Government

Revenue

Collection

• Total revenue collected as at the end of April 2024 amounted Kshs 1,830.0 bn, equivalent to 71.0% of the revised estimates of Kshs 2,576.8 bn for FY’2023/2024 and is 85.2% of the prorated estimates of Kshs 2,147.3 bn. Cumulatively, tax revenues amounted to Kshs 1,745.8 bn, equivalent to 69.9% of the revised estimates of Kshs 2,495.8 bn and 83.9% of the prorated estimates of Kshs 2,079.9 bn,
• The government has been unable to meet its prorated revenue targets for the ten months of the FY’2023/2024, attaining 85.2% of the revenue targets in April 2024, mainly on the back of the tough economic situation exacerbated by the elevated inflationary pressures that despite decreasing by 0.7% points in April to 5.0% from the 5.7% recorded in March, cost of living remains elevated in the country,  which continues to impede revenue collection despite an improvement in business environment with the PMI coming in at 50.1 in April from the 49.7 recorded in March 2024. In light of this, the government is yet to fully benefit from the strategies put in place to improve revenue collection such as expanding the revenue base and sealing tax leakages, and suspension of tax relief payments. The coming months' revenue collection performance will largely depend on how quickly the country's business climate stabilizes. This stabilization is expected to be aided by the ongoing appreciation of the Shilling, which gained by 1.9% against the dollar in the month of April, and a further ease in inflationary pressures in the country.

• In the short term, we expect the revenue collections to improve towards the prorated targets given the now recovering business environment, on the back of easing inflationary pressures as a result of high fuel and electricity prices, coupled with the sustained appreciation of the shilling against the dollar which continue to relieve pressure on the economic environment
• The government’s continued efforts to broaden the tax base will also lead to increased tax revenue collection, evidenced by the provisions in the current Finance Act Among the key provisions in the Act included an increase of the VAT on Petroleum from 16.0% to 8.0%, introduction of a higher personal income tax rate of 35.0% on the income of individuals earning above Kshs 500,000.0 per month from the then existed 30.0%, introduction of tax of 3.0% on income derived from the transfer or exchange of digital assets, and an increase in turnover tax to 3.0% from the then existed  1.0%. As such, we expect the tax collections to increase in the long-term and thus boost the government’s efforts to meet it revenue collection target, we, however, are wary of the negative impact these new taxes may have on the revenue collection
• Nevertheless, given the improving general business environment which is underpinned by the appreciation of the Kenyan shilling, easing liquidity in the money market, and easing inflationary pressures, we expect these to support the tax revenue, but remain wary of the unpredictable tax regime that may weigh down the collections.

Government Borrowing

• The government, as at 31^st May   2024, was 23.0% ahead its prorated borrowing target of Kshs 377.9 bn having borrowed Kshs 464.9 bn of the total borrowing target of Kshs 407.0 bn. The government has domestic maturities worth Kshs 63.0 bn and will have to borrow Kshs 2.5 bn monthly to meet the upcoming domestic maturities and the budget deficit in the FY’2023/2024
• Total Borrowings as at the end of April 2024 amounted to Kshs 1,207.4 bn, equivalent to 71.0% of the revised estimates of Kshs 1,701.7 bn for FY’2023/2024 and are 85.1% of the prorated estimates of Kshs 1,418.1 bn. The cumulative domestic borrowing of Kshs 851.9 bn comprises of Net Domestic Borrowing Kshs 471.4 bn and Internal Debt Redemptions (Rollovers) Kshs 380.5 bn.
• Kenya has continued to receive financing from the World Bank and other bilateral lenders such as the International Monetary Fund (IMF). Recently, the Executive Board of the IMF announced that it had concluded the 2023 Article IV consultation with Kenya together with the sixth reviews and augmentations of access of USD 941.2 mn (Kshs 151.3 bn) under the EFF/ECF arrangement, and the first review under the 20-month Resilience and Sustainability Facility (RSF) arrangement, approved in July 2023. Notably, the Board’s decision allows for the immediate disbursement of USD 624.5 mn (Kshs 100.4 bn) under the EFF/ECF arrangements - which includes an augmentation of access of USD 310.6 mn (Kshs 50.0 bn) - and brings total disbursements under the EFF/ECF arrangements to USD 2.7 bn (Kshs 431.1 bn). The approval also allows for an immediate disbursement of USD 60.2 mn (Kshs 9.7 bn) under the RSF arrangement, taking the total disbursement under this program to USD 60.2 mn (Kshs 9.7 bn).

