Tough call for Yatani as Covid-19 dampens revenue collection target

Thursday, June 11th, 2020 00:00 |
National Treasury Cabinet Secretary Ukur Yatani. Photo/PD/FILE

The budget highlights for the 2020/21 financial year will be presented today in the National Assembly by Treasury Cabinet secretary Ukur Yatani on the backdrop of the gruelling coronavirus pandemic.

For most Kenyans, expectations are high as many hope that Treasury will be put on the table goodies from the emblematic briefcase, resonating with Wanjiku’s needs.

The budget highlights will be presented against the backdrop of a global pandemic which has led to an erosion in economic fundamentals, with most sectors of the economy akin to intensive care.

Covid-19 has led to disruptions on the supply side, in particularly hospitality-oriented and transport sectors, but also on the demand side.

International trade has evaporated, business investment is on its knees in the current uncertainties and consumption has deteriorated in light of job layoffs and reduced income.

Recurrent spending

Following the Budget and Appropriation Committee (BAC) report on the FY2020/21 Budget, we expect overall budget at Sh3.2 trillion of which Sh1.9 trillion is budget allocation to the national government.

The split between recurrent and development spending is estimated at two-thirds and one-third, respectively, which has been the trend in recent fiscal years.

Despite the headline allocation of Sh111.7 billion towards health, the exact funding to combat Covid-19 is anything but desirable.

Some Sh1.73 billion can be pinpointed as direct funding to tackle the pandemic under the economic stimulus package albeit the fact we are yet to successfully bend the curve.

Most of the heavy lifting, centering funding of the pandemic, seem to lie squarely with the Covid-19 Emergency Response Fund. This is an area that the BAC has proposed to be under legal scrutiny and oversight of the National Assembly.

Equitable share allocation to the counties has been retained at Sh316.5 billion in the next financial year.

The Division of Revenue Bill, which effected the split of revenue between the national and the devolved governments has already been enacted into law.

As per the subsequent County Allocation of Revenue Bill, the equitable share to Nairobi County is Sh15.9 billion and Sh19.7 billion if you factor in the unconditional allocations.

Public debt

On the other hand, budgetary allocation to the Nairobi Metropolitan Services is at Sh28.4 billion. 

The other budget-related item is the Consolidated Fund Services, which constitutes the first charge.

This includes public debt obligations, pension obligations and salaries to the Constitutional office bearers. Public debt in the next financial year is set to gallop to Sh905 billion from Sh769 billion in the current fiscal year.

The import of this is that for every Sh100 in revenue, public debt will swallow up Sh55 and this is up from Sh39 at the start of the current financial year.

This will remain at elevated levels in light of the expected total debt accumulation of Sh823.4 billion.

The debt accumulation starting July will exacerbate pressure on credit mediation by banks considering that financial institutions hold roughly 55 per cent of the domestic debt.

Total revenue projections in the next fiscal year is Sh1.9 trillion, of which ordinary revenue - excluding Appropriation-in-Aid – at Sh1.6 trillion.

The revenue estimates have been drastically reduced by Sh264 billion from the initial estimate in the 2020 Budget Policy Statement approved three months ago.

Nonetheless, in light of the revenue underperformance coupled with the effect of the Tax Laws (Amendment) Act 2020, this has led to the downward calibration of the revenue estimates.

That said, the Covid-19 shock environment signals that the revenue projections are still ambitious.

Furthermore, it is hard to see compelling reason how meaningful the revenue raising measures will add, as proposed in the Finance Bill 2020. The writer is the head of research at Genghis Capital Ltd

More on Economy and Policy