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Thursday, October 22, 2020

Refocus 2020/21 budget to address Covid-19 pandemic

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Kenya Vision 2030 is the country’s long-term development blueprint. Vision 2030 is geared towards transform Kenya into a newly industrializing, globally competitive, and prosperous upper middle-income country with a high quality of life for all citizens by 2030. The Vision is anchored on three pillars; economic pillar, social pillar and the political pillar.  The Vision is implemented in 5-year successive Medium-Term Plans.

  1. The First Medium Term Plan covered the period 2008-2012
  2. The Second Medium Term Plan covered the period 2013-2017
  3. The Third Medium Term Plan (MTP III) will guide the country’s development agenda between 2018 and 2022.

The Third Medium Term Plan (MTP III) outlines the main policies, legal and institutional reforms as well as programmes and projects that the Government plans to implement during the period 2018-2022. It prioritizes the “Big four” agenda of manufacturing, affordable housing, food and nutrition security and universal health coverage. The current budget of 2019/20 and the next budget 2020/21 fall under the MTP III.

The budget process in Kenya is guided by the constitution and the Public Finance Management (PFM) Act, 2012. Contrary to what most Kenyans understand it to be, as a document read by the cabinet secretary of the national treasury in parliament every June, the budget preparation process for a Financial Year (which is July to June) starts as early 30th August of the previous Financial Year.

There are several processes and timelines to be met between the beginning of the process to the end. This includes preparation of the Budget Review and Outlook Paper (BROP), public participation process anchored in law for validation of budget proposals, submission of sector reports to Treasury, submission of Budget Policy Statement (BPS) to the Cabinet and Parliament, submission of draft budget estimates to the Cabinet and Parliament, the annual Budget Statement read in Parliament and approval of Appropriation Bill, among other processes.

Currently, the national assembly is expected to have a special sitting on the 8th April 2020 and part of the agenda is tabling of supplementary estimates for the Financial Year 2019/20 and tabling of the Public Finance Management (COVID-19 Emergency Fund Response) Regulations 2020 and the Tax laws (Amendment) Bill 2020 containing part of the legislative measures to address the taxation regime occasioned by the COVID-19 pandemic.

A Supplementary Budget is anchored in Article 223 of the Constitution. The provision states that “the National Government may spend money that has not been appropriated, if the amount appropriated for any purpose under the Appropriation Act is insufficient or a need has arisen for expenditure for a purpose for which no amount has been appropriated by that Act; or money has been withdrawn from the Contingencies Fund.”

To this end, a Supplementary Budget arises as a result of increases in revenue, increases in expenditure due to external funding through budgetary support, savings from revision of programs, shortfall in resources thus necessitating budget cuts, emergencies or unforeseen expenditures and reallocation(s) within a program.

Budget: President Uhuru Kenyatta and Treasury Cabinet Secretary Ukur Yattani
Budget: President Uhuru Kenyatta and Treasury Cabinet Secretary Ukur Yattani

There is no guessing why a supplementary budget is necessitated in the last quarter of 2019/20, it is to immediately address the COVID-19 situation. Its important to note that the 1st Supplementary estimate for FY 2019/20 was tabled in parliament on 12th November 2019 and proposed to increase the overall budget by Kshs. 80.1 billion.

For FY 2020/21, the Budget Policy Statement was prepared without any consideration to the current global crisis of COVID-19. It premises on a projected economic growth of 6.1% in 2020 from a 5.6% in 2019. This is to be supported by a strong rebound in the agricultural output, steady recovery in industrial activities, robust performance in the services sector, and strategic investments under the “Big Four” Agenda.

In the “risks to the economic outlook” section, there is no consideration of a pandemic of this proportion that is expected to have a catastrophic effect on the local economy. As we come to the end of the budgeting process for FY2020/21 and the realization of the effects COVID-19 on the economy in the coming financial year, the government must revise its budget estimates for 2020/21 to factor the prevailing circumstances.

