World Bank proposes more budget cuts in Kenya to seal deficit

Exhibitors inspect the red onions during the annual East African seeds Agricultural Farmers Field Day: Agricultural input has increased this year, increasing sector’s importance to the economy
The Government should cut wastage in the public sector and trim the wage bill if attempts at fiscal consolidation are to bear fruit.

This is according to the Kenya Economic Update, 2018 where the World Bank further cautioned that the country’s economic growth was threatened by budget cuts to development expenditure whereas the focus should be on cutting recurrent spending.

“A path where much of the burden of fiscal consolidation is disproportionately shouldered by development spending, as is the case in Kenya, undermines the underlying growth potential of the Kenyan economy,” said the bank.  

“In this regard, there is a need to recalibrate the balance between development and recurrent expenditures, with the latter bearing a higher share of the expenditure containment.”

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While presenting the budget for the 2018/2019 financial year earlier this year, Treasury Cabinet Secretary Henry Rotich revealed the formation of a Public Investment and Management Unit to appraise development projects before allocation of funds.

At the same time, President Uhuru Kenyatta ordered a freeze on new development projects as the first of a raft of austerity measures that preceded the supplementary budget.

Borne little fruit

However, these efforts have borne little fruit with both the national and county governments criticised for propagating nonessential expenditure and wastage.

On Tuesday, for instance, the Government called for bidders to supply a private aircraft and helicopter for the Deputy President, while last week it was revealed that the military had procured nine aircraft, raising questions on State commitment to cutting public spending.

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The World Bank now says bold decisions have to be made and spending needs to be cut on the recurrent budget if the Government is to fulfill the Big Four agenda.

“Specific areas that could be considered to rein in recurrent spending include lowering of transfers to State-owned enterprises, cleaning and regular audit of the payroll register, keeping wages, salaries and allowance adjustments in line with recommendations from the Salaries and Remuneration Commission (SRC), and maintaining frugality in operations and maintenance expenses,” it said in the report.

Financial reports from State corporations show taxpayers are owed more than Sh15 billion in non-performing loans lent out to parastatals and Government agencies, some of which have since become defunct.

The Local Government Loans Authority carries the biggest chunk of the debt at Sh7.5 billion, with the National Water Conservation and Pipeline Corporation owing Sh2.4 billion.

Majority of the parastatals that hold Treasury’s non-performing loans are in the agriculture sector with debt that stretches back decades.

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The Kenya Meat Commission is the largest debtor with Sh940 million in non-performing loans, while sugar millers Sony and Nzoia, owe the Government Sh199 million and Sh168 million respectively.

In 2013, President Uhuru promised to initiate a parastatal review process targeting moribund institutions and those whose functions had been devolved and merge duplicated public agencies.

This has not been achieved, with recommendations of a 10-member task-force appointed to lead the reforms now gathering dust. 

This year’s World Bank economic update comes on the back of increased pressure on the Kenya Revenue Authority (KRA) to broaden the tax base and increase revenue collection to fill a budget gap of Sh600 billion. 

According to the Bank, revenue mobilisation as a share of gross domestic product (GDP), fell to a 10-year low, settling at 15.4 per cent of GDP in the last financial year compared to 17.1 per cent in a similar period last year.

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“This is attributed to under-performance in both income tax and VAT – Kenya’s largest sources of tax revenue, accounting for over 70 per cent of tax revenue,” said the report.

This means Treasury and KRA are making little headway in broadening the tax base and the taxman is relying on the same economic sectors to generate revenue.

“Kenya’s GDP is increasing and naturally you would think that the taxes will also grow in proportion to it, but what we have seen in the past couple of years is that this relationship is becoming weaker than it should be,” said World Bank economist for Kenya Allen Denise.

As part of bolstering the country’s purse strings, the Government introduced a raft of tax measures in the Finance Bill, 2018 that saw new excise duty levied on Internet data, a doubling of excise levy on bank charges and an eight per cent Value Added Tax introduced on fuel and fuel products.

In addition to these measures, the Government has been advised to enhance interconnection between Government data management systems such as IFMIS with KRA’s iTAX.

“For example, implementing Geocris, a system that uses geo-spatial technology to locate property, could help boost real estate taxes, and a wider rollout of the electronic cargo tracking system could boost VAT and customs duties,” said the World Bank.

The bank, however, said fiscal consolidation is gathering pace with the overall fiscal deficit decreasing by 2.2 percentage points to 6.9 per cent of GDP, the fastest in five years.

At the same time, a rebound in the agricultural and manufacturing sectors and uptake in private sector investment is expected to stimulate economic growth. 

“Reflecting improved rains, better business sentiment and easing of political uncertainty, real GDP growth is estimated to rebound from 4.9 per cent in 2017 to 5.7 per cent in 2018 and rise gradually to six per cent by 2020 as the output gap closes,” said the World Bank.

Revenue mobilisation and cuts to public spending however remain necessary if the country is to achieve macroeconomic stability and help the Government marshal resources to fund the Big Four Agenda.

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World BankDebtKenya Economic Update 2018Cabinet Secretary Henry Rotich