World Bank Urges Kenya to Rethink Fiscal-Consolidation Plan

(Bloomberg) -- Kenya may need to recalibrate its fiscal-consolidation plans if it’s to see economic growth rebound from a five-year low reached in 2017, the World Bank said.

The government of East Africa’s biggest economy should slow the rate of expansion of recurrent expenditure, improve spending efficiency, restore the potency of monetary policy and rationalize tax exemptions to ensure its resources are fiscally sustainable, the Washington-based lender said in an economic update Wednesday.

The budget deficit more than doubled to 8.9 percent of gross domestic product in the five years through June 2017. The National Treasury wants to trim the gap to 3 percent by 2021 by cutting spending mainly on development projects rather than recurring expenses, which took up almost 99 percent of national revenue in the fiscal first half through December, the lender said.

“When you cut your development spending, you are reducing the capital stock of the economy -- that has implications for long-term growth,” Allen Dennis, an economist at the World Bank, told reporters Tuesday in the capital, Nairobi.

Efficient Spending

The Treasury is targeting to shrink expenditure by 1.4 percentage points of GDP this fiscal year, of which 1.2 percentage points will be axed from the development budget, according to the World Bank. The nation’s debt is seen hitting 58 percent of GDP by end-June, from 40.6 percent in the 2011-12 fiscal year.

Any fiscal consolidation is better undertaken amid robust revenue mobilization, according to Jared Osoro, director of the Kenya Bankers Association’s Centre for Research on Financial Markets and Policy.

“It will be both counterintuitive and counterproductive if the compelling fiscal consolidation is reduced to a mechanical process of expenditure cuts and tax hikes,” he said by phone. “The former, if it affects public investments, will affect the economy’s productive capacity while the later will hurt consumption.”

GDP expanded an estimated 4.8 percent last year. This may accelerate to 6.1 percent by 2020, more than the World Bank’s January forecast of 5.9 percent, as political tensions dissipate and agricultural output rebounds following good rains in the world’s biggest exporter of black tea, it said.

“The government could consider improving the efficiency of spending, public investment management; it could look at wages and salaries,” Dennis said. The measures would be “painful, but they are important,” he said.

Economic Stimulus

Kenya could employ measures to stimulate the private sector’s contribution to GDP, which has declined for four years, the bank said. The introduction of interest-rate caps in late 2016 caused lending to grind to a near halt, spurring the International Monetary Fund to warn that growth could suffer if the laws aren’t toned down or scrapped. The Treasury has acknowledged that the limits haven’t worked as intended and has said it will introduce legislation that will either abolish or modify the law so banks can better price loans for riskier customers, while bolstering rules to protect consumers.

The World Bank proposed setting up a regulatory environment and incentive structure to facilitate the flagship infrastructure projects -- such as those proposed in the government’s so-called Big Four agenda -- through public-private partnerships.

The development program seeks to ensure food security and agricultural productivity, affordable housing, increased manufacturing, and universal health coverage by 2022.

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