State abandons austerity, borrows extra Sh114 billion

Suspended Treasury Cabinet Secretary Henry Rotich holds the briefcase with Kenya 2019/2020 Budget. [Standard]
The Government found it difficult to stick to its own austerity plan, borrowing an additional Sh114 billion in the last financial year.

The National Treasury borrowed Sh770 billion in the 2018/19 financial year that ended in June against an initial target of Sh635.5 billion, or 6.3 per cent of the GDP, as increased wages and interest on loans forced the country back into the debt market.

However, the country's fiscal deficit - the difference between revenues and expenditure - increased to 7.4 per cent of GDP, a situation that saw the country’s stock of public and publicly guaranteed debt surge to Sh5.81 trillion.

This was a growth of 15.2 per cent from Sh5.039 trillion in June last year, according to the Central Bank of Kenya’s weekly bulletin.

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Last year, the country lost access to International Monetary Fund’s (IMF) precautionary facilities after the fiscal deficit peaked to 9.1 per cent of GDP in the 2016/17 financial year as the Government took loans mostly from China to finance mega infrastructural projects such as the Standard Gauge Railway.

The fiscal deficit would later go down to 7.1 per cent of GDP in June last year, which was within the country’s commitment to the IMF.

Treasury then promised the IMF to further bring down the fiscal deficit to 5.7 per cent of GDP by 1.5 percentage points. 

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The latest development brings into question the Government’s commitment to fiscal consolidation - a raft of austerity policies aimed at increasing revenues and slashing expenditure.

"The Government will continue with fiscal consolidation efforts. Deliberate steps will be undertaken to narrow the budget deficit and stabilise public debt, prioritise development expenditures while protecting social spending and investments,” said Treasury in its 2019 Budget Policy Statement.

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Also to narrow the deficit, Treasury said it would implement various measures to boost revenue mobilisation, including overhauling of the current Income Tax Act, strengthening tax administration and expansion of the tax base.

Debt as a fraction of GDP would in effect reduce from the initial 51.5 per cent in the 2017/18 financial year to 44 per cent in the 2022/23 financial year.

“This will be achieved by putting more emphasis on the efficiency and effectiveness of public spending and improving revenue performance,” explained Treasury.

However, in the last financial year ending June 2019, Treasury increased allocation to recurrent expenditure and reduced that of development.

During the period, Kenya borrowed Sh210 billion from mostly European and American investors after issuing its third Eurobond, part of which was used to refinance another Eurobond that matured in May.

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Treasury would also borrow Sh125 billion from a syndicate of lenders, which it used to retire another syndicated loan that matured in the just-ended financial year.

A World Bank loan of Sh75 billion for budgetary support would later push up the stock of external loans to Sh462 billion.

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