President William Ruto's Kenya Kwanza administration has drawn up a Sh4.2 trillion expenditure plan for the 2024/25 financial year, including allocations to counties, according to the 2024 Budget Policy Statement (BPS) currently before Parliament.
Of the Sh4.2 trillion budget, the national government's projected allocation is Sh2.5 trillion, a slight improvement from the Sh2.46 allocated in the current financial year, and Sh391.12 billion, which is an increase from the Sh385.42 billion currently allocated to the counties in an equitable share to the 47 devolved entities.
Counties are also expected to receive an additional Sh54.72 billion from the Government of Kenya and development partners in the 2024/25 financial year.
Of the trillions allocated to the National Government, the Executive has a lion's share of Sh2.44 billion, an improvement from the Sh2.4 trillion allocated in the 2023/24 financial year, Parliament has Sh41.62 billion up from the current period's Sh40.74 billion, while the Judiciary is expected to get Sh23.7 billion up from the Sh22.8 allocated in the current financial year.
The Consolidated Funds Services (CFS) projected allocation is up by Sh1.24 trillion from the current allocation of Sh1.13 trillion with the Equalisation Fund to receive Sh7.87 billion.
The National Treasury proposes to allocate an additional Sh3.53 billion to the Equalisation Fund in the next financial year "as partial payment of arrears to the Equalisation Fund".
At Sh666.46 billion, the education sector has the largest projected allocation, although this is a slight decline from the Sh689.61 billion allocated in the current financial year, followed by energy, infrastructure and ICT at a projected Sh505.67 billion, a slight improvement from the current allocation of Sh494.72 billion.
Public Administration and International Relations, which includes the Office of the President, will get Sh351.7 billion from Sh299.33 billion, National Security will get Sh244.42 billion from Sh199.3 billion and Health will get Sh147.6 billion from Sh138.85 billion.
However, the projected allocation to the agriculture sector, which President Ruto has identified as a key sector for the country's economic growth and rural and urban development, is Sh87.81 billion.
This is lower than the current allocation of Sh98.1 billion, with projected investment in general economic and commercial affairs also falling from Sh72.44 billion to Sh56.72 billion.
The 2024 BPO with a projected deficit of Sh703 billion compared to Sh785 billion in the current fiscal year is the second to be prepared under President Ruto's Kenya Kwanza administration since he assumed power after the August 9, 2022 general elections.
The deficit will be financed through domestic borrowing of Sh377.7 billion and external financing of Sh326.1 billion.
The BPO is framed under the theme - sustaining Kenya Kwanza's five pillars under the Bottom-up Economic Transformation Agenda (Beta) for economic recovery and improved livelihoods.
"The government will continue with the pro-growth fiscal consolidation plan through expenditure restraint and enhanced revenue mobilisation to slow down the growth of public debt without compromising service delivery," says the BPS.
The country's expenditure plans are based on revenue projections for the next financial year of Sh3.44 trillion, including ordinary revenue and Appropriations in Aid (AiA).
The projected revenue is about Sh400 billion higher than the Sh3.07 trillion projected for this fiscal year, although the Parliamentary Budget Office (PBO) warned that it risks falling short by Sh300 billion.
The BPO, which has since been sent to the National Assembly's portfolio committees for processing before being presented to the House's Budget and Appropriations Committee, assures that the revenue performance will be underpinned by reforms in tax policy and revenue administration measures.
The measures, the BPO says, are aimed at broadening the tax base and improving tax compliance with ordinary revenue projected at Sh2.95 trillion compared to the Sh2.62 trillion in the current financial year with the balance being Appropriations in Aid (AiA).
The projected allocation of the budget is pegged on the importance of completion of ongoing projects, viable stalled projects and payment of verified pending bills to which a programme addresses job creation and poverty reduction as well as the cost-effectiveness, efficiency and sustainability of the programme.
PBO, in its Quarterly Economic and Fiscal Update for July-September 2023, warns that the situation could get worse in the coming days as it predicts a Sh300 billion shortfall in revenue targets this fiscal year if the revenue performance trend continues.
The PBO, based on data from the National Treasury, shows that development spending, which is critical to boosting the country's economic growth, fell by Sh31.6 billion, or 4.2 percent, compared to 10 percent in the same period in 2022.
The net effect is that most government agencies received zero disbursements for development, with disbursements to the 47 devolved units averaging Sh61.1 billion, about 8.2 percent, "the lowest since the first quarter disbursement in 2021."
The first quarter target is based on the annual tax revenue target of Sh2.57 trillion, which is needed to finance this fiscal year's Sh3.6 trillion budget.
Although revenues grew by 7.9 percent year-on-year in the same period, the PBO notes that this is a decline from an average growth of 13 percent in previous years.
"If the performance rate follows the same trend for the rest of the fiscal year, the annual target is likely to be missed by Sh300 billion," the PBO document warns, although it attributes this to the delay in implementing the revenue enhancement measures contained in the 2023 Finance Act.
The document further points out that all tax revenue categories contained in the Finance Act underperformed their targets for the period under review.
For instance, income tax missed its projections by Sh35.5 billion, mainly due to below target collection of taxes from employment income - PAYE by Sh16.1 billion).
Consumption-based taxes also underperformed by Sh33.4 billion, with VAT missing the target by Sh12.6 billion, excise duties by Sh12.5 billion and import duties by Sh8.4 billion.
Public debt currently stands at over Sh11 trillion, according to the BPS, and is expected to remain above the 55 percent sustainability threshold "over the medium term, but will gradually improve by 2027".
In 2024, the BPS projects the debt-to-GDP ratio to be 61.9 percent, down from 64.4 percent in 2023, and is expected to fall to 60.2 percent in 2025, 58.3 percent in 2026 and 56.6 percent in 2027.
This is even though Kenya's fiscal risks remain high due to volatile international commodity prices, tighter external financing conditions, elevated inflation, and persistent drought.
There is also the public debt sustainability risk, which makes Kenya's debt sustainability vulnerable to "exogenous shocks such as export revenue patterns and the exchange rate".
The risk of a depreciation of the Kenyan shilling against major currencies could also increase the cost of debt service, as more than 50 percent of the debt portfolio is in foreign currency.
The high-interest rates have implications for fiscal policy, as a larger share of revenues may be used to service debt.
To reduce debt vulnerabilities, the government has committed to rely on concessional borrowing to finance capital investments. The performance of the economy and public revenues has a direct impact on debt sustainability.
"A slowdown in economic growth worsens debt sustainability indicators," the BPS said, as it became clear that market pressures due to monetary tightening in the US and Europe have led to reduced access to the international capital market.
The high inflation rates have stimulated high-interest rates in both international and domestic markets, making borrowing costly.
"This may prevent the government from carrying out liability management operations on its debt portfolio and also increase the debt service costs on the existing portfolio," the BPS said.
This means that the government will be forced to continue to monitor market conditions before undertaking any liability management operations.
