International rating agency Moody’s has warned Kenya of an economic rating downgrade if the country removes taxes on fuel.
Moody’s says decision to suspend the law that came into force this month will raise the budget deficit and weaken the country’s fiscal position.
In February Moody’s downgraded Kenya’s credit rating to B2 from B1 due the rising debt burden that currently stands at 58 percent of the Gross Domestic Product.
The agency is warning that it is likely to demote the credit rating for the country if Kenya suspends the VAT law.
The agency says suspension of the VAT law will leave Kenya with over Ksh30 billion udget deficit which will lead to a further deterioration of the country’s fiscal position.
In the fiscal year 2018/19, the budget deficit is projected at 7.1 percent of GDP almost two basis points above treasury’s target.
However, this is an improvement from 9 percent that the country recorded in the last financial year.
Lucie Villa, vice president and sovereign analyst for Kenya at Moody’s says the Kenyan shilling is also likely to come under pressure if the International Monetary Fund withdraws the Ksh150 billion emergency facility that seeks to cushion the shilling against internal or external pressures.
In its last rating in February, Moody’s demoted Kenya’s credit rating from B1 to B2 on weak fiscal position. A further downgrade could negatively affect foreign direct investment to Kenya.