Taxes may rise as govt seeks funding for infrastructure projects, analysts say

Tuesday January 19 2016

The SGR South Station under construction at

The SGR South Station under construction at Syokimau in Machakos County on January 11, 2016. Analysts have warned of a possible rise in taxes in the next financial year as the government seeks more money to fund ambitious infrastructure projects. PHOTO | SALATON NJAU | NATION MEDIA GROUP 

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Analysts have warned that taxes may go up in the next finance year as the government runs out of affordable options to borrow from the international markets.

Global assets manager PineBridge Investments has predicted a rise in taxes to finance ambitious infrastructure projects.

The projection comes on the back of a hike in taxes in December 2015 when the Excise Duty law came into place pushing inflation above the Central Bank of Kenya target to 8.01.

PineBridge Investment CEO Jonathan Stichbury says the risk from hard currency sovereign borrowing like the Eurobond which require foreign exchange support to repay will push the National Treasury away from the international market.

“We expect to see additional pressures on revenue financing with aggressive tax collection being required and additional taxes being levied in 2016,” Mr Stichbury said.

African countries are finding it harder to borrow from the international markets as investors ask for higher premiums than before.


For example, Ghana was unable to raise a $1 billion Eurobond in October 2015 at 9.5 per cent until it raised the coupon rate to 10.75 per cent for the 15 year bond.

Although the bond was oversubscribed by 100 per cent, the International Monetary Fund (IMF) described it as unfortunate that current market conditions have pushed borrowing costs higher which threatens debt stability.

In 2014, Kenya borrowed a total of $2 billion with a weighted average interest rate of 6.6 per cent from in Europe, Middle East and the US.

Economist David Ndii has already warned that with the scandal surrounding the Eurobond, Kenya is likely to attract high risk premiums from investors as well as reputational risks from transaction advisors.

But with a $750 million dollar loan that the government took out recently to plug the cash crunch falls due in October 2017 the government will be hard-pressed to borrow to refinance it.

The National Treasury has hinted at fresh plans to return to the international market to source for more funds, including the option of another Eurobond, to plug deficits in the national budget.

But a risk of currency volatility and a high premium for Eurobonds may make the debt burden unsustainable.

According to the IMF World Economic Outlook, Kenya’s debt burden rose to 56.2 per cent of GDP but is predicted to reduce to 55.9 per cent in 2016.