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Robert Maina

The global economy is set to recover from the negative effects of the Covid-19 pandemic in 2021 to grow at 6 per cent from a contraction of 3.3 per cent in 2020. 

It is expected that the same trend will be replicated locally with the economy being projected to grow by 6.3 per cent in the Financial Year (FY) 2021/22. 

This will be a significant improvement from the 3.8 per cent that was experienced in Financial Year 2020/21.

This is premised on a stable macroeconomic environment, improved domestic consumption and external demand.

It is no doubt that the economic performance in 2020 was an outlier with economic growth having averaged 5.6 per cent in the period 2015 to 2019 with the per capita income increasing by 17.4 per cent to an average of Sh99,865 in the same period compared with Sh85,050 in the period 2010 to 2014.

The effects of the Covid-19 pandemic led to a slowdown in the economy in 2020 and this was further exacerbated by the various containment measures that were rolled out by the government. 

The loss of lives and livelihoods and the measures that the government took to contain the spread of the pandemic which included the closure of the Kenyan airspace and borders, introduction of curfews and cessation of movement almost halted some economic activities.

Agriculture sector emerged as one of the critical cogs in the economy which remained resilient in the financial year. 

The sector grew by 6.3 per cent as compared with a growth of 3.6 per cent in 2019 supported by adequate rainfall which was received in 2020 thus enhancing production.

It is also noteworthy that the country experienced another shock in the form of invasion of desert locusts which seems to have been overshadowed by the Covid-19 pandemic.

In the Financial Year  2021/22 the government plans to implement a wide array of initiatives aimed at playing a critical role in stimulating the economy.

For instance, the Economic Stimulus Programme targets to enhance economic activities through labour-based activities. 

This is in addition to the implementation of interventions under the Covid-19 Economic Recovery Strategy which has set out thematic areas that are aimed at spurring economic recovery and growth. 

The government has also allocated Sh135.3 billion towards the Big Four agenda which entails enhancement of food security, affordable housing, manufacturing and affordable healthcare.

Post Covid-19 economic stimulus programme has been allocated Sh26.6 billion which is meant to assist in enhancing liquidity to business, improving education outcome among other critical aspects of the economy. 

Downside risks

Downside risks to the projected growth could, however, derail economic recovery.

These include the emergence of new Covid-19 variants which could lead to disruptions to trade and tourism; lower agricultural output due to potential adverse weather conditions and continued desert locust infestation.

There is also increased public expenditure pressures that are likely to put a strain on the fiscal space.

The government aims to raise revenues including Appropriation-in-Aid (AIA) of Sh2,038.6 billion which is equivalent to 16.4 per cent of the gross domestic product (GDP) in Financial Year 2020/21. 

Ordinary revenues are projected at Sh1.78 trillion or an equivalent of 14.3 per cent of GDP. This is set to be achieved through a combination of reforms in tax policy and revenue administration.

On the other hand, the expenditure is projected at Sh3.05 trillion which is equivalent to 24.6 per cent of the GDP out of which recurrent expenditures are estimated at Sh2.02 trillion or an equivalent of 16.3 per cent of GDP. 

The expenditure has been aligned to programmes that will support economic recovery which included programmes under the Big Four A\agenda, the Third Medium Term Plan (2018-2022) of the Vision 2030 Economic Blueprint, the post-Covid-19 Economic Recovery Strategy and the strategic policy initiatives of the government. 

The government has allocated 34 per cent of the total expenditure to development.

It is, however, noteworthy that the main challenge has been the under absorption of development expenditure both at the level of the national and the county governments. 

Effectively, the fiscal deficit including grants in FY 2021/22 is projected at Sh952.9 billion or an equivalent of 7.7 per cent of GDP. This is projected to decrease to Sh613.8 billion equivalent to 3.6 per cent of GDP in the FY 2024/25. 

The deficit will be financed via a combination of external financing of Sh291.3 billion and domestic borrowing of Sh661.9 billion. 

The government has committed to maintain stable tax rates and build confidence in the taxation system, enhance compliance, improve predictability and improve tax administration.

The progressive removal of tax exemptions will likely result in a change of the tax status of certain goods.

By and large, the 2021/22 budget presents hope of better fortunes to the citizenry, but this should be tempered with cautious optimism owing to the various downside risks.

Robert Maina is a Senior Tax Manager at EY. The views expressed herein are not necessarily those of EY.