EAC Budget Day (L-R): Finance ministers Njuguna Ndung’u of Kenya, Tanzania’s Mwigulu Nchemba, Matia Kasaija of Uganda and Uzziel Ndagijimana of Rwanda display budget briefcase on June 15, 2023 ahead of presenting them in their respective parliaments
By The East African
In his budget speech, Prof Njuguna Ndung’u, Kenya’s Treasury Cabinet Secretary, said: “Weare truly grateful, as a nation, to our development partners, who have, over the years, provided financial resources to support implementation of government programmes, policy and structural reforms.”
“In particular, allow me to single out the multilateral institutions, specifically the World Bank, the International Monetary Fund (IMF), the European Union, the African Development Bank, and the many bilateral donors, institutions and governments that have walked the journey of socioeconomic transformation with Kenya.”
The Kenyan minister had good reason to thank the IMF, as it has come in handy to provide a much-needed reprieve to a country sagging under a debt of over $73 billion.
The Fund has promised to release $410 million in July, after it reached an agreement with Kenyan authorities on economic policies and reforms to conclude the fifth reviews of Kenya’s Extended Credit Facility and Extended Fund Facility arrangement.
This is after the Fund was satisfied that President William Ruto’s administration is committed to fiscal consolidation, restructuring of troubled state corporations such as Kenya Airways and Kenya Power, and implementation of additional tax measures to lower the fiscal deficit.
“Looking ahead, continued strong commitment to fiscal consolidation over the medium term remains key to reduce debt vulnerabilities,” noted IMF’s deputy managing director Antoinette Sayeh.
“Additional tax policy measures, anchored in a Medium-Term Revenue Strategy to secure space for needed social and development spending, and improved spending efficiency, revenue administration, and public financial and debt management, will be key.”
But the contentious taxation measures introduced through the Finance Bill 2023, which include the imposition of a 16 percent value added tax on fuel, and a housing tax of 1.5 percent of employees’ salaries has sparked a public outcry.
Kenya has been under pressure from the IMF to double the VAT on petroleum products to cut budget deficit and control borrowing.
The IMF’s push for the fuel tax was disclosed in an advisory to the government after the fund’s board approved a new loan for Kenya valued at $2.34 billion in 2021 to help the country continue responding to the Covid-19 pandemic and address its debt vulnerabilities.
Former president Uhuru Kenyatta was in 2018 forced to reduce VAT on fuel to eight percent after the introduction of the full tax prompted protests from citizens and businesses.
The government expected to collect an additional $357.14 million from the eight percent VAT on fuel, helping it narrow the budget deficit to 4.4 percent of GDP as it had promised the IMF.
To combat the rising inflation, the Central Bank of Kenya raised its policy rate by 175 basis points to 9.5 percent in 2022, in line with IMF’s policy of tightening monetary policy Ms Sayeh welcomed the CBK monetary policy move, saying that “further tightening would limit second-round effects and keep inflationary expectations well-anchored while supporting external adjustment.”
In May, the World Bank approved $1 billion loan for the country, bringing Kenya’s financing from foreign lenders during May to $1.5 billion.
The National Treasury was seeking $2 billion between May and June to ease its weakening financial position, help stabilise the shilling and bolster forex reserves.
But it is feared that Kenya’s tax proposals have the potential harmful effects of destroying millions of dollars’ worth of investments in the country.
The Kenya Private Sector Alliance, an umbrella body of private businesses, said more than 100,000 jobs could be lost as a result of the punitive tax law, while the Kenya Association of Manufacturers said the country could lose about Ksh150 billion ($1.07 billion) in capital flight.
Prof Ndung’u hinted at a possible retrenchment of lower-cadre staff in state corporations. He said the State Corporations Advisory Committee will start “rationalising staff establishment to keep them lean.”
The National Treasury has renewed talks with foreign banks to release an additional $100 million loan to fund part of President William Ruto’s Ksh3.68 trillion ($26.3 billion) spending plan that is heavily linked to the IMF and World Bank conditionalities.
