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News and Analysis
December 20, 2024
It is that time of the week again when we look at the news headlines over the last seven days and dissect those that can affect your money.
Welcome to yet another edition of Money Weekly.
This week we delve into how Kenya used approximately 60% of its revenue collection to service debt in 2023. This significantly impacted the economy last year and is expected to get even worse this year.
Additionally, the Eurobond is maturing later this year, and there have been concerns about Kenya's ability to pay. The IMF has since loaned Kenya Ksh150 billion that will be used to pay the Eurobond. This has eased the tension.
This is as the Treasury is expected to give a directive concerning stalled projects in Kenya. These projects’ estimated value is likely to be between Ksh2 trillion and Ksh9 trillion.
The World Bank has upgraded Kenya’s GDP growth to 5.2%, which is higher than the previous two years, although below Tanzania’s and Uganda’s projections.
On the other hand, the CBK has resulted in buying dollars to boost Kenya’s dollar reserves. Meanwhile, the state plans to pay El Nino victims with Ksh1.5 billion set aside.
For this and much more. Let’s dive in.
According to the National Treasury, the country spent nearly 60% of its Ksh1.05 trillion revenue in 2023 to settle debts. Analysts predict that Kenyans will have to tighten their belts further as an even bigger percentage of revenue could end up being directed towards debt payment this year.
This is keeping in mind that the $2 billion (Ksh.319 billion) 2014 Eurobond will be maturing on June 24.
Here is a breakdown.
Despite using most of the taxes to pay off debt, Kenya is not even halfway through taking care of the total debt (Ksh 1.866 trillion) in the current budget cycle ending in June 2024.
However, the government has been trying to secure funds to help mitigate the debt pressure. It has, so far, secured Ksh150 billion from the International Monetary Fund (IMF). This has seen yields on Kenya's Eurobonds decline.
The National Treasury is confident that the 6.7% interest rate loan taken in 2014 will be cleared before the due date in June.
However, despite the positive outlook, Kenyans will still have to tighten their belts. In the period ending December 2023, the government was left with only 43% of revenue for development, salaries, and public services. Pension disbursements totaled Ksh59 billion, and Ksh 8.3 billion was allocated for salaries and allowances to public servants.
With the current debt obligation adjusted upwards, the government might have even less to spend on its running and projects.
The fate of 407 stalled public projects will be known at the end of February. The cabinet had directed government Ministries, Departments, and Agencies (MDAs) to conduct physical audits of 437 projects and submit their reports to the Treasury.
Treasury is set to review and validate the analysis by the end of February. Through the Office of the Attorney General, the Treasury will issue a Cabinet memo recommending suspension, continuation, or cancelation of projects. Different reports put Kenya’s stalled projects, some as old as 35 years, at between Ksh2 trillion and Ksh 9 trillion.
However, a government project that hasn’t stalled is the Social Health Insurance Fund (SHIF). The Court of Appeal lifted orders that were blocking its continuation.
Court of Appeal’s decision impact.
Nonetheless, the court suspended three sections of the law, including registration and contribution as prerequisites for accessing public services. The government was also mandated to build health facilities under the Universal Health Care program.
Another project the government plans to get underway is establishing the Kenya Credit Guarantee Scheme Company (KCGSC) in partnership with financial institutions to replace the Credit Guarantee Scheme. The KCGSC aims to de-risk lending to MSMEs and small businesses that borrow from the Hustler fund.
El Nino flood victims in eight counties will receive cash disbursement from the government. El Nino rains caused floods that killed over 160 people and displaced 529,120 in eight counties.
The disbursement will be made under the Hunger Safety Net Programme managed by the Drought Management Authority and is set to spend Ksh1.54 billion.
Elsewhere, the Ministry of Education has announced the release of Ksh14.4 billion for loans and scholarships for semester two of the 2023/24 academic year. Ksh10.39 billion will go towards the Higher Education Loans Board (HELB), and Ksh3.98 billion will be disbursed as scholarships through the Universities Fund (UF).
In the global economic prospects report, the World Bank projects Kenya’s economy to grow at 5.2% in 2024. This is up from the projected 5.0% growth in 2023 and 4.8% in 2022. Despite the upward projection, Kenya's projected growth is the weakest compared to its neighbours. Tanzania’s economy is expected to grow by 5.5%, while Uganda is expected to grow at 6.0%
The upward projection is attributed to reducing inflation and easing financial conditions. December’s inflation eased to 6.6% from 6.8% in November.
