Wallace Kantai engages Anzetse Were- Economist and Business Daily columnist, Dennis Kabaara- Business Daily columnist, Peter Karimi- CEO mCHEZA, Phyllis Wakiaga- CEO KAM, Ashif Kassam- Executive Chairman RSM, Sachan Benawra- Consulting Manager RSM in debating the pros and cons of the 2017/2018 Kenya Budget.
This article first appeared in my weekly column in the Business Daily on March 26, 2017
This week the National Budget for FY 2017/18 will be read, and being an election year this budget may indicate how fiscal policy will be approached post-election.
There are three issues with fiscal policy as articulated over the past few years. The first is sub-par revenue generation and unrealistic revenue targets. The economy grew at about 5.9 percent in 2016, yet the tax revenue forecast was raised by 8.7 percent. By December 2016, it was reported that the Kenya Revenue Authority (KRA) failed (once again) to meet its half-year target by KES 20 billion. This is not a new event; revenue targets are routinely not met begging the question as to whether or why unrealistic targets are set; this habit has to change in the upcoming budget. Kenya needs more realistic targets in order to more effectively anticipate debt requirements for the year.
The second issue in fiscal policy is notable increases in expenditure. Please note that according to the Budget Policy Statement 2017/18 released in November 2016, the government seeks to curb non priority expenditures and release resources for more productive purposes. The BPS states an expected overall reduction in total expenditures resulting in a decline of the fiscal deficit (inclusive of grants) from KES 702 billion to KES 546.5 billion, equivalent to 7.5 percent of GDP. This is positive in that this fiscal deficit should be lower than the 9.3 percent of GDP for 2016/17. However, two problems linger; firstly a deficit of 7.5 percent is still above the preferred fiscal deficit ceiling of 5 percent. Secondly, it is almost certain that supplementary budgets that ramp up expenditure will be tabled over the course of the fiscal year. Just last month the government proposed KES 75.3 billion of additional expenditure for various ministries and government departments. Government has the problematic habit of creating what seem to be artificially narrow fiscal deficits and borrowing requirements during budget reading, only for these to be revised upward significantly over the course of the fiscal year.
Finally, and linked to the point above, government has to rein in its debt appetite. Growing expenditure, partially attributed to a bloated devolution-related wage allowances and benefits bills has contributed to government borrowing aggressively for capital expenditure. The debt to GDP ratio currently stands at 52.7 percent, up from 44.5 percent in 2013 and above Treasury’s 45 percent threshold. To be clear, the debt to GDP ratio in itself would not be worrying if there were clear and demonstrated action to manage debt levels more aggressively. The World Bank puts the tipping point for developing countries at a 64 percent debt to GDP ratio above which debt begins to compromise economic growth. Thus while there is still wiggle room, continued debt appetite juxtaposed with (or due to) subpar revenue generation means Kenya is headed towards debt unsustainability in the near future.
It is hoped that the fiscal policy due to be read will provide detailed strategies on how revenue generated will be stimulated, expenditure cuts effected as well as the articulation of a clear and realistic debt management strategy.
Anzetse Were is a development economist; firstname.lastname@example.org
This article first appeared in my weekly column with the Business Daily on July 3, 2016
Last week it emerged that Treasury had overshot its domestic borrowing target. Net domestic debt hit KES 446.6 billion in May, one month before the end of the fiscal year, against the annual target of KES 397 billion. That is an overshoot of KES 49.6 billion. To make matters worse, the accelerated domestic borrowing has been mostly used to fund the recurrent budget. The root of this problem is multi-layered but a key element of this overshoot is that when developing the budget, Treasury uses overly generous domestic revenue numbers. In the analysis of the FY 2016/17 budget the Parliamentary Budget Office (PBO) made an important point; to avoid a big financing gap during the budget approval process, domestic revenues are nudged to their limits so as to accommodate excess spending plans and curb debt financing.
We have seen that revenue collection repeatedly falls short of the target year after year. FY 2015/16 was no different; the KRA had in the 11 months to May collected KES 987 billion, more than KES 200 billion below the annual target of KES 1.2 trillion. Although the inclination is to blame the KRA for under-performing, I am of the view that KRA is given unrealistic targets each FY. These targets seem more informed by ballooning government expenditure and seem oblivious of the serious structural constraints that mute tax collection such as a sizeable informal economy largely out of the tax net. The bottom line however is that there should be far more concern that government seems to have the habit of using overly generous domestic revenue numbers when formulating the budget hiding the eventuality of having to increase borrowing during the course of the FY. There are several implications of this problematic habit.
Firstly, when the annual budget is announced, fiscal deficit figures are artificially low. Because government uses such generous domestic revenue numbers, it artificially narrows the gap between revenue and expenditure. This creates an inaccurate perception of just what the real budget financing shortfall is. As a result, Kenyans and those interested in the country are given the impression that the fiscal deficit is not as large as actually would be the case if the more realistic revenue numbers were used. From where I sit, the use of these inaccurate numbers comes across as a PR strategy by government to make it look as though the budget is more sustainable than is actually the case.
