Businesses brace for Ruto’s Sh300 billion austerity axe

Suppliers, hotels, and travel agencies are among the firms that will be most hit by the move by President William Ruto to cut the budget by Sh300 billion in austerity measures aimed at easing pressure on State coffers.

Dr Ruto in September made the tough decision to cut this year’s Sh3.3 trillion budget by Sh290 billion amid an economic slowdown even as runaway inflation continues to erode earnings.

An austerity plan released in November by the Treasury showed that the entire budget on foreign travel, training, purchases of furniture, and motor vehicles has been cut, leaving the items the worst hit by President Ruto’s purge on the expenditures of ministries, departments, and agencies (MDAs) this financial year.

A schedule by Treasury Cabinet Secretary Njuguna Ndung’u showed that 100 percent of the remaining balances on foreign travel, training, and motor vehicle and furniture purchase budgets as of September 30, 2022 have been cut.

The Treasury has also effected a 75 percent cut on the remaining budgets on communication services, domestic travel, advertising and printing, hospitality, and vehicle rentals as of September 30, 2022.

Critical projects

Another 75 percent cut has been made on research and feasibility study budgets — underlining the depth of the recurrent expenditure rationalisation that is targeted at freeing up cash for other more critical projects such as healthcare, education, and food security.

“On the spending side, we will contain expenditures at Sh3.386 trillion by partly offsetting existing pressures (Sh290 billion) through cuts on non-priority recurrent spending for Sh48.6 billion and an ambitious plan of rationalisation of non-priority projects for Sh181.6 billion,” said the Treasury last month.

Thousands of firms depend on supplying goods and services to government ministries, departments, agencies (MDAs), and county governments despite the growing headache of pending bills.

But the cut in the budget for entertainment, travel, training, and accommodation will especially heavily hit hotels which are the go-to hosts for such events at a time the hospitality industry is still recovering from the Covid-19 shocks.

Local transport and travel agencies – which are often hired to transport government workers for events within Nairobi and to other towns – will also be negatively affected as the government tightens its belt by cutting the budget for both local and foreign trips.

Government travels inject significant cash into the private sector — national government officials spent Sh20.17 billion on trips in the financial year to June 2022 — which was a 41.7 percent increase from the Sh14.23 billion that the officials spent in the financial year 2020/21.

Construction firms also face a drought of government tenders after President Ruto opted to stop funding up to a tune of Sh182 billion that was allocated to development projects by former President Uhuru Kenyatta in this year’s budget.

The head of State said the monies will be redirected to more priority spending needs, dealing a blow to construction and allied firms that were hoping to benefit from the tenders to carry out the projects.

The huge pending bills owed by the national government is also a worry for suppliers who are currently facing liquidity issues amid the high inflation and slow business recovery from the economic slowdown that came in the months before and after the August 2022 polls.

Fresh data from the Controller of Budget (CoB) shows that the total outstanding MDA pending bills as of September 30, 2022, amounted to Sh82.35 billion,  comprising Sh61.15 billion (74.3 percent) for recurrent expenditure and Sh21.2 billion (25.7 percent) for development expenditure.

High inflation – year-on-year rate hit a high of 9.59 percent in October last year before slowing down to 9.06 percent in December – driven by a weaker shilling, high global crude oil prices, and rising food costs has also eroded the earnings of local firms on weakened demand for goods and services.

Gross domestic product

The gross domestic product (GDP) growth slowed to just 4.7 percent in the third quarter of 2022 compared to a growth of 9.3 percent in similar quarter of 2021, according to data from the Kenya National Bureau of Statistics (KNBS).

Despite these challenges, a recent survey by the Central Bank of Kenya (CBK) found that 47 percent of respondents remain optimistic about fortunes owing to proactive government policies, including the focus on micro, small and medium enterprises (MSMEs) which is expected to bolster employment and incomes, and support consumption.

In addition, improved economic activity post-election and a resilient services sector were cited by 29 percent and 24 percent of the respondents, respectively, as reasons for increased optimism.

However, non-bank private firms that were polled said a review of taxation policies, provision of low-interest credit facilities by banks, and lower money transfer charges are critical possible interventions to help small businesses brave the economic shocks.

Other interventions cited by the firms include incentives to industries such as tourism, and the introduction of incentives for both foreign and local investors, especially in the manufacturing and tours.

“In addition, respondents suggested that prompt settlement of pending bills to suppliers by the national and county governments would enhance cash flows and in turn facilitate expansions and thus job creation,” said the CBK in the Market Perception Survey of November last year.

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