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Protests could rock Kenya’s budget plan, warns Fitch

This week, policymakers in Kenya are bracing for social unrest due to the proposed Finance Bill 2024, a set of proposals that seek to plug Kenya’s fiscal deficit through various contentious tax measures.

The bill is, however, continues to spark widespread protests and opposition. According to Fitch Ratings, these protests could undermine the government’s plans to finance the fiscal year 2024/25 budget, potentially leading to severe economic consequences.

The Finance Bill 2024 is a critical plank of the government’s strategy to manage the fiscal deficit, which is projected at 3.3 percent of the GDP, being a drop from the 5.7 percent forecast for the FY2023/24.

However, Fitch has indicated that achieving these deficit targets will be an uphill task given the mounting opposition to the bill. The ongoing protests are a culmination of public discontent with President William Ruto’s government as well as the proposed tax measures, including the 16 percent VAT on bread and the 2.5 percent annual tax on motor vehicles, which have already been dropped following public outcry.

“We have listened to the view of Kenyans and we are all in agreement that there are 2 things that we must do. One of them is that we need to protect Kenyans from increased cost of living and therefore the proposed 16 percent VAT on bread has been dropped. To support reducing the cost of living, we are doing something about vegetable oil so that we do not make it expensive for Kenyans. Transfer of mobile services is a key concern to many Kenyans and therefore again we have proposed that we do not have any increase in taxation on mobile phone transfer,” explained said Chairman of the Finance and National Planning Committee, Kuria Kimani.

The rejection of these tax measures implies that the government will struggle to raise the projected revenue, thereby increasing the fiscal deficit. Fitch Ratings has on its part revised Kenya’s deficit forecast for FY2024/25 to 4.3 percent of GDP, indicating less confidence in the government’s ability to meet its revenue targets.

In the current FY, Kenya is set to experience a Kes300 billion revenue shortfall. To cover up the fiscal deficit, the government turns to borrowing, both domestically and externally. For the 2024/25 budget estimates, a total of Kes263.2 billion will be financed through domestic borrowing while Kes333.8 billion will be raised from external lenders.

Read also: MPs approve Finance Bill Second Reading amid Gen Z fury

Revenue shortfalls

However, the ongoing protests and subsequent revenue shortfalls may force the government to increase borrowing even further, worsening the country’s debt.

An increased debt burden can have several implications, warns Fitch. First, higher levels of debt service will consume a huge portion of the government revenue, reducing the finances available for essential public services and development projects as well.

Second, according to Fitch, increased borrowing could lead to higher interest rates, crowding out private investment and stifling Kenya’s economic growth.

Lastly, excessive debt levels can undermine investor confidence, leading to capital flight and reduced foreign investment.

Additionally, social unrest and the rejection of the Finance Bill 2024 is set to create an environment of economic uncertainty, leaving investors wary of committing resources to a country experiencing both political and economic instability further contracting investments, and the pace of creating new jobs.

What’s more, the government’s inability to roll out the necessary fiscal reforms could result in downgraded credit ratings, making it more expensive for Kenya to borrow in the international financial markets.

Overall, Fitch Ratings warning underscores the potential for a negative outlook on Kenya’s credit rating if the government fails to address the fiscal deficit through sustainable revenue-raising measures.

In the absence of adequate revenue, the government may be forced to cut spending on essential services such as healthcare, education, and infrastructure. If effected, such measures would disproportionately hit the most vulnerable segments of the society, further pushing millions into poverty and worsening inequality.

Reduced investment in infrastructure could hinder long-term economic development, making it more difficult for Kenya to achieve its growth objectives.

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