Published on 2022 | 05 | 11

A government budget is a document that presents a governing body's expected revenues and proposed spending for a fiscal year or budget year. 
The National Treasury and Planning Cabinet Secretary Ukur Yatani read the 2022/2023 budget on April 7, 2022. This was based on what is called the budget policy statement, which outlined the policy measures that will continue to stimulate resilient and sustainable economic recovery in the short- and medium-term, 2022 to 2023. The Cabinet Secretary’s speech consisted of proposals on policy and tax measures to be included in the Finance Bill or the ‘Finance Law’ which was tabled in Parliament before April 30, 2022. This is a regulatory procedure and requirement designed to give MPs time to debate, review and propose changes. 
After parliament has been given time to approve or reject the expected revenue and expenditure, it is assented by the President. Once it is passed, the proposals become law and therefore binding.
The FY 2022/23 budget was prepared under a revised budget calendar that considers the preparations for the 2022 elections.
Notable numbers from the budget policy statement
  1. The 2022/2023 overall budget hit Ksh3.32 trillion to be spent on 2.2 trillion government expenditure, 0.7 trillion for development and 0.41 trillion for counties. A large chunk of government expenditure will go towards debt repayment, at Ksh1.36 trillion up from Ksh1.15 trillion. Repayments of foreign debts will soar by 34.11 per cent to KES 440.06 billion, while repayments of domestic debts will go up by 11.65 per cent to KES 919.06 billion.
  2. The Government's debt position increased from KES 7.7 trillion as of 30th June 2021 to KES 8.2 trillion as of 31st December 2021. This was an increase of 6.6% in the first and second quarters of FY 21/22.
  3. Of this government debt, local borrowing through bills and bonds accounted for 48% while foreign borrowing through securities such as Eurobonds, commercial debt and concessional loans accounted for 52%.
  4. The debt increased by 15% from FY 2019/20 and is forecasted to reach KES 8.8 trillion and KES 9.8 trillion by June 2022 and June 2023, respectively, by the National Treasury.
  5. Kenya’s fiscal deficit as a share of GDP has expanded in tandem with the slow growth in revenue collection. Whereas expenditure as a share of GDP remained unchanged at about 25 percent between 2018/19 and 2020/21, the fiscal deficit as a share of GDP increased from 7.4 percent to about 8.6 percent.
Key take-outs from the numbers
The Government is currently running a fiscal and current account deficit. 
Current account deficit means Kenya's imports are more than its exports. To counter this, the government relies on foreign investment inflows which balance off the negative current account deficit. However, as things are currently, there are not enough foreign investment inflows, which is also why there is a current account deficit.
The rise in the budget deficit is a key factor contributing to rapid public debt accumulation.
Government expenditure is expected to increase significantly in 2022 on account of several factors, some of which include:
  1. the increase in debt repayment expenditures
  2. the economic stimulus and ongoing infrastructure projects yet to be completed
  3. election-related spending and increased expenditure demands for social services
  4. implementation of a new manifesto by the new administration which is expected to play a greater role in the stickiness of the fiscal deficit over the medium term
The Government had introduced a debt ceiling of KES 9 trillion, which was the maximum targeted borrowing amount. 
Current government debt accounts for 91% of the KES. 9 trillion Debt Ceiling. This leaves only 9 percent or KES. 800 billion to finance the budget (fiscal deficit). 
Given the prevailing debt accumulation and debt repayment trends, the current debt ceiling cannot hold. Therefore, it may be subject for review to accommodate any further borrowing to fund expenditure requirements.
Thus, the public debt stock is likely to increase further in the coming years. A greater level of both fiscal discipline and commitment to efficient implementation of the budget by both national & sub-national entities could lead to higher economic growth thereby increasing revenue and reducing the need to borrow.
How to take advantage of these budget take-outs?
Due to the budget deficits, expected upward adjustment of the debt ceiling, expected government expenditures among other issues, more borrowing by the government is expected. The Government borrows domestically through treasury bills and bonds. This borrowed money is used to finance the deficit.
The more the government borrows, the more yields on bonds rise, which increases income for a regular investor in government bonds and bills. 
A look at government bond yields in figure 1 shows that yields have significantly increased from 31st Dec 2021 to 22nd April 2022.
Also, when a bond yield increases, its price declines. Therefore, bonds which recorded higher increases in yields, had higher declines in price.
It is also clear from the graph that yields have increased the most in the short-term to the medium-term bonds. This means current investors are getting high coupon rates for shorter investment periods.
Investors stand to double-benefit from bond investing at such a time because they will get high coupon/interest rate on their invested bonds and will also buy bonds at the cheaper prices. 
The best investment however is to create a bond portfolio by investing regularly. Regularly investing in bonds will enable one to take advantage of the higher interest rates on offer. 
Bonds can be used to generate a stable, regular, and predictable stream of interest income, what is generally referred to as passive income.
Figure 1: Bond yields change from 31 Dec 2021 to 22 Apr 2022.
At Amana Capital, we can help you create a well-balanced bond portfolio. If you are interested in taking advantage of the current attractive interest rates on bonds and are looking to create a consistent stream of interest income from bonds, kindly do not hesitate to contact us.
FA Jesse Ludenyo| Research Analyst
Amana Capital Limited. Growing A Financially Prosperous Community
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