Experts have warned of the need for the government to reduce borrowing and to keep a firm grip on spending. PHOTO | FILE
What you need to know:
The National Treasury is projected to raise domestic debt to Sh208 billion in the next financial year.
Higher domestic borrowing— at more than Sh100 billion annually for over the past five years—has been blamed for the rising lending rates.
Experts have warned of the need for the government to reduce borrowing and to keep a firm grip on spending.
Kenya’s domestic borrowing is projected to rise by 75 per cent to Sh208 billion in the next financial year compared to the current year, energising the fixed-income market but also raising the spectre of even higher interest rates.
Higher domestic borrowing— at more than Sh100 billion annually for over the past five years—has been blamed for the rising lending rates.
Despite central bank’s attempts to see the rates come down, they remain at an average of 16 per cent, having come down only a percentage point since mid 2014.
Banks as the biggest financiers of government’s domestic borrowing are major beneficiaries. The borrowing will also be good news for brokerage houses that gain commissions from increased trading in the secondary market.
The Treasury’s Budget Policy Statement (BPS) for the 2015-16 financial year shows that the estimated budget deficit for the next financial year will go up to Sh479.7 billion from an earlier estimate of Sh383.7 billion, prompting the increase in both domestic and foreign borrowing targets.
The previous estimate was Sh141 billion, as stated in the Budget Review and Outlook Paper (BROP) released last year. For the year ending June 2014, the Treasury projects domestic borrowing to stand at Sh118.8 billion.
“The government has faced revenue mobilisation challenges in the first half of the 2014-15 fiscal year and this could translate in borrowing above target,” said risk and research firm StratLink Africa in its Kenya markets update for February 2015.
For the market traders, the promise of a rise in new issues from July is seen as likely to spur increased activity in the secondary market between now and June as investors raise funds with which to participate in the new issues.
Foreign financing towards plugging the deficit is expected to come in at Sh269.3 billion, up from the previous target of Sh241 billion.
The deficit financing is expected to increase Kenya’s public debt. According to the latest central bank statistics, Kenya’s domestic debt at the end of February stood at Sh1.335 trillion, while external debt as at mid December stood at Sh1.17 trillion.
Deficit as a percentage of GDP in 2015-16 will still be lower compared to the current financial year, at 7.4 per cent compared to eight per cent.
It was, however, expected to fall by to 6.1 per cent in the previous BROP estimates, but this has been made impossible by the increases shown in the BPS.
“The overall fiscal balance (after grants) is projected to decline from eight per cent of GDP in 2014/15 to a sustainable level of about four per cent of GDP over the medium term. This will allow public debt to decline gradually from about 43.8 per cent of GDP in 2014/15 to about 41.3 per cent of GDP by 2017/18,” states the budget policy statement.
Experts have, however, warned of the need for the government to reduce borrowing and to keep a firm grip on spending, especially taking into account that there will be additional spending pressure as the next general election approaches.
“While a deficit of just over six per cent of GDP is not a disaster, it is a potential issue,” said Citi Africa economist David Cowan in a Kenya macroeconomic review released in January.
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