INTRODUCTION

Aptly themed, this year’s Kshs. 3 Trillion budget aims to focus on economic recovery in the wake of the Covid19 Pandemic which has occasioned increased poverty and vulnerability levels across the country. In his speech, CS (Amb.) Ukur Yatani noted that the main focus while drafting the Budget was to strike a balance between stimulating economic recovery and responding to the health challenges caused by the pandemic.

The 2021/2022 budget has been prepared against the background of a precarious economic situation, as the country continues to address the challenges associated with the Covid-19 pandemic and its adverse effects, one year on. Between March and April 2021, because of a lethal third wave of the pandemic, the country had to once more contend with strict covid containment measures reminiscent of the first wave in March 2020. It is worth noting that the country entered this third wave in a more precarious position than the first wave due to higher unemployment and poverty levels.

OPERATING CONTEXT

The FY 2021/22 budget will be implemented at a period when the country’s economy is expected to recover from the COVID-19 pandemic which shook the entire world. The global economy is expected to grow at about 6.0% in 2021 as compared to a contraction of 3.3% in 2020. The Sub-Saharan region is expected to grow by 3.4% in 2020 from a contraction of 1.9% in 2020 while Kenya’s growth is expected to grow by 6.3% in FY 2021/22 from 3.8% in FY 2020/21. These positive projections are attributed to the roll-out of the various COVID-19 vaccines. However, the growth in Sub-Saharan Africa is slower compared to that in the other regions due to limited access to the vaccines as well as constrained fiscal space to support the crisis response and recovery.

Although Kenya’s economy has in the past remained resilient, the pandemic shook its economy and if not handled properly, it could lead to loss of the gains that have been accumulated over the past years.

Outlined in the Oxygene MCL Shadow Budget Report launched in April 2021, the global economy is estimated to have contracted by 3.3 percent in 2020 from a growth of 2.8 percent due to negative impacts of COVID-19 pandemic and is projected to grow at 6 percent in 2021, moderating to 4.4 percent in 2022. All advanced, emerging economies, and developing economies experienced negative economic contractions except in 2020 except China, Ethiopia, and Tanzania whose economies expanded by 2ifi.3, 6.1 and 1.0 percentage points, respectively. Ethiopia has the fastest growing economy in Sub-Saharan Africa averaging 9.4% for the period 2013 – 2019. However, the IMF projections show that its economy will plunge from 6.1% in 2020 to 2.0% in 2021 before rebounding to 8.7% in 2021. 

Prior to the COVID-19 pandemic, Kenya too had been experiencing stable and moderately strong growth since 2008, averaging a solid 5.6%per year, driven by a broad-based economy and was projected to expand by 6% in 2020 up from 5.4% in 2019. The outbreak of Covid-19 Pandemic in the country on March 13th, 2020 and the swift containment measures the government enforced adversely affected economic activities throughout the year which slowed down the economic growth significantly. The National Treasury shows that the economy expanded by 0.6 percent in 2020 while the IMF numbers show a contraction of -0.1 percent over the same period. The National Treasury further projects the economy to rebound to 6 percent in 2021 while the IMF’s projection puts it at 7.6 percent. Both projections are rather unlikely due to the impact of the third wave, containment measures impacting largest contributing counties (Nairobi City, Kiambu, Nakuru, Kajiado and Machakos) and other vector factors such as reduced spending capacity, decline in manufacturing; among others.

It was only in 2002 that the Kenyan economy registered growth closer to the one observed in 2020 which later registered a sustained growth taking five years to reach the peak of 6.9% in 2007 before a sharp decline to 1.5% due to the post election violence which preceded the 2007 general elections. With apossible referendum to amend the Constitution in 2021 and general election in 2022, coupled with the current COVID-19 pandemic, the economy is likely to register a less than expected growth.

However, per the Budget Statement of 10th June 2021, the Government is optimistic that the economic  growth will bounce back to around 6.6% in 2021 supported by stable macroeconomic environment, expected favorable weather and ongoing COVID-19 vaccinations that is meant to create herd immunity and allow resumption of full economic activities.  This growth will also be supported by ongoing investments in strategic priorities of the Government under the “Big Four” Agenda and the implementation of the Economic Recovery Strategy.  

