ECONOMY

KAREN KANDIE: Financing Kenya's Sh3.6 trillion budget

Kenya's balancing act of funding budget and paying debts

In Summary

•Kenya targets to raise KES 1.67 trillion from tax revenues financing 49.6% of the budget

•In absolute terms, income tax remains the main source of tax revenue with an expected take of KES 835 billion in FY21-22.

 

The Cabinet Secretary, National Treasury and Planning Ukur Yattani, announced the Government of Kenya’s budget for the FY21-22 fiscal period on 10 June 2021. Weighing in at KES 3.66 trillion (USD 34 billion), the FY21-22 budget represents the largest budget announced by the Government of Kenya, a 9% increase from the FY20-21 budget that clocked in at KES 3.36 trillion (USD 33 billion).

From a regional perspective, Kenya’s FY21-22 budget represents 54.7% of Kenya, Uganda and Tanzania budget allocation for the upcoming fiscal cycle, with the three principal East African Community (EAC) member states expected to spend an estimated USD 61 billion within this cycle.

In terms of financing the budget, Kenya targets to raise KES 1.67 trillion from tax revenues financing 49.6% of the budget. This, compared with the KES 1.43 trillion collected in the 2020/21 fiscal period, represents an ambitious 16% increase in tax revenue collections. Analysed per tax head, the Government of Kenya expects to see the biggest growth in revenue collections from excise duty and Value Added Tax (VAT), with estimated increases of 24% and 20%, respectively. However, in absolute terms, income tax remains the main source of tax revenue with an expected take of KES 835 billion in FY21-22.

According to Yattani , the anticipated growth in tax revenue collections is primarily resultant of a recovering economic environment, domestically, regionally and globally. Indeed, Kenya’s Gross Domestic Product (GDP) is anticipated to rebound to 6.3% in 2021 from the recorded decline to 0.6% in 2020. The expected growth is largely attributed to the successful implementation of the Government of Kenya’s Post COVID-19 Economic Recovery Strategy, the gradual re-opening of the economy resultant of fairly successful efforts to tame the spread of COVID-19, increased vaccine access, a reviving tourism sector and increased agricultural output on the back of favourable weather conditions.

In addition, the reversion of the VAT rate to 16%, and the applicable resident income tax rates to 30%, inclusive of Corporate Income Tax (CIT) and Pay As You Earn (PAYE), will likely result in increased revenue collections within these tax heads. From an excise duty front, increased activity in the manufacturing sector, together with a recovering global supply chain, and targeted excise duty adjustments is expected to support the estimated revenue growth of 24%. Similarly, the introduction of new taxes in the FY2020 period, for instance Digital Service Tax and Minimum Tax, will likely translate to increased revenue collections. The introduction of the Voluntary Tax Disclosure Programme may also aid in unlocking principal tax arising from instances of non-compliance with tax legislation.

The above notwithstanding, debt remains a major concern for the Government of Kenya with debt servicing commitments expected to amount to KES 1.17 trillion in the upcoming fiscal period, with Kenya’s total public debt standing at KES 7.39 trillion as at 31 March 2021. Whilst the Government of Kenya is positive that the current debt profile remains sustainable, it is noted that there is a high risk of debt distress should the current trend progress.

Karen Kandie – MD IDB Capital