Kenya’s 2021-22 budget and its aim on MSMEs Fiscal accommodation

Politics and the Economy in Kenya, still hold the most performance variables. The financial year 2021-2022 budget opens up an accommodation space to the Micro, Small and Medium Enterprises (MSMES) in the economy. However, as the country edges on the next general election on next year, the outlook of the budget needs to be revised. With the same, the budget has already set some key aims of protecting the economy this ‘politically injected’ season.

On 10^th June, the National Treasury presented a Sh 3.7 trillion budget for the financial year 2021-2022. The one of a kind budget, which toppled the previous years all bargains due to the issue of the Covid-19 pandemic. The figure representing a 9.0% increase over the prior year’s Ksh 3.4 trillion, chiefly focuses on the recovery from the Covid-19 pandemic, a disease that has left so many economies in the world on their knees trying to recover slowly. To put this in context, the 9% increase is equivalent to some central African Countries annual GDP.

According to the Treasury, the idea behind the rising figure was to enable a fiscal consolidation plan that aims at stabilizing debts over the medium term.  However, the success of the consolidation plan will depend on the effectiveness of fiscal policy implementation, as well as the strength of economic growth, which is highly uncertain due to the unpredictable evolution of the pandemic.

The government projects total revenues of Sh 2.0 trillion or 16.4% of GDP, aiming to collect Sh 1.7 trillion in tax revenues—a 16% increase over the current fiscal period—which would finance around 50% of the total budget. This would yield a deficit of 7.5% of GDP, down from the shortfall of 8.7% of GDP estimated for this fiscal year. Moreover, the fiscal consolidation plan aims to reduce the deficit further to 3.6% of GDP in FY 2024–2025.

To finance the deficit, the government aims to borrow Sh 271 billion, or 2.2% of GDP, through external financing and the remaining amount, equivalent to 5.3% of GDP, through net domestic financing. However, although the government noted that public debt remains sustainable, it poses a major challenge, as debt servicing costs are projected to amount to roughly Sh1.2 trillion in the coming fiscal year.

On 24^th Thursday last week, the International Monetary Fund (IMF) added another loan to Kenya. The amount which amounted up to Sh 44 billion from the international lender added to the already overflown kitty of debts in the country.

The Sh 44 billion was part of the Sh 255 billion loan request that was approved by IMF in April 2021. Despite the reactions from MSMEs and other groups in business over failure to reach the heights of the funding IMF replied with the aims of resurrecting the broken economy from covid-19.

“The Board’s decision allows for an aggregate immediate disbursement of Sh 44 billion…bringing Kenya’s total disbursements for budget support under the arrangements to about Sh 77 billion,” IMF said as reported by Daily Nation.

In relation to the Treasury earlier, the international lender said the amount would help the country address debt vulnerabilities, support response to the COVID-19 pandemic on MSMEs and enhance governance.

While a large portion of the planned spending in the budget is allocated to the “Big Four” agenda whose goal is to promote sustainable economic growth and accelerate jobs creation, the main focus is still spent on areas as such as universal health coverage, affordable housing policies, bolstering the manufacturing sector’s contribution to GDP through reforms and investment, and improving food and nutrition security. Moreover, a proportion of the budget will be used to acquire vaccines and facilitate the roll-out, in a bid to address concerns over vaccine availability.

Generally speaking it is the MSMEs are the most hit in the pandemic. Most businesses had to pay through lock-downs, curfews and reduced market returns with little or no profits in the interim. Many lacked enough protective gears and the procurement of vaccines has also been an agenda on these business group whose personnel is exposed to the flu to ensure success of the business. However, the economy has been stable because, MSMEs have not failed to roll up new plans to survive in the struggling economy. Innovative minds, creative operational strategies and escape plans that opens doors to their success have been on the show. For instance the show on CrystalPerk Mombasa Magazine “How Brands Are Born” show cases a number of “Corona Babies” – businesses born of the pandemic. Yes, many manufacturing business are coming up to meet the local demand of products that previously were easily imported.

The government on the other hand counts on an expected 6.3% GDP expansion in CY 2021 to support the proposed budget, although this comes against a backdrop of a fragile global recovery, with lingering uncertainty over the evolution of the pandemic and the emergence of new variants of the virus, as major parts of Western and Nyanza regions are now under lock-down from the Indian variant.

Experts still believe the country has a lot to reach in terms of public debts and sustainability of the current economic standards in relation to the previous years. The pandemic is exposing the misguided interests of the government in which a lot of infrastructure still lie underutilised or dilapidated while the cries of the MSMEs has always been to support these either via Public Private Partnerships or via local solutions which in turn have been known to bring in the much needed fluidity in the surrounding communities.

“The government’s ambitious multi-year fiscal consolidation plan will prove difficult, given a track record of ineffective fiscal policy implementation. Moreover, high debt and interest rate burdens increase financing risks. We expect the fiscal deficit to narrow to 7.9% of GDP in 2021, from an estimated shortfall of 8.7% in 2020. It will take time to bring the fiscal deficit to more sustainable levels. Public debt is expected to increase from 68.8% of GDP in 2020 to 70.7% of GDP this year, reaching a turning point of 73.4% of GDP in 2022 before declining slowly thereafter,” as noted from Jee-A van der Linde, an economist at Oxford Economics.

Power, bargains and focus on the key interests of MSMEs are the only driven agendas Kenya needs to bolster for the growth of the Nations net returns. However, if the blueprint will falter and sway to the face of the coming general elections, a growing Kenya will be a dying Kenya. This is a rationale to discuss at all levels.

Mombasa, Kenya.