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Kenya’s Economy and its budget cut Implication



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 losers

The 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 economy

The 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.


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Kenya’s economy on sound footing in 2019: Thanks to the political stability



After a year that began on the wrong footing due to divisions over the hotly contested and controversial 2017 presidential polls, 2019 could bring with it better economic growth prospects.

Among the key issues that could shape economic conversations and the lives of Kenyans this year are whether a law on interest rate caps will be repealed, the national census, a new currency, and the political climate.

This positive outlook could, however, be affected by the high-octane politics that is gaining momentum – specifically a referendum and 2022 succession politics that could hamper the country’s economic growth.

But with the World Bank having projected Kenya’s economy to hit 6.01 per cent this year from 5.475 per cent recorded in 2018, the Government is upbeat about the oncoming economic prospects.

“Our growth outlook at around six per cent remains stable and so are other macroeconomic indicators like inflation, interest rates, and the currency exchange rates,” Treasury Cabinet Secretary Henry Rotich averred.

“We will continue to monitor the global developments especially trade wars, Brexit, commodity prices and US monetary policy and take appropriate actions to mitigate any negative consequences to our growth,” he said.

Since Uhuru Kenyatta became president, the highest rate at which Kenya’s economy has grown in a year was 5.9 per cent in 2016 and 2013, when Mwai Kibaki retired.


Remittance inflows

This year’s growth could be supported by strong remittance inflows and rising household income from agriculture and lower food prices.

“Manufacturing is still recovering and its activities remain sluggish. The sector growth rose from 0.5 per cent in 2017 to 2.7 per cent in 2018, but still remains weak compared with a three-year average of 3.6 per cent over 2013 to 2016,” said the World Bank recently.

Among the key drivers of growth this year will be an improved business environment as well as the easing of the political climate, underpinned by strong agricultural output and a good performance by the service sector.

Further, the Bretton Woods institution projects that with interest rates capping and banks leaning towards government securities, credit is unlikely to grow, especially for small enterprises.

This view has also been shared by the Central Bank of Kenya (CBK) which has consistently said that the ceiling on interest rates charged by banks was denying entrepreneurs access to credit which is stifling economic growth.

However, according to a survey released last week by research firm Trends and Insights for Africa (Tifa), four out of 10 Kenyans, or 44 per cent would like to set up a business next year while 32 per cent will be scouting for jobs.

The drafters of Vision 2030 had insisted that for Kenya to be a medium income economy, its GDP was supposed to grow by more than seven per cent annually for two decades.

If the political environment remains stable, Kenya’s economy will for the first time in a decade hit a six per cent growth rate in 2019. Industry leaders are however afraid that all this could be wiped out by the unpredictable operating environment.

“2019 promises to be a strong year for the sector, specifically if the predictable and stable business environment can be guaranteed in policy formulation and implementation,” Kenya Association of Manufacturers Chief Executive Phyliss Wakiaga revealed.

On the bright side, previous economic growth numbers show that Kenya’s economy has in the last two decades grown its fastest in the second year after a presidential election.

The growth, however, starts to decline in the third year as another election approaches.

In 2004, just a year after Mwai Kibaki had been elected as president Kenya’s economy grew by seven per cent. In 2010 it rebounded to 8.4 after the peace deal between Kibaki and his political nemesis Raila Odinga in the 2007 elections that led to the grand coalition government.

Then in 2015, year after Uhuru had been elected for his first term it hit 5.9 per cent. Thanks to the handshake between Uhuru and Raila, Kenya’s business climate has stabilized, though still struggling in some sectors such as mining which remains on the growth path.

In all real GDP grew an estimated 5.9% in 2018, from 4.9% in 2017, supported by good weather, eased political uncertainties, improved business confidence, and strong private consumption. On the supply side, services accounted for 52.5% of the growth, agriculture for 23.7%, and industry for 23.8%. On the demand side, private consumption was the key driver of growth. The public debt–to-GDP ratio increased considerably over the past five years to 57% at the end of June 2018. Half of public debt is external. The share of loans from non-concessional sources has increased, partly because Kenya issued a $2 billion Eurobond in February 2018. An October 2018 International Monetary Fund debt sustainability analysis elevated the country’s risk of debt stress to moderate.

A tighter fiscal stance reduced the fiscal deficit to an estimated 6.7% of GDP in 2018, with the share of government spending in GDP falling to 23.9% from 28.0% in 2017. To stimulate growth, the Central Bank of Kenya reduced the interest rate to 9% in July 2018 from 9.5% in May. Nonetheless, a law capping interest rates discourages savings, reduces credit access to the private sector (especially small and medium enterprises), and impedes banking sector competition, particularly by reducing smaller banks’ profitability. The exchange rate was more stable in 2018 than in 2017. The current account deficit narrowed to an estimated 5.8% of GDP in 2018 from 6.7% in 2017, thanks to an improved trade balance as a result of increased Kenyan manufacturing exports. Kenya’s gross official reserves reached $8.5 billion (5.6 months of imports) in September 2018— a 7% increase from a year before.

Tailwinds and headwinds

Real GDP is projected to grow by 6.01% in 2019. Domestically, improved business confidence and continued macroeconomic stability will contribute to growth. Externally, tourism and the strengthening global economy will contribute.

The government plans to continue fiscal consolidation to restrain the rising deficit and stabilize public debt by enhancing revenue, rationalizing expenditures through zero base budgeting, and reducing the cost of debt by diversifying funding sources. Inflation is projected to be 5.5% in 2019 due to prudent monetary policy. Kenya also benefits from renewed political momentum (including the 2010 constitution and devolution), a strategic geographic location with sea access, opportunities for private investors, and the discovery of oil, gas, and coal along with continued exploration for other minerals.

Among downside risks are possible difficulties in making fiscal consolidation friendly to growth and in finding affordable finance for the budget deficit caused by tightening global markets. Boosting domestic resource mobilization and enhancing government spending efficiency are critical to restrain public borrowing.

Kenya continues to face the challenges of inadequate infrastructure, high income inequality, and high poverty exacerbated by high unemployment, which varies across locations and groups (such as young people). Kenya is exposed to risks related to external shocks, climate change, and security. The population in extreme poverty (living on less than $1.90 a day) declined from 46% in 2006 to 36% in 2016. But the trajectory is inadequate to eradicate extreme poverty by 2030.

Kenya’s Big Four (B4) economic plan, introduced in 2017, focuses on manufacturing, affordable housing, universal health coverage, and food and nutrition security. It envisages enhancing structural transformation, addressing deep-seated social and economic challenges, and accelerating economic growth to at least 7% a year. By implementing the B4 strategy, Kenya hopes to reduce poverty rapidly and create decent jobs.


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