A series of articles on Kenya’s 2022 budget

Kenya in particular faces risks to its economic outlook as the recovery from COVID-19 has left its economy vulnerable to external shocks. 

The world economy is recovering from the effects of the COVID-19 pandemic. It is still facing inflationary pressures, macro-policy uncertainty as Government spending and monetary policies remains in uncharted territory in 2022/2023. Uncertainty in the global economic recovery efforts has also been elevated by the Ukraine-Russia conflict.

Kenya in particular faces risks to its economic outlook as the recovery from COVID-19 has left its economy vulnerable to external shocks. The Ukraine-Russian crisis has had major impact on oil supply and prices, agricultural commodities, and metal prices around the world. Kenya Exports to Russia amounted to US$75.25 Million during 2020, according to the United Nations COMTRADE database on international trade with coffee and tea forming bulk of the exports at $43.63M.

Consequently, the effect of spikes in global oil prices has resulted in inflationary pressures that are currently being experienced through increased food, transport, and manufacturing costs. Kenya’s public debt burden having surged to 72% of GDP in 2020 has put the Government at a high risk of debt distress as highlighted by the IMF.

Outlook and risks

The inflation outlook set by the Central Bank of Kenya is expected to range between 2.5% to 7.5%, with downside risks emanating from delays in the full reopening of the economy, Government restrictions in informal sectors, failure to secure external financing to execute the 2022/2023 budget, a slowdown in global growth, recent oil price fluctuations and disruptive social conditions predicated on the 2022 electoral period and its outcome.

Kenya has embarked on efforts to curb the emerging fiscal and debt vulnerability risks through Government reforms, external financial assistance, concessional credit, debt-refinancing and restructuring that are expected to take shape in the first half of 2023. The Government efforts could be curtailed in the second half of 2022 by the upcoming political events.

Kenya’s economy is projected to grow by 5.0% in 2021 and 5.9% in 2022. The most severe year-over-year price increases will likely be seen in the second half of 2022 before starting to moderate toward the end of the year and the first half of 2023. During the 2017 elections Kenya’s economy growth slowed to 3.82 percent from 4.21 percent the year before, while in 2013 it slipped to 3.80 percent from 2012’s 4.57 percent. If these statistics hold, coupled by the impact of COVID-19 and the uncertainty of the Ukraine-Russia conflict, a slump by an average of 0.58 percent would be on the positive outlook.

The economic resurgence is predicated on a full reopening of the economy and successful implementation of the Government Economic Recovery Strategy. Also critical is the economic recovery approach that will be adopted by the incoming regime after the August 2022 elections. 

The country is expected to capitalise on an expected improvement in external liquidity and benefit from various initiatives to meet its external financing needs. The external initiatives could include debt refinancing, restructuring and debt service relief, and additional concessional loans.

In conclusion, the impact of COVID-19 on Kenya’s economic outlook has reduced due to a sharp decline in new cases and the lifting of many restrictions. It is however notable that new variants could still pose a threat to economic recovery.

Agriculture is an integral part of Kenya’s economy. It contributes about 33% of the country’s Gross Domestic Product (GDP). The agriculture sector employs over 40% of the entire Kenyan population with the number being higher in the rural population. Aside from being great for the economy, the agriculture sector enhances the country’s food security. The high rainfall areas accounts for 70% of the national output, while the semi-arid areas accounts for 20%, and the arid areas account for about 10%.

It is noteworthy that Kenya’s agricultural productivity remains low. This is occasioned by inter alia poor incentives to the farmers, lack of stable supporting institutions, and underdeveloped infrastructure.

The Kenyan Government has been working on various agricultural reforms that are supposed to grow the sector. There are numerous regulatory changes being lobbied for the various sub sectors in the agricultural industry. The launching of bills such as the Coffee Bill 2020, Horticulture Crops Authority Bill 2020 and many others will enhance the needed agriculture sector reforms. The issue of middlemen remains a thorn in the flesh in this sector as most farmers are often exploited by brokers who target the earnings due to farmers. The Government should also encourage farmers to embrace mechanisation in order to promote efficiency and increased farm yields.

The horticulture sub-sector is seemingly doing better than other sectors mainly because it is driven by the private sector. The other sub-sectors can only thrive with some Government intervention whereby systemic and capacity weaknesses have to be addressed. Even though there are some gains from the various reforms being implemented by the Government, a lot needs to be done to achieve optimal results.

