New proposals for the Kenyan budget

Like much else in Kenya, the fiscal policy as outlined in the 2015/16 budget statement is focused on “fast-forward” development. Spending on infrastructure and support for businesses are aimed at driving growth, which the government has forecast at 6% in 2015 and the coming years. When Cabinet Secretary for the National Treasury Henry Rotich presented his 2015/16 budget statement to parliament in June 2015 – Kenya’s fiscal year starts on July 1 – he outlined plans for a big expected increase in revenue to KSh1.36trn ($15bn) and an even bigger increase of expenditure and net lending to slightly over KSh2trn ($22bn) with the aim of keeping this growth on track. The benefits of this increased spending will be felt across a range of sectors.

Growth

When introducing the budget, Rotich identified “headwinds” that had been slowing Kenya’s dynamic record of economic growth as measured by GDP, with 2014 expansion at 5.3%, down from 5.7% in 2013. He talked about a “myriad of challenges”, including dips in tourist arrivals, low tea prices, a weak global economy, unemployment, weather shocks and corruption, among other things. The boosts to growth would come from “lower oil prices, higher public and private investment, increased consumer confidence and higher total factor productivity”. He added that prospects for growth and jobs would stay favourable and that the government was emphasising stability through prudent fiscal and monetary policies.

Rotich added that in line with the national economic development strategy Vision 2030 big infrastructure projects would help productivity and competitiveness. In his budget statement, he said, “We have significantly improved the business environment; rolled out the biggest infrastructure in Kenya’s history (the standard-gauge railway, SGR); completed key programmes in the roads and energy sectors; and brought down the cost of living.”

Revenue

The budget targets revenue collection of KSh1.36trn ($15bn), equivalent to 20.8% of GDP. This would be made up of ordinary revenues of KSh1.25trn ($13.8bn) and KSh103.2bn ($1.1bn) in appropriations in aid. Steps to achieve this, which would be a major increase over 2014, will include ongoing reforms in tax administration and policy, expanding tax collection and stopping leakages, including through digitising payments to the government. Overall fiscal policy is aiming for revenue to stabilise at 21.8% of GDP over the medium term, and resources should be shifted from recurrent to capital investment “to promote strong, sustainable and inclusive growth”. The road maintenance levy, to be paid to the Road Annuity Fund, will also be increased by KSh3 ($0.03) per litre of fuel and diesel.

Expenditure

Overall expenditure and net lending for the 2015/16 fiscal year is projected at slightly over KSh2trn ($22bn), or 30.7% of GDP, a large increase compared to the previous year. Ministerial recurrent spending will reach KSh784.2bn ($8.6bn), county governments will get KSh264.2bn ($2.9bn), interest payments on rising debt will take KSh185.3bn ($2.04bn) and KSh43.4bn ($477.4m) will be allocated to pensions. The ceiling for development spending will be set at KSh716.3bn ($7.9bn), including foreign financed projects but excluding net lending. Funding includes project loans and grants at a total of KSh349.3bn ($3.8bn) from development partners and the balance of KSh370.2bn ($4.07bn) from domestic resources. The capital budget underspends in many years, highlighting absorption capacity problems.

Spending in key sectors like infrastructure and energy is likely to lead to multiplier effects, as will investment in security, tourism, education and agriculture. KSh143.9bn ($1.6bn) has been allocated to the initial Mombasa-Nairobi phase of the SGR, of which KSh118bn ($1.3bn) is foreign financed. Rotich said, “The construction of the railway started in early 2015 and is expected to be completed around mid-2017, and should significantly reduce the cost of transport, [and] reduce fossil fuel consumption.”

Laying The Groundwork

The 2015/16 budget statement also mentioned a number of infrastructure projects, such as a programme to generate 5000 MW of electricity by 2017, which is on target with 280 MW achieved thus far and has helped to drop the cost of power by 30% already. Another KSh13.2bn ($145.2m) has also been allocated for geothermal power development, an additional KSh21.1bn ($232.1m) for power transmission and KSh14.9bn ($163.9m) for the Rural Electrification Programme. Spending on ongoing road construction is pegged at KSh58.5bn ($643.5m), as well as KSh26.7bn ($293.7m) for road maintenance, KSh42bn ($462m) for foreign-financed roads and KSh5bn ($55m) for the Road Annuity Programme.

The budget also prioritises spending on education and health care. A total of KSh335.7bn ($3.7bn) has been allocated for free day schools at the secondary and primary level. In addition KSh52.9bn ($581.9m) has been planned for university education and KSh181bn ($2bn) for the Teachers Service Commission, which is charged with hiring and managing the workforce at all public learning institutions, except universities, and is looking to hire 5000 teachers in the year ahead. Furthermore, KSh59.2bn ($651.2m) has been directed towards preventive and curative health services, including free maternity health care and the leasing of medical equipment.

