Treasury faces looming budget crisis in the wake of Gen Z uprising

President William Ruto's embattled administration faces a Herculean task in the months ahead in funding public services, implementing development projects and programmes and paying public debts. This follows the decision to reject the Finance Bill, 2024 amid unprecedented public pressure. President Ruto last week moved to avert a financial crisis for his administration as the legal budget deadline loomed. The most workable option is borrowing more money to fund this year's Sh3.9 trillion budget. On Sunday night, President Ruto alluded to this, saying Kenya would need to borrow Sh1 trillion nearly double what was initially planned following the move to withdraw the Finance Bill, 2024. "It means that this year we are going to borrow Sh1 trillion to be able to run our government," he told journalists during a roundtable session at State House, Nairobi. But it is tricky for Kenya following its ascension to conditionalities imposed by the International Monetary Fund (IMF) and the World Bank in return for support to repay debts and meet other obligations, economists say. The IMF has in the last three years committed to Kenya expand the tax net and increase taxes as part of a pursuit to ensure self-sufficiency in her budgetary obligations and cut back on loan borrowing. The aim has been to raise ordinary revenues by five percentage points of Gross Domestic Product (GDP) during the Financial Year 2024-25 and Financial Year 2026/27. The IMF has already indicated it will not compromise on its deal with Kenya due to concerns over her vulnerability to debt distress despite repaying the $2 billion (Sh2548 billion) Eurobond partly due to a resale and lending by the World Bank. Kenya's public debt was estimated to have reached 73 per cent of GDP by the end-2023, with debt service consuming about 55 per cent of revenues. It was estimated to be Sh11.14 trillion in February 2024 leaving the National Treasury with little room for more borrowing. The IMF has been pushing Kenya to ensure her fiscal strategy is centred on firmly reducing debt vulnerabilities and achieving a newly approved debt anchor by 2029 while protecting high-priority service delivery programmes. Kenya first agreed with the IMF in July 2021, which is subject to review every six months before further funding is released. "There isn't a great deal of room to manoeuvre unless you really start doing much more thorough reviews, so it's going to be difficult," Giulia Pelligrini, senior portfolio manager with Allianz Global Investors, avers. Before the fall of the Finance Bill 2024, National Treasury Cabinet Secretary Prof Njuguna Ndung'u had said that the government would need to borrow Sh263.2 billion domestically and Sh338.8 billion from international lenders to seal a deficit of Sh508.9 billion. The rest would come from taxes to the tune of Sh2.91 trillion. But this was still a Herculean task given KRA's failure to meet its targets over the years. For instance, KRA had targeted to collect Sh2.768 trillion (later revised to Sh2.5 trillion) by the end of the 2023/24 financial year and surpass the Sh3 trillion mark by the 2024-25 financial year. However, by the beginning of June, it still had a shortfall of Sh567 billion. In the 2024-25 budget, the government was seeking to reduce the budget deficit by nearly 50 per cent as a result of a fiscal consolidation strategy aimed at reducing government borrowing and achieving a balanced budget by 2027. While unveiling the budget, Prof Ndung'u stated that the government would be keen to slow down on the uptake of new external commercial debt and instead undertake liability management operations through debt swaps and other innovative solutions. How this will work in the new reality remains to be seen, experts say. According to IMF's Ms Pelligrini, the likely option is a mix of government spending cuts and flexibility from the IMF on its four-year programme targets. Despite the fall of the Finance Bill, 2024, President Ruto signed off on the 2024-25 Appropriations Bill to keep state operations running and avoid a financial meltdown in the financial year starting July 1 per constitutional and legal timelines. However, the President maintained his government would spearhead severe budget cuts in a subsequent supplementary budget as his government races to appease angry citizens but also avert a budget crisis that threatens key services across the country. The move leaves mandarins at the National Treasury with the task of finding ways of finding money to fill the hole left in the Sh3.9 billion 2024-25 budget following President Ruto's memorandum to the National Assembly Speaker Moses Wetang'ula seeking the deletion of all clauses in the Finance Bill, 