RECENT ECONOMIC DEVELOPMENTS AND THE MACROECONOMIC OUTLOOK: FY 2019/ /23 MEDIUM TERM BUDGET PERIOD

Transcription

1 RECENT ECONOMIC DEVELOPMENTS AND THE MACROECONOMIC OUTLOOK: FY 2019/ /23 MEDIUM TERM BUDGET PERIOD Presentation During the Launch of the Preparation of FY 2019/20 and the Medium-Term Budget at KICC, Nairobi DR. KAMAU THUGGE, CBS PRINCIPAL SECRETARY The National Treasury and Planning September 13,

2 Presentation Outline 1. Recent Economic Developments 2. Policy priority Going Forward - The Big Four Plan 3. Macroeconomic and Fiscal Projections 4. Resource Envelope 5. Debt Sustainability Analysis (DSA) 6. Potential Risks to the Macroeconomic Outlook 2

3 I. Recent Economic Developments 3

4 This Budget is prepared against the back ground of a global economic recovery; 3.7% in 2017 and projected at 3.9% in 2018 and Actual Estimated Projected World Output Advanced Economies Of which USA Emerging and Developing Economies Of which: China India Sub- Saharan Africa Of which: South Africa Nigeria Kenya* Global growth: Supported by notable improvements in investment, trade, and industrial production, coupled with strengthening business and consumer confidence and stabilizing commodity prices. Advanced economies: Growth expected to remain at 2.4% in 2018 similar to 2017 before easing to 2.2% in 2019 reflecting stronger activity and external demand in the United States. Emerging economies: Activities expected to increase further from 4.7% in 2017 to 4.9% in 2018 and 5.1% in 2019 reflecting improved prospects for commodity exporters after three years of very weak economic activity. SSA: Recovery is set to continue, supported by the rise in commodity prices. Growth is expected to increase from 2.8% in 2017 to 3.4% in 2018, rising further to 3.8% in 2019 Potential Risks: downside Tightening of financial conditions, waning support for global economic integration, growing trade tensions and risks of a shift toward protectionist policies, and geopolitical strains. 4

5 Growth of the Kenyan economy has remained robust in the past 5 years supported by appropriate economic and financial policies. Kenya, the economic hub of East Africa, benefits from a growing, resilient and diverse economy From 2013 to 2017, growth averaged 5.6% per year vis a via 4.7% in the period Growth is projected at 6.0% in 2018 Growth in Q was attributed to improved weather conditions and regaining of business and consumer confidence following political stability in the country. Per Capita Income has increased by 47% in the past 5 years. This has enabled generation of around 827,000 new jobs per year, compared to 656,000 new jobs created in the period

6 Low and stable Inflation (within the Government target range of 5+/-2.5%) in the period 2013 to 2018 as a result of prudent monetary and fiscal policies. By August 2018, inflation was at 4.0% from 8.0% in August 2017 due to improved weather condition that helped bring down the prices of food items In July 2018, Kenya s rate of inflation compared favourably with the rest of sub-saharan African countries Measures to reduce cost of living include; Pensions coverage for those who are 70 years and above - cash transfer in the form of a monthly stipend and NHIF cover Expansion of lower tax bracket - expand the tax bands by 10% and increase the relief by another 10% Cash transfers to orphans and vulnerable children; the elderly; and to persons with disability Education: Waiver of exam fees; Free Primary Education; Free Day Secondary Education; budget support to Technical Training Institutes; Universities; and to the Higher Education Loans Board Health: Free Maternal Health Care (Free NHIF Cover for all mothers for one year); Free Primary Healthcare; purchase of medical equipment under the MES 6

7 Interest rates low and stable; exchange rate has been competitive and less volatile Interest rates are fairly low and stable, thanks to improved liquidity conditions and prudent monetary stance. Kenya Shilling exchange rate to the dollar has continued to display relatively less volatility (August 2017 to August 2018) compared to other regional currencies The Central Bank Rate was reduced to 9.0% on 30th July 2018 from 9.5% in order to support economic activity. The interbank rate remained low at 6.8% in August 2018 from 8.1% in August 2017 due to ample liquidity in the money market while The stability of the Shilling reflects strong capital inflows from tea and horticulture exports, strong diaspora remittances and tourism receipts. The 91-day Treasury bill rate declined to 7.6% compared to 8.2% over the same period 7

