What it means for you as an individual
The Cabinet Secretary National Treasury, Mr. Ukur Yatani, proposed aNational Budget of KES 3.03 trillion for the 2021/2022 on June 10, 2021. The budget sought to support economic recovery following the negative impact of COVID-19 and the resultant containment measures. The National Treasury estimates that Kenya’s economic growth slowed to a record low of 0.6% in 2020 compared to 5.4% in 2019. It is also expected that growth is likely to rebound to approx. 6.6% in 2021, supported by the ongoing COVID-19 vaccinations, which will play a critical role in the resumption of economic activities.
The COVID-19 pandemic has deepened the need for healthcare. As a result, the government allocated KES47.7Bn to accelerate access to quality and affordable healthcare through the Universal Health Coverage (UHC) to all counties. Other than this, the budget also focused on a few other sectors of the economy as high priority areas for the financial year 2021/2022.
We delve into this year’s budget and highlight what it really means for you as an individual:
- Increase in domestic borrowing
The government plans to increase its domestic borrowing (through the Central Bank’s sale of treasury bills and treasury bonds) to KES 658.5 billion compared to KES 493.4 billion in 2020/2021, representing a 33% year-on-year (y-o-y) increase. Domestic Borrowing refers to a practice where a government finances its budget by borrowing money from investors within the country.
The potential impact: The higher domestic borrowing target may lead to a rise in interest rates, which would be negative for bonds (it is worth noting that interest rates and bond valuations have an inverse relationship, meaning that an increase in interest rates lowers the value of a bond). The positive news is that the high liquidity levels in the market currently may reduce the probability of a spike in rates on treasury bonds. Currently, treasury bills and treasury bonds have recorded oversubscriptions. Consequently, the Central Bank has sufficient room to reject aggressive rates by investors. However, on the other hand, in the short-term, investors may receive lower interest income if interest rates on treasury bills decline amid the high liquidity levels. In the long-term, investors are likely to enjoy competitive returns from treasury bills and bonds especially if interest rates exceed the rates of inflation, thereby resulting in positive real returns.
- Payment of Value Added Tax (VAT) refunds and clearance of pending bills
The Cabinet Secretary allocated KES 10 billion for the payment of VAT refunds and KES 13.1 billion for the clearance of pending bills.
The potential impact: If implemented, these initiatives would provide some reprieve to individuals or SMEs with unpaid loans arising from delayed payments for services rendered to the government.
iii. Digital Service Tax developments
The introduction of Digital Service Tax in the Finance Act, 2020, led to the imposition of a 1.5% tax on income earned online. In this year’s budget, the Cabinet Secretary proposed to expand the scope of digital service tax in order to include income derived through the internet and electronic network. Previously, the tax provisions did not cover all traders who use digital service platforms to transact their business
The potential impact: In the event that businesses pass on the cost of taxation, customers will incur higher costs when buying goods and services online. Also, if you run a business and you advertise your product or service online, this will mean increased cost of doing business.
- The “Big Four” Budget Allocations
The government set aside KES 142.1 billion cumulatively for the “Big Four” drivers and enablers:Food Security- KES 60.0 billion;UHC-KES 47.7 billion ;Manufacturing -KES 20.5 billion and Affordable Housing-KES 13.9 billion.
The potential impact: Overall, the roll out of projects under these pillars should support long-term economic growth. If implemented, these initiatives would allow individuals to reap the benefits of better healthcare and food availability as well as job opportunities and access to affordable housing.
- Kenya Mortgage Refinance Company (KMRC) capital injection
The KES 3.5 billion allocation for KMRC proposed in the budget would enhance the company’s balance sheet for lending to mortgage lenders. As at December 2020, KMRC had refinanced 1,400 affordable housing loans worth KES 2.75 billion cumulatively.
The potential impact: KMRC is critical to the success of the affordable housing agenda because the company disburses money at affordable rates to mortgage lenders who in turn provide affordable mortgages to individuals. The increasing scale of KMRC is likely to provide more individuals with affordable mortgages.
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