Three Charts Showing Why Kenyan Budget Could Be Overly Ambitious

  • Failure to meet revenue projections threatens shortfall target
  • Rate-cap law, ongoing drought could stymie economic growth

Kenyan Treasury Secretary Henry Rotich will seek to convince a skeptical market of the government’s plan to return to fiscal consolidation when he presents its budget on Thursday.

After reaping the benefits of low international oil prices for the last three years, East Africa’s largest economy risks being weighed down by a drought and a law capping the interest commercial banks can charge to 4 percentage points above the central bank’s key rate. These three charts show the factors that may complicate the budget aimed at boosting the nation’s gross domestic product.

The government intends to narrow its fiscal deficit to between 6 percent and 6.5 percent of gross domestic product in the fiscal year starting July from 9.6 percent in 2016-17, Treasury Principal Secretary Kamau Thugge said last week. 

Domestic loans of about 320 billion shillings ($3.1 billion) to help finance the shortfall could prove difficult to raise without stoking pressure on interest rates, Jibran Qureishi, Stanbic Holdings Plc East Africa economist, said by phone. The government may tilt financing toward international sources to control borrowing costs at home, according to Thugge.

“We are quite comfortable with where we are in terms of deficit, and where we are going,” Thugge said.

Key to narrowing the deficit will be the government’s ability to boost revenue collection to its target of 1.7 trillion shillings next year, from a projected 1.5 trillion shillings in 2016-17. Overall expenditure will increase to 2.29 trillion shillings from 2.23 trillion shillings as the government spends ahead of general elections on Aug. 8, according to Treasury estimates. President Uhuru Kenyatta’s office has said his government could increase spending to as much as 2.62 trillion shillings.

“Their revenue target is not realistic, it’s overly ambitious,” Qureishi said. “It would be possible if the rate-cap law was dropped and the economy wasn’t struggling with drought.”

Kenya has consistently failed to meet its revenue goals. It raised 1.29 trillion shillings in 2015-16 fiscal year, undershooting its target by 5 percent. Tax authorities had collected 44 percent of what’s been set out for them this year by the end of the first half.

A lack of rain that’s blighting most of eastern Africa and the law limiting what commercial banks can charge for loans to businesses and households will undermine output in the $69.2 billion economy, according to Qureishi.

While the government maintains the economy will grow by 5.9 percent this year, Yvonne Mhango, Johannesburg-based economist at Renaissance Capital, forecasts expansion of 4.2 percent and Razia Khan, head of macro-research at Standard Chartered Bank Plc. in London, sees output increasing by 5 percent. Chris Becker, strategist at Investec Prime Services, said earlier this month growth could slow to as little as 1 percent over the next two years.

“Slower growth poses a downside risk to revenue targets,” Mhango said.

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