A lot has been done to reform the dairy farming sub-sector including the regulation of the minimum price a farmer is to be paid for a liter of milk. New KCC is required to pay farmers a minimum of 30 shillings per liter of milk. The banning of cheap milk imports is also great for the sector as farmers will have a ready market for their product. The Government needs to intensify agricultural extension services whereby farmers can be guided on the best practices to increase their milk production. 

The maize farmer needs more than anything to be cushioned against low producer prices for their product. The provision of a minimum producer price for the maize crop is  welcome news to the farmer. A lot needs to be done by the Government to facilitate increased maize production. It is worth noting that the cost of fertiliser has been on a steady increase over the years hence resulting in increased costs of farming and consequently eating into the farmers’ returns. Farm input subsidies and increased agricultural extension services will see farmers grow their production and reduce the need for Kenya to import maize.

Vested interests have always slowed coffee reforms in this country, whereby corrupt private millers and coffee co-operatives have fought for the status quo to remain. The coffee bill 2020 seeks to address issues and it will be helpful for the coffee sector. The Government needs to work on reviving and strengthening the coffee co-operatives such that they can cushion farmers from unscrupulous entities. It is also worth noting that with the growth of the real estate sector, most of the land initially set aside for coffee farming has subsequently been subdivided and sold off for development of housing property thereby replacing coffee farms with buildings. The Government should also consider implementing policies to curb or control this.

The tea sector is equally affected by vested interests and reforms are being met with resistance. These regulatory reforms are welcome by the tea farmer as they will empower them economically. The Government should ensure that these regulations are enforced and the farmer gets to benefit from their hard work.

The revival of the pyrethrum and cotton sectors is great news to the farmer who should have an opportunity to make more money. The Government has committed to reviving the processing and crop production capacity for these sectors. The Kenya Agricultural and Livestock Research Organisation (Karlo) has been appropriately funded to carry out research that will see these crops yield more high-quality produce. The Government needs to intensify civic education as regards these crops with the help of agricultural extension officers, as this will see more farmers embrace these crops once again.

On the other hand, the sugar industry reforms do not seem to bear much fruit. The ministry has tried to inject private capital to the sector, but it is not yielding expected results in the implementation stage. The Government needs to balance the interests of various stakeholders in the sector and focus on an effective revival strategy.

Even though the Government is working on implementing various reforms in the agriculture sector, there is a lot that needs to be done so that the farmer can pocket more money for their hard work. This will not only encourage more Kenyans to invest into the sector, but it will also promote the country’s food security.

Before the introduction of the self-assessment system in Kenya, we had other notable systems such as provisional assessment of 1971, accounting and file number system of 1976 which were all under the Administration Assessment. The system was found to be expensive owing to challenges in revenue collection, and was time consuming with a lot of paperwork by the tax administrators. Owing to this, the self-assessment system was introduced through the Finance Bill no 2 of 1991 which culminated in the amended of Income Tax Act (Cap 470 of the Kenya Laws) by establishing section 52B in the year 1992.

Thus, effective 30 June each year since 1993, filing of annual tax returns was something that taxpayers were keen to comply with. However, queuing with volumes of tax returns for both individuals and companies was the order of the day at different Kenya Revenue Authority designated (KRA) stations; typically this was because it was the last day of filing annual tax returns, none of the informed and patriotic Kenyans was willing to miss this deadline!

The above trend has however changed drastically after the introduction of online filing on iTax platform in the year 2014/2015, all physical queues were eliminated, almost instantly paperwork was reduced, and more space was created at the KRA. The focus was basically to simplify and reduce the physical visits to the KRA offices to submit annual tax returns to the tax man, a fact that Kenyans have lauded and criticized in equal measure. Online filing has been embraced by the majority of taxpayers as demonstrated by the number of Kenyans filing their annual tax returns which stood about 5.5 million by 30th June 2021 for the 2020 annual tax return, this represents about 90% of the total registered taxpayers who are on the iTax platform according to KRA statistics. This number is however still dismal compared to the total labour force in Kenya of about 24.1 million Kenyans as per 2020 World Bank statistics.

So why do we submit self-assessments annually? Let us examine the relevant section of the Kenya Income Tax Act which requires every registered tax payer to fulfil this obligation, section 50B(1) of the income tax on submission of the final return with self-assessment provides that, “Notwithstanding any other provisions of this Act – every individual chargeable to tax under this Act, shall for any year of income commencing with the year of income 1992, furnish to the Commissioner a return of income, including a self- assessment of his tax from all sources of income, not later than the last day of the sixth month following the end of his year of income;”

It is on the above basis that every registered taxpayer (both resident and non-resident) is expected to submit a self-assessment return on or before the last day of the 6th month following year end. For individuals this would be 30th June of every year. Another noteworthy deadline is the tax balances deadline of 30th April of the subsequent year.

