Moody's rating agency
Ratings agency Moody’s Investors Service has sounded the alarm over Kenya’s heightened political and social risks threatening to undermine the government’s capacity to implement fiscal consolidation.
This comes as Kenyan president William Ruto announced that he would withdraw a finance bill, which contained controversial tax hikes, after deadly protests which left sections of the parliament building on fire earlier this week.
The ratings agency said the proposed tax measures were integral to improving Kenya’s fiscal position.
Last month, Moody’s cut Kenya’s senior unsecured debt rating, as well as long-term foreign currency and local currency issuer ratings, to B3 from B2, citing an increase in government liquidity risks.
Obligations rated B2 are considered speculative and are subject to high credit risk while a downgrade to B3 means that there is financial instability and it reflects a weaker than expected operating performance.
“Even if the government offsets the measures’ removal with lower spending, the protests and subsequent reversal of tax increases reduce the scope to broaden the tax base and are likely to slow fiscal consolidation,” Moody’s said in a note.
The government has dropped some of the contentious proposals in the Finance Bill of 2024 but protestors called for the entire bill to be scrapped.
Some of the proposals dropped by the government include an introduction of a 16% sales tax on bread and 25% duty on cooking oil and a tax on vehicle ownership amounting to 2.5% of the value of the vehicle.
In an address to announce that the bill would be scrapped, Ruto said the government would reduce spending by 200 billion Kenyan shillings (R28.3 billion) to compensate for the scrapped tax measures.
Moody’s said spending cuts would affect all government segments, including county governments and development spending.
It said that lower revenue projections for the fiscal year 2025 and reduced capacity to implement future tax measures would exacerbate an already weak debt affordability with interest payments consuming a larger share of government revenue.
“Fiscal consolidation efforts more heavily focused on reduced spending than with revenue-led fiscal consolidation will almost certainly slow the pace of fiscal consolidation,” the agency said.
According to BBC News, since he was elected president in August 2022, Ruto’s government has raised taxes on salaries, sales tax on fuel has doubled and there is a new housing levy, which led to a cost of living crisis protest in July 2023.
“The continuation of protests would signal prolonged political instability and further constrain the government’s options for fiscal consolidation,” Moody’s said.