Highlights of Budget

2013/14 Analysis

20th June 2013

Introduction

• Budget 2013/14 will play a big role in laying a firm foundation for ushering in devolved system of government.

• State of play - requisite legislations to govern budget formulation and prudent management of public finance set.

• Positives – budget estimates of the 3 arms of government submitted on time, programme based budgeting (PBB) adopted and public hearings held on 30th May.

• Negatives - delays in publishing PFM regulations, PBB lack some information, budget estimates not available during public hearings.

Table 1: Macroeconomic Indicators

Indicators 2008 2009 2010 2011 2012

Real GDP growth rate (%) 1.5 2.7 5.8 4.4 4.6

Agriculture growth rate (%) -4.3 -2.5 6.3 1.5 3.8

Income per capita (Ksh) 57,350 62,743 66,376

77,098

84,624

Population growth rate (%) 3 2.9 3.1 2.6 3.0

Annual Avg Inflation rate (%) 16.27 9.24 3.96 14.02 9.4

91 days Treasury Bill rates

(nominal) % 8.5 6.82 2.3 17.9 8.3

Exchange rate (Kshs/USD) 69.2 77.35 79.23 88.81 84.5

Public Debt as % of GDP 48.5 48.1 44.5 48.5 45.2

Public external debt as % of

GDP 24.7 21.5 20.6 26.48 21.7*

Public domestic debt as % of

GDP 20.6 23.5 22.2 27.78 26.0 *

Source: Economic Survey 2013, CBK Monthly Economic Reviews & * figure for 2012/13 at at end of March 2013

0 2000 4000 6000 8000 10000 12000

2008

2009

2010

2011

2012

Total Recorded Employment "000"

Informal sector Self employed & unpaid family workers Wage employees

Revenue and expenditure performance

• Estimated revenue of Ksh 1,200.44 billion in 2012/2013. Total revenue collected for the period July 2012-Mar 2013 was Ksh 737.63 billion vs target of Ksh 900.34 billion translating to a revenue shortfall of Ksh 21.3 billion - performance rate of 81.9%

• Overall rate of absorption has remained the same at 72%, with recurrent expenditure absorption capacity standing at 90.2% (higher than 84% at the end of June 2012) and the development expenditure at 45.8% (compared to 55% at the end of June 2012).

39

45

59

61

71

74

75

83

93

100

0 20 40 60 80 100 120

Envrionment Protection, Water and Housing

Energy, INfrastructure and ICT

Social Protection, Culture and Recreation

Agriculture and Rural Development

Health

Public Admnistration and INternational

General Economic, Commercial and Labour

Governance, Justice, Law and Order

Education

National Security

Percentage

Budget Implementation Rates Dec 2012-World Bank analysis

Table 2: Overall Budget Estimates 2013/14 (Ksh Billion)**

Forecast

2012/13

Forecast

2013/14 % Change

Revenue

Total Revenues 954.7 1027.2 7.6

Ordinary Revenue 870.5 961.3 9.4

Total Receipts (incl. of grants & loans) 1180.1 1,284 8.1

Expenditure

Total Discretionary expenditure

National Government **** 1010.5

Parliamentary Service Commission 16.9 19 12.4

Judiciary 15.4 16.1 4.5

Counties' transfer *** 210

Contingency Fund 5 5 0.0

Non Discretionary expenditure

Consolidated Fund Service 346 380.3 9.9

Total overall expenditure 1459.9 1640.9 12.4

Financing:

Overall deficit before grants and loans -505.2 -614 21.5

Total external grants 56.2 67.4 19.9

Total external loans 169.3 187.6 10.8

Deficit after grants and loans -279.7 -356.9* 27.6

Deficit financing

Net domestic borrowing 106.7 106.7 0

Domestic roll over 170.5 126.1 -26.0

Sovereign bond 123.9

Debt swap 0.5

Cash adjustment (LATF) 2

Total 279.68 356.7* 27.5

Source: Budget Statement 2013

Budget Financing Sources

• Local/domestic financing sources = 86.1% of the total budget

• Total tax revenue = 62.6% of total budget

• Non taxes =4.3% of total budget vs 5.8% in 2012/13

• Donor financing (loans + grants) = 15.6% of total budget vs 15.4% in 2012/13

Expenditure analysis

National Government

62%

County Governments

13%

PSC 1%

Judiciary 1%

Consolidated Fund Services

23%

Contingency Fund 0.3%

Equalisation Fund 0.2%

How is the Ksh 1,640.9 Bn Split?

