Kenya beyond the 2021/22 budget. What happens next?
On 29th April 2021, the National Treasury presented its Budget Estimates for the next financial year 2021/22 to the National Assembly, standing at Kshs. 3.1 tn, one of the biggest budget in the country since independence.
With an increase of 5.6% from the FY 2020/21, that stood at 2.9 tn. The government is set to use this method as a way of helping the economy recover from the hard strike pandemic.
Kenyans are expected to feel the heat with a number of increased tax and cut off measures in a projection that the government cautiously to maintain it’s normal revenue collection.
Furthermore, the allocation of resources has been aligned to priority programs under the Big Four Agenda, the Third Medium Term Plan (2018-2022) of the Vision 2030 blueprint, and various initiatives under the Post Covid-19 Economic Recovery Strategy. This is to ensure spending is directed towards the most critical needs considering the available resources.
To guide this estimates the national treasury had laid down a number of fit-in that cumulatively raffle up the 5.6% increase in the budget. The 2021 Budget estimates point to a 5.6% increase of the budget, to Kshs 3.1 tn from Kshs 2.9 tn in the FY’ 2020/21 supplementary budget.
Recurrent expenditure is set to increase by 10.0% to Kshs 2.0 tn, from Kshs 1.8 tn as per the supplementary budget, while development expenditure is projected to decline by 5.1% to Kshs 619.5 bn from Kshs 653.0 bn as per the FY’2020/21 supplementary budget. Under recurrent expenditures, ministerial recurrent expenditures increased by 4.8% to Kshs 1,321.7 bn, from Kshs 1,261.0 bn, while interest payment and pension increased by 21.5% to Kshs 697.5 bn from Kshs 574.1 bn in the FY 2020/21 supplementary budget.
The budget deficit is projected to decline to Kshs 952.9 bn (7.7% of GDP) from the projected Kshs 970.9 bn (8.7% of GDP) in the FY’2020/21 supplementary budget; in line with the International Monetary Fund’s (IMF’s) recommendation, in a bid to reduce Kenya’s public debt requirements. Revenue is projected to increase by 10.3% to Kshs 2.0 tn, from Kshs 1.9 tn in the FY’2020/21 supplementary budget, with measures already in place to work towards increasing the amount of revenue collected in the next fiscal year.
Total borrowing is expected to decline by 1.9% to Kshs 952.9 bn from Kshs 970.9 bn as per the FY’2020/21 supplementary budget , in a bid to reduce Kenya’s public debt burden which is estimated at 69.6% of GDP as at December 2020, 19.6% points above the East African Community (EAC) Monetary Union Protocol, the World Bank Country Policy and Institutional Assessment Index, and the IMF threshold of 50.0%, and lastly Debt financing of the 2021/22 budget is estimated to consist of 30.4% foreign debt and 69.6% domestic debt, from 28.7% foreign and 71.3% domestic as per the FY’2020/21 supplementary budget. Consequently, we might see an increase in domestic interest rates as the government tries to encourage capital flow.
According to the National Treasury, the estimates target a revenue collection of Kshs 2.0 tn which is 16.4% of the GDP, where ordinary revenues are projected to come in at Kshs 1.8 tn or 14.3% of GDP. The on-going reforms in tax policy and revenue administration will support revenue performance. Revenue collection will be enhanced by tax amendments meant to broaden the tax base in the Finance Act 2020 that introduced the minimum tax and digital services tax. Over the medium term, the fiscal policy will be targeted at helping raise revenues from 16.4% of GDP in FY’2020/21, to 18.1% of GDP in FY 2024/25.
The government’s goal is to reduce the fiscal deficit and stabilize growth in public debt while ensuring debt sustainability. They intend to achieve this through a combination of revenue enhancement initiatives and expenditure rationalization. We are of the view that the higher targeted revenue collection will be driven by the prospects of an economic recovery. This budget estimates has indicated that the government is set to cut back on borrowing and instead opt for higher taxation, Kenya Revenue Authority (KRA) has positioned itself to collect more by introducing a raft of tax amendments that are aimed at widening the tax base and other than raising taxes the government should also look at sealing tax leakages within KRA.
As per the FY’202/22 budget estimates, total expenditure is set to increase by 5.6% to Kshs 3.1 bn from Kshs 2.9 bn in the supplementary budget FY’2020/21. Recurrent expenditure is set to increase as the development expenditure is expected to decline; with recurrent increasing by 10.0% to Kshs 2.0 tn, from Kshs 1.8 tn as per the supplementary budget, while development expenditure is projected to decline by 5.1% to Kshs 619.0 bn from Kshs 653.0 as per the revised FY’2020/21 budget. The increase in the recurrent expenditure has mainly been driven by the increased interest payments in the past given the high borrowing in the country which has seen interest payments increase by 21.0% to Kshs 560.3 bn, from Kshs 463.1 bn in FY2020/21, according to the national treasury. One of the key concerns lies in the proportion of recurrent expenditure compared to development spending which as per the estimates is expected to come in at 66.1% against 33.9%, respectively.
In the financing of the debts, the fiscal deficit is projected at 7.7% of GDP whose funding will be through a net external borrowing of Kshs 291.3 bn coupled with a net domestic borrowing of Kshs 661.9 bn. The total new public debt requirement for the FY’2021/22 is set to decline by 11.6% to Kshs 952.9 bn from Kshs 970.9 bn, in FY’2020/21, as per the revised budget. The public debt requirement mix is projected to comprise 30.4% foreign debt and 69.6% domestic debt, compared to the 28.7% foreign debt and 71.3% domestic debt as per the supplementary budget FY’2020/2021. For the Medium term, official sources for loans on concessional terms will be maximized while non-concessional, commercial external borrowing and sovereign bond issuance will be limited to projects with high financial and economic returns in-line with the government’s development agenda. Additionally, the government intends to provide support for infrastructure to improve debt management operations for both the primary and secondary markets to enhance investor access, promote confidence among participants and further deepen the capital markets.
Considering the projected revenues and expenditures, for the Medium-term, official sources for loans on concessional terms will be maximized while non-concessional, commercial external borrowing, and sovereign bond issuance will be limited to projects with high financial and economic returns in line with the government’s development agenda. Additionally, the government intends to provide support for infrastructure to improve debt management operations for both the primary and secondary markets to enhance investor access, promote confidence among participants and further deepen the capital markets.
The fiscal year 2021/21 points out an expansive year where the government has tried to stretch in order to fix the stumbled economy into it’s initial state. The budget is however hinged on meeting the revenue collection targets, expected to be boosted by the relaxation of the tax cushions that had been implemented during the peak of the pandemic last year. This premise however ought to be a factor of economic recovery which is still uncertain given the uncertainty surrounding the persistence of the pandemic.
The fiscal deficit is estimated to reduce to 7.7% of GDP mainly as a result of an expected decline in recurrent expenditure and an improvement in revenues. The latter will be highly dependent on how well the government will be able to implement some of the measures put in place. With the number of changes done in the tax, there raises more uncertainties of unintended budgetary consequences to Kenyans and the economic stability of the country in the next 10 years, as we near the fiscal year of economic growth ( Vision 2030 ).