KenyaKenya’s Economy and its budget cut Implication Published 11 months agoon October 3, 2018By Vaultz Publisher Share Tweet Recent data signals that the economy remains on course for a solid third quarter following the second quarter’s likely stronger performance. Business conditions improved in August as reflected by the latest PMI reading, which climbed further above the critical threshold separating expansion from contraction in private-sector activity. Economic growth has been buoyed by rising confidence following the end of a protracted election cycle, along with buoyant exports and rising remittances.On 30 August, Kenya’s parliament voted to maintain the long-standing interest rate cap on commercial bank lending rates. Since coming into effect in September 2016, the cap has significantly curbed private credit growth. Parliament’s decision rejected a bid by the Treasury to scrap or modify the policy, as well as defying calls from the IMF to do so, thus failing to qualifying for a new standby arrangement.The Treasury confirmed that it would allow the existing USD 1.5 billion IMF standby credit facility to expire. Removal of the balance of payments’ support is seen increasing the economy’s vulnerability to external shocks. Leading Economic Indicator The Leading Economic Indicators highlights trends in Consumer Price Indices (CPI) and inflation, interest rates, exchange rates, international trade, agriculture, energy, manufacturing, building and construction, tourism and transport. Consumer Price Index (CPI) decreased from 193.31 points in June 2018 to 191.59 points in July 2018. The overall rate of inflation rose slightly from 4.28 per cent to 4.35 per cent during the same period. In July 2018, the Kenyan Shilling appreciated against the major trading currencies except for the Sterling Pound and the Ugandan Shilling.The average yield rate for the 91-day Treasury bills, which is a benchmark for the general trend of interest rates decreased slightly from 7.87 per cent in June 2018 to 7.69 per cent in July 2018, while the inter-bank rate rose from 5.03 per cent in June 2018 to 5.06 per cent in July 2018.The Nairobi Securities Exchange (NSE) 20 share index increased from 3,286 points in June 2018 to 3,320 points in July 2018, while the total number of shares traded dropped from 453 million shares to 323 million shares during the same period. The total value of NSE shares traded decreased from KSh 13.69 billion in June 2018 to KSh 9.74 billion in July 2018. Broad money supply (M3), a key indicator for monetary policy formulation, increased from KSh 3,242.94 billion in June 2018 to KSh 3,258.99 billion in July 2018.Gross Foreign Exchange Reserves increased from KSh 1,221.83 billion in June 2018 to KSh 1,235.33 billion in July 2018. Net Foreign Exchange Reserves decreased from KSh 760.51 billion in June 2018 to KSh 759.29 billion in July 2018.Budget Cuts and big losersThe National Assembly recently approved budget cuts worth Sh37.6 billion from the Executive, Parliament and the counties to bridge the current deficit. With a shortfall of more than Sh500 billion, the Government expects to further bridge the deficit through external borrowing to finance its Sh3 trillion budget.The MPs adopted the report of the Budget and Appropriations Committee chaired by Kikuyu MP Kimani Ichung’wa, which also retained the National Government Constituencies Development Fund (NG-CDF) at Sh 33.3 billion and the Affirmative Action Fund at Sh2.1 billion.Earlier, the legislators had planned to reject sections of the Supplementary Appropriation Bill based on proposals by the National Treasury to take away Sh6 billion from NG-CDF and Sh2 billion from the Affirmative Action Fund. The MPs also lost Sh3.8 billion from the Equalization Fund while the Parliamentary Service Commission (PSC) budget was reduced by Sh600 million.Lawmakers’ interests To ensure that the lawmakers’ interests were catered for after a charged meeting of the Jubilee Party Parliamentary Group (PG) at State House and the Opposition Orange Democratic Movement (ODM) party’s PG meeting at Orange House, Treasury assured Parliament that it would only lose funds for operations and maintenance.“The Government lost the standby credit when the International Monetary Fund (IMF) stood down its credit, although the Government is still in talks with them,” said Mr. Ichung’wa when he moved the motion to adopt the report. “Our foreign reserve depends on diaspora remittance, which requires a solid insurance policy. With a deficit of Sh562 billion, we now bank on domestic and foreign borrowing as well as local revenue,” he said. The MP said the budget cuts were arrived at after intense negotiations with Treasury, PSC and the Judicial Service Commission that went into the night.