Secondly, due to artificially narrow fiscal deficit numbers, the budget then sets out lower numbers for debt financing needs than what emerges in reality. As a result Kenya’s debt seems more sustainable than is the actual case hiding the fact that Kenya is more leveraged than formal figures used in the budget suggest. As is the case this year, because those domestic revenue numbers were too generous, government has had to finance the deficit created by this shortfall through further borrowing; pushing up the GDP to Debt ratio. Although it must be said that Kenya’s GDP to Debt is still manageable, a continued trend of increasing borrowing in supplementary budgets is worrying as government then has to put even more of future budgets aside to service this ‘unforeseen’ borrowing, increasing the debt burden on a relatively poor economy.
Finally, the government invariably goes to domestic sources to finance this funding gap which is problematic for several reasons. Not only does government crowd out private sector in the domestic borrowing space, substantial increases in domestic borrowing by government invariably places upward pressure on domestic interest rates making credit even more unaffordable for millions in Kenya. And although domestic borrowing conditions are more expensive than foreign borrowing and often have no grace period, government does this ‘emergency borrowing’ in local markets because they are guaranteed that they will get access to the funds and within a reasonable time period. As a result all government proclamations, strategy and intent to ensure foreign borrowing preponderates so as not crowd out the domestic space do not truly materialise and this has a negative knock on effect on economic growth.
It is time that Treasury used more realistic domestic revenue figures when developing the budget. The continued use of overly generous figures is not only imprudent, it’s dangerous.
Anzetse Were is a development economist; email@example.com
This article first appeared in my weekly column with the Business Daily on June 19, 2016
The informal economy has been a theme of mine this year and since the budget speech, even more so. The government seems to have caught on to the financial potential of tapping into this sector for revenue generation purposes, and understandably so. The informal economy is estimated to contribute to 34 to 35 percent to the country’s GDP and currently generates over 80 percent of jobs created in the country on an annual basis. My concern is that what will happen is a heavy handed reflex from government to over-regulate and intimidate informal economy players into paying taxes. I think this would be the wrong approach due to several reasons.
Firstly, the Kenya Revenue Authority (KRA) has already taken a step in the right direction by introducing itax and making it easier for individuals and businesses to pay taxes. As a result, some informal economy players who found the tax process too difficult to comply with voluntarily registered and started paying taxes. Another useful initiative the KRA is doing to facilitate tax compliance is working with county governments to recruit informal economy businesses who have established business premises such as in malls or office buildings, to pay taxes. To be clear, there is a difference between facilitating compliance and intimidating people and businesses into it. Thus I think the KRA should continue to focussing on facilitating tax compliance and scaling up their efforts on sensitising the general public on how to file taxes as well the benefits of doing so; benefits such as having a paper trail of tax compliance that make it easier for small businesses to qualify for financing or become suppliers for government contracts.
Secondly, there should be a distinct effort by government to improve the efficiency, productivity and profitability of the informal economy. As it stands, informality tends to overlap with poverty and low income. Due to the fact that it is often the poorly skilled who find themselves stuck in the informal economy as the qualifications for employment in the formal economy often serve as automatic disqualifiers, informal economy players need to be supported in building their ability to manage and scale up their businesses, as well as making their businesses more profitable. Therefore, government bodies should work with county governments to seek input from informal economy players on the factors they think constrain the growth of their informal businesses. There is already a sense that training in areas such as bookkeeping, business management, and market access strategies would be valuable for this sector. Thus rather than aiming to squeeze out as much as possible from a sector that is still largely defined by poverty, government should support informal businesses to become more profitable. This would likely then make more in the informal economy willing to pay their share of taxes because as it stands, most feel they are too broke to pay taxes as they are already struggling to get by.
Finally, the government should give tax amnesties to informal businesses that register and start the journey towards tax compliance. Government should give such business at least a three to five year tax amnesty period. The reason why this amnesty is so important is that it not only allows small businesses to develop the capacity to comply, it also provides a time period over which support to the informal businesses, such as that detailed above, can be deployed. This amnesty would also allow government to collect much needed information and data on the informal economy that can be used to better support the sector. Government could then, for example, use such data to establish realistic tax bands for small businesses.
In short, the informal economy is too valuable a sector of the economy to me intimidated out of existence or pushed further underground by threats of punishment for failure to comply with tax obligations. The priority should be for the KRA to continue facilitating tax compliance as other arms of government work to support players in the sector to become more profitable. Only then can a realistic conversation about more robust tax compliance occur.
Anzetse Were is a development economist, firstname.lastname@example.org
Kenya’s monetary management has been under scrutiny for mismanagement due to poor strategies and policies to guide spending. I joining CNBC Africa to discuss more on Kenya’s fiscal and monetary policies.
The foundation of my insights are from a piece I wrote on Kenya’s fiscal and monetary policies>> https://www.academia.edu/19288762/Kenyas_Fiscal_and_Monetary_Policies_Is_government_getting_it_right