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IMF fears Sh262b programme at risk over elections

By Dominic Omondi | April 4th 2021
Hon. Amb. Ukur Yatani Kanacho Cabinet Secretary for National Treasury and Planning. [Wilberforce Okwiri, Standard]

The International Monetary Fund (IMF) has expressed concerns that the heightened political activities as the country prepares for a possible referendum and General Election might scuttle Kenya’s belt-tightening plans. 

Flagging the buildup of political activities as one of the risks to the Sh262 billion programme that its Executive Board approved on Friday, the IMF emphasised that it is only by adhering to the agreed austerity path of increasing revenues and cutting non-essential spending that Kenya would be able to overcome the spending temptations that accompany the electioneering period. 

Kenya is set to receive Sh79 billion as part of the Sh262 billion before the end of this Financial Year, while the rest will be released thereafter after every six months after the review of the country’s performance.

The IMF noted that the programme provides a strong signal of support and confidence, but was not without its risks including “from uncertainty about the path of the pandemic, and steadfast pursuit of the programme objectives will be essential, also considering the upcoming political calendar. “

“The Kenyan authorities have demonstrated strong commitment to fiscal reforms during this unprecedented global shock, and Kenya’s medium-term prospects remain positive,” said the IMF in a statement yesterday. 

In Kenya, heightened political activities, especially during the pandemic have been known to make investors jittery. A lot of them have taken on a wait-and-see approach, a situation that has denied the economy much-needed liquidity.

But the electioneering period has also seen increased expenditures as government officials seek to woo voters with projects or even handouts.

Expansion of the executive

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Kenyans are currently faced with two political processes — a possible referendum where citizens vote for the amendment of the 2010 Constitution.

There is also a General Election next year.

Already, an analysis by the Parliamentary Budget Office (PBO) has shown that implementation of the constitutional changes will see taxpayers shoulder an additional Sh20 billion annually.

An analysis on the estimated cost of the Constitution (Amendment) Bill, 2020 by the PBO indicates that the Sh19.5 billion will be taken up by the additional constituencies and an expansion of the Executive among other changes that will result in a bloated budget.

The establishment of the youth commission might not come at a hefty cost in its first year, with PBO assuming the amendments will be completed before 2022.

However, in three years after it is rolled out to counties, the cost of having the commission will rise steeply.

Yesterday, Irungu Kang’ata, the former Majority Whip in the Senate, who had placed the initial request for the simulation, claimed the cost was too heavy for a country that would still be battling Covid-19.

The simulation was presented to the Senate Standing Committee on Justice, Legal Affairs and Human Rights yesterday.

Breached conditions

“The Sh20 billion is enough to provide free lunch for every primary school pupil in Kenya. This would boost school attendance and nutrition.

"Whereas there are some BBI suggestions that are worth considering, the budget implication seems too huge for a poor country such as Kenya,” said Kang’ata.

The last time Kenya had a programme with the IMF, it ended in acrimony after she breached some of the conditions including keeping the debt levels down.

Part of the reasons for the breach was a spike in expenditures in the run up to the 2017 elections.

“Public debt has been increasing at a relatively fast pace since 2013, with slippages in the run-up to the 2017 elections pushing debt up to a projected 60.7 per cent of GDP by June 2018,” said IMF in a staff report in 2018.

Besides the impact of the extensive drought, the IMF cited the “election-related expenditures” as some of the factors that contributed to the country “missing the performance criteria on the primary fiscal balance for end-December 2016 and end-June 2017.”

In the Financial Year ending June 2017, the budget deficit — the difference between what the government has collected in tax revenues and what it spends — increased to 8.4 per cent of the gross domestic product (GDP).

There were a lot of election-related expenditures including the government putting aside some money for the importation of maize, giving Mumias Sugar Sh1 billion bailout when it needed more than Sh10 billion.

All these and many other expenditures saw the government’s fiscal balance balloon. 

As a result, the 24-month precautionary facility that Kenya had signed with the IMF on March 14, 2016 was terminated.

It was a Stand-By Arrangement (SBA) and an arrangement under the Standby Credit Facility (SCF), with a combined value of Sh300 billion.

Kenya never got to use the facility as it was just like insurance, but the consequence of not having the arrangement in place would manifest itself later on when the country went to the international capital market to issue a Eurobond.  

Besides the political risks, the IMF is also concerned with the escalating cases of Covid-19 which are likely to depress the economy and make it harder for Kenya to repay its loan. 

President Uhuru Kenyatta’s government has instituted various containment measures against Covid-19, including a dusk-to-dawn curfew aimed at restricting social interactions and thus curbing the spread of the disease that has left a social crisis in its wake. 

Yesterday, National Treasury Cabinet Secretary Ukuru Yatani noted that Kenya had a 38-month programmme on how to recover from the effects of the pandemic. 

“The 38-month programme is an initiative of the Government of Kenya targeted at stabilising the economy and supporting Kenya’s economic recovery and inclusive growth plans,” said Yatani in a statement. 

He explained that the programme has four key main deliverables including scaling up the Covid-19 response, reducing debt vulnerabilities, structural and governance reforms while addressing the weaknesses of State-owned enterprises (SOES) and strengthening the monetary framework and supporting the financial stability. 

“It (the programme) will also advance the structural reform and governance agenda, including by addressing weaknesses in some state-owned enterprises (SOEs) and strengthening transparency and accountability through the anticorruption framework,” said IMF. 

Kenya will receive Sh79 billion end of the current Financial Year on June 30. The money will come in two tranches with the Sh33.7 billion being released immediately after the Executive Board of the IMF approved the loan. The remaining Sh44.2 billion will be released by end of June.

The approval of the facility comes at a time when the Kenya Revenue Authority (KRA) announced that it had recorded the highest revenue performance rate since the beginning of the Financial Year 2020/2021 after collecting Sh144.6 billion in March 2021 and surpassing the revenue target.

“This is an outstanding performance compared to the month of February when KRA collected Sh127.7 billion registering a performance rate of 105.1 per cent to surpass its February revenue collection target,” said the KRA Commissioner General Githii Mburu. 

As part of IMF’s condition that Kenya improves revenue collection, the National Treasury was forced to end the tax relief measures that had cushioned households and firms adversely affected by the pandemic. 

The measures saw those earning Sh24,000 and below exempted from paying Pay as you earn (PAYE) while the rest saw their PAYE reduce from 30 per cent to 25 per cent.

Corporate income tax which is charged on large’s company’s profits was also reduced to 25 per cent from 30 per cent while value added tax went down from the standard 16 per cent to 14 per cent. 

Except for the measure on the exemption of those earning below Sh24,000 from being charged PAYE, all the other measures have reversed.  

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