Kenyan budget office sends warning signal over IMF targets

By Herald Aloo
Posted on Monday, 20 June 2022 16:28

Ukur Yatani outside the National Treasury building with the budget briefcase before leaving for Parliament to read the 2020-21 budget. Credit: Dennis Sigwe

Kenya runs a risk of breaching targets agreed with the International Monetary Fund (IMF), the country’s parliamentary budget office (PBO) has warned, citing a bulging fiscal deficit.

In its review of the 2022-23 budget published in May, the PBO raises concern that the fiscal deficit has gone “above the agreed levels over the medium term” with the IMF. “The expenditure increase that has necessitated expansion of the deficit is mostly in recurrent rather than development expenditure,” says the report by PBO, an advisory unit to lawmakers.

Kenya has been on a 38-month finance programme with the IMF since April 2021 which allows access to credit of $2.34b on condition that expenditure is kept under a tight rein and debt is cut. The country’s recurrent expenditure has been on an upward trend for the past five years, accounting for about 50% of the total budget for 2022-23.

The increase is mainly attributed to debt servicing, which becomes more expensive as the shilling weakens against the dollar. Debt currently exceeds 70% of GDP, and Treasury data shows that debt repayments to China-funded projects surged to Ksh73.5b in the current tax year, which runs from July to June. The payments accounted for 81.4% of the amount spent on servicing bilateral debt in the nine months through March 2022.

  • For the 2022-23 fiscal year, development expenditure lags behind the minimum stipulated allocation of 30% of the budget.
  • “The status of rationalization of public investments as an agreed upon performance benchmark remains unclear even though a list of projects has been provided,” the PBO says.
  • A collapse of the IMF deal is very unlikely at present, says economist Mihir Dhakar.
  • That point is echoed by IC Group economist Churchill Ogutu, who argues that international markets will look at metrics other than the fiscal deficit and also take US Federal Reserve tightening and lower liquidity into account.
  • Ogutu adds that the IMF might be more concerned with fiscal revenue not performing as projected.

Fuel subsidies

A narrowing budget deficit hinges on significant slashing of expenditure. But many Kenyans are surviving on subsidies, from fertiliser to electricity and fuel, mostly introduced to quell growing public anger and pressure over the high cost of living.

Corporations earmarked for IMF-backed restructuring include Kenya Power and Kenya Airways, as well as the higher education sector, which have a massive combined workforce. Kenya Power is mooting plans to gradually do away with 2,000 workers ,while Kenya Airway battles opposition from aviation workers over pay cut plans.

Under the Medium-Term Debt Management Strategy 2022, the Treasury aims to reduce the fiscal deficit to 6.0% of GDP in the 12 months starting July 2022, from a projected 8.0% in the current fiscal year. This will be cut further to 3.9% by 2024-25. But parliament has raised the debt ceiling from Ksh9 trillion to Ksh10 trillion to create more scope to borrow.

The country is already lined up for a loan of about $600m from the African Development Bank (AfDB), of which $100m will be for budgetary support, subject to the board’s approval. The AfDB is considering anchoring its lending to Kenya on the IMF’s guidelines, which would add more pressure on Kenya to manage its debt.

There were attempts by Kenyan officials to resist the IMF’s push to scrap fuel subsidies. However, last week, National Treasury Cabinet Secretary Ukur Yatani said that the fuel subsidy leads to “misallocation of resources and crowding out funds from productive sectors.” The fuel subsidy could “eventually surpass its allocation in the budget, thus potentially escalating public debt,” Yatani said in a circular to the press.

  • Plans are now underway to gradually adjust pump prices to fully phase out the subsidy within the next financial year.
  • Fuel is a major determinant of inflation, which hit 7.1% in May.
  • VAT on fuel may also be a flashpoint. The IMF is pushing the government to raise VAT on fuel from current 8% to 16% despite opposition by the lawmakers. But the National Assembly Finance committee has proposed halving the VAT to 4%.

Bottom Line: Global economic shocks are making it ever more challenging for Kenya to stick to its IMF targets.

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