Uhuru’s budget headache as Covid-19 shAtters legacy ambitions

The virus is no longer just a healthcare crisis but a real disaster to the economy and for the President, this wouldn’t have come at a worse time

President Uhuru Kenyatta’s legacy looks precariously endangered, two years to the end of his second and last term with the COVID-19 pandemic hitting the economy hard, depressing revenues and sucking billions of shillings into interventions.

All indications are that the virus is no longer just a healthcare crisis but a real disaster to the economy. For President Kenyatta, this wouldn’t have come at a worse time.

Pundits had projected that the President would use these remaining two years to buttress his legacy projects, lumped under the Big 4 agenda to silence growing criticism that a majority of Kenyans are yet to benefit from economic expansion, seven years since he took over power. The pet projects include affordable housing, universal healthcare, increasing manufacturing contribution to GDP, boosting food security and nutrition.

Today, the country is still confronted by the perennial challenges of high levels of poverty and unemployment, frequent droughts, low agricultural and industrial productivity, inadequate decent housing, growing demands for higher investments in the health sector, inadequate revenue and other forms of financing and governance-related issues. That is never in dispute, whether you are speaking to a corporate leader, a bank employee, a politician or a Kenyan on the street.

When National Treasury Cabinet Ukur Yatani stood before Parliament on June 11 to unveil the 2020-2021 Budget, he was clear of what lies ahead for Kenya’s economic prospects. He explained blow by blow the challenges the country is facing, most of which have been exacerbated by the COVID-19 crisis.

For starters, due to the pandemic spread, Treasury projects that the Kenya economy will slow down in 2020 to grow by not more than 2.3%. This is due to the adverse impact of the containment measures, particularly in transport and storage, trade and accommodation and restaurants. The World Bank forecasts that Kenya’s economic growth will slow down to 1.5 % this year, and contract 1% in the worst-case scenario as the virus saps demand from trading partners like Europe and disrupts supply chains and domestic production.

This is not unique to Kenya. Further afield, the global economy is projected to contract sharply by 3% in 2020, much worse than during the 2008–09 financial crisis.

“The outbreak and the rapid spread of the Covid-19 Pandemic has led to contraction of the economy with disastrous consequences. The pandemic and the attendant containment measures aimed at saving lives have disrupted the businesses environment, including international trade, leading to loss of livelihoods for millions of people,” said Mr Yatani.

The economy was initially projected to grow by 6.1% in 2020, which was an improvement from 5.4 % in 2019. However, owing to the added blows of the COVID 19, locust invasion and flooding witnessed in better parts of the country, the projections have been abandoned.

Published statistics indicate that the economy grew by 6.3% in 2018 up from 4.9% in 2017, and the highest rate recorded for the past eight years. The expansion was anchored on strong macroeconomic fundamentals and driven by agricultural production, accelerated manufacturing activities, sustained growth in transportation and vibrant service sector activities.

Evidently the pandemic and the swift containment measures, including closure of the airspace and borders, curfews and cessation of movements in some counties among others, have not only disrupted livelihoods, but to a greater extent business.

From these shocks, all sectors of the economy have been adversely affected, sending thousands of Kenyans out of jobs and thousands others on reduced pay, a development that flies straight against President Kenyatta’s commitment to improve the livelihood of citizens across the country.

The country is literally dancing with a disaster, a state of affairs that might get more complex should the pandemic blow out into a bigger healthcare crisis in the coming months

The agriculture sector for example, has been hit hard by the low global demand for products especially horticulture, tea and coffee, among others. Further, the reduction in availability of raw materials and intermediate goods following closure of international borders has negatively affected the manufacturing sector.

Further, the intricacies arising from subdued economic activity has significantly complicated the government’s fiscal agenda, majorly how to finance the Sh2.8 trillion 2020-2021 financial year budget, handle spiraling public debt in the wake of falling revenues.