Why then is it so it important to comply with the above provision and section of the income tax?

• The basic obvious reason that the majority would file a return is to avoid penalties and interest that accompany such non-compliance.
• Another motivator for tax-filers is receiving a tax refund. This occurs when the amount of taxes withheld throughout the year exceeds your tax liability.
• Filing your annual tax return will also ensure that you take advantage of tax incentives in place that may not have been captured through payroll such as insurance relief or mortgage deductions.
• Filing your annual tax returns and reporting all your taxable benefits will also help you in determining if you have any tax liability at the end of the year or not.
• Issuance of Tax Compliance Certificates (TCCs), which is required in various instances such as when bidding for tenders. Also, effective 1 July 2019, applications for renewal of work permits require TCCs to be presented to the Department of Immigration for both the employer and the expatriate employee.
• Filing your tax return is also a sign of being responsible and patriotic citizen.

In a nutshell, there are many other benefits of submitting your self-assessment return early enough. In many cases the benefits are in fact, the avoidance of negative consequences. Nevertheless, submitting your tax return should be a top priority each year to ensure you receive all the credits and deductions to which you are entitled, pay your fair share of tax, and ensure you are tax compliant.

In Kenya, agriculture is one of the key sectors in the economy. The sector contributes approximately 33% of the country’s gross domestic product (GDP). Most people in rural areas in Kenya rely on subsistence agriculture as their main source of income and livelihood. According to research by Food and Agriculture Organisation (FAO), the agricultural sector in Kenya has provided jobs to approximately 40% of the entire Kenyan population. The role of Kenyan farmers is thus far-reaching and contributes significantly through the provision of income, food, nutrition, and export earnings in the country. However, to achieve this success, farmers have relied on both Governmental and non-Governmental support.

The role of Government has been marred by unending promises which have in entirety failed to materialise to farmers’ huts and improve agricultural production in the country. The Government has come up with various policies such as small-scale irrigation, value addition, cereal enhancement, smart agriculture, and provision of market information. Some of these policies are yet to be enjoyed by Kenyan farmers and this has continually deteriorated the performance of the agricultural sector. Some of the challenges faced by farmers include high costs of farm inputs, overreliance on traditional farming methods over smart agriculture, reducing prices of farm produce, and inadequate market information. Therefore, to ensure quick wins and generate revenues for the farmers, we set out below a highlight of interventions that need to be put in place.

Prioritising agricultural policies

The Government of Kenya needs to prioritise the agricultural sector as one of its key sectors in the economy. Agricultural policies and reforms need to be centered on the improvement of farming technology and the provision of incentives to farmers. Public expenditure in the agricultural sector should also aim at the provision of knowledge, reduction of input and market access costs as well as attracting private capital for farmers. The Government should also tackle issues of incentivisation of agricultural research and development, improving the terms of trade in international markets, and provision of farmer education. In the 1990s, the Egyptian Government liberalised the agricultural sector by shifting the sector towards a market orientation. The reform brought about increased wheat production and reduction in controls of wheat supply leading to market penetration for wheat farmers in the country. Many small-scale farmers in Egypt have been able to benefit from this reform as they can access markets and sell their produce. Therefore, if the Kenyan Government was to prioritise agricultural policies farmers would benefit more.

Farmer knowledge and organisation e.g., Women Empowerment

Most farmers in the country are benefiting through collective actions such as women empowerment groups, youth groups, and the cooperative movement. These forms of collective actions have increased access to farmer credit, innovation, and access to markets. Collective action enables farmers to pool funds together which has aided in acquiring capital to finance farming projects, seeking agricultural and farming knowledge which are key avenues to farm productivity. Local farmers need to capitalise on collective movements such as joining cooperatives and other collective action groups to improve farm productivity in the country.

The success of agriculture in Israel was majorly brought about by private farmer associations and farmer cooperatives which contributed to increased production, farmer bargaining power, granting access to inputs and markets.

The Government should also intensify the role of agricultural extension centres which are critical in providing agricultural education to farmers in rural areas on matters such as seed varieties, testing of the soil pH, type of feeds for livestock, disease and pest control, and available markets.

