Capitalise on the small print in Budget policy to grow your business

Last Thursday, the Cabinet Secretary for National Treasury, Mr Henry Rotich, unveiled the government’s 2014/15 Budget.

The Sh1.8 trillion Budget stands out as the largest yet to have been unveiled in the country.

Financial analyst James Njenga says the 2014 Budget is an expenditure one, and that it has come at a time when Kenyans are grappling with high inflation.

According to Mr Njenga, the inflation is a result of the high cost of living — which rose to 7.3 per cent last month, insecurity, high costs of starting and doing business, and rising electricity costs.

For instance, beginning July this year, consumer electricity bills will rise by 10 per cent when the second phase of the power billing structure comes into effect.

According to Mr Rotich, the Budget was precipitated by Kenyans’ needs in employment, security, and the economy.

Borrowing Sh200bn

Although the government was expected to go slow on domestic borrowing after issuance of the Eurobond and soliciting of foreign grants, the National Treasury is expected to borrow close to Sh200 billion from the local markets.

The Eurobond, which is expected to raise between Sh131.6 billion and Sh175 billion, is expected to ease the high cost of credit, with the government leaving the local credit market to individual and corporate consumers.

“If the Eurobond is successful, then interest rates will be expected to fall as a result of slowed domestic borrowing by the government,” says Moses Waireri, a financial research analyst at Sterling Capital.

Currently, interest rates across all financial institutions range between 15 and 25 per cent.

Of the Sh1.8 trillion Budget, Kenyans are expected to meet 83.6 per cent of the funding. Although the Cabinet Secretary only identified increased tax collection by Kenya Revenue Authority (KRA) through tapping the untaxed, Kenyans will be holding their breath over the next few weeks as the National Treasury Finance Bill on tax reviews is prepared.

According to Prof Joe Kieyah, a principal policy analyst at the Kenya Institute of Public Policy Research Analysis, taxes will contribute about 67 per cent of the total revenue, with income tax, VAT and excise duty taking the lion’s share.

“The budget shortfall will be financed through fiscal deficits that combine domestic and foreign borrowing in the ratio 2:1,” he says.

He adds that from domestic borrowing, demand for credit will go up and hence raise the cost of borrowing and the interest rates.

“If this happens, it will be detrimental to on-going efforts geared at reducing interest rates for private borrowers.” 

Apart from income and excise taxes, among those likely to be affected are millions of workers under the Pay As You Earn (Paye) tax programme.

Currently, workers earning less than Sh10,000 a month attract a flat tax rate of 10 per cent, while those earning above Sh38,000 attract a maximum tax of 30 per cent. Those earning Sh100,000 will be parting with Sh30,000 tax.

According to PricewaterhouseCoopers (PwC), the common man’s living standards are most likely to remain at the same level they were during the 2013-14 budget year. The level of disposable income is not likely to be affected.

On the other hand, according to the Consumer Federation of Kenya (Cofek), the 2014/15 Budget is not wholly open to key consumer issues.

“The budget deficit of Sh342.6 billion only means that there will be more domestic borrowing, higher inflation and a higher cost of credit.

These will slow personal and national growth.”

According to the consumer lobby, in spite of the birth of regulations clarifying the Value Added Tax Act, negative effects of the tax on basic goods will persist.

“The challenges of unresolved VAT and its spiral effect on basic consumer price structures and index will continue to persist,” says a Cofek report on the Budget.

Tough times ahead

“With challenges such as insecurity, slump in tourism, upcoming increases in electricity costs, petroleum and harmful politics, consumers must brace themselves for tough times ahead.”

In a World Bank report on Global Economic Prospects released last week, Kenya’s budget was ranked among those that had deteriorated over the past seven years, with widening deficit and a 10 per cent jump in debt to GDP ratio index.

Nonetheless, the 2014/15 budget has also come with its own basket of goodies for small traders and the public, both at the constituency and national levels.

