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Coronavirus crisis disrupts Yatani’s first budget plan

By Macharia Kamau | May 12th 2020 at 12:00:00 GMT +0300

Ukur Yatani (pictured) became The Treasury Cabinet Secretary at the worst possible time.
He is preparing his first budget well aware how the coronavirus pandemic will disrupt the economy.
Already, several businesses have been forced to close down, especially those in the hospitality and aviation sectors, sending home thousands of workers. Other firms have imposed pay cuts or sent their staff on unpaid leave. 
This means there will be a substantial decline in tax collections while Kenya will be asking him to spend more to mitigate the effects of the pandemic.
Before the first case of coronavirus was reported in Kenya in mid-March, Yatani had projected that the taxman would collect Sh1.86 trillion in tax revenue, but this has been scaled down to Sh1.62 trillion after Covid-19 hit exports and trade activities.
Further, Yatani had put the budget deficit at Sh571 billion, but the deficit has now been widened to over Sh823 billion, a massive amount that means Kenya has to borrow to fill the gap.
However, borrowing would not be a walk in the park. Many countries are still in lockdown in their bid to curb the spread of Covid-19.
Floating a Euro-bond would be near impossible, meaning Kenya would have to convince bilateral lenders such as China and Japan to advance it more debt to fund the budget. But that may not be easy.
Further, Kenya will borrow Sh486 billion from the domestic market, a move likely to crowd-out the private sector from the credit market.
While other finance ministers might talk of the major curve balls they have had to deal with, including election jitters every five years, the 2008 post-election crisis, and even the global financial crisis, Yatani is running out of options since coronavirus has affected nearly every sector.
Unlike his predecessors who had the options of looking outward to sort out local problems or inward for global problems such as the financial crisis, Covid-19 has battered everyone, leaving Yatani with nowhere else to turn.
The Treasury expects Kenya’s economy to grow at a slower rate of 2.5 per cent this year, down from a growth of 5.4 per cent in 2019.
The estimated growth for this year is a revision from an earlier three per cent, and depending on how the pandemic unfolds in the coming months, it may be revised further downwards.
At the start of the year, The Treasury was bullish and had expected the economy to grow by a magical 6.2 per cent over the 2020/21 financial year.
The International Monetary Fund (IMF) also projects the economy to grow by one per cent this year, from its earlier projection of six per cent.
This would be the worst performance since the early 1990s when the economy contracted. The global economy is expected to contract by three per cent while developed markets will contract by six per cent in 2020.
Economies in sub-Saharan Africa have been projected to grow at a negative 1.6 per cent.
Global economy
Analysts note that this will be the worst recession since the Great Depression of the early 1930s, which the IMF notes caused the global economy to contract by about 10 per cent.
But what makes it worse this time round is the level of integration of the different economies globally.
“The outbreak of the Covid-19 pandemic in the world has had a significant negative impact on the Kenyan economy in 2020…. Against this backdrop, the projected growth for 2020 has been revised downwards to 2.5 per cent from the baseline of three per cent (in early April 2020) and initial projection of 6.1 per cent in the 2020 Budget Policy Statement,” said The Treasury in documents for the 2020/21 financial year.
The Treasury said domestically, the economy will face significant headwinds from disruption of trade, reduced tourist arrivals and reduced investment flows.
It will also face restricted movement of people and goods due to Covid-19 containment measures and the disruptions of social norms.
While the pandemic is by far the biggest challenge that the economy faces this year, Kenya still has the headache of desert locusts that have wreaked havoc on farms.
According to The Treasury, the locusts pose a great challenge to food and fodder security.
The economy is also dealing with the impact of floods.
Should the pandemic be contained in the course of this year, The Treasury expects Kenya’s economy to rebound next year and grow at 5.8 per cent, similar to the global economy.
The government is already feeling the impact of the slowdown in economic activities on revenue collection.
The Treasury noted that the Kenya Revenue Authority (KRA) had missed the tax collection target by some Sh211.9 billion as of March 2020.
The impact of the disease on revenue collection will even be more pronounced in the last quarter of the year, between April and June.
Other than many companies, such as those in sectors likes tourism, travel and horticulture being completely out of business, the government has also given some relief to Kenyans.
The reduction of Value-Added Tax (VAT) to 14 per cent and the Pay-as-You Earn rate (PAYE) cut to 25 per cent is expected to see the government forego taxes to the tune of Sh79 billion.
The Treasury said the impact of the Covid-19 pandemic is projected to further worsen revenue-collection in the remaining quarter of 2019/20 financial year and the projection for 2020/21 financial year.
In particular, import-related taxes such as import duty, VAT on imports, import declaration fees and railway development levy will be negatively affected due to lower imports, coupled with the closure of trade among countries. Other domestic taxes will be affected due to declines in incomes and depressed consumption.
“To cushion Kenyans against the Covid-19 pandemic and increase liquidity in the economy, the government has put in place various measures such as the reduction in corporate income tax rate and personal income (PAYE) top tax rate from 30 per cent to 25 per cent, 100 per cent tax relief to those earning below Sh24,000 per month, reduction in the VAT rate from 16 per cent to 14 per cent and reduction in turnover tax rate from three per cent to one per cent among others.”
