Member: ICPAK Tax and Economics panel Macroeconomic Outlook FY 2019-2020 Presentation by: CPA Raphael Matu Member: ICPAK Tax and Economics panel Tuesday 18th June 2019 Uphold public interest

Presentation Agenda Macroeconomic Outlook FY 2019-2020

Current Macroeconomic Environment Kenya’s economy remained resilient in 2018 despite:- the rising global trade frictions among major trading partners, uncertainties from Brexit, renewed geopolitical risks. In 2018, our economy grew by 6.3 percent, up from 4.9 percent in the previous year The resilience in growth in 2018 was supported by:- The ongoing public sector infrastructure investments, Recovery in the tourism sector, Continued stable macroeconomic environment.

Current Macroeconomic Environment Economic growth for 2019 is project to remain strong as a result of:- continued strong performance in non-agricultural activities such as tourism and construction. programmed activities under the Big Four agenda gain traction. The projected risks in 2019 includes:- delayed long rains which may impact negatively on agriculture and weather related shocks escalation of global trade-related tensions, rise in oil prices However, the Government will take appropriate measures to mitigate any negative impact on growth.

Trends in Kenya’s Economic Growth Rates Source of data: Kenya National Bureau of Statistics

Global and Regional Economic Developments Global growth is projected to slow down to 3.5 percent in 2019 from an estimate of 3.7 percent in 2018 occasioned by weaker economic activities in both the advanced and emerging market economies The sub- Saharan Africa region is however, expected to register stronger growth of 3.5 percent in 2019 from an estimated 2.9 percent in 2018 largely due to improved commodity prices and capital markets access

Global Economic Growth, Percent Source: January 2019 WEO; * Projections by the National Treasury

Inflation Rate Inflation rate was highly volatile in the period 2008-2012 and averaged 10.6 percent compared to the period 2003-2007 when it averaged 8.5 percent. The sharp increase in inflation rate in the year 2008 to 2010 was occasioned by internal shocks (post-elections disruptions and unfavorable weather conditions) and external shocks (high crude oil prices and global financial crisis).The tightening of monetary policy, together with an easing in global food and fuel prices, saw the levels of inflation stabilize in 2012.

Inflation Rate Cont.. Inflation was low, stable and within the Government target range of 5+/- 2.5 percent in the period 2013 to 2018 (averaging 6.4 percent) as a result of prudent monetary and fiscal policies. The inflationary pressure witnessed in 2017 due to drought that affected food prices eased in 2018 supported by improved weather conditions that resulted in lower food prices.

Inflation Rate Cont.. Inflation Rate Source of data: Kenya National Bureau of Statistics

Kenya Shilling Exchange Rate The Kenya Shilling exchange rate remained broadly stable and competitive against major international currencies The Kenya Shilling exchange rate has continued to display relatively less volatility, compared to most sub - Saharan currencies. This stability reflects strong inflows from tea and horticulture exports, resilient diaspora remittances and improved receipts from services particularly tourism.

Kenya Shilling Exchange Rate Chart: Kenya Shilling Exchange Rate   Source of Data: Central Bank of Kenya

Interest Rates Interest rates remained stable and low in the period 2013-2018 except June – December 2015 when world currencies were under pressure. The Central Bank Rate (CBR) was reduced to 9.0 percent on 30th July 2018 from 9.5 percent in March 2018 as there was room for easing monetary policy stance to support economic activity. The CBR continues to be retained at 9.0 percent as inflation expectations remained well anchored within the target range.

Interest Rates Cont.. Commercial banks’ average interest rates remained stable and compliant with the interest rate capping law that was effected in September 2016. The CBR was reduced to 9.0 percent from 9.5 percent in March 2018 and as a result the lending rate declined to 12.6 percent in October 2018 compared to 13.7 percent in October 2017. The deposit rate also declined to 7.6 percent from 7.8 percent over the same period. Consequently, the interest spread declined from 5.9 percent in October 2017 to 5.0 percent in October 2018

Interest Rates Cont.. Chart: Short-Term Interest Rates Source of data: Central Bank of Kenya

Expenditure priorities FY 2019-20:

Revenue Projections In the FY 2019/20 revenue collection including appropriation-in-Aid (AiA) of Ksh 2.1 trillion (19.7 percent of GDP). Expenditures and net lending are projected at Ksh 2.8 trillion (25.7% of GDP), leaving a fiscal deficit including grants of Ksh 607.8 billion. In relation to GDP, this deficit translates to 5.6%, a decline from 6.8% in FY 2018/19 and 7.4% for FY 2017/18. The fiscal deficit of 5.6% of GDP in FY 2019/20 will be financed by net external financing of Ksh 324.3 billion (3.0% of GDP) and net domestic financing of Ksh 283.5 billion (2.6% of GDP).

Revenue Projections County Governments in the coming financial year will receive a proposed allocation of Ksh 371.6 billion, of which, Ksh 310 billion is the equitable share and Ksh 61.6 billion will be conditional transfers, including Ksh 38.7 billion from our development partners The Division of Revenue between the National and County Governments is subject to negotiations under the Joint Mediation Committee established by the two Houses of Parliament which we expect will fully take into account the provisions of Article 203 of the Constitution.

Revenue & Expenditure Projections

Are we on track with the Big Four Agenda?

Big Four Source: Budget 2019

Big Four Around ksh 450.9 billion to “the big four” sector drivers and their enabling sectors Ksh 47.8 billion to activities and programmes geared towards universal health coverage Ksh 10.5 billion to cater for social housing and construction of affordable housing units Around ksh 4.2 billion to activities and programmes geared towards Increasing Manufacturing Contribution to GDP. Ksh 18.2 billion to cater for Improving Food and Nutrition Security

Big Four Enablers The Food & Nutrition Security Key Outcomes

Big Four Enablers Achieving 100 percent Universal Health Coverage

Big Four Enablers Affordable Housing Project Pipeline

Big Four Enablers Investing in Critical Infrastructure Improving security and protecting our borders Reforming the Education System and Developing the Necessary Skills Improving governance and sustaining the fight against corruption Digitalizing our economy Protecting the vulnerable members of our society Equitable regional development

Big Four Enablers Critical Enablers of “The Big Four” Plan

What has been achieved so far The Government has strengthened all the institutions mandated to fight against to instill good governance and recover corruptly acquired assets. The Government has plugged the gaps in procurement by aligning the public procurement processes through the Public Procurement and Disposals Act. The Government has also extended the crackdown on corruption to all public officers in line Ministries and State Corporations

What has been achieved so far The Government conducted lifestyle audits on all public officers complementing it with a robust wealth declaration system for routine asset disclosures. The Government has improved governance across all public institutions. To improve project selection, budgeting and management, a new Public Investment Management (PIM) Unit was recently created at the National Treasury,

What has been achieved so far The PIM process will be automated to ensure operational effectiveness of the public investment management workflow. The Government has also revamped the public procurement process, in order to effectively and efficiently manage public resources as provided for in the Constitution. The Government will continue to strengthen capital markets infrastructure and institutions

What has been achieved so far The Government will expedite the development of a Credit Guarantee Scheme which will enhance access to credit by Micro, Small and Medium Enterprises and marginalized groups and regions. The Government will expedite finalization of the Financial Markets Conduct Bill, 2018.

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