SMEs response to COVID-19 crisis in Kenya

Even before the COVID-19 pandemic, the World Bank had projected a modest global economic growth of 2.5%. With COVID-19 pandemic and the uncertainty of the length of time before normalcy is resumed, it is definite that there will be a negative growth of the global economy in 2020.

Negative economic growth will have devastating effects especially for developing economies like Kenya which relies a lot on the developed economies for investments, trade, tourism and financial aid. What measures can the government introduce through the budget process to mitigate against the current pandemic? How should the government realign and restructure its budget to accommodate the realities of COVID-19 and its impact on our economy.

Globally, governments are introducing economic and social stimulus packages to cushion their citizens from the adverse effects of this pandemic. Does our government have the fiscal space to manoeuvre during this difficult time?

The reduction in collection of revenue over the years and the unmet ordinary revenue targets, ballooning government expenditure and resulting public debt weight will make it difficult for the government to institute meaningful measures to cushion the economy, businesses and ordinary citizens against the adverse effects of COVID-19.

Nonetheless, some realities have to be addressed immediately. The Kshs. 2.815 trillion FY2019/20 budget was to be financed partly by an estimated ordinary revenue collection of Kshs 1.851 trillion. KRA have consistently missed the revenue targets over the last few years partly due to unrealistic revenue targets given by the National Treasury. In 2018/19, the shortfall in ordinary revenue was Kshs 91.2 billion and in the current year 2019/20, it’s expected to be worse.

The parliamentary budget office has estimated that the tax measures announced by the President to cushion the people against the effects of COVID-19 are estimated to cause a revenue shortfall of Kshs 122 billion. It may also be necessary to take more measures to stimulate the economy thus further affecting tax revenues. This together with the effects of the pandemic on tax collection will significantly reduce the actual ordinary revenue collected in 2019/20.

As the pandemic continues to exert pressure on the economy, it is most likely that 2020 will be a bad year all round. Currently, there is no indication that the pandemic will be resolved, and normalcy regained by December 2020. Its prudent therefore to assume that the effects on our revenue collection will be sustained till end of 2020 and may spill over to 2021.

The key revenue earners for KRA are income tax and VAT, estimated to fetch 73% of the projected Kshs 1.857 trillion in 2020/21 budget estimates. With job losses and reduced wages as a result of this pandemic, PAYE collection will significantly reduce in the coming year. The anticipated low consumption and production in the economy coupled by low purchasing power will reduce profits for businesses and subsequently translate to reduced corporation tax collection for KRA.

Constrained consumption of goods and services locally and reduced importation of vat-able goods coupled with the reduction of the VAT rate from 16% to 14% will also translate to a significant reduction in VAT collection for KRA. It therefore goes without saying that KRA will be very lucky to collect Kshs 1 trillion of the budgeted Kshs 1.857 trillion in the next Financial Year. The government revenue estimates should therefore be revised accordingly.

If we are to revise our ordinary revenue downwards, then we must also adjust the government spending downwards. For a long time now, the government has been urged to live within its means but has adamantly refused to do so.

In the FY 2020/21 budget estimates, the government has budgeted to spend Kshs 2.748 trillion (Kshs 1.781 trillion in recurrent expenditure and Kshs 587.3 billion in development budget). Based on the current situation, it’s not practical to have such expenditure budgets. Drastic measures must be put in place to reduce overall government spending in the coming year if we are to survive the effects of this pandemic.

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For starters, the recurrent expenditure will have to come down significantly. For a long time, the government has promised to rationalize recurrent expenditure but has failed to do so. Wastage of resources in unnecessary and unhelpful expenditure must come to a halt. Wages and benefits budgeted at Kshs 500 billion for the coming year must be reduced.

The President announced that most senior executives including the Presidency will get a salary cut and he has urged the parliament and judiciary to follow suit. At a time when Kenyans are losing their jobs or getting 50-70% pay cuts, civil servants must follow suit and take pay cuts in order to manage government spending.

