Treasury to borrow Sh219.2bn from local market as revenue falls short

Treasury will borrow more from local institutions than previously planned to finance next year’s budget, amid a drop in tax collections and increase in spending.

The State plans to borrow Sh219.2 billion from the domestic market, Sh11 billion higher than revealed in the Budget Policy Statement (BPS) released in February which sets the spending priorities and revenue sources ahead of the budget.

In the preliminary estimates last December, domestic borrowing was forecast at Sh140.7 billion, meaning it has been reviewed upwards by Sh79.5 billion, implying private borrowers could be crowded out of the credit market and interest rates rise.

“Given these circumstances, revenues remain lower than projected mainly due to administration challenges of large income taxpayers and customs due to reduced oil imports following increased production of geothermal energy,” said the Treasury in the final budget summary.

Besides borrowing, the Treasury intends to raise tax cash amounting to Sh1.25 trillion, while ministerial collections (also called appropriations-in-aid or A-I-A) will amount to Sh103.16 billion and grants from Amisom of Sh6.44 billion. Grants for projects are set at Sh66.61 billion.

The total deficit in the budget has also risen to Sh567 billion to be funded through domestic borrowing and the rest mainly by external debt amounting to Sh347.7 billion.

The total deficit was initially Sh533.2 billion as shown in the BPS, but it has now risen by Sh33.75 billion with Sh11 billion of the increase in domestic debt and Sh22.75 billion in external loans.

READ: Treasury to raise domestic debt by 75pc next year

One of the key reasons given in the budget estimates for low tax revenues is the reduced collections from oil imports, charged on value, as well as large taxpayers paying less than expected.

International oil prices have fallen 41 per cent from $110 a barrel mid last year, to about $65 a barrel currently.

The Kenya Revenue Authority has resorted to auditing big companies for suspected evasion through transfer pricing, value added tax or both.

The Treasury said need for higher revenue arises from pressures to deal with emerging security operations and implementation of the Constitution. National security spending is planned to rise by 50 per cent in 2015-16.

However, Parliament has been advised by experts to take the Sh2 trillion total revenue target with a pinch of the salt because it is largely predicated on an economic growth rate of seven per cent that is too ambitious.

“There is likelihood of revenue underperformance as the revenue projections are based on a high GDP growth projection. Thus there may be need for a supplementary budget to reflect economic realities,” the Parliamentary Budget Office (PBO), which advises the House on government spending, said in its latest report.