Nairobi plans budget around $1.5b Eurobond even as tourism suffers
Kenya is looking to speed up growth in the coming financial year with a slew of medium-term policy projects that will send the government on an unprecedented borrowing spree and raise the tax burden but hopefully consolidate economic gains.
Finance Cabinet Secretary Henry Rotich is on Thursday expected to unveil the country’s spending plan – concurrently with Uganda, Tanzania, Rwanda and Burundi – with a Ksh1.77 trillion ($20.34 billion) budget that is way above that of other EAC member countries.
Kenya expects economic growth to rise to 6.4 per cent in 2015 from an initial forecast of 5.8 per cent this year, as it implements phase two of medium term plans of the Vision 2030 blueprint that aims to propel the country to middle-income status in under two decades.
These strategic interventions are expected to help create one million jobs per year and lift at least 10 million Kenyans out of poverty, as well as expand social protection coverage to all vulnerable members of the society. At least half of Kenya’s population is considered poor.
According to its preliminary prospectus for the $1.5 billion sovereign bond, central to its spending plans, the country’s priorities for the fiscal year 2014/15 will focus on more investment in devolution, infrastructure, diversification and commercialisation of agriculture and food security.
Funding will also be directed to boosting the performance of the manufacturing sector, improving access to African and global markets, creating more jobs for the youth and improving access to education, water and healthcare.
To attract investors, the government says it will waive tax on interest payment.
The Eurobond document shows that Kenya has allocated Ksh116.7 billion ($1.33 billion) for ongoing and new road projects and Ksh43.6 billion ($505 million) to energy-related initiatives. Infrastructure and energy are critical to improving Kenya’s economic performance.
Analysts said they were optimistic the country would successfully raise the required amount from the Eurobond.
“The focus on the next budget should be on keeping an eye on debt levels. What is critical is the success of the Eurobond because it would help to stabilise the macro-economic environment, easing pressure on interest rates and the local currency. The Eurobond will also support government projects. By easing pressure on domestic borrowing, there will be room for the private sector to borrow to stimulate growth,” said Paul Mwai, Afrika Investment Bank chief executive officer.
According to the Treasury, the government expects to finance the budget by raising Ksh1.18 trillion ($13.56 billion) through taxes and non-tax revenues.
The balance is expected to be filled through foreign debt at Ksh149.8 billion ($1.72 billion), domestic borrowing at Ksh190.8 billion ($2.19 billion) and grants at Ksh57 billion ($655 million). But this ambitious plan could be compromised by shaky revenue collections.
John Mbadi, a member of the Parliamentary Budget and Appropriations Committee said, “Given the fact that the tourism sector is already struggling and insecurity has dented Kenya’s business competitiveness, it will be difficult to raise adequate revenue to finance the whole budget.”
Private sector players argued that the high tax targets could affect businesses adversely given the prevailing harsh economic conditions.
“We would like to see tangible revenue collection measures to meet the proposed expenditure. This should be done in a way that promotes, rather than impedes, growth,” said Betty Maina, chief executive officer at the Kenya Association of Manufacturers.
Mwendia Nyaga, CEO of Oil and Energy Services Ltd, said, “The budget needs to encourage investment in productive sectors for Kenya not to have service economy that depends wholly on imported goods. There should be no tax on capital goods or withholding tax on investment. This country needs to grow exponentially.”
The Eurobond document shows that as at the end of December, total revenue amounted to Ksh460.6 billion ($5.4 billion), against a target of Ksh489.6 billion ($5.7 billion) – an underperformance of Ksh28.6 billion ($305 million).
Recently, the shilling fell to an eight-month low exchanging at Ksh87.50 to the dollar, the lowest since August last year. Experts predict the shilling will touch the 88 mark before the end of the year, although the Central Bank of Kenya is optimistic the currency will soon regain its footing, arguing that the depreciation factors were temporary.