DEBT

A concern that has been a staple in most economy-based conversations is the issue of public debt. There is increased concern that the debt portfolio will continue to balloon. This is based on an analysis conducted on the supplementary budget for the FY 2020/21 which showed that the consolidated fund services expenses have increased by Ksh. 45.6 billion and they are projected to account for about 58% of FY 2020/21 projected revenue. This increment is attributed to increased debt servicing expenses, especially with regard to domestic debt. It is estimated that debt-servicing will account for about 75% of projected revenues in the year 2023.

Additionally, the current borrowing strategy, as indicated under the approved Medium-Term Debt Management Strategy 2021, is pegged on the assumption that fiscal consolidation will reduce the overall cost of debt and safeguard debt sustainability.

To service the current debt stock, at least 66% of all revenue raised will have to be used to repay debt- this means that for every shilling raised, only 34 cents will be available for development and recurrent expenditure. In his speech to Parliament, CS (Amb.) Yatani mentioned that the concerns expressed by Kenyans had been factored in drawing up the budget and had in fact come up with proposals on how address the issues espoused in the Economic Recovery Program, notably reducing debt vulnerabilities through a revenue-driven fiscal consolidation with a view to stabilizing debt to GDP ratio over the medium term. In part, by doing so, this will reduce the level of fiscal deficit from 8.7 percent of GDP in the current Budget to 7.5 percent of GDP in the FY 2021/22 and further to 3.6 percent of GDP in the FY 2024/25. This will be a 5.1 percent reduction in fiscal deficit over the next 4 years, thereby slowing the annual growth of debt.

To manage and stabilise public debt, the CS urged his fellow Government officers to adhere to the expenditure ceilings as presented. 

While taking  note of Kenya’s sustainability on public debt, the CS took cognizance of the country’s reduced debt carrying capacity. Unless proper public debt restructuring is undertaken, the downgrade of Kenya’s debt carrying capacity from strong to medium by IMF indicates possibility of default in later years. Thus to prevent this, financing of the fiscal deficit will continue to be strictly guided by the Debt and Borrowing Policy and the annual Medium-Term Debt Strategy. Further the CS noted that the Government was in the process of implementing reforms to strengthen the institutional arrangement of public debt management by aligning the operations of the Public Debt Management Office to the PFM Act. In this respect, decisions on the day-to-day management and operations of public debt management shall be undertaken by the Public Debt Management Office to enhance efficiency, strengthen accountability and transparency. He did however urge Parliament to increase the debt ceiling set in the Public Finance Management Act to enable implementation of debt management operations including financing of the fiscal deficit.

BROAD AREAS OF FOCUS & SIGNIFICANT CHANGES IN TAX 

1. Proposal to expand the scope of digital service tax to include income derived through internet and electronic network
2. Proposal for contributions to the National Health Insurance Fund (NHIF) to qualify for tax relief at the rate of 15 percent of the contributed amount.
3. Proposal to amend the Retirement Benefits Act to provide for the registration and regulation of corporate trustees that provide services to pension schemes.
4. Insurance Act amendment to provide for foreign Insurers brokers
5. Rationalize non-priority expenditures with focus on expenditure being on Big Four.
6. Initiation of the National tax policy framework to enhance administrative efficiency of the tax system and provide for consistency and certainty of tax legislation and management of tax expenditure. 
7. VAT exemptions for diagnostic, laboratory reagents and artificial respirators. 
8. Exempt medicaments and breathing equipment to enhance the fight against the pandemic.
9. VAT exemption for  the transfer of assets and other transactions related to the transfer of assets into real estate investment trusts and asset-backed securities.
10. VAT  Exemptions  on specialized equipment for the development and generation of solar and wind energy to enhance access to these products 
11. Tax rebate extended to employers engaging TVET graduates as apprentices.
12. Import Declaration Fee (IDF) and Railway Development Levy (RDL) exemption on goods to promote investment above Ksh 5 billion. 

