PREVIEW
Risks to public finances multiply after the government’s u-turn on revenue measures in the Finance Bill
The decision by ratings agency Fitch to downgrade Kenya’s foreign currency sovereign rating, is the latest reminder that President William Ruto’s government will face international pressure to balance the books despite the return of relative stability to the country (AC Vol 65 No 14, After the protestors won the tax war).
On 2 August, Fitch downgraded Kenya to ‘B-’ from ‘B’– representing six levels below investment grade. In a statement, Fitch said that the move, ‘reflects heightened risks to Kenya’s public finances after the government backtracked on revenue measures in the Finance Bill 2024 in response to violent social protests, the increased risk to political stability, and rising domestic debt costs, even as the authorities embark on expenditure cuts’.
It also forecast that interest payments on debt as a proportion of revenue would increase to 31.7% in 2025 (from 31.5% in 2024) and 32.8% in 2026. The same day, the Central Bank in Nairobi said in its quarterly economic report that the country’s medium and long-term debt was sustainable, and that debt stood at 10.3 trillion shillings (US$79.3 billion) at the end of March, representing 67% of GDP, slightly down from 70% at the end of 2023.
The report, which covers January-March, argues that ‘efforts aimed at boosting exports and revenues would strengthen external debt sustainability,’ the Central Bank said, adding that the country’s exports to Africa have increased to their highest ever levels.
The Treasury and economy ministry is one of four obtained by the opposition Azimio la Umoja coalition in Ruto’s new unity government (AC Vol 65 No 16, Raila names his price). Minister designate John Mbadi, who is yet to be approved by the National Assembly, told lawmakers last week that he would seek to expand Kenya’s tax base and revenue mobilisation by giving the Kenya Revenue Authority more resources to ensure compliance, rather than by imposing new taxes and higher rates.
While the Finance Bill, which was abandoned following a wave of protests coordinated by the Generation Z movement, is unlikely to be brought back, Mbadi hinted that some of its provisions would return as amendments to existing laws. Mbadi has also indicated that he will focus on multilateral and concession loans rather than additional commercial borrowing in the coming months.
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