“We had to reduce expenses by 7.5 per cent to meet the fiscal deficit. We must exercise fiscal discipline in the principle of give and take. Then development partners will have confidence in the Government,” he said. The biggest losers in the new austerity measures are the Last Mile Connectivity electricity programme (Sh1.5 billion), the laptops for schools project (Sh5.5 billion), roads (Sh8.7 billion), Equalisation Fund (Sh3.8 billion) Ministry of Education infrastructure project (Sh600 million) and Konza City (Sh400 million).The Ministry of Energy will lose Sh2.6 billion, the Petroleum ministry Sh1.5 billion, PSC Sh1.2 billion, the National Assembly Sh1 billion, Teachers Service Commission Sh67 million and Sports ministry Sh29 million. Other losers were the Department of Planning (Sh286 million), Health ministry (Sh22 million) and Independent Policing Oversight Authority (Sh20 million). The Department for Immigration will lose Sh91 million, Devolution ministry Sh2.6 million, Department of Arid and Semi-Arid Lands Sh47 million, Defense ministry Sh42 million and Foreign Affairs ministry Sh179 million.Others were the Department of Vocational and Technical Training (Sh1.3 billion), Basic Education (Sh1 billion), University Education (Sh1 billion) and National Treasury (Sh6.5 billion). Among the austerity measures adopted were reduction of capital expenditure by Sh28.5 billion. The Presidency’s budget for recurrent expenditure and development was reduced by Sh323 million while the Interior ministry lost Sh377 million.“We have proposed 16 per cent budget cuts across the board. MPs’ house allowance, personal emolument, salaries and wages were not touched. We want real austerity measures cutting across all departments of Government,” said Ichung’wa. He said some items in domestic and foreign travel budgets had been cut while training and seminars for all ministries were reduced. Leader of Majority Aden Duale (Garissa Township) seconded the austerity proposals.“Let us engage from the point of facts and figures. Leaders should show goodwill. In law, the House balances the budget,” said Mr Duale. Leader of Minority John Mbadi (South Suba) admitted that the country was facing tough financial choices. “We must maintain financial integrity as a country. We projected the revenue at Sh1.9 trillion. The debt repayment stands at Sh870 billion,” he said, adding that there was no money left in the country’s budget for development.“Salaries stand at 650 billion; add that to debt repayment, and it goes to Sh1.5 trillion as Sh314 billion goes to counties. That makes it Sh1.8 trillion, leaving us with less than Sh100 million to spend on development,” he said.Opposed measures A number of MPs, including Robert Mbui (Kathiani), Omboko Milemba (Emuhuya), Ali Wario (Garsen), Alpha Miruka (Bomachoge Chache), Gideon Mulyungi (Mwingi central), Geoffrey Osotsi (nominated) and Owen Baya (Kilifi North) opposed the austerity measures. They took issue with the reduction of budgets for education, roads and energy.Mr Baya censured Cabinet secretaries, whom he accused of lacking innovation to help Government raise revenue instead of relying on budget cuts and tax increments. “They can offload assets and scale down their budgets.There are better austerity measures to ensure we cut costs,” he said. Mr. Osotsi argued that some budgets could be harmonized to seal the deficit. “The budget for technical and vocational education was initially Sh2.3 billion, now it is Sh7.4 billion. Why the huge variation?” Mr. Mbui said Parliament had a chance to correct the mistake of an ambitious budget with a lot of duplication.Implications on the economyThe proposed eight per cent VAT increase and proposed supplementary budget cuts will impact public service users and households, and Parliament should reject them.Counties are already distressed because the national government has fallen behind on its remittances to the devolved units. The proposal to reduce the allocation to county governments will further hurt services. Cutting the Equalization fund will hurt development in marginalized areas, particularly access to water, which is a main focus of the fund. A failure to address access to water in turn increases the disease burden, undermining health.The proposal to slash budgets on road repairs is irresponsible and equally counterproductive. Bad roads push up the cost of operating vehicles to all drivers, negatively affecting households, businesses and the economy. Poor roads also contribute to road accidents and deaths.It is unfortunate that the President’s flagship projects — Last Mile and digital learner platform — are facing the axe. In particular, electrification is a key development indicator with knock-on effects for economic growth. Similarly, the plan to slash capacity building at a time when the country needs to develop its human resource capacity is ill-advised.This will be the third supplementary budget of the year, a clear indication that the government is broke and the economy is in distress. It is also of concern that funds are being removed from development to debt servicing.The tax measures come against the backdrop of stringent conditions set by IMF that would negatively affect the economy further. So, what should be done?First, the President should declare the debt situation a national crisis and institute sustainable recovery measures that will target government waste, size and corruption and not hurt Mwananchi.These include releasing idle funds held by ministries and state corporations and redistributing equitably to debt repayment and basic service delivery at county level.The President should also redeploy CDF funds towards debt servicing whilst making sure ongoing projects are not affected.However, the fund should be restructured to conform to the Constitution as per the High Court’s ruling in Petition 71 of 2013.Further, the government should implement the parastatals restructuring report to eliminate duplication and overlap. This should be accompanied by rationalization of staffing and structures of the presidency and national