SUMMARY OF WINNERS AND LOSERS

Winners

Tax 

• NHIF Contributions to qualify for tax relief at the rate of 15% of the contributed amount
• Duty free importation of inputs for manufacture of baby diapers.
• VAT exemption on medicaments including decongestants and food supplements
• Equipment for generation of solar and wind energy exempted from VAT 
• Bulk purchase of data for resale to attract a rebate on the excise duty paid on internet data
• Youth and women including Ksh 4.2 billion Kenya Youth Empowerment and Opportunities Project;Ksh 10.0 billion for National Youth Service; Ksh 454.1 million Youth Enterprise Development Fund;Ksh 120.0 million for Women Enterprise Fund;and Ksh 62.0 million for Uwezo Fund 
• Enhancement of liquidity to businesses through payment of VAT refunds of Ksh 10.0 billion and clearance of pending bills of Ksh 13.1 billion

Losers 

Tax 

• Products containing nicotine or nicotine substitutes to attract excise duty at a rate of  Ksh 5.0 per gram
• Import duty on furniture at the rate of 35 percent to apply.
• Excise duty on betting at the rate of 20% of the amount wagered.

SUMMARY OF ECONOMIC RECOVERY PROGRAMME

Economic Recovery Programme has been allocated Ksh 23.1 billion in the following areas:

• Ksh. 2.6 billion to enhance liquidity to business;
• Ksh 6.4 billion for improving education outcome;
• Ksh. 6.9 billion for improving environment, water and sanitation facilities;
• Ksh. 1.97 billion for improving agriculture and food security;
• Ksh. 1.2 billion for the recruitment of health care interns;
• Ksh. 1.0 billion for the Kenya Wildlife Services to engage community scouts; and
• Ksh 3.0 billion for the youth empowerment and employment creation under Kazi Mtaani Programme
• MSMES – Kshs 2billion for credit guarantee programmes to enhance liquidity to MSMEs
• Pension contributors to access upto 7million for House purchases 
• Blue Economy- Kshs 3.2 billion- aqua-culture and Kshs 3.4 billion Kenya Marine Fisheries and Socio-Economic Development Project. 

SUMMARY OF ACHIEVEMENTS ECONOMIC STIMULUS PROGRAMME

• creation of over 100,000 job opportunities for the youth under the “Kazi Mtaani” initiative and 5,500 community scouts in wildlife conservation areas across the 47 counties;
• improvement of education outcome through construction of additional classrooms in secondary schools, procurement of locally fabricated desks for both primary and secondary schools and recruitment of 4,000 and 8,000 primary and secondary school intern teachers, respectively;
• enhancement of healthcare system capacity by recruiting 5,000 diploma and certificate level healthcare workers for one year under the Universal Health Coverage; 
• enhancement of liquidity to businesses through payment of VAT refunds of Ksh 10.0 billion and clearance of pending bills of Ksh 13.1 billion; 
• de-risking of lending to Micro, Small and Medium Enterprises by providing Ksh 3.0 billion to the Credit Guarantee Scheme as a seed capital; and
• cushioning the vulnerable particularly, the emerging urban vulnerable with an additional Ksh 10.0 billion to the cash transfer programme.

BIG FOUR AGENDA

The government has shown its commitment to the Big 4 Agenda through the fast tracking of implementation programs and projects under the “Big Four ” Agenda to:

• enhance food and nutrition security; 
• achieve universal healthcare; 
• provide affordable housing; and 
• support growth of the manufacturing sector for job creation.

The government has set aside Ksh 142.1 billion to support the implementation of the “Big Four” Agenda, for both Drivers and Enablers projects. The allocations are as follows:

• Manufacturing and industrialization- Ksh 20.5 billion
• Universal HealthCare- Ksh 47.7 billion
• Affordable and Decent Housing- Ksh 13.9 billion
• Agriculture and Food Security- Ksh 60.0 billion

Universal Health Coverage

Ksh 121.1 billion has been allocated to the health sector to support the following programmes aimed at improving various health outcomes.

Affordable Housing

Informal Sector Pension Scheme

CS Ukur Yatani noted that the majority of the Kenyans in the informal sector are not covered by any pension scheme making them vulnerable at old age. A National Informal Sector Pension Scheme was established in that regard. 

The government intends to roll out this scheme in the next financial year. 

