KENYA BUDGET SPEECH 2020/21

By Alex Mathini Thursday, June 11, 2020
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The Cabinet Secretary (“the CS”) responsible for the National Treasury, Ambassador Ukur Yattani, delivered his maiden Budget Speech on 9th June 2020 to what was a largely empty House of Parliament because of the Covid-19 restrictions.  The theme for this year’s budget is: “Stimulating the Economy to Safeguard Livelihoods, Jobs, Business and Industrial Recovery”.  His speech simply reiterated what was already public knowledge in that under the requirements of the Constitution, the expenditure and revenue estimates had been tabled at the end of April through the expenditure estimates and Finance Bill 2020 (“the Bill”).  Our newsflash dated 8 May 2020 analysed the proposed tax and other measures included in the Bill.  The only new measures announced in the speech related to customs duty which are agreed upon by East African Community member states and will take effect on 1st July 2020.

The annual Budget Policy Statement (“the BPS”) was issued in February 2020 and as the CS rightly pointed out, the economic environment was vastly different from where we find ourselves today.  The Covid-19 pandemic has devastated not only the Kenyan economy but most economies around the world.  In this unprecedented time, the CS has had to revise estimates presented in the BPS to take account of the new normal – an economy that is in free fall with unemployment rising.  Pre the pandemic, the economy was meant to grow at 6.1% in 2020 up from 5.4% in 2019.  The IMF, in a recent report, has projected that global economies are expected to contract by as much as 3% (growing to 5.8% in 2021) and indeed that Kenya’s GDP will likely be 1% for 2020.  The CS was somewhat more optimistic suggesting that the economy would grow by 2.5% and expecting growth of 5.8% in 2021 rising to 6.5% by 2024.

Economy

The Kenyan economy has been battered by the pandemic but added to that was the infestation of desert locusts and floods that have resulted in destruction of homes, deaths, agricultural output and infrastructure.  It was with this backdrop that the CS presented his 2020/21 Budget.  The fiscal deficit for the current financial year (ending on 30th June) is expected to be 8.3% of GDP up from 6.3% in the previous year.  The deficit is projected to improve to 7.5% and 6.1% in the following two fiscal years.  Again this seems rather optimistic given the current state of the economy.  The Kenya Revenue Authority (“KRA”) recently report that its collections in April 2020 were KES 20.1 billion lower than the same month in 2019.  While KRA have not met targets in the last few years, they have consistently shown year on year growth in collections.  The drop in April – a critical month in the tax payment cycle – is ominous.

The CS acknowledged that the country is “still confronted by perennial challenges of high incidences of poverty and unemployment, frequent droughts, low agricultural and industrial productivity, inadequate decent housing, growing demands for higher investment in the health sector, inadequate revenue and other forms of financing and governance related issues”.  These challenges are not new and have featured in previous budget speeches but little, if anything, has changed.  With the Covid-19 issue growing, it is difficult to see how any of the measures, both from an expenditure and revenue perspective, will change the situation for the better.  Corruption and general wastage by government did not garner a significant mention in the speech.

With this backdrop, the CS has decided to focus on an economic stimulus programme to; maintain macroeconomic stability; support Micro Small and Medium size enterprises through the “Buy Kenya Build Kenya” initiative; support the Big 4 Agenda; infrastructure development; support the youth, women and those with disabilities; improve education and strengthen health care; help counties to strengthen their systems and service delivery; and implement structural reforms to enhance delivery of services to the public.  These too have featured in previous budgets and it does not seem that anything new or innovative is proposed.

The country’s debt has risen significantly over the last few years and its composition has also changed with a little over half the debt now coming from external sources with higher interest rates and greater risk of exchange rate fluctuation.  The CS, however, believes that the debt levels are sustainable but agreed that there was a need to move back to more concessional loans.  The government has received loans from the IMF and World Bank amounting to US$ 739 million and US$ 1 billion respectively on concessional terms to help protect against the shock of the pandemic.  He also announced that the government would revitalise the Public Private Partnership framework by removing unnecessary approvals and regulations and strengthening the institutions handling this area.

Tax Measures

The tax measures have already been issued in the Bill and were analysed in a previous newsflash.  The new measures announced related to customs duties, which under the East African Community protocol will come into effect on 1st July 2020.  The measures proposed include:

  • Imports of iron and steel products will be subject to 35% import duty for a further year;
  • Imported paper and paper board products will continue to attract import duty of 25% for a further year;
  • To support the manufacture of baby diapers, inputs and raw materials will be duty free;
  • Inputs for the production of new clothing and apparel will be imported duty free;
  • Inputs for the assembly or manufacture of mobile phones will be imported duty free;
  • To protect the local leather and footwear industry, the rates set last year on imported goods will remain in force;
  • Imports of raw materials and inputs for the manufacture of personal protective equipment and sanitisers will be duty free; and
  • Supplies for the diagnosis, prevention, treatment and management of pandemics, epidemics and health hazards will be duty free.

There may well be other measures which will be included in the East African community gazette notice generally issued on 1st July every year.

Conclusion

The Budget speech did not necessarily provide any solutions to the perineal challenges facing the country and in some ways simply repeated what we have heard before.  In the current environment it is very unlikely that the economy will bounce back before 2021 and by all accounts 2020 is going to be a difficult year.