Capital inflow from commercial and private sources

Farmers have limited access to capital resources which they can use to improve productivity by diversifying into different farm products. The Government and the private sector through commercial banks and other financial institutions should avail financing facilities that will help bolster farming activities. Farmers mainly rely on cooperatives for financial support, however, the increased cost of loans as compared to profits from farming has made it less viable. The Government should institute policies that will ensure farmers can access cheaper funding opportunities to foster agricultural production.

Investment in output market information

There is a need for cooperation between the Government and private sectors in providing information on markets where farmers can sell their produce. Most farmers have limited information on how to ensure their goods are in the right quality, quantity, and variety required for a particular market. There are several cases of importation of raw materials in the country since what local farmers produce does not meet the required quality standards. The Government should partner with various entities to ensure they subcontract farmers and train them on how to produce raw materials with the quality that is required. To ensure farmers are benefiting, there is a need for partnerships between the parties. If such information was provided, the local farmer would grow the right varieties of products for certain markets, thereby increasing their revenues.

Infrastructure development

Poor road networks and inadequate means of transport limit access to market centres in the country and this has made it difficult for farmers to ensure their products reach the market. Besides that, farmers rely on urban market centres which are costly to access due to the high cost of transport. Consequently, the Government should improve rural road infrastructure networks, create market linkage, develop state-owned corporations to produce farm products and ensure farmers can easily sell their products in the market.

The cost of living in Kenya has been on an upward trajectory in the last couple of months. Basic food commodities prices for items such as maize flour, cooking oil, cooking gas among others have tremendously increased with some prices even doubling compared the prices in January 2021. Most households have been forced to dig deeper into their pockets to secure meals for their families.

The increased food prices also come at a time when most citizens are struggling to recover from the adverse effects of the Covid-19 pandemic that saw some business collapse; and livelihoods lost due to companies’ downsizing. This coupled with the global increase in fuel prices have resulted to an overall cost of living that have pushed most Kenyan citizens, and especially the poor into a dire survival situation.

According to a survey carried out the Kenya National Bureau of Statistics (KNBS), the Consumer Price Index for low-income earners who make up 70.89 per cent of Kenya's population reached 116.8 in July 2021, while that of the wealthy who make up just 3.53 per cent of the population, was 108.42. This shows the prices of products purchased by the low-income earners have over time risen faster than those of the products purchased by the wealthy. This is indicative of the fact that most of the people bearing the brunt of the high cost of living is the Wanjiku in our society. It is also an indication of the fact that the increased cost of living has mainly been on basic commodities consumed by the low-income earners.

It is worth noting that the International Monetary Fund’s (IMF) 2022 World Economic Outlook forecasts even more tough times ahead for most developing and emerging economies. IMF has indicated that the precipitous rise in fuel and gas prices globally is expected to push inflation to levels last witnessed during the global recession in 2008. This will only worsen an already dire situation for Wanjiku.

In February 2022, increased food prices in Kenya led to a countrywide outcry especially on social media platforms with Kenyans running the hashtag, LowerFoodPrices campaign. Kenyans called for a reduction in food prices and the implementation of President Uhuru Kenyatta's directive on electricity tariffs, which is expected to result to reduced electricity prices. 2022 is an election year and most of the presidential aspirants are promising Kenyans a reduction in the current high cost of living. Kenyans are also keen to see if this year’s budget will put in place measures and policies that will provide a reprieve to the difficult economic situation.

The Cabinet Secretary, National Treasury & Planning is expected to table the FY2022/2023 Budget Statement to parliament on 7th April 2022 as provided for in the Public Finance Management Act. Wanjiku is eagerly waiting to see if the Government of the day will use this year’s budget as a vehicle to put in place measures and polices that will ease the current economic burden. 

It is worth noting that the theme for this year’s Budget Policy Statement has been defined as “accelerating economic recovery for improved livelihood’’. Kenyans, and especially Wanjiku is therefore hopeful that the Government’s commitment to improve its citizens livelihoods through stimulation of economic growth will positively impact on key sectors of the economy and consequently spur growth which will in effect result in a lowering the cost of living.

Through this year’s budget, the Government aims at targeting key productive and service sectors such as agriculture, health, education, drought response, policy, infrastructure, financial inclusion, energy and environmental conservation. These will inter alia result in creation of employment opportunities, increased food production and secure quality health services for Kenyans. If implemented, these policies will go a long way in improving the quality life as well as lessen the current high cost of living for Wanjiku.

The Government’s proposed Economic Stimulus Programme aims at alleviating the adverse effects of the COVID-19 pandemic on the economy. The total cost on this is estimated at Ksh. 26.2 billion. It is indicated that the Economic Stimulus Programme will target key productive and service sectors. These include agriculture, health, education, drought response, policy, infrastructure, financial inclusion, energy and environmental conservation.