8 Growth in private sector credit is expected to pick up gradually with the continued recovery of the economy. Annual growth of Credit to the private sector on a gradual recovery path 4.3% in July 2018 from 1.4% in July Slowdown of credit was not unique to Kenya Lending to building and construction, manufacturing, and finance and insurance sectors grew by 13.7%, 11.6% and 8.5%, respectively. Slowdown of credit has been witnessed in other EAC Countries, such as in Uganda and Tanzania. Credit growth to other sectors was positive except for transport and communication and agriculture. 8

9 The foreign exchange market has remained relatively stable The 12-month current account deficit narrowed to 5.8% of GDP in June 2018 from 6.4% in June 2017 and it is expected to narrow further to 5.4% of GDP in 2018, The stability continues to be supported by strong growth of agricultural exports particularly tea and horticulture, resilient diaspora remittances, and improved tourism receipts The foreign exchange reserves remain high, and continue to provide an adequate buffer against short-term shocks in the foreign exchange market. Usable official reserves by CBK at stood US$ 8,577 million (5.7 months of import cover) by end August

10 2. Policy Priorities Going Forward The Big Four Plan 10

11 The Big Four Plan: Policy Priorities Going Forward to Unlock Growth Constraints for shared prosperity The Big Four Plan builds on achievements realized under the Economic Transformation Agenda implemented over the last 5 years. This Big Four Plan aims to transform lives by creating jobs, improving living and health conditions and ensure food and nutrition security for all Kenyans. 15% of GDP from the manufacturing sector Transforming societies 100% Universal Health Coverage (UHC) 100% Food and Nutrition Security Transforming the nation 500,000 affordable new houses for Kenyan families Transforming lives Youth in jobs through vocational training and education Targeted Infrastructure Investments Competitive cost of power Governance Security Technology innovation 11

12 The Big Four Plan: Policy Priorities Going Forward to Unlock Growth Constraints (cont d) Over the next five years, the government of Kenya aims to focus on the Big Four to further strengthen the economy, progress industrialization and create jobs, thereby contributing towards the realization of the Vision 2030 The Big Four Investment Plan is Anchored on Four Key Pillars Manufacturing Growing the manufacturing sector s share of GDP to 15% by 2022, thereby furthering growth, creating jobs and reducing poverty Textile/ apparel/ Cotton Leather Agro-processing Construction materials Oil, Mining & Gas Iron & Steel ICT Fish Processing 100% Food and Nutrition security Focusing on food security and nutrition to all Kenyans by 2022 by expanding food supply, reducing prices and supporting value addition Dedicate 700,000 acres to increase maize, potato and rice production Expand irrigation schemes and additional water towers and protect rivers; Enhance crop and livestock insurance and protect farmers against climate-related risks; Lease government-owned idle agricultural land; Establish 1,000 SMEs focused on food processing to improve value addition 100% Universal Health Care ( UHC ) Providing universal health coverage to all Kenyans Priority 2018 initiatives of National Hospital Insurance Fund ( NHIF ) Driving up NHIF uptake Enlist 100,000 Community Health Volunteers Align NHIF Act to UHC, Group Insurance, Multi-Tier Benefit Package Launch segregated Multi-Tiered Package Digitization of NHIF Housing Providing at least 500,000 affordable new homes by 2022 Preliminary project designs and budget for to 55 acres Mavoko, Portlands 1, Mariguini, Kibera B&C, Kiambiu, Old estates Offsite and access roads Public transport to identify sites 12

13 3. Macroeconomic and Fiscal Projections 13

14 Macroeconomic Projections Implementation of The Big Four Plan should see the economy growth at a much faster rate. Real GDP growth is projected to increase from 4.9% in 2017 to 6.0% in 2018 and around 7.0 percent over the medium term bolstered by: Expected stable weather conditions: This will boost agriculture Completion of key infrastructure projects (such as railway, roads, low cost housing and energy): This will improve competitiveness and boost investments Inflation should remain within the government target range, and interest rates and exchange rate are projected to remain broadly stable Further structural reforms are targeted at improving competitiveness of the private sector and promoting overall productivity in the economy Growth in exports expected to benefit from the relatively strong growth in the sub region 14

15 Fiscal Projections Given the outcome for FY 2017/18, projections for FY 2018/19 and the Medium Term have been reviewed. The revised projections take into account a lower projection base, the revised macro indicators and the revenue policy measures introduced in the finance bill and the tax law amendment. Cumulative Revenues are projected at Ksh 1,826.9 billion or 18.2% of GDP with ordinary revenues at Ksh 1,647.0 billion or 16.4% of GDP and Ministerial A-I-A at Ksh billion or 1.8% of GDP. Expenditures are projected at Ksh 2,468.4 billion or 24.6% of GDP. Recurrent expenditures are projected at Ksh 1,518.7 billion (15.1% of GDP) while development expenditures are projected at Ksh billion (5.7% of GDP) The deficit, incl.grants, is therefore projected at Ksh billion (equivalent to 5.9% of GDP). Excluding SGR, the deficit amounts to Ksh billion or 5.1% of GDP. This fiscal deficit will be financed by net external financing of Ksh billion (2.7% of GDP), Ksh billion (3.2% of GDP) from net domestic borrowing, and other net domestic receipts of Ksh 3.9 billion 15

