On fiscal performance, despite the challenges of lower revenues, the Government has been keen on fiscal consolidation path in order to reduce the level of fiscal deficit and debt. The shortfalls in revenues in FY 2020/21, reflect the weak business environment and the impact of the 9 month’s tax reliefs measures implemented in April 2020 to support people and businesses from the adverse effect of COVID-19 pandemic and the impact of the containment measures that were deployed. Revenues are expected to progressively improve in the first and second quarter of 2021 following the gradual reopening of the economy and the increased demand for imports as well as improved domestic sales. In addition, revenue performance will be underpinned by the on-going reforms in tax policy and revenue administration.
In this regard, the target fiscal deficit for the FY 2020/21 is 8.7 percent of GDP and is expected to decline to 7.5 percent of GDP in FY 2021/22 and further to 3.6 percent of GDP by FY 2024/2025. The fiscal consolidation will be achieved by raising revenue and reducing unproductive expenditures while protecting developmental spending.
The outlook faces risks. Emergence of new COVID-19 variants in Kenya or its trading partners, could lead to renewed disruptions to trade and tourism and require broader reinstatement of containment measures. Though global economic prospects have improved in recent months, largely supported by the deployment of vaccines and strong policy measures, the outlook remains highly uncertain, due to concerns on the pace of rollout of vaccination programmes in some countries. Additionally, weather related risks could adversely affect agricultural production.
The Government is committed to returning to the fiscal consolidation path based on a range of measures geared towards revenue enhancement; improving the efficiency of public investments; rationalization of recurrent spending; and improving debt management. These will help to restrain public borrowing, reduce fiscal risks and ensure that fiscal and macroeconomic stability objectives are achieved. The gradual reopening of the economy and reversal of Covid-19 related tax reliefs (e.g., VAT, CIT and income tax), is expected to lead to an increase in revenue collection. In addition, the GoK intends to create fiscal space by enhancing revenue collection by closing the Domestic Resource Mobilization (DRM) gap; implementing ongoing revenue enhancement measures (tax administration, streamlining list of exemptions, and widening the tax net); improving the efficiency and effectiveness of public investment by strengthening the Public Investment Management Unit; building the capacity in public debt management to manage recent shifts in public debt portfolio towards expensive and short maturing loans; and strengthening M&E capacity of the Public Private Partnership (PPP) Unit to reduce potential materialization of contingent liability risks.
Kenya’s public and external debt remain sustainable but the risk of debt distress has increased from moderate to high. The public debt–to-GDP ratio increased considerably over the past five years but was further exacerbated by significant expenditure hikes to deal with the impact of COVID-19. Public debt was estimated at 72 percent of GDP in 2020 (compared to 41 percent in 2013 and 62.1 percent in 2019). Of the total public debt, 51 percent is external while 49 percent is domestic. The increase could be attributed to a rise in both domestic and external borrowing to finance large infrastructure projects, including the standard gauge railway, and the COVID-19 response. The debt stock is made up of multinational debt at 33.4 percent of the total, commercial debt at 33.1 percent of the total, bilateral at 33.0 percent of the total, while other creditors comprise 0.5 percent of the total. Debt servicing accounts for a quarter of Government revenues. In April 2020, the IMF elevated Kenya’s risk of debt distress to high from medium on account of liquidity and solvency risks. Fiscal consolidation planned over the short to medium term will help to bring Kenya to reduce the risk of debt distress. Recently, the IMF Executive Board approved a loan of US$2.4 billion to finance a 38 months program.
The program plans to support Kenya’s Covid-19 recovery efforts and stabilize debt and reduce it relative to GDP through a multiyear fiscal consolidation program. Important aspects of the program include, anchoring debt sustainability on a positive primary balance through, among others, implementation of revenue enhancement and public spending efficiency enhancement measures.