Fiscal Policy
In 2010, the government continued to implement its economic stimulus programme, funding public projects in agriculture, services, infrastructure, health and education as well as various community-based initiatives through the Constituency Development Fund and Group funds (Youth and Women fund). To mitigate the impact of multiple shocks, the government eased its macroeconomic policies. The deficit of the primary balance increased from 3% of GDP for the fiscal year 2008/09 to 3.2% in 2009/10. It is expected to deteriorate further down to a deficit of 4.1% of GDP for fiscal year 2010/11. The overall deficit also grew from 5.4% of GDP in 2008/09 to 5.8% in 2009/10 and is forecast to increase to 6.8% in 2010/11.
Total revenue collection and grants increased to 24.9% of GDP in the fiscal year 2009/10, from 23.3% of GDP in 2008/09. Government total expenditure and net lending followed the same path, increasing from 28.7% of GDP in 2008/09 to 30.8% of GDP in 2009/10. Total government expenditure for the fiscal year 2009/10 increased by 21.7% amounting to KES 725.2 billion, against a target of KES 791.4 billion. The shortfall was attributed to lower absorption in both recurrent and development expenditures by the ministries. On the one hand, recurrent expenditure amounted to KES 510.5 billion, against a target of KES 536.3 billion, therefore representing a 95% execution rate. The lower-than-targeted recurrent expenditures mainly emanated from the operations and maintenance expenditures. On the other hand, development expenditures were executed at 84% compared with the target.
Cumulative external financing at the end of the 2009/10 fiscal year represented a net borrowing of KES 22.4 billion compared with KES 11.7 billion in 2008/09. Total disbursements including appropriations in aid amounted to KES 39.8 billion against a target of KES 66.5 billion. Public debt increased from KES 1 075.7 billion by the end of September 2009 to KES 1 294.4 billion by the end of September 2010.
From January to September 2010, domestic debt increased by 28% compared with a similar period in 2009. The stock of Treasury bills increased by 5.8% while Treasury bonds increased by 24.5%. External public debt increased from KES 525.5 billion in December 2009 to KES 589.7 billion in September 2010. The Fitch Rating for 2010 remained B+ for long-term foreign debt, B for short-term foreign debt and BB- for domestic long-term foreign debt.
Cumulative debt service payments to external agencies as of the end of September 2010 amounted to KES 8.6 billion: 81.2% in principal and 18.8% in interest. For the first quarter of the fiscal year 2010/11, government expenditure on interest and other charges on domestic debt increased to KES 16.2 billion from KES 14.1 billion in the first quarter of the fiscal year 2009/10. For the current fiscal year 2010/11, budget estimates are that government domestic borrowing will amount to 3.8% of GDP while external borrowing shall account for 3.0% of GDP. Gross domestic debt-to-GDP ratio is projected to increase from 24.2% in June 2010 to 27.1% in June 2011.
For the fiscal year 2010/11, the government plans to contain the increase in expenditures through improved public financial management while maintaining strong revenue collection. In addition, the composition of expenditures will be shifted from recurrent to capital expenditures. For 2010/11, total government revenues and grant should represent 24.5% of GDP. Overall expenditures are projected at 31.3% of GDP. The overall recurrent expenditures are targeted at 21.3% of GDP, an increase from 20.9% of GDP recorded in fiscal year 2009/10. Current expenditures are projected at 21.9% of GDP, compared to 20.3% of GDP in 2009/10. Additional expenditures are targeted at supporting infrastructure by reducing the cost of doing business and encouraging private sector investment.
The overall fiscal deficit (after grants) is expected to worsen from the equivalent of 5.8% of GDP in 2009/10 to 6.8% of GDP in 2010/11. The government plans to cover it by net external financing of 3% of GDP and domestic borrowing of 3.8% of GDP, including domestic infrastructure bonds on 1.1% of GDP. Over the medium term, the government expects to take the fiscal deficit down to about 5% of the GDP and to bring the debt-to-GDP ratio towards 45%. The debt management strategy will aim to diversify sources of financing by emphasising long term maturities and concessional loans.
