Will IMF succeed making Kenya increase basic commodity prices?

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Growth projections for sub-Saharan Africa are expected to grow to 3.6 per cent in 2020 from 2019’s 3.2 per cent.

The expected recovery is, however, at a slower pace than previously envisaged for about two-thirds of the countries in the region, partly due to a challenging external environment.

Growth in non-resource-intensive countries is projected to remain strong, averaging about 6 per cent. As a result, 24 countries, home to about 500 million people, will see their per capita income rise faster than the rest of the world, according to the World Bank.

For resource-intensive countries, the contrast is that growth is expected to move in slow gear at 2.5 per cent. This means that 21 countries are projected to have per capita growth lower than the world average.

The World Bank says that reducing risks and promoting sustained and inclusive growth across all countries in the region requires carefully calibrating the near-term policy mix, building resilience, and raising medium-term growth.

Proposals to increase basic commodity prices

In Kenya, for instance, the International Monetary Fund (IMF) is pushing the country’s Treasury to raise basic goods prices by at least 16 per cent. The move, the Bretton Woods institution says will help cut budget deficits and tame public borrowing.

IMF wants the Kenyan government to increases taxes for basic goods including maize and wheat flour, bread and cooking gas. Maize flour is a live wire for the Kenyan authorities so this may be an issue the government treads cautiously on.

The World Bank’s sister institution says that the government’s move to reduce or zero rate taxes on the sensitive goods had contributed to the significant tax collection shortfalls.

While reviewing Treasury’s and Kenya Revenue Authority (KRA) books last year, IMF said that the reduced and zero-rated tax for the goods and services was costing the country in excess of Sh478 billion despite the demand having doubled since 2013. KRA’s tax collection shortfall for 2019 was Ksh300 billion (US$300 million).

In rationalising such a move in Kenya and other countries in similar situations, the IMF says that the countries have to carefully calibrate the near-term policy mix.

It notes: “Amid limited buffers and elevated debt vulnerabilities in some countries, policymakers have limited room for manoeuvre to counter external headwinds. The room for supporting growth remains mainly on the monetary policy side and is restricted to countries where inflation pressures are muted and growth is below potential. In the event downside risks materialize, fiscal and monetary policy could be carefully recalibrated to support growth, in a manner consistent with debt sustainability and available financing, and as part of a credible medium-term adjustment plan.”

The Washington, D.C-based multilateral financier adds that countries that are growing slowly could see the pace of adjustment being more gradual as long as financing is available or its composition fine-tuned to minimize the impact on growth.

“In fast-growing countries that are facing elevated debt vulnerabilities, the priority remains to rebuild buffers,” adds the IMF.

Kenya’s economy improving

After a sustained period of sluggish growth following the prolonged 2017 elections, the East African economic hub’s growth is expected to improve marginally this year.

The World Bank’s latest Global Economic Prospects report shows that Kenya’s economy will slightly accelerate in 2020to hit 6 per cent.

Favourable weather and increased credit flow to businesses are projected to aid this growth which is just a point 1 percentage over June 2019’s projection.

WB estimated that Kenya’s growth for 2019 would slow to 5.8 per cent from 6.3 per cent in 2018 due to the adverse weather conditions which affected agricultural production.

Read: Is Kenya’s economy safe and sound after IMF standby loans expire?

I have 10 years of experience in multimedia journalism and I use the skills I have gained over this time to meet and ensure goal-surpassing editorial performance. Africa is my business and development on the continent is my heartbeat. Do you have a development story that has to be told? Reach me at njenga.h@theexchange.africa and we can showcase Africa together.

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