Thursday, March 24, 2011

Shock for Kenyans in Uhuru's June Budget

By Jackson Okoth and Morris AronThousands of youth and other vulnerable groups will be rendered jobless after the Government stops funding for various programmes classified as "temporary" under the Sh22 billion National Economic Stimulus Programme. This means the Government’s much-touted target of creating at least 500,000 jobs a year has been dealt a severe blow.
With close to Sh9.5 billion needed to finance implementation of the new Constitution, the Government has fallen on the idiom of "robbing Peter to pay Paul" by scaling back on what it regards as popular, but unsustainable programmes as part of its 2011-2012 Budget to be unveiled in June.
In the Budget Policy Statement presented to Parliament by Finance Minister Uhuru Kenyatta yesterday, several programmes have been wound down as part of measures to contain public financing.
Also to be denied funds are unfinished public projects under the stimulus, including construction and building of hundreds of schools and dams. Many of the projects fell behind schedule due to the cumbersome public procurement process in Government. The centrepieces of the stimulus package were education, health and infrastructure.
Up to Sh7.6 billion was also allocated to social safety nets, such as the so-called Kazi Kwa Vijana projects.
The changes have come at the worst possible time, with oil prices having gone up following the upheavals in Arab countries, especially Libya. The price of kerosene, used by most households, has already gone up by Sh3 per litre and diesel by Sh5. Diesel prices have a major effect on the cost of electricity and manufacturing.
As a result of the pressure from oil prices, there has been a sustained increase in prices for goods and services, also known as inflation, and measured as an annual percentage increase. Inflation rose to 6.5 per cent last month, well beyond Central Bank’s target of 5 per cent.
Recurrent expenditure
All signs are that the coming Budget will see an increase in austerity measures to contain recurrent expenditure and reduce wastage in various ministries. The Treasury says funding for some of the phased out programmes was inevitable since, although they were meant to cushion vulnerable groups from effects of drought, oil prices, post-election crises and the global economic crisis, they have served their purpose.
The proposed Budget, going by the policy statement, has shrunk in size to Sh975.8 billion from Sh998 billion in the current year, ending June.
Matters were made worse by capacity challenges faced by various ministries under this fiscal plan.
While economic recovery was hinged on full implementation of the stimulus, delays in the programme have brought Uhuru’s stewardship at the Treasury under stronger scrutiny. He is already under pressure to provide funding in the coming Budget for the 47 new counties.
Uhuru is expected to present this year’s Budget, the first under the new Constitution, at a time when a weakening shilling, dry spells in some parts and rising oil prices continue to dilute all optimism for growth.
This is also the last Budget to be presented by President Kibaki’s administration ahead of 2012 elections.
Finance Minister Uhuru Kenyatta
Part of the Treasury’s quandary lies in the fact that despite its relatively above par performance over the years, the Kenya Revenue Authority (KRA) has been unable to meet revenue collection targets since the economy is not expanding fast enough to spread the tax net.

For instance, at the end of February 2011, KRA has cumulative revenue receipts amounting to Sh394 billion against a target of Sh426.4 billion, an underperformance of Sh31.9 billion.
Although promulgation of the new Constitution was all pomp and pageantry, it appears that the hard part begins, even as Kenyans dig deeper into their pockets to fork out Sh9.5 billion needed to implement the new law. Another Sh4 billion was to be used to tackle effects of severe drought following lack of prior planning to deal with the perennial problem.
The policy statement provides a macro-economic forecast of Uhuru’s projected budget for the new financial year, and an inventory of achieved targets from the ending fiscal year.
The policy document projects Kenya’s economy to grow by 5.7 per cent this year, an indication the economy appears to be finally out of the woods since 2008. The overall budget deficit in 2011-2012, including grants, is projected at Sh152.6 billion.
Domestic borrowing
A net external financing amounting to Sh47.4 billion is expected to cover part of this budget deficit, leaving about Sh105.2 billion to be financed through domestic borrowing.
In the short term, however, increased Government borrowing from the domestic market, expected to exert pressure on the credit market as the private sector is ‘crowded out’.
Already, Central Bank has had to intervene in the market to support the flagging shilling, by revising interest rates upwards to keep inflation in check. The effect of this is that the cost of borrowing from banks will rise.
The BPS mentions that domestic borrowing, which has been financing over 75 per cent of the deficit during the economic stimulus period, is now expected to decline steadily to finance less than 40 per cent of the budget deficit over the medium term.
To effect this change, the Government is already planning to issue a sovereign bond in 2012/13 if market conditions permit.
Total revenues in the 2011/12 budget is projected at Sh774.4 billion while overall expenditures is set at 31.7 per cent of GDP or Sh975.8b.
The ceiling for development expenditure, including donor-funded projects, will increase to Sh331 billion in 2011/12. This is as the Government makes an expected exit from the economic stimulus program.
The 2011 Budget Policy Statement, to be tabled in Parliament, is the second to be issued by the Government.
It is a creature of Parliament’s Standing Orders adopted in 2008 and the Fiscal Management Act 2009.
The document provides a macro-economic forecast of the Finance minister’s projected budget for the new financial year, and an inventory of achieved targets from the ending fiscal year.
According to Standing Order 143, the Finance minister ought to table the statement not later than March 21, but the Act allows that if that date comes when Parliament is not in session it must be tabled within a week of convening.
Early this month, Parliament’s Budget Committee, which holds oversight authority over the Ministry of Finance, accused Uhuru of plotting to bypass the committee on this matter for failing to table the paper, and publishing a fiscal policy statement that did not acknowledge the need to budget for the structures of the proposed county governments.

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