Table 4: Public finances (percentage of GDP)
| 2002 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | |
|---|---|---|---|---|---|---|---|
| Total revenue and grants | 19.8 | 22.5 | 23.4 | 23.3 | 24.9 | 24.5 | 23.7 |
| Tax revenue | 17.7 | 19.6 | 20.4 | 20.7 | 21.3 | 21.1 | 20.8 |
| Oil revenue | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
| Grants | 0.7 | 0.9 | 1.3 | 0.8 | 1.3 | 1.2 | 0.8 |
| Other revenues | 1.5 | 2 | 1.7 | 1.8 | 2.4 | 2.2 | 2.1 |
| Total expenditure and net lending (a) | 22 | 23.4 | 28.6 | 28.7 | 30.8 | 31.3 | 30.7 |
| Current expenditure | 19.3 | 18.7 | 21.8 | 21.2 | 20.3 | 21.9 | 21.2 |
| Excluding interest | 16.3 | 16.2 | 19.3 | 18.8 | 17.7 | 19.1 | 18.8 |
| Wages and salaries | 7.6 | 7.4 | 7.5 | 7.1 | 7 | 7 | 6.7 |
| Goods and services | 4.4 | 5.8 | 8.2 | 7.9 | 7.2 | 8.3 | 8.3 |
| Interest | 3 | 2.5 | 2.5 | 2.4 | 2.6 | 2.7 | 2.4 |
| Capital expenditure | 2.6 | 4.7 | 6.7 | 7.4 | 10.3 | 9.4 | 9.4 |
| Primary balance | 0.8 | 1.6 | -2.7 | -3 | -3.2 | -4.1 | -4.7 |
| Overall balance | -2.2 | -0.8 | -5.2 | -5.4 | -5.8 | -6.8 | -7.1 |
Monetary Policy
The Central Bank of Kenya (CBK) implemented flexible monetary policy in 2010. It aimed to keep inflation low by setting an inflation target of 5%, ensuring stable long-term interest rates and competitive exchange rates. It supported the economic activity by facilitating the private sector access to credit. The CBK has cut the Central Bank Rate (CBR) four times, amounting to a total reduction of 100 basis points in 2010, from 7% in January to 6% in July 2010. In addition, the CBK reduced the Cash Reserve Ratio from 6 to 5% in the first half of 2010.
By implementing these measures, the government expects to revive lending and stimulate the economy through increased consumer consumption. This monetary stimulus has been successful and resulted in increased access to credit for the private sector as well as recovered consumption growth. The credit allocated to the private sector grew dramatically, registering a 17% increase in the first half of 2010. The major part of this growing credit was captured by credit to households, which grew by 30% over the same period.
The CBK introduced agency banking in 2010 to deepen access to financing for a majority of Kenyan small entrepreneurs and to reduce the high cost of financial services. Under the Guideline on Agent Banking enacted in May 2010, banks are allowed to conduct banking business through third party agents such as petrol stations, shops, telecom companies, chemists and sole proprietors. However, services delivered by these entities exclude customer appraisal and loan approval. Information asymmetry between borrowers and banks is another factor contributing to the high premiums charged by banks. To reduce information asymmetries and promote cheaper credit, the CBK has created a credit information-sharing mechanism. The first Credit Reference Bureau was licensed in February 2010.
As a result of strong and prudent macroeconomic management combined with a favourable conjuncture (slowing international oil prices and better food supplies), inflation dramatically decreased to 3.1% in October 2010 from a high of 19.5% in November 2008. Kenya achieved its lowest inflation performance since 2003, posting a consumer price index inflation rate of 4.1% for 2010. For 2011, the CBK will target a low inflation rate of 5% and stable interest rates. To achieve these objectives, it will need to tackle inflationary pressures arising from the rebounding economic activity as well as accelerated government spending.
