Treasury’s huge funding gap points to higher loans cost
Ernst & Young CEO Gitahi Gachahi (left) with manager Daniel Kamande during a post-analysis budget press briefing at Laico Regency last week. Photo/DIANA NGILA
What you need to know:
Henry Rotich on Thursday presented to Parliament a Budget with a Sh329 billion deficit that he said would be financed through a combination of debt and grants.
Heavy borrowing would only encourage banks to concentrate on lending to the government and at higher costs, leaving the private sector to pay higher prices for loans.
High lending rates and the resulting drop in private sector borrowing are in turn likely to impede investment, putting Kenya’s economic growth in jeopardy.
Treasury secretary Henry Rotich’s revenue plans left the biggest financing gap ever in the national Budget, setting the government up for heavy borrowing that could reverse the recent drop in the cost of loans, analysts have said.
Mr Rotich on Thursday presented to Parliament a Budget with a Sh329 billion deficit that he said would be financed through a combination of debt and grants. But the slow pace of revenue growth means the gap could be wider, leading the country further down the debt financing path.
“The total revenue estimate is Sh1.027 trillion, comprising Sh961.3 billion of ordinary revenue, and Sh67 billion of appropriations-in-aid,” Mr Rotich said.
Money already in the Treasury’s accounts makes for Sh1.284 trillion in total receipts, grants and loans, leaving a Sh329.7 billion financing deficit in the Sh1.6 trillion Budget.
The Sh329 billion deficit is 31.8 per cent higher or Sh79.6 billion more than the current year’s financing gap.
Analysts said it was not clear how the government would meet its financing needs given the continued failure to meet tax and total revenue targets in recent years.
“It may be difficult to meet the more than Sh1 trillion revenue target the Treasury has set, leaving the government with borrowing from the domestic market as the only option to meet its spending needs,” said Antony Muthusi, a partner for transaction advisory services at consulting firm Ernst & Young.
Mr Muthusi said the huge borrowing would only encourage banks to concentrate on lending to the government and at higher costs, leaving the private sector to pay higher prices for loans.
High lending rates and the resulting drop in private sector borrowing are in turn likely to impede investment, putting Kenya’s economic growth in jeopardy. The deficit represents 7.9 per cent of the GDP, up from a deficit of 6.9 per cent for the year ending this month.
Internationally, it is recommended that governments keep the fiscal deficit below five per cent to curb the growth of public debt to a maximum of 45 per cent of GDP.
Kenya’s public debt stands at about Sh1.8 trillion or about 44 per cent of GDP and is expected to rise above 45 per cent should the Treasury exceed the planned domestic borrowing target as has happened this year.
Mr Rotich set net domestic borrowing for the next financial year at Sh106.7 billion while some Sh223 billion is expected to come from foreign sources.
Domestic borrowing rose to Sh165.5 billion in the current fiscal year, Sh54.3 billion more than the set target in response to slow growth in tax revenue and slow disbursement of donor funds.
A money-hungry Government is expected to become an attractive lending target for commercial banks because of the low risks involved and the higher interest rates they are likely to get, reducing the competitiveness of the private sector in the loans market.
Commercial banks have in recent months maintained lending rates at double the policy rate, a decision seen as informing their understanding of the government’s thirst for borrowing.
Average base lending rates stood at 17.87 per cent in April or marginally more than the previous month’s 17.78 per cent and only two per cent shy of the peak 20 per cent rate in 2011.
Banks maintained the high lending rate despite the steady fall in the Central Bank Rate (CBR) to 8.5 per cent from a high of 18 per cent in July last year.
It shows that banks are still able to raise their lending rates – albeit marginally – even when other interest rates, especially on government securities, are declining. This raises the possibility of the rates rising even further with increased government borrowing from the domestic market in the coming fiscal year.
Kenya Bankers Association chief executive Habil Olaka recently told the Business Daily that lending rates were not likely to come down any time soon unless the cost of money for the lenders – in terms of deposit rates – declined. Average deposit rates have stayed above six per cent this year.
Official data shows that by the end of March this year, nine months into the financial year, the Treasury was Sh98.2 billion below the total revenue target.
The financing deficit stood at a whopping Sh130 billion, including unrealised grant funds.
“By the end of March 2013, total cumulative revenue collection including A-I-A, was below the target by Sh98.2 billion. Ordinary [tax] revenue collection amounted to Sh531.6 billion against a target of Sh610.4 billion, resulting in an underperformance of Sh78.8 billion,” the Treasury said in its quarterly economic review for the third quarter of the current financial year.
Mr Muthusi said the Treasury could only meet the set revenue targets if the economy were to grow at the rate of between nine and 10 per cent.
Mr Rotich said the economy is expected to grow at 5.6 per cent this year up from 4.6 per cent last year but the World Bank expects the rate of economic expansion to stay at about five per cent in the same period.
Ernst & Young partner and East Africa region tax leader Catherine Mbogo said it was virtually impossible to achieve the set tax targets.
“We have heard complaints that the tax targets are too stretched to be achieved. What we need to do is expand the economy by becoming competitive to attract investors,” said Ms Mbogo.
The government has some leeway with consumer taxes especially with the re-introduction of the VAT Bill to Parliament, she said but that was likely to lead to an increase in prices of goods with devastating consequences on consumption.
Steve Okello, a partner at audit and financial advisory firm PricewaterhouseCoopers, said that although tax revenues are expected to increase with the introduction of capital gains and the reintroduction of the VAT Bill, it was difficult to grow revenue by Sh157 billion in one year as Mr Rotich had forecast.
“Expecting to grow tax collections by Sh157 billion more this coming fiscal year is quite an aggressive move given that the increases have been about Sh70 billion a year. So this is more than double the annual increase and it is going to be a challenge for KRA,” said Mr Okello.
