Kenya should prepare for a bumpy economic ride - experts

The Institute of Public Finance attributes this to high debt obligation, low revenue collection and volatile money market

In Summary
  • The warning from economic experts is coming at a time the government is struggling to pay civil servants
  • Kenya is expected to make the bullet payment to retire the 10-year sovereign bond whose issuance in 2014
Treasury building
Treasury building
Image: FILE

Kenya’s economy is headed for a tougher run due to a growing burden of debt servicing, the government’s inability to implement austerity measures and a worsening global economic slowdown.

Speaking during the launch of the FY2023/2024 Annual National Shadow Budget in Nairobi yesterday, the Institute of Public Finance (IPF) blamed the current stalemate on poor fiscal discipline.

The warning from economic experts is coming at a time the government is struggling to pay civil servants amid low revenue collection, bloated wage bill and ballooning public debt. 

Kenya is expected to make the bullet payment to retire the 10-year sovereign bond whose issuance in 2014 signalled the Jubilee administration’s turn to commercial debt to fund the budget.

The country took $2.75 billion (Sh346 billion at yesterday's rate) in two tranches consisting of a 10-year paper and a five-year issuance ($750 million), at interest rates of 6.78 per cent and 5.87 percent respectively.

The five-year paper was repaid partly using the proceeds of another $2.1 billion Eurobond issued in May 2019.

"The country is expected to repay the 2014 Eurobond in July. Kenya Revenue Authority is likely to miss the collection target, FX reserves are way below the threshold while the shilling is at its lowest against the dollar. This is bad for an economy,'' the IPF report says. 

Already, both the exchequer and international lenders like IMF and World Bank have already downgraded this year's growth to 5.8n per cent from 6.1 per cent. 

On Tuesday, IMF slashed the global growth forecast to 2.8 per cent from 3.4 per cent triggered by the pandemic and political tensions. 

The international lender said up to 90 per cent of advanced economies are likely to experience a decline in their growth rate this year, she warned, with activity in the US and the Eurozone hit by higher interest rates.

While IPF acknowledges that some of the economic slowdowns is a global issue, it blames the government’s decision to reduce budget allocations to high-impact sectors like agriculture and social protection for adverse effects on the overall welfare of the population.

According to the report, the National Treasury proposes a 12 per cent and a 0.3 per cent reduction in allocation for the Agriculture, Rural and Urban Development (ARUD) and Social Protection, Culture and Recreation (SPCR) sectors respectively in the FY2023/2024 Budget estimates, compared to the FY2022/23 Supplementary I Budget allocations.

 IPF CEO James Muraguri says that the mismatch between the government promises and the budgetary allocation to the priority areas is worrying.

“There seems to be a significant misalignment or less prioritization of critical sectors of high impact. The agriculture sector, which employs more than 40 per cent of the total population and 70 per cent of the rural population, does not seem to receive the attention that it deserves,'' Muraguri said.

According to him, this has a net effect of leading to food insecurity where it is estimated that by June 2023, 5.4 million Kenyans are projected to face elevated levels of acute food insecurity.

According to the FY 2023/24 budget ceilings, the government seeks to spend Sh3.6 trillion.

Among the top five gainers in the FY 2023/24 are environment protection, water and natural resources (51 per cent), health (36 per cent), national security (26 per cent), Energy, Infrastructure, and Information Communications Technology (22 per cent), and General Economics and Commercial Affairs (14 per cent).

Although the health sector has an increased budget allocation, it still falls short of the 15 per cent budget share for health required by the Abuja Declaration.

Failure by the government to meet such a threshold raises questions about the government's commitment to Universal Health Coverage targets.

IPF further notes the existence of overlap and duplication of roles across the various government subsectors.

For instance, despite the budget of the State Department for the EAC being 100 per cent recurrent, its mandate overlaps with that of the State Department for Trade and the State Department for Foreign Affairs.

Additionally, the General Economic & Commercial Affairs (GECA) and the Social Protection, Culture and Recreation (SPCR) sectors have the same interventions targeted towards MSMEs, youth and women.

“To cure this, we call for the full implementation of the report by the Presidential Task Force on Parastatal Reforms 2013, which proposed the collapsing of several state agencies,'' Muraguri said.

On low absorption rates for development budgets by some government agencies, Muraguri cautions against giving additional funding to such government agencies, as it may lead to the wastage of public funds on non-essential services.

Additionally, the government needs to institute appropriate measures to streamline operations in the Kenya Revenue Authority (KRA) to meet its revenue collection targets. Failure to do this may lead to above target fiscal deficit and a rising debt burden.

Isaac Mwaura, the Chief Administrative Secretary (CAS) in the Office of the Prime Cabinet Secretary noted with concern the increased appetite for increased budgetary allocations to sectors that do not have a direct impact on the common Mwananchi.

“We need to consider budget consolidation and a tighter fiscal management structure to ensure that we resolve the current constraints for more sustainable and inclusive economic growth,'' Mwaura said. 

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