Staying with Kenya and Uganda, Kenya’s exports to Uganda surpassed Ksh100 billion in November 2023. However, the increase in exports was as a result of the weakening of the Kenyan shilling against the Ugandan shilling. The Kenyan shilling depreciated by 17.45% against the Ugandan shilling.
This made Kenyan goods cheaper in Uganda. In Uganda, Kenyan products in high demand include local cement, iron, steel, common salt, oil, perfumes, and palm oil.
Here in Kenya, though, fuel consumers are set to pay more for inefficiencies in the Kenya Pipeline Company (KPC). The Energy and Petroleum Regulatory Authority (EPRA) has set record-high rates to compensate for fuel lost along the pipeline from Mombasa.
This is because they anticipate a lot more fuel will be lost in the pipeline due to increased demand at the pump. EPRA sets the rate at Ksh0.16 per litre for super petrol and Ksh0.15 per litre for kerosene.
Pipeline losses are part of the pricing build-up passed on to consumers, capturing losses due to temperature, density, pressure, theft, and leakages.
In the year to December 2023, manufacturers raised prices by an average of 9.1%. Some of the reasons for this upward adjustment is that the government raised electricity costs by up to 63% in April 2023, not to mention the depreciating currency and muted consumer demand.
The rise in the cost of production was passed on to consumers. Here is a breakdown.
Only manufacturers of textiles, apparel, and paper decreased prices by 0.98%, 6.4%, and 0.57%, respectively.
Moving on, Freight costs are expected to rise sharply as container prices have more than tripled in the last 30 days. Container prices have surged by up to 260%, and Kenya, being a net importer, may face higher costs of goods.
Additionally, the disruption in the supply chain, where ships are now forced to reroute to avoid the Red Sea and Suez Canal due to attacks by the Houthis, will also affect Kenya’s imports.
An influx in imported sugar caused the price to drop by Ksh5 from Ksh218 to Ksh 213 in November, the lowest price in five months. Sugar imports increased by 51.3% to 90,759 tonnes, while domestic production plummeted to 22,736 tonnes from 81,648 tonnes.
elsewhere , Kitui Flour Mills has received unconditional approval from the Competition Authority of Kenya (CAK) to acquire Rafiki Millers fully. The combined assets of Kitui Flour Mills and Rafiki Millers exceed Ksh1 billion, prompting the need for regulatory approval.
Kitui Flour Mills is the third-largest player in the wheat milling market with a 13% share, after Mombasa Maize Millers (22%) and Ajab Miller Grain Industries Limited (15%).
As disclosed to the IMF, the CBK has shifted to being a net buyer of US dollars to build up foreign exchange reserves. The CBK's foreign exchange reserves stand at $6.829 billion, equivalent to 3.7 months of import cover, with a target to maintain at least four months.
The shortage of dollars has made it difficult for firms and individuals with dollar-denominated loans to access dollars to pay their loans. They are now offering repayments in local currency, therefore effectively defaulting. This has led to a rise in non-performing loans.
Borrowers in sectors like real estate, transport, communication, building, and construction, along with individuals, have been most affected, unable to accumulate dollars like exporters.
Consequently, the export market fell by 2.1%, contrary to expectations. The shilling lost more than a fifth of its value against major currencies. This was expected to make Kenyan exports attractive and affordable to other countries, but this was not the case. The failure of export growth indicates deeper issues and an economy losing competitiveness.
This is as the National Treasury defends the government-to-government (G-to-G) deal to secure fuel, saying that it has helped ease dollar demand and stabilise the exchange rate, contributing to what it terms as a slowdown in the depreciation of the Kenya Shilling.
According to the Kenya National Bureau of Statistics (KNBS), the consumer price index reached a record high of 137.55 points in December 2023. This results from government tax measures, including 16% VAT on fuel, a housing levy, an increase in health coverage deductions, and a rising cost of living.
This has led to Kenyans adopting cost-cutting measures such as,
These cost-cutting measures contribute to Kenya Revenue Authority (KRA) missing the tax revenue collection target.
However, a 2024 economic outlook report by Nigerian intelligence firm Stears suggests a gradual increase in consumer spending in African countries like Kenya as inflation slows.
