Budget gives finance minister nightmares

Shortly after presenting his budget proposals in Parliament last Thursday, Kimunya said it was not “automatic” for the economy to grow steadily for three successive years.

Last year, the economy grew by 5,8 percent and Kimunya was optimistic that the same target can be achieved this year despite the impact of the recent drought.

“Three things must have been foremost in the finance minister’s mind while presenting the 2006/07 budget,” says Evans Osano, a senior investment manager at the AIG Global Investment Group.

“These include consolidating economic growth, which reached a decade high of 5,8 percent in 2005.”

He says Kimunya was also out to provide resources and incentives for employment creation and poverty reduction at a time when donors are cutting down their assistance due to corruption concerns.

Kimunya touched on the ever-sensitive topic of governance and maintained that the war against corruption was on course.

Osano says Kimunya faces the daunting task of maintaining the growth momentum started in 2003 by his predecessor, David Mwiraria, who resigned in February.

However, the manager says it would not be easy for the minister to achieve the desirable 7 percent economic growth required to make any major impact in poverty reduction.

He says that although the minister increased budget allocation to key sectors like health, education, agriculture and infrastructure, poverty was a deep-rooted problem that would take time to redress. The 60 percent of the population living on less than Sh72 a day, he says, is unacceptably high considering the high level of income, especially among the rich minority.

The poverty problem, he says, is due to the widening income gap between the rich and the poor that requires urgent attention.

“In a normal situation we would expect at least 57 percent of the population in the middle class and a few in the extreme ends ‘ either rich or very poor,” he says.

“There is a major problem in the distribution of the national income, which is not acceptable.”

However, Osano says, the minister tried to reallocate money to help the weakest in the society by raising allocation to the social sectors like education and health.

Besides removing VAT on small items like diapers, an increase in allocation to key ministries is likely to help improve the welfare of the poor.

Kimunya allocated Sh137 billion for development expenditure. Most of the money allocated for development purposes will go towards provision of drugs in hospitals, improving water and sanitation as well as building and repairing the road network.

Though the money allocated for development was not enough, Osano says, the minister had tried to balance his books considering that he did not factor in foreign aid.

“Like in 2005, the minister has not factored in significant budgetary support from the development partners, and he will substantially be relying on a 15,6 percent increase in tax revenues set to increase to Sh336 billion.”

Budgetary support coming from the aid agencies is given to the government to allocate to priority sectors. But over the last two years, the government has not been able to access most of the pledged funds due to numerous conditions tied to it.

Besides omitting the pledged donor funds from the budget, Kimunya went ahead to also omit funds pledged by multilateral aid agencies led by the World Bank and the International Monetary Fund (IMF).

The two Bretton Woods institutions have been the key financiers in project development and as well as in supporting pro-poor programmes through the Sh23 billion IMF-Poverty Reduction and Growth Facility.

The two have, however, joined a group of donor countries that accuse the Kenyan government of not doing enough to fight corruption.

Kimunya says his decision will not affect the Sh28 billion pledged for specific donor-funded projects like the multi-billion-shilling Northern Corridor Road improvement project supported jointly by the European Union and the World Bank. ‘ The East African Standard.

June 2006
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