IMF Says Kenya’s New Government Tier Adds to Budget Pressure

Kenya’s new tier of government is adding to spending pressures, requiring wage restraint to keep the fiscal deficit under control, the International Monetary Fund said.

The government will present tomorrow the country’s first budget statement under a devolved system of governance that was introduced after national elections in March. It enacted a constitution in 2010 creating 47 county governments that are largely dependent on national transfers for revenue.

“There will be spending pressures linked to the devolution process,” Ragnar Gudmundsson, the IMF’s representative in Kenya, said in an e-mailed response to questions on June 10. “The process may also create pressures on the wage bill in the public sector.”

While revenue growth in East Africa’s largest economy has been “stunted” over the past several years amid subdued economic expansion, government spending has steadily risen and led to increased domestic and external borrowing to plug the gap, Kenya’s Parliamentary Budget Office said in March.

The deficit including grants may reach 6.7 percent of gross domestic product in the fiscal year ending June 30, from 5.6 percent in 2011-12, according to the Finance Ministry, which didn’t provide an estimate for next year.

The East African Community governments of Tanzania, Uganda and Rwanda will also announce 2013-14 budget plans tomorrow. Burundi plans its budget on a calendar-year basis.

Economy Growing

The Kenyan government spends about half of its tax revenue paying public workers, which is “very high” and “needs to be controlled in order to create fiscal space for much-needed development expenditure,” Gudmundsson said.

The government projects economic growth of 6 percent in 2013 from 4.6 percent last year. Improving economic sentiment has helped drive down Kenyan bonds yields in the primary market and boosted share prices. Yields on three-month government debt dropped to 6.721 percent at the last auction on June 6 from 10.78 percent a year earlier. Kenya’s NSE All Share index has gained 33 percent so far this year, adding to a 39 percent rise in 2012, when it was sub-Saharan Africa’s best performer.

Criticism has grown about the mushrooming wage bill after members of parliament last month awarded themselves a pay rise to 851,000 shillings ($10,018) a month, higher than the 532,000 shillings set by the Salaries and Remuneration Commission. The High Court has delayed implementation pending a court challenge.

Activists with Kenya’s Occupy Parliament movement gathered outside parliament in Nairobi, the capital, yesterday to protest the higher salaries. Last month, protesters released pigs in front of the buildings to symbolize greed.

Deficit Challenge

“The call for a higher wage bill may hinder efforts to reduce the fiscal deficit especially if the government has to increase its borrowing to meet the new demands,” Judd Murigi, head of research at Nairobi-based African Alliance Securities Kenya, said by phone on June 10.

Combined, Kenya’s counties will receive 210 billion shillings, or 34.5 percent of revenue, for the fiscal year through June 2014, according to the Division of Revenue Bill.

County governments can collect property and entertainment taxes and are responsible for providing basic services including primary health care and local transport.

Kenyatta, elected as president in the March 4 vote, has promised to boost economic growth to between 7 percent and 10 percent by 2015, create a million new jobs a year, double the amount of tarmac roads and construct a port in Lamu.

Budget Pressures

While the limited functions of county governments may cap immediate spending increases, their needs over time will grow and add to budget pressures, Razia Khan, head of Africa economic research at Standard Chartered Bank in London, said in an e-mailed response to questions on June 10.

The government should put “much more focus on capital expenditure, cutting down on recurrent expenditure where possible,” Khan said. “Of course, given the context of more devolved government, this will be difficult to achieve.”

Kenya should also review tax policy, including removing some exemptions, and strengthen taxpayer compliance to increase income, Gudmundsson said. The state collected 15 percent less revenue than targeted in the first nine months of 2012-13.

Rising Debt

Kenya’s debt may reach 45.9 percent of GDP in 2013-14 from 44.7 percent this year, according to the budget office.

Total expenditure in 2013-14 may reach 1.65 trillion shillings, according to estimates cited by the budget office. The government aims to collect 986.2 billion shillings in revenue and 491 billion shillings in grants, external financing and domestic borrowing. That leaves a deficit of 163.4 billion shillings, which may require spending cuts or additional borrowing to reduce the gap, the budget office said.

“The growing wage bill may continue to be a major setback as the implementation of devolved system of governance gains momentum,” according to the budget office.

Kenya’s shilling weakened for a third day against the dollar, declining 0.4 percent to 85.45 by 4:11 p.m. in Nairobi, heading for its lowest since March 29 and paring its gains this year to 0.8 percent, according to data compiled by Bloomberg.

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