In a significant policy shift aimed at economic stabilization and boosting state revenue, Kenya’s government announced the reintroduction of tax reforms on Friday. This move follows the shelving of an earlier finance bill in June that incited widespread protests and civil unrest across the country. President William Ruto’s administration, which has faced mounting pressure to address fiscal deficits and a crippling debt load, is now reinstituting measures that have proven contentious in the past.

Background of the Tax Reforms and Public Protests

The previous finance bill introduced earlier this year was part of President Ruto’s broader economic agenda to tackle the nation’s soaring public debt, which stands at approximately $80 billion. However, it was met with fierce opposition from both the public and civil society organizations due to the significant financial strain it posed on ordinary citizens. Key elements included increases in value-added tax (VAT) and new levies on essential services, triggering protests that were met with severe police crackdowns.

Rights organizations and human rights defenders accused the government of using excessive force during the protests, which led to over 60 deaths and numerous arrests. This brutal response drew widespread criticism from international bodies and domestic groups, casting a shadow over Ruto’s economic reforms. The protests showcased the deep-seated frustration within Kenya, where nearly a third of the population lives below the poverty line and many are grappling with inflation and job scarcity.

Specifics of the New Tax Measures

Despite the backlash earlier in the year, the government has reintroduced many of the contentious provisions. Reports in local newspapers on Friday revealed that the reinstated reforms would include increased VAT on goods and services as well as new taxes targeting the burgeoning digital economy. This means that freelancers and gig economy workers, such as those engaged in food delivery services and ride-hailing platforms, will now be subject to income tax for the first time.

The digital sector in Kenya has grown exponentially over the past decade, serving as a critical source of employment, especially for the youth. For many, platforms such as Uber, Bolt, and various food delivery services provide essential income amid high unemployment rates. The new tax policies aim to tap into this sector, generating much-needed revenue but potentially impacting the livelihoods of thousands who rely on these services.

Government Justifications and Economic Strategy

President Ruto’s administration has defended the reintroduction of these tax measures as necessary steps to address Kenya’s debt crisis and expand fiscal space for critical development programs. The government has pointed out that with an annual budget deficit of around $6 billion, continued reliance on borrowing is unsustainable. Ruto emphasized that the measures would help fund essential public services, including education, healthcare, and infrastructure, thereby boosting long-term economic growth.

The International Monetary Fund (IMF) and World Bank have been key advisors to Kenya’s economic reforms, advocating for measures that expand the tax base and reduce dependency on external debt. The reintroduction of tax measures aligns with these recommendations, as the country navigates its obligations under existing loan agreements.

Introduction of New Deputy President Abraham Kithure Kindiki

The announcement of tax reforms coincided with a significant political event: the swearing-in of Kenya’s new Deputy President, Abraham Kithure Kindiki. The ceremony, which was declared a public holiday at the last minute, marked the culmination of a turbulent period following the impeachment of former Deputy President Rigathi Gachagua. Gachagua, a key ally to President Ruto during the 2022 elections, was accused of promoting ethnically divisive politics and was impeached by the Senate on October 17. Although he was cleared of corruption charges, the move underscored the government’s effort to distance itself from polarizing figures.

Kindiki’s appointment is strategic for multiple reasons. A 52-year-old academic and lawyer, Kindiki has been a trusted member of Ruto’s inner circle and previously served as the interior minister. His roots in the Mount Kenya region, a politically influential area, make him an asset in consolidating support for Ruto’s administration. Notably, Kindiki defended President Ruto at the International Criminal Court when Ruto faced charges of crimes against humanity related to the 2007-2008 post-election violence.

In his acceptance speech, Kindiki highlighted his humble beginnings and the opportunities that Kenya has afforded him. “Kenya has made it possible for anyone to become anything in this country. I don’t take it for granted,” he said, expressing gratitude for his new role and pledging commitment to national unity and development.

Reactions to the New Deputy President

The appointment of Kindiki has drawn mixed reactions from the public and political analysts. Some view him as a stabilizing figure who could help temper the aggressive policies of the Ruto administration, while others criticize his previous stance supporting the use of force during protests. Human rights advocates have pointed out Kindiki’s role during the earlier protests, where he backed the police despite allegations of excessive violence.

President Ruto expressed high expectations for his new deputy, stating, “Welcome to the team that is going to transform Kenya into a great nation. Failure is not an option.” Ruto outlined key priorities that the government will address under Kindiki’s leadership, including reforms in higher education, agriculture, healthcare, and housing.

Economic Challenges Ahead

Despite the administration’s efforts, the economic challenges facing Kenya remain formidable. With inflation rates hovering around double digits for much of 2024, the cost of living continues to strain households. Food prices, driven by global supply chain disruptions and local climate conditions, have exacerbated poverty levels. The reintroduced taxes may potentially lead to further unrest, as many citizens feel they are already overburdened by the cost of basic commodities.

The IMF has projected that Kenya’s economy could grow by around 5% in 2024, a modest improvement but still short of the 6% annual growth targeted by President Ruto. Achieving this goal requires not only fiscal consolidation but also robust strategies to boost investment and foster job creation. Analysts argue that a balanced approach, focusing on both revenue generation and protecting the economic welfare of the most vulnerable, will be essential for the success of these reforms.

Lessons from Previous Tax Reforms

Kenya’s tax policies have historically faced strong public opposition, particularly when they disproportionately impact lower-income populations. The failure of previous tax measures to generate sufficient compliance has been attributed to the lack of trust between the government and the public. For the new measures to succeed, Ruto’s administration will need to engage in transparent communication and ensure that tax revenues are utilized effectively for public benefit.

Conclusion: Balancing Fiscal Responsibility and Public Sentiment

Kenya’s decision to reintroduce tax reforms amid economic and political shifts illustrates the delicate balance the government must maintain between fiscal responsibility and public approval. The challenge lies in implementing policies that enhance revenue without stoking further social unrest. Deputy President Kindiki’s role in this process will be pivotal as the administration works to restore trust and lead the nation toward stability and growth.

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Photo source: Google

By: Montel Kamau

Serrari Financial Analyst

4th November, 2024