Yatani walks tightrope with Sh3.6trn budget amid Covid

Treasury Secretary Ukur Yatani will this afternoon walk a tightrope in trying to raise the hopes of a nation seeking relief from the economic shock of the Covid-19 pandemic, amid a gaping revenue shortfall.    

The Treasury boss is expected to factor President Uhuru Kenyatta’s ‘Big Four’ legacy projects, as this marks the last full financial year of the Jubilee administration.

The economist has to find money from a thin resource envelope hard hit by the economically devastating Covid-19 pandemic.

But on the other hand, he has to prepare to borrow at least Sh930 billion in the new financial year to plug the huge budget deficit at a time when the country is coming to terms with the consequences of high borrowing appetite that has seen Kenya’s public debt triple to Sh7.3 trillion in less than eight years. 

In between, he also has to ensure he delivers on the promises made to the International Monetary Fund (IMF), that include increasing tax collections that can only be achieved by growing the economy, raising taxes or catching tax cheats. 

At the back of his mind will be the ticking clock of debt repayment schedules including the Eurobond and the Standard Gauge Railway (SGR) loans among others, and the urgent need to protect the country from slipping into pariah list of defaulting nations. 

An analysis of the Consolidated Fund Services (CFS), the kitty from which debt repayments and salaries for constitutional commissions are drawn, paints the picture of a government that plans to spend more money on repaying debt than anything else. In the new financial year, CFS expenditures will increase by 24 percent to Sh1.33 trillion, which is a rise of Sh253.5 billion.

The Budget and Appropriations Committee (BAC) says in its report tabled in parliament this week that a five-year review indicates that by 2021/2022, the CFS will have increased by over 150 percent since 2016/2017.

Ghosts of pending bills

“The annualised growth rate is 20 percent, which is much higher than the nominal GDP growth rate for the same period,” the BAC report adds.

By the end of March 2021, the Public and Publicly Guaranteed Stock of debt amounted to Sh7.34 trillion, representing 82 percent of the Sh9 trillion national debt ceiling.

“The Committee is concerned that FY 2021/22 budget may not be implementable if the debt ceiling is not adjusted,” BAC says in the report.

Also on the list of priorities is the growing pension obligations estimated at Sh153.6 billion, a Sh42.5 billion increase from the current financial year. The office of the Auditor General also needs an extra Sh2.4 billion, which he did not factor in his current budget, to deal with the audit of the 47 devolved units.

He is also dealing with the ghosts of pending bills, which continue to affect implementation of the budget.

Economists have also raised concerns that Yatani may be punching in the dark given the fact that he has prepared a budget using out-dated data as the 2021 economic survey is yet to be released.

As he reads the Sh3.6 trillion budget this afternoon, he will be shifting the tax collection burden to the Kenya Revenue Authority (KRA) boss, James Githii Mburu, who has been sharpening his latest tax tools to squeeze more from the same pool of taxpayers.

Then there is the cost of keeping loss making parastatals afloat. From cash strapped Kenya Airways to Kenya Power, the Postal Corporation of Kenya (PCK), to public universities, Yatani is staring at a imminent collapse unless he frees up resources to bail them out.

Best financing mix

For public universities, the Sh40,000 per student capitation is no longer sustainable. Universities want their budgets to be increased from Sh41 billion to Sh61 billion at the very least.

The Ministry of Health has unpaid court awards amounting to Sh39.5 billion. Kenyatta National Hospital and Moi Teaching and Referral Hospital have accumulated unpaid patient bills, mostly from indigents, amounting to Sh8.6 billion and Sh7.2 billion respectively.

He has to balance a multitude of interests to figure out the best financing mix of the Sh3.6 trillion budget, which has proven quite difficult to make.

Parliament accused him of forming a perpetual habit of submitting additional changes to a budget which was already under scrutiny, creating difficulties at arriving at the final budget.

“This raises serious capacity issues in the National Treasury and points to laxity in preparing the budget,” the BAC says in its report.  

In terms of the three arms of government, Yatani plans to give a total of Sh1.89 trillion to the executive, led by President Kenyatta. The recurrent expenditure of the executive will amount to Sh1.29 trillion, while the development expenditure will stand at Sh666.5 billion.  

Parliament will receive a generous Sh46.61 billion in the New Year, a 24 percent jump from what it received in the current financial year, as the Treasury courts legislators to endorse some of his painful tax and policy proposals.

Generous allocation to parliament

One of the key requests to parliament is raising the budget ceiling beyond the Sh9 trillion. This will be the second time the National Treasury is making this request in the last two years. A similar request was presented in October 2019.

He is counting on this generous allocation to parliament, which is higher by Sh8.7 billion from the Budget Policy Statement (ceiling), to warm the hearts of parliamentarians and get his way on tax proposals that will hit motorcycle taxis, commonly known as boda boda, punters, nicotine pouches, imported jewellery and suppliers of ordinary bread among others.   

The Judiciary will once again be treated like the unwanted child of the family, with the Treasury keeping their budget at Sh17.92 billion, a marginal increase from the current year budget. 

In the new budget that starts next month, Yatani expects to collect Sh2.03 trillion from ordinary revenue as well as appropriations in aid, an increase of Sh210 billion compared to the current financial year. 

Mr Mburu will carry the biggest share of this burden, with an new target of Sh1.77 trillion, a 13 percent jump from the current financial year or Sh202 billion more.

KRA currently had a Sh1.57 trillion tax revenue target in the current year which ends on June 30.

In the Sh1.77 trillion, income tax, which accounts for about half of all tax revenue, is projected to fetch an extra Sh102 billion this year to Sh835 billion.

On the other hand, Value Added Tax (VAT) is projected at Sh473 billion in the 2021/22 financial year, up from Sh395 billion while excise duty is expected to generate Sh241 billion, an increase from the Sh209 billion in the current year.

Import duty is expected to fetch Sh119 billion, up from the current Sh96 billion.

Current economic conditions

“Though the revenue projections appear to be conservative and have complied with the IMF benchmarks, it should be noted that the expected revenue performance is based on sustained recovery in economic performance,” BAC says.

“Should the risks to the growth outlook materialise, it may lead to significantly lower than projected tax revenue collection,” BAC says. If revenue underperforms, it will lead to an expansion of the fiscal deficit and a likely increase in the public debt levels.

His budget is also based on an assumption that Kenya will post a GDP growth of 6.3 percent in 2021/2022, counting on a stable macroeconomic environment, improved domestic consumption and higher external demand.

However, the growth fundamentals are potentially weak given the current economic conditions. Private consumption has reduced considerably due to increased unemployment and income losses.

A prolonged pandemic will also delay recovery of the tourism industry, which is an important generator of forex exchange that cushions the shilling.

Besides this forex risk, the growth will also be dampened by rising fuel prices, political uncertainty as the country approaches the general elections as well the possibility of reintroduction of strict Covid-19 containment measures.

Yatani will also be reading a budget that hands him financial control of cash-rich parastatals after stripping them from the infrastructure and energy ministries.

In the new financial year, the Treasury will be the implementing agency of projects such as the Dongo-Kundu Special Economic Zone, SGR Nairobi- Naivasha, Mombasa Port Development Project, LAPPSET as well as the Kenya Mortgage Refinance Company (KMRC).

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