Fiscal Balance in Kenya

Kenya - Fiscal Balance

Government unveils record FY 2021–2022 budget, but still aims for fiscal consolidation

On 10 June, the government presented a record KES 3.7 trillion (around USD 34 billion) budget for the fiscal year 2021–2022—which starts on 1 July and runs through 30 June 2022—representing a 9.0% increase over the prior year’s KES 3.4 trillion (around USD 33 billion) budget. The blueprint chiefly focuses on the recovery from the Covid-19 pandemic, while it also features an ambitious fiscal consolidation plan aiming to stabilize debt over the medium term. However, the success of the consolidation plan will depend on the effectiveness of fiscal policy implementation, as well as the strength of economic growth, which is highly uncertain due to the unpredictable evolution of the pandemic.

The budget projects total revenues of KES 2.0 trillion or 16.4% of GDP, aiming to collect KES 1.7 trillion in tax revenues—a 16% increase over the current fiscal period—which would finance around 50% of the total budget. This would yield a deficit of 7.5% of GDP, down from the shortfall of 8.7% of GDP estimated for this fiscal year. Moreover, the fiscal consolidation plan aims to reduce the deficit further to 3.6% of GDP in FY 2024–2025. To finance the deficit, the government aims to borrow KES 271 billion, or 2.2% of GDP, through external financing and the remaining amount, equivalent to 5.3% of GDP, through net domestic financing. However, although the government noted that public debt remains sustainable, it poses a major challenge, as debt servicing costs are projected to amount to roughly KES 1.2 trillion in the coming fiscal year.

A large portion of the planned spending is allocated to the “Big Four” agenda—whose goal is to promote sustainable economic growth and accelerate jobs creation. The key spending areas are universal health coverage, affordable housing policies, bolstering the manufacturing sector’s contribution to GDP through reforms and investment, and improving food and nutrition security. Moreover, a proportion of the budget will be used to acquire vaccines and facilitate the rollout, in a bid to address concerns over vaccine availability.

The government counts on an expected 6.3% GDP expansion in CY 2021 to support the proposed budget, although this comes against a backdrop of a fragile global recovery, with lingering uncertainty over the evolution of the pandemic and the emergence of new variants of the virus. Meanwhile, risks to the path to fiscal sustainability remain, as noted by Jee-A van der Linde, economist at Oxford Economics:

“The government’s ambitious multi-year fiscal consolidation plan will prove difficult, given a track record of ineffective fiscal policy implementation. Moreover, high debt and interest rate burdens increase financing risks. We expect the fiscal deficit to narrow to 7.9% of GDP in 2021, from an estimated shortfall of 8.7% in 2020. It will take time to bring the fiscal deficit to more sustainable levels. Public debt is expected to increase from 68.8% of GDP in 2020 to 70.7% of GDP this year, reaching a turning point of 73.4% of GDP in 2022 before declining slowly thereafter.”

FocusEconomics Consensus Forecast panelists project a budget deficit of 7.7% of GDP in 2021 and 6.9% of GDP in 2022.