• Kenya’s rising debt sustainability remains a significant concern with the government's borrowing appetite remaining high given the subdued economic environment coupled with an ever-present fiscal deficit. While credit risk was significantly reduced with the Eurobond buyback in February, the debt servicing costs are expected to remain high with the payment on the remaining part of the USD 2.0 bn Eurobond This has led to Credit rating agencies such as Moody’s Credit Rating Agency, S&P Global Rating and Fitch to downgrade their outlook of Kenya. Notably, Kenya’s latest rating by moody was at B3 for both local issuer and foreign currency issuer an indication of a high credit risk

Inflation

• Year on year (y/y) inflation rate for May 2024 rose marginally by 0.1% points to 5.1%, from the 5.0% recorded in April 2024. The headline inflation in May 2024 was majorly driven by increase in prices of commodities in the following categories; transport, food and non-alcoholic beverages, and housing, water, electricity, gas and other fuels by 8.1%, 6.2% and 4.4%, respectively.
• Notably, the m/m increase in transport Index was recorded despite the decline in the prices of a litre of petrol and diesel by 0.5% and 0.7%, respectively.
• Super Petrol, Diesel and Kerosene which decreased by Kshs 1.0, Kshs 1.2 and Kshs 1.3 each respectively, and will retail at Kshs 192.8, Kshs. 179.2 and Kshs. 168.7 per litre respectively, for the period between 15th May 2024 to 14th June 2024, as well as the high taxation of petroleum products as provided in the finance Act 2023.
• Notably, May’s overall headline inflation was back on the rise after decreasing for three consecutive months to April 2024, however, it has remained within the Central Bank of Kenya (CBK) target range of 2.5% to 7.5% for the eleventh consecutive month.

• We expect inflation rates to remain within the CBK’s target range of 2.5% - 7.5% supported by the current fiscal stance by the Monetary Policy Committee, having increased the Central Bank Rate by 0.5% points in February 2024 to 13.0%, after the rate remained constant at 12.5% for two consecutive meetings. Additionally, the recent appreciation of the Kenyan shilling against major currencies is also expected to keep inflationary pressures in the country down as manufacturers get relief with the lower importation costs of inputs

Currency (USD/Kshs)

• Since the last meeting, the Kenyan Shilling has appreciated by 1.0% against the US Dollar to Kshs 130.2 as at 31^st May 2024, from Kshs 131.5 recorded on 3^rd April 2024 mainly attributable to eliminated credit risk from the Eurobond buyback
• However, the Forex Reserves have decreased by 2.2% to USD 7.0 bn (equivalent to 3.7 months of import cover) as of 24^th May 2024 from USD 7.1 bn (equivalent to 3.8 months of import cover) recorded in 5^th April 2024. Notably, the forex reserves are below the statutory requirement of maintaining at least 4.0 months of import cover and lower than the EAC region’s convergence criteria of 4.5 months of import cover

