementing its development programmes. The Kenya Shilling hit an all-time low against the dollar yesterday, setting up the government for further debt servicing distress. According to Central Bank of Kenya (CBK) data, the shilling exchanged at an average of 146.9059 against the dollar. With the external financing environment likely to deteriorate further as global interest rates and debt levels rise, and as commitments to development assistance dwindle, KRA is expected to come into focus on how it raises more domestic resources to finance the Ruto government's development agenda and money for repaying public debt. Provisional data by CBK shows that Kenya's debt stood at Sh9.686 trillion as at May this year. President Ruto is banking on a host of new systems and radical changes at KRA to help raise revenue and bring more Kenyans into the tax bracket. Even then, the taxman faces the gruelling task of raising massive revenues in the face of a slowing economy. The government's just-released draft Medium Term Revenue Strategy proposes a plethora of taxes ostensibly to raise tax revenue to GDP ratio from 13.5 per cent in the 2022-23 financial year to 20 per cent by the end of the 2026-27 financial year. However, experts have cautioned that raising taxes might not have the intended impact of increasing revenues and that the government should instead focus on growing the tax base. For example, they say the government should consider reducing taxes to boost businesses and Kenyans' spending power.

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