Kenya's Fiscal Fiasco: Uncertainty Looms Over Finance Bill 2023

And now, inside Kenya's fiscal fiasco and Declan Galvin, Managing Director at Exigent Risk Advisory, joins us to shed light on state of Kenya's Finance Bill 2023 and what next for East Africa's largest economy. Declan, thank you so much for joining me, for joining us. So given the expected release of Kenya's Finance Bill 2023 today, how do you anticipate the proposed budget measurements are going to impact the country's economic growth, particularly in the context of rising inflation and also global economic uncertainty? Great, thank you again for inviting me. The future of Kenya's economic planning, as it stands now, is going to be disproportionately impacted really by two key events this month. The first and the ongoing event is the Supreme Court deliberations over the constitutionality of the 2023 Finance Bill. This is such a significant event because it is informing the kinds of conversations that will happen between the Kenyan government and the IMF during the anticipated IMF board meeting in Nairobi this month. And then the second element, and really the most significant one, is depending on how the Supreme Court rules on the constitutionality of that bill, the Finance Bill, is going to have a direct implication in terms of what the Kenyan government could include in the tax amendment bill, which it's currently looking to table this month on September 30th. So that means decisions around how they can manage VAT, how they could zero rate or exempt certain goods, and then of course some of the more contentious issues around the housing levy and the eco-levy, which they've kind of talked about in the past. So these events will help Kenya decide how it can then shape revenue collection in order to manage growth, development, and then manage its debts. And yes, the court could toss the whole bill out or only parts of it, which changes the whole context of Kenya to move forward with economic planning. So let us assess the impact this will have on the economic planning of Kenya. Yes, so again, if we look at the current fiscal crisis the country's in, the government by and large has three options. They can either increase taxes, they can either cut more in terms of spending, or the Kenyan government can borrow. And ultimately how they manage this and the way they manage out of this is going to involve kind of a combination of all three. But there are so many unknowns, at least kind of publicly, in terms of how they're going to manage those three items. And this is, of course, happening against an intensifying local backdrop of labor-related protests, students frustrated with fees, questions around some of the efficacy or growth of major development projects. So there's still a lot of uncertainty within the political and fiscal space here. And that's ultimately, the hope is that come October there'll be much more clarity, as we hear from the Supreme Court, once we get signals from the IMF, and once they start trial bleeding and having public participation in a new tax amendment bill. But until these things happen, there's just enormous uncertainty. And looking at the short-term and long-term economic implications, you know, for partial or full rejection of the bill, what are we seeing here? What are the potential implications here? Well, the first, and what we saw in some of the government's arguments yesterday at the Supreme Court on the finance bill deliberations, is there's clearly concern on Kenya's sovereign debt rating, how that has fallen, you know, for the second year in a row, but more specifically since the president withdrew the 2024 finance bill. This ultimately just makes it more difficult for Kenya to access external capital markets, it makes it much more expensive to borrow money, it creates more barriers for people to kind of invest more confidently in the country. So this is all a near and medium-term assessment. In terms of the immediate, you know, implications, Kenya does not have a roadmap or plan. To work its way out of the current rut, and then ideally to a development or growth type agenda. So until some of these legal questions are answered, you know, we are flying blind, essentially, from a planning perspective. And yes, that will indeed affect the ability to attract foreign investment for the country. But let us look at the political and social implications here. Let us look at the political and social implications here, Declan. So how could the court's decision impact the political landscape in Kenya, particularly in terms of public trust in the government? Well, so I mean, the first part of the answer is in a multi-faceted way. I think that yes, to a certain extent, public confidence in the Supreme Court may wane, depending on how they come out on the issue. That's not my first, that's not the first order of concerns, I think. Ultimately, if the Supreme Court were to throw out parts of the finance bill due to constitutional reasons, and the government accepts and does not try to circumvent whatever is kind of thrown out, whether it's, you know, and most specifically, it would likely be, you know, they're going to start ruling against certain provisions of the bill. If those provisions that are thrown out align with kind of public sentiment, then that could actually help reinforce overall confidence in Kenya's political legal system. But if what we end up seeing is a situation where really unpopular amendments are deemed constitutional, and the government continues to pursue them, and I'm speaking specifically about the housing levy, maybe the eco levy, although people aren't really talking about that right now, then what we'll see is we'll see a public that becomes more angry and may go back out to the streets again to protest elements of a proposed tax amendment bill. And the big question here is, what's next for Kenya's finance bill 2023? You know, if the court upholds its ruling, how do we see the government likely adjusting its fiscal strategies? And at the same time, what does this mean for Kenya's economic stability? What can you say the current state of Kenya's economic stability? So I think right now, there is a degree of instability within, you know, its macroeconomic reality. But I think that one way or another, it will stabilize this month on because we're just waiting for rulings from the legal authorities. And then it will be clearer in terms of what needs to happen next. And that is in itself a form of stability. And then it's up to policymakers to then begin to execute those ideas. And I mean, what you're asking, lots of people are asking the same question, what does it look like? To be fair, I think the most honest answer is we're just really unclear. There's been signaling that the VAT may blow up. There's been signaling and news coming out of Kenya's bilateral engagements in Beijing that there'll be some more borrowing. So there's lots of data points. But how those are going to come together are still very much dictated on, again, outcome of the Supreme Court and outcome of the IMF meetings. And then the last point I'll make on the IMF meetings is a lot of this kind of, a lot of this that will take place in the meeting, I think is going to be aligning with the October IMF meetings in Washington, D.C. And so I think we're going to be looking at much more kind of future thinking and alignment on the IMF side, probably a more cautious approach to the management of debt, which is going to be ultimately a relief for Kenya. Yes, indeed. Thank you so much, Niklan. We indeed look forward to today's hearing and also come 30th September impact and also the IMF board meeting that will take place later on in the month. Thank you so much, Niklan.

Declan Galvin, Managing Director at Exigent Risk Advisory,  joins CNBC Africa to shed light on state of Kenya's Finance Bill 2023 and what next for East Africa's largest economy. 

Kenya's fiscal fiasco: State of Finance Bill 2023

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Kenya's fiscal fiasco: State of Finance Bill 2023

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