This article first appeared in my weekly column with the Business Daily on November 8, 2015
Over the past few weeks Kenya’s fiscal management has been under domestic and international scrutiny particularly with regards to the Eurobond. However, what has been lacking in the conversation is a look at Kenya’s overall fiscal policy and how it has informed the articulation of the economy. There are three core anchors that can be useful when analyzing Kenyan fiscal policy: planned expenditure, fiscal deficits and revenue generation. These will allow an elucidation of the prudence of Kenyan fiscal strategy.
In terms of planned expenditure, annual fiscal budgets have been consistently increasing year on year. In 2012/13 the budget stood at KES 1,459.9 billion, in 2013/14 it was KES 1,640.9 billion, 2014/15 the budget presented was KES 1,773.3 trillion and for 2015/16 it was a massive KES 2.2 trillion. Noting these consistent increases in annual budgets are important as it puts pressure on government to increase revenue generation.
Secondly, yearly increases in planned spending have been correlated by growing fiscal deficits: 6.5 percent in 2012/13, 7.9 percent in 2013/14, 7.4 percent in 2014/15 and 8.7 percent in 2015/16. The first point to note is that Treasury has been consistently flouting its 5 percent fiscal deficit target. Secondly, as of October 2015 according to Standard and Poor’s the fiscal deficit has already exceeded what government intended and stands at a much higher estimate of 9.4 percent. Finally, these hikes in fiscal deficits are occurring in a context of decelerating GDP growth: 2012 GDP growth was 6.9 percent, 5.7 percent in 2013, 5.3 percent in 2014 and this year we’re hoping to hit 5.4 percent. This anaemic performance fuels anxiety around growing fiscal deficits. Increases in fiscal deficits buttressing increased expenditure in the context of decelerating growth puts pronounced pressure on government to ensure sufficient revenue is generated to meet these costs. How will government sustainably finance growing fiscal deficits in the context of a slowing economy?
Further, this year Treasury aimed to finance the deficit through external financing worth KES 340.5 billion and domestic financing worth KES 229.7 billion (~ 60/40 divide). Though understandable, debt heavily weighted towards foreign currency is bound to be strenuous to service because as an import economy a scarcity of FX preponderates in Kenya. However, although government stated most funds would be sourced externally, government has since signalled it will borrow heavily in domestic markets as well, partly to service the fiscal deficit one presumes. Therefore, not only are Kenyans being pushed out of domestic borrowing markets by government, there is added pressure to raise foreign currency to service the fiscal deficit portion sourced externally. Thus, the Kenyan economy will be hit both by hikes in interest rate due to aggressive domestic borrowing by government, as well as experiencing pressure in servicing foreign debt in the context of poor FX earnings (especially tourism) and a depreciating shilling.
Finally, although government budgets have been increasing each year revenue generation has not been growing at par. In 2012/13 KRA collected KES 800 billion, in 2013/14 KES 963.7 billion, in 2014/15 KRA collected 1.001 trillion. This year the KRA target stands at KES 1,358.0 billion, juxtapose that with the 2015/16 budget of KES 2.2 trillion. Already there are signs this year’s targets will not be met; it emerged that the Kenya Revenue Authority missed its revenue target by KES 10 billion shillings for the first quarter ending September. Ergo it can be surmised that government may experience difficulty in not only financing future ballooning budgets, but meeting the debt service obligations of both domestic and foreign denominated debt including that linked to the fiscal deficit.
In short, there is an extent to which current fiscal strategy has informed the squeeze the economy is facing currently. There is clear room for improvement and this can be done by lowering planned expenditure and controlling spending, lowering fiscal deficits and ensuring that revenue generation is more at par with (lower) planned expenditure.
Anzetse Were is a development economist: firstname.lastname@example.org