- Locally, investors are avoiding government papers, with the latest bonds and bills recording massive undersubscriptions.
- The doubling of VAT on fuel products to 16 percent brings at least Sh26 billion yearly.
Image: PCS
The government is between a rock and a hard place in the financing of the 2024/25 budget as available options continue to narrow.
On Wednesday, the Court of Appeal declared the Finance Act, 2023 unconstitutional, threatening to deny the National Treasury more revenue, less than two months after it lost a provisional Sh346 billion after a month-long countrywide protests led to the rejection of the Finance Bill 2024.
Although the government has since appealed the ruling by Justices Kathurima M'inoti, Agnes Murgor and John Mativo at the Supreme Court, financial experts warn that the state could lose up to Sh100 billion more if the appeal fails.
According to economist Kelvin Mwachi the government could lose more on measures like the doubling of the Value Added Tax (VAT) on fuel, a 2.5-5 percent increase in income tax for those earning above Sh5000, 000 among others.
The doubling of VAT on fuel products to 16 percent brings at least Sh26 billion yearly.
"While the ruling might look inconsequential as most tax measures are covered by individual law, the overall picture puts the government at a crossroads. It has no room for a minus on its budget,'' Mwachi said.
He added that negative sentiments locally continue to cut the government's chances of accessing loans in the external market, especially after a recent credit downgrade by Moody's.
The government is staring at a Sh946 billion deficit in the current financial year despite slashing the budget from Sh4.2 trillion to Sh3.8 trillion.
On Wednesday, Kwame Owino of the Institute of Economic Affairs (IEA) suggested that the government will continue collecting taxes through foundational tax laws but agreed it is in a tight corner to meet budgetary needs.
An economist Jamleck Ngesa commeds Ruto's planned austerity measures aimed at helping the country live within its means but says more should be done.
"The country is facing a tough funding moment in over two decades. President William Ruto needs to double on his austerity measures by further slashing the recurrent budget. Our wage bill is too big with less return on investment,'' he said.
According to him, Kenya has limited or expensive funding options, especially after the rejection of the Finance Bill, 2024, credit downgrades and low economic activities that are likely to dim tax collection.
"It is even finding it hard to raise money in the domestic debt market. I foresee a bad debt crisis if it yields to creditors' demand for higher rates."
Last week, the National Treasury revealed that the country will be spending 63 percent of its domestic revenue on debt servicing, leaving a paltry 37 percent for expenditure.
Locally, investors are avoiding government papers, with the latest bonds and bills recording massive under subscription.
Last week, Treasury bills were undersubscribed for a third week in a row, falling further to 32 percent from the 60 percent recorded the previous week.
Both the 182-day and 364-day papers witnessed shrunk subscription rates to 14.9 percent and 18.3 percent respectively.
Only short-term 91-day bills performed well, with the Central Bank of Kenya (CBK) accepting bids worth Sh6.1 billion out of the Sh7.7 billion received, reflecting a 79 percent acceptance rate.