• We expect the Kenyan Shilling to be supported by Diaspora remittances standing at a cumulative USD 4,457.5 mn in the 12 months to April 2024, 11.9% higher than the USD 3,984.9 mn recorded over the same period in 2023, which has continued to cushion the shilling against further depreciation. In the April 2024 diaspora remittances figures, North America remained the largest source of remittances to Kenya accounting for 54.0% in the period, and which has continued to cushion the shilling against further depreciation. In the February 2024 diaspora remittances figures, North America remained the largest source of remittances to Kenya accounting for 56.0% in the period, and,
• Additionally, the shilling performance and strength is expected to be supported by the sufficient forex reserves currently at USD 7.0 bn (equivalent to 3.7-months of import cover), which is slightly below the statutory requirement of maintaining at least 4.0-months of import cover. Moreover, tourism inflow receipts which came in at USD 352.5 bn in 2023, a 31.5% increase from USD 268.1 bn inflow receipts recorded in 2022, and owing to tourist arrivals that improved by 27.6% to 182,000 in the 12 months to January 2024, from 151,000 recorded during a similar period in 2023.

GDP Growth

• Kenyan’s economy recorded a 5.6% growth in FY’2023, faster than the 4.9% growth recorded in FY’2022, pointing towards a faster economic growth. The performance was driven by;

1. The positive growth recorded in all sectors, with most sectors recorded improved growth compared to FY’2022, with Agriculture, Forestry and Fishing, Accommodation and Food Services and Real Estate Sectors recording the highest growth improvements of 7.9% points, 6.8% points, and 2.8% points, respectively. Other sectors that recorded expansion in growth rate, from what was recorded in FY’2022 were Financial Services Indirectly Measured, Transport and Storage and Health sectors, of 2.5%, 0.3% and 1.5% points respectively;
2. The rebound of Agricultural Sector with Agriculture, Forestry and Fishing activities recording a growth of 6.5% in FY’2023. The performance was an increase of 8.0% points, from the contraction of 1.5% recorded in FY’2022. However, the performance was a decrease of 0.2% points, from the growth of 6.7% recorded in Q3’2023. The positive growth recorded during the quarter was mainly attributable to favorable weather conditions that boosted crop and livestock production. Notably, during the quarter, of key food crops such as maize, beans, and potatoes increased significantly during the year.  

• We expect Kenya’s GDP to continue growing at a slower pace in line with the global economy trends. However, the economy will be supported by sustained recovery in sectors like accommodation and food services sector, as well as recent fiscal policies such as subsidizing costs of crucial farm inputs such as fertilizer that are expected to support growth in the agriculture sector, which remains to be Kenya’s largest contributor to GDP,

• The continued appreciation of the Kenya shilling has continued to support the business environment, by reducing the cost of imported inputs and decreasing the finance cost of the foreign currency denominated debts

• Notably, the country’s PMI for the month of April 2024 increased to 50.1, up from 49.7 in March, to move into the expansionary zone, an indication of an improved business environment in the country. Likewise, according to CEO’s survey-November 2023 report, optimism regarding growth prospects for the Kenyan economy deteriorated due to input cost constraints.

Private Sector Credit Growth

• The latest data from CBK indicates that private sector credit growth declined to 7.9% in March from 10.3% recorded in February 2024, attributable to the impact of monetary policy tightening in addition to the effect of exchange rate appreciation on foreign currency. Notably, the 7.9% growth rate recorded in March 2024 is the lowest recorded figure in 28 months.

• We anticipate continued adoption of the risk-based pricing model in the banking sector to continue to unlock access to credit to individuals and businesses who were not captured by the previous frame works due to being considered too risky,
• However, the increased government borrowing is expected to continue crowding out the private sector in the short term as seen by the weighted average yield for T-Bonds coming at 18.6% in the month of January effectively edging out majority of the corporate bonds currently in the trading in market
• Additionally, banks have adjusted their lending rates in line with the   CBR rate which was maintained at 13.0% in April MPC meeting. This is expected to slow down the private sector credit demand

Liquidity

• Liquidity levels in the money markets tightened slightly, with the average interbank rate since the previous MPC meeting increasing slightly by 4.1 bps to remain relatively unchanged at 13.3% as of 31^st May 2024, partly attributable to Government payments that offset tax remittances

• We expect liquidity in the money markets to be supported by the domestic debt maturities that currently stand at Kshs 60.3 bn worth of T-bill maturities for FY’2023/2024.