Background

The Budget Policy Statement (BPS) is a government policy document that sets out the broad strategic priorities and policy goals to guide the National Government and County Governments in preparing their budgets for the subsequent financial year and over the medium term. This is the second BPS to be prepared by the Kenya Kwanza administration. In it, the administration reaffirms its priority policies and strategies outlined in the Bottom-Up Economic Transformation Agenda (BETA).

The 2024 BPS, themed “Sustaining Bottom-Up Economic Transformation Agenda for Economic Recovery and Improved Livelihoods”, has been prepared against the backdrop of bold policy responses to mitigate the negative global and persistent shocks that pushed the economy to its lowest vibrant level. These shocks include global supply chain disruptions due to ongoing conflicts in Eastern Europe and the Middle East; tightening of monetary policy in the developed world leading to high-interest rates that limit access to credit and exacerbate debt servicing costs; significant losses and damages due to frequent extreme weather events; and elevated commodity prices such as petroleum products on account of increased geopolitical fragmentation and global oil supply cuts.

Having been tabled in Parliament as per the requirements of the Public Finance Management Act, 2012, the BPS is now open for public participation.

The general economic outlook

FY 2023/2024 has been characterised by a challenging fiscal environment. That notwithstanding, economic vibrancy was noted because of some of the interventions rolled out under the BETA pillars.  For the first three quarters of 2023, the economy remained strong posting an average growth of 5.6 percent, a clear demonstration of resilience. Compared to the estimated global and Sub-Saharan African region average rates of 2.9 percent and 3.3 percent respectively, the economy stood at a positive standpoint.

The economy is projected to expand by 5.5 percent in 2023 and 2024 from 4.8 percent in 2022. This growth outlook will be supported by broad-based private sector growth, continued robust performance of the services sectors, the rebound in agriculture, and the ongoing implementation of policy measures to boost economic activity in the priority sectors of the BETA.

The hard budget constraint approach

The core agenda of the government in the 2024 BPS is to enhance revenue mobilisation and reduce expenditure by cutting on non-prioritized projects. 

Terming it the ‘hard budget constraint’ approach, the government aims to implement several structural reforms to stabilise government finances and the economy. In doing so, the government acknowledges that there is a need to critically focus on reducing the cost of living and improving livelihoods. Consequently, the proposed interventions in the 2024 BPS are meant to reverse the economic recession and ignite economic recovery.

The interventions target five core priority areas, namely: (a) Agricultural Transformation and Inclusive Growth; (b) Micro, Small and Medium Enterprise (MSME) Economy; (c) Housing and Settlement; (d) Healthcare; and (e) Digital Superhighway and Creative Industry.

Medium-Term Revenue Strategy and the National Tax Policy

The National Treasury has embarked on redesigning the taxation instruments to make them more supportive of economic activity without distorting the market and eroding investment incentives. This is being done with the aim of boosting revenue collection and raising tax efforts from the current 16.0 percent of GDP in FY 2023/24 to where it was previously, above 20 percent of GDP.

To do this, the National Tax Policy and the Medium-Term Revenue Strategy for the period FY 2024/25 – 2026/27 have been formulated already and are awaiting parliamentary approval. The underpinning strategies in these key policy documents will combine both tax administration and policy measures to enhance revenue mobilisation.

Efforts have also been doubled up that would see various Ministries, Departments and Agencies (MDAs) not only mobilise more non-tax revenues but also transfer resources to the exchequer. The penultimate goal is to see a considerable chunk of MDAs to be self-financing.

On the Tax Administration side, the government is keen on leveraging technology to seal leakages; enhance iTax and Integrated Customs Management System (iCMS) and improve the e-TIMS (Tax Invoice Management System). These policy strategies are primed to expand the primary surplus in the fiscal framework and stabilise the growth of public debt thereby boosting the country’s debt sustainability position.

More importantly, the government is keen on partnering with the private sector through the Public-Private Partnerships (PPP) framework to tap into the capacity of the private sector to deliver projects that have strong economic, commercial, and environmental benefits and are aligned with the BETA priorities.

Reform agenda

For the next four years, the reform agenda is at the top of the priorities of the government. Policy and structural reforms are going to be given priority, aligning them to the BETA to navigate global turbulence, accelerate economic recovery, and address overarching development challenges, namely creating jobs, eradicating poverty, and mitigating climate change.

As part of the process, the government will accelerate investments in (i) Human capital development, (ii) Reviving and sustaining markets to play their pivotal function, (iii) Developing diverse methods for domestic resource mobilisation, (iv) Reform and restructuring of institutions to provide policy leadership and policy implementation; and (v) Digitisation to coordinate all the other four areas.

Implications for businesses

The government is greatly leaning towards expanding its revenue base whilst cutting down on non-prioritised expenditures. Consequently, businesses need to be on the lookout for:

1. Pending bills. With the Pending Bills Verification Committee almost concluding its report, the recommendations of this Committee will have a huge impact on how businesses trade with the government.
2. Partnerships. The government is keen on leveraging Public-Private Partnerships to see it achieve its agenda. This can form the basis for entities to strategically position themselves in supporting the government agenda.
3. Reforms. Policy and structural reforms are part of the government’s agenda. Various sectors are going to be met with shifts in policy, and this would necessitate readjustments for businesses. Changes in licensing requirements, new models of taxation as well tax administration, among others, are mooted. It is also essential that entities participate during the formulation of these structural and policy shifts to secure their plight.

In conclusion, the budget cycle is already in motion, and businesses need to brace themselves for policy and structural changes. To effectively do so, strategic stakeholder engagement is essential. This should be underpinned by messaging that aligns with the BETA, considering that the government is extremely open to engaging the private sector in achieving its objectives.