Experts seek fiscal policy reforms to boost growth

Wednesday, January 12th, 2022 08:00 | By
Institute of Public Finance CEO James Muraguri (right) and Head of Research John Nyangi compare notes during the launch yesterday. Photo/PD/John Ochieng

Jacktone Lawi

Tax and revenue exemptions by the government are causing undue pressure to the formal sectors of the economy, experts have warned, urging the government to consider fiscal consolidation.

A report by the Institute of Public Finance Kenya (IPFK) and Oxford Policy Management’s study says revenue generated is declining despite economic growth.

“When we compare the rate at which Kenya’s revenue is growing as a share of the gross domestic product (GDP), we see that it has been nominally growing, but as a share of the total economy is declining,” reads the report on Kenya’s 2022 Economic Outlook, which was unveiled at a Nairobi hotel yesterday. 

The experts are now urging the government to stick to its fiscal consolidation path in the upcoming 2021-22 budget revision and 2022/23 budget, despite previous failed attempts.

James Muraguri, IPFK chief executive said Kenya government’s debt policy has reduced the country’s ability to respond to shocks that may arise.

Tax policy framework

He said development of the new National Tax Policy Framework to be released in 2021/22 promises to outline new measures to boost revenue performance, including reversal of the many exemptions and exclusions that have plagued Kenya’s performance for many years. 

“It is especially important, but is politically difficult, so must be monitored closely,” Muraguri added.

The institute said that Kenya is experiencing a growing informal sector which is not contributing substantially into the revenue, thereby emerging as a burden to the formal sector to generate this revenue.

It warns that economic damage caused by Covid-19 is worse than originally anticipated, with a downturn that leaves the GDP approximately 9 per cent below Kenya’s pre-crisis forecast by 2023.

Prior to the Covid-19 crisis, IPFK added, Kenya’s public finances were managed in an unsustainable manner, which made the country vulnerable to shocks, stopped the government from mounting a very significant stimulus in 2019/20, and now leaves it with a pressing need for fiscal consolidation going forward.

As a country whose debt carrying capacity has massively downgraded from strong to medium signalling increased liquidity risks due to the government spending a larger share of the country’s revenues on debt payments, it adds, Kenya remains at high risk of debt distress and as a result, fiscal space will be highly constrained for several years. 

The country’s fiscal deficit is projected     to fall back to 4.5 per cent by 2023/24, from highs of over 8 per cent of GDP in 2020/21. The survey further exposed the impact that fiscal consolidation will have on the county government finances.

“Government plans for fiscal consolidation are set to have a major impact on the finances of county governments, which if carried through, will have major implications for service delivery going forward,” added the institute’s Head of Research, John Nyangi.

Fiscal deficits

So far in 2021-22, he added, transfers are on average behind schedule by two months. Fiscal deficits of  8  per cent   of GDP in 2019/20 and 2020/21 (estimated) are expected to push debt to over 70 per cent of GDP by the end of 2021/22, with Kenya continuing to be assessed as being at high risk of debt distress by the International Monetary Fund (IMF).

Government plans to narrow the deficit signals significant cuts in public spending from 2022/23 onwards, at both levels of government, Muraguri said, adding that the Public Financial Management (PFM) system in Kenya still faces some critical weaknesses.

“The national government has continued to make efforts to strengthen budget transparency, but county information is limited.

At the time of writing, county governments had not made their FY 2021/22 budgets publicly available, and there continues to be no ‘one-stop shop’ for accessing county budgets,” he added.

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