The International Monetary Fund (IMF) has warned the Kenyan government of the dire consequences of enacting a new environmental tax proposal that was put in motion last month.
The Ministry of Environment, headed by Cabinet Secretary Aden Duale, is proposing an Environmental Restoration Levy on all imported finished products.
According to the IMF, the government should be mindful of introducing such levies and steer clear of unintended consequences by conducting upfront an economic impact assessment before considering enacting the tax levy into law.
In its Staff Report following the conclusion of the 7th & 8th Reviews of Kenya's US$3.6 billion(ksh 460.8 Billion) program, IMF advised the government to do its due diligence assessment on exports, potential spillovers to trading partners, inflation, and public finance.
The IMF has also warned about the possibility of multiple taxation along the value chain. It has warned about the tax rates and risk of overestimating associated yields by considering demand elasticity and administrative and compliance costs, including the feasibility of monitoring and enforcement.
"Staff advised the authorities in introducing such levies to be mindful of possibilities of multiple taxations along the value chain, to be mindful of the tax rates and the risk of overestimating associated yields by considering demand," reads part of the report by IMF released on Friday.
It has also advised the government to take a careful assessment and build consensus that is essential to ensure that future environmental-related levies do not face social and political pushback.
In the proposed Bill, CS Duale revealed that all importers of finished products would be required to pay the fee directly to the National Environment Restoration Fund established by Section 25 of the Environmental Management and Coordination Act.
The proposed Environmental Restoration Fee is set to be used to address the triple planetary crises of environmental pollution, nature and biodiversity loss, and climate change.
The IMF has advised the government to consider embedding the environmental levies in a comprehensive policy package where receipts help fund efforts to transition toward a circular economy that could not only help garner social and political support but also render the levies more effective in reducing waste and incentivizing recycling.
IMF staff are in the country following a request for a government and performance review from President William Ruto's government. The government wished to be reviewed on fraud and the reason for rebellion from Gen Zs.
The IMF staff have advised Ruto and the Kenya Kwanza government to address fraud cases to regain the trust of Gen Z, who are skeptical about tax increases and their intended public benefits.
