Kenya’s MPs push for suspension of projects in austerity drive
Tuesday April 06 2021
Kenya’s Parliamentary Budget Office (PBO) has advised the National Treasury to defer projects by one year.
This comes even as Cabinet Secretary for the National Treasury, Ukur Yatani, prepares to table a spending plan for Ksh3 trillion ($27.52 billion) in the 2021/22 fiscal year amid growing pressure to control public expenditure, reduce borrowing and put off new projects to save a struggling economy.
PBO wants Treasury to rationalise recurrent spending as much as possible and freeze nominal expenditure growth for all spending categories particularly growth supportive sectors such as energy and infrastructure.
The MPs have also demanded that infrastructure spending be limited to major road networks and that the government should reinforce the work-from-home option for public servants and encourage shift to online platforms for meetings to reduce demands on operations and maintenance.
The lawmakers, through a report called “Evading recessionary pressure under a mounting debt burden: Budget Options for 2021/2022 and the Medium Term”, have also proposed a merger of State Corporations to reduce government spending.
However, the merger of state corporations should be implemented in a way that reduces operation costs and absorbs a large portion of the current workforce to avoid costly litigation due to loss of jobs.
According to the report, Kenya’s debt repayments is taking a large share of tax revenues, which would otherwise be used to stimulate recovery for an economy whose growth contracted to 0.6 per cent last year, down from 5.4 per cent in 2019.
“With the low growth, low revenues, high expenditure, and high debt service pressure the design of expenditure policy should shift towards extracting maximum value from each tax shilling collected or debt shilling incurred,” says report.
Kenya’s debt repayment expenditure, estimated at Ksh925 billion ($8.48 billion) in the current (2020/21) fiscal year is expected to reach Ksh1.02 trillion ($9.35 billion) by the end of the next financial (2021/2022).
Tax revenue as a share of GDP declined to 14 per cent in 2019/2020 fiscal year from 17 per cent in 2013/14, with the largest decline in income tax and value added tax.
“As we finalise preparation of the budget for the 2021/2022 fiscal year, we are cognisant of the prevailing unfavourable economic conditions which have adversely affected revenue performance,” Mr Yatani said in his budget policy statement.
“At the same time, additional expenditure requests for FY 2020/21 budget are at unprecedented levels which necessitated alignment of expenditures to the available fiscal space.”
He said the budget will focus on economic and industrial recovery to safeguard livelihoods, jobs, and businesses.
The MPs have also proposed the revival of exports to drive growth and enhance foreign exchange receipts by extending duty relief and exemptions scheme on imported intermediate inputs for exporting firms.
They want closer scrutiny and parliamentary approval of public-private partnerships given the contingent risks often embedded in such long-term and large-scale projects.
Enhanced foreign reserves are needed to cover the increasing foreign debt repayments given that over the past decade growth in interest payments on foreign debt has outpaced growth in exports of goods and services.
It is estimated that interest payment on foreign debt has increased from about one per cent of exports of goods and services to close to 10 per cent.
It is argued that the increase in the share of revenue used to pay both external and domestic debt may also hamper efforts to reduce the expanding fiscal deficit.
According to the PBO, the government should shore up the manufacturing sector by increasing funding to institutions such as the Kenya Industrial Estates that support innovation and development of small-scale industries.
Funding to initiatives like Brand Kenya should also be increased to grow exports through identification of foreign markets.
PBO says more money should be provided to the National Social Safety Net programme and the vulnerable cohort expanded to reach poor households in urban areas, unemployed youth and chronically unemployed and poor job-seekers given the large negative impact of the ongoing economic downturn.
In 2020/21 fiscal year the programme was allocated Ksh26 billion ($238.53 million) through the cash-transfer project.
Kenya’s economy contracted to 0.6 per cent last year and is projected to grow by 1.3 percent in 2021.
However, there are fears that the election fever that has hit the country rather early on account of the Building Bridges Initiative (BBI) referendum drive as well as various by-elections could slow growth.
The US Congress is set to approve $650 billion in global reserves or Special Drawing Rights (SDR) held by the International Monetary Fund, to provide temporary financial relief to low-income countries, especially in Africa, hard hit by the coronavirus pandemic.
Africa urgently needs an economic relief package that includes loan restructuring, debt relief and a reallocation of SDRs from rich countries to navigate the challenge of a health and economic crisis.
Last week, Rwanda’s President Paul Kagame reaffirmed that a new issuance of SDR would enhance liquidity but called for a system of accountability for how SDRs are used, as well as a method of allocating them according to need rather than quota.
“Recovery from the Covid-19 pandemic depends on adequate fiscal space and liquidity. However, some countries can finance their own recovery through quantitative easing. The rest must borrow from private or public creditors. Without corrective action, this divergence will entrench a profoundly unequal global order, in which the poor have no chance of ever catching up with the prosperous,” President Kagame said during a virtual meeting on international debt architecture and liquidity.
No additional legislation
Under the Special Drawing Rights Act, Congress has authorised the Secretary of the Treasury to support an SDR allocation without additional legislation where the amount allocated to the US does not exceed the current US quota in the IMF in the applicable five-year period.
Based on the $650 billion allocation, the US with 16.5 percent of the votes, will receive about $113 billion in SDRs.
Countries need to access global reserves at the IMF to boost their depleted international reserves that have come under attack due to pandemic containment related expenses.
The pandemic has also reduced foreign investment, demand for key exports and hit hard the tourism sectors which generate most of foreign exchange inflows.
The IMF estimates that low-income countries will need to deploy around $200 billion over the next five years just to fight the pandemic and an additional $250 billion to return to the path of catching up with advanced economies.
The US Treasury notified Congress of its support for $650 billion in IMF global reserves, also known as Special Drawing Rights (SDRs), to assist developing countries struggling with the coronavirus crisis.
A decision by the US congress is required as it is the largest shareholder of the IMF with 16.51 percent of the votes. Once the allocation is approved, approximately $224 billion will immediately go to developing low-income and middle-income countries in the creation of $650 billion SDRs.
The US Treasury has called for the remaining amount to be donated to support vulnerable countries. SDRs were last created following the 2008 financial crisis.
“If approved, a new allocation of SDRs would add a substantial, direct liquidity boost to countries, without adding to debt burdens. It would also free up badly needed resources for member countries to help fight the pandemic, including to support vaccination programs and other urgent measures. And it would complement the range of tools deployed by the IMF to support our membership in this time of crisis.” said Kristalina Georgieva, Managing Director of the IMF in a statement issued on March 23.
The statement was issued after conclusion of an informal discussion of the IMF’s Executive Directors on the technical case for a SDR general allocation.
However, given that SDRs are allocated in proportion to each country’s shareholding (quota) in the IMF, what is required is for the largest shareholders of the bank to reallocate their unused reserves to low income countries. For instance, Africa’s current shareholding of the IMF is just about seven percent.
Countries need to find a willing country to provide them with hard currency in exchange for their SDRs.