“There was increased volatility... mainly attributed to high demand for foreign exchange from corporates repatriating dividends... The bank therefore, sold foreign exchange and stepped up open-market operations to stabilise the exchange rate,” the CBK said in its May 30 update.
Kenya expects its inflation to stay within target despite the recent rally triggered by more expensive fuel and food items. Treasury estimates that inflation will remain in the upper limit target of 7.5 per cent in 2014. Inflation rose to 7.3 per cent in May, the highest in six months, from 6.4 per cent in April.
Economists fear inflation will rise beyond the government range of 2.5 per cent and 7.5 per cent before the end of the year, given the current economic conditions.
But some business executives are cautiously optimistic. “My outlook for the economy is positive. We are in a space of development with agriculture, wholesale, retail and financial services showing strong potential for growth. These will be significant in contributing to economic growth given the challenges we are experiencing with tourism and insecurity,” said Gachao Kiuna, CEO at TransCentury, the investment firm.
Insecurity concerns due to terrorism and violent robberies have seen the country’s tourism sector, one of the leading sources of foreign exchange, grind to a near-halt due to travel advisories issued by several Western countries.
Already hundreds of permanent and casual workers have lost their jobs as hotels cut costs following the decline in customer numbers. The loss of jobs will deny the government millions of shillings in direct and indirect taxes.
“The government must urgently address insecurity and manage the ballooning public expenditure, among other challenges,” said Kwame Owino, who heads the Institute of Economic Affairs. “For example, we need to do more on security to win the confidence of both local and international communities,” Mr Owino added.
Budget documents tabled in parliament on Thursday show the education sector will take the lion’s share of the budget at 29 per cent, followed by energy and infrastructure (22 per cent).
The Treasury projects that public administration and international relations will consume 14.9 per cent of the budget while the justice, governance, law and order sector will take up 9.9 per cent.
The government plans to spend at least eight per cent on national security while investments in agricultural, rural and urban development will take a combined 5.3 per cent of the budget. Health is budgeted to take 4.2 per cent, environment, water and natural resources a combined 4.4 per cent while social protection, culture and recreation will be allocated 2.1 per cent of the budget.
“Incoming investors must be factoring in the issue of security,” said Gitahi Gachathi, the chief executive officer of EY, the audit firm.
“Other key risks include bureaucracy, infrastructure, corruption and the high cost of doing business. The good thing is that at least there is a good story in what is being done about these risks,” said Mr Gachathi.
The country’s energy sector, which will be critical in uplifting the economy, has registered sluggish growth due to the high initial capital outlay and inability to mobilise adequate financial resources to undertake massive investments.
Statistics from the Energy Ministry show that the national peak demand for power as at May 2013 had reached 1,347MW, against an installed capacity of 1,672MW, leaving the country highly exposed. The scenario is further blighted by the fact that Kenya experiences losses of close to 20 per cent on its national grid.
Kenya depends on hydropower for about 60 per cent of its energy but this has proved unreliable, especially whenever there are poor rains.
Food security has also been a challenge, with thousands of families living in arid and semi-arid areas facing the threat of starvation each year despite the country’s high potential for irrigated agriculture.
The second phase of Vision 2030 was announced in October 2013 and replaces the earlier round of policies that defined government operations between 2008 and 2012.
“The second medium term plan aims to build on the successes of the first MTP, particularly in increasing the scale and pace of economic transformation through infrastructure development, and strategic emphasis on priority sectors under the economic and social pillars of Vision 2030,” the Eurobond document says.
“Under the second MTP, transformation of the economy is focused on rapid economic growth in a stable macroeconomic environment, modernisation of infrastructure, diversification and commercialisation of agriculture, food security, and a higher contribution of manufacturing to GDP,” it adds.
In the initial year of the first MTP, Kenya focused on a number of projects that were aimed at national healing and reconciliation following the 2007 post-election violence that was triggered by disputed presidential election results.
Reported by Jeff Otieno, Joshua Masinde, Steve Mbogo and Kennedy Senelwa