Kenya Rate-Cap Retention Dents Policy Credibility, Moody’s Says

NAIROBI (Capital Markets in Africa) – Kenyan lawmakers’ move to postpone a value-added tax on fuel and their failure to repeal a cap on commercial lending rates weakens the government’s fiscal-policy credibility, Moody’s Investors Service said.

While President Uhuru Kenyatta can still reject the proposed amendments to legislation, they could exacerbate Kenya’s “sizeable financing needs in light of the government’s recurring fiscal deficits and growing debt burden,” Moody’s Vice President Lucie Villa said in an emailed report Monday.

The 16 percent fuel tax was implemented on Sept. 1 against parliament’s wishes and in the absence of Kenyatta assenting to a bill that proposes postponing it for two years. It could bring in 71 billion shillings ($705 million) a year — a sum the region’s biggest economy badly needs to shore up faltering revenue collection and fund projects.

The removal of interest-rate controls, which set the maximum that banks can charge for loans at 400 basis points above the benchmark rate, and broadening the tax base broadening are among Kenya’s key commitments to the International Monetary Fund. The nation’s $989 million standby facility with the Washington-based lender expires on Friday and it’s uncertain whether the country will secure a further extension.

While the IMF in the recent past praised Kenya for its progress in narrowing the fiscal deficit “Kenya’s track record of compliance with the fund’s targets is mixed,” Villa said.

Source: Bloomberg Business News