Low tax compliance and high debt leave Kenya with ‘negative’ outlook

1 Apr 22

Kenya’s shrinking tax base and high debt burden have kept Kenya’s credit rating at risk of a downgrade, according to ratings agency Fitch.

Maintaining its rating at B+ with a ‘negative’ outlook, Fitch said strong growth and “relative macroeconomic stability” were not enough to assuage its concerns over public finances.

It said surging commodity prices were pushing up inflation and said it remains uncertain around the government’s deficit reduction plan.

“Kenya’s government will make some progress on fiscal consolidation, but fiscal deficits will remain high as we expect tax revenue/GDP below pre-pandemic levels throughout the forecast period,” Fitch said in a note accompanying the decision.

Analysts described a “declining tax base in recent years” with poor compliance, although revenues this year (ending in June) are above target.

Fitch said it expects the fiscal deficit to fall to 7.8% of GDP this year, following 8.2% in 2020-21, and to fall further to 6.8% of GDP in 2022-23, if the economy continues to grow and tax compliance can be improved, but this is still far above the 3.7% average for B-rated countries.

Interest payments as a percentage of revenue are similarly high at 28.8%, with this being “likely to increase as the government increases its call on domestic debt markets for fiscal financing” if global financial conditions continue to tighten, the note said.

Fitch forecasts general government debt to rise to about 70% of GDP in the medium term.

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