•CS Njuguna Ndung’u has projected the fiscal deficit including grants at Sh597.0 billion, down from Sh925.0 billion in 2023-24.
•The fiscal deficit for will be financed by net external borrowing of Sh333.8 billion and net domestic borrowing of Sh263.2 billion.
Image: EZEKIEL AMING'A
Kenya's budget deficit could increase past the Sh597 billion set for the financial year 2024-25, experts now say, which could push the government into more borrowing.
This is on the back of revenue shortfalls and low production and output in key sectors of the economy, as Kenya remains a net importer.
The low production has been pegged on failure by the country to invest enough in factors of production, which economists define as land, labor, capital and entrepreneurship.
A budget deficit occurs when a government spends more than it collects in taxes. Reducing tax rates may also cause a deficit, if spending is not reduced to account for the decrease in revenue.
National Treasury has set the 2024-25 expenditure plan at Sh3.9 trillion, up from Sh3.7 trillion in the current financial year ending June 30, with recurrent expenditures (which includes salaries, operations and maintenance), set to go up to Sh2.84 trillion from Sh2.53 trillion, despite Treasury freezing new employments.
Cabinet Secretary Njuguna Ndung’u has projected the fiscal deficit including grants at Sh597.0 billion, down from Sh925.0 billion in 2023-24.
“The fiscal deficit will be financed by net external borrowing of Sh333.8 billion and net domestic borrowing of Sh263.2 billion,” he said during last week’s budget reading.
However, this is now projected to increase through supplementary budgets.
“We have seen supplementary budgets which are not very emotive being used to sneak in some expenditures, so it might still go up,” said Ken Gichinga, Chief Economist at business analytics consulting firm–Mentoria Consulting.
He spoke yesterday during a post-budget forum by the American Chamber of Commerce-Kenya.
A key contributor to the rise in budget deficit is likely to be driven by revenue shortfalls, where Kenya Revenue Authority (KRA) has continued to miss its targets.
Treasury projects total revenue collection, including appropriation-in-aid for the financial year 2024-25 budget to be Sh3.34 trillion, up from Sh2.96 trillion in the current financial year ending June 30.
KRA has been given a higher target for ordinary revenues at Sh2.92 trillion, from the current Sh2.57 trillion.
The Parliamentary Budget Office had earlier projected that KRA could miss its target for the current financial year by about Sh300 billion.
The taxman is likely to face even more challenges in the next financial year as the Finance Bill 2024 faces protests from Kenyans, where the government has already given into some of the demands and removed several tax measures, which will hamper its collection of an additional Sh302 billion.
According to International Budget Partnership (now Bajeti Hub) country manager Abraham Rugo, the ambitious target comes at a time when the economy is contracted.
“When you look at the projections of moving revenue to Sh3 trillion in the next financial year, when there is already a clear indication that even in the current financial year they are likely to miss the revenue target by almost Sh300 billion, we see it as being too aggressive,” he said.
The government has been under pressure from IMF and the World Bank to raise more revenues to meet its budgetary obligations, including debt repayment, where the country has in recent times been at risk of default.
Of every Sh10 collected as tax, about Sh6 is said to go into debt repayment. The country's debt stood at Sh10.4 trillion as of March.
The country has been challenged to invest in production mainly agriculture sector and manufacturing, to drive economic growth and create jobs.
Treasury has allocated Sh54.6 billion to the agriculture sector up from Sh49.9 billion.
To further promote local industries, CS Njuguna has proposed an allocation of Sh 23.7 billion under various implementing Ministries, Departments and Agencies.
Out of this, Sh4.5 billion will support establishment of County Integrated Agro-Industrial Parks while Sh1.9 billion will go towards Export Processing Zones.
While the government continues to support the sectors whose investments are hugely driven by the private sector, the country’s operating environment, including an unpredictable tax regime, has been blamed for poor performances.
For instance, manufacturing sector growth decelerated to two per cent in 2023 compared to a growth of 2.6 per cent in 2022, the Economic Survey 2024 indicates.
This is far from the government’s target of increasing the sector's contribution to the GDP from 7.2 per cent in 2021, to 20 per cent by 2030.
Manufacturers are also concerned that to date, the government is yet to adopt the National Taxation Policy, which aims to assure both local and foreign investors have certainty and consistency in tax policies, including a framework for granting tax incentives and a favourable regulatory tax regime.
"Exporters continue to be faced with export barriers such as delays in VAT refunds, and high costs of intermediate products, and inputs including packaging costs which deter exports in the manufacturing sector," Kenya Association of Manufacturers CEO Anthony Mwangi said.
High pending bills at both national and county governments, valued at Sh662.3 billion as of November, also continue to stifle businesses.