2024, which effectively translates into its withdrawal. President William Ruto during the Kenya Kwanza Parliament Parliamentary Group Meeting at State House, Nairobi. [PCS] Under the previous Finance Act, 2023, the government targeted to raise Sh211 billion in ordinary revenue to partly fund a Sh3.68 trillion budget. Going forward, it means there must be deeper cuts this year if the government will be able to survive the unique situation brought about by the crusade by mainly Generation Z (Gen Z) demonstrators who stormed Parliament on Tuesday last week after MPs rushed the Finance Bill through the third reading stage, analysts said. This, therefore, leaves the government in a dilemma regarding how it will find money to finance key projects and programmes as well as fulfil its ballooning debt obligations amid the failure of the Kenya Revenue Authority to meet its tax collection targets. At stake is the pledge to employ 46,000 Junior Secondary School (JSS) intern teachers on permanent and pensionable terms this month as Parliament's allocation of Sh Sh13.4 billion is no longer guaranteed. The implementation of the affordable housing programme, the rollout of universal health coverage and the undertaking of new infrastructure projects are among many others likely to be hit hard. Already, Ruto has announced austerity measures and suspension of development projects, among other measures, but it is not clear how this will ameliorate the big public concerns, including the high cost of living and high rate of unemployment, among others, which were at the core of the Gen Z revolt. On Friday last week, while assenting to the Appropriation Bill, 2024, the President directed the National Treasury to reduce the budget by Sh349 billion, which was expected to be raised from taxes. He noted that Articles 221 and 222 of the Constitution require that the Appropriation Bill be assented to by June 30 every year to guarantee the continuity of government operations, especially in providing critical services. This is despite a High Court ruling that the Finance Bill has to be enacted first to stipulate how the budget will be funded. But Ruto said Treasury would now be required to prepare a supplementary estimate, which would reduce government expenditure by the amount of revenue that was expected to be generated by the rejected Finance Bill, 2024. But this can only be an interim measure awaiting enactment of a new Finance Bill. Economic analysts say that the government needs to prioritise the hold on recurrent expenditures both at the national and county levels since they gobble up a giant slice of the annual budget. In the 20233-24 budget, for instance, Sh2.53 trillion was allocated to recurrent expenditures, with Sh743.5 billion going to development expenditures and Sh385.4 billion to county governments as their equitable share of national revenue. In this year's budget, development projects were allocated only Sh687 billion, representing 18 per cent of the total budget. There is also the headache of the ballooning wage bill, which consumes much of the taxes collected by the Kenya Revenue Authority (KRA), crowding out other critical services and programmes. In the 2022-23, financial year, for instance, KRA collected about Sh2.38 trillion, but about 43 per cent of the money was spent on the wage bill, according to National Treasury figures. Kenya's large public sector wage bill, which accounts for about eight per cent of the gross domestic product, the World Bank says, has reduced fiscal buffers and increased fiscal risks. The government is, however, working on efforts to reduce the wage bill to 38 per cent by 2028, including by freezing employment in the public service, which had a component of 963,000 last year. There will also be a need to push through the austerity plan aimed at reducing its budget on luxuries in areas such as travel and hospitality, office renovations and buying of new vehicles, among others. According to a report by the Controller of Budget Margaret Nyakango, the national government blew Sh18.8 billion on local and foreign travel in the first nine months of the 2023-24 financial year, surpassing the amount spent by ministries, departments and agencies in the previous financial year over a similar period. During the same period, State House and the Office of the President spent Sh1.1 billion in hospitality, up from Sh653.5 million the previous year. President Ruto has particularly come under focus for his many foreign trips, which have earned him the monikers "Flying President" and "Kenya One in the Sky", though he has defended them, saying the deals he has secured with various countries and other partners will bring immense benefits to the country.

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