The funds were part of the planned $600 million syndicated commercial loan to finance expenditures during the current financial year, of which $500 million has been released.
Haron Sirma, director-in-charge of debt management at the National Treasury, told The EastAfrican this week that the remaining $100 million will be used in the next financial year.
Meanwhile, Kenyan Parliament on Thursday approved the conversion of Kenya’s debt ceiling from Ksh10 trillion to a debt anchor as a percentage of GDP, removing the final hurdle for Kenya to align with global best practices backed by the IMF. The National Assembly’s Public Debt and Privatisation Committee approved the threshold of the debt anchor of 55 percent of GDP in present value terms.
Uganda
In Uganda, the IMF Executive Board this week concluded the Fourth Review Under the Extended Credit Facility Arrangement. This completion enables the immediate disbursement of $120 million to support the “near-term response to the Covid-19 pandemic and boost more inclusive private sector-led long-term growth.”
The IMF has been pushing reforms on “creating fiscal space for priority social spending, preserving debt sustainability, strengthening governance and reducing corruption, and enhancing the monetary and financial sector frameworks,” it said in a press statement on Wednesday.
This brings the aggregate disbursement under the ECF arrangement to about $750 million.
The Board also approved Kampala’s request for a waiver of non-observance of a performance criterion on the ceiling on net credit to the central government from the Bank of Uganda.
The IMF warns that although the economy is projected to grow six percent and inflation to fall to five percent, the risks to the outlook remain elevated, “including from further tightening of external financial conditions, a renewed pickup in inflation, which would increase borrowing costs via additional monetary tightening, and a stronger-than-expected drag of higher borrowing costs on private sector credit and investment.”
The conflict in Sudan is expected to impact exports, while the recent signing into law of the Anti-Homosexuality Bill, 2023 could have a larger-than-anticipated impact on the availability of grants and external loans from development partners, as well as foreign direct investment flows and tourism, the IMF warned.
The Brettonwoods institutions are pushing for fiscal consolidation, tight monetary policy, and continued exchange rate flexibility to keep debt on a sustainable path, reduce the current account deficit and protect foreign exchange buffers.
Efforts to increase social spending will also improve prospects for achieving more inclusive, sustainable, private sector led long-term growth, said the IMF team.
This seems to speak to President Museveni’s pet project, the Ush1 trillion ($271.9 million) Parish Development Model, a programme the government launched in February 2022 to bring 39 percent of poor Ugandan households into the money economy.
Uganda’s Ush52.7 trillion ($13.9 billion) is dedicated to poor Ugandans but does not address the high cost of living.
Finance Minister Matia Kasaija has proposed austerity measures, including a freeze on new administrative units, domestic borrowing and rationalisation of agencies to save the government Ush1 trillion ($271.9 million –- the same amount targeted for the parish development project) annually.
Finance Minister Matia Kasaija said: “The economic growth strategy underlying the budget for the next financial year and the medium term includes: Increased domestic revenue mobilisation and a reduction in non- concessional borrowing to ensure debt sustainability; effective implementation of the Parish Development Model and Emyooga initiatives; effective implementation of the various export strategies and enhancing access to global and regional markets; support for the private sector by reducing the cost of doing business.”
IMF Deputy Managing Director and acting chair Kenji Okamura praised Ugandan authorities for remaining firmly committed to their economic programme, “amid a challenging environment.”
Uganda’s public debt stood at Ush80.8 trillion ($21.7 billion) as at end December 2022. Of this, external debt was Ush47.9 trillion ($ 12.9 billion) while domestic debt was Ush33 trillion ($ 8.9 billion). Public debt is projected at Ush88.9 trillion ($23.7 billion) by June 30, 2023.
The IMF says the Ugandan banking system is well-capitalised, and liquidity has rebounded, but the asset quality of some banks has deteriorated.
Tanzania
In Tanzania, the region’s second-largest economy, there are just four contributors to the government’s total Tsh2.18 trillion ($936.62 million) general budget support fund: the World Bank ($500 million), the IMF ($305.7 million), the African Development Bank ($106.63 million), and the European Union ($24.29 million).
