Moody’s: Kenya budget deficit won’t fall

Rating agency Moody’s believes that Kenya is unlikely to reduce its budget deficit in the short term because of huge spending on wages and devolution.

Moody’s says that the deficit will remain at about nine per cent of the gross domestic product even with the recent reforms in Value Added Tax (VAT).

The nine per cent is well above the East African Community monetary union recommendation of six per cent.

“The government’s projections regarding the impact of the VAT increase may also prove overly optimistic, which would leave the deficit at about the expected level of nine per cent of GDP,” said the Moody’s report.

The report, titled Credit Analysis: Government of Kenya, says the country has B1 rating with a stable outlook, citing improving institutions and economic outlook.

But it also notes several vulnerabilities such as the fiscal and current account deficits. The Treasury expects the spending-to-GDP ratio to decline thereby narrowing the budget deficit, but Moody’s says it is actually bound to rise.

“We think it is more likely that the spending ratio will continue to rise towards 35 per cent of GDP in 2014/15 and that it will remain sticky at those levels given the pressures emanating from the public sector wages and potential for spending overruns related to the decentralisation of government.”

Spending on transport infrastructure would also put pressure on the deficit. “As a consequence, the deficit is not likely to narrow as much as predicted in the MTEF; rather, we expect the deficit to stay at around nine per cent of GDP again,” says Moody’s.

READ: Terror risk exposes Kenya to expensive Eurobond

Moody’s says this is a rationale for the sovereign bond but cushions that capacity constraints could see the government service a debt that is not put to good use.

“The government has embarked on an ambitious and costly effort to expand the transport network… for which the government intends to issue its first Eurobond in the near future.

However, we expect that the government lacks capacity to raise investment spending as much as it has been predicting,” says Moody’s.

The State could meet the 70:30 ratio of recurrent spending to development spending, using such methods as limiting transfers to state-owned enterprises and agencies and downsizing staff levels, says Moody’s.

In a memo on the Division of Revenue Bill 2014/15, the Institute of Economic Affairs said the wage bill was a major factor in the high expenditures. It asked Parliament to interrogate the hiring of staff by the national government for functions that have been devolved.

“The burgeoning wage bill, at about 13 per cent of GDP in 2013 against a target of eight per cent is a case for concern. Parliament needs to interrogate the case where the national government is busy hiring staff for functions already transferred to the county, hence duplication of effort,” said the IEA memo.