Kenya: Record budget unveiled for the new financial year, targets greater fiscal consolidation
June 19, 2018
Kenya’s Finance Minister Henry Rotich presented the largest budget on record for the 2018/2019 fiscal year to parliament on 14 June, with the income tax bill tabled alongside it. Both will come into effect on 1 July. The government aimed to strike a tough balance between realizing an accelerated pace of economic expansion through increased infrastructure investment while also striving for an improved fiscal picture. However, it remains to be seen if the government will be able to meet its ambitious fiscal target, as the budget was devoid of bold tax reforms and the country has suffered from low revenue collection in recent years.
The new budget is 25% bigger than the current one and amounts to around KES 3 trillion (USD 29 billion). It will target a deficit of 5.7% of GDP for the upcoming financial year, below the estimated 7.2% of GDP for FY 2017/2018. If achieved, this would mark the lowest deficit since 2013. Spending will be tailored to meet the goals set under President Uhuru Kenyatta’s “Big Four” agenda, which will prioritize investment in manufacturing, food security, universal healthcare and affordable housing over a five-year span. In addition, a large chunk of expenditure will go towards servicing the country’s burgeoning debt. On the revenue front, a number of small tax measures were introduced, including a Robin Hood tax of 0.05% that will be instituted on any amount exceeding KES 500,000 transferred through banks or financial institutions. However, the budget was devoid of a large tax reform. While a higher tax bracket of 35% for Kenyans earning above KES 250,000 per month was proposed in the early stages of the draft, this measure was withdrawn from the final bill and awaits further guidance from the cabinet.
Meanwhile, the highlight of the income tax bill was the repeal of the interest rate cap on commercial bank lending rates that has long stymied the availability of credit to the private sector, especially to small- and medium-sized enterprises, and has been a persistent impediment to achieving higher economic growth. The overturn was eagerly awaited by Kenyan banks that have long voiced opposition to the ceiling on the cost of loans, which has hindered their ability to price risk. However, the bill has yet to be approved by parliament, which is likely to see pushback against the law in favor of maintaining access to cheap credit.
Kenya’s economy was derailed last year by a severe drought that crippled agricultural output and a prolonged election cycle, in addition to growth being limited by the interest rate cap. With the political scene returning to stability and weather conditions improving, economic activity has picked up since the start of the year, expanding at a solid pace for six consecutive months. While the measures proposed by the budget should aid the economy onto a higher growth trajectory, the government will be tasked with a tough challenge in meeting the ambitious fiscal consolidation aims given its track record of missed revenue targets.
Kenya GDP Forecast
FocusEconomics Consensus Forecast panelists see GDP expanding 5.5% in 2018, which is unchanged from last month’s estimate. Panelists project growth rising to 5.8% in 2019.
Author: Nihad Ahmed, Economist