Kenya Terminates Covid-19 Tax Relief Amid Debt Default Risk

CS Treasury Ukur Yatani address the press on November 9, 2020 at Serena Hotel in Nairobi, and Other leaders.Pastoralists leaders supports BBI Unanimously after holding a meeting to present their view to be captured in BBI report. PHOTO LUCY WANJIRU

In a desperate move to save an ailing economy closing in on a Ksh9 trillion ($90 billion) debt ceiling, with the risk of debt distress rising to ‘high’ from ‘moderate,’ Kenya has terminated part of the tax relief measures extended to cushion households and businesses from the adverse impact of the Covid-19 global pandemic.

Kenya’s National Treasury Cabinet Secretary Ukur Yatani on Friday issued a statement saying the corporate tax rate also reverts to 30 percent from 25 percent while the value added tax (VAT) reverts to 16 percent from 14 per cent.

The treasury clarified that “these are not new tax rates but just a return to the prevailing tax rate before the pandemic.”

However, the government will continue to cushion low-income earners by retaining 100 percent tax exemption/relief for those earning monthly incomes of Ksh24,000 ($240) and below.

The announcement comes as it emerged that Kenya’s risk of debt distress increased from moderate to high as the government’s debt accumulation closes in on the Ksh9 trillion ($90 billion) ceiling, breaching several debt sustainability indicators and narrowing the space for additional borrowing.

Read also: Kenya’s debt repayment to India and China is piling up

With close to half of the total revenue collections going towards debt repayment, Yatani faces a difficult task in financing government operations and infrastructure development projects.

Kenya’s apex bank says the country’s risk of debt distress has been exacerbated by the impact of the pandemic.

“The rapid pace of debt accumulation has resulted in increased interest and principal repayments in the past six years. However, revenues and export earnings have not increased in tandem with debt service. As a result, the ratio of debt service to exports and debt service to total revenue increased, signalling potential debt distress,” according to the Central Bank of Kenya in its Financial Stability Report (2019) released last week.

Also, data from Kenya’s Treasury shows that as at August this year, the country’s stock of public debt stood at Ksh7.06 trillion ($70.6 billion), accounting for 69.2 per cent of the gross domestic product, compared to the East African Community convergence criteria of 50 percent.

This $70.6 billion, together with committed undisbursed debt of Ksh1.35 billion ($13.5 million) translates to a stock of public debt of Ksh8.41 trillion ($84.1 billion) against a ceiling of Ksh9 trillion ($90 billion) implying limited space for additional borrowing, according to the National Treasury’s Post-Covid-19 Economic Recovery Strategy (2020-2022).

Kenya has already breached the solvency indicator; present value of the external debt-to-exports ratio and the liquidity indicator; external debt service-to-exports ratio, which are already above the thresholds, according to the NationalTreasury’s Quarterly Economic and Budgetary Review report.

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