- Kenya’s fiscal trajectory is looking weak.
- The Central Bank of Kenya Governor in September 2021 projected a 6.1 per cent growth rate for 2021 and 5.6 per cent in 2022.
- The story of Kenya’s economic growth still remains a puzzle to us.
Kenya’s National Treasury published the draft 2022 Budget Policy Statement in which it has set out the broad strategic priorities and policy goals to guide expenditure plans for the fiscal year 2022/23 and the medium term for both the national government and the 47 county governments.
We have looked at the document and Kenya’s fiscal trajectory is looking weak. The National Treasury has tabled a total expenditure ceiling of KES3.3Tn (USD30.3Bn), an increase of 9 per cent over the FY2021/22 approved budget.
Recurrent expenditures will account for 66 per cent of total expenditure while development expenditure will only constitute 22 per cent.
The Executive will see its budget rise by 7 per cent to KES2.0Tn (USD18.3Bn) while Parliament and the Judiciary budgets have been set at a ceiling of KES38.5Bn (USD353.2Mn) and KES18.9Bn (USD173.4Mn) respectively. Allocation to the Consolidated Fund Services received the largest increase at 20.3 per cent to KES864.13Bn (USD7.9Bn), reflecting the growing burden of public debt service on the fiscus.
County governments have not received any increase in allocation and they will receive a total of KES370Bn (USD3.4Bn).
On the funding side, Treasury projects total revenues of KES2.45Tn (USD22.5Bn), including grants, an increase of 17 per cent over the FY2021/22 approved budget. Ordinary revenues are projected at KES2.14Tn (USD 19.6Bn), a growth of 21 per cent. With a gross budget deficit at KES893Bn (USD8.19Bn), this spending plan, in our view, conveys an expansionary posture.
As a result, we expect an aggressive deficit spending in FY2022/23, which will have three consequences: Kenya’s continued presence in the international debt markets, continued crowding out of the private sector, and monetary policy being held hostage.
The National Treasury is projecting real GDP growth of 6.0 per cent and 5.8 per cent for 2021 and 2022 respectively and has used the same as the basis for its revenue projections. But this adds to the overall optimism being projected.
In September 2021, the Central Bank of Kenya Governor projected a 6.1 per cent growth rate for 2021 and 5.6 per cent in 2022.
The International Monetary Fund’s most recent forecast puts 2022 growth expectations at 6.0 per cent. The World Bank, on the other hand, projects growth to print at 4.5 per cent and 4.7 per cent in 2021 and 2022 respectively. We really believe this optimism being projected around is largely irrational and the story of Kenya’s economic growth still remains a puzzle to us.
Beyond the growth puzzle, the proposed fiscal posture reduces fiscal consolidation to mere rhetoric. Treasury says that the fiscal deficit is projected to decline from 8.3 per cent of GDP in FY 2020/21 to 3.8 per cent of GDP in the medium term. We believe this is just irrational exuberance on the part of the Treasury.
Looking at the trajectory, the actual deficit may hover around 9 per cent in our assessment. Broadly, Kenya’s fiscal consolidation measures lack clarity and remain just paper ambitions. Depending on the fiscal situation, fiscal consolidation, as we know it, is about either ramping up revenues or cutting down expenditures in line with revenues. Kenya is doing neither. Further, Kenya’s recent budgets have lost credibility.
Specifically, intra-fiscal year budget revisions, through budget supplements, have continued to weaken budget credibility.
For instance, in the fiscal year 2019/20, there were three supplementary budgets while in FY2020/21, there were two supplementary budgets.
In the current fiscal year 2021/22, we project two supplementary budgets.
Why can the Treasury not get it right from the onset?
Overall, based on this dominant fiscal stance, we see monetary policy under continued hostage throughout 2022. This is for the simple reason that monetary policy still will have to factor in the central government’s domestic borrowing costs.
There seems to be an implicit fear in the monetary policy committee that hiking would signal the market the wrong way.