government administration to reduce the wage bill.Other measures should include reduced overpricing and waste; intensifying the fight against corruption, civil service effectiveness and fiscal compliance. Related Topics: Up NextKenya’s economy on sound footing in 2019: Thanks to the political stability Don't MissThe Budget to Boost Economic Growth Continue Reading Advertisement You may like Click to comment KenyaKenya’s economy to grow at 6% in 2019 amidst Q3 growth expansion Published 5 days agoon August 15, 2019By Vaultz Publisher Q3 to maintain growth pedalFor the third quarter of 2019, Kenya’s real economic growth is likely to bounce back to 5.8 percent, above the trend of 5.3 percent. Analysts from Genghis Capital suggests the economic growth of Kenya for Q3 to be driven by the service sectors. “We doubt the going concern of the counties in the near-term. What was a tail risk situation at the start of Q2, 2019 has morphed into a base case; the unresolved Division of Revenue Bill, 2019,” said Genghis in their latest outlook. The bullish tone on the private sector at the tail end of last quarter will likely spill into Q3 2019.A slow start of the budget cycle will offset this high degree of exuberance. The inflation rate in July touched a 3-month high of 6.3 percent from 5.7 percent in June highlighting increased pressure on the consumer spending ability.The hike in inflation has been attributed in great part to the acceleration in the pricing of key agricultural commodities including maize and sifted grain flour and the implementation of new taxes under tax amendments by the National Treasury.While the overall food and non-alcoholic beverages index has retreated by a single percentage point since the last review, with a slide to the pricing of commodities such as milk, potatoes and sukuma wiki, biting maize grain shortages has countered hopes for further relief to the costing of food.“The decline in price of these commodities outweighed the observed increase in the cost of other commodities like maize grain, maize flour-loose, carrots and onions which increased by 0.52, 1.33, 6.81 and 1.19 per cent, respectively, over the same period,” noted the Kenya National Bureau of Statistics (KNBS) in its end month (July) inflation publication.New taxes targeted at the ‘sin’ alcohol and cigarette industries which were made operational on July 1, 2019 to include a Ksh18 and Ksh24 hike of excise duty charged on wine and whisky respectively and a raise of a Ksh.61 tax on a packet of cigarettes have seen the index jump by 0.8 percent during the month.At the same time, the impact of fluctuating petroleum prices has seen the cost of housing, electricity and transport rise in spite of a hold in the increase of diesel and kerosene prices by the Energy and Petroleum Regulatory Authority (EPRA) in mid-July.While the impending harvest season will further support recourse in the rise of food prices; taxes, fuel costs and a depreciating shilling are, when combined, expected to anchor further shocks to the consumer disposable income represented in the Consumer Price Index (CPI).The Kenya Revenue Authority (KRA) is expected to implement new excise taxes on non-alcoholic beverages and cosmetics beginning September 1, 2019 to effectively eat into the level of disposable income available to consumers.Meanwhile, the pricing of petroleum commodities in the international market is set to remain unpredictable in the near-term irrespective of its recent cool down as tensions in the oil-rich Persian Gulf persists.The recent devaluation of the Kenyan shilling against the US dollar will however make for the gravest concern on inflation, given the dollar’s impact on major purchases of imports and pricing of essential services including the electricity billing’s fuel-cost charge.The shilling has been on a free-fall in the past couple of months, hitting both the two and five-year low in a matter attributed mainly to increased foreign currency demand by investors and heightened liquidity in the financial markets.The over-supply of money in the economy has brought forth real risks of more money chasing fewer goods in a build-up which when held in the long-run poses the risk of hyper-inflation.The shilling touched a low Ksh.104.20 valuation against the dollar at the close of trading on 23rd July before recovering marginally on the following day.While inflation is once again on the rise, the rate holds within the government targeted range of 2.5 to 7.5 percent aligned to the ongoing medium term III plan, with the range being most recently retained for the eighth consecutive year by the National Treasury.On the maize debate that is ongoing, analysts say they do not foresee maize supply shock to either give headline or food inflation a lift in Q3 2019. The CBK Monetary Policy Committee (MPC) reaction function signals a stable CBR at 9.0 percent in Q3 2019. Investors say they expect the local currency to be at 102.5 – 103.5 levels in Q3 2019.At the macro level, the reduced big-ticket needs in FY2019/20, increased remittances (5.2 percent y/y to USD 1.45 billion in 1H19) and lower ADNOC Murban crude price will support the local currency.The maturity of the 2-year bond (FXD1/2017/2Yr) in the current depressed yield environment will likely nudge its refinancing (a 2-year primary bond paper) in the month of August.