This year’s Budget theme and the various programmes set out to support the implementation of the same is indicative of the fact that the Government aims to improve the livelihood of its citizens in the FY 2022/2023. Kenyans are therefore optimistic that through this year’s budget, the Government will take off, or lessen, the huge cost of living burden currently weighing down on their shoulders. 

The main sources of Government revenue are taxes, aids, grants, loans and dividends from shares held in profitable businesses, amongst others. However, taxation is the main source of Government revenues. The fiscal deficit in Kenya for year 2021/2022 stood at 8.2% with the Government projecting that it will fall to 5.6% in 2022/2023 financial year. The underperformance of tax revenues in relation to economic growth has been a key driver of the fiscal deficit. With the revenue as a share of GDP (14.3%) expected to remain low in year 2021/2022, the question then becomes where else can the Government raise revenue to fully finance its budget demands and expenditures?

One of the ways that the Government can raise funds is through debt-financing, which is done by issuance of financial instruments such as treasury bonds. According to the IMF country report 2021, Kenya’s gross public debt stood at 79% of GDP as at the end of 2021 with a debt-service to tax ratio of 49% in 2020/2021. Forecasts by the parliamentary budget office puts the stock of debt as at the end of June 2022 at Sh8.6 trillion with the current ceiling at Sh9 trillion. This effectively means that borrowing as a source of revenue is limited since public debt sustainability is in question.

With the limitations in debt and taxes availability as financing options, the Government is left with non-tax revenues to source funds from. This includes all non-taxable financial funds - royalties from issuance of mining rights/property income, dividends from investments, fees from issuance of permits and licences, fines, penalties, forfeitures and income from sale of goods and services. There is potential for growth in this component of Government revenue through enactment of reforms, legislations and policies in the administration of the revenues resulting in increased collection efficiency. Considerable inefficiency is experienced especially with the County Governments, with most of them collecting lower revenues than the former municipalities. This inefficiency can be mitigated by having the Kenya Revenue Authority collect the taxes at the County level on behalf of the counties since it has better administrative capacity and tools/systems.

The Government can raise additional revenue by offloading the stake it holds in high value listed firms operating in the telecommunications, energy and financial services sector. This has the potential of raising Sh792.6 billion according to the Nairobi Securities Exchange. The sale would also have the impact of increasing liquidity at the bourse given that more securities will be freed up thus increasing turnover and making it more attractive to foreign investors. There are several cash-rich state-owned enterprises (SOE’s) that can be offered for listing on the Nairobi securities exchange. Listing such entities operating in the maritime sector, energy and aviation industries will see the Government reap a substantial sum of money from the Initial Public Offering (IPO). The IPO in the energy sector in 2006 saw the Government raise Sh26.5 billion, going by this, the Government can expect to raise even more from the sale of the SOE’s.

By streamlining operations in state-owned enterprises with a focus on profitability, the Government would be able to raise more money as dividends received from these entities. With enhanced corporate governance, state owned enterprises may turn a profit or reduce their dependency on Government support thus freeing up funds that can be channelled towards other Government ventures. The reforms can be done by adopting the recommendations of the taskforce on parastatal reforms. This will result in mergers and dissolution of some parastatals in instances of role duplication thus reducing inefficiency in their operations.

Reform in public funds management. All financial funds received or raised by the Government ought to be deposited in the consolidated fund. This requirement is not strictly enforced thus resulting in the Government, through various bodies and entities, holding accounts with the commercial banks. Idle funds deposited in commercial banks results in inefficiency in public finance management. This is illustrated where the Government goes to the market to borrow funds to finance its operations whilst there are idle funds that belong to it in commercial banks, the Government ends up borrowing its own money consequently incurring unnecessary interest expense.

Public Private Partnerships (PPP); the Government can undertake infrastructure projects by partnering with the private sector in sustainable projects with clear economic benefits. These could be projects in the energy, health, transport and education sectors. By leveraging on the private sector’s technology and funding, the Government can undertake projects that it would not have been able to achieve given the debt-levels and constrained tax-space. Several projects have been successfully undertaken, such as the Mombasa Grain Terminal, Jomo Kenya International (JKIA) cargo amongst others.

By exploring the above measures, the Government can reduce its dependency on tax revenue. Analysts however portend that Kenya has a spending problem rather than a funding problem and that the solution out of this quagmire may lie not in evaluating the source of funds but rather in evaluating the expenditure.