Chris Diaz: Opinion and budget prognosis

Chris Diaz, Director EABC and Trustee Brand Africa.

Were the budget a boxing bout and I the judge, I’d hand Treasury Cabinet Secretary Ukur Yatani a narrow win by split decision.

However, there were many views both from the private sector and various players in the economy, all feeling the effects of the global pandemic and a deep struggle in business.

Coming into Thursday’s budget statement, the government was confronted by multiple adversaries turning the setting of spending priority for the new fiscal year into a handicap match.

For starters, the government was and continues to be pushed to the wall by the emergence of the Covid-19 pandemic and its resultant economic strain.

From shredded personal incomes to job losses and a broken macro-economic environment, the past year has seen the lowest of lows with not only livelihoods affected but also sector such as health stretched to the limits.

At the same time, underlying challenges such as mental health and climate change has been brought to the fore in just a short 12 months.

For Kenya, the 2021 budget statement has found the government of the day at crossroads.

Weighing scales

The Jubilee administration commences its final full financial year in office before the scheduled August 2022 general elections.

On one hand, the government is in overtime vying to round off on targets outlined as far back as the start of its reign in 2013.

On the other, the government is confronted by the country’s worst crisis since independence as the economy relentlessly bleeds from the fall out of the pandemic.

Meanwhile, the need for fiscal discipline, reducing government expenditures and sourcing for higher revenues presents the flip-side of the coin and rounds off the government’s trilemma.

CS Yatani was tasked with addressing the multiple crises when he took centre stage to outline Kenya’s fiscal plan for the next financial year which commences imminently from July 1.

His statement attempted to capture the very issues, just as in the summary of budgetary allocations.

The economic transformation agenda which enters its final year of execution for instance got Sh142.1 billion of total spending with the government seems keen on rounding off its five-year agenda.

At the same time, Treasury has initiated varying revenue raising and enhancing measures to better funding to the exchequer coffers in an effort to trim the fiscal deficit and ultimately, the reliance on debt financing to shore up government spending.

For instance, the Kenya Revenue Authority (KRA) has earned an enhanced role in revenue mobilisation including increased time limits to assess taxpayers’ documentation on tax.

It is important the governments look further at retaining and growing investors to enhance more development, productivity, digital business,  including the creation of employment which, is greatly supported by the private sector which drives the East African economies.

To address the more pressing crisis, Treasury has to continue to set aside funding for direct Covid-19 vaccine procurement and look at the health of all, plus leverage donor-funded programs such as COVAX.

While the Sh14.3 billion in vaccine funding may not fully be adequate to reach herd immunity for Kenya, the appropriation is a step in the right direction and will complete vaccine sourcing from alternative channels.

Lastly, Sh23.1 billion has been scheduled to extend the Covid-19 economic stimulus package (ESP) announced in last year’s budget.

From this allocation, the government aims to cut the size of pending bills to small businesses, secure funding to SMEs and spur job creation through programs such as Kazi Mtaani.

Nevertheless, much challenge has been drawn on the extended ESP plan which in contrast represents a mere 0.2 per cent of Kenya’s GDP.

To boost the recovery of the economy and build back better, as is the theme for the 2021/22 budget, the government should have prioritized more funding for stimulus programs such as the ESP.

This is as a rebound from the pandemic including the protection of the health sector and rapid jobs creation should anchor down future growth prospects for the economy.

Moreover, the government should share a surgical review, of results from the first stimulus program which featured nearly Sh60 billion in direct spending to stimulus initiatives.

Fiscal realities

At the start of yet another fiscal year, problems on the reflection of spending to fiscal realities persist for the umpteenth time.

For instance, out of Sh3.6 trillion in total planned spending, only Sh2 trillion is expected from government revenues.

Total inflows to State coffers may very well miss the KSh2 trillion mark as they have persistently done, dragged down mainly by the pace of recovery in the post-Covid-19 era.

As such, the government is expected to continue relying on borrowing as the fiscal deficit remains widened.

While debt has its merits and demerits, for Kenya, the cost of debt servicing cannot be ignored.

