The Need To Reduce Recurrent Expenditure To Attain Fiscal Consolidation

On 10^th June 2021, the National Treasury presented Kenya’s FY’2021/2022 National Budget to the National Assembly highlighting that the total budget estimate is Kshs 3.0 tn, a 4.8% increase from the Kshs 2.9 tn final FY’2020/21 budget.

The government projects that total revenue will increase by 10.3% to Kshs 2.0 tn, from the Kshs 1.8 tn in FY’2020/2021. The increase largely being projected to come from ordinary revenue, which is to grow by 11.4% to Kshs 1.8 tn in FY’2021/22 from Kshs 1.6 tn in the FY’2020/21 budget.

On the other hand, the total expenditure is expected to increase by 4.8% to Kshs 3.0 tn in FY’2021/22, from Kshs 2.9 tn in the FY’2020/21 budget mainly attributable to an 8.4% increase in recurrent expenditure to Kshs 2.0 tn from Kshs 1.8 tn in FY’2020/21.

However, Development Expenditure is expected to decline by 5.9% in FY’2021/22 to Kshs 655.4 bn from Kshs 696.6 bn in FY’2020/21, the first decline since FY’2017/18.

The decline in development expenditure is in line with the government’s fiscal consolidation efforts where it intends to cut down on expenditure to help reduce the need to take on debt.

The main concern from this budget is the growth of the recurrent expenditure by 8.4% and the increasing proportion of recurrent expenditure to total expenditure to 75.4% from 72.6% in FY’2020/21, meaning that we are not investing much for the future.

The total borrowing for FY’2021/22 is set to reduce by 4.2% to Kshs 929.7 bn, from Kshs 970.9 bn, in the FY’2020/21 budget, mainly attributable to a 36.5% decline in net foreign borrowing to Kshs 271.2 bn in FY’2021/22 from Kshs 427.0 bn in the FY’2020/21 budget.

The public debt mix is projected to comprise of 29.2% foreign debt and 70.8% domestic debt, from 44.0% foreign and 56.0% domestic as per the FY’2020/21 budget while the debt servicing costs are set to rise by 22.1% to Kshs 560.3 bn in FY’2021/22.

Debt sustainability continues to be a key concern, with the country’s public debt–to-GDP ratio having increased considerably over the past five years to 69.6% as at December 2020, from 44.3% as at the end of 2013 with half of the debt being external.

In the current fiscal year 2020/21, Kenya has seen revenue underperformance attributable mainly to the adverse effects of the COVID-19 pandemic on the economy for most parts of 2020.

According to the most recent data as of 31^st May 2021, the total revenue collected amounted to Kshs 2.4 tn, equivalent to 80.1% of the revised target of Kshs 2.9 tn and is 83.3% of the prorated estimates.

External loans & grants and Non-tax revenue recorded the highest underperformance coming in at 29.7% and 64.8% of the revised targets.

Uganda and Tanzania also released their FY’2021/2022 budgets on 10th June 2021, with the Tanzanian budget expanding by 20.9%, mainly due to higher allocation in both recurrent and development expenditure, and the Ugandan Budget declining by 5.6%, mainly attributable to the Ugandan government’s fiscal consolidation efforts which will see a reduction in projected development expenditure by 4.5% in FY’2021/22.

The three economies expect significant recovery from COVID-19-related negative effects, to boost their revenue. Kenya projects its total revenues plus grants to grow by 9.3% in FY’2021/22, while Uganda projects a 10.2% growth to Kshs 727.9 bn, from Kshs 660.4 bn in FY’2020/21.

Tanzania’s revenue levels are also expected to increase by 21.6% to Kshs 1.2 tn, from Kshs 1.0 tn in FY’2020/21 mainly attributable to an expected 20.6% increase in tax revenue collections on the back of improved business activities especially as Tanzania’s trading partners recover and open up their economies.

Kenya’s borrowing remains a major concern going forward with its current public debt burden at 69.6% compared to Uganda’s 49.8% and Tanzania’s 27.1%.

Additionally, Kenya’s fiscal deficit is projected to stand at 7.5% in FY’2021/22, higher than both Uganda’s 6.4% and Tanzania’s 6.0%. The government of Kenya needs to seek more sustainable ways of minimizing their expenditure levels to help reduce the need for borrowing and leverage on the revenue-generating bases to help service the existing debts.

For more information, please see our topical on Kenya’s FY’2021/2022 Budget Review.