10 October 2018

Kenya: World Bank Warns Treasury on Development Budget Cuts

The World Bank is cautioning that Kenya's style of cutting development budget to reduce budget deficits and borrowing amid hitches in disbursements to counties may stifle growth in the near future.

The bank says cutting development spending at a time private sector is also struggling to access credit may leave the economy running at sub-optimal level.

World Bank senior country economist Peter Chacha said achieving fiscal consolidation may look good on the surface but doing so by contracting development spending will eventually slow the engines of growth.

"We have a concern with the quality of fiscal consolidation because when you cut more on development, you basically constrain potential for growth," said Mr Chacha.

Development spending is critical to building infrastructure like roads and sewerage and putting money in private hands through demand for raw materials, which ultimately creates new jobs.

Cement makers, steel manufacturers, contractors and thousands of workers who are employed in infrastructure projects all benefit from public spending and are likely to feel the pinch of the slowdown.

The World Bank concern comes barely a month after the government hived off Sh34.33 billion from development budget.

According to the World Bank report, development expenditure contracted by 20.1 per cent in the 2017/2018 financial year. As a share of GDP, it fell from eight per cent in financial year 2016/17 to 5.5 per cent in the last financial year.

It cites completion of first phase of standard gauge railway, delays in the release of development funding and low absorption of the development budget as the queer ways through which government hit fiscal consolidation target.

Allen Dennis, a senior economist at World Bank, said Kenya seems to be more fixated on the end point than quality of the process.

"It is good to achieve consolidation on aggregate perspective but it also depends on how it was achieved. For Kenya, it is not a quality way of doing it," said Mr Dennis.

Despite the slowdown, recurrent spending still accounted for more than 94 per cent of total tax revenue, a scenario the bank says leaves limited room for use of domestic resources to finance development. However, it sees Kenya struggling to cut recurrent expenditure.

"The difficulty in reining in recurrent spending, in part, reflects structural rigidities from higher debt servicing payments (about 24 per cent of tax revenues) and still high contribution of wages and salaries (40-50 per cent of revenues)," says World Bank.

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