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Kenya's budget cut

10 October 2019 William Farmer

Kenya's Cabinet approved on 30 September an additional 2.1% cut to the 2019/20 state budget. At the time of writing, the Kenyan government has yet to publish confirmation that the Cabinet approved the proposed cut, but we expect this to be announced, even if it entails a delay of around one week. The reduction will then be subject to parliamentary approval under the Public Finance Management Act. The cut would be made to recurrent expenditure, most notably public-sector wages, thereby increasing strike risks in several counties. Over the coming two years, we assess that the budget is likely to be rationalized further by focusing development expenditure on completing projects that are already at an advanced stage of implementation.

The proposed additional budget cut is unpopular with parliamentarians, but we assess that it is likely to be approved before November. The Cabinet's approval relates to a draft budget review first published by the National Treasury on 19 September. This proposed a 2.1% cut to Kenya's 2019/20 budget, totaling around USD450 million. A major priority for President Uhuru Kenyatta's government is to reduce the budget deficit, with the goal of cutting it from 7.6% of GDP in 2018/19 to 5.9% in 2019/20; on 19 September, Acting Finance Minister Ukur Yatani announced plans to lower the budget deficit further, targeting 3.5% of GDP by 2022/23. Fiscal consolidation efforts have been set back by the revised and lower revenue outcome for the 2018/19 fiscal year (FY), plus shortfalls in revenue collection during June–July 2019. Proposals to raise taxes under the previous budget have largely been rejected. For example, both houses of parliament – opposition and ruling party members alike – rejected an increase in household taxes amid concerns that it would raise the cost of living.

Yatani stated that the budget cut would target unnecessary expenses such as government representatives' foreign travel costs, while also trimming other recurrent expenditures such as public-sector wages, increasing the likelihood of strikes. The budget review called for a "concerted effort" from county governments to reduce their wage bills. Despite a law capping wage bills at 35% of total expenditure, county governments have only reduced their wage bills from 58.8% of total expenditure over the first nine months of FY 2017/18 to 52.3% over the same period of FY 2018/19. In the increasingly likely event of salary cuts, payment arrears, or redundancies, county employees are likely to conduct more frequent and prolonged strikes during 2019–20. Accompanying protests are likely to be peaceful, staged outside local government buildings, and last up to several weeks. Unrest risks are highest in the six counties where salaries account for a particularly large proportion of spending, including Laikipia (a popular area for tourism) and Machakos (home to a cement factory and an export processing zone in the Athi River area).

Development expenditure allocated under the 2019/20 budget to well-advanced projects is unlikely to be affected, although Yatani's budget review statement indicated that early-stage projects face risks of delay. From July 2018, the government placed a moratorium on new development projects, which it intends to maintain throughout 2019/20. On 12 September, Yatani stated that the 2020/21 budget allocations for development spending would priorities projects nearing completion to maximize the effectiveness of outlays for taxpayers. As such, majority government-funded projects which have been approved, but where construction has not started or is at an early stage, such as the Konza ICT City, are more likely to be delayed or cancelled.

Additionally, projects in the Rift Valley, especially those in Baringo, Bomet, Elgeyo-Marakwet, Kericho, Nandi, Uasin Gishu, and Trans-Nzoia counties, also are likely to face revision, delay or cancellation. We assess that President Kenyatta and main opposition leader Raila Odinga will seek to undermine Deputy President William Ruto's credibility for bringing development to his home region ahead of the 2022 presidential election. On 11 September, Kenyatta cancelled the Kimwarer Dam project in Elgeyo-Marakwet county after a feasibility study deemed the project economically unviable. An earlier probe into this dam project resulted in former finance minister Henry Rotich being charged with corruption offences; Rotich denies these charges. While also located in Elgeyo-Marakwet county and subject to corruption investigations, the Arror Dam project received presidential approval for construction to continue, but only after its capacity was decreased by reducing its height from 96 meters to 60 m. This follows Ruto's loss of control over development project funding and oversight in January when Kenyatta promoted his ally Interior Minister Fred Matiang'I to oversee development projects.

Posted 10 October 2019 by William Farmer, Analyst, Sub-Saharan Africa, Country Risk, IHS Markit

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