Times Tower in Nairobi, Kenya, the headquarters of Kenya Revenue Authority. PHOTO | NMG
By VINCENT OWINO
Kenya’s Institute of Public Finance (IPF) says missed revenue targets this year and in
the medium term could lead to spending cuts on sectors crucial for poverty reduction and economic development.In its Macro Fiscal Analytic Snapshot report published on January 29, the think-tank said the consistent revenue underperformance over the past five years indicates that the government may not increase its income to 19 percent of GDP by the 2025/26 financial year as expected.
This will lead to spending cuts, specifically a drop in development expenditure, which is already lower than needed, causing a stagnation in economic development and poverty reduction, the lobby warns.
“The need to keep the deficit down during a period of heightened debt vulnerability means that if revenue comes in below target, the projected increases in expenditure may not be possible, with development spending likely to be the main casualty,” they said in the report.
Read: Tax exemptions, incentives rob Kenya of growth in revenues
Kenya’s revenue target for the first quarter of this financial year was missed by about 12 percent, “raising some questions over the effectiveness of the tax measures and which may threaten the government’s plan to run a primary surplus in this fiscal year and beyond,” the lobby said.
In the first five months of the current financial year, Kenya Revenue Authority (KRA) collected Ksh963 billion ($5.93 billion), about 37 percent of the expected Ksh2.5 trillion ($15.39 billion) targeted by the end of June. Last year, KRA missed the revenue targets by over Ksh107 billion ($658.7 million).
The government also missed the revenue targets set in the 2021, 2020, and 2019 financial years, but surpassed it in 2022, although the revenue performance was still below the potential of 25 percent of GDP as estimated by the IMF.
Traditionally, such revenue shortfalls have led to increased borrowing by the government, but IPF says inflated borrowing costs in the international and domestic markets have slimmed the prospects of taking more loans to bridge the fiscal deficit gap.
According to IPF, general government spending on health, education, and social protection, which are crucial for poverty reduction and economic development, have traditionally been low and could reduce further if the state does not meet revenue targets.
Spending on agriculture and water, sanitation and hygiene sectors has also remained below recommended levels and could be slashed further amid revenue shortfalls in the coming years.
Read: External shocks dim EA economic growth prospects
The increasing cost of debt is also worsening the outlook, with an increasingly large portion of collected revenues now going directly into payment of the country’s debt.
“In a higher interest rate environment, there is a real risk that Kenya’s debt service burden will crowd out any additional fiscal space that could otherwise be used for productive purposes,” IPF said.
The experts recommend that to grow tax revenue, the government should reduce the number and scope of tax exemptions, which cost the country approximately 2.9 percent of GDP in forgone taxes in 2022.
“Tax exemptions continue to result in substantial revenue loss, with limited evidence of their effectiveness in promoting investment and growth,” they said in the report.
They also suggest that county governments should ramp up their revenue collection efforts to reduce overreliance on the national government, which makes them susceptible to revenue problems at the national level.
This will lead to spending cuts, specifically a drop in development expenditure, which is already lower than needed, causing a stagnation in economic development and poverty reduction, the lobby warns.
“The need to keep the deficit down during a period of heightened debt vulnerability means that if revenue comes in below target, the projected increases in expenditure may not be possible, with development spending likely to be the main casualty,” they said in the report.
Kenya’s revenue target for the first quarter of this financial year was missed by about 12 percent, “raising some questions over the effectiveness of the tax measures and which may threaten the government’s plan to run a primary surplus in this fiscal year and beyond,” the lobby said.
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In the first five months of the current financial year, Kenya Revenue Authority (KRA) collected Ksh963 billion ($5.93 billion), about 37 percent of the expected Ksh2.5 trillion ($15.39 billion) targeted by the end of June. Last year, KRA missed the revenue targets by over Ksh107 billion ($658.7 million).
The government also missed the revenue targets set in the 2021, 2020, and 2019 financial years, but surpassed it in 2022, although the revenue performance was still below the potential of 25 percent of GDP as estimated by the IMF.
Traditionally, such revenue shortfalls have led to increased borrowing by the government, but IPF says inflated borrowing costs in the international and domestic markets have slimmed the prospects of taking more loans to bridge the fiscal deficit gap.
“Given the limited room for borrowing to address revenue shortfalls for the foreseeable future, it is likely that revenue and expenditure will be more closely linked over the intervening period,” said IPF Chief Executive James Muraguri.
“This presents risks on the expenditure side should the projected increases in revenue fail to materialise.”
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