Moody's Rating Agency
Ratings agency Moody's Investors Service has warned that rising political and social risks in Kenya could undermine the government's ability to consolidate its finances.
The announcement comes after Kenyan President William Ruto announced he would withdraw a finance bill containing controversial tax increases following deadly protests that saw part of Parliament House burn down earlier this week.
The ratings agency said the proposed tax measures are essential to improving Kenya's fiscal position.
Moody's last month downgraded Kenya's senior unsecured debt ratings, as well as long-term foreign and local currency issuer ratings, to B3 from B2, citing increased liquidity risks to the government.
While B2-rated debt is considered speculative and subject to high credit risk, a downgrade to B3 signifies financial instability and reflects weaker-than-expected operating performance.
“Even if the government compensates for the rollback with spending cuts, the protests and subsequent rollback of tax increases are likely to reduce room for expanding the tax base and delay fiscal consolidation,” Moody's said in the report.
While the government has withdrawn some of the controversial proposals in the Finance Bill, 2024, protesters have called for the entire bill to be scrapped.
Among the proposals the government has dropped are a 16 percent sales tax on bread, a 25 percent customs duty on edible oil and the introduction of a vehicle ownership tax equal to 2.5 percent of a vehicle's value.
In a speech announcing the repeal of the bill, Finance Minister Ruto said the government would cut spending by 200 billion Kenyan shillings (R28.3 billion) to make up for the scrapped tax measures.
Moody's said the spending cuts would affect all government departments, including county governments and development spending.
The government said lower revenue projections for fiscal 2025 and a weakened ability to implement future tax measures would mean interest payments would take up a larger share of government revenue, further worsening an already weak debt-repayment capacity.
“Fiscal consolidation efforts that focus on spending cuts rather than revenue-led consolidation will almost certainly slow the pace of fiscal consolidation,” the agency said.
According to BBC News, since being elected in August 2022, Ruto has increased payroll taxes, doubled sales tax on fuel and introduced a new housing tax, which led to the cost of living crisis protests in July 2023.
“Continued protests signal prolonged political instability and will further limit the government's fiscal consolidation options,” Moody's said.