Highlights of Budget 2020/21 Analysis

PFM-Program

2

Outline of Presentation

• Overview of the budget

• Expenditure side

• Revenue side

• Taxation proposals

Pre-COVID 19 Budget Context

• Slowdown in economic growth from 6.3% in 2018 to 5.4% in 2019 and expected to pick up to 6.1% in 2020

• Underperformance in agricultural and private consumption despite service sector resilience.

• Strong revenue growth

• Reduction in non-core expenditure

• Fiscal consolidation path of 6.3% fiscal deficit target in 2019/10

• Debt distress risk - moderate

2013 2014 2015 2016 2017 2018 2019

Real GDP growth rate (%) 5.9 5.4 5.7 5.9 4.9 6.3 5.4

Agric. growth rate (%) 5.4 4.4 5.3 4.7 1.9 6.4 3.6

Mnfg. growth rate (%) 5.6 2.5 3.6 2.7 0.5 4.2 3.2

GDP per capita, constant prices (Ksh) 87,261 89,430 91,989 94,789 96,788 100,310 106,244.4

Population growth rate (%) 2.7 2.9 2.8 2.7 2.6 2.6 2.6

Avg. Annual Inflation rate (%) 5.7 6.9 6.6 6.3 8.0 4.7 5.2

Treasury Bill rates (nominal) % 9.4 8.6 10.4 8.6 8.1 7.5 7.2

Exchange rate (Ksh/USD) 86.3 90.4 102.2 102.1 103.1 101.9 106.2 (Apr 2020)

Current Account Balance (% GDP) -10.4 -6.7 -5.2 -6.1 -7.2 -5.8 -5.8

Fiscal Trends

2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20

% Total Rev to GDP 19.2 19.0 18.8 18.4 17.3 18.5 17.0

% Expend. to GDP 26.0 28.1 27.1 27.4 24.4 25.1 23.24

% Public debt to GDP 46.7 48.5 55.1 57.1 57.3 61.0

Macroeconomic IndicatorsSource: Various issues of Economic Survey-KNBS, National Treasury 2nd Quarterly Economic and Budgetary Review

Distribution of GOK Budget 2020/21

2019/20 Estimates

2020/21

Ksh Billion

% Change % GDPApproved Est.

(Ksh Bn)

Suppl. II Est. (Ksh

Bn

Revenue

Revenue & Grants 2,126.0 1,927.3 1,906.6 -1.08 18.4

Total Revenue (incl. AiA) 1,843.8 1,892.8 1,870.5 -1.18 18.1

Grants 41.8 34.5 36.1 4.7 0.3

Expenditure

Expenditure 2,884.4 2,784.9 2,723.8 -2.2 26.3

Discretionary 2,334.3 2,254.1 2,137.3 -5.2 20.6

National Executive 1,947.9 1,879.2 1,751.7 -6.8 16.9

Judiciary 19.2 17.5 19.1 9.4 0.2

Parliament 39.9 35.9 39.2 8.95 0.4

County Gov'ts Equitable Share 316.5 316.5 316.50 0.00 3.1

Contingency Fund 5 5.0 5.0 0.00 0.0

Equalization Fund 5.8 0.0 5.8 0.1

Non-Discretionary 550.1 530.8 586.5 10.5 5.7

CFS (interest +pension +others) 550.1 530.8 586.5 10.5 5.7

Overall deficit (less grants) -758.4 -857.6 -817.2 -4.7% -7.9

Financing

Net Foreign Financing 353.5 349.9 349.8 -0.04 3.4

Net Domestic Financing 340.7 489.9 473.6 -3.3 4.6

Total 694.2 839.8 823.4 -1.96 8.0

Financing Gap -64.2 -17.8 6.1

Budget OutturnSource: Estimate of Expenditure; Est. of Revenue and Grants

Fiscal Trends: Revenue and Expenditure, 2013/14 – 2020/21

Source: National Treasury | Budget Estimates, April 2020

Supplementary Budget II 2019/20 in Response to COVID-19

Ksh Billion

Health (strengthening system-HRH, beds, Isolation facilities,

PPEs, testing kits, etc) 6.8

Food relief, WASH and others 2

Social protection 10

VAT refunds clearance 10

Pending bills clearance 13.8

Kazi Mtaani 10

Savings from expenditure rationalization

Realignments of capital expenditure ??

Postponement of low priority projects ??

Salary cuts for the President and Deputy Pres. (80%) and

other select senior public officers (20% -30%) ??

