Uhuru between a rock and hard place

June 8, 2011
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, NAIROBI, Kenya Jun 8 – Finance Minister Uhuru Kenyatta is a man between a rock and a hard place as he prepares to deliver the Sh1.155 trillion 2011/2012 Budget.

On one hand, Mr Kenyatta must focus on huge expenditure requirements required for infrastructure development and implementation of the new Constitution.  On the other hand, this must be balanced with the expectations of most Kenyans that the Budget must address the high cost of living and work on bringing it down.

The question most people will be asking ahead of the Budget presentation is how the Treasury intends to finance this huge Budget.

The Minister will be walking a tight rope, as revenue collection during the current financial year has been below target.

While Kenya Revenue Authority (KRA) has done a commendable job in terms of collecting more income, it has failed to meet its targets.

In the third quarter, KRA collected Sh141.4 billion bringing total collection for the year-to-date to Sh444.5 billion which is Sh61 billion more than in the previous year.

However, a fall in airtime, cigarettes and oil taxes with energy industry in a constant crisis mode put in doubt the realisation of the Sh641 billion target by the end of the current financial year.

In a bid to cushion Kenyans from the high cost of living, the government decided to zero rate import duty of kerosene and cutting tax on diesel, maize and wheat.  This further complicates the taxman\’s ability to mobilise resources.

Mr Kenyatta has already indicated that he will not be raising VAT and income tax as it may take more people out of the tax net.

PKF Senior Tax Manager Michael Mburugu said that in the next financial year, KRA must work for a wide range of tax reforms and bring in more people into the tax bracket.

"This time round KRA is likely to bring in more tax payers into the tax-paying bracket. I would expect that the Minister will direct that this be done in the shortest time period to raise revenue collection," Mr Mburugu said.

With the increased spending, the country is likely to drive up its Budget deficit forcing the Treasury to consider debt financing.

Currently, the total debt stands at around 50percent of GDP while the past Budget deficits have hovered between 5.5percent to 6.8percent of GDP.

The increased spending coupled with the government reducing taxes on fuel products and staple foods will further widen the deficit, accumulate more debt.

Mr Mburugu said borrowing heavy both internally and externally could pile more pressure on how the country manages its debt levels adding that the minister should develop mechanisms to keep the levels down.

"The shortfall between the estimates the Minister has already given is quite huge and it will be interesting to see what he does to correct this," Mr Mburugu said.

Central Bank Governor Prof Njuguna Ndung\’u however says the Kenyan economy has created massive fiscal space that cushions it between the debt levels and the ability to pay back.

"The mistake of the 90\’s is that the government was rolling over the debt then it was becoming unsustainable. Since 2003, the Kenyan economy has been creating massive fiscal space and the debt levels are only creeping back because of the economic shocks," Prof Ndung\’u said.

Whatever happens in Parliament from 3.30 PM, one thing is for sure, the Ministry of Finance will be presenting the largest Budget yet, and Mr Kenyatta will be hard pressed to look for sustainable ways of financing it.

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