Low development expenditure hurts economic growth

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National Treasury building in Nairobi
National Treasury building in Nairobi. FILE PHOTO | NMG 

Development spending in the first three months of the current financial year fell below the legal threshold, hurting momentum in economic activity and job opportunities for a growing unemployed graduate youth population.

Treasury data shows a total of Sh68.1 billion was channelled to development projects from July to September, an equivalent of 25.95 per cent of the Sh262.4 billion disbursed to ministries and other state agencies. That was below the 30 per cent threshold under the Public Finance Management Act, 2012.

Treasury Principal Secretary Kamau Thugge notes in the quarterly Economic and Budgetary Review for the first quarter (July-September) of the current year ending June 2019 that development spend was short of Treasury target by Sh101.2 billion.

That means the absorption rate of the development funds in the three months was 40.22 per cent of the Sh169.3 billion the Treasury had targeted in the period.

The reduced development spend affects project plans such as roads, water, power plants, real estate projects and electricity transmission.

Key State departments such as Infrastructure, Energy and Water missed development spending targets by Sh15.31 billion, Sh9.80 billion and Sh9.46 billion, respectively, the Treasury statistics indicate.

The State department for Infrastructure which oversees projects such as roads, however, accounted for the largest share at Sh15.1 billion, or 22.2 per cent, of the total Sh68.1 billion which went into development projects.

It was followed by Devolution with Sh8.97 billion or 13.2 per cent of the total development budget spend, Transport (Sh8.91 billion or 13.1 per cent share), ICT (Sh6.50 billion or 9.5 per cent), Energy (Sh6.3 billion or 9.3 per cent) and Health ministry (Sh4.56 billion or 6.7 per cent).

“The development expenditures by these large ministries’ were generally below the target,” Dr Thugge says in the report.

The government remains the biggest buyer of goods and services from the private sector, and reduced spending on projects hurts momentum in the economy which is recovering from a five-year low in 2017.

State spending puts money in private hands through demand for raw materials, which ultimately creates new jobs.

Cement makers, steel manufacturers, contractors and the thousands of workers employed in the infrastructure pipeline benefit from public spending and usually feel the pinch of a drop in public expenditure on development.

The private sector activity during the quarter, as measured by Stanbic Bank Kenya’s Purchasing Managers Index (PMI), softened to an average of 53.63 compared with an average 55.60 in the previous quarter (April-June).

That may have slowed down momentum in economic growth recovery. Growth in the second quarter (April-June) stood at 6.29 per cent expansion compared with 5.7 per cent in the January-March period and 4.9 per cent in the corresponding quarter in 2017.

“Government spending to the productive sectors in the economy was curbed by a Presidential order effecting austerity on development projects. Thus we estimate real GDP (gross domestic product) growth cooled in the third quarter to average 5.5 per cent to 5.70 per cent,” analysts at Genghis Capital said in a macroeconomic report earlier in the month.

Government revenue during the three-month period through September fell short of the target by Sh76.8 billion, Treasury statistics show.

Dr Thugge says in the report that cumulative revenue, including external grants, into government coffers stood at Sh369.57 billion against a target of Sh446.38 billion.

The inflows into the exchequer were, however, Sh22.42 billion, or 6.46 per cent, more than Sh347.15 billion in the July-September period of 2017 which was clouded by a bruising presidential poll contest.

Total tax collections from key streams such as income, value added tax (VAT), excise and import duty missed the target by a whopping Sh60.46 billion in three months ended September on the back of delayed implementation of some new taxation measures.

Tax revenue as collected by the Kenya Revenue Authority stood at Sh320.311 billion against the Sh380.76 billion set by the Treasury. The collections by the KRA were, however, Sh15.38 billion, or 5.04 per cent, more than the Sh304.93 billion in the July-September period of 2017.

The taxman collected Sh159.11 billion from income tax, underperforming Treasury CS Henry Rotich’s targets for quarter by Sh32.02 billion. Payroll taxes missed the target by Sh7.15 billion to stand at Sh89.8 billion, reflecting a sluggish growth in new job opportunities.

Other income tax streams such as corporation tax also fell short by Sh24.87 billion after standing at Sh69.31 billion, a 22.35 per cent drop compared with Sh84.8 billion a year earlier.

Value added tax collections stood at Sh92.64 billion, underperforming the target by Sh18.30 billion, the data show.

KRA collected Sh40.59 billion from VAT on imports, Sh10.29 billion short of the target while the VAT levies on local products was Sh8.01 billion less than Sh60.06 billion target.

“We estimate that consumption by the private sector was dampened, in particular during the latter period of the quarter. This was due to the expected inflationary pressure attributed to imposition of VAT on petroleum products,” the Genghis Capital analysts said.

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By Kenyan Digest

The Kenyan Digest Team