S

Source: National Treasury Suppl. II Budget 2019/20 Est. World Bank and PBO

Indicator Threshold 2019 2020

PV of public debt to GDP ratio (%)70 55.4 55.7/62.4

Absolute threshold (Ksh trillion) 9 6.0 6.2

Debt service (Total) to revenue ratio

(%) 30 45.2 35.2

Overall risk levelLow Moderate High

Debt Sustainability Analysis (DSA)

Trends in Consolidated Fund Services (CFS), Ksh billion

Source: Various issues of Estimate of Recurrent Expenditure

Effect of borrowing appetite

Debt service is expected to increase Interest payment to increase

2017/18 2018/19 2019/20 2020/21

Interest payments 305.1 399.98 433.7 463.1

Redemptions 344.3 470.6 335.2 441.6

Total interest and redemptions 649.4 870.58 768.9 904.7

Pension and others 77.46 91.95 97.13 123.4

Total CFS 726.86 962.5 866.0 1,028.1

% Total revenue 47.7 57.6 45.8 55.0

% of GoK Budget 27.5 31.9 28.0 32.5

% GDP 8.5 10.3 8.4 9.9

Emerging issues

• Frequent revision of the budget reduces budget credibility

• Supplementary budget -> revenue underperformance unrealistic revenue projections

• Debt financing will remain - revision of debt ceiling from 50% of GDP to Ksh 9 trillion

• Refinancing risk.

• Commercial debt share in external debt Is 34%. Vulnerabilities due to likely reduction in receipts from exports and revenue on the back of COVID 19 crisis.

• Majority (71%) of our external debt is denominated in USD –exchange rate risk

Economic Classification of the MDAs

What are the priorities areas/sectors in the budget?

Education sector –lion share of the budget (29%)Any –COVID related interventions – COVID 19 Emergency Response project,

MoH: Ksh 2.6 bn

Example of Sector Analysis: Environment Protection, Water & Natural

Resources

Energy, infrastructure and ICT – 89% absorption rate

Infrastructure development is an enabler of the big four plan. Commendable absorption rates – a plus towards the realization of some of the big four initiatives and in particular manufacturing.

Financing of the Budget

• Total revenue (incl AiA) projected at Ksh 1,870billion.

• Total revenue + grants = Ksh 1,906 bn (18.4% of GDP)

• Projected revenue is predicated on economic growth and on-going reforms in tax policy and revenue administration.

Comparison of Kenya’s Economic projections in 2020 with its

peers

Source: KNBS

National Government cumulative revenue collection including A-I-A

Source: National Treasury

Tax receipts to decline due to dual effect of COVID 19 and tax relief measures

Tax revenue depends on economic activity (GDP)

Tax Relief Measures

Collection pre-COVID (Ksh Bn)

Est. of Rev losses (Ksh

Bn)

Targeted Beneficiary 2018/19

2019/20 (A)

Est. 2020/21 (B)

Diff’ (B-A) PBO

World Bank

Reduction of corporate income tax (CIT) from 30% to 25% Formal firms 292.4 340.9 308 -32.9 45.7 13.7

Reduction of turnover tax (ToT) from 3% to 1% for MSMEs MSMEs 0.05 0.1

Reduction of VAT from 16% to 14% General public 414.1 412.6 481.6 69 49.6 13.8

100% PAYE tax relief for earning below Ksh 24,000 pm

Formalemployees

393.4 395.4 377 -18.4 26.9 11.7

Reduction of PAYE top income tax band rate from 30% to 25%

Source: Tax Amendment Act 2020; NT QBER and Est of Revenue 2020/21; PBO and World Bank

Ord. Revenue Ksh 1,6434 bn (16% of GDP) in 2019/20 to decline to Ksh 1,622 bn (14.4% of GDP) in 2020/21

Emerging Issues

• Tax revenue to GDP <15% - structure of economy not yielding sufficient taxes

• If COVID persist revenue underperformance may worsen – rationalize the budget

Development

Partner

Facility Terms Amount (Ksh

Billion)

IMF Rapid Credit Facility Concessional @

0%

78.3

World Bank Contingency Emergency

Response

6.8

World Bank 2nd Development Policy

Operation

Budget Support 108

Africa Dev’t Bank

(AfDB)

Loan Concessionary 22.5

European Union

(EU)

Grants 7.5

Resource Mobilization

Source: Budget Statement

Key Messages

• Post COVID 19 Economic Recovery

– Post CoVID 19 Economic Stimulus Package -53.74 bn??

• Alternative source of funding - PPPs??

• Pending bills

• Austerity measures and freeze on development projects

• Savings from wastages

• Debt restructuring