Rotich’s biggest test is mobilising cash for ambitious Sh1.8 trillion Budget

Kenya: In President Uhuru Kenyatta’s unfamiliar role in a current TV commercial, it is easy to tell of the distress in government that has been worsened by heightened terror threats.

His anxiety would be obvious in the likely scenarios of massive job cuts and a slump in foreign currency earnings, especially in the tourism sector.

Tourism is Kenya’s second most important pillar after agriculture. National Treasury Cabinet Secretary Henry Rotich will be telling Kenyans how he plans to finance a record Sh1.8 trillion budget – when nothing seems to be going right for the country’s economy.

The Kenyan economy performed modestly for the last three years and realised growth in gross domestic product (GDP) of 4.4 per cent in 2012, 4.5 per cent in 2013 and 4.7 in 2014 against projections of 5.8 per cent and things don’t look different. Key economic drivers such as tourism, agriculture including tea and maize — Kenya’s staple food crop are doing badly as a result of terrorism threats and inadequate rainfall.

 From a soaring recurrent budget to massive planned investments in security, infrastructure and irrigation projects, Mr Kenyatta’s government second budget would be funded on optimism – according to Benson Kiriga, the lead macroeconomist at Kippra. “There will be significant problems in the short term. We can only hope that the policy interventions could help in the long run,” said Mr Kiriga.

10,000 police officers

In spite of the funding problems, President Kenyatta has outlined that he would make massive investment in security, including CCTV cameras, recruitment of about 10,000 police officers and acquisition of a huge fleets of policing vehicles and aircraft. This high expenditure plan presents a major funding headache in the next budget.

Rotich has acknowledged that Kenya is not in a good shape but planned interventions ‘will help tackle some of the outstanding economic challenges and lock in a higher and sustainable inclusive growth’. Treasury secretary acknowledges in his budget summary of Sh1.8 trillion that growth in Kenya and other sub-Saharan African countries will be slowed by weaker growth prospects in many developed countries, caused by spill-overs from sluggish external demand, reversal of capital flows and decline in commodity prices.

“The economy has been sluggish for a while now and we haven’t witnessed the impressive days of 2007 in the last seven years. Of course it is easy to simply blame factors that are supposedly beyond our control but those are not the answers,” said Nikhil Hira, a partner with Deloitte East Africa. 

“Our policy framework needs to be carefully looked at and we must start thinking more medium to long-term. Many of the policy changes over the last few years have been reactive rather than proactive and as a consequence suggest short-term thinking. Perhaps in the circumstances that is understandable but it certainly doesn’t make it right.”

Immediate impact

But he hopes that interventions such as investments in security, food production and transport could lift Kenya’s prospects. Kiriga disagrees that the interventions would have an immediate impact, in the medium-term.

Among the other interventions the State has planned that could have rapid impact on the tourism sector include tax incentives to encourage local tourism, in the face of declining arrivals and hotel bookings from the traditional markets in Europe and US.

It is however highly unlikely that local tourists could make up for the dipping numbers of high-value foreigners. Average per capita income in UK stands at $38,940 (Sh3.3 million), which is more than 40 times Kenya’s $943 (Sh81,000), using World Bank’s data. Official statistics show that tourist arrivals fell 18 per cent to 1.4 million last year, taking the country further from a target of three million visitors by 2017. Sector earnings also dropped from 2012’s Sh96.2 billion to 94 billion last year, on the back of increased terror attacks.

Kiriga says the tourism sector is still exposed to further losses, but it is the dimming prospects of the agriculture sector that could be more worrying. “Kenya has received far less rainfall, while almost the entire sector relies on rainfall; we are exposed on agricultural exports and even food for local consumption.”

As a pointer to the faltering agriculture sector, Sasini- which grows and exports tea and coffee last week announced 86 per cent drop in profits blaming low productivity at home and depressed prices in the international markets.

Sasini reported a Sh28 million profit because tea prices were ‘far below the target’. Given the outlook for the twin sectors remains dull, Rotich would be praying for a miracle to fund his ambitious budget that would include Sh17.4 billion that President Kenyatta hopes to use to achieve his largest campaign promise of giving a laptop to every child joining Class One.

The laptop project, running one year behind schedule, could be the most transformative achievement that Mr Kenyatta must deliver alongside the standard gauge railway that has been allocated nearly Sh20 billion. However, it is Mr Rotich who is now tasked with advising the State how the projects would be funded, in the midst of likely shortfalls in revenue collection, going by set precedence. Kenya Revenue Authority only managed to beat its target once- in the first half of the current financial year, a feat that could be too far in view of the prevailing conditions.

A planned Euro Bond targeting to raise up to Sh174 billion from international investors would offer some reprieve on the National Treasury, which has fallen behind in repaying a Sh52 billion loan plus interest, that should have been settled last month.

New taxes

In his last budget, Rotich introduced new tax laws that saw basic commodities become taxable, making life more painful for Kenyans. It is not clear whether he would propose new taxes this time around, when his obligations is bigger than ever— but on a people that might not shoulder any more taxation.

Mr Kiriga observes that additional taxes on the basic commodities would be unlikely in the national budget, adding that Kenya could do well with new foreign direct investment from her newfound friend in China. “There is no much we could sell to China as a country but the Chinese could invest in manufacturing here – but even that would be a medium term intervention.”

 Kenya’s economy grew by 4.7 per cent last year, compared to 4.6 per cent in 2012. Rotich hopes to overcome the funding problems in the current budget and uncertainties to grow at 5.8 per cent in 2014, before picking up gradually to seven per cent in 2017.

The current awkward financial position also comes when the Government is struggling to contain runaway wage bill that stands at 55 percent of the country’s revenue collection of Sh900 billion.

The public service workers stands at a staggering 700,000 employees and has seen the wage bill shot up from Sh200 billion in 2008/2009 to Sh461 billion in 2012/2013.

It will be interesting how Rotich will balance the high spending plan to fit into the dwindling public coffers.