Fed rate, inflation and taxes

Kenya's National Treasury is grappling with significant fiscal challenges as it anticipates closing the 2024 fiscal year with a 5.2 per cent GDP deficit due to debt service obligations outstripping tax revenues. This scenario unfolds against the backdrop of the Central Bank's decision to maintain the lending rate at 13 per cent following its recent Monetary Policy Committee meeting. To shed light on these developments, CNBC Africa spoke with Kwame Owino, the CEO of the Institute of Economic Affairs. The global economic landscape has been closely monitored in light of comments from Fed Chair Powell regarding potential rate cuts. Kwame Owino highlighted the interconnectedness between the US Federal Reserve's monetary policy changes and their implications for countries like Kenya. The US elections, concerns about inflation management, and their impact on the US dollar's strength relative to the Kenyan shilling all play a pivotal role in shaping Kenya's economic outlook. Domestically, Kenya has faced scrutiny over its tax policies, with the government facing criticism for escalating revenue collection efforts at a time when the economy is still reeling from the effects of the COVID-19 pandemic. Despite striving to meet debt repayment obligations to avert a default, the government's strategy of hiking tax rates while making minimal expenditure cuts has faced backlash from citizens and businesses alike. The implementation of new taxes has strained the private sector, leading to job losses and economic challenges. As Kenya prepares to receive financial support from international institutions such as the World Bank and the IMF to alleviate its debt burden, concerns persist over the sustainability of the current fiscal trajectory. While external funding provides temporary relief, it does not address the underlying issues driving the country's fiscal imbalances. Striking a balance between meeting debt obligations and safeguarding economic growth remains a pressing challenge for policymakers. The high interest rates on government bonds and bills, coupled with ongoing industrial actions in essential public service sectors like healthcare and education, underscore the pressing need for a comprehensive fiscal strategy. Failure to stimulate private sector investment due to exorbitant borrowing costs could dampen economic growth prospects and impede revenue generation in the long run. In conclusion, Kwame Owino emphasized the importance of a prudent fiscal approach that balances debt management with sustainable economic development. While acknowledging the necessity of certain investments, he cautioned against rushing into large-scale projects that may strain the country's financial resources. Delaying non-critical expenditures and fostering a conducive business environment could help avert a prolonged period of high taxation and economic uncertainty, ensuring a more stable and prosperous future for Kenya.