Where’s the cash? Budget 2013 displays blind optimism

By TIMOTHY MACHI and JEVANS NYABIAGE

Nairobi,Kenya:This man Henry Rotich. On his first outing as National Treasury Cabinet Secretary, he did not disappoint, at least in inflicting maximum pain to Kenyans.

Even as a “stranger” in the House, he tabled the Budget Statement for 2013/14 with verve, and thanks to his ruthlessness, his Budget has since been described as a statement of unpretentious knives and flying daggers.

Rotich could have drawn inspiration from the fact that he is an old State mandarin — an experienced hand at figures and numbers — but his confidence was also fanned by something greater. Intoxicating optimism.

Setting the Budget 2013/14 at Sh1.64 trillion, Rotich hoisted his spending plans by almost Sh200 billion more than in the current financial year.

The record expenditure includes domestic and external debt redemption as well as contingency provisions.

Soaring expenditure

What did not change against the soaring expenditure is the fact that revenue collections continue to fall disproportionately behind the growing expenditures.

In what sounds more like a prayer for a miracle rather than tabling a figure of statistical reality, the National Treasury estimates receipts, including KRA collections, loans and grants, at Sh1.284 trillion — leaving the overall deficit at a massive Sh356.9 billion.

According to Treasury, the taxman is expected to collect Sh961.3 billion as ordinary revenue — making it the most ambitious target in the agency’s history. Treasury also anticipates to receive Sh67 billion in appropriations-in-aid.

Representing a 7.5 per cent increase over the Budget estimates for the current year, and 24.7 per cent of GDP, the estimates are the highest ever projected revenue collections in a single financial year.

But beneath these rosy projections lies disturbing gloom.

Already, there are flashing signs that KRA’s revenue collections for the current financial year (2012/2013) will fall below target by Sh120 billion against the original estimates, according to accounting and business advisory firm PKF.

In the nine months to March this year, KRA had collected Sh560.3 billion against a Sh723 billion annual target for the current financial year.

Quite clearly, the taxman is unable to meet its increased targets as a result of a near-fixed tax base.

Unfortunately, there is little to tell of KRA’s improving fortunes — leaving the Government staring at a definite shortfall, yet again.

This is sure to deal a blow to the two things that characterise this Budget – optimism and ambition.

If President Uhuru Kenyatta inherited a toxic legacy of living beyond means, his first Budget as unveiled by Rotich sets an even a more dangerous economic environment — giving estimates that are far beyond reach.

Even if the mathematics in the Budget adds up, Uhuru will still be left with the nightmare of filling a Sh560.3 billion deficit — the highest in 10 years.

And the reality is actually a lot grimmer. Treasury for instance has set sights on Sh10 billion from the planned re-introduction of the VAT Bill in a desperate move to shore up revenue.

“I will re-table the VAT Bill …whose enactment will raise at least an additional Sh10 billion to the exchequer,” Rotich told Parliament last Thursday.

The Bill proposes to slap Value Added Tax (VAT) of 16 per cent on a host of essential goods and inputs, including fertiliser, maize flour, bread, wheat flour, milk, livestock feed, pesticides and books.

Others are sanitary towels, newspapers, computers, insecticides, locally assembled water pumps and gin cotton.

Public outcry

Shelved last year in the run up to presidential elections following public outcry, the VAT Bill would see the cost of such commodities rise by 16 per cent or more, because their final retail price is left to the discretion of traders.

In 2012 when it was first introduced, critics of the Bill argued that imposing a levy on essential commodities such as foodstuffs was being insensitive to poor Kenyans and constituted a threat to national food security.

To count on a Bill as corrosive as this is, therefore, a recipe for failure.

Hugely unpopular, the Bill has already sparked opposition from consumer lobby groups and a number of legislators.

The Consumers Federation of Kenya (Cofek) said last week that it would sue the State should the VAT Bill or any other Bill proposing to tax basic commodities, sail through Parliament.

“We will sue on the basis of Article 43, which states that ‘every person has a right to be free from hunger, and to have adequate food of acceptable quality’,” said Cofek Secretary-General Stephen Mutoro.

Universally regarded as the tax of the future, the problem is that the productivity of VAT has been declining steadily since 1990, when it replaced the defunct sales tax.

Experts say Kenya is not collecting enough VAT mainly due to a complex system of exemptions and zero rating. The system of VAT refunds has also proved to be messy and unworkable.

Plug the deficit

To plug the deficit, which now stands at 7.9 per cent of GDP, Treasury is also betting on net foreign financing to the tune of Sh223 billion and Sh106.7 billion from the domestic market.

Domestic borrowing, which has been the easiest option so far, has its inherent risks. Borrowing from the local market doubled in the revised 2012/13 Budget from the previous financial year’s level of Sh83.4 billion.

The amount of domestic borrowing shot up by more than Sh30 billion towards the end of 2012 when it became apparent that both tax revenue and donor receipts would fall short of expectations.

The increase has surpassed the borrowing limit for the current fiscal year by more than Sh75 billion. Treasury had set the limit at Sh138 billion but has so far seen the domestic debt increase to Sh213.3 billion.

Treasury’s uncontrolled borrowing in the local market against a high interest rates regime will crowd out the private sector from credit.

The country’s total domestic debt shot up by Sh212.5 billion as at May 10, from Sh858.8 billion at the end of June 2012.

The cost of servicing Kenya’s domestic debt rose 38 per cent to Sh90 billion between June 2012 and May this year — making a powerful case for alternative sources of financing.

In fact, there is a growing push by the private sector to have the Government reduce borrowing from the domestic market over concerns that banks will lock them out of the money market.

Also on the cards is sovereign bond, from which Treasury hopes to raise at least Sh85 billion ($1 billion).

Part of the proceeds from the bond are expected to help retire the more expensive Sh600 syndicated loan. But even this is not a carte blanche for the Government.

The London-based investment think tank Capital Economics says investors in the Kenya Eurobond are likely to demand a higher yield due to the latter’s less favourable macro-economic status.

“Kenya has a higher public debt — net of Government and related deposits — of 45 per cent, its current account deficit is close to 10 per cent and its fiscal deficit is over six per cent,” the think tank noted in its assessment of Kenya’s Eurobond.

But the Budget also displayed Uhuru as shrewd on politics even though the math is lean on economics. The President succeeded in giving favours to three core constituencies.

The first being women, via a Sh3.8 billion allocation for free access to maternal health.

Premium exemptions

The second was employers, through premium exemptions on policy covers paid on behalf of employees where such covers do not confer a benefit to the employees.

And finally, on purely sentimental grounds, Sh53.2 billion allocation to facilitate the deployment of 1.35 million laptops to class one pupils.

But in one fell swoop, Rotich also made everybody a loser. The proposed 1.5 per cent levy on all imports to fund construction of a standard gauge railway is set to send the prices of goods skyrocketing. 

The numbers in the Budget may not add up, but the burden on taxpayers certainly will.