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Kenya fulfils 6 of IMF's strict conditions in budget & Finance Bill 2024

Government is set to borrow Sh263 billion from the domestic market and Sh333 billion from the foreign market

Treasury CS Njuguna Ndungu, Majority Leader Kimani Ichung'wa and Budget and Appropriations Chairperson Ndindi Nyoro
  • Treasury CS Njuguna Ndungu presented the Budget Policy Statement for the Financial Year 2024/25 in Parliament
  • Kenya's debt situation stands at Sh11.3 trillion, with 55% being external debt and the rest domestic
  • Kenya needs to reduce its fiscal deficit to below 4.1% of GDP in the FY2023/24 budget as required by the IMF

Treasury CS Njuguna Ndungu presented the Budget Policy Statement for the Financial Year 2024/25 in Parliament on Thursday.

The National Treasury CS outlined a Sh3.9 trillion ambitious agenda that seeks to balance the government’s debt obligations, public wage bill, development and provision of services to Kenyans.

Kenya’s debt situation currently stands at Sh11.3 trillion, with 55 per cent of it being external debt and the rest being domestic.

According to the Treasury, approximately 63% of the money Kenya collects goes to debt repayments leaving little room for the rest of the government's obligations.

Kenya has been under pressure from lenders such as the International Monetary Fund and World Bank to implement strategies that are aimed at avoiding an economic crisis where the country cannot live within its means.

IMF loans, which have been crucial in rescuing the government in crises, have come with strict conditions that must be implemented.

These conditions are designed to ensure that Kenya's economy is stabilised and that the country's debt is managed effectively.

Kenya has been trying to meet these conditions in its Finance Bills and budget policies. This means that some of the proposals in the Finance Bill 2024 and Appropriations Bill 2024, that are linked to these commitments are likely to pass.

The IMF has required Kenya to further reduce its fiscal deficit to below 4.1 per cent of GDP in the FY2023/24 budget.

In simpler terms, Kenya needs to ensure that the gap between what the government spends and what it earns through taxes and other revenues is not more than 4.1% of the country's total yearly economic production.

President William Ruto has committed to meeting this objective by increasing revenue through tax measures.

This includes broadening the tax base by reducing exemptions and loopholes, increasing tax rates for higher-income brackets or luxury goods, and introducing new taxes like value-added or environmental taxes.

Other measures involve identifying and eliminating inefficiencies and waste in government programs and reforming entitlement programs to control spending.

In the 2021/22 budget, the deficit was Sh1 trillion, Sh925 billion in FY 2023/24 and now Sh597 billion in FY 2024/25.

This year’s deficit represents 3.6%. Government is set to borrow Sh263 billion from the domestic market and Sh333 billion from the foreign market.

The International Monetary Fund (IMF) also requires Kenya to adopt a single treasury account (TSA) system.

This system consolidates various government accounts into a single account, enhancing cash management and transparency in government financial operations.

One of the significant reforms highlighted in this year’s budget is the establishment of a Treasury Single Account (TSA).

The TSA will also facilitate real-time monitoring of government cash flows, thereby enabling better fiscal planning and decision-making.

This move aligns with global best practices and is expected to curb instances of idle cash balances across multiple accounts, ultimately reducing unnecessary borrowing costs.

The migration from cash-based accounting to accrual accounting represents a significant shift in how the government will record and report its financial transactions.

Accrual accounting provides a more accurate picture of the government's financial position by recognising economic events regardless of when cash transactions occur.

This method will improve the transparency and reliability of financial statements, enabling better management of public assets and liabilities.

The adoption of accrual accounting is anticipated to enhance fiscal discipline and provide a clearer view of the long-term fiscal outlook, aiding policymakers in making more informed decisions.

The adoption of an end-to-end e-procurement system is another cornerstone of the proposed reforms. This digital procurement system aims to enhance efficiency, transparency, and accountability in the public procurement process.

By automating procurement activities, the government seeks to reduce corruption, eliminate inefficiencies, and ensure value for money in the acquisition of goods and services.

The e-procurement system will enable electronic tendering, contract management, and supplier performance evaluation, thereby streamlining the entire procurement cycle.

This initiative is expected to result in significant cost savings and improve the quality of public service delivery.

To address the challenges associated with human resource management across the public sector, the government plans to implement a unified HR information system.

This system will integrate all HR processes, including recruitment, payroll management, performance appraisal, and employee records management, into a single platform.

The unified HR system aims to improve the accuracy and efficiency of HR operations, reduce administrative costs, and enhance workforce planning.

By providing a centralised repository of employee data, the system will enable better decision-making and ensure that the government can effectively manage its human capital.

In a bid to simplify the tax system and enhance revenue collection, the government proposes an overhaul of the VAT Act’s 1st and 2nd schedules.

These schedules, which list goods and services that are either exempt from VAT or subject to zero-rating, will be reviewed to broaden the tax base and eliminate ambiguities.

The overhaul aims to reduce the number of exempt and zero-rated items, thereby increasing VAT revenue and ensuring a more equitable tax system.

This reform is expected to improve compliance, reduce tax evasion, and create a more predictable and transparent tax environment for businesses and consumers alike.

The Finance Bill 2024 proposes several significant changes to the Value Added Tax (VAT) regime.

Key areas of focus include:

Increase of VAT Registration Threshold

The threshold for mandatory VAT registration is increased from Sh5 million to Sh8 million.

Exemption of Transfer of Business as a Going Concern from VAT

The transfer of business as a going concern is proposed to be exempt from VAT, currently applicable at the standard rate of 16%

Exemption of Insurance and Reinsurance Premiums from VAT

The VAT exemption on insurance and reinsurance services is limited to insurance and reinsurance premiums only.

The rest of insurance and reinsurance services will be subject to VAT at the standard rate

Application of VAT on Betting, Gaming, and Lotteries Services

The VAT exemption for betting, gaming, and lotteries services is proposed to be deleted, making these services subject to VAT at the standard rate

Scrapping of Certain VAT Exemptions in the Tourism and Manufacturing Sectors

The Bill proposes to delete several VAT exemptions in the tourism and manufacturing sectors, including exemptions for taxable goods and services used in the construction of tourism facilities, recreational parks, and convention and conference facilities

VAT on Bread

The VAT status of ordinary bread is changed from zero-rated to standard-rated, attracting a VAT of 16%

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