kenya 2018 national budget brief - unicef

1 KIPPRA Policy Brief No. 63/2018-2019

Supporting Sustainable Development through Research and Capacity Building

The KENYA INSTITUTE for PUBLICPOLICY RESEARCH and ANALYSIS

No. 63/2018-2019

Kenya 2018 National Budget BriefPrefaceThis national budget brief is among five (5) briefs which seek to identify the extent to which the needs of children are addressed by the national budget and social sector budgets in Kenya. The brief presents the macroeconomic framework for Kenya for the period 2013/14-2017/18. It covers the performance of public expenditure in Kenya with a view to analyzing the implications of macroeconomic indicators on child sensitive planning and budgeting in the country. The brief is organized into the following sections: Introduction; Government Spending Trends; Budget Credibility; Sub-National Spending; Revenue Trends; and Implementation Strategies.

Key Highlights and Recommendations

(i) Between 2013 and 2017,Kenya’s economy remained stable and resilient with an average of 5.6 per cent growth in real GDP, though still below the Kenya Vision 2030 target of 10 per cent per annum. Population increased by 2.6 percent with children constituting 47 per cent on the population. The Kenya population was 46.6 million people in 2017 and is projected to 50.3 million by 2020. The sustained economic growth creates opportunities for the country to provide basic needs for children, key among them education, health, water and sanitation; and protection from various vulnerabilities including poverty. The economic growth was mainly driven by agriculture and services sectors. There is therefore need to increase the contribution of industrial sector to GDP, which stagnated at 10 per cent during the review period, through value addition of the agricultural products and in the process create employment for the youth exiting education and training; and improve household welfare.

(ii) Kenya recorded double-digit inflation index for food and fuel during the review period. This implies diminishing purchasing power for households that are net consumers of food because of higher prices. The increase in prices was exacerbated by unemployment among the population. Fuel inflation was on an upward trend in 2018, increasing the cost of living for both rural and urban households. Measures to contain food and fuel prices are required because the two items have a significant effect on household disposable income and ability to meet basic children’s needs including quality nutrition, which has long term effect on children health, education cognitive performance and ultimately labour market productivity.

(iii) Kenya is projected to experience a declining age dependency ratio in the medium term. The impact of this change would be greater when combined with investments in social sectors such as education and health because the country would then experience an increase in skilled and healthy labour force while benefiting from the implied demographic dividend.

(iv) Debt servicing has been on an upward trend since 2014, with nominal debt level reaching 57.2 per cent of GDP in 2017. This has raised concerns on debt sustainability

KIPPRA Policy Brief No. 63/2018-20192

and heightened the risk of crowding out of social sector investment. In addition, crowding out of private sector credit by domestic borrowing would hamper growth, employment and household income. Fiscal consolidation through improving efficiency in public spending and increased revenue mobilization will help anchor Kenya’s macroeconomic stability, reduce crowding out pressures, contain the pace of debt accumulation while ensuring adequate fiscal space for social sector spending which has direct effect on children.

(v) Under the current tight liquidity conditions, social sector spending has experienced pressure. During the review period, the government increased allocations to infrastructure; governance justice and law while health, agriculture and education spending as share of total government outlays declined. There is need to balance infrastructure investment and social sector spending for development of the much needed healthy, skilled, educated and trained human resource.

(vi) Equitable share transfer to counties increased but counties recorded shortfalls in own source revenue mobilization. Increased transfers of equitable share of revenue to sub-national level is important as service delivery takes place closer to the households and, therefore, increasing access to services. However, counties should be able to raise more of their own revenue to support sustainable implementation of various devolved functions such as health and early childhood development education (ECDE) and tackle the challenge of increasing pending bills.

(vii) The public sector wage bill has persistently remained high and potentially competing for the limited socio-economic expenditure. The wage bill averaged 22 per cent of the total budget and 10 per cent of GDP during the review period, way above the internationally accepted level of 7 per cent. There is need to improve oversight and control of the public wage bill to ensure affordability, equity and create fiscal space to adequately finance non-wage inputs that affect the needs for children, especially in social services.

IntroductionAs envisioned in the Kenya Vision 2030, government priority for Kenya is to attain an upper middle income status by 2030. In the third medium term plan, the key policies and strategies include the “Big Four” agenda which puts emphasis on raising the share of manufacturing sector to 15 per cent of GDP; delivering 500,000 affordable housing units; achieving universal health care coverage; and ensuring all citizens enjoy food security and improved nutrition by 2022. This will bolster health and nutritional needs of children and with more employment opportunities, households will be endowed to adequately meet such needs.

