Members of Parliament on Wednesday approved President William Ruto administration's second supplementary budget, just less than two weeks to the close of the financial year as the government adjusts its spending.
Among the factors that necessitated review of the mini-budget for the 2022-23 financial year include higher external debt repayment obligations owing to the weakening of the shilling against the US dollar as well as a shortfall in tax revenues.
The impact of the review is a reduction in the overall budget by Sh23.4 billion to Sh3.36 trillion from the earlier Sh3.38 trillion.
The drop in total government's spend is on account of reductions in expenditure on development projects.
Failure by the Kenya Revenue Authority (KRA) to hit the target is expected to see the government borrow more, with the budget deficit increasing by Sh16.9 billion.
In a report on the second supplementary budget, the National Assembly's Budget and Appropriations Committee noted that there was also a need to address other pressing matters including capitation for junior secondary schools, drought-related interventions and security operations-related interventions.
"Consolidated Fund Service expenditure has increased by Sh7.76 billion from Sh867.77 billion to Sh875.54 billion," said the Budget committee in its report to Parliament.
"The net increase is as a result of Sh16.5 billion increase in interest payment on foreign debt, a Sh1.4 billion increase in payment of guaranteed loans partly attributable to weakening of the shilling and a Sh9.5 billion decrease in interest payment on domestic debt partly due to lower uptake of short term debt instruments."
The report also noted that KRA was unlikely to meet its revenue collection target. The taxman had collected Sh1.64 trillion in ordinary tax revenue by the end of April this year against a target of Sh1.78 trillion, which led the committee to conclude it is unlikely to meet the revenue collection target for the financial year.
KRA has a target of collecting Sh2.1 trillion in tax revenues. The committee noted that the underperformance by KRA would result in the budget deficit growing and in turn the government borrowing more.
"However, the committee observed that due to the expected underperformance of revenue collection, the fiscal deficit including grants has expanded by Sh16.9 billion from Sh824 billion (5.7 per cent of gross domestic product) to Sh840.9 billion (5.8 per cent of GDP)," said the committee.
"This (shortfall in revenue collection) is an indication that the National Treasury continues to set over-ambitious revenue targets during the budget-making process, resulting in larger than projected fiscal deficit towards the end of the financial year when the revenue targets are not met. As such, the deficit has always remained a moving target over the years."
The State is expected to meet the expanded deficit through local borrowing, which the committee noted presented a risk in banks denying local businesses and households loans and instead offering them to the government through buying Treasury Bills and Bonds.
"To finance the expanded fiscal deficit, the projected net domestic borrowing for the 2023/23 financial year has been revised upwards by Sh49.9 billion," noted the committee.
"The committee expresses concerns over the increased appetite for domestic borrowing, especially given the non-responsiveness of the markets," the committee's report said.
The committee indicated that although overreliance on domestic borrowing may ease the exchange rate from external borrowing, it may affect credit flow to the private sector - hampering private sector-led economic growth.
This is the second mini-budget. It was tabled in Parliament in February and came into effect in March.
Among the issues that the government had anticipated to address included settling pending bills, and setting aside Sh60 billion for paying contractors.