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Ideas & Debate

What the Budget means in Kenya’s quest for growth

Last Wednesday the national government announced the Budget for 2016/17 financial year.

Overall expenditure and net lending for the fiscal year will be Sh2.26 trillion, about 30.6 per cent of gross domestic product (GDP). Estimated revenue collection is Sh1.29 trillion or 19.7 per cent of GDP by end of June.

As a result there is a financing gap of Sh691.5 billion which reduces to Sh603.2 billion if the standard gauge railway (SGR) is excluded.

Please note that Treasury secretary Henry Rotich only gave the fiscal deficit as 6.1 per cent of GDP excluding the SGR. The full fiscal deficit was not detailed in the Budget speech.

The deficit will be financed by net domestic borrowing of Sh225.3 billion plus what was termed “other domestic financing” of Sh4 billion. Net external borrowing will be Sh462.3 billion. There are several points to note with regard to the Budget.

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First, if one has been following the Budget formulation process for several years it is clear that expenditure is ramping up faster than revenue generation.

As a result the fiscal deficit continues to be sizeable, expanding year after year. Once again, the fiscal deficit, even excluding the SGR, is above the government’s own ceiling of five per cent.

It seems to have become a habit for government to state that fiscal deficits may be a bit high currently but will come down in the medium term. This year is no different.

Mr Rotich made the point that government remains committed to bringing the fiscal deficit down gradually to below four per cent of GDP in the medium term. From where I sit it looks like reducing the fiscal deficit is a moving target during each annual Budget speech.

The core problem with the fiscal deficit is that revenue generation has been subpar and revenue targets are routinely not met.

I think part of the problem is that the rapidly expanding expenditure has led government to set aggressive and frankly unrealistic targets for the Kenya Revenue Authority.

There are several structural constraints in the Kenyan economy that undermine revenue generation, a key one being a sizeable informal economy that exists outside the formal tax net.

Although the CS noted the challenges of the informal economy remaining largely untaxed and undermining revenue generation efforts, there were no specifics on how it will be addressed.

Second, in terms of borrowing for the fiscal deficit, the bias is towards external borrowing.

This is understandable as government does not want to crowd out private sector or effect upward interest rate pressure on high domestic borrowing.

However, it will be interesting to see how such aggressive external borrowing will play out given the highly publicised Eurobond debacle last year where the political Opposition accused government of embezzling Eurobond proceeds.

This event dented the government’s reputation in global financial markets.

It will, therefore, be interesting to see the types of risk premiums that will be associated with government borrowing in pursuit of foreign credit.

Finally, Sh280.3 billion will be allocated to the 47 county governments as the equitable share of revenue.

While government noted that this allocation is more than double the constitutional minimum of 15 per cent of the latest audited revenues, there was no mention of the fact that counties are having problems absorbing devolved funds, particularly in the development expenditure docket. 

According to the Controller of Budget’s latest report, only 19.9 per cent of development funds had been absorbed as of mid-year.

Thus, while it is wonderful to see national government’s continued commitment to deploying funds to counties, it would be useful for national government to make suggestions on how counties can better absorb devolved funds.

Ms Were is a development economist. Email: [email protected]

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