Yattani seeks nod to borrow more billions

National Treasury Cabinet Secretary Ukur Yatani is set to meet with the Budget and Appropriations Committee to finalise what will be Kenya’s most ambitious Sh3.5 trillion Budget Policy Statement (BPS).

The policy document will morph into Kenya’s Budget for the Financial Year 2021/22, and indeed President Uhuru Kenyatta’s last attempt to align funds to cushion his legacy projects, which have been hard hit by Covid-19 pandemic shocks.

Once tabled in the National Assembly any time from Thursday this week, awaiting approval of the recommendation report, the BPS will pave the way for the Division of Revenue Bill, 2021, and County Allocation Bill (2021) in line with Kenya’s budget making calendar.

The budget for the Financial Year (FY) 2021/22 is estimated at Sh3.02 trillion, which is a Sh216 billion increase from the current Sh2.81 trillion budget. However, the estimates surge to Sh3.5 trillion when redemptions are included.

In the FY2021/22 budget, the National Government is set to apportion Sh1.966 trillion, with Sh1.16 billion going to the Consolidated Fund Services (CFS) while Sh370 billion will be set aside as County Equitable Share.

The budget estimates a deficit of Sh937.6 billion which will be financed by net external borrowing of Sh345.5 billion, and net domestic borrowing of Sh592.2 billion.

“Kenya must answer basic questions, like, why are we borrowing, and for which projects. It will also be important to say what are the models of disbursement of funds in the BPS.”

In this ambitious budget making process, the National Treasury raises a red flag that ordinary revenue shortfalls could get wider this financial year, on the back of Covid-19 pandemic shocks.

“We have also had to critically review our existing programmes and policies to ensure they are not only consistent with our development agenda but also informed by emerging realities brought about by the emergence of Covid-19 pandemic,” says Yatani in the latest BPS document.

“In particular, the budget framework has focused on the Big Four agenda, post Covid-19 recovery, the strategic policy initiatives of the government to accelerate growth, employment creation and poverty reduction,” he says.

Yatani will be banking on reversal of the Covid-19 tax relief measures and a raft of new levies, such as the Digital Service tax and Minimum tax, to raise more revenue for the 2021-22 financial year.

He also plans to deepen austerity measures in government expenditure to cater for the anticipated reduction in revenue, in a move that could have a direct knock-on effect on various development projects.

Big Four Agenda

It remains to be seen how the Treasury will align the budget to leverage the Big Four agenda on food security, manufacturing, Universal Health Coverage and affordable housing in the FY2020/21. According to Francis Kamau, partner and tax leader, East Africa at Ernst Young, the BPS has followed the traditional model of appropriations.

“The Big Four agenda is already in the mix, but these being electioneering budget years, revenue will be allocated in a pingpong manner based on political waves,” he said.

Kamau, however, warned that the country could get into bigger economic turmoil if the Treasury continues to follow basic international practices when raising the budget.

Samuel Nyandemo, an economics lecturer at the University of Nairobi, says it is unfortunate that Treasury is still targeting the Big Four agenda despite littleresources for mega projects.

“The government should have changed the budget to target small businesses with stimulus packages so that they can stand on their own feet. Instead of pumping money into agriculture, we are targeting road projects and the Building Bridges Initiate (BBI),” he said.

“We also need to zero-in on things like healthcare and clean water and how to put food on the table.”

Compared to the last financial year, the Treasury expects total revenue to increase by Sh184.6 billion, as it projects better economic performance compared to the last financial year. It also projects that total revenue including Appropriations in Aid (AiA) will increase from Sh1.85 trillion to Sh2.03 trillion.

The projections are informed by streamlined tax revenues following the end of tax relief to cushion Kenyans from the pandemic. To this end, income tax is expected to increase by 13.8 per cent, import duty will go up by 23.6 per cent while Excise duty and Value Added Tax will surge by 15.4 and 19.7 per cent.

The challenge will be to actualise the targets, which have been elusive in the past. In the last financial year (2019/20), for example, revenue collections fell short of the target by Sh0.31 trillion to stand at Sh1.57 trillion, against a target of Sh1.88 trillion.

As at December last year, the shortfall in ordinary revenue for the current financial year (2020/21) was Sh75.8 billion, midway to the end of the financial year.

“This is an indication that the shortfall in ordinary revenue is getting even wider in the current financial year,” says the Treasury in the 2021 Budget Policy Statement.

The situation is worsened by disrupted economic activities which have hurt productive sectors, meaning the taxman will find it difficult to meet set tax targets.

This even as the government increased the equitable share allocated to counties from Sh316.5 in last financial year to Sh370 billion.

The counties will receive a further Sh53.5 billion as conditional grant in the 2020/21 financial year, bringing the total funding to counties at Sh409.9 billion that year.

The BPS documents shows that while a shortfall in revenue is likely to impact national government projects, it will not affect the Sh370 billion equitable share allocation to counties.

“As per the annual Division of Revenue Act (DoRA) if the actual revenue raised nationally in the financial year falls short of the expected revenue, the shortfall shall be borne by the National Government, while county allocations have to be disbursed in full.”

Indeed, Churchill Ogutu, the head of research at Genghis Capital, says the noncritical recurrent expenditure could be hurt in case of a revenue shortfall, since the allocation to counties cannot be revised downwards.

To sustain the budget, the elephant in the room will be the soaring public debt, which is set to lead to further lifting of the debt ceiling. But, it’s not all doom and gloom as far as revenue collection is concerned with Kenya Revenue Authority announcing it had surpassed its revenue targets for the second month in a row.

The administration allocated Sh127.3 billion to the legacy projects in the last financial year, laying bare the extent to which budget cuts for Covid-19 emergencies had taken a toll of the President’s development agenda.

This was a mere 28 per cent of the Sh450.9 billion allocated to drivers and enablers of the development agenda. Since the President’s declaration, the Treasury ring fenced Sh400 billion to the venture in 2018-19, bringing the total allocation to Sh987 billion before the FY2021/22.

With a few months left to his retirement, the dwindling economic fortunes stoke curiosity whether the administration will achieve the Big Four agenda.