Expenditure analysis 2013/14

• Total budget Kes 1,640.9 bn (47.7% of GDP) vs ksh 1459.9 bn (37.8% of GDP) in 2012/13

• Expenditure mix – Development expenditure 27.3% vs 31.3% in 2012/13.

• Mandatory expenditure-CFS is 23.2% vs 23.7% in 2012/13 - budget flexibility or spending is inversely proportional to the size of the CFS

Trends in Consolidated Fund Services (CFS)

Item 2009/10

2010/1

1 2011/12 2012/13 2013/2014

Public Debt 161.13 157.20 175.39 322.11 337.29

Pensions 26.51 26.73 29.26 28.15 38.17

Salaries & Allowances 1.81 2.06 3.30 3.35 3.40

Miscellaneous Service 1.26 0.06 0.06 0.13 0.13

Subscriptions to

International Orgs 0.06 0.00 0.00 9.16 0.00

Guaranteed Debt 0.00 1.36 1.46 1.46 1.30

Total 190.8 187.4 209.5 364.4 380.3

% Total Public Spending 18.8 18.2 17.9 23.7 23.20

Source: Various issues of Estimate of Recurrent Expenditure

Consolidated Fund Services

• Public debt and pensions take up >95%

• Debt rollover and deficit imply future payments from CFS will be large.

• How debt and pension liabilities are managed is key to improving budget flexibility

Fiscal Implications/1

• Need to observe fiscal responsibility principles as set out in Section 15(2) of PFM Act 2012.

• Realizing revenue targets a tall order

• Various challenges of implementing huge budget and hence need to:

Continue austerity measures for fiscal space

Rationalise transfers to agencies

Address low budget execution rates

Promotion of private sector growth and job creation

• Commendable proposals to create conducive business environment that encourages innovation, investment and growth through business registration reforms, ease of obtaining business permits, reforming tax system and strengthen regulatory framework of insurance and retirement benefits industry.

• Interesting proposal to introduce Railway Development Levy @ 1.5% of the value of all imported goods to fund railway construction may be counterproductive as it will increase cost of imported goods.

• It is important to reflect on lessons learnt from previous procurement incentive of 10% in the design of revamped procurement system in support of SMEs

Deepening regional integration

• Estimated budget for the Ministry of East African Affairs, Commerce and Tourism – Ksh 6 bn. Trade Development and Investment programmes accounts for 45.2% of the Ministry Budget.

• Setting up of One-stop border post to lead to reducing non tariff barriers and in turn spur trade

• The so called ‘ Uganda list” reduced from 138 to 49 items –enhance competitive environment

Investing in National Security • Allocation to then Ministry and the now Ministry of Interior has

increased from Ksh 52.2 Bn in 2010/11 to the estimated Ksh 108.( bn in 2013/14.

• Proposed allocation to the Police Service of Ksh 67 bn accounts for 58.6% of Ministry Budget. 65.4% of Police Service total recurrent is expenditure committed for salaries.

• Despite increased No of police officers 42,586 in 2012 from 40,708 in 2010 reports show that ratio of police to population still of UN recommended 1:450. Besides there is need to recruit more female officers for engendered community policing posts and functional gender desks.

• Proposed allocations to purchase security equipment, lease vehicles, enhance crime research and investigation welcome as they will increase police mobility and improve crime investigation. For sustainability there is need to reallocate Police budget from the low 23% for use of goods and services.

Number of Police Officers, Prison and Probation Officers by Sex 2010-2012

Officers

2010 2011 2012

Total % Male

%

Female Total % Male

%

Female Total % Male

%

Female

Police Officers 40,708 90% 10% 39,717 91% 9% 42,586 89% 11%

Prison Officers 19,993 85% 15% 19,737 85% 15% 19,878 84% 16%

Probation Officers 624 63% 38% 863 57% 43% 624 56% 44%

Source: Economic Survey 2013

Promoting Food Security and Rural Development

• Agriculture and fisheries contribute about 26.4% to GDP and provide 18% and 60% of the formal and total employment respectively.

• Various proposals towards improvement of food security and modernization of agricultural sector: – Ksh 8 bn for irrigation projects, Ksh 3 bn to phase 1 of Galana Irrigation

project, Ksh 2 Bn for Agri-Business Fund to improve farmers’ access to credit.

• Ksh 38.8 bn to the ARD sector (2.3% of Budget 2013/14)-explained by the transfer of majority of it functions to the counties. However we noted some allocations, for example, construction of abattoirs is a county function.

