Rotich banks on faith, hope to fix cash crunch

The Government has announced that it will cut its spending to correct the ongoing liquidity challenges it faces.

According to National Treasury Cabinet Secretary Henry Rotich, the Government is re-evaluating the 2015/2016 financial plan to identify non-priority areas and consolidate spending to more crucial areas of the economy.

Rotich, however, did not explain sectors that would be affected by the latest austerity measures but close industry observers say the planned cuts would take total government spending to its lowest level as a proportion of national income.

“We crafted the budget with assumptions on how it will be financed but with the challenges of revenue collection, we are reviewing it to ensure our expenditure is as productive as much as possible,” explained Rotich.

He, however, could not elaborate which areas of the budget will be trimmed, instead stating that the focus would be to ensure that exchequer funds go to ‘productive’ use.

“The expenditure measures are going to be wide-ranging and we are looking at expenditure considered unproductive and in areas where we need to slow down we will obviously do that so that we can also achieve less borrowing in the domestic market,” he said.

As part of the austerity measures, Rotich said the budgetary allocations would be scrutinised further before funds are released. This, he said, will help evaluate the rationale for such spending.

“We are reviewing expenditure plans before we release exchequer funds to the ministries and we will be going through them in detail to determine whether the expenditure is productive,” explained Rotich. In addition to this measure, the CS also revealed that the Central Bank of Kenya (CBK) could soon announce a reduced base lending rate to single digit figures in an attempt to reduce the cost of credit and stimulate economic growth.

“We have discussed with the CBK on a quick normalisation in the rates so that we can have them back to where they were a couple of months ago,” said Rotich.

“This will basically involve CBK managing the liquidity in the system to ensure that the tightness bias we had as a response to the weakening of the exchange rate is unwound to adjust the rate downwards to sustainable levels.”

The Kenya Revenue Authority (KRA) will further be expected to tighten compliance and boost collection targets particularly collections from VAT, customs and income taxes, which the Government states have been below target.

The Government’s bold decision to cut spendings comes in the wake of recommendations from the World Bank that it re-looks its fiscal planning, especially in the wake of the unpredictable global economic environment to which Kenya remains adversely exposed.

“While the bulk of increased expenditure is on account of high infrastructure spend, there is a need for the Government to carry out fiscal consolidation and minimise the risk to the economy moving forward,” said Mr John Randa, senior World Bank economist for Kenya.

Rotich further moved to assure the private sector and investors that the liquidity challenges have been blown out of proportion and that the economy is not in a state of collapse.

“Kenya has never defaulted on its debt payments, which is normally what happens when an economy is going bust and in Q2 we grew by 5.5 per cent, which is one of the fastest growing rates in the world,” he said.