Key Macroeconomic and Socio-economic IndicatorsTable 1 reports the status of key macro- and socio-economic variables in 2017 for Kenya. The country’s real GDP per capita in 2017 stood at Ksh 96,799.8 with an estimated population of 46.6 million. Nominal public debt was 57.2 per cent of the GDP in 2017. In 2017, the country attained a Human Development Index (HDI) of 0.59, which was slightly above the global average of 0.5 signalling the need to invest more in the social sectors notably health, education and social protection to enhance human capital development.

Table 1: Macro and socio-economic indicators (2017)

Indicator (year) Value

Real GDP, 2017 Ksh 7,749.4 billion

Real GDP growth, 2017 4.9%

Real GDP per capita, 2017 Ksh 96,799.8

Public debt as a % of GDP, 2017 57.2%


Indicator (year) Value

Budget deficit as a % of GDP, 2017/18 6.9%

Overall average inflation, 2017 8.0%

Average food inflation, 2017 13.5%

Average fuel inflation, 2017 3.4%

Unemployment rate, 2015/16 7.4%

Estimated population size, 2017 46.6 Million

Estimated children population, 2017 22.3Million

Human Development Index, 2017 0.59

Source: Kenya National Bureau of Statistics (2018), Economic SurveyKenya is projected to experience an improvement in dependency ratio in the medium term (Figure 1a).This is attributable to the projected decline in proportion of children in Kenya’s population from about 48 per cent in 2017 to 47 per cent in 2018 and 41 per cent by 2030, and declining levels of total fertility rate (Figure 1b). A higher proportion of labour force relative to proportion of dependent population is expected to enhance economic growth and reduce the burden on public resources. The impact of this demographic change can be greater if combined with significant investment in social sectors such as education and health, as this would increase the proportion of skilled and healthy labour force.

In 2020, the proportion of children would constitute about half of the population in all counties and the largest number of children will be residing in Nairobi County. Data on demographic structure at county level is presented in Figure 1c. Overall, 23.7 million Kenyans (47%) will constitute children aged 0-17 years in 2020. Consequently, it is critical for the country to adopt the life cycle planning and budgeting approach while allocating adequate resources for the needs and requirements of children, key among them basic education, health water and sanitation, social and child protection. These interventions could contribute to long term human development critical for country’s sustainable development.

Macroeconomic TrendsEconomic growthKenya’s economy remained resilient with a 5.6 per cent average growth in real GDP and 2.0 per cent growth rate in real per capita GDP in the period 2013 to 2018. With a prolonged electioneering period and persistent drought effects, economic growth slowed in 2017. However,

Figure 1a: Working and dependency age population projections, 2013-2022

Figure 1b: Children and adult population projections, 2018-2030

Source: HDI (2018), KDHS (2008)

40

45

50

55

60

65

70

70

68

66

64

72

74

76

78

80

82

2013

Dep

ende

ncy

age

Perc

enta

ge

2014 2015 2016 2017 2018 2019 2020 2021 2022

47 46 46 45 45 44 44 43 43 42 42 42 41

53 54 54 55 55 56 56 57 57 58 58 58 59

0

20

40

60

80

100

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2023

0-17 (%) 18 and over (%)Workers Dependants Dependency ratio

Source: UNICEF ESARO calculations based on UNDESA World Population Prospects (2017)


Figure 2: Real GDP and real GDP per capita growth trend: 2013-2022

5.95.4

5.7 5.9

4.9

5.9 6.3 6.86.9 7.0

3.1

2.42.9 3.0

2.0

3.1 3.3 3.43.6 3.7

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Rea

l GD

P an

d R

eal p

er c

apita

(%)

Real GDP Growth Real GDP Per Capita Growth

Source: Kenya National Bureau of Statistics (2018), Economic Survey and Government of Kenya (2018), Third Medium Term Plan (MTP III) (2018-2022)

Figure 1c: Projected number and proportion of children by County (2020)

0 0

10

20

30

40

50

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47

3941

4642

464544

0-17 Proportion

44 4444 43

54 52 5253 5350 5050

53 5354

4646

41464649 49 49 4748 48

37 37

51 51 51 51 5155 55 55 55

Source: Kenya National Bureau of Statistics (2012), Analytical Report on Population Projections

the economy is on a positive growth trajectory and is projected to attain 7.0 per cent average annual real GDP growth rate during the MTPIII period (Figure 2). In the first and second quarters of 2018, the economy grew by 5.7 per cent and 6.3 per cent, respectively, signalling a recovery trajectory. Further, with increased public investments, a stable macroeconomic environment and political stability, a strong growth momentum is likely to be maintained.