The CS proposed to amend the Retirement Benefits Act and mortgage regulations to allow members utilize up to 40 percent or maximum of Ksh 7.0 million of their accrued benefits to purchase a house under a tenant purchase basis by their pension scheme.

The Affordable Housing Programme has been allocated Ksh 13.9 billion which will be spent as follows:

Manufacturing for Job Creation

To promote local industries, Treasury has proposed an allocation of Ksh 20.5 billion which will be spent as follows:

Food and Nutrition Security

 Ksh 60.0 billion has been set aside for various programs in this budget such as:

OTHER SECTORS & INITIATIVES

Tourism Recovery, Sports, Culture, Recreation and Arts-Ksh 15.0 billion

Environmental Protection, Water and Natural Resources

Improving Governance and Sustaining the Fight against Corruption

Education 

A total of Ksh.202 billion has been allocated for the FY 2021/22 with the aim of enhancing learning and competencies while developing quality and relevant skills for the 21st century. The allocations include:

• Ksh 12.0 billion will cater for Free Primary Education
• Ksh 2.5 billion for recruitment of teachers
• Ksh 62.2 billion for Free Day Secondary Education including insurance under NHIF for secondary school students
• Ksh 4.0 billion for examinations fee waiver for all class eight and form four candidates.
• Ksh 1.8 billion for the School Feeding Programme.
• Ksh 1.0 billion for the Competency Based Curriculum
• Ksh 420.0 million for the Digital Literacy Programme and ICT Integration in our Secondary Schools.
• Ksh 4.2 billion for Primary and Secondary schools infrastructure
• Ksh1.8 billion for construction and equipping of Technical Training Institutes and Vocational Training Centres.
• Ksh 1.1 billion has been set aside to increase access and improve the quality of Technical and Vocational Education and Training programs under the East Africa Skills Transformation and Regional Integration Project.
• Ksh 76.3billion for University Education
• Ksh 15.8 billion to the Higher Education Loans Board
• Ksh 5.8 billion for Kenya Secondary Education Quality Improvement Project.
• Ksh 5.2 billion capitation for TVET students.
• Ksh 745.0 million has been set aside for Technical, Vocational Education Training and Entrepreneurship
• Ksh 633.0 million for promotion of Youth Employment and Vocational Training.
• Ksh 323.0 million for the National Research Fund.

The Teachers Service Commission (TSC) has separately been allocated an extra Ksh 281.7 billion.

Critical infrastructure

The Government will undertake strategic interventions to achieve a resilient and sustainable economic recovery. This includes scaling up development of critical infrastructure in the country such as roads, rail, energy and water to reduce the cost of doing business and ease movement of people and goods as well as promote competitiveness. The proposed allocation towards this is  Ksh 182.5 billion, excluding the allocations set aside for the Economic Stimulus Programme and “Big Four” Agenda. Government’s expansion of road networks, railways, seaports, airports and energy investments include: 

–          the Standard Gauge Railway and urban commuter rail in Nairobi;

–          the on-going rehabilitation 24 of meter gauge railway lines along various routes including Nairobi-Nanyuki, and Nakuru-KisumuButere

–          the first berth in Lamu Port as a critical pillar of the LAPSSET corridor

–          establishment of a disease-free zone in Lamu to support export of live animals and processed meat

–          the rehabilitation and subsequent use of Kisumu port

–          expansion in energy generation and connectivity with over 7.5 million households connected to electricity compared to 2.3 million households in 2013.

Digitizing the Economy 

CS Yatani proposes the allocation of the following items in order to leverage on the rapid technological advancements in Kenya.

Energy

Key allocations under the energy sector include: 

• Ksh 50.1 billion to Power transmission & distribution;
• Ksh 11.3 billion for Geothermal Development;
• Ksh 5.7 billion for Electrification of identified Public Institutions; and
• Ksh 1.3 billion for Development of nuclear energy and exploration and mining of coal

Security 

The following key allocations have been made to the Security sector: 

COUNTIES– Ksh 409.9 billion

Transfers to County Governments

Transfer of Functions from Nairobi City County to the National Government-Ksh 27.2 billion

RESOURCE MOBILIZATION- HOW WILL WE FINANCE THE PROPOSALS?

