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Kenya Budget Shortfall - 2002-06-14

Finance Minister Chris Obure has announced plans to raise taxes, saying the government will increase revenues from 2.6 billion to 3.2 billion US dollars in the next fiscal year. The minister said in the absence of donor support the government is left with no alternative but to borrow from the domestic market and raise taxes on some products.

Presenting the budget to parliament Thursday (June 13), Mr. Obure says "Since the suspension of donor support the government has relied on domestic borrowing." He said "interest on domestic debt stands at 12% of the government’s recurrent expenditure."

But economic observers say heavy borrowing in the domestic market to meet a 400 million US dollar budget deficit has pushed up interest rates in the banking industry to unaffordable levels. They say this will starve the private sector of much-needed investment capital.

Kenya has not received donor support from the World Bank and the International Monetary Fund in the last nine years. The two institutions cut off donor aid to Kenya due to what they termed high-level corruption and the lack of commitment by the government to stop it. They also say the government has not initiated enough reforms in the economic sector.

Many Kenyans say this year’s budget is another example of the government giving with one hand and taking away with the other. They say where as Kenyans may celebrate the removal of import duties on cellular phone handsets, sim cards and scratch cards, they will be pinched harder when they start to use those phones because call charges will attract a five percent tax.

Perhaps the most controversial provision of the budget is the increase of Kerosine prices by one Kenya shilling per liter. Until Thursday one liter of the commodity was retailing at quarter of a dollar for a liter. Kerosine is used by Kenyans for lighting and cooking and is particularly precious in rural areas where more than 80% of the population lives. In these areas gas or electric power is not available.

Dr. Wycliff Odour is a Kenyan politician. He says "by increasing it by one shilling actually it is going to affect the common man in a lot of ways because they are going to start looking for alternative fuel. We have seen in the past that when prices of things like kerosine go up then there is a lot of harvesting of firewood which the common man tends to use as alternatives. "

Mr. Odour says depletion of forests will lead to land degradation, which is one of the factors responsible for a decline in Kenya’s agricultural production. He says although the budget removed import duties on wood products, this will not stop poor Kenyans from cutting down trees for fuel. He says imported wood benefits only rich Kenyans who buy expensive furniture made of such wood.

A measure of the budget that has been well received is the removal of taxes on agricultural fertilizers. Kenya is predominantly an agricultural country where over 80% of the population rely on farming of various export and domestic crops. Some of the main cash crops include tea, coffee and pyrethrum. Most people also see the reduction of duty on industrial fuel as a way of salvaging Kenya’s production sector which is virtually on its death bed.

The government also introduced higher taxes to curb dumping of finished goods such as used clothes and used motor vehicles. Minster Obure says such imports have contributed to the collapse of the local cotton industry and the motor vehicle assembly.