Kenya Economic Update, October 2018 : In Search of Fiscal Space
The Kenyan Economy is on a rebound in 2018. Reflecting improved rains, better business sentiment and easing of political uncertainty, economic activity is rebounding after the slowdown in activity in 2017. According to official statistics, the econ...
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| Format: | Report |
| Language: | English |
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Washington, DC: World Bank
2018
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| Online Access: | http://documents.worldbank.org/curated/en/766271538749794576/In-Search-of-Fiscal-Space-Government-Spending-and-Taxation-Who-Benefits http://hdl.handle.net/10986/30597 |
| Summary: | The Kenyan Economy is on a rebound in
2018. Reflecting improved rains, better business sentiment
and easing of political uncertainty, economic activity is
rebounding after the slowdown in activity in 2017. According
to official statistics, the economy expanded from 4.7
percent in H1 of 2017 to 6.0 percent in H1 of 2018 supported
by improved harvest in agriculture, steady recovery in
industrial activity, and still robust performance in the
services sector. As a result, real GDP growth is projected
to reach 5.7 percent in 2018, an upward revision of 0.2
percentage points from the April 2018 Economic Update.
Growth in private consumption and investment are driving the
rebound. Private consumption picked up in 2018 fueled by
rising household incomes from improved agricultural
harvests, lower food prices, and strong remittance inflows.
A recovery in private sector investment activity is also
underway, partly reflected in increased imports of raw
materials and chemicals and more positive investor sentiment
with the Purchasing Managers’ Index remaining in
expansionary territory (above the 50- mark) for H1 2018 at
55.1 points compared to 49.7 points over the same period in
2017. The recovery in private sector activity (consumption
and investment) is expected to off-set potential drag in
growth due to unwinding of fiscal stimulusat a time when
fiscal consolidation is gathering momentum. Net exports
continued to weigh on growth owing to faster expansion in
imports relative to Kenya’s exports. There are three key
policy recommendations from this analysis. First, the
government could consider expanding direct cash transfer
programs. Cash transfer programs are well-targeted so that a
large fraction of the benefits are captured by the poor.
These programs could further be expanded in order to
increase their poverty-reducing effect. However, this will
require enhancing revenue mobilization for the coverage to
increase significantly. Second, exemptions granted within
Kenya’s VAT regime appear to benefit the poor only
marginally. The variation in consumption shares of exempt
and zero-rated items across the welfare distribution is
small. A review of the VAT law might help remove exemptions
and increase revenue that could then be spent in
well-targeted and progressive cash transfer programs.
However, a more detailed follow-up analysis of exemptions
and zero-rates would be necessary to determine item-level
incidence. Third and finally, shifting public resources from
higher-level health facilities to lower-level facilities is
likely to benefit the poor. Conditional on uptake, public
health spending on outpatient care is pro-poor while the
associated user fees and over the counter purchases are
regressive. The results suggest that redirecting spending
from higher-level public health facilities to primary care
facilities has the potential to benefit the poor and might
increase access. |
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