The government intends to finance the budget through Revenue collection including Appropriation-in-Aid totalling Ksh. 2.038billion of which ordinary tax revenue projected at Kshs 1.77billion.  Fiscal deficit in FY 2021/22 budget of Kshs 952.9billion shall be financed through net external financing of Ksh 271.2 billion and net domestic financing of Ksh 658.5 billion.

It is important to note from the Cabinet Secretary speech that the National Treasury has initiated a process of developing a National Tax Policy Framework that will not only enhance administrative efficiency of the tax system but provide consistency and certainty in tax legislation and management of tax expenditure

On taxation, the following proposals have been initiated:

I) Income Tax

1. Multinational Enterprises (MNE’s) will be required to submit to the Commissioner a return describing the group’s financial activities in Kenya. Most MNEs that have subsidiaries in Kenya will not be impacted by the proposed amendment. This appears to contradict the intention of BEPS Action 13 which would have provided the KRA visibility of MNEs that are headquartered outside of Kenya
2. Interest restriction ratio has been increased from a fixed ratio of 3(debt):1(equity) to 30% of earnings before interest, tax, depreciation and amortization. There is however no provision to exclude financial institutions from this scope although on average 60% of their expenses are interest.
3.  Withholding Tax on Service Fees and Management and Professional Fees has been increased to 10%.
4. Relief has been proposed to be extended to individuals who pay premiums for health insurance to NHIF

II) VAT

• VAT collections are expected to increase following the reversal to 16% up from the 14% imposed to mitigate the effects of the pandemic.
• Medical supplies from VAT are exempted to aid in fighting the COVID-19 crisis
• exportation of taxable services are exempt from VAT. This has the potential effect of making Kenya an uncompetitive BPO destination and is discriminatory as exported goods are zero-rated.
• 16% VAT has been imposed on ordinary bread which would make it inaccessible to many Kenyans. This also contrary to the Big Four Pillar on Food Security
• Prohibition of claim of input tax – where the vehicles are leased or hired.

III) Excise Duty

• Re-introduced 20% excise duty on betting on the amounts staked. The betting industry is one of the most heavily taxed and imposing this 20% tax will kill the formal industry causing it to move online which will not generate any revenue for the Exchequer.
• Charge on 20% excise duty on fees or commissions earned in respect of a loan. This potentially will make the loans more expensive and inaccessible to borrowers especially the SMEs that are in dire cash flow constraints compounded by delayed payments by both levels of government.
• The rate of excise duty on motorcycles has been amended from a specific rate of Ksh 11,608.23 to an ad valorem rate of 15%. This will essentially increase the cost of motorcycle and bodabodas
• Excise duty has been introduced on jewellery made of precious metals at 10%. The cost of the engagement and wedding rings, earrings and such jewelry essentially increasing
• Excise duty has been introduced on products containing nicotine or nicotine substitutes at Kshs 5,000 per kg
• Excise duty on nicotine pouches at Ksh 5,000 per kg.

IV) Customs 

• The government aims to raise additional Ksh. 8.7 billion from custom duty
• Duty-free importation window for raw materials and inputs for manufacture of masks, sanitizers, ventilators and personal protective equipment remission has been extended for a further one year to 2022.
• Imported iron and steel products, shall continue attracting a duty rate of 25 percent with the corresponding specific rates for a further one year
• Manufacturers have been allowed to access inputs for manufacture of baby diapers duty free, under Duty Remission Scheme. This was meant to support Kenya’s capacity to manufacture these products locally and create jobs.

PAPERS SUBMITTED TO THE NATIONAL ASSEMBLY:

1.Budget Statement for the FY 2021/22; 

2.Budget Policy Statement 2021 

3.Estimates of Revenue, Grants and Loans for the FY 2021/22 Budget; 

4.Financial Statement for the FY 2021/22 Budget; 

5.Medium Term Debt Management Strategy 2021; 

6.Budget Highlights – The “Mwananchi” Guide for the FY 2021/22 Budget; and 

7.Statistical Annex to the Budget Statement for the FY 2021/22.