Interest payments are budgeted at Kshs 456 billion and other recurrent expenditure at Kshs 705 billion. The government should enter into agreements with lenders to waive interest payments for the coming year in order to utilize that money to stabilize the economy. Other re-current expenditures must also be reduced significantly to create savings.

As noted by the CS National Treasury during his launch of the FY2020/21 budget process, the expenditure control and policy measures include budget rationalization on non-core expenditures which include foreign and domestic travel, hospitality, training, communication supplies, printing and advertising, purchase of furniture, office and general supplies, use of government vehicles, and size of government delegation in meetings amongst others. These measures and controls must be strictly adhered to.

Development expenditure budgeted at Kshs 587 billion must be reassessed. In the coming year, capital expenditure should not be a priority for the government unless it’s essential in the situation for example capital expenditure necessary in the health sector or agriculture for food and nutrition security.

Kenya is riddled with stalled government projects. Consecutive governments have used development projects as campaign tools, therefore starting projects all over the country with no desire or budget to complete them. According to the chairman of the Budget and Appropriation Committee Hon. Kimani Ichungwa, it is estimated that by June 2018, there were Kshs 396.9 billion worth of stalled national government projects in the country.

Recently, the government directed that no new projects should be undertaken without the approval of the cabinet. The government therefore needs to look at this budget item and reallocate significant portion to the measures required to protect the economy from the effects of COVID-19.

County governments have constantly been accused of misappropriation of funds as evidenced by many governors summoned either by the Senate Committees or EACC and the prosecution of some in the corridors of justice. The Auditor General reports adversely mention many of the counties leaving Kenyans wondering whether they get value for money. County governments too must contribute during this difficult time to assist the central government protect the economy from a collapse.

Although legislative amendments to the Division of Revenue Act, 2019 and County Allocation of Revenue Act, 2019 may be required to reduce funds allocated to the county governments, this may be necessary. This is because once revenue is allocated to the county governments, any actual shortfall of revenue collected during that year is borne by the national government. The same may be considered for the next financial year 2020/21.

After revision of revenues downwards and rationalization of government expenditure, we would still have a deficit that will need to be financed by borrowing, both foreign and domestic. In recent times, public debt has been an issue of concern to many resulting in a debate as to whether the government is borrowing more than it should. Of course, public debt is very high and could be approaching unsustainable levels.

As at December 2019, public debt was at Kshs 6 trillion (Kshs 3.1 trillion foreign debt and Kshs 2.9 trillion domestic debt). The increasing debt was a result of unprecedented infrastructural investments, cost of free government services and debt refinancing. Because public debt is forecasted to increase but the GDP may not grow significantly, the percentage of debt to GDP will increase. Borrowing should therefore be keenly monitored to ensure it supports vital sectors of the economy during these hard times.

Authored by;

Abdi Dubat - Managing Partner at Umuro Wario and Associates - SME Covid-19 - Bizna
Abdi Dubat – MBA, FCCA, CPA_K Managing Partner at Umuro Wario and Associates – Bizna

Abdi is a highly Experienced Auditor and professional consultant with unparalleled expertise in tax advisory, corporate finance, audit of corporate and government institutions, business strategy formulation and implementation. policy and governance, donor-funded agency compliance, SME support including review of business process, setting up systemic Structured and financial management training.

Abdi is an exemplary leader with an extensive track-record in leading dynamic across the region, delivering stellar results in number of complex projects undertaken.

He has over 20 years’ experience in the field of Audit, Tax, advisory and consultancy providing services to a wide range of clients in different industries and the region.

Abdi is a qualified accountant (FCCA) and a CPA (K). He a member of the association of Chartered Certified Accountants (ACCA), UK and is a practicing member of the Institute of Certified Public Accountants of Kenya (ICPAK).

Abdi is currently pursuing his PHD (Accounting) at the University of Nairobi and holds an MBA (Strategic Management) and a Bachelor of Commerce (Finance) from the same university.

Abdi is the Managing Partner of Umuro Wario and Associates.

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