Key highlights from Kenya’s Ksh.2.3 trillion FY 2017/18 budget

The Kenyan economy is still on a firm footing supported by continued investment in infrastructure and real estate, the growth in the financial sector and the recovery of the tourism sector. Despite the positive sentiment, there are a couple of challenges facing the economy, among them being the ongoing drought, political risk as we head into the election and increasing oil prices that may lead to a weakening shilling.

The government in a bid to support the economy presented a very expansionary budget last week. The budget was themed “Creating Jobs, Delivering a Better Life for All Kenyans”. There was a 2.4 percent increase in the budget to Ksh.2.3 trillion from the Ksh.2.2 trillion FY 2016/17 budget, as per the Budget announcement speech made by Cabinet Secretary to the National Treasury, Henry Rotich, with the bulk of it being financed by tax collection.

Key highlights as regards to financing the Budget were:

1. The budget will focus on reducing the budget deficit to 6 percent of GDP at Ksh.524.6 billion from 8.9 percent of GDP in the FY 2016/17 budget; with external and domestic debt estimated at Ksh.256 billion and Ksh.268.6 billion, representing 2.6 percent and 3.1 percent of GDP, respectively
2. The Kenya Revenue Authority (KRA) is expected to collect revenue of Ksh.1.7 trillion through taxation. In a bid to continue supporting investments into the country a couple of Tax incentives were introduced:
   1. Additional tax incentives for businesses in the Special Economic Zone (SEZ), including allowing a capital deduction of 100 percent of the cost of buildings and machinery owned by the SEZ enterprise, and exempting goods exported from and imported by a SEZ enterprise from export duty and Import Declaration Fees
   2. Exemptions from VAT on transactions related to transfer of assets into Real Estate Investment Trusts and Asset Backed Securities
   3. Increased the taxation on gains from gambling to 50 percent to discourage the betting culture
   4. Exemptions from VAT on locally assembled tourist vehicles
   5. Zero rate importation of maize for four months, and
   6. In order to support the low income population in Kenya, and encourage health care initiatives, the budget has introduced an increase in the lowest monthly taxable income to Ksh.13,489 from Ksh.11,135, and a cash transfer allocation for health care for people over 70 years of age, respectively.

The tax incentives are a commendable effort by the government as it indicates that the operating environment will improve going forward.

Let us now look at the Kenya National Budget growth in the last 5-years, highlighting the changes from fiscal year 2016/17 to the 2017/18 budget estimates. Key points to note are:

1. The budget is estimated to increase by 4 percent from FY 2016/17 to FY 2017/18, and by 111.2 percent in the last 5 fiscal years, with recurrent & county allocation expenditure growing faster than development expenditure at 136 percent as compared to 66.3 percent
2. The government has tried to cut down on expenditure by reducing development expenditure by an estimated 2 percent. This coupled with a 12.5 percent estimated increase in revenues and grants will reduce the budget deficit to GDP ratio to 6.3 percent in FY 2017/18 from 8.9 percent the previous fiscal year
3. The government continues to borrow heavily to finance the budget, and with tax collections having historically always fallen below target numbers, pressures on borrowing continue to increase during every fiscal year. The budget deficit has been growing at a faster rate than the budget has, with the deficit growing at 5 percent, which translates to an equal growth in budget financing through government borrowing
4. Growth in domestic borrowing has outpaced foreign borrowing, at 6 percent over the last 5 fiscal years, with an estimate that it will increase by 12.4 percent this fiscal year
5. Foreign borrowing has increased at a slower rate at 24 percent over the last 5-years but is estimated to decrease by 2 percent in 2017/18, leading to increased pressure on the domestic borrowing front

The Kenyan budget has always been expansionary, with no single year when the budget has been less than the previous years. However, we foresee the government facing these challenges in budget implementation, as has been in past years:

• Under-absorption of development expenditure, which has averaged 65 percent, and over-absorption of recurrent expenditure which has averaged 5 percent leaving the overall budget absorption rate below 100 percent consistently in the last 5 fiscal years
• Failure to meet revenue collection targets by the Kenya Revenue Authority, which is projected to rise to 1.7 trillion in 2017/18, from Ksh.1.5 trillion in 2016/17, after having missed its first half of the fiscal year target by 3.2 percent
• High budget deficit being plugged in by debt, especially external dollar denominated debt and resulting in a rising debt-to-GDP ratio

We are of the view that the government should put in place structural measures to address these challenges in order to ensure the budget policy items are actually well implemented. In addition, KRA needs to address a number of areas, including:

• Streamlining tax collection, and allowing for efficient payment of taxes
• Taxation of the informal sector in order to achieve their tax collection targets, to boost revenue collection and reduce the pressure

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Mr. Felix

A Math Nerd and a Computer Geek. Currently a Windows 10 Insider. Interested in AI, big data and AR/VR. Takes a keen interest in developments in the tech, business and social media spheres.