This article first appeared in my weekly column with Business Daily on June 12, 2016
Last Wednesday the National Government announced the National Budget for 2016/17. Overall expenditure and net lending for FY 2016/17 will be KES 2,264.8 billion, about 30.6 percent of GDP. Estimated revenue collection is KES 1,295.4 billion or 19.7 percent of GDP by end of June 2016. As a result there is a financing gap of KES 691.5 billion which reduces to KES 603.2 billion if the Standard Gauge Railway (SGR) is excluded. Please note that the Treasury Cabinet Henry only gave the fiscal deficit as 6.1 percent of GDP excluding the SGR; the full fiscal deficit was not detailed in the budget speech. The deficit will be financed by net domestic borrowing of KES 225.3 billion plus what was termed ‘other domestic financing’ of KES 4.0 billion. Net external borrowing will be KES 462.3 billion.
There are several points to note with regards to the budget. Firstly, if one has been following the Kenya budget formulation process for several years it is clear that expenditure is ramping up faster that revenue generation is. As a result the fiscal deficit continues to be sizeable, trending towards consecutive expansion year after year. Once again, the fiscal deficit, even excluding the SGR is above the Government’s own preferred ceiling of 5 percent. It seems to have become habit for Government to state that fiscal deficits may be a bit high currently but will come down in the medium term. This year is no different; CS Treasury made the point that Government continues to be committed to bringing the fiscal deficit down gradually to below 4.0 percent of GDP in the medium term. From where I’m sitting it looks like reducing the fiscal deficit is a moving target that Government pushes out another year during each annual budget speech.
The core problem with the fiscal deficit is that revenue generation has been subpar and revenue targets are routinely not met. I think part of the problem is that the rapidly expanding expenditure has led Government to set aggressive and frankly unrealistic targets for the Kenya Revenue Authority. There are several structural constraints in the Kenyan economy that undermine revenue generation a key one of which is a sizeable informal economy that exists outside the formal tax net. Although the CS noted the challenges of the informal economy remaining largely untaxed and undermining revenue generation efforts, no specifics on how this will be addressed were mentioned.
Secondly, in terms of borrowing for the fiscal deficit, the bias is towards external borrowing. This is understandable as Government does not want to crowd out private sector or effect upward interest rate pressure if domestic borrowing preponderated. However, it will be interesting to see how such aggressive external borrowing will play out given the highly publicised Eurobond debacle last year where the political opposition accused Government of embezzling Eurobond proceeds. This event dented the Government’s reputation in international financial markets. It will therefore be interesting to see the types of risk premiums that will be associated with Kenya Government borrowing in pursuit of foreign credit.
Finally, KES 280.3 billion will be allocated to the 47 County Governments as the equitable share of revenue. While Government noted that this allocation is more than double the constitutional minimum of 15 percent of the latest audited revenues, there was no mention of the fact that Counties are having problems absorbing devolved funds, particularly in the development expenditure docket. According to the Controller of Budget’s latest report, only 19.9 percent of development funds had been absorbed as of mid-year. This inability to spend funds as required may well translate to limiting the extent to which Devolution will deliver the development dividends it was intended to deliver. Thus while it is wonderful to see National Government’s continued commitment to deploying funds to counties, it would be useful for National Government to make suggestions on how County Governments can better absorb devolved funds.
Anzetse Were is a development economist; firstname.lastname@example.org