Kenya Government Committed to Fiscal Consolidation, Effects to Be Felt in 3 Years

Kenya's Parliament Scrap Interest Rate Caps on Commercial Lending

Treasury has set budget deficit to reduce to 3.5% of GDP in 2022/23 from a high figure of 7.7% of the GDP in 2018/19.

Kenya’s National Treasury is committed to continuing on the path of fiscal consolidation but its effects would take time, the director-general in-charge of budget, fiscal and economic affairs Geoffrey Mwau said.

“Of course that could not happen in one year but over time if you look at our fiscal consolidation path, in the next three years we will be in a very comfortable level in terms of borrowing,” he said,” Mwau said on the sidelines of the launch of the Regional Economic Outlook.

He disclosed that the government will give more focus on concessional borrowing and increasing revenue growth.

“What we are doing is scaling down commercial borrowing, to a point where it is manageable, the key is to focus on revenue growth so that we do not have to depend on borrowing,” he said.

“That will not happen in one year, but over time, if you look at our fiscal consolidation path, even if three years it will be enough,” he added.

The World Bank has already warned that Kenya is falling back towards debt distress. World Bank senior economist-macroeconomics, trade, and investment Peter Chacha Wankuru during the Africa Economic Update in Nairobi on October 9, called for fiscal consolidation to reduce debt from the current 62 percent of Gross Domestic Product (GDP) to 55 percent in the medium-term.

“We really care about the pace of accumulation towards the 70 percent threshold. Previously it has been going down but it has turned around and it is now picking up again,” said Wankuru. “It is important the public debt management office adopts measures to ensure that this debt is not accelerating,” he added.

Kenya Government Committed to Fiscal Consolidation, Effects to Be Felt in 3 Years
The International Monetary Fund (IMF) Director for African Department Mr Abebe Selassie when he met President Uhuru Kenyatta at State House Nairobi

On the other hand, the International Monetary Fund (IMF) on Monday said Kenya should focus on increasing its tax base to tame its high expenditure.

“We would recommend the revisiting of tax exemptions with the aim of returning taxes as a share of GDP to 19/20 percent. This is not achievable in the immediate but can be done over time by setting targets of between 0.5 and one percent at the end of each financial year,” said Abebe Aemro Selassie, the director of the African Department at IMF.

According to Selassie, despite Kenya exhibiting strong growth, they have not seen taxes growing as much. “One of the reasons is because some parts of the economy are excluded from the tax net.”
The Central Bank of Kenya (CBK) data shows that the country’s debt has increased to KSh6 trillion. This is a 14% increase in the first 8 months of 2019 from KSh5.3 trillion at the beginning of the year.
Kenya’s economy expanded by 5.60% in the second quarter of the year, slower than the 6.40% recorded in a similar period a year earlier. This is despite consolidation measures aimed at cutting the deficit to 5.90% in the 2019/2020 financial year.

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Genghis Capital, an Investment Bank, in its 4Q19 Macro-Economic & Fixed Income Outlook said: “We are worried that fiscal consolidation will remain elusive.” According to them, the Actual fiscal deficit in FY2018/19 widened more-than-expected to 7.5% (6.3% as per 2019 Budget Policy Statement (BPS) estimate). This was partly attributed to revenue subdued performance (-6.9% -vs- KES 1.79Tn target) with ordinary revenue underperforming by 5.7% its target (KES 1.59Tn). The underwhelming revenue performance in FY2018/19 led to an uptick in borrowing from the initial Ksh 650.5Bn to the actual Ksh 721.1Bn.

For the current fiscal year, we note that the fiscal deficit target has been a moving target, surprising on the downside. (5.1% in 2019 BPS released in Feb, 5.6% as per the budget estimates in June and 5.9% as per the draft Budget Review and Outlook Paper).

The first-quarter performance in FY2019/20 with actual tax revenue performance at KES 372.3Bn (vs KES 451.9Bn on a pro-rata basis) is hardly inspiring. We thus expect a Supplementary Budget to issue from the finalized Budget Review and Outlook Paper in 1Q20 to rationalize the revenue estimates. Having said that, we note that FY2019/20 borrowing target has increased from KES 607.3Bn to KES 640.2Bn, which dents the narrative around fiscal consolidation.

Finally, nominal GDP is a moving target and an ambitious denominator skews positively the fiscal deficit in percentage terms. For FY2018/19, the target nominal GDP was KES 9.51Tn whilst the actual has been KES 9.35Tn, which pivots the fiscal deficit upwards.

(Last paragraphs from Genghis Capital)