Structure of the economyEconomic transformation has stagnated with sluggish growth of industrial sector and continued dependence on rain-fed agriculture that makes the country vulnerable to weather shocks. The contribution of agriculture sector to the country’s GDP consistently increased from 26.4 per cent in 2013 to 31.5 per cent in 2017 (Figure 3) as the service sector contribution declined from 48 per cent of GDP in 2013 to 45.4 per cent in 2017, due to poor performance of the financial sub-sector and uncertainties related to the general elections in 2017. The industrial1 sector’s contribution to GDP stagnated at around 17.5 per cent of GDP between 2013 and 2017, implying poor performance of the sector.


About 8.4 per cent of children and youth aged between 15 and 19 years were engaged in the labour force in 2015/16. Most in the age category had only attained pre-primary education (16.2%), primary education (10.8%) and secondary education (9%). This implies that a large proportion of children enter the labour market before attaining tertiary and higher education, which are critical for skills development. The long term effect of this labour dynamics is low human capital development characterized by low education levels and skills deficits.

Table 2: Distribution of the labour force (15-64 years) by age group and highest education level attained (2015/16) (per cent)

15-19 (%) 20-64 (%) Total ‘000Pre primary 16.2 83.8 54.4

Primary 10.8 89.2 8,924.0

Post primary, vocational 6.6 93.4 258.3

Figure 3: Kenya’s sectoral percentage contribution to GDP, 2013-2017

26.4 27.5 30.2 32.1 31.5

48.0 48.0 46.2 44.7 45.4

18.0 17.4 17.3 17.5 17.5

0

10

20

30

40

50

60

70

80

90

100

2013 2014 2015 2016 2017

% C

ontr

ibut

ion

Agriculture Service Industry

Source: Kenya National Bureau of Statistics (2018), Economic Survey

Secondary 9 91.0 5,716.2

College(Middle level) 0.7 99.3 1,812.1

University 1.5 98.5 866.4

None 6.3 93.7 1,571.0

Other 22.9 77.1 40.2

Not stated 5.9 94.1 68.9

Total 8.4 91.6 19,311.4 Source: Kenya National Bureau of Statistics (2018)

InflationThe country has sustained a single digit overall inflation over the past four years. However, food prices remained high, almost doubling from 7.6 per cent in 2014 to 13.5 per cent in 2017 due to prolonged drought and other adverse weather effects such as floods, which affected agricultural productivity (Figure 4). The country mainly depends on rain-fed agriculture, and is therefore vulnerable to weather shocks which impact on food supply. For example, insufficient rains in 2016 together with delayed importation to make up for the domestic shortfall in food supply led to a sharp rise in food prices. However, between September 2017 and September 2018, food inflation has been on a downward trend, falling from 10.89 to 0.91 per cent (Figure


5). This is good for the country as many households can afford food for themselves, including for children.

The decline in food inflation between February and September 2018 is attributable to improved weather conditions which resulted in bumper harvest of agricultural products. Prices of food products such as maize, beans, fruits, vegetables and livestock products fell significantly, leading to low food inflation over the last 12 months. Similarly, overall inflation fell from 7.1 per cent in September 2017 to 4.0 per cent in August 2018 after which it rose to 5.7 per cent in September 2018 due to increase in fuel prices resulting from the enactment of the Finance Bill 2018 which led to a VAT of 8 per cent on petroleum products.

Fuel inflation recorded an upward trend from 3.3 per cent in September 2017 to 17.4 per cent in September 2018 (Figure 5). This is attributed to increase in international oil prices and the implementation of the Finance Bill 2018. This resulted in increase in cost of living for both rural and urban households. For example, the transport index rose by 8.00 per cent between August and September 2018, and 17.29 per cent September 2017 and September 2018. The increase in transport cost might result in high transport costs especially for children who commute daily to

Figure 5: Kenya’s monthly inflation trends, 2017-2018

Sept-1

7

Oct-17

Nov-17

Dec-17

Jan-1

8

Feb-18

Mar-18

Apr-18

May-18

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-18

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-2

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6

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18

20

Infla

tion

Rat

e (%

)

Food Inflation Fuel Inflation Overall Inflation

Source: Central Bank of Kenya (August 2018), Monthly Economic Indicators

Figure 4: Food, non-food and overall inflation rates, 2010-2017

4.0

6.0

8.0

10.0

12.0

14.014

12.6

7.6

6.3

11.4

10.1

5.9

6.7

13.5.0

2014 2015 2016 2017

Infla

tion

Rat

e (%

)

Food Non-food Overall



school using public transport. Similarly, education and health indices rose by 4.9 per cent and 5.9 per cent, respectively, which is likely to limit access to critical services by children. A single room house rent rose by 5.5 per cent between September 2017 and September 2018. Such increases may make some households to forego or limit spending in basic foods, resulting in adverse health effects on children.