“It is our expectation that the funds committed by development partners for the execution of the 2023/2024 budget will be disbursed and utiliaed as agreed and in line with Tanzania’s priorities, guidelines, traditions, customs, and cultures,” said Finance minister Mwigulu Nchemba. In April, IMF directors commended Dodoma’s plan for fiscal consolidation starting in FY2023/24, while prioritising concessional financing to allow the “much-needed priority investment and social spending.
Antoinette Sayeh, IMF Deputy Managing Director, said Tanzania’s reform programme supported by the Extended Credit Facility focuses on completing the pandemic health and economic response, preserving macroeconomic stability, and addressing long-term challenges to support sustainable and inclusive growth, drawing on the government’s reform priorities articulated in their Five-Year Development Plan.
The Bretton Woods institutions remain the country’s leading sources of expected grants and concessional loans during the next financial year, with the World Bank pledging $1.2 billion, including $500 million in general budget support, and $710 million for specific projects, while the IMF’s earmarked $305.7 million for general budget support.
Tanzania has also considerably raised its agriculture budget for the third year in a row, this time from Tsh1.21 trillion ($521.55 billion) in 2022/2023 to Tsh1.46 trillion ($629.31 million), as the Samia Suluhu Hassan government seeks to increase food production for both domestic and export markets and as protection against the vagaries of the weather and other external factors.
This maintains a trend during President Samia’s two years at the helm where the agro budget has increased by more than trebledfrom Tsh294 billion ($126.7 million) in 2020/2021 to Tsh954 billion ($411.2 million) in 2021/2022, and now to the current Tsh1.46 trillion ($629.31 million).
Aside from kickstarting the credit guarantee scheme, the agro sector priorities for the next fiscal year will include strengthening the government’s agribusiness initiative targeting the youth through establishing more farming blocks under the Building a Better Tomorrow programme introduced last year.
Rwanda
Rwanda has started implementing a series of reforms to fast-track a transition into a low-carbon economy amid mounting climate change shocks. The country is still counting the cost after landslides and flooding left at least 130 dead, thousands homeless and destroyed livestock and crops.
The reforms come after the International Monetary Fund (IMF) Board released $98.6 million in budget support under its Resilience and Sustainability Facility (RSF) programme to finance its climate action ambitions.
While the definite figure has to be revealed, in the 2023/24 budget, the government gave tax exemptions and incentives to drive the use of environmentally friendly products to cut carbon emissions. Electric and hybrid vehicles, and electric motorcycles, will continue to enjoy an import duty rate of zero in the new financial year.
the government also plans to operationalise the Ireme Invest Fund, a new catalytic green investment facility launched on the sidelines of the UN Climate Change Conference (COP27) in Egypt last year, with an initial capitalisation of slightly over $100 million.
This is in addition to operationalising the NDC Facility, which already received €46 million ($50.25 million) from Germany — new funding that will be available to institutions working to implement Rwanda’s climate action plan, also known as the Nationally Determined Contribution (NDC) to the Paris Agreement.
The NDC climate action plan aims to reduce greenhouse gas emissions by 38 percent by 2030. This is equivalent to an estimated mitigation of up to 4.6 million tonnes of carbon dioxide equivalent (tCO2e).
Rwanda needs at least $11 billion by 2030, of which $6.9 billion is conditional on new financing to fund its climate change mitigation ambitions according to the World Bank. This amounts to spending 8.8 per cent of the country’s GDP each year through 2030.
In December, the IMF Board approved $319 million under RSF, making Rwanda the first African country to access the facility. Under the facility, the IMF expects Rwanda to improve transparency and accountability in the planning, execution, reporting, and oversight of budget resources dedicated to addressing climate change. It is also expected to implement a set of reforms to allocate climate resources more effectively and transparently to help it mobilise additional climate funding.
According to the IMF, the recent natural disasters such as landslides and flooding are expected to take a heavy toll on Rwanda’s economy and prove the country’s high vulnerability to climate change shocks.