Although the Budget Policy Statement is a constitutional requirement that the Treasury must issue by February 15 of each year, it is also an opportunity to recommend changes on improving and modernising our budgetary system.
Despite Treasury issuing two versions of the Budget in January and February, both critical reports demonstrate gaps.
The Treasury misses the opportunity to pioneer the President’s economic strategy based on the Big Four agenda.
Reduced allocations to the plan relative to 2016/17, as well as the Treasury’s self-allocation of a Sh43 billion budget increase are surprising.
The January version shaves Sh20 billion from the gross Big Four budget headings relative to financial year 2016/17.
Unusually tough questions are doing the rounds in peer-to-peer commentaries on the 2018 Budget Policy Statement. The National Treasury proposals portray a crisis in public policy.
A wider airing could benefit the legislature, especially on how the budget cycle could improve our growth results in this year’s Appropriations Bill for 2018/19 financial year. It should underpin co-ordination of President Uhuru Kenyatta’s Big Four plan with the methods of managing for development results.
Two critical reviews aim to help the Treasury on how to shift to the coordination and results framework — Budget Policy Statement by the Parliamentary Budget Office and the report on BPS and debt management strategy for 2018/19 and the medium–term by the parliamentary Budget and Appropriations Committee in February.
Although the Budget Policy Statement is a constitutional requirement that the Treasury must issue by February 15 of each year, it is also an opportunity to recommend changes on improving and modernising our budgetary system. Despite Treasury issuing two versions of the Budget in January and February, both critical reports demonstrate gaps.
The Treasury misses the opportunity to pioneer the President’s economic strategy based on the Big Four agenda. Reduced allocations to the plan relative to 2016/17, as well as the Treasury’s self-allocation of a Sh43 billion budget increase are surprising. The January version shaves Sh20 billion from the gross Big Four budget headings relative to financial year 2016/17.
Moreover, despite having a point, the Treasury attempts to explain its shortcomings by questioning the performance of other institutions, such as the Kenya Revenue Authority (KRA), when its own has been contentious. The KRA strategic plan had touted a no-deficits Sh2 trillion tax collection target for 2017/18 but we expect only Sh1.4 trillion. Value-added tax (VAT) to gross domestic product (GDP) ratio was to rise from four per cent three years ago to nine per cent this year.
The forecast is only 4.6 per cent. The Treasury’s inability to hold itself accountable portends to a lack of vision necessary to fulfil and significantly contribute to the Managing for Development Results (MfDR) framework: to set results, targets, implementation, monitoring and evaluation. Without a professional approach, and use of people with domain capacity, budget implementers can showcase anything: where activities paid for by taxpayers are anything but hot air.
The Treasury should have taken advantage of the Big Four agenda and shaped it into a masterplan or blueprint, spelling out links in its agenda, strategy or policies, with a full results matrix for resource allocation, as well as implementation monitoring and evaluation frameworks for each ministry, department or agency (MDAs). The lack of implementation plans at county level is glaring while some pillars clearly are devolved functions.
Furthermore, the BPS covers the first financial year of the Third Medium-Term Plan (MTP) (2018-2022) of Vision 2030 yet it is yet to be issued.
On legal compliance as per the Constitution and the Public Finance Management Act 2012, Section 25, as well as public finance management regulations, the Parliamentary Budget Office pokes other holes in BPS. Two examples: i. There is no information on pending bills as required under public finance management regulations 26 (2)(f) ii. The macro-fiscal framework is anchored on over-optimistic forecasts, especially GDP and revenues.
Ignoring years of parliamentary advice, the Parliament’s second session report makes key comments — one recommends a coordination body be set up for implementation of the Big Four agenda at the Office of the President, with an MfDR framework. This adds to other recommendations made in the past. One key reminder — the government should effect the Treasury’s single account system to ensure that no ministry, department or agency unnecessarily holds resources in its separate bank accounts that are not for immediate use. This key proposal would avoid use of public deposits in the commercial banking system mainly to lend to government, in securities, at super-profits — current practice amounts to taxpayers paying interest on their own money. More on that later.
Other voices question budget-related debt including the Economist of London, the African Development Bank, the International Monetary Fund (IMF) and the Institute of Certified Public Accountants. Assessments comparing Kenya’s public debt with that of Japan — more than 50 per cent of GDP and rising, versus 249 per cent pose how Japan’s debt under MfDR and convertibility of the yen and good ratings, permits low bond yields, easy longer tenor loans, and sustainable debt. Kenya’s lower debt veers towards unsustainability despite much higher yields.
In context, Africa currently offers the highest yields on Eurobonds in the world. The Treasury’s latest Eurobond — at coupons of 7.25 and 8.25 — catered to a feeding frenzy of banks and fund managers earning juicy returns from Africa’s debt.
Rating agencies cringe that Kenya is now among the four most Indebted countries in Africa, others being, Eritrea, Mozambique, Congo Brazzaville, with public and publicly guaranteed external debt of between 50-75 per cent of GDP.
Debt can be beneficial for development. It could be a sign of vibrant growth if managed within project or programme results of the MfDR framework, as emerging economies demonstrate.
But research in Africa suggests that for every 1$ borrowed, up to 63 cents left the African continent within five years — siphoned out as private assets. Lending banks and fund managers seem keener on juicy returns than good governance in borrowing countries.
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For example, while the Treasury was away, it failed to expose its conflict with the IMF.
The IMF nowadays has little work in growing emerging economies that use the MfDR framework, and yet, the Treasury has stated that the IFI has been dissatisfied by Kenya’s interest rate law. By allowing the organisation to dictate the state of the country’s economy, it will attract IMF conditionalities on repeal. This would raise domestic banks’ margins, all the while allowing banks to continue to ignore domestic lending to businesses or homebuyers.
In Kenyan lenders’ balance sheets, major Western banks hold the lion’s share of deposits owned by Kenyan customers (liabilities). On the assets side, they deny credit or increase loan hurdles and fees to local businesses, especially SMEs, whether or not interest rates are capped.
The Kenya National Bureau of Statistics (KNBS) poses questions in its latest (2015-2016) survey — done before the interest rate capping — on why millions of Kenyans cannot only access loans from kiosks, employers or saccos, and hardly from the banking system. As example, saccos finance 90 per cent of total credit for housing while banks offer a paltry 10 per cent.
The Central Bank of Kenya’s (CBK) latest report on the cap further shows that quick and easy assets are favoured by banks, such as government securities and loans to big corporates.
My analysis from the global balance sheet of commercial banks shows that since the capping law in August 2016, banks virtually ceased private lending to purchase government securities. Their ratio of interest from government securities to profits before tax rose from 54.6 per cent to 75 per cent by December 2017. Like the KNBS, the CBK confirms the bias and loan appraisal fees to locals. Moody’s estimates African banks’ exposure to sovereign debt at about 150 per cent of their equity, with Kenya’s securities offering 11-13 per cent returns. Institutionalised policy biases seem to be at work to perpetuate underdevelopment.
If government unravels the cap, it will score a historic own-goal. Its taps on domestic debt will run dry unless it raises its offerings (read tax revenues) to banks. The crowding out of the private sector will escalate.
The private sector will be further starved of credit. The top tier banks will celebrate increased dividends exiting to foreign bank shareholders. In the Treasury’s journeys of escalating external borrowing, the parallel domestic securities bonanza is a veritable trap. Any sovereign-debt crisis with external default would translate quickly to a securities-based domestic banking crisis.
Dr Wagacha, senior economic adviser at the Executive Office of the President, was the first acting chairman of CBK board (2011-2015).
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Note: The results are not exact but very close to the actual.
