By end of tomorrow, Kenya could find itself in a predicament it experienced 15 years ago as the International Monetary Fund (IMF) makes ecision on whether or not to grant Kenya access to a precautionary credit facility.
It is a catch-22 situation. There is disquiet from majority of Kenyans who see the 16 per cent Valued Added Tax (VAT) on fuel as punitive, saying allowing it to pass just because the government requires IMF’s precautionary credit facility will increase cost of living.
But if Kenya got locked out of IMF’s Sh100 billion precautionary credit facility, this automatically signals to international investors that Kenya is not safe for investment, which will have a direct knock-on effect on Kenya’s credit worthiness. The ratings will dip significantly putting the country in an awkward position.
In contrast, is a country where more than half the population live below two dollars a day. A hike in cost of living can trigger unprecedented public unrest as people come alive to the reality of paying higher taxes to keep the government afloat, amid runaway graft and wanton wastage of public funds.
If the government shelves the IMF proposal to levy the tax on fuel, it is likely that the commitment to the donor communities could burst. But in one swoop, this could make the country lose all the gains made with the Washington institutions in the past.
For instance, Kenya signed an agreement with the bondholders of the $2 billion (Sh200 billion) Eurobond which says the holders are at liberty to recall their outstanding principals with interest if Kenya either leaves the IMF or is ineligible for the fund’s resources, could punish the country.
Interestingly, Central Bank governor and some other stakeholders have reportedly claimed the country does not need the guarantee of IMF’s standby credit facility. The condition is that if this facility is accessed, the government must enforce the 16 per cent VAT on fuel.
This school of thought further claims Kenya has enough dollars to cushion the country against any adverse effect that might require instant injection of dollars.
But questions abound, if the foreign exchange reserve at the Central Bank is adequate enough to withstand any shock why can’t the country deal with the IMF without taxing the public more? As it stands, the die is cast, and the country awaits to see what action the National Treasury portends to ordinary Kenyans.