NAIROBI, Kenya – The World Bank has issued a stark caution to President William Ruto administration, highlighting significant fiscal challenges stemming from overly optimistic revenue projections.
According to the World Bank’s latest Kenya Economic Update, the government’s inability to meet revenue collection targets is complicating efforts towards fiscal consolidation.
The World Bank noted that unrealistic revenue forecasts have led to spending plans that exceed actual revenues, potentially causing an accumulation of pending bills.
Despite efforts by the Kenyan Treasury to enhance tax administration and control primary expenditures, revenue mobilization has consistently fallen short of targets.
“The fiscal outturn in the first nine months of FY2023/24 shows the government’s continued efforts to remain on a fiscal consolidation path. Steady revenue growth driven by the implementation of tax administration and policy measures in the Finance Act 2023 and the government’s efforts to contain growth in primary expenditures resulted in an increased primary surplus,” Kenya’s Ministry of Treasury said.
However, achieving fiscal consolidation targets requires realistic revenue forecasting.
The World Bank emphasized that consistent revenue shortfalls undermine the credibility of the budget process, leading to unjustifiably large expenditure allocations without adequate revenue backing.
This fiscal imbalance has broader economic implications, particularly in eroding investor confidence and complicating long-term strategic planning for businesses.
The World Bank also criticized the frequent and unpredictable tax changes implemented by the Ruto administration.
Such volatility creates an uncertain business climate, making it difficult for businesses to plan for the future and assess potential returns on investment.
This instability discourages foreign direct investment (FDI) and complicates tax compliance, ultimately reducing government revenue.
“Frequent and unanticipated tax policy shifts create a volatile business climate, erode investor trust, and hinder strategic planning,” the World Bank said in a report.
“Such unpredictability, exemplified by abrupt tax rate changes or the introduction of new taxes, directly impacts the cost structures of businesses, especially those in the import-export sector.”
The World Bank’s announcement comes as the Kenyan government is preparing to implement new tax increases to bridge its budget deficit.
However, these proposals have sparked concerns about their potential impact on the economy.
Critics argue that higher taxes could stifle already struggling businesses, push more economic activities into the informal sector, and ultimately harm the economy.
Proponents of the tax hikes within the Kenya Kwanza regime argue that increased revenue is essential for funding vital government services such as infrastructure and social programs.
However, the World Bank and other experts caution that excessive taxation could lead to greater tax evasion and a thriving black market, further distorting the economic landscape.