Government SpendingNominal and Real Government SpendingBoth real and nominal total government outlays have expanded over time. The real government expenditure2 rose from Ksh 1.2 trillion in 2013 to Ksh 1.6 trillion in 2017 (Figure 6). Fiscal policy stance has been expansionary in recent years, partly driven by implementation of the 2010 Constitution and increased expenditure on key infrastructure projects and education.

Government spending prioritiesDuring the periods 2014/15 and 2018/19, Energy, Infrastructure and Information Communication and Technology (ICT); Education; Debt repayment; and Governance, Justice, Law and Order sectors took a large share of government spending (Figure 7). Even though Energy, Infrastructure and ICT sector allocation reduced between 2016/17 and 2017/18, the sector dominated all the sectoral allocations from 2015/16 to 2018/19. Agriculture, rural and urban development; health; social protection, culture and recreation; environment protection, water and natural resources; economic and commercial affairs had a smaller share of total government spending. Limited budgetary allocations to sectors such as health, water and social protection could have adverse effects on the health of children. For example, lack of access to clean water might lead to children acquiring water-borne diseases, this coupled with inadequate health care can negatively affect the health of children. Debt servicing is also taking an increasing share of government budget, heightening competition for limited resources. Allocation to debt servicing as a share of total budget increased from 10.2 per cent in 2014/15 to 14.1 per cent in 2017/18.

Kenya’s total government spending as a percentage of GDP averaged 32 per cent between 2013/14 to 2017/18 period. The spending, however, rose from 30.4 per cent in 2013/14 to 35.9 per cent in 2017/18 (Figure 8).This has resulted from devolved system of government and increased public infrastructure spending by the national government.

Total government spending by economic classification

Figure 6: Nominal and real total government spending trends, 2010-2017 (Ksh billions)

-

500

1,000

1,500

2,000

2,500

3,000

2013 2014 2015 2016 2017

Nominal expenditure

Ksh

(bill

ions

)

Real expenditure

Source: The National Treasury (2018)


Figure 7: Nominal government spending by priorities (sectors), 2013/14-2017/18 (% of total budget)

2013/14 2014/15 2015/16 2016/17 2017/18

Agriculture, Rural andUrban Development

Energy, Infrastructure and ICT

General Economic and Commercial Affairs

Health

Education

Governance, Justice, Law and Order

Debt Repayments and Others

2.9

16.5

1.23.0

19.0

8.6

10.2

5.7

24.0

1.56.1

16.8

7.7

10.3

5.3

22.7

1.46.5

16.4

7.4

12.1

4.6

24.1

1.66.8

15.4

8.6

12.5

3.8

19.4

1.45.7

18.0

9.1

14.1


Figure 8: Kenya’s Total government expenditure, 2013/14-2017/18 (% GDP)

30.39

33.56

30.38 30.55

35.85

2013/14 2014/15 2015/16 2016/17 2017/18

Gov

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% o

f GD

P

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38


Wages and salaries form the biggest share of government expenditure. This coupled with increasing spending on interest payments for the periods 2013/14 and 2017/18 may limit government spending on social sectors infrastructure such as health and education which directly affect children. According to the Comprehensive Public Expenditure Review (CPER) 2018, the wage bill to revenue ratio between 2013/14 and 2016/17 was consistently above 50 per cent, exceeding the Public Finance Management (PFM) Act 2012 threshold of 35 per cent. Between 2013/14 and 2017/18, wages and salaries dominated government outlays with an average of 22.6 per cent of the total budget followed by acquisition of financial and non-financial assets with an average of 21.8 per cent during the same period. Expenditure on interest payments increased from 8 per cent to 14 per cent (Figure 9).

Total government spending in select countriesKenya’s government expenditure as a percentage of GDP in 2017 was 26.2 per cent, slightly above her East Africa Community (EAC) counterpart Rwanda at 25.4 per cent but above the Sub-Saharan Africa (SSA) region of 20.1 per cent. Other countries such as Zimbabwe and Eritrea have larger government size of 34.6 per cent, and 29.2 per cent, respectively. Madagascar and Tanzania have a relatively smaller government size with a government expenditure of 17.2 per cent and 17.3 per cent of GDP, respectively (Figure 10). Countries with lower government spending have relatively low debt levels, and are therefore likely to spend more in social sectors due to less debt servicing costs.


