IMF warns Kenya against budget cuts impacting education, health and KRA
By Lucy Mumbi |
The IMF has instead recommended that Kenya focus on new revenue measures to stabilise its fiscal position, particularly in light of growing demands on government spending and the nation’s significant debt burden.
The International Monetary Fund (IMF) has cautioned Kenya against drastic budget cuts in sectors such as health, education, and the Kenya Revenue Authority (KRA), warning that such reductions could hamper essential services and hinder economic growth.
The IMF has instead recommended that Kenya focus on new revenue measures to stabilise its fiscal position, particularly in light of growing demands on government spending and the nation’s significant debt burden.
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The IMF notes that Kenya faces new spending demands, including leftover costs from the 2023/24 financial year and the expenses tied to collective bargaining agreements (CBAs) with government workers. Given these added pressures, the IMF sees major budget cuts as difficult to implement.
Instead, the IMF recommends that Kenya focus on new revenue-generating measures as a better way to achieve fiscal stability.
"The withdrawal of the Finance Bill, 2024 has necessitated spending compression to contain the fiscal deficit. While spending rationalisation will be important, including restoring public trust and tax morale, Kenya's elevated debt vulnerabilities and large debt service obligations call for fiscal consolidation underpinned by additional revenue mobilisation to fund priority social and developmental spending needs while also ensuring debt sustainability," the IMF said in its staff report.
CBA agreements
The IMF’s concerns follow spending reductions approved in the first 2024/25 parliamentary budget. However, the fund suggests these cuts may only serve as temporary measures, likely to be reversed by required CBA agreements with security personnel, teachers, and civil servants.
The cost of meeting these obligations could offset the intended savings from wage adjustments, and funding for universities and vocational training will also need to be incorporated.
The IMF further warns that deep cuts in development spending, particularly those that reduce domestically financed development efforts to their lowest level in two decades, could be counterproductive.
“Staff has cautioned against deep cuts in development spending—bringing domestically financed development spending to the lowest level in the past two decades—that may not generate the envisaged savings should existing projects be affected due to the accrual of penalties and fees nor improve debt dynamics due to negative growth rates,” the IMF said.
The warnings come as Kenya seeks to reintroduce some abandoned tax measures from the Finance Bill, 2024, through the proposed Tax Laws (Amendment) Bill, 2024.
Key measures include an excise duty on alcoholic drinks based on alcohol content, increased levies on telephone and data services, and adjustments to VAT zero-rating and exemptions. The anticipated revenue from these tax initiatives is expected to be about Sh137 billion, or 0.9 per cent of GDP.
Still, the IMF considers these tax measures insufficient to fully address spending pressures, predicting the need for a second supplementary budget for 2024/25, expected by January 2025.
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