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Treasury, Uhuru in tight spot over fuel VAT

The current crisis over the imposition of a 16 per cent VAT on petroleum products has put the National Treasury in an tight position.

As Kenyans wait to see if President Uhuru Kenyatta will sign a bill that suspends the new tax, the Treasury has been pushed to a tight corner, especially now that the International Monetary Fund (IMF) Stand-By Arrangement precautionary loan facility ends this Friday.

The bill also puts the President in a dicey position. In case he signs the bill passed by Parliament recently, he must contend with the fact that the Treasury will have a Sh71 billion deficit that had already been budgeted for and anticipated to raise the money this financial year.

In the event the Head of State does not assent to the bill, he will have to return it to Parliament with a memorandum explaining his concerns. This could mean the fuel crisis, which has sparked public outcry,  may take a little longer to solve.

Also, the end of the  IMF precautionary loan facility this Friday is likely to have huge implications on any decision the Executive and Parliament makes.

It is believed that IMF is one of the driving forces behind the contentious VAT Act 2013.

However, it is worth noting that the IMF started engaging with the government with a view to making available Stand-By Arrangement (SBA) and Stand-By Credit Facility (SCF) of $688.3 million (Sh69 billion) in February 2015. SBA and SCF are non-concessional loan facilities made available by IMF at short notice to countries to cushion their economy against unforeseen shocks.

This was barely one-and-a-half years after Treasury drafted and convinced the 11th Parliament to pass the Finance Bill 2013, which provided for the 16 per cent VAT on fuel.

IMF easily made available the SCF, saying it was satisfied with government’s “prudent macroeconomic policies and major institutional and economic reforms”.

During the review, Treasury Cabinet Secretary Henry Rotich had also given the IMF team a letter committing that the government would abolish VAT exemptions on petroleum products in the 2016/17 financial year as a way of raising more revenue to address the growing fiscal deficit. Remember, this is the time the government had received its first Sh250 billion Eurobond. 

However, the 16 per cent VAT, which was due for implementation in June 2016, was again extended by a further two years up to this year.

Since the first review in 2015, IMF and the Treasury have had three more other reviews and during these engagements, the issue on how the government expects to bridge the growing budget deficit has been a sticking point.

When the IMF and Treasury met again this year between July 27 and August 2, despite acknowledging the performance of the Kenyan economy and extending the SBA facility from March to September 14, the lender had reservations on the government’s fiscal policies. They were also concerned by Parliament failure to scrap interest rate caps and other reforms to spur sustainable investment-driven and inclusive growth.

So any decision the government makes on Finance Bill will loom large when the Treasury meets IMF team in the coming days to discuss the renewal of the precautionary loan facility to cushion the shaky economy against any external shocks.