16 Revenue mobilization measures to support the Fiscal Consolidation process Revenue collection under the Revenue Enhancement Program (REP) for the period January to June 2018 was Ksh 51.4 billion against the total REI target of Ksh 73.7 billion, a performance of 70%. In order to bring REI back on track, KRA has built the REI around three broad initiatives that are estimated to raise Ksh 51 billion. This include; 1. Incomplete Revenue Enhancement activities from FY 2017/18; Integrated Customs Management System (ICMS) which is expected to be fully rolled out within the first quarter of 2018/19; The Regional Electronic Cargo Tracking (RECTS) system where the purchase of additional seals is yet to be completed; Completion of the integrated scanner solution; Continued collection of revenues released through the dispute resolution process, and Continued emphasis on the enhanced debt programme. 16

17 Fiscal consolidation on course Fiscal consolidation program targets deficit reduction from 8.8% of GDP in FY 16/17 to 6.0% in FY 18/19 and 3.0% of GDP by FY 2021/22 Strong Revenue Growth has enabled the Government implement various programmes and projects in all sectors of our economy 17

18 5. Resource Envelope 18

19 Resource Envelope underlying the FY 2019/20 Medium Term Budget. Resource Envelope remains limited against all the priorities by the Government There is need to therefore focus on the priorities: The Big Four Plan Budgets have been aligned to the needs of The Big Four strategic areas Funding the non discretionary expenditures (a must) leaves little room/resources for the MDAs to bid for. It is therefore critical to PRIORITIZE and avoid non core expenditures! 19

20 Medium Term Fiscal Framework FY 2019/ /23 20

21 Resource Envelope for FY 2019/ /23: From taxes and borrowing. Ksh 2,775.1 billion available for FY 2019/20. Of which: Ksh 2,078.4 billion is from both ordinary revenue and AiA Ksh billion is from grants and borrowing 21

22 5. Debt Sustainability Analysis (DSA) 22

23 The public debt sustainability indicators illustrates that Kenya faces a moderate risk of debt distress Stable debt-to-gdp ratio ranging between 39.4 percent in 2012 to 49.0 percent in 2017 which is below the threshold of 74 percent of GDP in net present terms. Government has made adequate budgetary provisions for debt service and has honored all debt obligations as they fall due Kenya among sub Saharan African Countries with least debt accumulation as a share of GDP 23

24 Democratic Republic of the Congo Comoros Seychelles Botswana Guinea-Bissau Sao Tome and Principe Eritrea Cote d'ivoire Lesotho Madagascar Mauritius Kenya Malawi South Africa Tanzania Cabo Verde Mali Senegal Liberia Ghana Gambia Burkina Faso Burundi Ethiopia Guinea Chad Togo Sub Saharan Africa Uganda Niger Sierra Leone Zimbabwe Namibia Benin Rwanda Central African Republic (CAR) Nigeria Cameroon Swaziland Angola Zambia Mozambique Gabon Republic of the Congo South Sudan Equatorial Guinea Debt (% of GDP)Accumulation: (%) % Change of Debt to GDP % % Change of Debt to GDP %

25 External Debt Sustainability Kenya s external debt indicators are within the sustainability thresholds Indicator s PV of debt to-gdp ratio PV of debt-toexports ratio PV of debt-torevenue ratio PPG Debt serviceto-exports ratio PPG Debt service- Source: IMF Country Report No. 16/85, Threshol ds Kenya is rated a strong policy performer under the World Bank s Country Policy and Institutional Assessment (CPIA) rating

26 6. Potential Risks to the Macroeconomic Outlook 26

27 he macroeconomic outlook is not without risks from both external nd Domestic sources Continued uncertainty in the global markets due to US economic and trade policies (Monetary policy normalization) and Geopolitical tensions. Uneven and sluggish growth in advanced and emerging market economies as well as impact of low commodity prices on our exports. Internally, public expenditure pressures, particularly wage related recurrent expenditures Weather related shocks that could impact on agricultural output, energy generation and higher inflation However, we continue to monitor these risks and will take appropriate measures to safeguard macroeconomic stability. 27

28 THANK YOU