- The budget presented to parliament last week appears modest, given that 2022 is an election year.
- However, the proposal carries considerable downside risks on both the revenue and expenditure fronts.
- If these materialize, Kenya may be forced to request debt restructuring after all.
Despite being President Uhuru Kenyatta’s final year in office – typically considered the time to spend heavily to leave a brick-and-mortar legacy – the government’s budget proposal for the financial year (FY) 2021/22 submitted to parliament last week appears comparatively modest. However, rather than having suddenly converted to fiscal conservatism, Kenyatta’s hand is being forced by the circumstances. In fact, the government faces a dramatic surge in debt service payments while, as per usual, overly optimistic revenue projections and potential supplementary budgets leave considerable downside risk. As such, this raises the prospects that Kenya may eventually have to seek debt treatment under the’Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative’ (DSSI).
Unlike in previous years, Kenyatta’s’Big Four’ legacy agenda (focusing on food security, affordable housing, manufacturing, and universal healthcare) does not appear to take center stage in FY2021/22. Merely KSH 135.3bn (USD 1.3bn) of the KSH 3.66trn (USD 33.9bn) budget presented to parliament by National Treasury Cabinet Secretary Ukur Yatani on 10 June are allocated to development programs under the Big Four.
However, there is considerable downside risk to Yatani’s bullish 10% year-on- year revenue growth projection, which underpins the government’s expectation to narrow the fiscal deficit from 8.7% currently to 7.5% of GDP in FY 2021/22. Admittedly, certain tax reforms are anchored in the USD 2.34bn multi-year IMF program the government entered in February, and the World Bank last week greenlit a USD 750mn facility to boost revenue generation. However, while Kenya taps that same facility for the third time since 2019, it has persistently undershot its revenue targets for the past five years. Meanwhile, overall revenue as a share of GDP has steadily declined pre-pandemic, from 17% in FY2016/17 to 15.4% in FY 2019/20.
On the expenditure side, there is a potential for supplementary budgets to emerge down the line, as happened on several occasions over the previous financial year. On the one hand, these may be triggered by larger budgetary transfers and/or the manifestation of contingent liabilities resulting from guaranteed debt to state-owned enterprises such as Kenya Airways, Kenya Power and Kenya Railways. Secondly, as the August 2022 general elections come into view, the government may decide to prop up spending to win over voters in certain constituencies. This process will be informed by the political calculus of the Building Bridges Initiative (BBI) between Kenyatta and opposition leader Raila Odinga. As their far-reaching plans for a constitutional reform were recently derailed by a court ruling, it remains more uncertain than ever which presidential candidate Kenyatta’s Jubilee Party will support.
The potential cost of a constitutional referendum, if it were still to happen before the election, appears negligible at an estimated at KSH 13.7bn (USD 127mn), and the budget allocated for the electoral commission to organize for the 2022 vote remains in line with previous election budgets. Yet calls for a supplementary budget may emanate from the government’s inadequate funding for its future Covid-19 response in case the pandemic takes a turn for the worse in Kenya. The budget allocated for testing will cater for merely 800,000 tests (against a 53mn population) and – against ministerial assurances to the contrary – no budget appears to be allocated for vaccine procurement, which seems a glaring omission given that the government is looking at sourcing vaccines from Johnson & Johnson and Chinese suppliers amid severe supply delays by the global COVAX initiative. While it looks as though the government is banking on international support to materialize to cover for pandemic management, this approach has obvious shortfalls.
As such, the sovereign risk outlook carries considerable downside risks. As the debt-service-to-revenue ratio is projected to surge to 68% this year, from 53.8% in 2020 and 33.4% pre-pandemic, any unforeseen expenditure may completely derail the government’s plans. There is currently no indication that the government intends seek a debt restructuring under the Common Framework. Its debt management strategy remains predicated on market access. Besides, there has been very little progress in negotiations between creditors and those countries that have so far gone down this road, which means Kenyan policymakers are unlikely to consider the Common Framework a viable option at this stage. Nevertheless, circumstances may force a sudden rethink if said downside risks materialize, though for now the budget bill is expected to sail smoothly through the parliamentary approval process.