National Treasury CS Ukur Yatani

National Treasury Cabinet Secretary Ukur Yatani.

| Salaton Njau | Nation Media Group

Sh125bn tax deficit bites as Treasury struggles to pay staff

Kenya is pulling out of festivities into the New Year with a tax deficit of Sh125 billion and is struggling to pay civil servants as revenue sources thin in the midst of swelling expenditure and an expensive pandemic.

Despite the National Treasury putting up a brave face that the country is not broke, all signs point to a government that is teetering on the brink and whose accounts are drying up faster than they can be refilled.

Thousands of national and county government workers have celebrated Christmas without pay, with some having not been paid for three months.

This as government suppliers continue to hurt in silence as parastatals, ministries, department and other State agencies accounts dry up, as the Kenyatta administration continues to grow its mountain of debt to meet the shortfalls.

The most recent government accounts published last week show that in the first five months of this current financial year that started on July, Kenya has collected total revenues of Sh1 trillion, which works out to about Sh200 billion a month.

But only about a half, or Sh527 billion, came from tax revenue between July-November 2020.

The rest came from domestic borrowing (Sh360 billion), external loans (Sh26.2 billion) and other non-tax revenue (Sh37 billion).

The Sh527 billion collected by November is a drop of Sh100.72 billion or 16 per cent contraction compared to a similar period a year ago, reflecting the impact of Covid-19 economic hardships that triggered a fall in company earnings, layoffs and cuts on levies.

To put this numbers into perspective, the government has a full year budget of Sh2.8 trillion, which means that on average, it should be raising about Sh235 billion every month from all sources.

Its financial statement shows that it is targeting to raise Sh1.56 trillion this year through taxes, Sh786.6 billion from domestic borrowing while external loans will bring in Sh373 billion.

The rest of the money will come from other domestic financing (Sh36.8 billion) and non-tax revenue (Sh66 billion).

To meet the tax collection targets, the Kenya Revenue Authority is expected to be collecting Sh130 billion every month.

But it has only been collecting Sh105 billion on average in the past five months, leaving it with a deficit of Sh125 billion by November 30.

Kenya's financial year starts on July 1 and ends on June 30 of the following financial year.

The financial nightmare has seen the country open its doors wide to the International Monetary Fund (IMF) to come back with its stringent loan conditions, which became unpopular during the Moi regime.

The Treasury is planning to push wealthy countries and multilateral lenders like the World Bank to cancel part of Kenya's ballooning public debt, reflecting concerns about the burden of paying creditors from taxes that have been hit hard during the coronavirus pandemic.

When President Mwai Kibaki took over, one of his major tasks was to wean the country off IMF and World Bank-loan dependency.

Treasury Cabinet Secretary Ukur Yatani says Kenya is actively holding discussions with the IMF “for a programme to anchor its fiscal policy to stabilise the economy and address emerging vulnerabilities”.

The country is also looking at joining the G20 Debt Service Suspension Initiative in January, which would place it in the unpopular league of debt defaulters.

But the CS has strongly dismissed reports that Kenya is broke.

"Kenya has not applied for the G20 Debt Service Suspension Initiative. Some countries have faced challenges re-arranging debt service with creditors with undesirable outcomes," Mr Yatani said.

"In this respect, Kenya seeks a cautious approach in evaluating the costs and benefits of the offer and make informed decision to safeguard the economic and financial standing of the country," Mr Yatani said.

He said this decision is expected early in the year.

The IMF revealed in its November update that it had held discussions with Kenyan officials on the extended fund facility programme to support the next phase of Kenya's response to Covid-19.

"The programme would provide resources to protect vulnerable groups and would reduce debt vulnerabilities over time through a multi-year fiscal consolidation centred on raising tax revenues,” IMF Director, Communications Department, Gerry Rice said.

"It would also advance the structural reform and governance agenda, and address weaknesses in some State-owned enterprises that had been exacerbated by the Covid shock. And finally, it would strengthen the monetary policy framework and support financial stability."

Debt is a first charge on the revenues and high debt expenditures leave the country with very little to spend on development.

The financial statements show that Kenya has paid a third of the Sh904 billion budgeted for public debt expenditures.

The national government plans to spend a total of Sh355 billion, or about Sh30 billion per month on average, on development expenditure this year.

But it is the county governments that have borne the brunt of the revenue shortfalls. Five months into the year, the Treasury still owes counties Sh29.7billion in arrears for the previous financial year, 2019/20.

In the new financial year, counties have complained that they have gone without Exchequer disbursements for more than two months.

To deal with the cash shortfalls, the government has ended the tax reliefs that were meant to soften the blow for Kenyans from the impact of the Covid-19 pandemic.

Mr Yatani said by the end of the year, the government will have foregone tax revenues totalling Sh65 billion, over the course of the preceding seven months.

"This in due course has and will affect the implementation of the government's priority programmes under the Big Four Agenda and the recovery of the economy in general," he said in a statement explaining the reasons why the government has been forced to end the tax reliefs next week.

This means that from January 1, the corporate and individual tax rates will revert to 30 per cent from 25 per cent, while the Value Added Tax (VAT) will revert to 16 per cent from 14 per cent.

The immediate impact of these is goods and services will become more expansive, by at least two per cent while salaried employees should expect less money in their accounts due to higher Pay As You Earn (PAYE) taxes.