Kenya’s budget must focus on efficiency. New zero-based strategy could help

Henry Rotich - Kenya’s Cabinet Secretary for the National Treasury EPA/DANIEL IRUNGU

Kenya’s Treasury Secretary has tabled a budget that is aimed at addressing five challenges. These are the creation of an enabling environment for businesses, the prudence and efficiency of government spending, the mobilisation of domestic resources, the reduction of the fiscal deficit and stabilisation of debt and the implementation of reforms to make the Kenyan economy more competitive. The Conversation Africa’s Moina Spooner asked Tim Njagi for insights into whether it’s achieved this.

How well does the 2019/20 budget address these challenges? Please give details.

To some extent the Treasury Cabinet presented a budget that tried to address the challenges listed above. Kenya needs to be competitive to continue to attract investments.

Key proposals in the budget aimed at improving competitiveness included the 30% rebate to manufacturers on the cost of electricity, reduction of VAT withholding tax (from 6% to 2%), expediting VAT refunds and pending bills (and ensuring that suppliers to government are paid within 60 days), facilitating faster clearance of cargo at ports, and some protection measures for manufacturers – like increases in the railway development levy. The government also plans to prioritise locally manufactured products in its procurement.

But some areas of concern remain. These include the mobilisation of local resources, reduction of the fiscal deficit and stabilisation of the national debt.

As at December 2018, the Kenya Revenue Authority missed the revenue target by KSh61 billion (about US$598million). This deficit will likely double by the end of the financial year, later this month. The National Treasury has proposed a number of strategies to try to contain expenditures, including adopting zero-based budgets (a fresh budget with each cycle), a freeze on new projects, restructuring and realigning externally funded projects with the national agenda, and reducing the recurrent expenditures.

It is likely that the government will have to borrow more to address the increasing fiscal deficit, currently at 5.6% of the GDP.

The National Treasury has tried to suggest measures that will reduce recurrent expenditures – like reducing the increasing government wage bill, domestic and foreign travel expenditures. But this is unlikely to work. The wage bill has increased by an average of Ksh 46 billion (about US$450 million) over the last six years due to an increase in the number of employees and salaries.

The government must increase human resource planning and management and implement other recommendations proposed in the comprehensive public expenditure review report – like implementing a robust payroll system to prevent leakages and ensure better forecasting.

In addition to this, measures to improve fiscal responsibility should be cascaded to county governments where there’s a lack of fiscal discipline and wasteful expenditure is high.

How well does the 2019/20 budget speak to the country’s economic development agenda?

It speaks to it very well. The 2019/20 budget prioritised the “Big Four” – the economic agenda of President Uhuru Kenyatta’s administration – manufacturing, housing, health care and food security. About 15% of the total budget was allocated towards these.

On food security, the allocation to the agriculture, rural and urban development sector increased from 1.6% of the total budget in 2018/19 to 3%. A significant rise.

On universal health care, the allocation rose by 0.3% to 3.1%.

The government also made a significant allocation (about US$174 million) to housing for its employees and partnered with other stakeholders – like the World Bank – to make mortgages affordable for other citizens through the Kenya Mortgage Refinance Company.

As mentioned earlier, the budget has good proposals for improving the business environment and competitiveness. But, it’s important to verify whether the government is implementing measures to make spending more efficient. For instance, a low hanging fruit would be to further develop agro-based industries – which Kenya has already done quite well – a model which was successfully implemented in Ethiopia.

Of the various measures announced in the budget, what stood out for you? And why?

I have a keen interest in food security so was watching out for those.

There are a number of familiar proposals – like bailing out the sugar industry and monies for crop diversification. There are also a number of unclear programmes – like the National Value Chain Support Programme whose details are vague, and whose functions are now said to have been devolved to county governments.

While the intention is not bad, these expenditures have a low return on investment.

For example, studies have shown that the government sugar mills would be better off if they were privatised.

The Coffee Cherry revolving fund – set to provide an advance payment to coffee farmers at a modest interest rate – is another expenditure that is unlikely to lead to the revival of the coffee industry. The coffee industry has performed poorly over the past 20 years, current production is the same as it was in the 1970s. Some farmers are now abandoning the crop for other profitable commodities.

I commend the zero-rating of agricultural chemicals, reducing the price of agro-chemicals, but more incentives are needed to enhance productivity within the agricultural sector. Allocations should be based on efficiency. For example, the country spent an average of 22% of the agriculture budget on input subsidies, but only 2% of the agricultural budget on extension (farmer knowledge and skills) between 2013 and 2017. Providing inputs at low prices has not translated into any significant improvement in yield performance.

As an alternative, more spending on extension services will mean that farmers have more knowledge and can better use the inputs (like fertilisers) that they have access to.

Government has adopted zero-based budgeting. What are the expected benefits of zero-budgeting for Kenya? And what are the risks?

Zero-based budgeting means making a fresh budget with each cycle. This implies that there are no incremental/carry over costs. Everything is assessed afresh and justification for resourcing made.

One of the immediate benefits is that budgets will be evaluated in line with proposed activities. This works very well with programme based budgets – which the government is trying to implement – as the budget has to be justified for each project. This improves efficiency since funds will only be requested for activities that ministry departments and agencies will implement. The traditional approach has sometimes led to lobbying for funds, even when the justification for the funding is weak.

It will also help to weed out ineffective programmes and activities and allow the government to channel funds to efficient areas.

But a zero-based budget needs careful and detailed planning. This means that the ministries and agencies must allocate human resources to devote time to planning and budgeting. Missed activities would imply missed budgets and gaps in service delivery and performance. Kenya has the human capacity to do this. But it needs to be committed to it.