The Covid tax goodies to take away as Yatani fights to pay his debt

Treasure CS Ukur Yatani

Kenya is broke. The country is under pressure to repay billions of shillings in the next seven months, the shilling is weakening, counties are demanding money and foreign exchange reserves are at their lowest in six months.

This follows an economy devastated by Covid-19, reducing the government’s ability to raise funds.

As a result, the Treasury has been forced to dip into the largest amount it has ever borrowed through overdraft facilities with the Central Bank of Kenya, as well as turning to multinational donors for a way out. .

Fearing the worst, the country has approached the International Monetary Fund (IMF) and the World Bank for a loan of 400 billion shillings, and plans to spend some of the money to repay some of its loans to foreign creditors.

No difficulties

Already, the IMF has signaled that the country is at high risk of default given the adverse effects of the pandemic on the economy.

“Zambia has become the first African government to default during the current crisis and debt risks are high in several other frontier markets, including Ghana and Kenya,” said William Jackson, chief emerging economist at Capital Economics. , a London-based economic research consultancy.

However, a debt sustainability analysis carried out jointly by the World Bank and the IMF in May found that although Kenya’s debt position was sustainable – with the country not facing repayment difficulties – the risk of debt distress (default) had risen to “high” due to the pandemic, which has weakened export earnings and economic growth.

In an economic update on the country, the World Bank advised Kenya to reduce unnecessary expenses and operating costs, as well as increase efficiency by leveraging digitalization.

There is also pressure from lenders for Kenya to roll back tax exemptions and concessions to increase revenue. These measures have, however, contributed to mitigating the harmful effects of the confinement made necessary by the pandemic on citizens and businesses.

The Treasury had given up nearly 200 billion shillings through tax relief measures, including the reduction of Value Added Tax (VAT) to 14% from 16%, and the reduction of Pay As You Earn (PAYE ) and corporate income tax at 25% versus 30 percent.

Government officials are now considering rolling back those relief measures that have helped put more money into Kenyans’ businesses and wallets. If it does not reduce its spending, the Treasury will be forced to borrow to meet its expenses.

But as things stand, the country’s debt, as Treasury Cabinet Secretary Ukur Yatani once said, has reached dangerous levels.

The World Bank has asked Kenya to take advantage of debt relief measures to free up cash that would otherwise be absorbed by debt servicing.

But restructuring its loans carries the risk of downgrading Kenya’s credit rating, as rating agencies could interpret such a move as a sign of financial distress.

However, times are tough and the country is now wondering how it will freeze repayment of 80 billion shillings owed to several rich countries without jeopardizing its solvency.

Churchill Ogutu, an analyst at Gengis Capital, said Kenya’s participation in Group of 20 (G20) debt relief would have no effect on the country’s credit rating as it does not involve any private lenders.

But China appears to have thrown the spanner in the works, a situation which has made Kenya reluctant to accept the offer.

“So far, China has played hardball in debt relief talks, insisting that state-owned bank loans should be treated as commercial debt and not subject to the debt relief initiative. the G20 debt (the DSSI),” Jackson said.

With high debt overhang, Kenya, like 26 other countries, is just one step away from joining Zambia in the default territory.

Glimmer of hope

However, despite the gloom, the government can take comfort in the fact that some of the new debt it is taking on includes cheap loans from multilateral institutions such as the World Bank, IMF and African Development Bank. These loans have a longer repayment grace period and attract low interest rates.

Kenya is expected to repay nearly 200 billion shillings to external creditors over the next seven months, according to World Bank data.

But without enough foreign exchange reserves, treasury officials, led by Yatani, were puzzled.

Part of the 250 billion shillings that Kenya will receive from the IMF will most likely be used to repay external loans.

However, the funds will come with strings attached, including the need for Kenya to implement austerity measures such as collecting more taxes and restructuring loss-making parastatals.

Kenya also expects to get nearly 150 billion shillings from the World Bank by the end of the current fiscal year in June 2021. The money will mainly be used for budget support, including system strengthening. health.

In the current financial year, Kenya is expected to borrow more than 1 trillion shillings, bringing its debt level to 7.6 trillion shillings, or more than 70% of the value of goods produced in the country. (GDP).

The Treasury plans to spend 2.8 trillion shillings in the current financial schedule. Much of this expenditure will relate to recurring items, such as salaries and allowances, pensions, hospitality costs, car maintenance, travel and other administrative costs.

Recurrent expenditure is expected to gobble up nearly 1.8 trillion shillings, while development expenditure will amount to 675.2 billion shillings.

Counties, which have complained about delays in receiving money from the state treasury for three months, are expected to receive 342.5 billion shillings as their fair share of tax collection.

However, the Treasury had estimated that it would collect 1.6 trillion shillings in taxes by June next year, leaving it with a 1 trillion shilling budget hole.

This hole, technically known as the budget deficit, was to be filled by domestic and external borrowing of 600 billion shillings and 401 billion shillings, respectively.

Additionally, the Kenya Revenue Authority (KRA) has underperformed in tax collection – it collected 70 billion shillings less in the four months to October than in a similar period last year.

This leaves the Treasury in a trap of 22: either cut spending or take on more debt, but with the government having to do the heavy lifting to stimulate the economy by increasing spending, cutting spending is not an option. .

Recovery plan

The government has already earmarked nearly 57 billion shillings for a stimulus package to help revive the economy. Moreover, to minimize the costs and risks of public debt, the Treasury intends to borrow mainly on the domestic market at 72%, including 28% from external sources in the medium term.

This would help it deal with currency risks. Already, the country is struggling with a weak shilling which, for example, inflated the country’s external debt stock by 58 billion shillings between June and August, when it traded at 108.2 against the dollar against an average of 106.5.

In its Medium-Term Debt Sustainability (MTDS), the Treasury acknowledged the risk of a volatile exchange rate and instructed all state enterprises to continue austerity measures and maintain macroeconomic stability.

“Any negative shock to macroeconomic variables, such as the exchange rate or interest rates, will translate directly into a deterioration of the debt position and debt service burden and therefore into fiscal instability,” said the Treasury.

But while it plans to borrow mostly domestically, the Treasury has noted the risks that banks, spooked by a volatile business environment, will largely lend to the government rather than the public.

“Accordingly, in addition to reducing fiscal deficits, real financing of fiscal deficits should gradually be diverted from domestic sources to external sources and mitigate the crowding out of the private sector in the domestic credit debt market,” said the treasure.

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