Kenya continuous infrastructure rollout and growth of access to the market continues to bring some progress, but making business more competitive while attracting private investment programs need to be enhanced further while

processing approved refunds and incentives need to be faster and remain important for private industry players.

The government has to balance a very tough business environment, for instance, Sh6 out of every Sh10 collected in the form of taxation will go towards debt servicing leaving behind meagre resources to run routine government services and spur investments including funding to capital projects.

Debt taking, the routine fixture in budgets remains elevated in the new financial year with the government averaging Sh2.6 billion in daily loans across the period to June 2022.

The National Treasury is meanwhile expected to lobby for the extension of the public debt ceiling to Sh12 trillion to leverage financing from borrowing.

The extension of the debt ceiling will be coming barely two years since an initial extension to Sh9 trillion in late 2019.

Parliament and stakeholders will take the opportunity to demand a full proof fiscal consolidation plan addressing the high debt servicing cost while anchoring down fiscal consolidation plans to the medium term.

Taxation

While no new income taxes were introduced this time round, a number of changes were effected touching on the very heart of Kenyans.

The price of commodities such as bread and motorcycles is set to go up adding pressure, to Mwananchi who already faces a high cost of living driven primarily by high inflation.

New tax proposals will only be yielding Sh87 billion in new funding to the government pausing questions on whether the government should have done away with the tax proposals and instead opt for cuts to non-essential spending in the budget.

With businesses noting the need for a predictive business environment, the National Treasury should consider bringing Kenya’s first National Taxation Policy to clear erroneous and haphazard taxation habits in each subsequent budget.

Moreover, the feeling is more must be done to address the high cost of living on Kenyans to deliver on the theme of building back better.

Unemployment remains the most worrying situation in the region and needs to be tackled by both strategic, private-public sector programs and investments.

The regional budget

Uganda had a budget of 12.61 billion dollars (that’s about USh44.7 trillion) and Hon Amos Lugoloobi, the State Minister for Finance delivered it as anticipated.

According to available statistics by the Economic Policy Research Centre (EPRC) and the International Growth Centre (IGC), only 10 per cent of Micro, Small and Medium Enterprises in Uganda remained open during the lockdown, and 93 per cent of all Micro, Small and Medium enterprises were back in operation by October 2020.

In addition, 90 per cent of employees of private sector firms who were laid off during the lockdown were subsequently hired back after lockdown, and only 6.5 per cent suffered permanent layoffs.

It is worth noting that coffee remains the leading agricultural export in Uganda earning 497.4 million dollars in the Financial Year 2019/20.

Dairy exports fetched 204.5 million dollars, while tea exports earned 71 million dollars in Financial Year 2019/20. Fish exports earnings increased from 121 million dollars to 227 million dollars over the same period.

With the above data, it’s clear Uganda’s agricultural sector is doing well and can only get better if more resources and energy is channelled towards the same.

In Tanzania, Minister of Finance and Planning Dr Mwigulu Nchemba perfectly delivered the 15.59 billion dollars (about TSh36.32 trillion) budget.

Tanzania’s budget had a theme of ‘nurturing industrialization for economic transformation and human development.’ That worked well with East African Community Partner States theme that stated – ‘Stimulating the economy to safeguard livelihoods, jobs, businesses and industrial recovery.’

Due to the Covid-19 pandemic, Tanzania’s 2020/2 budget took into consideration the effects of the pandemic on various sectors of the country’s economy.

Heavy rainfall across the country had adverse effects - there was the destruction of transport and transportation infrastructures in rural and urban areas as well as crops such as grapes, maize and paddy due to heavy rainfall across the country. This was factored in well as good allocation went into this sector.

In general, Tanzania’s 2020/21 budget focused on compelling the government to ensure enabling environment for investment and business.

The regional budgets and private sector look forward to business recovery programs, despite the pandemic challenges, we all remain positive and continue with the spirit of resilience and giving support and showing care to all stakeholders.

The writer, Chris Diaz, is the Director EABC and Trustee Brand Africa.