Themed consolidating economic gains in an environment of subdued global demand, the 2017 Budget Policy Statement (BPS) is a delicate attempt to balance between the medium/long term national ambitions to the needs of the day. The document is a requirement of the Public Financial Management (PFM) Act and is aimed at setting out the broad strategic priorities and policy goals that guide the national and county governments in their budgeting process. It provides the framework for these two levels of government to execute their respective mandates.
The BPS for 2017/2018 is prepared within the context of an environment of subdued global demand, as seen by the slowed global economic growth, with many of the major economies experiencing a slowdown. The BREXIT outcome of the UK referendum has complicated matters in the EU, a major trading partner of Kenya, and this could have implications on the economy. The change of guard in the US leadership is also evidence that there will be significant changes affecting different countries, Kenya included.
The BPS also comes at a time of transition between the second Medium Term Plan (MTP II – 2013-2017) and the third Medium Term Plan (MTP III – 2018-2022), which is part of Vision 2030. This is where the short term subdued global demand must be balanced with the long/medium term aspirations of Kenya to become a middle income economy by 2030. The 2017/18 budget will therefore be the stepping stone into MTP III, which will determine whether Kenya is headed in the right direction towards achieving Vision 2030 or not.
It is also not lost on Kenyans that 2017 is an election year, and with it come many challenges and demands on the local economy. It is therefore expected that the main challenges of an election must be addressed, the general slow-down in government business as a result of the high voltage campaign season, and secondly the possibility of a change in guard, at the various elective offices, at both national and county levels.
The BPS therefore projects the Kenya economy as very resilient in the face of global slow-down in growth. With a projected growth of over 6% in the coming three to five years, Kenya’s growth pattern is only comparable to the emerging and developing Asian economies of China and India, which are projected to grow at the rate of 6.0 and 7.6 percent respectively. On the other hand, the twin giants of Africa, South Africa and Nigeria, are projected to grow at the marginal rates of 0.8 and 0.6 percent respectively.
Such growth projections are predicated on positive macro-economic factors that place Kenya way ahead of her peers in the region and Africa as a whole. Such factors include single digit inflation, stable exchange rate, lending rates, and adequate foreign exchange reserves. However it should be noted that despite the performance above her peers’, Kenya’s growth compares poorly with her own Vision 2030 growth aspirations of double digit numbers.
What will spur this anticipated growth? The growth to significant investment in infrastructure projects such as Standard Gauge Railway (SGR), LAPSSET, roads, ports, energy, construction of second runway at Jomo Kenyatta International Airport and agricultural projects. But with non-elastic revenue generation, the government will require to source alternative funding, hence sustainable debt management is key to ensure economic balance. Pundits have sounded a warning over the ever-growing budget deficits over the last few years, spurred by heavy borrowing to finance infrastructure projects.
In 2016/2017, however, estimates have been revised to project a decline of annual deficit by 26% based on expected growth in revenue and reduced spending in the current fiscal year. It is anticipated that the government will take advantage of the Public Private Partnership (PPP) model to finance most of the development projects that require heavy financing. The BPS identifies several projects that will be financed through PPP to the tune of USD6.7B over the period 2015-2018. These include toll road projects such as dualing of Mombasa-Nairobi and Nairobi-Mau Summit roads, second Nyali Bridge among other water and sanitation projects.
One key challenge the government must face head on, is how to contain the ballooning wage bill to a sustainable level. An election year always presents bait for governments to try and appease the labour movements that will take advantage of the political vulnerabilities of a government that is in need for votes. It will be interesting therefore to see how the government navigates this tricky area. With the on-going doctors’ strike, the question is, who will be the first to blink? If the government accedes to the doctors’ demands, will that create a spiral of other labour demands and what will that mean to its development agenda? Balancing the need for votes with the long/medium term goals will present a challenge in budgeting for 2017/2018. The government is still very keen to keep to within regulation 26(1)(a) of the PFM Act that requires the wage bill to be within 35 percent of national government’s equitable share of the revenue.
Any discussion on fiscal planning cannot be complete without mention of devolution, the single biggest change that the 2010 constitution provided to Kenya. The national government plans to increase allocation of equitable share of revenues to the counties to KES299B, which is an increase of 19B (7%) over the allocation for 2016/17. Despite the challenges that counties have faced in prosecuting development agenda at the devolved levels, it is encouraging to note that many of the counties have been able to allocate around 35% of their spending to development expenditure. We can only hope that this trend continues, but more importantly, the counties should enhance their capacity for generating “own source revenue” instead of relying predominantly on allocations from national government.
With the vision already cast, we await to see how the 2017/2018 budget aligns to it, and whether current day priorities will cloud out the medium to long term vision of the country.
Mwangi Karanja is an Associate Director at PwC Kenya