“These measures will reduce income tax and VAT collections. Overall, it is projected that in the FY 2019/20, the pandemic will directly lead to a revenue loss of about Sh79.4 billion and indirectly through the incentives by Sh53.7 billion. This will widen the fiscal deficit in the financial year 2019/20 and in the medium term.”
Earlier this year, in the Budget Policy Statement, The Treasury had projected that ordinary revenue would stand at Sh1.86 trillion in 2020/21 financial.
This would have been an increase from Sh1.84 trillion that it had targeted to collect in the current financial year.
Even with the expected recovery in the course of next year, The Treasury still expects a decline in revenue collection to Sh1.62 trillion in the 2020/21 financial year.
The size of the budget has also been affected, with the government now planning to spend Sh2.73 trillion in the 2020/21 financial year, against the earlier expectations when it had estimated the total budget to be at Sh2.75 trillion.
While recurrent expenditure is expected to slightly go up to Sh1.8 trillion from Sh1.78 trillion over the 2019/20 financial year, it is the development plans that will suffer the reduction, with plans to spend Sh549.7 billion in the 2020/21 financial year from Sh587.3 billion.
Nearly all government agencies have seen their budgets slashed, with a few outliers seeing an increase.
Among the few whose allocations will go up in the coming year include health, which is at the forefront of fighting the pandemic.
But even with the heavy task of containing Covid-19, the Health Ministry has just been allocated an additional Sh21 billion, bringing the total to Sh114 billion for the financial year compared to Sh92.7 billion it had been allocated in the current financial year which ends in June.
Other ministries that have seen their allocations grow include agriculture, whose State Department of Crop Development received an additional Sh17 billion.
While it may be at the forefront in fighting coronavirus, Agriculture Ministry is currently fighting the desert locust invasion, which The Treasury has identified as another major risk to the economy.
Among those that will see the largest slash is the State Department of Transport, whose allocation is down to Sh49 billion, from Sh99 billion in the current financial year.
Others with major deductions are The Treasury (Sh19 billion), Planning (Sh19 billion) and Housing and Urban Development (Sh17 billion).
The latter is critical to the government’s Big Four Agenda as it is in the driving seat of the affordable housing projects.
Slashing its budget might mean slowing down on the planned half a million housing units by 2022.
While the equitable share to the counties remained unchanged at Sh316.5 billion, the conditional allocation by the national government to the devolved units will go down by Sh8.2 billion.
This will bring to Sh369.9 billion the total amount that the counties will get in the next financial year, down from Sh378 billion this year.
“The National Treasury proposes that county governments receive additional conditional allocations amounting to Sh53.4 billion. This reflects a decrease of Sh8.2 billion. This decrease has been occasioned by the decrease of donor-funded additional conditional allocations compared with the funding in financial year 2019/20,” The Treasury said.
The allocation to Parliament has been reviewed downwards to Sh35.2 billion from Sh39.14 billion in the budget statement while judiciary will have Sh18.05 billion down from Sh19.05 billion.
“The fiscal framework that informed the 2020 Budget Policy Statement (BPS) has been revised in light of the Covid-19 pandemic … Parliament and Judiciary have been requested to adjust their ceilings to the revised expenditure levels,” The Treasury said.
The Ministry of Tourism, which will has the toughest jobs of wooing back tourists post-Covid-19 as it grapples with competition from other tourism destinations, will receive an additional Sh1 billion - bringing its allocation for the next financial year to Sh8.97 billion.
And due to shortfall in revenue-collection, The Treasury will have to increase borrowing to bridge the spending gap.
The budget deficit will in the 2020/21 financial year increase to Sh823.2 billion, a major jump from Sh571 billion that The Treasury had projected would be the deficit in the BPS early in the year.
This will put it at 7.3 per cent of Gross Domestic Product (GDP), which is above the five per cent to GDP target by The Treasury but is expected to come to 4.2 per cent by 2023/24 financial year.
“The situation is a bit awkward but all is not lost. The government should curtail unnecessary borrowing to the minimum. We need to limit borrowing to when we have no other options,” said Samuel Nyandemo, an Economics lecturer at the University of Nairobi.
“The economy will not perform to the expectations, and it will surmount to a decline in revenues but we must apportion the little that we will collect in a more rational manner and cut down unnecessary government expenditure. The key concept should be value for money,” Dr Nyandemo said.
Breathing space
He urged the government to suspend development projects that are not a priority. “If we can stay away spending on infrastructure for instance roads, we will have a breathing space. This money can be directed to other sectors that can cushion the economy and help even in the recovery.”
Dr Nyandemo added: “Focus should instead be on priority projects that can have some kind of spill-over that can cushion us after the aftermath of the pandemic. This means the focus should be on sectors such as agriculture… it should be key. If we enhance food security, we can cushion ourselves from hunger and live another day to generate revenue.”
He said lack of discipline would see the government borrow in a manner that could “further increase the debt burden to overwhelming proportions,” noting that this would see the revenue collected used only to service debts.”
Public debt currently stands at Sh6.2 trillion. Another area where we need to focus on, he noted, is manufacturing.


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