Spending On The Future

The 2015/16 budget also focuses expenditure on segments that will bolster economic growth and address concerns that have damaged business confidence. As such, the government is investing in security, which will play an important role in reviving tourism and investors’ interest. More than 2400 police vehicles have been purchased and 15,000 security personnel recruited. The National Intelligence Service, and defence more generally, will receive KSh112.5bn ($1.2bn) and the State Department of the Interior will see KSh102.4bn ($1.1bn). In May 2015 the first phase of a national security surveillance plan was rolled out, which included 1800 high-powered CCTV cameras. The new budget also dedicates KSh5.2bn ($57.2m) for the recovery of the tourism sector.

In terms of the wider economy, agriculture, rural and urban development will receive KSh79.2bn ($871.2m), which includes KSh10.3bn ($113.3m) for the National Irrigation Board and KSh3.5bn ($38.5m) for the 4000-ha pilot phase of the Galana-Kulala irrigation project. The 2015/16 budget also directs KSh25bn ($275m) to youth employment by restructuring the National Youth Service, which should ensure that this investment meets the needs of the population. In line with the government’s focus on making sure that funds reach their intended destination, KSh2.6bn ($28.6m) has been allocated to the Ethics and Anti-Corruption Commission and KSh2.2bn ($24.2m) to the Office of the Director of Public Prosecutions to support faster investigation and prosecution of misconduct. The key challenge for the government is to spend these sums effectively and to avoid leakage. This is likely to be more difficult for the first few years of working through new county governments until capacity improves.

Deficit

The overall fiscal deficit, after considering KSh73.4bn ($807.4m) of grants, is projected to be KSh570.2bn ($6.3bn), equivalent to 8.7% of GDP. The deficit would be KSh426.3bn ($4.7bn), or 6.5% of GDP, if the new railway was not taken into account. The fiscal deficit will be covered by net external financing of KSh340.5bn ($3.7bn) and KSh229.7bn ($2.5bn) of domestic financing. Rotich explained that borrowing remains within the Medium-Term Debt Strategy Paper. Government borrowing has a major effect on domestic fixed-income markets and the high cost of credit, and government’s aim was not to “crowd out” the private sector by containing fiscal deficits and to add alternative sources of funding the deficit, such as the 2014 $2bn eurobond.

Kevin Tuitoek, research analyst at Genghis Capital, wrote in a budget report, “Financing the budget has been a pertinent question raised. A key component that the government shall use in plugging the infrastructure gap would be through the use of public-private partnerships (PPPs) in project implementation.” Key PPPs include the 5000 MW of power goal, 10,000 km of roads using the levy approach, the Kisumu port project and university hostels.

Improving Transperancy

The government is seeking to close loopholes in its receipts and spending. All ministries, departments and agencies are required to use the e-procurement modules of the Integrated Financial Management Information System. All government receipts will be handled on digital platforms. Over 400,000 Kenyans have registered on the e-citizen payment platform and on average KSh10m ($110,000) is collected daily. The National Electronic Single Window System is to be used by all importers and exporters for transparency and to boost revenue collection.

Encouraging Inclusion

Procuring entities are also required by law to reserve at least 30% of their procurement to youth, women and persons with disability. The money accessed by these in 2014/15 was KSh10bn ($110m), below the target, and ministers have called for better quarterly reporting. One-stop-shop service centres known as Huduma Centres have also been rolled out in 23 counties and another 23 are planned for 2015/16. They bring more than 35 government services under one roof and make it easier for businesses and citizens to access services. The government is also implementing a business regulatory reform strategy to raise Kenya’s ranking on the World Bank’s Doing Business Index, including cutting time, procedures and cost of starting a business, getting electricity and registering property by 80%, reducing the time it takes to obtain construction permits by 50%, and cutting the time and costs associated with paying taxes by 60%.

Responsiveness

The government highlighted its responsiveness to private sector concerns when it pledged to repeal a 5% capital gains tax (CGT) on securities reintroduced in January 2014. Rotich proposed to remove CGT from the sale of securities and introduce a 0.3% withholding tax on transaction value. In fact, when President Uhuru Kenyatta signed the Finance Bill into law in September 2014, both CGT and withholding tax were cancelled for trades in securities listed on the Nairobi Securities Exchange, although a CGT tax remains for securities traded over the counter and other gains. In addition Rotich proposed exempting transfers of assets and other transactions related to real estate investment trusts and asset-backed securities from stamp duty. Retirement benefit schemes would be allowed to invest up to 10% of assets into licensed private equity and venture capital funds.

However, in August 2015 Kenya’s parliament overturned Rotich’s proposal to increase minimum core capital for banks from KSh1bn ($11m) to KSh5bn ($55m) by December 2018.

Patrick Njoroge, the new governor of the Central Bank of Kenya (CBK), had said he preferred a riskbased approach to capital requirements. The budget included a boost in minimum capital to KSh600m ($6.6m) for general insurance and to KSh400m ($4.4m) for long-term insurance businesses by June 2018, as well as risk-based capital requirements.