Treasury tabled before parliament its first supplementary budget for the current fiscal year 2023/24. In it, priority spending has now shifted from development-led expenditure to focus on debt servicing and investments in primary sectors like education, health and agriculture.
Infrastructure heavy departments such as roads, energy, and housing all saw their budgets revised downwards while service departments like education, crop production and health saw their budgets revised upwards.
This is the first time in a very long time that the government has done that.
In it, Treasury wants to:
- Increase overall expenditure by 4.9% to Kshs 3.98 trillion (USD 26.5 billion).
- Increase recurrent spending by 5.35% to Kshs 1.65 trillion (USD 10.9 billion).
- Reduce development spending by 5.2% to Kshs 765.7 billion (USD 5.09 billion).
The Elephant in the Room
- Total debt servicing has been revised upward by 14.8% to Kshs 1.87 trillion (US$12.4 billion). The revision was mainly on account of external debt service, which was revised up by 35% to Kshs 835 billion (USD 5.57 billion).
- On the other hand, local debt service on the other hand was revised up by only 2% to Kshs 1.03 trillion (USD 6.81 billion).
- These changes in debt service allocation reflect the impact of the depreciating shilling on the country’s debt service.
Here’s why such a policy direction is positive for the economy in the long term:
For 10+ years, the Kenyan economy has relied on government’s infrastructure spending to drive growth. This type of growth has had little positive impact on the real economy since most of the money spent on these projects ends up abroad in the hands of contractors, deal makers and foreign governments. Most of the projects have also had low-to-negative economic return on the real sectors. Investments in primary services, on the other hand, usually have a direct impact on real economies.
Spending more on agriculture for instance, increases production of food and raw materials, which in turn has an income generating ripple effect across value chains. Education & healthcare also has a similar effect. Shifting from government spending led growth to a private sectorled growth will benefit more people, especially the low-income bracket.
The infrastructure spending has exposed the economy to serious external shocks since it was largely financed in foreign currencies. The same projects have not yielded good returns in foreign currency in the form of exports, tourism etc., to cushion the economy against the shocks. On the other hand, investments in primary sectors like education have helped the economy earn significant foreign exchange in the form of service exports and diaspora remittances.
- The Government is now expected to shift its focus from developing new infrastructure to encouraging the utilization of the existing infrastructure.
- Sweating existing assets will/should increase their economic return.
Prioritizing debt servicing also signals positive credit standing to the financial markets, and this may improve access to financing in the future.
This shift will not be easy
Transitional hiccups and adjustment costs are bound to manifest in the short term. Before the real sectors start benefiting from the transition, there will be a period of stagnant incomes and rising consumer prices (the ongoing cost-of-living crisis).
If the government fails to manage expectations during the transition, it may lead to public outcry and heighten political tensions. Elected politicians are also likely to express negative sentiments, given the promises they made during the election season a year ago.
Supporting private sector driven growth rather than public spending driven growth is a positive signal. Investors, entrepreneurs and households need to start aligning themselves to this transition while embracing themselves for the short-term negative effects.
Ruriga Kimani is a seasoned Business Analyst and Consultant specializing in economics and finance. His expertise lies in financial analysis, strategic planning, and effective risk assessment.