“We believe the issuance of longer tenor bonds will remain the baseline scenario although net domestic borrowing target in FY2019/20 (KES 289.2Bn) is higher than FY2018/19 (KES 255.4Bn).”Investors should expect interbank rates to average 4.0 percent at the end of Q3 2019 from the current sub 2.0% levels. In the event a modification of the interest rate cap comes to pass at the tail end of Q3 2019, “we expect a normalization at the long end of the yield curve beginning Q4 2019.”CBK Maintains Lending RateThe Central Bank of Kenya (CBK) on 24th July maintained the benchmark lending rate at 9 percent due to the relatively stable inflation rate.Patrick Njoroge, CBK governor, who chaired the Monetary Policy Committee (MPC) meeting in Nairobi said that the inflation expectations remained well anchored within the target range, and that the economy was operating close to its potential.“The MPC will continue to closely monitor developments in the global and domestic economy, including any perverse response to its previous decisions, and stands ready to take additional measures as necessary,” Njoroge said in a statement issued in Nairobi.The monetary policy organ met to review the outcome of its previous policy decisions as well as the recent economic developments against a backdrop of domestic macroeconomic stability, increased optimism on the economic growth prospects, and increased global uncertainties.Njoroge said there is need to be vigilant on the possible effects of the recent increases in fuel prices, the ongoing demonetization, and the increased uncertainties in the external environment.The committee noted the gradual demonetization through the withdrawal of the older 1,000 shilling notes (10 U.S. dollars) and the close monitoring by CBK will ensure that the process is not disruptive to the economy.The governor noted that month-on-month overall inflation remained relatively stable and within the target range in May and June 2019.“The inflation rate stood at 5.7 percent in June compared to 5.5 percent in May. However, food inflation rose to 6.6 percent in June from 6.0 percent in May, reflecting increases in the prices of non-vegetable food crops particularly maize, due to uncertain supply,” Njoroge said.According to the MPC, non-food-non-fuel inflation remained below 5 percent, indicative of muted demand pressures and spillover effects of the recent rise in fuel prices.“Overall inflation is expected to remain within the target range in the near term largely due to expectations of lower food prices following improved weather conditions, and lower electricity prices with the reduced reliance on expensive power sources,” Njoroge observed.The governor added that the economy remained strong in the first quarter of 2019, despite the effects of the delayed long rains on agricultural production.The MPC noted that the leading indicators of economic activity point to stronger growth in the second quarter of 2019.“Consequently, growth in 2019 is expected to remain strong, supported by agricultural production, strong growth of micro, small medium enterprises and the service sector, foreign direct investment, and a stable macroeconomic environment,” he added.The apex bank said that the real GDP growth stood at 5.6 percent, reflecting a stronger than expected performance of agriculture and a resilient services sector, particularly information and communication, accommodation and restaurants, and transport and storage.Njoroge added that the alignment of the 2019/20 financial year government budget to the Big 4 priority sectors is expected to boost economic activity in manufacturing, agriculture, construction and real estate, and health sectors.Growth on right gearKenya’s gross domestic product (GDP) is likely to expand by at least 6 per cent this year, the country’s finance minister said, sticking to rosy government forecasts despite delayed rains that could hit agriculture, a mainstay of the economy. The Kenyan economy grew 6.3 per cent in 2018, the statistics office said, helped by adequate rainfall, which spurred farming, which contributes about a third of output. Growth had slumped to 4.9 per cent the previous year in 2017. “The Kenyan economy remains resilient. It is expected to perform better in 2019, growing by at least over 6 per cent,” the minister, Henry Rotich, said at an event to disclose last year’s economic performance. The World Bank trimmed its forecast for Kenyan growth in 2019 to 5.7 per cent this month from an earlier forecast of 5.8 per cent because the main rainy season was delayed. Food shortages and water scarcity could worsen if the rainy season – from March to May — fails entirely, the country’s meteorological department said just days after the World Bank’s move. “Uncertain rainfall may act as an inadvertent drag on growth,” said Razia Khan, the head of research for Africa at Standard Chartered in London. The government, however, which expects the economy to grow by at least 6.3 per cent in 2019, according to President Uhuru Kenyatta in a speech earlier in the month of July, stuck to its optimism. “Though the onset of the long rains have delayed, it is still early to predict on its impact on agricultural production,” Rotich said. Last year’s recovery in growth was driven by agriculture, excluding fisheries and forestry, which expanded by 6.6 per cent, up from 1.8 per cent in 2017, said Zachary Mwangi, director general of the Kenya National Bureau of Statistics. 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