IMF anxious to see jump in Kenyas tax base

The International Monetary Fund (IMF) has pinned taxes as the central pillar to the attainment of a satisfactory fiscal consolidation program as the country remains under the close watch of the multi-lateral credit institution.

Speaking in Nairobi on Monday, IMF African Department Director Abebe Selassie said the elevation of Kenya’s tax base remains the open challenge to striking a balance between the taming of borrowing and the expedition of output bearing projects.

“There has been too much emphasis on compressing spending. Going forward, the country should rely on revenue based consolidation,” he said.

“We would recommend the revisiting of tax exemptions with the aim of returning taxes as a share of GDP to 19/20 percent. This is not achievable in the immediate but can be done overtime by setting targets of between 0.5 and one percent at the end of each financial year”.

IMF has previously queried Kenya’s reclining tax base, raising the alarm on the country’s aggravated debt-risk profile following years of missed tax ceilings.

In 2018, the IMF revised down Kenya’s debt risk profile from low to moderate referencing the slide to the persistent misses in collections by the Kenya Revenue Authority (KRA).

While the tax man alongside Treasury has backed itself to grow the much needed revenues, the sourcing of taxes has been hard to come by as crucial revenue segments undergo an unprecedented shortfall.

By the end of June 2019, ordinary revenue collection amounted to Ksh.1.5 trillion against a target of Ksh.1.6 trillion as income tax comprising of Pay As You Earn (PAYE) and other income tax recorded the highest shortfall of Ksh.56.8 billion.

Total cumulative revenues and grants as a share of Gross Domestic Product (GDP) in the 2018/19 financial year comprised of 17.6 percent compared to 17.9 percent recorded in the 2017/18 fiscal year.

At the same time, the Kenyan economy has began to decouple as major tax contributing segments such as manufacturing take a dive against lesser yielding sectors like agriculture.

Onward revenue projections by the National Treasury exacerbate the jitters on the tax base with total revenues to GDP set to cool down to a flat 17 percent over the medium term.

The success of the revised fiscal plan, or the lack of it, by Treasury may anchor new relations between Kenya and the IMF over the access of key options including the standby credit facility (SCF).

The IMF is yet to renew its Ksh.102.2 billion ($989.8 million) with the government following the expiry of the facility in September 14, 2018.

The capture of the ‘insurance policy’ by government will likely be centered on the fruition of the underway fiscal consolidation.

According to the Central Bank of Kenya (CBK) Governor Patrick Njoroge, the government remains keen on tapping onto the IMF’s standby facility even as the macro economy remains largely shielded from pervasive risks in the external environment.

“This is an ongoing conversation. However, we are in no rush and we wouldn’t want to be pushed into anything. The objective is clear,” he said.