Kenya’s 2018-19 budget is set to be tabled before Parliament on June 14 in an unusually calm political climate. Economist Timothy Njagi Njeru explains what Kenyans can expect and how the budget will likely serve as a showcase for President Uhuru Kenyatta’s “Big Four” agenda. Kenyatta has prioritised food security, manufacturing, universal health coverage, and affordable housing over the next five years.
What is the context of this year’s budget?
This is the first budget since the announcement of the “Big Four” agenda by the government. As such, it’s expected to reveal what foundations the government is putting in place to achieve its agenda.
The budget also comes amid renewed optimism about Kenya’s economy. There is political calm after the country’s two main political protagonists agreed to work together. And there is much closer cooperation between county and national governments. Harmony between the two levels of government is essential for development key functions – such as health and agriculture – are largely managed by each of the country’s 47 counties.
The macroeconomic environment is also stable, bringing with it hopes for increased investment in Kenya.
That’s the good news. But the country is still grappling with familiar challenges.
Flooding in some areas has left households worse off. Productive sectors, mainly manufacturing and agriculture, continue to register sluggish growth. There are high levels of youth unemployment with more young people joining the labour market each year than it can accommodate.
Overall, the country’s business environment can do with improvement. Kenya moved 12 places in the ease of doing business ranking. However, there are complaints over taxation and high number of permits from different agencies required to operate a business.
What are the most challenging factors heading into this budget?
The tax burden on citizens is already high and is likely to rise in order to finance the budget proposals. For successive quarters in the last year, the taxman fell short of expanding targets. Increases in tax also affect the business environment and could impact private sector growth.
Additionally, there is increased demand for funding from county governments, which affects attainment of the government’s development agenda. County governments rely almost exclusively on exchequer releases with majority of the counties unable to raise significant revenue due to weak systems of a narrow base for raising revenue.
When it comes to the “Big Four” agenda, agriculture and health are vastly devolved to county governments. Majority of functions under the health and agricultural sectors are the responsibility of county governments. This means that county governments allocate resources to meet the need in these sector. However, for health, county governments receive conditional grants as part of their exchequer releases which means that they must spend such budgets on health. This is not the case for agriculture. County governments have a prerogative on how much to allocate. County governments allocated an average of 6% of their budgets to agriculture in the past four years. The low funding for agriculture is a risk to fulfilling an essential development objective as most of the implementation in the sector is done by county governments.
With reduced funding to county governments, sectors such as agriculture could potentially receive less funding; that could compromise the success of this key government priority.
Borrowing to finance development activities is not a viable option at either level of government. The government borrowed heavily during the last financial year from both international and domestic markets. Although the law allows county government to borrow funds, they must be guaranteed by the national government. Also, with low revenue collection, this certainly means that repayments will be made from the exchequer releases they receive.
Expanding the debt beyond current levels is not a sustainable solution for raising revenue. So the challenge is to achieve the correct balance between raising revenue, maintaining a stable macroeconomic environment and stimulating the economy to keep Kenya on track for success in the coming years.
What policy highlights would you want to see and why?
For significant economic development to be registered, the country must invest in and develop productive sectors such as manufacturing and agriculture by increasing the level of investments.
Some of the proposals in the budget policy statement are interventions that have been tried before and not yielded meaningful outcomes. This is because the programmes were poorly designed or implemented.
For example, the government has implemented the input subsidy programme, supplying seed and fertiliser at subsidised prices, since 2008. Nobody really knows how effective this has been, since no evaluation has ever been done. These programmes have suffered from poor programme design and wrong targeting. Currently, the government is probing the diversion of subsidised fertilizer intended for resource constrained farmers to private markets. It has also emerged that the producer support programme that aimed to provide favourable market to farmers purchased maize from traders.
Given that the country has continued on a low productivity pathway, government needs to restructure these programmes by redesigning their objectives and implementation.
Meanwhile, private sector investments are going to be critical if the Big Four agenda is to succeed. Policies that promote Kenyan exports in regional and global markets should also be pursued. Finally, I expect to see policies to manage the budget deficit and public debt.
How is Kenya’s current political climate likely to impact on the budget proposals?
The push to unify the country and return the focus to national development is good for the economy.
To respond to the need for change for a better leadership, and have desirable impact on livelihoods of the electorate, top government bureaucrats and politicians are more likely to support proposals that have key impacts in alleviating poverty and stimulating economic growth.