DRAFT 2022 BUDGET POLICY STATEMENT

1 REPUBLIC OF KENYA THE NATIONAL TREASURY AND PLANNING MEDIUM TERM DRAFT 2022 BUDGET POLICY STATEMENT ACCELERATING ECONOMIC RECOVERY FOR IMPROVED LIVELIHOOD NOVEMBER 11, 2021 ii DRAFT 2022 BUDGET POLICY STATEMENT BUDGET POLICY STATEMENT (BPS) 2022 To obtain copies of the BPS, please contact: The National Treasury and Planning Treasury Building P. O. Box 30007-00100 NAIROBI, KENYA Tel: +254-20-2252-299 Fax: +254-20-341-082 The document is also available on the website at: iii DRAFT 2022 BUDGET POLICY STATEMENT Foreword The 2022 BUDGET POLICY STATEMENT (BPS) is prepared against a background of expected global recovery after a slump in 2020 occasioned by the negative effects of the COVID-19 pandemic. The global economy is projected to grow by percent in 2021, from a contraction of percent in 2020.

2 However, economic prospects vary across countries with the emerging markets and developing economies expected to pick up slowly compared to advanced economies give n different country POLICY responses to the pandemic. The projected recovery in advanced economies reflects the anticipated additional fiscal support in the second half of 2021 and broader vaccinations coverage across the group. On the domestic scene, Kenya s economy rebounded strongly in the second quarter of 2021, with real GDP growing percent supported by easing of COVID-19 containment measures. Economic growth is projected to rebound to percent in 2021 from the contraction of percent in 2020. In terms of fiscal years, economic growth is projected to recover to percent in FY 2021/22 from percent in FY 2020/21. The economic recovery is supported by the prevailing stable macroeconomic environment, ongoing implementation of the strategic priorities of the Government under the Big Four Agenda and the third Economic Stimulus Programme.

3 To further reinforce this growth outlook, this 2022 BUDGET POLICY STATEMENT outlines POLICY measures that will continue to stimulate resilient and sustainable economic recovery. The policies are anchored on the Medium-Term Plan III of the Vision 2030 and focuses on creating an enabling environment for businesses and industrial recovery, job creation, and safeguarding livelihoods. In this respect, the Government will strengthen implementation of programmes and strategies that ensure a more inclusive growth, foster macroeconomic stability and avail liquid ity to the private sector including initiating innovative products to boost credit to Micro, Small and Medium Enterprises (MSMEs). With regard to fiscal POLICY , performance in the FY 2020/21 was satisfactory despite the slight underperformance in revenue and elevated expenditure s associated with the adverse impact of COVID-19 pandemic and the ensuing containment measures adopted in March 2020.

4 In the first quarter of FY 2021/22, revenues grew in pace with targets and supported smooth implementation of the BUDGET . However, there are unfavorable economic conditions, which might adversely affect revenue performance and will be taken into account during finalization to the FY 2022/23 BUDGET . In light of this, the Government fiscal POLICY continues to focus on enhanced revenue mobilization, expenditure prioritization and reduction of the fiscal deficit. The Government will continue implementation of cost cutting measures including parastatals reforms and alignment of resources to programmes in the MTP III with particular focus on the Big Four Agenda and Economic Recovery Strategy to accelerate growth, employment creation and poverty reduction. In this regard, detailed budgets of all MDAs have been scrutinized to curtail growth of recurrent iv DRAFT 2022 BUDGET POLICY STATEMENT budgets, and ensure completion of ongoing projects with particular emphasis placed on projects nearing completion to ensure that citizens benefit from such public investments.

5 Further, the fiscal POLICY will focus on activities aimed at ensuring successful conduct of the 2022 General Elections. As such, the FY 2022/23 BUDGET is being prepared under a revised BUDGET calendar that takes into account the preparations for the 2022 General Elections. Therefore, Ministries, Departments and Agencies (MDAs) are expected to adhere to the strict deadlines in the revised BUDGET calendar to enable finalization of the FY 2022/23 BUDGET by March 2022. The POLICY measures outlined in the 2022 BPS have benefited from wide consultations. I would like to thank The President and The Deputy President for their guidance while developing this document. Much appreciation also to my colleagues in the Cabinet, staff of the National Treasury and Planning, Stakeholders and the general public for their valuable contributions. HON. (AMB.) UKUR YATANI, EGH CABINET SECRETARY/ NATIONAL TREASURY & PLANNING v DRAFT 2022 BUDGET POLICY STATEMENT Acknowledgement The 2022 BPS is prepared in compliance with the provisions of the Public Finance Management Act, 2012.

