Time for national conversation on our fiscal state

The National Treasury’s muscular response to a news headline last week that “broke Kenya seeks Sh75 billion debt suspension” should act as a wake-up call to all and sundry about the parlous state of the country’s fiscus during these uncertain Covid-19 times in which we are determined to push through the “reggae” of the Building Bridges Initiative (BBI).

In short order, the claim that Kenya is broke was refuted as unfortunate and malicious, and a clarification offered that there is no current application for reliefs under the G20 Debt Service Suspension Initiative (DSSI).

Then this week, Bloomberg quoted the self-same National Treasury as suggesting that Kenya is seeking an IMF loan of $2.3 billion (Sh250 billion) and possibly another $1-1.5 billion (Sh109-164 billion) from the World Bank to support our economic recovery.

Let’s not forget that September’s Budget Review and Outlook Paper (BROP) estimated an overall budget deficit of around Sh1 trillion for the 2020/21 fiscal year. That was before we learnt that revenue collection in the four months to October 2020 was off target by Sh70 billion. The next headline we read was “Broke Kenya seeks foreign debt cancellation”.

In its November 2020 Kenya Economic Update titled “Navigating the Pandemic” published this week, the World Bank offers us three key policy messages. First, continue to allocate sufficient resources to the health sector to combat the pandemic.

Prioritisation, efficiency and transparency must be the by-words underpinning such allocations. Second, support firm liquidity and digital capabilities, as well as the “new poor” (estimated at 2 million people) who have lost livelihoods.

Third, pursue fiscal consolidation over the medium-term. Streamlining the public investment project portfolio, cutting wasteful spending and taking advantage of debt service relief are three “quick wins” that the Bank suggests.

Is this the price to pay for new Bretton Woods support? We might also have seen a recent Financial Times graphic on sentiments around the likelihood of worst-case sovereign bankruptcy, or some debt distress, showing Kenya alongside Angola, Cameroon, Ghana and Nigeria. These are interesting times indeed.

This week, an important process in the annual budget calendar is also taking place; the Public Sector Budget Hearings. Simply, these hearings, which ran from Wednesday to Friday allow national government sectors to share their past programme and financial performance, lay out their future programme priorities and make forward resource bids against resource ceilings specified in the BROP.

Prefacing these hearings was a presentation on the so-called Post-Covid Economic Recovery Strategy (ERS) 2020-2022 (I’m not sure 2022 will be post-Covid, but that’s a story for another day). After arguing for 2.9 percent GDP growth a couple of months back, the National Treasury now projects 2020 at 0.6 percent, with a rebound to 6.4 percent in 2021 (again, post-Covid?). By comparison, the World Bank projects an output contraction of 1-1.5 per cent in 2020 and a rebound to 6.9 per cent in 2021.

The draft ERS is full of hopes and wishes. A reduced fiscal deficit. Increased national savings (from 7.6 percent of GDP in 2019/20 to 12.3 percent in 2022/23). An increased investment to GDP ratio from 13.1 percent in 2019/20 to 17.2 percent in 2022/23.

A doubling of diaspora remittances. Increased private sector financing of infrastructure to at least two percent of GDP annually. A debt service moratorium and debt cancellation. Diversified development partnerships to include philanthropic organisations and non-state actors. Amended guidelines to allow insurance sector investment in debt instruments and affordable housing. Changes to various business-enabling laws and regulations.

Welcome to the first of Kenya’s parallel fiscal universes. Going back to the sector hearings, this is also the universe in which total sector resource bids – for national government – are Sh3.2 trillion against the overall resource ceiling of Sh2 trillion. This excludes mandatory consolidated fund services of Sh1 trillion, and counties.

It is a universe in which the Energy, Infrastructure and ICT sector has asked for Sh806 billion for development expenditure in 2021/22 against a ceiling of Sh312 billion. Where the Education sector wants over Sh100 billion more than its Sh500 billion recurrent expenditure ceiling.

It’s the same budget impunity every year. Indeed, 2021/22 represents the third straight year in which sector bids have exceeded the ceiling by more than Sh1 trillion. What is the point?

The BBI proposals represent the second parallel fiscal universe. Can we afford Sh600-700 billion for counties? Why are we making the Constituencies Development Fund (for Members of Parliament) and the Ward Development Fund (for Members of County Assemblies) constitutional, hence mandatory, costs?

How will we pay for new political offices, Commissions and more Members of Parliament in Senate and the National Assembly? Put differently, which part of the BBI proposals point us towards a restructured, slimmed-down and fit-for purpose government? Again, what is the point?

If ever there was a time for a conversation about fiscal realism in Kenya, it is today, not tomorrow.