Figure 9: Total government spending by economic classification, 2013/2014-2017/2018 (% of total budget)

2012/13 2013/14 2014/15 2015/16 2016/17

Wages and Salaries

Interest Payments

Acquisition of Non-Fin. and Fin. Assets

Other Expenses

Goods and Services

Subsidies

Social Benefits

Other Expenses

23%

14%

15%

0%

12%

1%

20%

10%

19%

0%

12%

1%

21%

10%

25%

0%

12%

1%

21%

9%

28%

1%

11%

2%

25%

8%

19%

1%

12%

1%


Figure 10: Total government spending in select countries in 2017 (% of GDP)

17.2 17.318.8

21.8 23.025.3 25.4 26.2

29.2

34.6

0

30.0

20.0

10.0

40.0

Madag

asca

r

Tanza

nia

Ugand

a

Burund

i

Rwanda

Zambia

Rwanda

Kenya

Eritrea

Zimba

bwe

Perc

enta

ge o

f GD

P

Source: International Monetary Fund (April 2018), World Economic Outlook Database

Figure 11: Budget credibility in select ministries, 2012/13-2015/16

-60

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Ministry of

Perc

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Devolution andPlanning

Ministry ofEducation, Science

and TechnologyThe National

Treasury Ministry of Health

Ministry ofEnvironment, Water

and NaturalResources

Ministry of Labour,Social Security and

Services

2013/14 2014/15 2015/16 2016/17



Budget Credibility Budget credibility in select ministriesOverall selected ministries’ expenditure out-turns were lower than the allocated budget during the period under review. Budget credibility is concerned with the variance between actual government expenditure and budget estimates/allocations. On average, expenditure out-turn in most ministries has under-performed based on allocated budget. The Ministry of Environment, Water and Natural Resources experienced the highest out-turn in 2015 due to reorganization resulting from the early stages of devolution, and donor dependent nature of that sector. The health sector was also highly affected in 2013 when devolution was first implemented and faced a challenge as most functions were devolved but funds released to the county governments were not commensurate with the devolved functions.

The trend of budget credibility reflects the challenges the country faces in coming up with credible budgets. Among the concerns include inefficient disbursement of funds to line ministries, failure to align procurement plans to cash flow projections, and low absorption of development expenditure budgeted towards programmes and projects in the country.

Budget credibility by economic classificationSpending by economic classification did not meet the credibility target of 100 per cent as reflected by the negative trend in absorption rate. Other than subsidies, the rest of the economic classifications such as wages and salaries, social benefits, goods and services had low budget execution levels between 2013/14 and 2016/17. There was spending above the target for subsidies in 2014/15, 2015/16 and 2016/17 by 4 per cent, 15 per cent and 5 per cent, respectively. This is partly attributed to the government fertilizer subsidy programme.

County Spending by Revenue SourceCounty expenditure expanded during the review period, driven by progressive roll-out of devolved functions. However, equitable share remained the main source of county revenue. Own source revenue decreased from 11 per cent of county total revenue in 2014/15 to 8 per cent in 2017. Similarly, conditional grants fell from 8 per cent to 6 per cent in a similar period (Figure 13). In general, counties’ expenditures have been on an upward trend while their own source revenue has been on a downward trend.

Figure 12: Budget credibility by economic classification, 2013/2014-2016/2017

-52%-44%

-23%-35%

-22%

-50%

-24%-20%

-39%

-7%

-27%-35%

-26%-32%

-17%

-29%-19%

-27%-19%

-38% -33%-41%

-30%

-3%-3%

0% -1%-9%

4%15%

5%

-100%

-50%

0%

50%

2013/14 2014/15 2015/16 2016/17

Wages and SalariesSocial BenefitsAcquisition of Non-Fin. and Fin. Assets

OverallInterest PaymentsGoods and Services

Grants and Transfers to semi-autonomousgovt. agencies

Subsidies

-6%

Source: The National Treasury


Revenue by RegionIn 2017, Kenya’s revenue as a percentage of GDP was 18.3 per cent, below most of the Sub-Saharan Africa countries (Figure 14). Botswana, Namibia and Lesotho have relatively higher revenue levels than Kenya and are therefore likely to finance a bigger percentage of their budgets including the social sectors. Kenya’s revenue is still inadequate to meet the budgetary needs, hence the need to enhance domestic revenue mobilization and reduce debt level to increase spending on social sectors. According to the PFM Act 2012, total revenue is expected to increase in 2018 to Ksh 1,949.2 billion excluding grants. Kenya has moderated its spending trends with careful revenue projections to manage levels of external borrowing.

Revenue composition trends

Domestic revenue constitutes the largest share of government revenue, with an average of 75.8 per cent between the 2013/14 and 2017/18. Official development assistance was on a downward trend over the five review years, declining from 21 per cent of the total revenue in 2013/2014 to 10 per cent in 2017/18. Commercial sources of revenue averaged 9.4 per cent of total revenue between 2013/14 and 2017/18 (Figure 15).