6 It outlines the current state of the economy, provide s macro- fiscal outlook over the medium term and specifies the set strategic prioritie s and POLICY goals together with a summary of Government spending plans as a basis for the FY 2022/23 BUDGET . The publication of the 2022 BPS aims to improve the public s understanding of Kenya s public finance management and guide debate on economic and development matters. As we finalize the BUDGET for the FY 2022/23 and the medium term, I wish to emphasize that we are operating under tight resource constraints amidst signific a nt revenue shortfalls occasioned by declining economic activities as a result of the adverse effects of the COVID-19 Pandemic. On the other hand, the Government is confronted with significant expenditure demands including financing the Economic Recovery Strategy and the Big Four Agenda. This called for proper prioritization to ensure focus is on critical expenditures with the highest positive impact on the well-being of Kenyans.

7 In this regard, the Government will continue to prudently manage the use of public resources over the 2022/23-2024/25 Medium Term Expenditure Framework (MTEF). Towards this end, while developing the BUDGET proposals for the medium-term, the Sector Working Groups (SWGs) undertook a critical scrutiny of individual MDAs budgets execution reports to curtail growth of recurrent budgets and ensured that funding priority is accorded to completion of ongoing projects, which are supportive to accelerate inclusive growth and development. The preparation of the 2022 BPS was a collaborative effort among various Government MDAs and we are grateful for their timely inputs. We are also grateful for the comments received from the Macro Working Group, participants of the October 2021 Public Sector Hearings and the general public who provide d invaluable inputs to this 2022 BPS. Finally, we are grateful to the core team from the Macro and fiscal Affairs Department and BUDGET Department who worked tirelessly to put together inputs from different MDAs and stakeholders and ensured the document was produced in time while maintaining high quality standards.

8 JULIUS MUIA, PhD, CBS PRINCIPAL SECRETAR Y/THE NATIONAL TREASURY vi DRAFT 2022 BUDGET POLICY STATEMENT Table of Conte nts Foreword ..iii v I. RECENT ECONOMIC DEVELOPMENTS AND MEDIUM-TERM 1 Overview ..1 Recent Economic Developments and Outlook ..1 fiscal Performance ..15 fiscal Economic Risks to the Economic Outlook ..19 II. ACCELERATING ECONOMIC RECOVERY FOR IMPROVED LIVELIHOOD .. 21 Overview ..21 Economic Stimulus Programme ..22 Harnessing the Big Four Agenda for Job Supporting Growth of Manufacturing for Job Food and Nutrition Security to all Kenyans ..26 Universal Health Coverage to all Affordable and Decent Housing for All Kenyans ..30 Conducive Business Environment for Employment Creation ..31 Stable Macroeconomic Environment ..31 Deficit Financing POLICY ..32 Business Regulatory Enhancing National Security for Sustained Growth and Infrastructure Development for Inclusive Growth.

9 34 Expansion of the Road Rail, Marine and Air Transport ..35 Adequate, Affordable and Reliable Energy Supply ..36 Promoting the Use of Information, Communication and Technology (ICT) ..37 Sectoral Transformation for Broad Based Sustainable Economic Growth ..38 Environmental Conservation and Water Supply ..38 Stimulating Tourism Recovery, Sports, Culture, and Arts ..39 Sustainable Management of Land for Social-Economic Development ..39 Expand Access to Quality Social Services ..40 Quality and Relevant Education for all Kenyans ..40 Strengthening the Social Safety Nets ..41 Empowering Youth and Women for Employment Creation ..42 Enhancing Service Delivery through Entrenching Structural Reforms to Facilitate Business and Employment Growth ..43 Strengthening Governance and the Fight against vii DRAFT 2022 BUDGET POLICY STATEMENT Deepening Public Financial Management Fostering Financial Sector Developments and Reform.

10 45 III. BUDGET FOR FY 2022/23 AND THE MEDIUM TERM .. 47 fiscal Framework Summary ..47 FY2022/23 and Medium-Term BUDGET Priorities ..48 Budgetary Allocations for the FY2022/23 and the Medium-Term ..48 Details of Sector Priorities ..50 Public Participation/ Sector Hearings and Involvement of Stakeholders ..63 IV. COUNTY FINANCIAL MANAGEMENT AND DIVISION OF REVENUE .. 64 County Governments Compliance with fiscal Responsibility Principle ..64 Compliance with the Requirement for Development Spending Compliance with the Requirement for Expenditure on Wages ..65 Enhancement of County Governments Own-Source-Revenue ..66 Prudent Management of fiscal Risks ..67 Pending Division of Revenue between the Two Levels of Shortfall in Ordinary County Allocations for FY2022 Horizontal Allocation of Revenue among the County Intergovernmental fiscal Transfers ..74 Conditional Equalisation Fund ..75 Emerging Issues and POLICY Interventions ..76 Transfer of Functions between the national and county Governments and cooperation between national and county POLICY on Transfer of Functions and Cooperation between Governments.