PBO warns slow economy puts Finance Act in limbo

Kenya’s economic growth is likely to slow in the 2023/24 Financial Year due to various risks bedevilling the country, report shows.

Report from the Parliamentary Budget Office (PBO) on Budget Watch for FY 2023/24 and the medium term say prolonged drought is likely to worsen food insecurity, and slow down in both government and private consumption amid an ongoing fiscal consolidation.

In February, the Kenya Food Security Steering Group revealed that the number of Kenyans affected by drought and hunger had gone up from 4.2 million to six million

“There are substantial risks to the outlook that may dampen the growth projection for 2023 and the medium term,” the report. The high cost of production due to high energy prices, economic distortion from demonstrations linked to political rivalry, and the tight monetary policy – which could lead to higher cost of credit – will impact private sector investments affecting economic growth.

Move comes at a time when the country has been faced by demonstrations instigated by Azimio leader Raila Odinga over high cost of living and other issues including audit of electoral commission servers, assault on multiparty democracy and Government incompetence.

However, the coalition called off the protests following formation of the bi-partisan talks but has already issued threats that they may be going back to the streets should the talks fail.

External forces will also come into play, and as per the report, a weaker global demand and monetary tightening in advanced countries could hurt Kenya with lower net exports, reduced foreign investments and increased capital outflows.

“The World Bank projects a slightly modest growth rate of 5.0 per cent in 2023 and an average of 5.2 per cent over the medium term due to the probability of these risks materialising,” the report.

In order to realise aspirations of the Bottom-up Economic Transformation Agenda (BETA), spanning the value chains, delivery of enablers, the sustainable debt management, and delivery of social services, the parliamentary office says the FY 2023/24 budget must be monitored closely.

Critical areas

Some of the critical areas that should be monitored throughout the Financial Year include implementation of the fiscal consolidation strategy to ease debt vulnerabilities through boosting revenue collection measures while slowing down expenditure growth; and full implementation of funded strategic priorities identified under BETA.

Others include maintaining macroeconomic stability to foster a conducive business environment; and good performance of various spending sectors including health, education, infrastructure, water and sanitation, agriculture, energy, trade and manufacturing.

With regards to inflation rate, the report states inflation is expected to remain within a manageable statutory range throughout 2023/24 due to slowdown of food inflation associated with good rainfall performance in the recent months.

To keep inflation under control, various structural measures including improving functioning of the interbank market to strengthen monetary policy transmission, and continued improvement of communication on monetary policy decisions will help in the medium term.

In addition, the report notes that the ongoing coordination of non-monetary measures to deal with the cost of living, inflation, and growth like the provision of subsidised fertilizer to lower the cost of farm inputs, the provision of duty-free importation of key food items particularly maize, cooking oil, rice and sugar, and the planned investment in critical economic value chains will help dampen the negative effects of higher interest rates.

On revenue raising measures and others contained in the Finance Act 2023 that are expected to enhance revenue collection and expand the tax base.

The report notes that the achievement of the ambitious revenue targets is premised on the assumption that the tax measures will not alter consumer behaviour or hamper economic activity and hinder growth.

Report however states that the country’s economic growth is expected to remain strong in the midst of domestic and global headwinds.