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Fiscal Policy in Kenya: Looking Toward the Medium-to Long-Term

By Kamau Thugge, Peter S Heller, and Jane Kiringai[1]

Executive Summary

Kenya’s authorities, in articulating their vision for the next two decades of Kenya’s development, understood clearly that fiscal policy would need to play a critical role in influencing the pace at which the economy will grow and its capacity to deal with the key challenges that will arise over the next several decades. Domestic policy challenges include a high population growth, rapid urbanization, significant weaknesses in infrastructural capacity, inadequate levels of investments, and pressures for decentralization. External challenges include security risks as well as an uncertain global economic growth environment. Fiscal policy will not only affect macroeconomic stability, but also whether Kenya can transition to a higher economic growth path, reduce its high poverty rate, and address its substantial income, asset, and regional inequalities. The paper by Thugge, Heller and Kiringai examines whether Kenya’s medium-term fiscal policy strategy is responsive to addressing the potential scale of the challenges confronting Kenya, particularly given the inevitable uncertainties assicuated with the global economic environment. It also takes stock of the impact of recent developments on the viability of the original strategy.

Kenya is likely to face in the next two decades and the scope of its policy goals for this period. Section II will briefly identify both the domestic policy challenges that Kenya’s fiscal policy-makers must address in coming years as well as the different potential external policy environments within which these policies must be formulated. Section III reviews the Government of Kenya’s (GOK) fiscal policy strategy, as broadly embodied in its recently issued long-run perspective--Vision 2030, but more concretely in the Medium Term Plan for 2008/09-2012/13 and the Medium-Term Budget Strategy Paper (MTBSP) for 2009/10-11/12. In particular, it will examine the economic and institutional assumptions underlying this strategy; the policy choices made in terms of the balance between the roles of the public and private sectors; the choice among alternative public spending priorities; the way in which possible downside risks are addressed; the approach to financing fiscal initiatives; and the sustainability of the fiscal and debt strategy. Section IV will then assess whether the GOK’s chosen policy strategies appear both responsive to the long-term policy challenges identified in Section II and robust to the downside risks in the external economic environment.

II. Medium to long-run challenges

In Vision 2030, Kenya aspires to achieve middle-income status by 2030 through the realization of a 10 percent per annum real growth rate for the period 2012-2030. This is a highly ambitious objective although not an unreasonable aspiration, given the importance of Kenya to the regional economy of East Africa and the many assets that Kenya possesses in terms of its human capital and its industrial, service, and tourism potential. But achieving this goal will require that Kenya successfully pursue disciplined and ambitious policies that will confront the many domestic and external policy challenges it now faces. It will also require a bit of luck and a bit of skill by Kenyan policy-makers in adapting to the uncertain global economic policy environment that will undoubtedly emerge in the next two decades.

Fiscal policy will need to be finely balanced if Kenya is to achieve the Vision 2030 objectives. It must facilitate rapid growth—both through the provision of needed infrastructure and human capital—while still being responsive both to the demands of the population for basic public services and the potential downside risks that may emerge. Yet fiscal policy must also be sustainable. Fiscal space will be precious if the various expenditure objectives are to be met without...
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