Throughout 2010, the Kenyan shilling depreciated against the dollar and appreciated against the euro during the first half of 2010. For 2011, the CBK aims to ensure a competitive exchange rate that should promote private sector development.
External Position
The main exports in the first half of 2010 were tea (23.6%), horticulture (14.5%), manufactured goods (12%), raw materials (4.4%), coffee (3.9%) and oil products (2.2%). Improved commodity prices in the international markets and growing domestic production led to an increase in the value of merchandise exports of 8.4% between August 2009 and August 2010. This increase was mainly attributed to tea exports whose value increased by 37.5%. Over the same period, receipts from other exports also increased. Horticultural exports increased from USD 673 million to USD 709 million. Oil products exports increased by 21.7% from USD 91 million in August 2009 to USD 110 million in August 2010.
Almost half (46%) of Kenya’s exports for the year up to August 2010 went to African countries. The main destinations for exports were Uganda (12.4%), Tanzania (8.4%), Egypt (4.5%) and Sudan (4.3%). Outside Africa, Kenya mainly exported to United Kingdom (UK) (10.7%), Netherlands (6.9%), United States (US) (4.5%), Pakistan (4.5%), and United Arab Emirates (UAE) (4.4%).
The increased value of imported oil and manufactured goods raised the value of imports by 10.1% during the first half of 2010 compared to the first half of 2009. Oil imports increased by 23.6%; manufactured goods imports increased by 20% and imports of machinery and transport equipment increased by 10.8%. During the third quarter of 2010, Kenya sourced most of its imports from Far East Asia, whose share of imports accounted for 42% of the total import bill as well as from the European Union and Middle East Asia, which shares of imports respectively amounted to 20.4% and 14.7% of the import bill.
Kenya imports crude oil and refines it for domestic use and for export. In the last five years, the quantity of imported petroleum products has grown from 3.5 million tonnes in 2004 to 4.7 million tonnes in 2009. On the other hand, the export of petroleum products increased from 37 400 tonnes in 2004 to 216 100 tonnes in 2007, fell again to 88 700 tonnes in 2008, but increased to 112 500 tonnes in 2009.
The services current account deficit improved to USD 1 787 million in the year to August 2010 from USD 1 966 million in the year to August 2009. Earnings from tourism and transportation services are the main sources of this improvement. Increased value of Kenya’s imports contributed to worsening its merchandise account deficit from a deficit of USD 5 842 million in the year to August 2009 to a deficit of USD 6 509 million in the year to August 2010. As a result, the current account deficit increased from 5.3% of GDP in 2009 to 7.8% of GDP in 2010.
The main sources of foreign direct investment (FDI) were Australia (KES 16 billion), Israel (KES 4 billion), the UK (KES 738 million) and India (KES 434.3 million). On external grants, commitments amounting to KES 40.4 billion have been received for the fiscal year 2010/11. Remittances flows for 2010 are estimated at USD 642 million, from USD 609 million in 2009. These flows to Kenya are a critical source of foreign currency even if the remittances are mostly used to pay for daily needs.
Table 5: Current account (percentage of GDP)
| 2002 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | |
|---|---|---|---|---|---|---|---|
| Trade balance | -7.6 | -15.7 | -18.8 | -19.5 | -20.9 | -21.5 | -21.1 |
| Exports of goods (f.o.b.) | 16.5 | 15.2 | 16.8 | 15.2 | 16.4 | 17 | 16.8 |
| Imports of goods (f.o.b.) | 24.1 | 30.9 | 35.6 | 34.7 | 37.2 | 38.5 | 37.9 |
| Services | 2.6 | 4.6 | 4.6 | 6.6 | 5.4 | 5.5 | 5.4 |
| Factor income | -1.1 | -0.5 | -0.2 | -0.2 | 0 | -0.1 | -0.1 |
| Current transfers | 5.2 | 7.8 | 7.8 | 7.8 | 7.8 | 7.6 | 6.7 |
| Current account balance | -0.9 | -3.8 | -6.6 | -5.3 | -7.8 | -8.5 | -9.1 |
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