Among the key areas targeted for increased productivity that are likely to open opportunities for the public are retail and wholesale, agriculture, building and construction and manufacturing. 

Farmers

Among those preparing to reap big are farmers as the cost of seedlings and farm inputs, including fertilisers and chemicals, is expected to go down with mega subsidisation.

In a strategic attempt at lowering the cost of living, the Treasury singled out commercial agriculture as an essential fuel.

“To reduce the cost of living on a long term basis, we are transforming agriculture to ensure food security,” said Mr Rotich.

Subsequently, the Budget set aside Sh9.5 billion for the agricultural sector.

Irrigation took Sh3.5 billion, with both small and large farms such as Mwea, Kano, Bunyala, Perkerra, Bura and Hola expected to benefit from the programme.

Fisheries netted Sh1 billion, Kenya Meat Commission Sh700 million and fertilisers Sh3 billion.

Pyrethrum-growing regions like Nyandarua County will be smiling as revival of the crop was allocated Sh300 million, together with creation of disease-free zones.

Disease-free zones have been planned for Kilifi and Tana River counties.

Already, a section of the Galana–Kulalu ranch will be a disease-free zone by next year at a cost of Sh2.6 billion, a move that is expected to boost livestock farming.

“The free lands are expected to be put to profitable agriculture to improve the livelihoods of local communities and prevent tsetse fly re-infestation,” says Mr Felix Koskei, the Cabinet Secretary for Agriculture.

In Meru, Mwea, Faza, Lake Bogoria and Lake Victoria, the disease-free zone programme has successfully dealt with the tsetse fly problem, increasing livestock productivity. 

Women and Youth

Although attempts aimed at reducing cost of credit may be hampered by domestic borrowing from the government, women and youths should prepare to receive easier credits from government funds over the coming year.

According to the budget report, existing youth funds have been boosted to spur easier access to credit and startup capital.

For instance, in the new financial year, the Sh6 billion Uwezo Fund will receive an additional Sh200 million for the youth, while the Youth Development Fund will get Sh300 million.

The women’s fund will get an additional Sh200 million.

This will be a boost to the Sh3.8 billion released in February for disbursement to 800,000 women across the country, and an addition to the Sh381.4 million disbursed over the past seven years to February 2014.

“The three funds will be merged into one capitalised unit that will meet the growing demands for credit,” says Mr Rotich.
The money allocated to Uwezo Fund has already been disbursed to the fund’s boards in 210 constituencies.

According to Mr Njenga, these allocations will open borrowing opportunities to young, small and medium entrepreneurs.

“We should see an intense hunger for funding from both youth and women in their respective fund categories,” he says. 

Counties

On a county level, local governments received Sh226.7 billion.
And with the initial allocation to the counties in the 2013/14 financial year said to have been gobbled up by non-development expenditures and remunerations, the current allocation is expected to spur entrepreneurial development and income growth at the county level,” says Mr Njenga.

For those in teaching professions awaiting over-due promotions, Sh5.5 billion was set aside to boost this.

Some Sh33.4 billion was set aside for regional development, and Sh27.97 for the Constituency Development Fund.

Arid and semi-arid areas received Sh12 billion for construction of dams, water pans and water supply. 
Textile and leather

Although this sector has seen sunshine only from afar, a Sh3 billion revival could be the inspiration farmers and traders in cotton and leather industries have been missing.

Mr Rotich says the sector has a capacity of putting about 800,000 people in employment in the coming few years.

The revival is expected to take advantage of trading spaces provided by acts such as the African Growth Opportunity Act (Agoa).

“Ironically though, sectors such as cotton have been on their knees with extremely low outputs.

The cotton sector produces about 10,000 tonnes, which is 30,000 tonnes less than what should be produced,” says Mr. Njenga.

With the revival of these industries and the subsequent commercial gains, sectors such as cotton and leather are likely to benefit thousands of jobless youth, he says.