Tight budget cuts loom as State seeks funds for Big Four agenda

Key state ministries, departments and agencies face massive spending cuts as the Treasury looks for cash to finance President Uhuru Kenyatta’s “Big Four” agenda and tame spiralling public debt.

Below-target tax collections amid sluggish economic growth has forced CS Henry Rotich to tighten allocations to free funds for priority sectors in Mr Kenyatta’s second term in office.

Tax receipts between July and November 2017 rose by a modest 7.36 per cent to Sh508.70 billion, latest Treasury statistics show, falling short of expectations given the Sh1.44 trillion full-year target.

The lower-than-expected tax revenue affected allocations to development projects in the first half of this financial year which ended in December. The development budget fell by Sh45.17 billion in five months to November, compared with the same period last year.

Mr Rotich has, as a result, vowed to intensify austerity measures, which came into force in October, in the second half of the financial year (January to June) and beyond.
Each ministry, department and agency has been asked to justify any cash demand outside regular allocations and its impact on economic growth before the cash is released from the Exchequer.

“Austerities will continue. We have just been going through with the ministries line by line, item by item. Everybody must justify every expenditure so that we eliminate any wastage,” Mr Rotich said in an interview on December 26.

“In fact, we have adopted what’s called a zero-base budgeting, so you start from zero and build up by justifying every single cent that you want to spend in the next financial year (2018-19).”

Budget cuts — a process technically referred to as fiscal consolidation — are expected to free some cash to various sectors that have the biggest impact on growing the economy and creating new jobs.

Priority in budgetary allocations has been placed on President Uhuru Kenyatta’s “Big Four” agenda in his legacy term in under five years — manufacturing, food security, affordable housing and healthcare.

“We believe that exercise will yield some fiscal space which should allow us to implement... the Big Four,” Mr Rotich has said.

READ: Rotich plans mini budget as revenues fall by Sh14.2 billion

“The idea is to continue with the austerities as we work towards recovery on our revenues, which were affected by the elections. We look forward to a speedy turnaround in our revenue performance.”

To boost tax receipts, the Treasury is working with the Kenya Revenue Authority to “pin-point areas where there have been leakages and areas where we can collect more revenue,” he said.

The taxman has, for example, adopted a tough line on firms over non-compliance with laws and regulations on Pay As You Earn (PAYE) taxes, said Sage, a global software provider including payroll applications for companies, in a regional report on December 14.

“We are seeing Tanzanian and Kenyan tax authorities take a more robust approach to registering taxpayers and enforcing compliance to help the governments meet their tax collection targets,” said Sage’s director for East Africa Nikki Summers.

The gap in this financial year’s Sh2.33 trillion budget was last September revised upwards to Sh691.2 billion. This will rise to Sh750.9 billion if grants will not come through as expected (only Sh1.29 billion was received in grants during five months through November). Part of the cause was unplanned expenditure on the October 26 repeat presidential poll and the food subsidy programme which ended on December 31.

The deficit is bridged through borrowing, a worrying trend that is also giving Mr Rotich sleepless nights.

Public debt had crossed Sh4.48 trillion in September 2017 and was estimated to be hovering around Sh4.55 trillion by the end of 2017, a steep climb from Sh1.89 trillion in June 2013 when the Jubilee administration took the reins of power.

About 57.1 per cent of Kenya’s national wealth was in debt, a phenomenon technically called debt to gross domestic product (GDP) ratio, in June 2017, and was projected to rise to 59 per cent in June 2018 in the Budget Review and Outlook Paper (BROP) released last September. 

“With reforms on the revenue side and also on expenditure, we should expect to live within our fiscal targets that will ensure debt is sustainable going forward,” Mr Rotich said.

The rising debt saw the Treasury pay out nearly Sh266.39 billion interest on domestic and foreign debt in 12 months through June 2017, CBK data indicates. This was Sh160.54 billion more compared with four years earlier.

READ: Uhuru bets on four key sectors to boost growth

Analysts have flagged the widening budget deficit, which results in increased borrowing, as a major threat to this year’s economic growth outlook of between 5.5 per cent and 6 per cent.

“While Kenya remains unlikely to default on its debt, growing interest payments and international banks’ shrinking appetite to provide further loans will result in lower public spending, which has been a key driver of economic growth in recent years,” said the London-based global consultancy, Control Risks, in an outlook report on December 19.

Global credit ratings agency Standard & Poor’s of the US, Standard Chartered Bank’s chief economist for Africa Razia Khan, Citi’s lead economist for Africa David Cowan and Stanbic Bank’s economist for East Africa Jibran Qureishi have all cited budget deficit as the biggest risk to Kenya’s economic growth in the near-to-medium term.

The danger of increased borrowing amid below-target revenue flows and sluggish economic growth was manifested in October 2017 when the Treasury sought to extend the maturity date for $750 million (Sh77.4 billion) syndicated loan it took two years earlier to April this year.

The Treasury consequently tapped a relatively expensive Sh77.4 billion ($750 million) commercial loan from Eastern and Southern Africa Trade and Development Bank (formerly PTA Bank) to retire the maturing credit.

The new facility will be repaid in eight years with an interest of 6.7 percentage points above the current six-month London Interbank Offer Rate (Libor) — the benchmark for international loans.

“The recent extension of the syndicated loan demonstrates how important it will be to secure confidence in order to ease refinancing,” Ms Khan said in November.

“This will be best done through efforts to achieve faster fiscal consolidation, which will now need to be a priority. In the absence of more rapid consolidation, Kenya’s external creditworthiness could suffer.” 

Treasury has started the groundwork for its second Eurobond later this year after securing $2.75 billion (Sh255.5 billion) in debut offering in June 2014 ($2 billion) and December that year ($750 million tap sale).