Kenya: Government unveils FY2020 budget against Covid-19 backdrop; sets a trajectory for consolidation
June 19, 2020
On 11 June, the government presented a KES 2.79 trillion (around USD 26 billion) budget for fiscal year 2020–2021, which will start on 1 July and run through to 30 June 2021. The budget seeks to tackle the economic impact from the Covid-19 pandemic, locust invasions, and floods, and revive growth by supporting households and businesses. It also sets out a gradual fiscal consolidation path following the inevitable deterioration in public finances during the latter half of the 2019–20 fiscal year.
The budget projects revenues of KES 1.89 trillion or 16.8% of GDP, down markedly from 18.6% of GDP this fiscal year, yielding a budget deficit of KES 841 billion or 7.5% of GDP, down from the 8.3% shortfall estimated for this fiscal year. The framework for the budget has taken into account the adverse impact of the coronavirus shock on revenue, which has been amplified by VAT reductions and tax relief measures to cushion the fallout from the pandemic. However, expenditure consolidation is expected to more than offset the loss of revenue, especially as the economy begins to recover: The government sees the deficit narrowing to 6.1% of GDP in fiscal year 2021–2022 and has retained the medium-term target at 3.0%. Meanwhile, with regards to financing, the government plans to tap into both foreign and domestic credit markets, with external funding projected to account for roughly 42% of the deficit.
The authorities also outlined an eight-point new KES 57 billion (USD 540 million) stimulus package as an additional response to Covid-19, which aims to revive economic activity and enable businesses to recover from the shock. Noteworthy measures include rehabilitating road infrastructure; enhancing liquidity support to businesses; increasing expenditure in healthcare and agriculture; reopening the tourism sector; and promoting local manufacturers.
The budget comes against a weakening backdrop due to the Covid-19 pandemic and associated containment measures, locust swarms and floods. However, despite the inevitable fiscal deterioration, stemming from shrinking revenue and a surge in spending in response to the pandemic, the plan appears to remain credible and bodes well for containing the worst effects of the crisis.
Commenting on the budget, Dylan Smith, economist at Goldman Sachs, noted:
“A sharp deterioration in revenues is offset by a robust expenditure consolidation in the coming fiscal year, before revenues recover and drive the expenditure in outer years. Relative to peers, this response would keep the fiscal deterioration contained, and Kenya has been among the first countries in the region to present a credible medium-term fiscal framework in response to the corona crisis challenge. This, combined with Kenya’s ongoing program talks with the IMF in 2020, broader economic diversification and limited commodity exposure, leads us to view Kenya in a comparatively favorable light.”
Author: Hanna Andersson, Economist