Uhuru’s new budget signals slow growth

Consultants yesterday emerged as the biggest losers as Treasury unveiled plans to reorganize government budget and realign it with emerging economic realities.

Supplementary expenditure estimates tabled in Parliament show that the Finance ministry will take the biggest budget cut of Sh9 billion it was to spend on professional services signalling a significant slowdown in new investments and future growth.

This is part of the Sh26 billion that the government hopes to raise to deal with emergencies that have risen in recent months as the country suffers low rainfall and a severe famine.

Consultant services are usually employed in the execution of investment plans that are the main drivers of economic growth.

The estimates show that a significant portion of the money raised through the new budget will go to the ministry of special programmes for use in buying relief maize.

Finance Minister Uhuru Kenyatta’s new budget, however indicated a clear determination by the government to ring-fence key infrastructure projects such as roads construction from the planned cutbacks.

In what appeared to have been a delicate balancing act, the Government indicated plans to spend Sh26 billion that was not in the budget that parliament approved last year even as it cuts its expenditure plans by a similar amount (Sh27.3 billion).

Revised expenditure estimates show that appropriations in aid of Sh61.5 billion to the development budget kitty is likely to boost Treasury’s total development spending for the 2008/9 financial year to Sh203.3 billion, up from Sh196.1 billion.

At the same time, the government is planning to increase its expenditure on salaries and wages, entertainment and travel allowances and other such recurrent expenses to Sh390.5 billion, up from Sh388.9 billion that was approved by parliament last year.

The proposed increase in recurrent expenses comes barely one month after Mr Kenyatta, declared that the Government was facing a financing gap of Sh25 billion this financial year, which ends in June.

The government has also sent a circular to all permanent secretaries urging for a reduction in expenses by various ministries, while also announcing a freeze in all employment of new civil servants.

Mr Kenyatta was scheduled to table the supplementary budget estimates in parliament yesterday, but this did not happen as Parliament adjourned its sitting to today after failing to agree on the formation of house business committees.

No parliamentary proceedings can commence before the formation of the house committees.

The deputy director of economic affairs at Treasury, Henry Rotich, said that by preserving spending on development programs, the government is paying heed to the fact that the economy is in need of an economic stimulus given the slowing economic growth.

The Kenya Revenue Authority has already announced a four per cent shortfall in revenue collections for the first nine months of the current financial year to Sh354.8 billion, signalling a revenue squeeze that could naturally tempt the government to slash development spending.

Earnings from tourism and commodity exports are also under pressure owing to the global economic crisis that has reduced demand for goods from the developed countries.

Mr Rotich, however, said domestic borrowing and external support will be used to provide funds that are needed to keep the economy humming, especially given the increasing uncertainty creeping into the private sector.

“It is important for the government to provide an economic stimulus at this time when economic growth is slowing down and hence the need to preserve development spending,” said Mr Rotich.

Treasury, according to Mr Rotich, is of the opinion that it could borrow domestically without distorting interest rates, as most of the private sector is currently inactive in the capital markets.

The additional domestic borrowing will be used to bridge the revenue gaps left by the diminishing tax collections and the failure to float a Sh33.6 billion sovereign bond that was shelved after the international financial markets tipped into a crisis.

In the supplementary budget, a total of 8.7 billion has been set aside for maize importation and financing of new irrigation schemes and dams, reflecting just how much adverse weather has distorted the national budget.

Some of the dams to be constructed include the Badasa Dam for water supply and irrigation in Marsabit, Chemusu Multipurpose Dam in Baringo, UMMA Dam, in Kitui and Kiserian Dam for water supply have been planned fro this reason. Others are River Nzoia Dam for irrigating Bunyala and Budalangi, and the Upper Ewaso Nyiro Dam for irrigation and water supply in the areas around the Ewaso Nyiro Basin.

The new irrigation schemes together with the eight others already under construction are expected to provide a solution to farmers who have traditionally been upset by the rain fed agriculture.

Observers say the government’s must raise its ability to put into use funds that are set aside for development expenditure if it is to be used as a tool for spurring economic growth.

For example, in the first six months the development expenditure is already below target by 31 per cent (Sh50.8 billion) out of an original budget of Sh80.7 billion.

“Any cut in development expenditure could undermine future growth and reduce Kenya’s attractiveness as an investment destination,” said Edward Gitahi, a senior investment manager at AIG Investments.

The Kenya Association of Manufacturers chairman, Mr Vimal Shah, said with the global economy showing initial signs of recovery, the economic growth that had been feared may not be as severe and Kenya may benefit from increased demand for its goods, which had been on the downturn.

“Manufacturers had put on hold their capital expenditure plans as a precautionary measure but it appears that we may have passed the worst part of the economic crisis,” said Mr Shah.

Source: www.bdafrica.com

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