Figure 13 A: Trends in sub-national spending by revenue source, 2014/15-2017/2018 (%)

Figure 13 B: Trends in Sub-national revenue source, 2014/15-2017/2018 (%)

Source: HDI (2018), KDHS (2008)

84% 86% 86% 87%

16% 14% 14% 13%

0

20%

40%

60%

80%

100%

120%

2014/15 2015/16 2016/17 2017/18

National level Sub-national level

80% 86%85% 87%

8% 1% 4% 6%11% 13% 11% 8%

0%

20%

40%

60%

80%

100%

Conditional grants

Own revenue

Blocked Transfers

2014/15 2015/16 2016/17 2017/18

Source: Office of Controller of Budget (2018)

Figure 14: Government revenue excluding grants, 2017 (as a % of GDP)

0.0

10.0

20.0

30.0

35.0

14.0 14.717.6 18.3

22.9 25.428.3

31.7 32.3

43.045.0

Madag

asca

r

Burund

i

Rwanda

Zambia

Kenya

Malawi

South

Africa

Namibi

a

Botswan

a

Lesh

otho

Perc

enta

ge (%

)

Source: International Monetary Fund (October 2018), World Economic Outlook Database


Figure 15: Revenue and financing, 2013/2014-2017/2018 (Ksh billions)

1,359 1,4401,746

2,027 2,095

246 300 319 273 308255 211 234 321 125-

500

1,000

1,500

2,000

2,500

2013/14 2014/15 2015/16 2016/17 2017/18

Ksh

(bill

ions

)

Domestic Revenue Development Assistance Comercial Financing


Foreign Aid, Grants and LoansForeign aid marginally increased from 0.5 per cent of GDP in 2013/14 to 2.5 per cent in 2017/18. Concessional loan disbursements remained constant at 0.1 per cent of GDP between 2014/15 and 2016/17 before increasing to 1.6 per cent in 2017/2018 (Figure 16). Conditional loans and grants from donors in 2017/2018 comprise Ksh 6.5 billion loan under International Development Association (IDA), Ksh 3.92 billion proceeds from Danish, Sweden, and European Union Government, and Ksh 26.5 billion from the World Bank. Most of the grants are mainly used to finance programmes in education and health which directly affect children.

Foreign aid per capita by region

Kenya’s foreign aid per capita stood at US$ 26.5 in 2016, close to Zambia and Zimbabwe with US$ 26.6 and US$ 26.2, respectively. Swaziland (among the selected countries) had the highest foreign aid per capita at US$ 31.5 (Figure 17).Foreign aid programmes in most developing countries such as Kenya normally focus on improving the general welfare of the population, including children, and therefore high levels of foreign aid are desirable.

BorrowingKenya finances its deficit from domestic and foreign sources. International concessional and domestic long-term loans constituted the largest share of borrowing with each constituting 54.3 and 38.5 per cent in 2013/14 and 45.4 and 34.1 per cent in 2017/18, respectively. International commercial loans increased from 4.3 per cent in 2013/14 to 18.9 per cent of total borrowing in 2017/18; this has been experienced due to increased borrowing to fund infrastructure development (Figure 18).Out of the total debt stock, the share of international concessional loans dropped from 54 per cent in 2013/14 to 45 per cent in 2017/18.

Other than domestic short-term financing that declined in 2017/18, borrowing from the other three main sources (Domestic long term, International concessional and International commercial) increased consistently, thereby increasing Kenya’s debt stock from 44.5 per cent of GDP in 2013/14 to 57.5 per cent in 2017.

Debt Stock and Interest

Domestic debt stock maintained a steady increase from Ksh 564 billion in 2013/14 to Ksh 1.2 trillion in 2017/18, representing 112 per cent increase. Foreign debt stock increased from Ksh 800 billion in 2013/14 to Ksh 2.2 trillion in 2017/18, representing 170 per cent increase (Figure 19).


Figure 17: Per capita foreign aid in select countries, 2016 (in current US$)

15.0

17.0

19.0

21

18.0

20.1 20.221.4

22.8

25.326.2 26.5 26.6

28.328.9

30.231.5

.0

23.0

25.0

27.0

29.0

31.0

33.0

Madag

asca

r

US$

Angola

Tanza

nia

Ugand

a

Burund

i

Rwanda

Zimba

bwe

Kenya

Zambia

Eritrea

Malawi

Comoro

s

Swazila

nd

Source: International Monetary Fund (April 2018), World Economic Outlook Database

Figure 16: Foreign aid trends, 2013/2014-2017/2018 as a % of GDP

0.0

2.0

1.0

3.0

4.0

5.0

2013/14 2014/15 2015/16 2016/17 2017/18

Foreign grants Concessional loan disbursements

Perc

enta

ge o

f GD

P

0.5 0.4

2.5

0.1 0.10.6

0.10.4

0.1

1.6

Source: National Treasury

Figure 18: Government borrowing trends, 2013-18 (Ksh billions)

