Columnists

Treasury signals another year of fiscal expansion

rotich

National Treasury secretary Henry Rotich. PHOTO | FILE

The National Treasury has baked another expansionary FY2016/17 budget of Sh2 trillion, a nine per cent growth over the estimated Sh1.9 trillion in the current fiscal year.

In the just-released Budget Policy Statement (BPS), once again the Treasury is quite bullish on the ability of its expansionary fiscal stance to create wealth for ordinary folks.

It also elaborately allays any fears of debt unsustainability. The spending priorities look fine, especially in an electioneering period, albeit on paper.

It appears much of the emphasis has been placed on the social sectors as well as capital investments in key areas of energy, infrastructure, ICT and other development expenditures in general.

These two areas alone will gobble up 53 per cent of the budget — which is fine. However, some of the baking ingredients used in the budget look a bit unripe. The Treasury is assuming a 6.1 per cent GDP growth. This is way too lofty, especially if viewed through two prisms: the first being the IMF’s position.

It’s increasingly evident that the IMF is struggling to piece up a strong 2016 growth story (occasionally citing infrastructure projects).

In fact, the IMF has revised down Kenyan’s 2015 projected real GDP growth rate to 5.6 per cent from the 6.5 per cent. At the same time, it has forecast the 2016 growth at six per cent from the initial 6.8 per cent.

It’s more likely to issue a growth downgrade in its upcoming April forecasts. When the IMF speaks, that’s 70 years of experience in providing growth forecasts.

The second issue is on-the-ground dynamics. It feels a little different when you look at happenings on the ground.

Eighteen listed companies have issued profit warnings so far since the second half of 2015.

These companies are a fair proxy of the level of economic activity in the country and, therefore, paint a fairly accurate picture of the state of the economy. 

Further, it’s an electioneering fiscal year and politics’ negative grip on the economy is about to start rearing its ugly head very soon.

The fiscal, indiscipline and heavy spending that normally characterises Kenya’s election cycles is about to kick-in (or has already done so). If you sum up these variables, a growth quantum of 6.1 per cent is a little too stretched.

Funding side

On the funding side, the Treasury is targeting ordinary revenue collection of Sh1.4 trillion from a projection of Sh1.2 trillion in the current fiscal year. Again, this appears stretched. Already, revenue collection in the current fiscal year is way below the budget.

Indeed, according to the Treasury, by the end of December 2015, total cumulative revenue including Ministerial Appropriation-in-Aid amounted to Sh575.2 billion against a target of Sh642.9 billion, implying a shortfall of Sh67.7 billion.

Ordinary revenue collection was below target by Sh47.6 billion. This corroborates my previous views that the tax base is overstated and may not be capable of fully funding a Sh2 trillion budget.

Consequently, the fiscal gap in the next financial year is likely to widen to 10 per cent of GDP.

The problem will be exacerbated by the fact that the Treasury has prioritised bridging the fiscal gap rather than reduction. In terms of deficit financing, there is some Sh310 billion that is likely to be sourced externally. There is a high chance the entire amount could be sourced on non-concessional basis.

In which case the Treasury should brace for a premiumisation of any issuance. So looking at the BPS, it’s likely to be another round of fiscal dominance where gaps are likely to be addressed using bridging rather than cuts; essentially, we should expect continued instability in Government finances.

Mr Bodo is an investment analyst. @GeorgeBodo