Government Revenue Collection

• Total revenue collected in FY’2020/2021 amounted to Kshs 1.67 tn, against a revised target of Kshs 1.65 tn, representing an out-performance of 101.0%. The out-performance, despite the challenges posed by the COVID-19 pandemic on business conditions and people’s income, is mainly attributable to; (i) enhanced compliance enforcement efforts and the implementation of new tax measures focused on ensuring that that non-compliant taxpayers pay their due taxes, (ii) introduction of new taxes such as digital services tax, minimum tax and voluntary tax disclosure as KRA bid to expand sources of revenue, and, (iii) the reopening of the economy which led to a 12.0% growth in Domestic Excise tax in FY’2020/21, compared to a decline of 6.4% recorded in the last financial year

• We expect a gradual economic recovery going into FY’2021/2022 as evidenced by KRA collecting Kshs 1.7 tn in FY’2020/2021, a 3.9% increase from Kshs 1.6 tn collected in FY’2020/2021 and a 101.0% out-performance despite implementing fiscal measures to cushion Kenyans against the adverse impact of the pandemic in Q1’2020/2021 and Q2’2020/2021

Government Borrowing

• The Government, as of 16^th July 2021, was 36.8% ahead of its current borrowing target, having borrowed Kshs 52.0 bn against a prorated borrowing target of Kshs 38.0 bn and has domestic maturities worth Kshs 770.0 bn. The government will have to borrow Kshs 52.9 bn monthly to meet its domestic borrowing target of Kshs 658.5 bn in the 2021/2022 fiscal year
• Key to note, the government has raised USD 714.5 mn (Kshs 77.0 bn) from the IMF, USD 130.0 mn (Kshs 14.1 bn) from the World Bank and USD 1.0 bn (Kshs 107.8 bn) from the Eurobond issue, totalling USD 1.8 bn (Kshs 198.9 bn) in external borrowing since April 2021

• The budgetary support received from the IMF under the Extended Fund Facility (EFF)/ Extended Credit Facility (ECF), which is pegged on fiscal and structural reforms aimed at reducing debt-related vulnerabilities, is expected to lead Kenya on a path to debt sustainability
• The IMF Economic Recovery Program has boosted investor confidence in Kenya, as evidenced by the 12-year Eurobond issued in June 2021, which recorded an oversubscription of 5.4x and was priced at 6.3%, 1.7% points lower than the 12-year 2019 issue which was priced at 8.0%. As such, the domestic interest rate environment may stabilize since the government will not be desperate for cash

Inflation

•  Y/Y inflation for June came in at 6.3%, while the m/m inflation came in at 0.1%. This was mainly attributable to an 8.5% increase in the Food and Non-Alcoholic Drinks’ Index, a 4.3% increase in the Housing, Water, Electricity, Gas and Other Fuels and a 14.7% increase in the Transport Index

• Y/Y inflation increased to 6.3% in June from 5.9% in May and we expect it to continue on its upward trajectory, mainly due to increasing fuel prices
• We expect an increase in the transport and fuel index, which carries a weighting of 9.7% in the total consumer price index (CPI) as a result of the increase in fuel prices. Inflation is however still projected to remain within the government’s target range of 2.5%-7.5% due to the expected rains which are expected to stabilise the Food and Non-Alcoholic Drinks’ Index

Currency

(USD/Kshs)

• Since the last meeting, the Kenyan Shilling has depreciated by 0.4% against the US Dollar to Kshs 108.2 as of 19^th July 2021, from Kshs 107.7 on 26^th May 2021, mainly attributable to dollar demand from commodity importers outweighing the supply of dollars from exporters, and,
•  Forex Reserves have increased to USD 9.6 bn (equivalent to 5.9 months of import cover) from USD 7.6 bn (equivalent to 4.6 months of import cover) since the last meeting. The Forex reserves remain above the statutory requirement of maintaining at least 4.0-months of import cover, and the EAC region’s convergence criteria of 4.5-months of import cover

•  We project the Kenya Shilling to remain stable supported by the sufficient forex reserves, currently at USD 9.6 bn (equivalent to 5.9 months of import cover), and the improving diaspora remittances evidenced by a 6.0% y/y increase to USD 305.9 mn in June 2021, from USD 288.5 mn recorded over the same period in 2020
• The shilling is however expected to remain under pressure in the medium term following the demand from merchandise traders as they beef up their hard currency positions in anticipation for more trading partners reopening their economies globally

GDP Growth

• Kenya’s economy contracted by 1.1% in Q3’2020, a decline compared to the 5.8% growth recorded in Q3’2019, which was mainly due to:

i.    A 57.9% contraction in the accommodation and food services sector, compared to an expansion of 9.8% in Q3’2019. This sector was the worst hit by the COVID-19 pandemic as businesses in the sector either operated under minimum capacity or completely closed down, and,

ii.   This contraction was mitigated by the 6.3% growth in the agriculture and forestry sector, compared to 4.3% growth recorded in Q3’2019, supported by favourable weather conditions

• We expect a gradual recovery in 2021 with improved business activity following the reopening and easing of some of the government restrictions. The average PMI came in at 50.0 for the first 6 months of 2021
• The World Bank projects the Kenyan economy to register a 4.5% GDP growth in 2021 supported the gradual recovery of the business environment more so in sectors such as trade, tourism and education which were the worst hit by the pandemic in 2020
• Although improving external demand and the gradual recovery of the economy are expected to propel growth in 2021, risks abound such as the new COVID-19 variant and slow vaccine inoculation still persist and could weaken the economic rebound

Private Sector Credit Growth

• The latest data from CBK indicates that private sector credit growth recorded a 6.8% growth in the 12 months to April 2021, the lowest it has been since October 2019 when the private sector credit growth stood at 6.6%, reflecting the persistent uncertainty in the economy on account of the toll of the COVID-19 pandemic on the business environment

• The tough economic conditions brought about by the pandemic have increased cash constraints for businesses as well as households with most businesses struggling to keep afloat due to subdued revenues. Slight improvements have however been witnessed in the banking sector’s Gross Non-Performing Loans, which declined to 14.2% in April 2021 compared to 14.5% in February 2020
• The emergence of the new COVID-19 variant coupled with the slow vaccine distribution are expected to negatively affect the financial sector. We expect to see continued caution on lending especially to the tourism and hospitality sectors which are yet to recover from the adverse effects of the pandemic such as global travel restrictions

Liquidity

• Liquidity levels in the money markets improved, with the average interbank rate on 19^th July 2021 coming in at 3.5%, a decline from the 5.1% recorded during the last meeting on 26^th May 2021, supported by government payments

• Liquidity is expected to remain favorable due to:

i.   High domestic debt maturities that currently stand at Kshs 706.2 bn worth of T-bill maturities and Kshs 63.8 bn worth of T-bond maturities as at 16^th July 2021, and

ii.  Low Cash Reserve Ratio (CRR) currently at 4.25% from 5.25% previously. Despite the reduction of the CRR,  lending to the private sector has remained muted