Shocks that reduce growth or increase borrowing needs could put significant pressure on Kenya’s limited fiscal buffers, likely eroding overall economic growth.
According to the latest Macro-Fiscal Analytic analysis by the Institute of Public Finance (IPF) Kenya is experiencing a “lost decade” in public expenditure due to large fiscal deficits, weak export performance, and sluggish investment growth.
According to the report, the collapse of the 2024 Finance Bill forced the government to adopt a piecemeal approach for alternative tax measures, akin to a hand-to-mouth scenario.
The country anticipated collecting at least Sh346 billion from tax proposals in the rejected Bill that triggered bloody protests led by the nation’s youthful population.
The report warns that although the government has devised various contingency measures to bridge the budgetary vacuum, the country’s economy will quickly descend into jeopardy in the face of any significant shakeup in the local and international marketplace.
IPF CEO James Muraguri says that with revenue generation continuing to face headwinds, aid allocations, particularly in health and infrastructure, have declined, emphasizing the urgency of mobilising domestic revenue.
“The ability of the government to collect more revenue continues to be hampered by its inability to on board the hard-to-tax sectors leading to a failure to deliver on its fiscal consolidation targets,’’ Muraguri.
He added that Kenya’s poverty rate remains high for its level of income perpetuated by a dual labour market that generates a small number of well-paying jobs in the formal sector and leaves most in the informal sector on much lower wages.
The report compares Kenya’s poverty rate of 36 per cent and the average annual economic growth rate of five per cent to Ghana, which has significantly cut the number of people falling into poverty.
“Ghana’s economic growth rate is consistent with the drop in poverty levels, pointing to an improved level of economic equity. In Kenya, only few people are getting richer while the majority are sinking into the poverty trap,’’ the report by IPF says.
Furthermore, Kenya’s enduring debt vulnerability highlights the importance of the government staying on course with fiscal consolidation over the medium term.
IPF says that the country’s current debt difficulties reflect its lack of fiscal buffers to protect it against any future potential shocks.
“With further fiscal restraint, borrowing should decline and the need for additional external financing should be minimized, which should hopefully result in the re-building of both fiscal buffers and foreign exchange reserves which to date have not recovered.”
“The higher-than-planned borrowing in the 2024/25 fiscal year while it is intended to offset underperforming revenues, it under mines Kenya’s consolidation efforts, as the country has limited scope to continue doing this without triggering further debt problems,’’ Muraguri said.
He adds that despite economic recovery and reforms since then, revenues have been slow to return to pre-pandemic levels and have lagged previous projections and targets.
Another area of concern is the reduced government spending on the health sector, which has declined by approximately seven per cent in real per capita terms over the past five years and falls well short of international benchmarks necessary to attain UHC.
It notes that donor on-budget financing for health has gone down, accounting for much of the overall decline in spending.
“While reforms to the social health insurance system are underway, it remains to be seen if they will be successful in delivering the much-needed universal primary coverage.”
The report further noted the mixed picture painted by sector analysis, with agriculture rebounding with a 6.5 per cent growth in 2023, driven by favourable rains, and positive growth in investments in gender-sensitive programmes.
However, burdens persist such as sanitation problems in urban informal settlements, and the triple challenge of malnutrition, with stunted growth and obesity.
The country’s Open Budget Index
score of 55 per cent is lower than
the sufficient threshold of 61 per
cent.