Government Revenue Collection

• Following the release of the Q2’ 2020/2021 fiscal year budget outturn figures, the fiscal measures implemented by the Government in order to cushion Kenyans against the adverse impact of the pandemic and to further increase liquidity in the economy, is estimated to cost the exchequer Kshs 172.0 bn in revenue foregone by the Government
• For FY’2020/21 the total revenue collected in the 10 months to April 2021 amounted to Kshs 1,337.4 bn against a revised target of Kshs 1,383.9 bn, a 3.4% shortfall. However, the decision by the government to reverse some of the tax incentives implemented in April 2020 as part of the COVID-19 economic stimulus relief coupled with changes in the Finance Bill 2020 has led to a revenue over performance in the first 4 months of 2021.

• We expect a gradual economic recovery going into 2021 as evidenced by KRA collecting Kshs 176.7 bn in April, a 22.2% improvement from March’s collection of Kshs 144.6 bn, and,
• We believe that the reversal of the COVID related tax incentives as well as amendments in the Finance Bill 2020 such as the introduction of digital taxes will boost revenue collection. However, given that we are in the last quarter of the current fiscal year and the government is still behind target in revenue collection having recorded a 3.4% shortfall  in the first 10 months, we do not expect the government to meet the revenue collection target by 30^th June 2021.

Government Borrowing

• The Government, as of 13^th May 2021, was 1.6% ahead of its current borrowing target having borrowed Kshs 492.1 bn against a prorated borrowing target of Kshs 484.6 bn against a domestic borrowing target of Kshs 572.7 bn and has domestic maturities worth Kshs 165.0 bn. With a high possibility of the government not hitting its borrowing target, there has been aggressive domestic borrowing to bridge the fiscal deficit gap.

• The downgrading of Kenya’s credit rating by Standard & Poor’s credit rating agency to ‘B’ from ‘B+’ means Kenya will find it harder to borrow from the international market and may have to pay more on interest to borrow money from the foreign lenders due to the perceived higher risk. As such, we expect the aggressive domestic borrowing to persist, thus  creating uncertainty in the interest rate environment

Inflation

• Y/Y inflation for April came in at 5.8%, while the m/m inflation came in at 0.8%. This was mainly attributable to a 1.7% increase in the Food and Non-Alcoholic Drinks’ Index coupled with a 0.3% increase in the Transport Index

• Y/Y inflation declined to 5.8% in April from 5.9% in March despite the recent hikes 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 appreciated by 2.3% against the US Dollar to Kshs 107.3 as of 18^th May 2021, from Kshs 109.8 on 29^th March 2021, mainly attributable to market participants anticipating a positive economic recovery following the arrival of the Covid-19 vaccines in the country in March
• Forex Reserves have increased to USD 7.6 bn (equivalent to 4.6 months of import cover) from USD 7.3 bn (equivalent to 4.5 months of import cover) since the last meeting. The Forex reserves remain above the statutory requirement of at least 4.0-months of import cover, and the EAC region’s convergence criteria of 4.5-months of import cover

• We expect the Kenya Shilling to remain stable and trade within the range of between Kshs 107.0 and Kshs 110.0 against the USD in 2021. This will be supported by: (i) The improving diaspora remittances which totaled to Kshs 122.7 bn for the first 4 months of 2021 as compared to Kshs 93.4 bn remitted over a similar period in 2020, and, (ii) Improving forex reserves which are currently at USD 7.6 bn which is equivalent to 4.6 months of import cover, further disbursements of the IMF credit facility, including the Kshs 44.0 bn in May 2021, are expected to boost the reserves.
• However, the shilling may come under pressure from dollar demand as foreign investors receive the annual dividend payments and increase in imports by energy and general merchants as economies of key trading partners open up

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:

1. 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,
2. 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 an improved business activity following the reopening and easing of some of the government restrictions. The average PMI coming in at 49.1 for the first 4 months of 2021.
• The IMF and World Bank project the Kenyan economy to register a 4.7% GDP growth in 2021 supported by favourable weather conditions and the reopening of schools during the year. The third wave of COVID-19 globally however constrains the growth of the tourism, accommodation and food services sector which is yet to recover since the onset of the pandemic in March 2020

Private Sector Credit Growth

• The latest data from CBK indicates that private sector credit growth recorded a 9.7% growth in the 12 months to February 2021 as demand recovered as a result of improved economic activity. The operationalisation of the Credit Guarantee Scheme for the vulnerable Micro Small and Medium-sized Enterprises (MSMEs), will de-risk lending by commercial banks to the sector and is critical to increasing credit to the MSME sector

• The tough economic conditions brought about by the pandemic have increased cash constraints by businesses as well as households with most businesses struggling to keep afloat due to subdued revenues. Consequently, this led to an increase in the banking sector’s Gross Non-Performing Loans to 14.5% as of February 2021 compared to 14.1% in December 2020, and,
• Total loans amounting to Kshs 1.7 tn were restructured (57.0% of the total banking sector loan book of Kshs 3.0 trillion) by the end of February 2021, in line with the emergency measures announced by CBK on March 18 2020 to provide relief to borrowers. However, the one-year restructuring period expired on 2^nd March 2021, with the Central Bank revealing that the outstanding amount of restructured loan amounts to Kshs 569.3 bn (19.0% of the banking sector’s loan book) by end of February 2021

Liquidity

• Liquidity levels in the money markets improved, with the average interbank rate on 13^th May 2021 coming in at 5.0%, a decline from the 5.4% recorded during the last meeting on 29^th March 2021, supported by government payments

• Liquidity is expected to remain favorable due to:

1. Domestic debt maturities that currently stand at Kshs 165.0 bn worth of T-bill maturities, and,
2. 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.