Kenya: Why Ukur Yatani's Sh3.6 Trillion Budget Will Be a Tough Balancing Act

Ambassador Ukur Yatani will be on a tight rope as he reads his second budget this Thursday.

On one end, the Treasury chief must honour the promise made to the International Monetary Fund (IMF) to hit Kenyans with more taxes, but still find ways to stimulate an economy that has been battered by the Covid-19 pandemic, that can't be cured by additional taxes.

Yatani will also be reading President Uhuru Kenyatta's final full year budget and he will be required to be careful not to sink the economy in an election year, as he scraps for additional resources to complete the Jubilee administration's legacy infrastructure projects.

He will also be required to free resources to fund a possible referendum a year to the 2022 general election.

Besides the list of the new taxes outlined in the new finance bill, Yatani will also be expected to table a second request to increase Kenya's debt ceiling in under two years. If Parliament steps out of his way, he will be allowed to borrow beyond the current Sh9 trillion.

Treasury has already laid the ground for this move through the Medium Term Debt Management Strategy 2021 where it reveals that it will be tabling changes to the Public Finance Management law for approval by legislators.

It is not yet clear how much Treasury will be looking at but going by the previous request, this could be above Sh12 trillion.

Sh6 trillion

A similar request came in October 2019, where lawmakers raised the ceiling from Sh6 trillion in October 2019.

The fresh request is expected to be tabled in Parliament this Thursday when Yatani is scheduled to officially read the 2021/2022 budget.

"The formulation of this strategy has been on a background of public debt stock fast approaching the statutory ceiling of Sh9 trillion set out in the Public Finance Management Act, 2012," Treasury officials wrote in the debt strategy paper for the next three years.

"As a result, the implementation of this strategy may require the revision of the debt ceiling through the amendment of the PFM Act based on future borrowing requirements."

To clear the way in Parliament, Treasury has bowed to Pressure from lawmakers to increase its budget by nearly a quarter in the final year to election.

The budget estimates show that while Yatani squeezed almost every other government agency including the judiciary, military and the presidency to accommodate the extra Sh300 billion needed to repay debt, he increased allocation to parliament by 24 percent to Sh46.6 billion, up from the current Sh37.3 billion, making it one of the biggest budget increments in this financial year.

In the new expenditure plan, the executive will receive Sh1.89 trillion, a marginal drop from the Sh1.91 trillion in the current financial year while the Judiciary will receive Sh17.9 billion, a marginal increase.

The Consolidated Fund budget, which largely takes care of debt repayments and salaries for constitutional commissions, has shot up by 23 percent to Sh1.3 trillion. The bulk of the Sh253 billion increase will go towards servicing Kenya's mountain of debt.

Recurrent budget

A breakdown of the expenditure under the consolidated fund shows that Sh1.1 trillion will be used for public debt related expenses, which is nearly the same amount used to run the national government's recurrent budget.

This is a 21 percent increase compared to the Sh958.4 billion set aside in the current fiscal year. Pensions, salaries and allowances will consume the remaining Sh158 billion in the consolidated fund.

The Treasury CS is required by law to submit to parliament the debt management strategy of the national government on or before February 15, every year.

Rating agencies Standard and Poors and Fitch Ratings in 2020 placed Kenya at B+ with a negative outlook, signifying the effects of the Covid-19 pandemic on the economy and depressed internal revenue.

"The mitigating measures to the rising debt levels lies in active debt management and fiscal consolidation programme supported by a sound macroeconomic environment," the latest debt management strategy paper reads in part.

By the end of December 2020, the nominal stock of public debt stood at Sh7.2 trillion, which is equivalent to 65.6 percent of GDP. This debt has now increased substantially in the last six months given the government's unrelenting appetite for debt.

"The public debt accumulation has been on elevated mode due to high fiscal deficits," the debt document adds. In 2019/20, the net borrowing for Kenya stood at Sh790.8 billion to fund the fiscal deficit.

Yatani will also be putting up a fight against legislators, as he asks for unfettered powers to set Value Added Tax (VAT) without the need to seek Parliament's approval. This will not go down without a fight since such powers are a preserve of parliament, which is required to be the people's watchdog.

But his biggest task is how to convince parliament to allow the increase of taxes on basic commodities in a year they are going to face the electorate in an election.

Unless parliament amends the finance bill, from next month, Kenyans should brace themselves for hikes in prices of bread, motorcycles, imported jewellery, betting, and nicotine pouches.

The Treasury has proposed to amend the Excise Tax Act by substituting the excise duty paid per motorbike from the current Sh11,608.23 per unit to a flat rate of 15 per cent, as detailed in the Finance Bill 2021.

This will see any motorbike priced above Sh79,000 fetch more in taxes in a direct hit on the booming motorcycle taxi sector, commonly known as bodaboda, which is a key mode of transport in both urban and rural areas.

Imported jewellery will also now attract excise duty at the rate of 10 per cent, while products containing nicotine or nicotine substitutes will attract a Sh5,000 tax per kilogramme.

This will bring into the tax net the latest inventions in the tobacco industry, such as British American Tobacco's (BAT) nicotine pouches.

Disposable plastic syringes and others with or without needles will also attract the 16 per cent VAT after being dropped from the list of exempted products. To get the latest Sh257 billion loan commitment from the IMF, Treasury promised to increase internal sources of revenue through taxes to cut on the ballooning budget deficit that is blamed for the insatiable borrowing.

Yatani will also be expected to explain how the budget will ensure the fulfilment of the Big Four Agenda that focuses on manufacturing, food security, Universal Health Coverage (UHC) and affordable and decent housing for Kenyans.

Already the Parliamentary Budget Office (PBO) is raising concerns if the allocations are enough to give the Big Four Agenda the necessary push.

"There hasn't been any real commitment towards implementation of the big four agenda," the PBO document says.

Sh135 billion

PBO is a technical body based within parliament buildings and advises parliament and its committees on fiscal matters.

"Other than an indication that it has been allocated Sh135 billion in the next financial year, there is no further discussion or how the government will ensure that at least a certain percentage of the targets are met," the document says.

PBO has also warned that it is highly unlikely that all the Sh135 billion allocated for the big four will serve its purpose. "It is worth noting that budgetary allocations towards big four projects tend to be adjusted downwards during the supplementary budget," says PBO.

But even as the big four agenda faces uncertainty, the PBO document stresses its importance given the role it is expected to play in economic growth.

"A review of the project's status and plan of action is necessary to ensure that at least some of the targets are achieved by 2022."

A target to provide 500,000 affordable and decent housing for all Kenyans by 2022 has fallen short of expectations.

So far, only 1,370 housing units along the city's Park road project have been achieved under this programme.

This represents an achievement rate of 0.3 percent target. In the budget estimates for the next financial year, Sh14.85 billion has been allocated to deliver 3,336 housing units by the end of 2021/22 financial year.

To support value addition, the President had planned to raise the share of manufacturing to Gross Domestic Product (GDP) to 15 percent by 2022.

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