Interest rates to remain high as State ups domestic borrowing

IMF Managing Director Christine Lagarde and Treasury Cabinet Secretary Henry Rotich when she visited Kenya recently. Financing State operations from domestic debt could increase fiscal pressures. [PHOTO: KIBERA MBUGUA]

By James Anyanzwa

Interest rates are likely to remain high in the next financial year starting July 2014. This is as the State continues to borrow from the domestic market to finance its revenue shortfall.

 “The more the Government borrows the fewer the funds available for the private sector to borrow,” said Nikhil Hira, head of tax practice at Deloitte and Touche East Africa.

“This is something that could be of concern because it will crowd out the private sector from credit.” Treasury plans to float Treasury Bills and Bonds to finance part of an overall budget deficit estimated at Sh275.4 billion.

Infrastructure projects

This will be done in the next financial year (2014/2015). The $1.5 billion (Sh130 billion) will profile and benchmark Kenya in international capital markets and to fund priority infrastructure projects.

This compares unfavourably with the proposed internal borrowing of Sh106.7 billion in the current (2013/2014) fiscal year. Cabinet Secretary Henry Rotich is facing an arduous task of financing a Sh1.64 trillion budget crafted to fund the operations of the county governments fulfill campaign ambitious promises.

“Public expenditure pressures, especially recurrent expenditures and in particular wage and interest payment, pose a fiscal risk,” said Justus Nyamunga, director in-charge of Economic Affairs Department at the National Treasury. According to Treasury, overall expenditures for the 2014/2015 financial year are projected at Sh1.52 trillion up from the estimated Sh1.47 trillion in the current financial year.

The total revenue estimates based on broad-based economic growth and the on-going reforms in tax policy and revenue administration are projected at Sh1.17 trillion. Treasury’s 2014/2015 Budget Framework and the Medium Term Expenditure Framework show the overall budget deficit (including grants) in 2014/15 is expected to stand at Sh.275.4 billion. Net external financing of Sh100.7 billion is expected to cover part of the budget deficit, while Sh175.2 billion will be financed through domestic borrowing.

Budgetary deficits

Increasing expenditure and slowed growth in revenues has seen the government has born the brunt of huge budgetary deficits, which has mainly been financed through borrowing.

This has been worsened by MPs, members of county assemblies, teach ers, nurses and doctors agitating for higher pay hikes. Heavy borrowing, particularly from the domestic market carries the danger of crowding out the private sector from credit and throwing the country’s debt to gross domestic product ratio out of proportion.

 According to the Parliamentary Budget Office, government expenditures have more than quadrupled over the last 10 years with total spending rising by 350 per cent to Sh1.2 trillion in the 2012/2013 financial year, from Sh264.1 billion in 2002/2003 financial year.

According to the Budget office, the stock of public debt has increased substantially over time and is tipped to grow even further as the government borrows extensively to make up for the persistent revenue short falls.

“A review of our current public debt indicates that the government has in the recent times financed its deficit with an increasing proportion of domestic debt,” it said.