525 617 730 927 114359235 277

432634

741

8581102

1303

1525

39

66

63

100

55

2013/14 2014/15 2015/16 2016/17 2017/18

Domestic long term International commercial International concessional Domestic short term

Source: The National Treasury


Figure 19: Debt stock and interest, 2013/2014-2017/2018 (Ksh millions)

0

50,000

100,000

150,000

200,000

250,000

0

500,000

1,000,000

1,500,000

2,000,000

Dom

estic

and

fore

ign

Deb

t Sto

ck (b

illio

ns)

Inte

rest

pay

men

t on

debt

(bill

ions

)

2,500,000

3,000,000

3,500,000

4,000,000

2013/14 2014/15 2015/16 2016/17 2017/18

Domestic stock Foreign stock Domestic interest Foreign interest

Source: The National treasury (2018)

Both domestic and foreign debt servicing have been on an upward trend with each increasing from Ksh 115 billion and 13 billion in 2013/14 to Ksh 212 billion and Ksh 64 billion in 2017/18, respectively (Figure 19). The cost of debt servicing could crowd-out government spending on the social sectors that directly affect children.

Figure 20: General government gross debt, 2010 and 2018 (% of GDP)

0

50

100

150

Perc

enta

ge G

DP 200

250

3002010

63

92814

1441 414116

6319 20

4022

37

27

34

31

36

32

5354

43

102

44

65

44

57

47

52

51

32

59

82144

132

37

54

35

59

3020

2017

South

Sudan

Swazila

nd

Namibi

a

Zambia

Rwanda

Botswan

a

Ugand

a

Tanza

nia

Malawi

Leso

tho

Madag

asca

r

South

Africa

Ethiop

ia

Mozam

bique

Angola

Kenya

Burund

i

Comoro

s

Zimba

bwe

Eritrea

ESAR Ave

rage*

*

Source: International Monetary Fund (October2018), World Economic Outlook Database

Debt by regionKenya’s gross debt increased from 44 per cent in 2010 to 57.2 per cent of GDP in 2017, slightly above the Eastern and Southern Africa Region (ESAR) average of 54 per cent. However, countries such as Eritrea, Mozambique, Zimbabwe and Angola have a higher debt levelsof 131 per cent, 102 per cent, 82 per cent and 65 per cent of GDP, respectively (Figure 20). In October 2018, IMF debt sustainability analysis rated Kenya from low to moderate risk of debt sistress. High debt level can impede public investment in child sensitive sectors such as education, water and health. However, country policy and institutional assessment (CPIA) debt policy rating3 for Kenya averaged 4.4 between 2010 and 2017, implying that the country still has good debt management strategy.


Implementation Strategies of Key IssuesThe following strategies have been proposed to ensure that the policy issues emerging from the analysis are addressed.

Issue Recommendation (s) Action (Responsibility)

Projected decline in dependency ratio in the medium term

• Scale up spending on social sectors for Kenya to take advantage of the demographic shift.

National Treasury and Planning; Ministry of Health; Ministry of Education; Ministry of Labour and Social Protection; Development Partners

Stable growth averaging 5.6%real GDP growth rate, though still below the Vision 2030 target of 10%.Stagnant contribution from the manufacturing sector

• Increase the contribution of manufacturing sector to GDP through value addition of agricultural products.

National Treasury and Planning; Central Bank of Kenya; Kenya Private Sector Alliance; Ministry of Industrialization, Trade and Cooperatives

Double digit inflation index for food and fuel, reducing the purchasing power for households

• Establish measures to contain food and fuel inflation.

• The National Treasury and Planning

• Central Bank of Kenya

High debt servicing cost, crowding-out investments in social infrastructure.

• Fiscal consolidation through reduction of unnecessary spending.

• Increased revenue mobilization should help anchor Kenya’s macro stability and reduce crowding out pressures.

• Contain the pace of debt accumulation.

National Treasury and Planning; Central Bank of Kenya; Commercial Banks

Under conditions of tighter liquidity, social spending tends to face pressure.

• Need to balance government spending on both economic and social infrastructure.

National Treasury and Planning

Counties recorded shortfalls in own source revenue collection with increases in equitable transfers.

• Counties should be able to raise more of their own revenue to finance their operations and minimize high pending bills.

National Treasury and Planning; County Governments; Commission for Revenue Allocation; Kenya Revenue Authority

Wage bill is persistently high and potentially crowding out other important socio-economic expenditure.

