IMF advises Kenya to cut growing public expenditure

Sunday January 22 2012


The International Monetary Fund wants Kenya to slash its swelling public expenditure and increase its revenue base to cushion it from expected harsh economic conditions this year.

The financial institution argues that the government should also continue focusing on consolidation of medium-term plans and effective monetary policy to curb domestic demand.

At a recent meeting convened by the executive directors to assess the country’s economic status, the institution urged the government to adopt a more ambitious medium-term target by reducing non-priority expenditure and front-loading adjustment.

Increased public expenditure, as a result of increased demand for goods and services, has seen the country’s public debt rise sharply from 48 per cent to 54.2 per cent, more than five percentage points above the IMF’s recommended ceiling of 45 per cent.

There are fears that expenditure might increase further, this year, as the country continues to implement the new constitution ahead of the general elections.

“Directors underscored the importance of protecting key outlays, in particular emergency food relief for the population, targeted transfers to the poor, implementation of the new constitution, and high-priority investments,” the IMF statement added.

Prompt implementation of the new legislation on public finance management and the draft VAT law will be important to ensure sound expenditure management in the context of fiscal decentralisation and to strengthen revenue mobilization, the officials added.

A new value-added tax (VAT) Bill is almost ready to be sent to parliament, and a Public Finance Management (PFM) Bill has been submitted to the Commission for the Implementation of the Constitution.

The VAT Bill is expected to improve the administration and collection of VAT to boost revenues. The government argues that the old law that excludes taxation on certain goods, organisations, people and property, as well as zero-rating, has been a stumbling block in administering the tax.

It is estimated that the government loses more than Sh100 billion through these policies annually.

The executive directors commended Kenya’s strong economic growth and satisfactory programme implementation despite challenges posed by the severe drought in the Horn of Africa and higher than expected food and fuel prices.

However, the officials noted that combination of external shocks and strong domestic demand, fueled by rapidly expanding credit, has led to a sharp increase in inflation, a widening current account deficit, and currency depreciation.

The inflation rate has been on the increase in the past 14 months and only reduced slightly this year to 18.93 per cent from a high of 19.72 per cent.

Directors welcomed the recent decisive steps taken to rein in inflation and noted that further tightening of monetary policy should anchor inflation expectations.

They also commended the Central Bank of Kenya for raising its policy rate to help absorb liquidity and discourage excessive credit growth and demand for foreign exchange. A gradual accumulation of international reserves and maintaining the existing floating exchange rate regime will mitigate the impact of external shocks, the officials said.
Public Information Notices (PINs) form part of the IMF’s efforts to promote transparency of the institution’s views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board bilateral discussions with members every year.