Just how exactly does the government purse look like? Treasury said expenditure and net lending is estimated to increase to Sh2.79tn or 24.7% of GDP from the estimated level of Sh2.77tn or 27.2% of GDP in 2019/20. The recurrent expenditures in FY 2020/21 will amount to Sh1.82tn or 64% of the total budget while the balance will go into development expenditure.

According to Yatani, the burdening fiscal deficit is projected at 7.5% in 2020/21 financial year as the Government struggles to finance its growing expenditure.  Analysts and independent economists reckon the country is literally dancing with a disaster, a state of affairs that might get more complex should the pandemic blow out into a bigger healthcare crisis in the coming months.

“Our concern is that weaker growth than that outlined, or slower revenue momentum, could easily see upward pressure on the outlined fiscal deficit and borrowing requirement,” says Razia Khan, head of research for Africa at Standard Chartered.

But the biggest challenge lies in financing the spending. The Treasury said revenue collections would at most hit Sh1.89 trillion, accounting for only 68% of the projected expenditure.

“The Covid-19 Pandemic has not only worsened revenue performance in 2019/20, but will affect revenue in 2020/21 budget. Import related taxes such as import duty, VAT on imports, import declaration fees and railway development levy have been negatively affected due to lower imports and reduction of trade among countries. Other domestic taxes have been severely affected by declining incomes and depressed consumption,” says Westminster Consulting, a tax firm.

This will leave the Government with a fiscal deficit of Sh840.6b or 7.5% of GDP. Due to contracting revenues, the Government will once again tap into the credit markets to finance the budget deficit, which now accounts to nearly one-third of the budget. The cost of financing the national debt consumes a significant portion of tax revenues, leaving the Government with limited options for financing development projects.

Evidently, the Treasury will be financed through net external financing of Sh347b, or 3.1% of GDP; net domestic financing of Sh493.4b, or 4.4% of GDP and other net domestic repayments of Sh627 million.

Interest payments will account for 21.4% of total revenue while total debt repayments (including interest) will take up 29.5% of total revenues during the next 12 months. This has left the Government with little to fund the “Big Four” agenda drivers, which has have been allocated Sh198.3 Billion (7.1% of total expenditure).

“We appreciate the initiative of the G20, and the multilateral financial institutions to press for a debt moratorium for about 6-7 months up to December. We’ve looked at it. We are happy with the proposal but based on the circumstances. We are still not sure we are trying to push for better terms, better concessions because as it stands some of the conditions regarding debt relief are quite punitive,” said Mr Yatani.

As a result, the Government has been on a borrowing spree, tapping multi-lateral partners. First, the country received Sh78.3b under the Rapid Credit Facility of the International Monetary Fund to help address the impact of the COVID-19 Pandemic. Secondly, Kenya sought Sh108b from the World Bank under the second Development Policy Operation, as both budgetary support and extra resources to help fight the Pandemic.

At the initial phase of the COVID-19 outbreak, the World Bank extended support of Sh6.8b under the Contingency Emergency Response to the Ministry of Health for prompt preparations and response. Thirdly, the Government has also received Sh22.5b from the African Development Bank as a concessional loan and an additional Sh7.5b commitment from the European Union inform of grants.

“Whereas Kenya’s public debt remains sustainable, we need to be cautious about future debt accumulation. Our focus therefore, will be to strengthen management of public debt to minimize cost and risks of the portfolio, while accessing external concessional funding to finance development projects,” said Mr Yatani.

Economic experts said the Covid-19 Pandemic has not only worsened revenue performance in 2019/20, but will affect revenue in 2020/21 budget. In particular, import related taxes such as import duty, VAT on imports, import declaration fees and railway development levy have been negatively affected due to lower imports and reduction of trade among countries. Further, other domestic taxes have been severely affected by declining incomes and depressed consumption.

“Coming against the background of economic shocks caused by the Covid-19 pandemic, Treasury budget proposals are unique in many ways considering that the economy is hurting and no one is sure when the country will emerge from the woods,” said the Business Daily in an editorial on June 12 titled Fulfill fiscal promises made to Kenyans.

