Risks lurking in Kenya’s budget 2020 outlook

This week Treasury Cabinet Secretary Ukur Yatani said the government has missed its annual revenue collection targets by a cumulative Sh1 trillion over the past seven years.

Coincidentally, Sh1 trillion is the amount estimated by the IMF (in its January 2020 Fiscal Transparency Evaluation Update for Kenya) as required to complete 500 stalled public investment projects.

Last week, the National Assembly’s Budget and Appropriations Committee (BAC) presented its report on the Budget Policy Statement (BPS) and Medium-Term Debt Strategy for the 2020/21 Fiscal Year. There seems to be a new belief that fiscal consolidation might happen, even though the theme for the BPS this year is “Harnessing the Big Four for Job Creation and Economic Prosperity”.

As the government moves towards presenting full budget estimates to Parliament by the end of April 2020, a couple of thoughts struck me from this BAC report in light of the interesting times we face. First is the matter of Kenya’s general economic prospects in the short to medium-term. Are there any estimates of the loss and damage caused by the desert locust invasion?

What of coronavirus and the COVID-19 disease it causes? Is Kenya prepared to implement a multifaceted “contain-delay-mitigate” approach like the UK? What of economic impact? This week McKinsey identified three broad global economic scenarios in order of impact: quick recovery; global slowdown and global pandemic and recession. The last one is the nightmare, especially with WHO formally declaring a pandemic.

Kenya Private Sector Aliance (Kepsa) surveyed its members and found out that more than half are affected, though impacts have been low, and losses minimal, so far. Everyone is thinking about China and alternative supply chains and value addition opportunities given that 20 percent of our imports (50 percent of electrical equipment and ophthalmic, medical, surgical or other precision tools, 60 percent of furniture, and 70 percent of apparel/clothing accessories and knitted fabrics) come from that country.

More generally as with the rest of the world, our high touch/high contact services sector will be on the alert. Risk mitigation is the byword.

Does the Treasury need to revisit its 6.2 percent growth prediction for 2020, especially given estimated 2019 growth at 5.6 percent? As the IMF report above noted Kenya’s “economic forecasts would benefit from an explanation of the assumed growth in specific sectors of the economy as well as the assumed level of employment and wages …(in a way that) … better highlights risks as well as discussions on relevant policies that may affect them”.

BAC raises further questions on issues of bank credit, private investment and exports.

Debt is the next matter that BAC is concerned with, and the Treasury has been directed to resubmit the Macroeconomic and Fiscal Framework (before the 2020/21 Budget Estimates) in a way that clearly identifies concessional, semi-concessional and commercial borrowing within a coherent borrowing strategy supported by a list of specific projects that will benefit from these funds. There is also a call to conform to the legal debt ceiling as well as international benchmarks for external borrowing.

Debt, and deficit reduction, is a function of revenue and expenditure.

As the IMF report noted “revenue forecasts have been consistently and significantly optimistic, with a striking increase in over-optimism since 2012/13” while further observing “there is little discussion of the link between growth and revenue, factors that may affect growth of individual revenue heads, or whether new policies may be required to meet the projections”.

While acknowledging the Treasury’s lower revenue projection for 2020/21, BAC also highlights this “mismatch” between GDP and revenue growth. Concerns are also raised about exemptions and zero-rated tax breaks, which the IMF figures have more than doubled since 2013. By one estimate, tax expenditures (the sum effect of exemptions) exceed the shortfall in projected tax collections.

On the expenditure front, while the Big 4 retains prominence, the BAC report also calls for better programming, commitment control and reporting, including non-financial reporting while warning against “ad-hoc, across the board” budget cuts. It seems we may have the beginnings of better and more accountable performance reporting, beyond inputs, to outputs and outcomes.

Let’s close with that IMF report. Kenya scored reasonably on fiscal reporting, forecasting and budgeting practices, but less so on fiscal risks estimated at 40 per ent of GDP across 519 public sector entities (an increase of 100 from 2014), including 213 extrabudgetary units, 47 county governments and 136 public corporations.

Quantifying and managing fiscal risk — guaranteed debt, public-private partnerships, public corporation liabilities and public pensions, plus pending bills and payments — is the one area we haven’t quite got to.

Despite this, risk and its mitigation is probably Kenya’s overriding, unwritten theme for Budget 2020.