Commentary On BAC Report On The 2021 Budget Policy Statement

Giving credit where it’s due, we applaud the alacrity in which the Budget and Appropriations Committee (BAC) report on the 2021 Budget Policy Statement (BPS) and 2021 Medium Term Debt Management Strategy (MTDS) was approved in last Thursday’s sitting sessions of the National Assembly.

Mirroring local folklore, Simon Makonde, the report was tabled in the morning sitting session, debated in the afternoon sitting session, and approved in the evening sitting session. That deserves applause.

We also commend BAC’s retention of spending targets to the national government and counties (equitable revenue share) at KES 1.966Tn and KES 370Bn, respectively, as proposed in the 2021 BPS.

The spending ceilings in the BPS documents have not been adhered to in the final budget estimates. Therefore, the BAC report recommending the spending ceiling is worth praise. Furthermore, the Committee also capped total revenue and net borrowing at KES 2.034Tn and KES 930.0Bn, respectively.

Again, these broadly gave a thumbs up to the targets proposed in the 2021 BPS. The Committee request to the National Treasury to align the borrowing strategy in the BPS 2021 and the 2021 MTDS, is also not much of an asking.

As far as the length of the good city’ goes, this marks the farthest distance we can go. Buckle up as we take a tour of the other city’.

For a start, we note that respective Departmental Committees requested additional spending totaling KES 240.0Bn (that’s unfunded). We have to appreciate the budget process is not a one-way street but has twists and turns. To be sure, we had previously highlighted in our “Draft 2021 Budget Policy Statement: Confessions from the draft data”, the fact that the budgetary requirements at the macro-sector working group (in late November 2020) totaled KES 3.026Tn (2021 BPS ceiling: KES 1.966Tn).

Against that backdrop, it’s easy to see the additional spending requests percolating through at this point of the budget process.

On the equitable revenue share to counties in FY2021/22, BAC approved the total amount at KES 370.0Bn. The breakdown of the equitable revenue share as indicated in the 2021 BPS had baseline allocation (KES 316.5Bn), adjustment for revenue growth (KES 36.1Bn), and conversion of four conditional allocations to unconditional allocation (KES 17.4Bn).

The BAC expressed its reservation with the conversion of the road maintenance levy fund as in its view, it’s a violation of the Road Maintenance Levy Fund Act of 1993. That being the case, BAC could have put (or in this case, reduced) money where their mouth is as part of its policy recommendation, but it chose the path of least resistance; kicking the can down the road.

To be exact, the draft 2021 Budget Policy Statement had allocated KES 9.9Bn as the 15% share of the Road Maintenance Levy from the national government. This means that had BAC’s contrarian view prevailed, the equitable share to counties would have been slashed to KES 360.1Bn.

Furthermore, BAC recommended the debt financing for the next fiscal year at 57:43 split between net external financing to net domestic financing, respectively, (in line with the 2021 MTDS) and also capped the target at KES 930.0Bn (as 2021 BPS). This implies KES 530.0Bn and KES 400.0Bn in net external and net domestic financing, respectively.

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That being the case, BAC amended the proposal during the debate of the report to reflect a 43:57 split between net external financing (KES 400.0Bn) to net domestic financing (KES 530.0Bn). This implies that the external financing target has been revised upwards by KES 132.7Bn from KES 267.3Bn (2021 BPS). At this juncture, it’s really hard to pinpoint the exact sources of this increased external financing.

On the flip side, the BAC recommendation will reduce net domestic borrowing from the elevated level of KES 662.8Bn to ‘manageable’ KES 530.0Bn; lowering the risk of crowding out of the private sector. That said, although BAC has tasked the reduction in the quantum of T-bills by KES 200Bn in a month’s time, we see execution risks to this policy recommendation.

The other thing that caught our attention in the BAC report is the preempted KES 75.0Bn roads bond. To be specific, the State Department of Infrastructure has an additional funding request in the order of KES 75.0Bn that intends to fund through the roads bond. The proposed roads bond, birthed by the Kenya Roads Board (Amendment) Act, 2019, has had false starts in the past.

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Further, the report acknowledged that the sector had accumulated arrears to the private sector of a similar quantum and it is less clear cut whether the roads bond will finance these lagged payments. Nonetheless, we are of the view that the proposed road bond will get in the way of the overall target of borrowing from the domestic front that has been capped at KES 730Bn. This will give legs to an overshooting in the proposed net domestic borrowing target. One has to give in with the most likely result being a relaxation of the net domestic borrowing target so as to accommodate the floating of the roads bond.

This commentary is courtesy of Genghis Capital.