“Be that as it may, the public expects that the promises made, especially on how to improve public welfare, support social services and increase gross national wellbeing will be implemented as outlined. This is the whole basis of the tax and spend principle,” said the newspaper.

In order to cushion Kenyans against the adverse impact of the Pandemic and to further increase liquidity in the economy, the Government lowered tax rates for corporate and personal incomes, turnover tax, value added tax and provided tax relief to low-income earners and employees.

The measures taken by the Government to counter the impact of COVID-19 are estimated to cost the exchequer Sh172b in revenue foregone by the Government in one financial year.

But the Government won’t take the hit just yet. In order to recoup part of this revenue loss, Mr Yatani submitted to Parliament proposals to lower the level of tax exemptions. Government statistics show that in the year 2018, the tax revenue foregone by Government through tax incentives/exemptions amounted to Sh 535b— 6% of GDP – which is considered one of the highest levels globally.

“Whereas these tax incentives are well intended, they have limited the capacity of Government to fund critical expenditures. In addition, a critical review of the incentives shows that consumers have not benefitted through commensurate reduction in the cost of goods and services. Further, some of these incentives have given undue advantage to some sector players over others thus entrenching unfairness and stifling competition,” said the Treasury CS.

Immediately after the Budget was read, Audit firm Ernst & Young warned that the COVID-19 interventions, which currently stand at 2% of the country’s Gross Domestic Product (GDP), are short of the Sh 393.7 billion needed to kick-start the economy. According to the firm, the Government’s stimulus package currently stands at Sh225.7b in foregone taxes and liquidity injection.

“At least 4% of GDP is required to jumpstart a battered economy like ours. On the basis of this, the Government intervention falls short by about Sh170b,” said Christopher Kirathe, Ernst and Young tax partner.

But it is the proposal that requires retirees aged 65 and above to start getting reduced pay by removing the tax exemptions they enjoy which highlighted exactly the fiscal pressure the Government is facing. Mr Yatani wants monthly or lump sum pension paid to senior citizens subjected to applicable income taxes through the proposed changes in the Finance Bill 2020.

The senior citizens are seen as a vulnerable group in the fight against Coronavirus partly because of low immunity. They have rejected the proposal, a turn of event that has seen experts question President Kenyatta’s intention and grasp on realities on the ground.

“What this country needs are bold moves to rationalize the public sector around a limited number of core public functions and to make every expenditure consistent with the resources we have. We will need something as disruptive as a revolution before we can see a reorientation of government expenditure away from spending too much money on wages and debt service to budgeting with an emphasis on creation of new wealth,” said Jaindi Kisero, a seasoned economics columnist.

The Government intends to roll out an 8-Point Economic Stimulus Programme (ESP) that is expected to catalyze economic activity in order to safeguard livelihoods of Kenyans and enable businesses to recover from the current shocks.

The specific focus areas of this stimulus are: infrastructure; improving education; enhancing liquidity to businesses; improving health; focus on agriculture and food security; promotion of tourism; improving environment; water and sanitation facilities and manufacturing.

In addition to implementing the stimulus, Treasury is formulating a Post-COVID-19 Economic Recovery Strategy (ERS) to mitigate the adverse impacts on the economy and further re-position the economy on a steady and sustainable growth trajectory. This will focus on macroeconomic stability, resource mobilization, partnership with the private sector, supporting small businesses, and promotion of local production, said Mr Yatani.

The biggest question in most minds is just how Kenya will navigate through the current economic challenges. Only time will tell.

The Sub-Saharan region is projected to slip into recession with real GDP projected to contract by 1.6% in 2020. This is on the backdrop of deteriorated external demand following a sharp contraction in output growth among the region’s key trading partners (China and Europe), a fall in commodity prices (oil and metals), reduced tourism receipts, as well as the effect of measures taken to contain the spread of COVID-19 pandemic.  

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