Kenyan Economy on its Death-bed-Parliamentary think-tank
The Parliamentary Budget Office (PBO), a non-partisan professional office of the Parliament of Kenya, has released a report that unpacks the estimates of revenue and expenditure for the financial year 2023-2024 and the medium term. The report paints a gloomy picture of the economic outlook for Kenya, highlighting the challenges and risks that the country faces amid a weak recovery from the COVID-19 pandemic and other shocks.
According to the report², the 2023-24 budget is the first under the current government administration and is expected to set the pace of economic performance for the next five years. However, the budget has been prepared against a background of significant global economic uncertainty with the ongoing Russia-Ukraine conflict, agitated financial markets, and tightening monetary policy which have led to a significant slowdown in economic growth.
On the domestic front, the economy is experiencing significant macroeconomic challenges. Lingering effects of drought continue to pose a risk to increased agricultural production, even as the 2023 long rains are expected to enhance food security in the coming months. The business environment has deteriorated, denoted by a decline in the PMI index in the first quarter of 2023 to 47.2 percent²; attributed to a cutback in consumer spending due to high inflation. The Kenya shilling has declined significantly against the dollar resulting in a reduction of the forex reserves below the statutory four months of import cover and increasing the risk of debt distress. Indeed, the country is facing an increasingly vulnerable debt position underpinned by undersubscription of domestic bond issuance, constrained access to international capital markets and a downgraded credit rating by S&P from stable to negative which has increased the country’s risk profile.
The report notes that the 2023-24 budget faces the unenviable task of rebalancing the economy by implementing corrective policies aimed at addressing debt vulnerabilities while at the same time using available fiscal space to implement structural policies that will boost investment and economic productivity. The report evaluates the budget estimates using four criteria: adherence to legal provisions, assessment of allocative efficiency, credibility of the macro-fiscal framework, and alignment with medium-term priorities.
The report finds that the budget documents as presented comply with the constitutional provisions, Public Finance Management Act, PFM regulations, National Assembly standing orders, and other applicable laws. However, the report raises concerns about the quality and timeliness of the budget information, the lack of a clear link between the budget and the government’s strategic priorities, and the limited public participation in the budget process.
The report also assesses the allocative efficiency of the budget, which measures how well the budget resources are allocated to achieve the desired outcomes. The report observes that the budget allocation is skewed towards recurrent expenditure, which accounts for 72 percent of the total budget, leaving only 28 percent for development expenditure. The report also notes that the budget allocation does not reflect the government’s priority sectors, such as health, education, agriculture, and social protection, which receive less than the recommended minimum thresholds. The report further points out that the budget allocation is not aligned with the performance of the sectors, as some of the poorly performing sectors, such as energy, infrastructure, and ICT, receive more resources than some of the better performing sectors, such as environment, water, and natural resources.
The report also examines the credibility of the macro-fiscal framework, which refers to the consistency and realism of the macroeconomic and fiscal assumptions and projections that underpin the budget. The report finds that the macro-fiscal framework is overly optimistic and does not reflect the prevailing economic conditions and risks. The report argues that the projected GDP growth of 5.6 percent in 2023 and 6.0 percent in 2024 is unrealistic, given the weak recovery from the COVID-19 pandemic and other shocks, and the constrained fiscal and monetary policy space. The report also questions the projected revenue growth of 16.8 percent in 2023-24, which is based on optimistic assumptions about tax compliance, tax policy reforms, and economic activity. The report warns that the projected revenue shortfall could lead to increased borrowing and debt accumulation, which could further undermine the fiscal sustainability and macroeconomic stability of the country.
The report also evaluates the alignment of the budget with the medium-term priorities of the government, which are outlined in the Third Medium Term Plan (MTP III) of the Vision 2030, the Big Four Agenda, and the Post-COVID-19 Economic Recovery Strategy. The report finds that the budget does not adequately reflect the medium-term priorities of the government, as there is no clear link between the budget programs and the strategic objectives and targets of the MTP III, the Big Four Agenda, and the Post-COVID-19 Economic Recovery Strategy. The report also notes that the budget does not provide sufficient information on the expected outcomes and impacts of the budget programs, making it difficult to monitor and evaluate the performance and accountability of the budget.
The report concludes that the 2023-24 budget is not likely to achieve the desired economic and social outcomes for the country, given the challenging and uncertain economic environment, the weak macro-fiscal framework, the inefficient allocation of resources, and the lack of alignment with the medium-term priorities. The report recommends that the government should undertake a comprehensive review of the budget to address the gaps and weaknesses identified in the report, and to ensure that the budget is responsive to the needs and aspirations of the Kenyan people.