• Need to improve oversight and control of the public wage bill to ensure affordability, equity, and competitiveness.

• The government could find ways of increasing productivity of workers to neutralise the high wage bill.

National Treasury and Planning; National Government; County Governments; Salaries and Remuneration Commission

APPENDIX: Kenya’s Budget Calendar Target Date (annually)

Activity

30th August Budget Circular Issued• Budget Circular must outline procedures for inviting public participation in the process

1st September County Integrated Development Plan Submitted• Within 7 days of submission to the County Assembly, the County Executive Committee member responsible for planning must

publish and publicize the plan

30th September BROP/CBROP Submitted

• Treasuries prepare and submit the Budget Review and Outlook Paper (BROP) to the Cabinet/County Executive

• Cabinet/County Executive must review and approve within 14 days of submission

• Within 7 days of approval by the Cabinet or County Executive Committee, the respective Treasury must arrange for the paper laid before the National or County Assembly. Thereafter the papers are published and publicized


Target Date (annually)

Activity

31st December Audit Reports Submitted

• Audit reports are submitted to Parliament and County Assemblies

31st December • Commission for Revenue Allocation (CRA) makes recommendations on sharing (vertical and horizontal)

15th February BPS Submitted

• Budget Policy Statement (BPS) is submitted to the Parliament on 15th February

• Parliament must review and adopt it within 14 days of submission.

• Within 7 days of submission to the National Treasury publishes and publicizes it.

28th February C-FSP Submitted

• The County Fiscal Strategy Paper (C-FSP) is submitted to County Assembly for approval by 28th February

• County Assembly must review and adopt within 14 days of submission

• Within 7 days of submission County Assembly, the County Treasury publishes and publicizes the C-FSP

28th February County Assembly Debt Management Strategy Submitted

• Medium Term Debt Management Strategy submitted to the County Assembly

• As soon as practicable after the statement has been submitted to the County Assembly, the County Executive Committee member, Finance (CEC-F) publishes and publicizes the statement and submits a copy to the CRA and Intergovernmental Budget and economic Council (IBEC)

28th February DoRB and CAoRB Submitted

• Cabinet Secretary submits Division of Revenue Bill and County Allocation of Revenue Bill to Parliament

• Parliament to consider and approve Bills with or without amendments within 30 days

Once the Bills are submitted, the Cabinet Secretary shall notify CRA and IBEC

30th April Budget Estimates Submitted

• CEC-F submit Budget Estimates to the County Executive for approval and to the County Assemblies by 30th April

• Budget Estimates must be submitted with all supporting documents and draft bills

As soon as practicable after the budget estimates and other documents have been submitted to the County Assembly publish and publicizes the documents

15th June County Governments to prepare and submit annual cash flow projections to the Controler of Budget (CoB) with copies to IBEC and National Treasury

30th June Budget Estimates Approval

• County Assemblies consider budget estimates and approve them with or without amendments, in time for relevant appropriation law or laws required to implement the budget –to be passed by 30th June

By 30th September • The CEC-F with approval from County Executive submits County Finance Bill to the County Assembly, which sets out the revenue raising measures for the national or county government, with a policy statement expounding on those measures.

Source: National Treasury

(Endnotes)

1 Industrial sector in this analysis consist of manufacturing, mining, electricity and water supply, and construction sectors.

2 The real expenditure were computed by adjusting the nominal expenditure for inflation in order to estimate the actual spending changes over time3 CPIA debt policy rating published by World Bank ranges from 1=low to 6 high. It assesses the ability of debt management strategy in minimizing budgetary

risks and ensuring long-term sustainability.

The KENYA INSTITUTE for PUBLICPOLICY RESEARCH and ANALYSIS

Acknowledgements The preparation of this National Budget Brief was funded and supported by UNICEF and ESARO under the Child Responsive Planning and Budgeting project. The Brief was prepared by a team led by James Ochieng (KIPPRA), Dr Eldah Onsomu (KIPPRA) and Patrick Chege. The entire process of preparing the brief was guided by the KIPPRA Executive Director, Dr Rose Ngugi. We are most grateful to the UNICEF team of Ousmane Niang and Godfrey Ndeng’e (UNICEF KCO) and Matthew Cummins (UNICEF ESARO) for providing technical

support throughout the process of writing the briefs. The KIPPRA research team comprised Boaz Munga, Phares Mugo, and Victor Mose.

For more information, contact

Kenya Institute for Public Policy Research and AnalysisBishops Road, Bishops Garden TowersP.O. Box 56445-00200, NairobiTel: 2719933/4 ; Cell: 0736712724, 0724256078Email:[email protected]: http://www.kippra.org Twitter: @kipprakenya

kenya 2018 national budget brief - unicef

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