IMF raises queries over Kenya’s revenue shortfall

The International Monetary Fund (IMF) has raised concerns about the decrease in revenue collections in Kenya, urging authorities to implement ‘urgent corrective measures.’

In an update announcing the immediate disbursement of Kes150 billion to Kenya, the IMF is pressing the government to adopt measures outlined in the Medium-Term Revenue Strategy promptly to address revenue shortfalls.

Ms. Antoinette Sayeh, Deputy Managing Director, and Acting Chair added, “Implementation of the Medium-Term Revenue Strategy would be key to reversing the erosion in the tax base, promoting equity and fairness in the tax regime, and creating more space for spending to improve public services.”

Decrease in tax collections

The Kes150 billion loan brings total disbursements to Kenya under  Extended Fund Facility and the Extended Credit Facility, approved in April 2021 and extended by 10 months in July 2023 to April 2025 to about US$2.6 billion (roughly Kes418.35 billion).

The latest statistics show that the Kenya Revenue Authority (KRA) collected Kes1.03 trillion in revenue between July and early December 2023.

Whereas this collection represented 15.8 percent growth or Kes180.7 billion more compared to the comparable month in 2022, the collection missed KRA’s annual collection target. This dip can be partly attributed to the tough economic environment facing both people and businesses across Kenya.

Meanwhile, the IMF highlights the need for managing fiscal risks proactively including pending bills, and contingent liabilities facing the government.

According to President William Ruto, the government owes its suppliers, mostly small and medium-sized enterprises, more than Kes600 billion.

“When we pay in time, we will bring discipline in our country’s fiscal management,” the President said in November when he inaugurated the Pending Bills Verification Committee led by former Auditor General Edward Ouko.

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Kenya’s forex market

While acknowledging that Kenya’s economic health remains steady, the IMF has called for continued institutional and technical reforms aimed at improving the functioning, deepening, and transparency of Kenya’s foreign exchange market.

The Kenyan shilling depreciated by almost 20 percent against the dollar in the 12 months to December 2023. Currently, the local currency has crossed the 160 mark against the greenback and continues to weaken significantly against other major world currencies.

“The exchange rate should be allowed to respond flexibly to market conditions. Recent measures facilitating greater exchange rate flexibility should help ease FX market dysfunction and support a buildup of FX reserves. The banking system is generally sound, but emerging vulnerabilities need close monitoring,” noted Antoinette Sayeh.

Kenya is set to post growth of about 5 per cent this year amid ongoing adjustments in fiscal policy and external accounts, as observed by the IMF.

Inflation, which eased to 6.6 per cent in December, is expected to inch up in the first half of 2024, driven primarily by global oil price volatility and exchange rate pass-through. However, it is anticipated to remain contained due to recent monetary policy tightening and as authorities strive to deliver a stronger fiscal consolidation to stabilize the overall public debt to GDP this year.

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