Entry-level consumers, spending between $2-$4 (Sh322-650) daily, are expected to drive consumption demand.
The French Development Agency (AFD) has provided grants and loans worth Ksh383.7 million to support Kenya's agriculture and public finance programs. The first tranche includes a Ksh174.4 million grant to enhance services and offer timely support to small and medium enterprises, focusing on a comprehensive business acceleration program.
The remaining funds will be loaned to the Treasury to support public finance management reforms. The business acceleration program involves training seminars, experience-sharing initiatives, and the promotion of networking between Kenyan and French private companies in the agriculture sector.
Elsewhere, the African Development Bank (AfDB) and the United Kingdom have chosen Kenya's Transmission Network Improvement Project as a beneficiary under the Room to Run Sovereign transaction (R2RS).
The project, with a total cost of Ksh18.9 billion, will receive up to Ksh9.6 billion for the climate mitigation component facilitated by additional capital from the UK government guarantee.
The Transmission Network Improvement Project addresses transmission network capacity limitations, reliability, quality of electricity supply, and high-power system losses in Kenya.
East African Community member states, under the East African Insurance Supervisors Association (EAISA), cite high fraud in motor and medical insurance as a significant challenge for market growth.
Geopolitical tensions, political instability, global economic uncertainties, and challenges balancing regional economic and trading blocs affect the insurance sector's growth.
Insurance penetration rates in the East African Community are low, with Kenya leading at 2.43%, followed by Rwanda (1.70%), Uganda (0.84%), Burundi (0.77%), and Tanzania (0.53%).
On the other hand, Resolution Insurance has entered the liquidation phase after nearly 21 months of unsuccessful attempts to rescue the company. The company was incorporated in 2002 as Resolution Health before being renamed Resolution Insurance in 2013. It has struggled with financial woes, leading to its statutory management since April 5, 2022.
The Kenyan government has initiated the process of paying Ksh6.94 billion owed to farmers and staff by four public sugar factories ahead of their leasing. The four factories are Muhoroni Sugar Company, Nzoia Sugar Company, South Nyanza Sugar Company, and Chemelil Sugar Company.
The four sugar mills, along with Miwani Sugar, have been put up for leases of 20 years as part of a revival plan for the struggling industry. The total outstanding debts of the five public sugar mills (including Miwani Sugar) amount to Sh128.07 billion, and the Cabinet approved the waiver of Sh117 billion.
The leasing process will involve successful bidders taking control of various assets, including factories, office buildings, machinery, equipment, nucleus farms, staff accommodations, schools, sports stadiums, and service contractor yards owned by the millers.
Many Kenyan youths, including graduates, are turning to the boda boda (motorcycle taxi) business for quick money, distracting them from long-term beneficial projects. The Micro and Small Enterprise Authority (MSEA) notes that impatience is prevalent among the youth, who prefer quick cash over long-term projects.
The Labour Migration Management Bill of 2023 proposes a voluntary pension scheme for Kenyans working abroad, aiming to regulate private employment agencies and recruitment. Section 13(1) of the bill mandates the Cabinet Secretary for Foreign Affairs to promote a voluntary savings scheme for migrant workers in consultation with relevant Kenya missions.
Total assets under management held by unit trusts or collective investment schemes surpassed the Ksh200 billion mark for the first time in September 2023, reaching Ksh206.6 billion. The growth in assets has been supported by double-digit returns on investment vehicles amid a general rise in interest rates.
The Capital Markets Authority (CMA) had licensed 29 unit trust schemes as of September 2023, with Mayfair Asset Managers being the latest entrant.
Elsewhere, retail investors in government securities added Ksh229.2 billion over the last six months, reflecting the appeal of higher interest rates and reduced business investments amid economic challenges.
These retail investors, classified as 'other investors,' increased their share of the government's domestic debt to 11.38%, equivalent to Ksh573.7 billion, as of January 12, 2024, compared to 7.13% or Ksh344.5 billion at the end of June 2023.
Alternative asset classes, such as equities, have provided lower returns, with the Nairobi Securities Exchange losing 12.8% or Ksh213.4 billion in market capitalization since June 30, 2023.
Pension funds have reduced their holdings of government debt by Ksh104 billion since June, while banks' holdings increased by Ksh83 billion.
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