• Issues: Food expenditure accounts for 70% of poor households, hence policies to maintain stable food inflation and the need for new institutional framework for improving access to markets.

Social Sectors Education sector

• Proposed allocation to education sector Ksh 273.3 bn. As share of Budget, MoE allocation was 8% and to TSC 8.7%. TSC allocation increased from Ksh 137 bn to Ksh143 Bn

• Part of Ksh 32 bn for basic education will go to fund free milk programme and expansion of school feeding program

• Proposal to transform education system to e-teaching and e-learning approaches

• Bizzare proposal to inject Ksh 4.9 into the Higher Education Loans Board yet it is a “revolving fund”

Health • Proposed allocation for was Kshs 34.7 bn vs Ksh 55.1 bn in

2012/2013.

• Proposals made:

– Kshs 3.8 billion for free access to maternal health

– Kshs.700 million for free access to all health centres and dispensaries

– Kshs 3.1 billion and Kshs 522 million for recruitment of 30 community nurses and 10 community health workers respectively per constituency.

– Kshs 1.2 billion for provision of 1500 affordable housing units for healthcare workers Kshs 200 million for the construction of healthcare facilities in slum areas of Nairobi, Kisumu and Mombasa

• Policy issue – whether allocations for health workers account for population and coverage differences at the constituency. Is the allocation a conditional transfer or part of allocation for counties.

• Allocation seem in line with shift from curative to preventive health but amounts are low.

Youth Affairs

• To harness the abilities of youth, women and disabilities Ksh 6 bn in addition to the existing SME and Agri-Business Fund.

• Preference on reservation of procurement increased from 10% to 30% .

• Without a fully transparent procurement system the above proposal may fail to enhance their participation of the youth in entrepreneurial ventures.

Allocations towards Realizing Social Equity

• Gender specific allocation

– Kshs 30 million allocated towards the provision of sanitary towels for girls from poor families in primary schools. It is a sensible policy but the absence of clear numbers of beneficiaries makes it difficult to judge whether this effort is adequate in comparison to the needs.

• Allocation to marginalized Groups

– Kshs 903 million has been allocated to the provision of ARVs

– Kshs 200 million for the Slum upgrading programme

– Kshs 3.4 billion for Equalization fund to the counties

– Kshs 300 million allocated for provision of land for resettling the Internally Displaced Persons.

– Ksh 7.5 billion has been allocated for doubling the number of orphans and vulnerable children covered by cash transfers from 115,00 to 310,000.

– Ksh 770 million allocated for doubling the coverage of those with extreme disability from 14,700 to 29,400.

Cont’d – Kshs 452 million allocated for doubling the number of other

disabled persons under coverage of cash transfer.

– Ksh 100 million for albinos

– Ksh 400 million for presidential secondary school bursary scheme for orphans. Ksh 356 million allocated for urban food subsidy

– Corroborative infrastructure investment in the region through the expansion of road network linking the countries to create business opportunities as well as investing in several regional power generation and transmission projects.

• Need to make public assessment of performance for previous disbursements and no details provided for allocations to albinos and urban food subsidy.

Highlights of Taxation

Proposal

Value Added Tax

• VAT Bill will be re-table in Parliament.

• Aim to Bill is to simplify, modernize and reduce the cost of compliance and administration of VAT.

• The Treasury estimates that upon enactment, the KRA would raise an additional Ksh. 10 billion. Based on preliminary concerns, there is opposition to expanding VAT to cover food and essential commodities as proposed in the previous bill.

Income tax

• Review of Capital Gains tax with a view to formulating modalities for its effective enforcement.

• Impose a withholding tax on winnings from gaming and betting.

• Improve compounding framework for income tax on tax offences

Import Duty

• Exempt import duty on items used to facilitate railway operations

• Increase import duty on welding electrodes from 10% to 25.

• Increase import duty on millstones and grindstones from 10% to 25%.

• Increase import duty on plastic tubes for packing of toothpaste, cosmetics and similar products from 10% to 25%.

Excise Duties

• Remission of exercise duty on KEG from 100% to 50% for a period of 3 years.

• Reduction to 50% of excise duty on beers made from millet, sorghum and cassava.

Talking points • For effective public participation, all the budget

documents as required by PFM should be made public on time.

• Observance of fiscal responsibility threshold

• Adoption of PBB should be enhanced with more comprehensive information

• How to address persistent revenue shortfall and low absorption of the Budget

• Management of public debt critical for budget flexibility

• Estimates of expenditure for the National Government contained some allocations to some county functions