A higher wage bill is the greatest threat to the economy, projected to grow at between 6.5 to 7 per cent this year.
The economy is also projected to grow above seven per cent in the medium term.
According to the directorate of budget, fiscal and economic affairs, demand for higher salaries will stifle growth and slow the economy. This is because money will be diverted to pay salaries. The government may borrow more to raise money for the new salaries, starving the private sector of funds to expand the economy.
“There is major risk in meeting demands for new salaries as we have seen this week with Sh17 billion more required to pay teachers,” directorate of budget director-general Geoffrey Mwau said on Wednesday.
“Demand for higher wages is bad as it will put pressure on other sectors, cut down on development or raise taxes,” said Mr Mwau who spoke during the launch of Budget 2016/2018 sector working groups at the Kenyatta International Convention Centre in Nairobi.
Teachers won a landmark case on salary increment against the Teachers Service Commission on Monday. The commission is now required to find Sh17 billion to pay teachers’ salaries.
Experts say this is likely to be followed by similar salary demands from other public servants in the coming months.
Mr Mwau said increased salaries might lead to a violation of the law on public finance management that puts the threshold of development expenditure at 30 per cent of the total revenue. The wage will now stands at Sh568 billion, which is 52 per cent of the national revenue.
Other risks that might derail growth include the general weakening of economic performance in China and the volatility in the international oil markets.
Declining exports is another problem that the economy will have to deal with.
Mr Mwau said he was worried by the widening of the current account in the last two years due to poor exports. “It is worrisome because our exports are not performing well and we are getting more from foreign direct investment and borrowing. Tourism has also been declining for the last two years,” Mr Mwau said.
“Foreign exchange reserves at $7.2 billion can cover 4.4 months of imports which is fairly comfortable but is on a decline and we need to increase our exports,” he added.
Debt levels have also increased to 51.5 per cent of the Gross Domestic Product. This, Mr Mwau said, was still sustainable as it falls below 74 per cent. He however added that the government aimed to reduce it to below 50 per cent to withstand external shocks.
He said while Sh1.08 trillion the Kenya Revenue Authority collected last year was remarkable, more can be collected.
National Treasury Cabinet Secretary Henry Rotich said low absorption of development funds by various ministries, particularly donor funds, remained a great concern for the country.