How State plans to raise funds in Budget proposals

The government is banking on raising Sh30 billion annually from the sale of State Owned Enterprises (SOEs) among a raft of fiscal consolidation measures to turn around an economy ravaged by debt, a high cost of living, drought and global economic shocks.

In some with of the enterprises, such as KenGen, Kenya Power, Kenya Airways and banks in which it has shares, the State intends to cede part of its shareholding for a consideration. Many of these firms are listed on the stock exchange, meaning that some of the shares will either be sold in the open market or to preferred investors.

Also targeted are State-owned sugar companies, the proposed sale of which has already sparked controversy with legislators from western Kenya already opposing the plans, an indication of how tough it will be for the government to offload them given suspicions about who will buy the stakes.

With a cash crunch biting hard, and Treasury finding itself between a rock and a hard place in settling increasing recurrent and development obligations, the Parliamentary Budget Office (PBO) reckons these resources will come in handy in boosting government revenues.

Treasury is eyeing a Sh3.6 trillion Budget in the next financial year, the first full financial year for the Ruto administration.

The sale recommendation — contained in the PBO proposals — comes against the backdrop of elevated global inflation, persistent supply chain disruptions because of the ongoing Russia-Ukraine conflict, and drought, both of which have created urgency to boost food security. As a result, according to fiscal consolidation report from the PBO, agriculture will play a key part in driving this growth in the short term.

Kenya’s economy grew at an average of 4.4 per cent per year over the past five years, which was below the Medium-Term Plan target of 7.0 per cent. This lower-than-expected growth was attributed to unfavorable weather conditions affecting agriculture, whose contribution to economic growth dropped when the country experienced drought in 2017 and 2021.

The contribution of the Industry Sector was affected by weather-dependent agricultural production given that about half of manufacturing activities involve food processing.

Supply chain disruptions in grain imports and climate change-induced disruptions are also becoming a regular phenomenon, and may be one of the reasons for the decline in the share of real GDP contributed by agriculture. This reduced from 21.4 per cent in 2012 to 19.5 per cent in 2021. Consequently, manufacturing also declined in its share of wealth creation from 9.6 per cent in 2012 to 9.2 per cent in 2021.

Public debt

The PBO, however, notes that the proposed privatisation deals must be implemented along with a strategy of improving the financial status of most SOEs in order to reap long-term benefits.

“For long-term impact, privatisation proceeds should be earmarked to capital projects that have potential to generate future revenues or be used to retire expensive public debt,” says the PBO document seen by the People Daily.

To achieve this, there is an urgent need to review Public Private Partnership (PPP) laws and set up an enabling framework to ensure that the policies are clear and guarantee benefits to Kenyans as opposed to foreign entities involved in the partnerships. To enhance agricultural production, the Treasury intends to allocate Sh15 billion for expansion of the inputs subsidy programme to target 200,000 metric tonnes of subsidised fertiliser and other assorted farm inputs.

The Ministry of Agriculture will also restructure the e-voucher input management system to achieve efficiency and effectiveness in the supply of farm inputs and allocate Sh1.5 billion for the provision of extension services, which are critical for boosting yields through farmer education.

Allocating Sh7.2 billion as credit or working capital to farmers through well managed farmer organisations or cooperatives is also expected to increase production by allowing farmers to purchase critical inputs not supplied through the subsidy programmes. The actualisation of the warehousing receipt system will also play a critical role in credit provision as these can be used as collateral for loans.

To spur manufacturing activities, the allocation of Sh5 billion towards scaling up of Kenya Industrial Estates (KIE) operations countrywide will be followed with enhanced credit disbursements from the current Sh1 billion to Sh3 billion.

This will also see the establishment of industrial parks to support incubation centres in all the 47 counties. In the past, KIE offered loans to small-scale operators to buy equipment or increase inventories with a view to scaling their businesses.

Provision of Sh8.2 billion per year over the medium term will enable completion of special economic zones and industrial parks. However, there is need to re-appraise all the projects in the manufacturing sector to ensure that funding is channeled only to the viable projects, including leather and related industries, which offer low-hanging fruits for players in the sector.

Funding for research entities is expected to increase from the current 0.8 per cent of GDP, progressively to one per cent. Recommendations are that allocation for research purposes be increased by 0.1 per cent in FY 2023/24 – an equivalent of additional Sh11 billion – before achieving the one per cent in subsequent years.

This will be complimented by increased collaboration between these institutions and industry players, including incorporating industry-led standards into training curricular to equip future workers with relevant skills for the new and emerging markets and processes.

As part of its economic turnaround plan, the government intends to scale up revenue collection by the Kenya Revenue Authority (KRA) to Sh3.0 trillion in the FY 2023/24 and raise this to Sh4.0 trillion over the medium term, meaning more Kenyans will be roped in into the tax bracket as the economy expands.

Tax system

The KRA is expected to implement among others, the following measures: reduction of Value Added Tax (VAT) gap from 38.9 to 19.8 per cent of the potential by fully rolling out electronic Tax Invoice Management System (eTIMS); reduction of Corporate Income Tax (CIT) gap from 32.2 to 30.0 per cent.

Others include integration of the KRA tax system with telecommunication companies; tax base expansion in the informal sector; implementation of rental income tax measures by mapping rental properties; rolling out of measures at the Customs and Border Control and leveraging on technology and enhanced data analytics to enhance revenue collection per unit.

According to the Budget Policy Statement, the Medium-Term Revenue Strategy will provide a comprehensive approach of undertaking effective tax system reforms for boosting tax revenues and improving the tax system over the medium term.

Reducing government expenditure through austerity measures will, however, lead to lower output. Therefore, the challenge of the government is to strike the right balance for fiscal consolidation without harming economic growth.

To be continued tomorrow